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FOMC_Meeting_Statements_Minutes

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2024-10-09

Minute

Minutes of the Federal Open Market Committee September 17–18, 2024 A joint meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve System was held in the offices of the Board of Governors on Tuesday, September 17, 2024, at 10:30 a.m. and continued on Wednesday, September 18, 2024, at 9:00 a.m.1 Developments in Financial Markets and Open Market Operations The manager turned first to a review of developments in financial markets. Nominal Treasury yields declined notably over the period, driven by weaker-than-expected data releases—especially the July employment report in early August—and policy communications that were seen as affirming expectations that a reduction in policy restraint would begin at this meeting. The decline in nominal yields over the period was primarily attributable to lower expected real yields, but measures of inflation compensation declined as well. Broad equity prices finished the period modestly higher, while credit spreads had come off the very tight levels seen earlier this year but were still narrow by historical standards. Overall, risky asset prices were compatible with continued economic expansion. The manager also discussed the brief episode of elevated market volatility in early August. That episode saw some large moves in U.S. and foreign equity indexes, equity-implied volatilities, the dollar–yen exchange rate, and Treasury yields. These sharp moves appeared to be the result of a rapid unwinding of some speculative trading positions induced by unrelated events—such as the unexpectedly inflation-focused communications from the Bank of Japan (BOJ) in late July and the weaker-than-expected U.S. employment report in early August—and amplified by technical and liquidity factors. All told, the unwinding process was contained, and market functioning recovered relatively quickly. Turning to policy expectations, the manager noted that the market-implied policy rate path shifted down materially. At the time of the September meeting, the modal path for the federal funds rate implied by options prices was consistent with about 100 basis points of cuts through year-end, compared with around 50 basis points at the time of the July meeting. The average path for the federal funds rate obtained from futures prices also shifted notably lower and remained below the options-implied modal path, likely reflecting investors' perception that risks were tilted toward more rather than fewer cuts. In the Open Market Desk's Survey of Primary Dealers and Survey of Market Participants, most respondents had a modal expectation of a 25 basis point cut at this meeting, though the manager also noted that, since the time of the surveys—about a week earlier—the probability of a 50 basis point cut at the September meeting implied by futures prices had increased and exceeded the implied probability of a 25 basis point cut. The median respondent's modal path for the federal funds rate shifted down notably over the next two years, in line with the options-implied modal path, and was unchanged thereafter. Balance sheet expectations in the surveys were little changed from July. Most survey respondents did not appear to be concerned about an economic downturn in either the near or medium term; the median dealer's most likely path of the unemployment rate for the next few years was only modestly higher than that in the July survey and was roughly stable around current levels. In international developments, many central banks in advanced foreign economies (AFEs) had begun or continued to lower policy rates during the intermeeting period, with the Bank of England (BOE) deciding to initiate its rate-cutting cycle with a 25 basis point reduction and the European Central Bank (ECB) and the Bank of Canada (BOC) delivering their second and third 25 basis point cut, respectively. The market-implied expectations for year-end policy rates fell over the period for most central banks in AFEs, although by a smaller amount than they did for the Federal Reserve, contributing to a modest decline in the trade-weighted U.S. dollar index. The manager then turned to money markets and Desk operations. Unsecured overnight rates remained stable over the intermeeting period. In secured funding markets, rates on overnight repurchase agreements (repo) were higher than a few months earlier amid large issuance of Treasury securities and elevated demand for securities financing but were little changed, on net, over the period. The manager discussed the interconnections between the repo and federal funds markets, underscoring the importance of monitoring a range of indicators to assess reserve conditions and the state of money markets. Looking at a range of such indicators, the manager concluded that reserves appeared to remain abundant. Usage of the overnight reverse repurchase agreement (ON RRP) facility declined about $100 billion over the intermeeting period, helped by an increase in the net supply of Treasury bills. With net bill supply expected to decrease as a result of the September tax date before increasing again, the staff assessed that the decline in ON RRP usage might slow over the coming intermeeting period before resuming later this year. The manager also added that, with the concentration of ON RRP usage in a small number of fund complexes, there was an increased risk that idiosyncratic allocation decisions could have an outsized effect on aggregate ON RRP volumes. 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 available at the time of the meeting indicated that real gross domestic product (GDP) had expanded solidly so far this year. The pace of job gains continued to moderate since the beginning of the year, and the unemployment rate had moved up but remained low. Consumer price inflation was well below its year-earlier rate but remained somewhat elevated. Consumer price inflation—as measured by the 12-month change in the price index for personal consumption expenditures (PCE)—was lower in July than it had been in March, which had followed some high month-over-month changes in the beginning of the year. Monthly changes in PCE prices since April had been smaller than those seen in the first three months of the year. On a 12-month basis, total PCE price inflation was 2.5 percent in July, and core PCE price inflation—which excludes changes in energy prices and many consumer food prices—was 2.6 percent. In August, the 12-month change in the consumer price index (CPI) was 2.5 percent, and core CPI inflation was 3.2 percent; both measures were well below their rates from a year ago. The staff estimated, given both the CPI and producer price index data, that total PCE price inflation would be 2.2 percent over the 12 months ending in August and that core PCE price inflation would be 2.7 percent. Recent data suggested that labor market conditions had eased further but remained solid. Over July and August, average monthly nonfarm payroll gains were less than their average second-quarter pace, the unemployment rate edged up to 4.2 percent, the labor force participation rate ticked up, and the employment-to-population ratio ticked down. The unemployment rate for African Americans moved down, while the rate for Hispanics rose, and both rates were above those for Asians and for Whites. The ratio of job vacancies to unemployment edged down to 1.1 in August, a bit below its level just before the pandemic. Job layoffs, as measured by initial claims for unemployment insurance benefits, remained low through August. Measures of nominal labor compensation continued to decelerate. Average hourly earnings for all employees rose 3.8 percent over the 12 months ending in August, and the four-quarter change in business-sector compensation per hour was 3.1 percent in the second quarter. Both measures were well below their pace from a year earlier. Real GDP rose solidly, on balance, over the first half of the year. Real private domestic final purchases (PDFP)—which comprises PCE and private fixed investment and which often provides a better signal than GDP of underlying economic momentum—posted a stronger first-half increase than GDP, and PDFP growth over the first half was only moderately slower than last year. Recent indicators for third-quarter GDP and PDFP suggested that economic growth was continuing at a solid pace, particularly for PCE and business investment in equipment and intangibles. After growing at a tepid pace in the second quarter, real exports of goods moved down in July, led by declines in exports of autos and industrial supplies. By contrast, real imports of goods, especially of capital goods, continued to grow at a robust pace in July. Real GDP growth in foreign economies stepped down in the second quarter, and recent economic indicators suggested economic growth abroad remained subdued. Although services activity and high-tech manufacturing had been relatively robust, overall manufacturing activity remained weak, in part due to restrictive monetary policies. Weakness in manufacturing was particularly pronounced in Canada, Germany, and Mexico. In China, indicators of domestic demand remained weak. Inflation in economies abroad continued to abate, on net, though developments were mixed. In the AFEs excluding Japan, 12-month headline inflation ticked down but remained above target levels due to still-high services inflation. In the emerging market economies, inflation moved sideways, with some Latin American economies still experiencing upward inflation pressures from food prices. The BOE cut its policy rate for the first time in the current cycle, while the BOC, the ECB, and the Bank of Mexico eased policy further, in part citing progress toward achieving their inflation targets. By contrast, the BOJ continued to remove monetary accommodation. Staff Review of the Financial Situation The market-implied path for the federal funds rate declined notably over the intermeeting period. Similarly, options on interest rate futures suggested that market participants were placing higher odds on greater policy easing by early 2025 than they had just before the July FOMC meeting. Consistent with the downward shift in the implied policy rate path, nominal Treasury yields declined significantly, on net, with the most pronounced decreases at shorter horizons driven by reductions in both inflation compensation and real Treasury yields. Market-based measures of interest rate uncertainty in the near term rose notably, reportedly reflecting in part increased concerns among investors about downside risks to economic activity. Broad stock price indexes increased, on net, despite a sizable but temporary drop in early August. Yield spreads on investment- and speculative-grade corporate bonds were little changed, on net, and remained in the bottom quintile of their respective historical distributions. The one-month option-implied volatility on the S&P 500 index ended the period roughly unchanged, on net, after a large but temporary spike in early August. Overnight secured rates were largely unchanged, and conditions in U.S. short-term funding markets remained stable. Average usage of the ON RRP facility declined as net Treasury bill issuance increased, providing a more attractive alternative asset for money market funds. Market-based measures of the expected paths of policy rates as well as sovereign bond yields in most AFEs fell notably, largely in response to declines in U.S. interest rates. The broad dollar index declined, with the dollar depreciating significantly against AFE currencies amid a narrowing in interest rate differentials between the U.S. economy and AFEs. Financial markets were volatile early in the intermeeting period following the weaker-than-expected U.S. employment report and the policy rate increase by the BOJ, which led to the unwinding of some speculative trading positions. However, declines in equities mostly retraced over the following weeks, and moves in foreign risky asset prices were mixed over the intermeeting period. In domestic credit markets, borrowing costs remained elevated despite modest declines in most credit segments. Rates on 30-year conforming residential mortgages and yields on agency mortgage-backed securities (MBS) declined, on net, but continued to be elevated. Interest rates on both new credit card offers and new auto loans were little changed and remained at elevated levels. Interest rates for newly originated commercial real estate (CRE) loans on banks' books increased. Yields on an array of fixed-income securities, including investment- and speculative-grade corporate bonds and commercial mortgage-backed securities (CMBS), moved lower, generally following decreases in benchmark Treasury yields. Financing through capital markets and nonbank lenders was readily accessible for public corporations and for large and middle-market private corporations, and credit availability for leveraged loan borrowers remained solid. For smaller firms, however, credit availability remained moderately tight. Commercial and industrial loan balances at banks were little changed on net. Credit remained generally accessible to most CRE borrowers. CRE loans at banks continued to decelerate in July and were unchanged in August. Non-agency CMBS issuance was robust in August, while agency CMBS issuance slipped to a bit below its post-pandemic average. Credit remained available for most consumers, though credit growth showed signs of moderating. Auto lending continued to slow, while balances on credit cards increased moderately in July and August on average. In the residential mortgage market, access to credit was little changed overall and continued to be sensitive to borrowers' credit risk attributes. Credit quality continued to be solid for large and midsize firms, home mortgage borrowers, and municipalities but kept deteriorating in other sectors. The credit quality of nonfinancial firms borrowing in the corporate bond and leveraged loan markets remained stable. Delinquency rates on loans to small businesses remained slightly above pre-pandemic levels. Credit quality in the CRE market deteriorated further, with the average delinquency rate for loans in CMBS and the share of nonperforming CRE loans at banks both rising further. Regarding household credit quality, delinquency rates on most residential mortgages remained near pre-pandemic lows. Though consumer loan delinquency rates remained above pre-pandemic levels, the pace of increases had slowed. Delinquency rates for credit cards rose moderately in the second quarter, while they were largely flat for auto loans. Staff Economic Outlook The staff forecast at the September meeting was for the economy to remain solid, with real GDP growth about the same as in the forecast for the July meeting but the unemployment rate a little higher. Although real GDP growth in the second quarter was stronger than the staff had expected, the forecast for economic growth in the second half of this year was marked down, largely in response to recent softer-than-expected labor market indicators. The real GDP growth forecast for 2024 as a whole was little changed, though the unemployment rate was expected to be a little higher at the end of the year than previously forecast. Over 2025 through 2027, real GDP growth was expected to rise about in line with the staff's estimate of potential output growth. The unemployment rate was expected to remain roughly flat from 2025 through 2027. All told, supply and demand in labor and product markets were forecast to be more balanced and resource utilization less tight than they had been in recent years. The staff's inflation forecast was slightly lower than the one prepared for the previous meeting, primarily reflecting incoming data, along with the projection of a less tight economy. Both total and core PCE price inflation were expected to decline further as supply and demand in labor and product markets continued to move into better balance; by 2026, total and core inflation were expected to be 2 percent. The staff judged that the risks around the baseline forecast for economic activity were tilted to the downside, as the recent softening in some indicators of labor market conditions could point to greater slowing in aggregate demand growth than expected. The risks around the inflation forecast were seen as roughly balanced, reflecting both the further progress on disinflation and the effects of downside risks for economic activity on inflation. The staff continued to view the uncertainty around the baseline projection as close to the average over the past 20 years. Participants' Views on Current Conditions and the Economic Outlook In conjunction with this FOMC meeting, participants submitted their projections of the most likely outcomes for real GDP growth, the unemployment rate, and inflation for each year from 2024 through 2027 and over the longer run. These projections were based on participants' individual assessments of appropriate monetary policy, including their projections of the federal funds rate. The longer-run projections represented each participant's assessment of the rate to which each variable would tend to converge under appropriate monetary policy and in the absence of further shocks to the economy. The Summary of Economic Projections was released to the public after the meeting. In their discussion of inflation developments, participants observed that inflation remained somewhat elevated, but almost all participants judged that recent monthly readings had been consistent with inflation returning sustainably to 2 percent. Some participants commented that, though food and energy prices had played an important part in the decline in the overall inflation rate, slower rates of price increases had become more evident across a broad range of goods and services. Notably, core goods prices had declined in recent months, and the rate of increase in core nonhousing services prices had moved down further. Many participants remarked that the recent inflation data were consistent with reports received from business contacts, who had indicated that their pricing power was limited or diminishing and that consumers were increasingly seeking discounts. Many participants also observed that inflation developments in the second and third quarters of 2024 suggested that the stronger-than-anticipated inflation readings in the first quarter had been only a temporary interruption of progress toward 2 percent. Participants remarked that even though the rate of increase in housing services prices had slowed, these prices were continuing to rise at an elevated rate, in contrast to many other core prices. With regard to the outlook for inflation, almost all participants indicated they had gained greater confidence that inflation was moving sustainably toward 2 percent. Participants cited various factors that were likely to put continuing downward pressure on inflation. These included a further modest slowing in real GDP growth, in part due to the Committee's restrictive monetary policy stance; well-anchored inflation expectations; waning pricing power; increases in productivity; and a softening in world commodity prices. Several participants noted that nominal wage growth was continuing to slow, with a few participants citing signs that it was set to decline further. These signs included lower rates of increases in cyclically sensitive wages and data indicating that job switchers were no longer receiving a wage premium over other employees. A couple of participants remarked that, with wages being a relatively large portion of business costs in the services sector, that sector's disinflation process would be particularly assisted by slower nominal wage growth. In addition, several participants observed that, with supply and demand in the labor market roughly in balance, wage increases were unlikely to be a source of general inflation pressures in the near future. With regard to housing services prices, some participants suggested that a more rapid disinflationary trend might emerge fairly soon, reflecting the slower pace of rent increases faced by new tenants. Participants emphasized that inflation remained somewhat elevated and that they were strongly committed to returning inflation to the Committee's 2 percent objective. Participants noted that labor market conditions had eased further in recent months and that, after being overheated in recent years, the labor market was now less tight than it had been just before the pandemic. As evidence, participants cited the slowdown in payroll employment growth and the uptick in the unemployment rate in the two employment reports received since the Committee's July meeting, lower readings on hiring and job vacancies, reduced quits and job-finding rates, and widespread reports from business contacts of less difficulty in hiring workers. Some participants highlighted the fact that the unemployment rate had risen notably, on net, since April 2023. Participants noted, however, that labor market conditions remained solid, as layoffs had been limited and initial claims for unemployment insurance benefits had stayed low. Some participants stressed that, rather than using layoffs to lower their demand for labor, businesses had instead been taking steps such as posting fewer openings, reducing hours, or making use of attrition. A few participants suggested that firms remained reluctant to lay off workers after having difficulty obtaining employees earlier in the post-pandemic period. Some participants remarked that the recent pace of payroll increases had fallen short of what was required to keep the unemployment rate stable on a sustained basis, assuming a constant labor force participation rate. Many participants observed that the evaluation of labor market developments had been challenging, with increased immigration, revisions to reported payroll data, and possible changes in the underlying growth rate of productivity cited as complicating factors. Several participants emphasized the importance of continuing to use disaggregated data or information provided by business contacts as a check on readings on labor market conditions obtained from aggregate data. Participants agreed that labor market conditions were at, or close to, those consistent with the Committee's longer-run goal of maximum employment. With regard to the outlook for the labor market, participants noted that further cooling did not appear to be needed to help bring inflation back to 2 percent. Participants indicated that in their baseline economic outlooks, which included an appropriate recalibration of the Committee's monetary policy stance, the labor market would remain solid. Participants agreed that labor market indicators merited close monitoring, with some noting that as conditions in the labor market have eased, the risk had increased that continued easing could transition to a more serious deterioration. Participants observed that economic activity had continued to expand at a solid pace and highlighted resilient consumption spending. A couple of participants noted that rising real household incomes had bolstered consumption, though some cited signs of a slowing in expenditures or of strains on household budgets, including increased delinquencies in credit card and automobile loans. A couple of participants suggested that the financial strains being experienced by low- and moderate-income households would likely imply slower consumption growth in coming periods. Various participants reported that their business contacts were optimistic about the economic outlook, though they were exercising caution in their hiring and investment decisions. Participants noted that favorable aggregate supply developments, including increases in productivity, had contributed to the recent solid expansion of economic activity, and a few participants discussed possible implications of the introduction of new technology into the workplace. Many participants emphasized that they expected that real GDP would grow at roughly its trend rate over the next few years. Participants discussed the risks and uncertainties associated with the economic outlook. Almost all participants saw upside risks to the inflation outlook as having diminished, while downside risks to employment were seen as having increased. As a result, those participants now assessed the risks to achieving the Committee's dual-mandate goals as being roughly in balance. A couple of participants, however, did not perceive an increased risk of a significant further weakening in labor market conditions. Several participants cited risks of a sharper-than-expected slowing in consumer spending in response to labor market cooling or to continuing strains on the budgets of low- and moderate-income households. Risks to achieving the Committee's price-stability goal had diminished significantly since the target range for the federal funds rate was last raised, and the vast majority of participants saw the risks to inflation as broadly balanced. A couple of participants specifically noted upside inflation risks associated with geopolitical developments. In addition, some participants cited risks that progress toward the Committee's 2 percent inflation objective could be stalled by a larger-than-anticipated easing in financial conditions, stronger-than-expected consumption growth, or continued strong increases in housing services prices. In their consideration of monetary policy at this meeting, participants noted that inflation had made further progress toward the Committee's objective but remained somewhat elevated. Almost all participants expressed greater confidence that inflation was moving sustainably toward 2 percent. Participants also observed that recent indicators suggested that economic activity had continued to expand at a solid pace, job gains had slowed, and the unemployment rate had moved up but remained low. Almost all participants judged that the risks to achieving the Committee's employment and inflation goals were roughly in balance. In light of the progress on inflation and the balance of risks, all participants agreed that it was appropriate to ease the stance of monetary policy. Given the significant progress made since the Committee first set its target range for the federal funds rate at 5-1/4 to 5-1/2 percent, a substantial majority of participants supported lowering the target range for the federal funds rate by 50 basis points to 4-3/4 to 5 percent. These participants generally observed that such a recalibration of the stance of monetary policy would begin to bring it into better alignment with recent indicators of inflation and the labor market. They also emphasized that such a move would help sustain the strength in the economy and the labor market while continuing to promote progress on inflation, and would reflect the balance of risks. Some participants noted that there had been a plausible case for a 25 basis point rate cut at the previous meeting and that data over the intermeeting period had provided further evidence that inflation was on a sustainable path toward 2 percent while the labor market continued to cool. However, noting that inflation was still somewhat elevated while economic growth remained solid and unemployment remained low, some participants observed that they would have preferred a 25 basis point reduction of the target range at this meeting, and a few others indicated that they could have supported such a decision. Several participants noted that a 25 basis point reduction would be in line with a gradual path of policy normalization that would allow policymakers time to assess the degree of policy restrictiveness as the economy evolved. A few participants also added that a 25 basis point move could signal a more predictable path of policy normalization. A few participants remarked that the overall path of policy normalization, rather than the specific amount of initial easing at this meeting, would be more important in determining the degree of policy restriction. Participants judged that it was appropriate to continue the process of reducing the Federal Reserve's securities holdings. In discussing the outlook for monetary policy, participants anticipated that if the data came in about as expected, with inflation moving down sustainably to 2 percent and the economy near maximum employment, it would likely be appropriate to move toward a more neutral stance of policy over time. Participants emphasized that it was important to communicate that the recalibration of the stance of policy at this meeting should not be interpreted as evidence of a less favorable economic outlook or as a signal that the pace of policy easing would be more rapid than participants' assessments of the appropriate path. Those who commented on the degree of restrictiveness of monetary policy observed that they believed it to be restrictive, though they expressed a range of views about the degree of restrictiveness. Participants generally remarked on the importance of communicating that the Committee's monetary policy decisions are conditional on the evolution of the economy and the implications for the economic outlook and balance of risks and therefore not on a preset course. Several participants discussed the importance of communicating that the ongoing reduction in the Federal Reserve's balance sheet could continue for some time even as the Committee reduced its target range for the federal funds rate. In discussing risk-management considerations that could bear on the outlook for monetary policy, almost all participants agreed that the upside risks to inflation had diminished, and most remarked that the downside risks to employment had increased. Some participants emphasized that reducing policy restraint too late or too little could risk unduly weakening economic activity and employment. A few participants highlighted in particular the costs and challenges of addressing such a weakening once it is fully under way. Several participants remarked that reducing policy restraint too soon or too much could risk a stalling or a reversal of the progress on inflation. Some participants noted that uncertainties concerning the level of the longer-term neutral rate of interest complicated the assessment of the degree of restrictiveness of policy and, in their view, made it appropriate to reduce policy restraint gradually. Committee Policy Actions In their discussions of monetary policy for this meeting, members agreed that economic activity had continued to expand at a solid pace. Job gains had slowed, and the unemployment rate had moved up but remained low. Members concurred that there had been further progress toward the Committee's 2 percent inflation objective but that inflation remained somewhat elevated. Almost all members agreed that to appropriately reflect cumulative developments related to inflation and the balance of risks, the postmeeting statement should note that they had gained greater confidence that inflation was moving sustainably toward 2 percent and judged that the risks to achieving the Committee's employment and inflation goals were roughly in balance. Members viewed the economic outlook as uncertain and agreed that they were attentive to the risks to both sides of the Committee's dual mandate. In light of the progress on inflation and the balance of risks, the Committee decided to lower the target range for the federal funds rate to 4-3/4 to 5 percent. One member voted against that decision, preferring to lower the target range for the federal funds rate to 5 to 5-1/4 percent. Members concurred that, in considering additional adjustments to the target range for the federal funds rate, they would carefully assess incoming data, the evolving outlook, and the balance of risks. Members agreed to continue to reduce the Federal Reserve's holdings of Treasury securities and agency debt and agency MBS. All members agreed that the postmeeting statement should affirm their strong commitment both to supporting maximum employment and to returning inflation to the Committee's 2 percent objective. Members agreed that, in assessing the appropriate stance of monetary policy, they would continue to monitor the implications of incoming information for the economic outlook. They would be prepared to adjust the stance of monetary policy as appropriate if risks emerged that could impede the attainment of the Committee's goals. Members also agreed that their assessments would take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments. At the conclusion of the discussion, the Committee voted to direct the Federal Reserve Bank of New York, until instructed otherwise, to execute transactions in the System Open Market Account in accordance with the following domestic policy directive, for release at 2:00 p.m.: "Effective September 19, 2024, 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 4-3/4 to 5 percent. Conduct standing overnight repurchase agreement operations with a minimum bid rate of 5 percent and with an aggregate operation limit of $500 billion. Conduct standing overnight reverse repurchase agreement operations at an offering rate of 4.8 percent and with a per-counterparty limit of $160 billion per day. Roll over at auction the amount of principal payments from the Federal Reserve's holdings of Treasury securities maturing in each calendar month that exceeds a cap of $25 billion per month. Redeem Treasury coupon securities up to this monthly cap and Treasury bills to the extent that coupon principal payments are less than the monthly cap. Reinvest the amount of principal payments from the Federal Reserve's holdings of agency debt and agency mortgage‑backed securities (MBS) received in each calendar month that exceeds a cap of $35 billion per month into Treasury securities to roughly match the maturity composition of Treasury securities outstanding. Allow modest deviations from stated amounts for reinvestments, if needed for operational reasons. Engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions." The vote also encompassed approval of the statement below for release at 2:00 p.m.: "Recent indicators suggest that economic activity has continued to expand at a solid pace. Job gains have slowed, and the unemployment rate has moved up but remains low. Inflation has made further progress toward the Committee's 2 percent objective but remains somewhat elevated. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee has gained greater confidence that inflation is moving sustainably toward 2 percent, and judges that the risks to achieving its employment and inflation goals are roughly in balance. The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate. In light of the progress on inflation and the balance of risks, the Committee decided to lower the target range for the federal funds rate by 1/2 percentage point to 4-3/4 to 5 percent. In considering additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities. The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments." Voting for this action: Jerome H. Powell, John C. Williams, Thomas I. Barkin, Michael S. Barr, Raphael W. Bostic, Lisa D. Cook, Mary C. Daly, Beth M. Hammack, Philip N. Jefferson, Adriana D. Kugler, and Christopher J. Waller. Voting against this action: Michelle W. Bowman. Governor Bowman preferred at this meeting to lower the target range for the federal funds rate by 25 basis points to 5 to 5-1/4 percent in light of core inflation remaining well above the Committee's objective, a labor market that is near full employment, and solid underlying growth. She also expressed her concern that the Committee's larger policy action could be seen as a premature declaration of victory on the price-stability part of the dual mandate. Consistent with the Committee's decision to lower the target range for the federal funds rate to 4-3/4 to 5 percent, the Board of Governors of the Federal Reserve System voted unanimously to lower the interest rate paid on reserve balances at 4.9 percent, effective September 19, 2024. The Board of Governors of the Federal Reserve System voted unanimously to approve a 1/2 percentage point decrease in the primary credit rate to 5 percent, effective September 19, 2024.2 It was agreed that the next meeting of the Committee would be held on Wednesday–Thursday, November 6–7, 2024. The meeting adjourned at 10:30 a.m. on September 18, 2024. Notation Vote By notation vote completed on August 20, 2024, the Committee unanimously approved the minutes of the Committee meeting held on July 30–31, 2024. Attendance Jerome H. Powell, Chair John C. Williams, Vice Chair Thomas I. Barkin Michael S. Barr Raphael W. Bostic Michelle W. Bowman Lisa D. Cook Mary C. Daly Beth M. Hammack Philip N. Jefferson Adriana D. Kugler Christopher J. Waller Susan M. Collins, Austan D. Goolsbee, Alberto G. Musalem, and Jeffrey R. Schmid, Alternate Members of the Committee Patrick Harker, Neel Kashkari, and Lorie K. Logan, Presidents of the Federal Reserve Banks of Philadelphia, Minneapolis, and Dallas, respectively Joshua Gallin, Secretary Matthew M. Luecke, Deputy Secretary Brian J. Bonis, Assistant Secretary Michelle A. Smith, Assistant Secretary Mark E. Van Der Weide, General Counsel Richard Ostrander, Deputy General Counsel Trevor A. Reeve, Economist Stacey Tevlin, Economist Beth Anne Wilson, Economist Shaghil Ahmed, James A. Clouse, Brian M. Doyle, Edward S. Knotek II, Sylvain Leduc, and William Wascher, Associate Economists Roberto Perli, Manager, System Open Market Account Julie Ann Remache, Deputy Manager, System Open Market Account Jose Acosta, Senior System Engineer II, Division of Information Technology, Board Gianni Amisano, Assistant Director, Division of Research and Statistics, Board Mary Amiti, Research Department Head, Federal Reserve Bank of New York Roc Armenter, Executive Vice President, Federal Reserve Bank of Philadelphia Alyssa Arute,3 Assistant Director, Division of Reserve Bank Operations and Payment Systems, Board Alessandro Barbarino, Special Adviser to the Board, Division of Board Members, Board David Bowman, Senior Associate Director, Division of Monetary Affairs, Board Brent Bundick, Vice President, Federal Reserve Bank of Kansas City Jennifer J. Burns, Deputy Directory, Division of Supervision and Regulation, Board Isabel Cairó, Principal Economist, Division of Monetary Affairs, Board Michele Cavallo, Special Adviser to the Board, Division of Board Members, Board Daniel M. Covitz, Deputy Director, Division of Research and Statistics, Board Wendy E. Dunn, Adviser, Division of Research and Statistics, Board Eric M. Engen, Senior Associate Director, Division of Research and Statistics, Board Eric C. Engstrom, Associate Director, Division of Monetary Affairs, Board Erin E. Ferris, Principal Economist, Division of Monetary Affairs, Board Andrew Figura, Associate Director, Division of Research and Statistics, Board Glenn Follette, Associate Director, Division of Research and Statistics, Board Etienne Gagnon, Senior Associate Director, Division of International Finance, Board Jenn Gallagher, Assistant to the Board, Division of Board Members, Board Carlos Garriga, Senior Vice President, Federal Reserve Bank of St. Louis Jason A. Hinkle,3 Deputy Associate Director, Division of Reserve Bank Operations and Payment Systems, Board Valerie S. Hinojosa, Section Chief, Division of Monetary Affairs, Board Jane E. Ihrig, Special Adviser to the Board, Division of Board Members, Board Michael T. Kiley, Deputy Director, Division of Financial Stability, Board Don H. Kim,3 Senior Adviser, Division of Monetary Affairs, Board Anna R. Kovner, Executive Vice President, Federal Reserve Bank of Richmond Andreas Lehnert, Director, Division of Financial Stability, Board Paul Lengermann, Deputy Associate Director, Division of Research and Statistics, Board Kurt F. Lewis, Special Adviser to the Chair, Division of Board Members, Board Laura Lipscomb, Special Adviser to the Board, Division of Board Members, Board David López-Salido, Senior Associate Director, Division of Monetary Affairs, Board Mark Meder, First Vice President, Federal Reserve Bank of Cleveland Ann E. Misback, Secretary, Office of the Secretary, Board Michelle M. Neal, Head of Markets, Federal Reserve Bank of New York Edward Nelson, Senior Adviser, Division of Monetary Affairs, Board Alyssa O'Connor, Special Adviser to the Board, Division of Board Members, Board Anna Paulson, Executive Vice President, Federal Reserve Bank of Chicago Eugenio P. Pinto, Special Adviser to the Board, Division of Board Members, Board Andrea Prestipino, Principal Economist, Division of International Finance, Board Odelle Quisumbing,4 Assistant to the Secretary, Office of the Secretary, Board Andrea Raffo, Senior Vice President, Federal Reserve Bank of Minneapolis Manjola Tase, Principal Economist, Division of Monetary Affairs, Board Robert J. Tetlow, Senior Adviser, Division of Monetary Affairs, Board Alex Zhou Thorp,3 Associate Director, Federal Reserve Bank of New York Clara Vega, Special Adviser to the Board, Division of Board Members, Board Annette Vissing-Jørgensen, Senior Adviser, Division of Monetary Affairs, Board Jonathan Willis, Vice President, Federal Reserve Bank of Atlanta Donielle A. Winford, Senior Information Manager, Division of Monetary Affairs, Board Paul R. Wood, Special Adviser to the Board, Division of Board Members, Board Egon Zakrajsek, Executive Vice President, Federal Reserve Bank of Boston Rebecca Zarutskie, Senior Vice President, Federal Reserve Bank of Dallas _______________________ Joshua Gallin Secretary 1. The Federal Open Market Committee is referenced as the "FOMC" and the "Committee" in these minutes; the Board of Governors of the Federal Reserve System is referenced as the "Board" in these minutes. Return to text 2. In taking this action, the Board approved a request to establish that rate submitted by the board of directors of the Federal Reserve Bank of Atlanta. The vote also encompassed approval by the Board of Governors of the establishment of a 5 percent primary credit rate by the remaining Federal Reserve Banks, effective on September 19, 2024, or the date such Reserve Banks inform the Secretary of the Board of such a request. (Secretary's note: Subsequently, the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Richmond, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco were informed of the Board's approval of their establishment of a primary credit rate of 5 percent, effect September 19, 2024.) 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 of the economic and financial situation. Return to text

2024-09-18

Statement

Recent indicators suggest that economic activity has continued to expand at a solid pace. Job gains have slowed, and the unemployment rate has moved up but remains low. Inflation has made further progress toward the Committee's 2 percent objective but remains somewhat elevated. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee has gained greater confidence that inflation is moving sustainably toward 2 percent, and judges that the risks to achieving its employment and inflation goals are roughly in balance. The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate. In light of the progress on inflation and the balance of risks, the Committee decided to lower the target range for the federal funds rate by 1/2 percentage point to 4-3/4 to 5 percent. In considering additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities. The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments. Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Thomas I. Barkin; Michael S. Barr; Raphael W. Bostic; Lisa D. Cook; Mary C. Daly; Beth M. Hammack; Philip N. Jefferson; Adriana D. Kugler; and Christopher J. Waller. Voting against this action was Michelle W. Bowman, who preferred to lower the target range for the federal funds rate by 1/4 percentage point at this meeting. For media inquiries, please email [email protected] or call 202-452-2955. Implementation Note issued September 18, 2024

2024-07-31

Statement

Recent indicators suggest that economic activity has continued to expand at a solid pace. Job gains have moderated, and the unemployment rate has moved up but remains low. Inflation has eased over the past year but remains somewhat elevated. In recent months, there has been some further progress toward the Committee's 2 percent inflation objective. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee judges that the risks to achieving its employment and inflation goals continue to move into better balance. The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate. In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent. In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities. The Committee is strongly committed to returning inflation to its 2 percent objective. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments. Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Thomas I. Barkin; Michael S. Barr; Raphael W. Bostic; Michelle W. Bowman; Lisa D. Cook; Mary C. Daly; Austan D. Goolsbee; Philip N. Jefferson; Adriana D. Kugler; and Christopher J. Waller. Austan D. Goolsbee voted as an alternate member at this meeting. For media inquiries, please email [email protected] or call 202-452-2955. Implementation Note issued July 31, 2024

2024-08-21

Minute

Minutes of the Federal Open Market Committee July 30–31, 2024 A joint meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve System was held in the offices of the Board of Governors on Tuesday, July 30, 2024, at 10:00 a.m. and continued on Wednesday, July 31, 2024, at 9:00 a.m.1 Developments in Financial Markets and Open Market Operations The manager turned first to a review of developments in financial markets. Financial conditions eased modestly over the intermeeting period, reflecting lower long-term interest rates and higher equity prices. The manager noted that current financial conditions appeared to be providing neither a headwind nor tailwind to growth. Nominal Treasury yields declined over the period, with shorter-term yields having decreased by more than longer-term yields, leading to a steepening of the yield curve. Treasury yields remained sensitive to surprises in economic data, particularly consumer price index releases and employment reports. While near-term inflation compensation fell over the intermeeting period, longer-term forward measures were little changed. Measures of inflation expectations obtained from term structure models were modestly lower. The policy rate path derived from futures prices and the modal path derived from options prices both declined over the intermeeting period and had come into closer alignment with the median of the modal responses from the Open Market Desk's Survey of Primary Dealers and Survey of Market Participants. Policy expectations, however measured, pointed to a first rate cut at the September FOMC meeting, at least one more cut later in the year, and further policy easing next year. In the equity markets, the high perceived likelihood of a September cut in the target range for the policy rate induced a notable appreciation in the stocks of firms with small and medium capitalization, which tend to be more sensitive to interest rates. Stocks of larger companies, especially those in the technology sector, underperformed. Second-quarter earnings reports received before the meeting had been slightly above analysts' expectations, although some companies noted a softening in consumer spending. Expectations for policy rates in most advanced foreign economies (AFEs) declined, as recent data generally pointed to continued progress on inflation. Although most AFE central banks had cut their policy rates or were expected to do so soon, the manager noted that market participants continued to expect the Bank of Japan to tighten policy this year. The sudden announcement of a French election contributed to some short-term market volatility early in the intermeeting period, including a widening between yields of French and German 10-year sovereign bonds and a widening in spreads for off-the-run U.S. Treasury securities, but the effects on U.S. Treasury markets were short lived. The effective federal funds rate remained unchanged over the intermeeting period, but the manager noted that rates on repurchase agreements (repo) had edged higher, reflecting increased demand for financing Treasury securities as well as the expected effects of gradual balance sheet normalization. Use of the overnight reverse repo (ON RRP) facility declined slightly over the intermeeting period. The staff projected that ON RRP usage would decline more noticeably over the remainder of the year, particularly as issuance of Treasury bills increases. However, the manager noted that it was possible that idiosyncratic factors specific to some ON RRP participants might support ON RRP balances in the months ahead. Looking at a range of money market indicators, the manager concluded that reserves remained abundant but indicated that the staff would continue to closely monitor developments in money markets. Finally, the manager described a set of technical adjustments to the production of the Secured Overnight Financing Rate that the Federal Reserve Bank of New York had proposed in a recent public consultation. 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 available at the time of the meeting indicated that U.S. economic activity had advanced solidly so far this year, but at a markedly slower pace than in the second half of 2023. Labor market conditions continued to ease: Job gains moderated, and the unemployment rate moved up further but remained low. Consumer price inflation was well below its year-earlier pace but remained somewhat elevated. Consumer price inflation—as measured by the 12-month change in the price index for personal consumption expenditures (PCE)—was about the same in June as it was at the start of the year, though the month-over-month changes in May and June were smaller than those seen earlier in the year. Total PCE price inflation was 2.5 percent in June, and core PCE price inflation—which excludes changes in energy prices and many consumer food prices—was 2.6 percent. Recent data suggested that labor market conditions had eased further. Average monthly nonfarm payroll gains in the second quarter were smaller than the average pace seen in the first quarter and over the previous year. The unemployment rate moved up further in June to 4.1 percent; the labor force participation rate ticked up as well, and the employment-to-population ratio was unchanged. The unemployment rate for African Americans rose in June, while the rate for Hispanics declined slightly; both rates were above that for Whites. The ratio of job vacancies to unemployment remained at 1.2 in June, about the same as its pre-pandemic level. Measures of nominal wages continued to decelerate: Average hourly earnings for all employees rose 3.9 percent over the 12 months ending in June, down 0.8 percentage point relative to a year earlier, and the 12-month change in the employment cost index of hourly compensation of private industry workers was 3.9 percent in June, down 0.6 percentage point from its year-earlier pace. According to the advance release, real gross domestic product (GDP) rose solidly in the second quarter after a modest gain in the first quarter. Over the first half of the year, GDP growth was noticeably slower than its average pace in 2023. However, real private domestic final purchases (PDFP)—which comprises PCE and private fixed investment and which often provides a better signal than GDP of underlying economic momentum—posted a solid second-quarter increase that was in line with its first-quarter pace and only moderately slower than its average rate of increase in 2023. As in the first quarter, net exports subtracted from U.S. GDP growth in the second quarter. Growth in real exports of goods and services remained tepid overall, as gains in exports of capital goods and consumer goods were partly offset by declines in exports of foods and industrial supplies. By contrast, real imports continued to rise at a brisk pace, driven by further increases in imports of capital goods. Foreign economic growth was estimated to have been subdued in the second quarter, held down by a sharp deceleration in economic activity in China amid ongoing property-sector woes. In Europe and Latin America, output likely expanded below its trend pace, as restrictive monetary policy continued to be a drag on activity. Recent global inflation developments were mixed. In the AFEs, headline inflation edged down in the second quarter but generally remained above target levels. In emerging market economies, headline inflation rose a touch overall, reflecting, in part, run-ups in food prices in some countries. The Bank of Canada and the Swiss National Bank cut their policy rates further, in part citing easing inflation pressures. The People's Bank of China also lowered some key policy rates amid ongoing property-sector woes and weak consumer sentiment. Staff Review of the Financial Situation The market-implied path for the federal funds rate moved down over the intermeeting period. Options on interest rate futures suggested that market participants were placing higher odds on a larger policy easing by early 2025 than they did just before the June meeting. Consistent with the downward shift in the implied policy path, nominal Treasury yields moved down, on net, with the most pronounced declines at shorter horizons driven largely by decreases in inflation compensation. Broad stock price indexes rose slightly on net. Yield spreads on investment- and speculative-grade corporate bonds were little changed and remained at about the lowest decile of their respective historical distributions. The one-month option-implied volatility on the S&P 500 index rose moderately and was somewhat elevated by historical standards, suggesting that investors perceived some, but not outsized, risks to the economic outlook. Market-based measures of the expected paths of policy rates and sovereign bond yields in most AFEs fell notably, largely in response to declines in U.S. rates. Following the surprise announcement of parliamentary elections in France, the spread between yields of French and German 10-year sovereign bonds widened to its highest level since 2012 but then partially retraced on the outcome of no clear parliamentary majority. The broad dollar index was little changed over the intermeeting period. On balance, moves in foreign risky asset prices were mixed and modest. Overnight secured rates edged up over the intermeeting period, but conditions in U.S. short-term funding markets remained stable, with typical dynamics observed surrounding quarter-end. Average usage of the ON RRP facility declined slightly. Banks' total deposit levels increased modestly, as large time deposits displayed moderate inflows. In domestic credit markets, borrowing costs remained elevated over the intermeeting period despite modest declines in some markets. Rates on 30-year conforming residential mortgages declined, on net, over the intermeeting period but stayed near recent high levels. Interest rates on new credit card offers increased slightly, while rates on new auto loans were little changed. Interest rates on small business loans remained elevated. Yields on an array of fixed-income securities—including commercial mortgage-backed securities (CMBS), investment- and speculative-grade corporate bonds, and residential mortgage-backed securities—moved lower to still-elevated levels relative to recent history. The declines were largely driven by decreases in Treasury yields. Financing through capital markets and nonbank lenders was readily accessible for public corporations and large and middle-market private corporations, and credit availability for leveraged loan borrowers remained solid over the intermeeting period. For smaller firms, however, credit availability remained moderately tight. In the July Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS), banks reported modestly tighter standards and lending terms for commercial and industrial (C&I) loans, on net, while reported demand for C&I loans remained about unchanged. Meanwhile, C&I loan balances increased in the second quarter. Regarding commercial real estate (CRE) loans, banks in the July SLOOS reported tightening standards for all loan categories. Nonetheless, bank CRE loan balances increased over the second quarter, albeit at a diminished pace relative to the previous quarter. Credit remained available for most consumers over the intermeeting period, though credit growth showed signs of moderating. Credit card balances slowed in June, and SLOOS respondents indicated that standards for credit cards tightened moderately in the second quarter. Although banks reported in the SLOOS that lending standards on auto loans were unchanged in the second quarter, growth in auto lending at both banks and nonbanks contracted further. In the residential mortgage market, access to credit was little changed overall and continued to depend on borrowers' credit risk attributes. Credit quality remained solid for large and midsize firms, home mortgage borrowers, and municipalities but continued to deteriorate in other sectors. The credit quality of nonfinancial firms borrowing in the corporate bond and leveraged loan markets remained stable. Delinquency rates on loans to small businesses remained slightly above pre-pandemic levels. Credit quality in the CRE market deteriorated further, with the average delinquency rate for loans in CMBS and the share of nonperforming CRE loans at banks both rising further. Regarding household balance sheets, delinquency rates on most residential mortgages remained near pre-pandemic lows. Though consumer delinquency rates had increased, particularly among nonprime borrowers, the rise in delinquency rates for both credit cards and auto loans slowed in the second quarter. The staff provided an update on its assessment of the stability of the U.S. financial system and, on balance, continued to characterize the system's financial vulnerabilities as notable. The staff judged that asset valuation pressures remained elevated, with estimates of risk premiums across key markets low compared with historical standards. House prices remained elevated relative to fundamentals. CRE prices continued to decline, especially in the multifamily and office sectors, and vacancy rates in these sectors continued to increase. Vulnerabilities associated with business and household debt were characterized as moderate. Nonfinancial business leverage was high, but the ability of public firms to service their debt remained solid, in large part due to strong earnings. The fraction of private firms with low debt-servicing ability continued to move up and remained at high levels compared with the past decade. Household balance sheets remained strong overall, as aggregate home equity stayed quite high and delinquencies on mortgage loans remained low. Leverage in the financial sector was characterized as notable. Regulatory capital ratios in the banking sector remained high. The fair value of bank assets, however, remained low. For the nonbank sector, leverage at hedge funds was at its highest recorded level based on data since 2013, partly due to the prevalence of the cash–futures basis trade. Leverage at life insurers was somewhat elevated, and their holdings of risky and illiquid securities continued to grow. Funding risks were also characterized as notable. Assets in prime money market funds and other runnable cash-management vehicles remained near historical highs. Life insurers' greater reliance on nontraditional liabilities, coupled with their increasing holdings of risky corporate debt, suggested that adverse shocks to the industry could trigger substantial funding pressures at these firms. Staff Economic Outlook The economic forecast prepared by the staff for the July meeting implied a lower rate of resource utilization over the projection period relative to the forecast prepared for the previous meeting. The staff's outlook for growth in the second half of 2024 had been marked down largely in response to weaker-than-expected labor market indicators. As a result, the output gap at the start of 2025 was somewhat narrower than had been previously projected, although still not fully closed. Over 2025 and 2026, real GDP growth was expected to rise about in line with potential, leaving the output gap roughly flat in those years. The unemployment rate was expected to edge up slightly over the remainder of 2024 and then to remain roughly unchanged in 2025 and 2026. The staff's inflation forecast was slightly lower than the one prepared for the previous meeting, reflecting incoming data and the lower projected level of resource utilization. Both total and core PCE price inflation were expected to decline further as demand and supply in product and labor markets continued to move into better balance; by 2026, total and core inflation were expected to be around 2 percent. The staff continued to view the uncertainty around the baseline projection as close to the average over the past 20 years. Risks to the inflation forecast were still seen as tilted to the upside, albeit to a smaller degree than at the time of the previous meeting. The risks around the forecast for real activity were viewed as skewed to the downside, both because more-persistent inflation could result in tighter financial conditions than in the baseline and because the recent softening in some indicators of labor market conditions might be pointing to a larger-than-anticipated slowdown in aggregate demand growth. Participants' Views on Current Conditions and the Economic Outlook Participants observed that inflation had eased over the past year but remained elevated and that, in recent months, there had been some further progress toward the Committee's 2 percent inflation objective. Participants noted that the recent progress on disinflation was broad based across the major subcomponents of core inflation. Core goods prices were about flat from March through June after having risen during the first three months of the year. Price inflation in June for housing services showed a notable slowing, which participants had been anticipating for some time. In addition, core nonhousing services prices had decelerated in recent months. Some participants noted that the recent data corroborated reports from their business contacts that firms' pricing power was waning, as consumers appeared to be more sensitive to price increases. Various contacts had also reported that they had cut prices or were offering discounts to stay competitive, or that declines in input costs had helped reduce pressure on retail prices. With regard to the outlook for inflation, participants judged that recent data had increased their confidence that inflation was moving sustainably toward 2 percent. Almost all participants observed that the factors that had contributed to recent disinflation would likely continue to put downward pressure on inflation in coming months. These factors included a continued waning of pricing power, moderating economic growth, and the runoff in excess household savings accumulated during the pandemic. Many participants noted that the moderation of growth in labor costs as labor market conditions rebalanced would continue to contribute to disinflation, particularly in core nonhousing services prices. Some participants noted that the lags in the time it takes for housing rental conditions for new tenants to show through to aggregate price data for housing services meant that the disinflationary trend in this component would likely continue. Participants also observed that longer-term inflation expectations had remained well anchored and viewed this anchoring as underpinning the disinflation process. A couple of participants noted that inflation pressures might persist for some time, as they assessed that the economy had considerable momentum, and that, even with some easing of the demand for labor, the labor market remained strong. Participants assessed that supply and demand conditions in the labor market had continued to come into better balance. The unemployment rate had moved up but remained low, having risen 0.7 percentage point since its trough in April 2023 to 4.1 percent in June. The monthly pace of payroll job gains had moderated from the first quarter but had been solid in recent months. However, many participants noted that reported payroll gains might be overstated, and several assessed that payroll gains may be lower than those needed to keep the unemployment rate constant with a flat labor force participation rate. Participants observed that other indicators also pointed to easing in labor market conditions, including a lower hiring rate and a downtrend in job vacancies since the beginning of the year. Participants noted that the rebalancing of labor market conditions over the past year was also aided by an expansion of the supply of workers, reflecting increases in the labor force participation rate among individuals aged 25 to 54 and a strong pace of immigration. Participants noted that, with continued rebalancing of labor market conditions, nominal wage growth had continued to moderate. Many participants cited reports from District contacts that supported the view that labor market conditions had been easing. In particular, contacts reported that they had been experiencing less difficulty in hiring and retaining workers and that they saw limited wage pressures. Participants generally assessed that, overall, conditions in the labor market had returned to about where they stood on the eve of the pandemic—strong but not overheated. Regarding the outlook for the labor market, participants discussed various indicators of layoffs, including initial claims for unemployment benefits and measures of job separations. Some participants commented that these indicators had remained at levels consistent with a strong labor market. Participants agreed that these and other indicators of labor market conditions merited close monitoring. Several participants said that their District contacts reported that they were actively managing head counts through selective hiring and attrition. Participants noted that real GDP growth was solid in the first half of the year, though slower than the robust pace seen in the second half of last year. PDFP growth, which usually gives a better signal than GDP growth of economic momentum, also moderated in the first half, but by less than GDP growth. PDFP expanded at a solid pace, supported by growth in consumer spending and business fixed investment. Participants viewed the moderation in the growth of economic activity to be largely in line with what they had anticipated. Regarding the household sector, participants observed that consumer spending had slowed from last year's robust pace, consistent with restrictive monetary policy, easing of labor market conditions, and slowing income growth. They noted, however, that consumer spending had still grown at a solid pace in the first half of the year, supported by the still-strong labor market and aggregate household balance sheets. Some participants observed that lower- and moderate-income households were encountering increasing strains as they attempted to meet higher living costs after having largely run down savings accumulated during the pandemic. These participants noted that such strains were evident in indicators such as rising credit card delinquency rates and an increased share of households paying the minimum due on balances, and warranted continued close monitoring. Several participants cited reports that consumers, especially those in lower-income households, were shifting away from discretionary spending and switching to lower-cost food items and brands. A couple of participants remarked that spending by some higher-income households was likely being bolstered by wealth effects from equity and housing price appreciation. Participants noted that residential investment was weak in the second quarter, likely reflecting the pickup in mortgage rates from earlier in the year. Regarding the business sector, participants noted that conditions varied by firm size, sector, and region. A couple of participants noted that their District contacts had reported larger firms as having a generally stable outlook, while the outlook for smaller firms appeared more uncertain. A few participants said that their contacts reported that conditions in the manufacturing sector were somewhat weaker, while the professional and business services sector and technology-related sectors remained strong. A few participants noted that the agricultural sector continued to face strains stemming from low food commodity prices and high input costs. Participants discussed the risks and uncertainties around the economic outlook. Upside risks to the inflation outlook were seen as having diminished, while downside risks to employment were seen as having increased. Participants saw risks to achieving the inflation and employment objectives as continuing to move into better balance, with a couple noting that they viewed these risks as more or less balanced. Some participants noted that as conditions in the labor market have eased, the risk had increased that continued easing could transition to a more serious deterioration. As sources of upside risks to inflation, some participants cited the potential for disruptions to supply chains and a further deterioration in geopolitical conditions. A few participants noted that an easing of financial conditions could boost economic activity and present an upside risk to economic growth and inflation. In their discussion of financial stability, participants who commented noted vulnerabilities to the financial system that they assessed warranted monitoring. Some participants observed that the banking system was sound but noted risks associated with unrealized losses on securities, reliance on uninsured deposits, and interconnections with nonbank financial intermediaries. In their discussion of bank funding, several participants commented that, because the discount window is an important liquidity backstop, the Federal Reserve should continue to improve the window's operational efficiency and to communicate effectively about the window's value. Participants generally noted that some banks and nonbank financial institutions likely have vulnerabilities associated with high CRE exposures through loan portfolios and holdings of CMBS. Most of these participants remarked that risks related to CRE exposures depend importantly on the property type and the local market conditions of the properties involved. A couple of participants noted concerns about asset valuation pressures in other markets as well. Many participants commented on cyber risks that could impair the operation of financial institutions, financial infrastructure, and, potentially, the overall economy. Many participants remarked that because a few firms play a substantial role in the provision of information technology services to the financial sector and because of the highly interconnected nature of some firms in the financial industry itself, there was an increased risk that significant cyber disruptions at a small number of key firms could have widespread effects. Several participants noted that leverage in the Treasury market remained a risk, that it would be important to monitor developments regarding Treasury market resilience amid the move to central clearing, or that it is valuable to communicate about the Federal Reserve's standing repo facility as a liquidity backstop. A couple of participants commented on the financial condition of low- and moderate-income households that have exhausted their savings and the importance of monitoring rising delinquency rates on credit cards and auto loans. In their consideration of monetary policy at this meeting, participants observed that recent indicators suggested that economic activity had continued to expand at a solid pace, job gains had moderated, and the unemployment rate had moved up but remained low. While inflation remained somewhat above the Committee's longer-run goal of 2 percent, participants noted that inflation had eased over the past year and that recent incoming data indicated some further progress toward the Committee's objective. All participants supported maintaining the target range for the federal funds rate at 5-1/4 to 5-1/2 percent, although several observed that the recent progress on inflation and increases in the unemployment rate had provided a plausible case for reducing the target range 25 basis points at this meeting or that they could have supported such a decision. Participants furthermore judged that it was appropriate to continue the process of reducing the Federal Reserve's securities holdings. In discussing the outlook for monetary policy, participants noted that growth in economic activity had been solid, there had been some further progress on inflation, and conditions in the labor market had eased. Almost all participants remarked that while the incoming data regarding inflation were encouraging, additional information was needed to provide greater confidence that inflation was moving sustainably toward the Committee's 2 percent objective before it would be appropriate to lower the target range for the federal funds rate. Nevertheless, participants viewed the incoming data as enhancing their confidence that inflation was moving toward the Committee's objective. The vast majority observed that, if the data continued to come in about as expected, it would likely be appropriate to ease policy at the next meeting. Many participants commented that monetary policy continued to be restrictive, although they expressed a range of views about the degree of restrictiveness, and a few participants noted that ongoing disinflation, with no change in the nominal target range for the policy rate, by itself results in a tightening in monetary policy. Most participants remarked on the importance of communicating the Committee's data-dependent approach and emphasized, in particular, that monetary policy decisions are conditional on the evolution of the economy rather than being on a preset path or that those decisions depend on the totality of the incoming data rather than on any particular data point. Several participants stressed the need to monitor conditions in money markets and factors affecting the demand for reserves amid the ongoing reduction in the Federal Reserve's balance sheet. In discussing risk-management considerations that could bear on the outlook for monetary policy, participants highlighted uncertainties affecting the outlook, such as those regarding the amount of restraint currently provided by monetary policy, the lags with which past and current restraint have affected and will affect economic activity, and the degree of normalization of the economy following disruptions associated with the pandemic. A majority of participants remarked that the risks to the employment goal had increased, and many participants noted that the risks to the inflation goal had decreased. Some participants noted the risk that a further gradual easing in labor market conditions could transition to a more serious deterioration. Many participants noted that reducing policy restraint too late or too little could risk unduly weakening economic activity or employment. A couple participants highlighted in particular the costs and challenges of addressing such a weakening once it is fully under way. Several participants remarked that reducing policy restraint too soon or too much could risk a resurgence in aggregate demand and a reversal of the progress on inflation. These participants pointed to risks related to potential shocks that could put upward pressure on inflation or the possibility that inflation could prove more persistent than currently expected. Committee Policy Actions In their discussions of monetary policy for this meeting, members agreed that economic activity had continued to expand at a solid pace. Job gains had moderated, and the unemployment rate had moved up but remained low. Inflation eased over the past year but remained somewhat elevated. Members concurred that, in recent months, there had been some further progress toward the Committee's 2 percent inflation objective. Members judged that the risks to achieving the Committee's employment and inflation goals had continued to move into better balance. Members viewed the economic outlook as uncertain and agreed that they were attentive to the risks to both sides of the Committee's dual mandate. In support of the Committee's goals to achieve maximum employment and inflation at the rate of 2 percent over the longer run, members agreed to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent. Members concurred that, in considering any adjustments to the target range for the federal funds rate, they would carefully assess incoming data, the evolving outlook, and the balance of risks. Members agreed that they did not expect that it would be appropriate to reduce the target range until they had gained greater confidence that inflation is moving sustainably toward 2 percent. In addition, members agreed to continue to reduce the Federal Reserve's holdings of Treasury securities and agency debt and agency mortgage‑backed securities. All members affirmed their strong commitment to returning inflation to the Committee's 2 percent objective. Members agreed that, in assessing the appropriate stance of monetary policy, they would continue to monitor the implications of incoming information for the economic outlook. They would be prepared to adjust the stance of monetary policy as appropriate if risks emerged that could impede the attainment of the Committee's goals. Members also agreed that their assessments would take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments. Members agreed that to appropriately reflect developments since the previous meeting related to their maximum-employment objective, they should note in the statement that "job gains have moderated, and the unemployment rate has moved up but remains low." Similarly, to appropriately reflect developments related to their price-stability objective, they agreed to note that "there has been some further progress toward the Committee's 2 percent inflation objective." Members also agreed to reflect the shifting balance of risks by stating that "the Committee judges that the risks to achieving its employment and inflation goals continue to move into better balance" and that "the Committee is attentive to the risks to both sides of its dual mandate." At the conclusion of the discussion, the Committee voted to direct the Federal Reserve Bank of New York, until instructed otherwise, to execute transactions in the System Open Market Account in accordance with the following domestic policy directive, for release at 2:00 p.m.: "Effective August 1, 2024, 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 5-1/4 to 5-1/2 percent. Conduct standing overnight repurchase agreement operations with a minimum bid rate of 5.5 percent and with an aggregate operation limit of $500 billion. Conduct standing overnight reverse repurchase agreement operations at an offering rate of 5.3 percent and with a per-counterparty limit of $160 billion per day. Roll over at auction the amount of principal payments from the Federal Reserve's holdings of Treasury securities maturing in each calendar month that exceeds a cap of $25 billion per month. Redeem Treasury coupon securities up to this monthly cap and Treasury bills to the extent that coupon principal payments are less than the monthly cap. Reinvest the amount of principal payments from the Federal Reserve's holdings of agency debt and agency mortgage-backed securities (MBS) received in each calendar month that exceeds a cap of $35 billion per month into Treasury securities to roughly match the maturity composition of Treasury securities outstanding. Allow modest deviations from stated amounts for reinvestments, if needed for operational reasons. Engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions." The vote also encompassed approval of the statement below for release at 2:00 p.m.: "Recent indicators suggest that economic activity has continued to expand at a solid pace. Job gains have moderated, and the unemployment rate has moved up but remains low. Inflation has eased over the past year but remains somewhat elevated. In recent months, there has been some further progress toward the Committee's 2 percent inflation objective. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee judges that the risks to achieving its employment and inflation goals continue to move into better balance. The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate. In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent. In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities. The Committee is strongly committed to returning inflation to its 2 percent objective. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments." Voting for this action: Jerome H. Powell, John C. Williams, Thomas I. Barkin, Michael S. Barr, Raphael W. Bostic, Michelle W. Bowman, Lisa D. Cook, Mary C. Daly, Austan D. Goolsbee, Philip N. Jefferson, Adriana D. Kugler, and Christopher J. Waller. Voting against this action: None. Austan D. Goolsbee voted as an 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 of the Federal Reserve System voted unanimously to maintain the interest rate paid on reserve balances at 5.4 percent, effective August 1, 2024. The Board of Governors of the Federal Reserve System voted unanimously to approve the establishment of the primary credit rate at the existing level of 5.5 percent, effective August 1, 2024. It was agreed that the next meeting of the Committee would be held on Tuesday–Wednesday, September 17–18, 2024. The meeting adjourned at 10:10 a.m. on July 31, 2024. Notation Vote By notation vote completed on July 2, 2024, the Committee unanimously approved the minutes of the Committee meeting held on June 11–12, 2024. Attendance Jerome H. Powell, Chair John C. Williams, Vice Chair Thomas I. Barkin Michael S. Barr Raphael W. Bostic Michelle W. Bowman Lisa D. Cook Mary C. Daly Philip N. Jefferson Adriana D. Kugler Christopher J. Waller Susan M. Collins, Austan D. Goolsbee, Alberto G. Musalem, Jeffrey R. Schmid, and Sushmita Shukla, Alternate Members of the Committee Patrick Harker, Neel Kashkari, and Lorie K. Logan, Presidents of the Federal Reserve Banks of Philadelphia, Minneapolis, and Dallas, respectively Mark Meder, Interim President of the Federal Reserve Bank of Cleveland Joshua Gallin, Secretary Matthew M. Luecke, Deputy Secretary Brian J. Bonis, Assistant Secretary Michelle A. Smith, Assistant Secretary Mark E. Van Der Weide, General Counsel Richard Ostrander, Deputy General Counsel Trevor A. Reeve, Economist Stacey Tevlin, Economist Beth Anne Wilson, Economist Edward S. Knotek II, David E. Lebow, and William Wascher, Associate Economists Roberto Perli, Manager, System Open Market Account Julie Ann Remache, Deputy Manager, System Open Market Account Stephanie R. Aaronson, Senior Associate Director, Division of Research and Statistics, Board Jose Acosta, Senior System Administrator II, Division of Information Technology, Board Alyssa G. Anderson, Principal Economist, Division of Monetary Affairs, Board Alessandro Barbarino, Special Adviser to the Board, Division of Board Members, Board David Bowman,2 Senior Associate Director, Division of Monetary Affairs, Board Fang Cai, Assistant Director, Division of Financial Stability, Board Mark A. Carlson, Adviser, Division of Monetary Affairs, Board Stephanie E. Curcuru, Deputy Director, Division of International Finance, Board Rochelle M. Edge, Deputy Director, Division of Monetary Affairs, Board Jonas Fisher, Senior Vice President, Federal Reserve Bank of Chicago Glenn Follette, Associate Director, Division of Research and Statistics, Board Etienne Gagnon, Associate Director, Division of International Finance, Board Jenn Gallagher, Assistant to the Board, Division of Board Members, Board Carlos Garriga, Senior Vice President, Federal Reserve Bank of St. Louis Michael S. Gibson, Director, Division of Supervision and Regulation, Board David Glancy, Principal Economist, Division of Monetary Affairs, Board Joseph W. Gruber, Executive Vice President, Federal Reserve Bank of Kansas City Christopher J. Gust, Associate Director, Division of Monetary Affairs, Board Diana Hancock, Senior Associate Director, Division of Research and Statistics, Board Valerie S. Hinojosa, Section Chief, Division of Monetary Affairs, Board Colin J. Hottman, Principal Economist, Division of International Finance, Board Jane E. Ihrig, Special Adviser to the Board, Division of Board Members, Board Mark J. Jensen, Vice President, Federal Reserve Bank of Atlanta Benjamin K. Johannsen, Assistant Director, Division of Monetary Affairs, Board Faten Khoury,2 Senior Financial Institution Policy Analyst, Division of Reserve Bank Operations and Payment Systems, Board Michael T. Kiley, Deputy Director, Division of Financial Stability, Board Don H. Kim, Senior Adviser, Division of Monetary Affairs, Board Anna R. Kovner, Executive Vice President, Federal Reserve Bank of Richmond Andreas Lehnert, Director, Division of Financial Stability, Board Kurt F. Lewis, Special Adviser to the Chair, Division of Board Members, Board Laura Lipscomb, Special Adviser to the Board, Division of Board Members, Board Rebecca D. McCaughrin,2 Policy and Market Analysis Director, Federal Reserve Bank of New York Benjamin W. McDonough,3 Deputy Secretary and Ombudsman, Office of the Secretary, Board Yvette McKnight,4 Senior Agenda Assistant, Office of Secretary, Board Andrew Meldrum, Assistant Director, Division of Monetary Affairs, Board Karel Mertens, Senior Vice President, Federal Reserve Bank of Dallas Thomas Mertens, Vice President, Federal Reserve Bank of San Francisco Ann E. Misback,5 Secretary, Office of the Secretary, Board Norman J. Morin, Associate Director, Division of Research and Statistics, Board Michelle M. Neal, Head of Markets, Federal Reserve Bank of New York Alyssa O'Connor, Special Adviser to the Board, Division of Board Members, Board Paolo A. Pesenti, Director of Monetary Policy Research, Federal Reserve Bank of New York Eugenio P. Pinto, Special Adviser to the Board, Division of Board Members, Board Odelle Quisumbing,4 Assistant to the Secretary, Office of the Secretary, Board Andrea Raffo, Senior Vice President, Federal Reserve Bank of Minneapolis Donald Keith Sill, Senior Vice President, Federal Reserve Bank of Philadelphia Arsenios Skaperdas, Senior Economist, Division of Monetary Affairs, Board Gustavo A. Suarez, Assistant Director, Division of Research and Statistics, Board Manjola Tase, Principal Economist, Division of Monetary Affairs, Board Thiago Teixeira Ferreira, Special Adviser to the Board, Division of Board Members, Board Clara Vega, Special Adviser to the Board, Division of Board Members, Board Jeffrey D. Walker,2 Associate Director, Division of Reserve Bank Operations and Payment Systems, Board Randall A. Williams, Group Manager, Division of Monetary Affairs, Board Paul R. Wood, Special Adviser to the Board, Division of Board Members, Board Egon Zakrajsek, Executive Vice President, Federal Reserve Bank of Boston Rebecca Zarutskie, Special Adviser to the Board, Division of Board Members, Board _______________________ Joshua Gallin Secretary 1. The Federal Open Market Committee is referenced as the "FOMC" and the "Committee" in these minutes; the Board of Governors of the Federal Reserve System is referenced as the "Board" 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 Wednesday's session only. Return to text 4. Attended through the discussion of the economic and financial situation. Return to text 5. Attended Tuesday's session only. Return to text

2024-06-12

Statement

Recent indicators suggest that economic activity has continued to expand at a solid pace. Job gains have remained strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated. In recent months, there has been modest further progress toward the Committee's 2 percent inflation objective. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee judges that the risks to achieving its employment and inflation goals have moved toward better balance over the past year. The economic outlook is uncertain, and the Committee remains highly attentive to inflation risks. In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent. In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities. The Committee is strongly committed to returning inflation to its 2 percent objective. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments. Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Thomas I. Barkin; Michael S. Barr; Raphael W. Bostic; Michelle W. Bowman; Lisa D. Cook; Mary C. Daly; Philip N. Jefferson; Adriana D. Kugler; Loretta J. Mester; and Christopher J. Waller. For media inquiries, please email [email protected] or call 202-452-2955. Implementation Note issued June 12, 2024

2024-07-03

Minute

Minutes of the Federal Open Market Committee June 11–12, 2024 A joint meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve System was held in the offices of the Board of Governors on Tuesday, June 11, 2024, at 10:30 a.m. and continued on Wednesday, June 12, 2024, at 9:15 a.m.1 Attendance Jerome H. Powell, Chair John C. Williams, Vice Chair Thomas I. Barkin Michael S. Barr Raphael W. Bostic Michelle W. Bowman Lisa D. Cook Mary C. Daly Philip N. Jefferson Adriana D. Kugler Loretta J. Mester Christopher J. Waller Susan M. Collins, Austan D. Goolsbee, Alberto G. Musalem, and Jeffrey R. Schmid, Alternate Members of the Committee Patrick Harker, Neel Kashkari, and Lorie K. Logan, Presidents of the Federal Reserve Banks of Philadelphia, Minneapolis, and Dallas, respectively Joshua Gallin, Secretary Matthew M. Luecke, Deputy Secretary Brian J. Bonis, Assistant Secretary Michelle A. Smith, Assistant Secretary Mark E. Van Der Weide, General Counsel Richard Ostrander, Deputy General Counsel Trevor A. Reeve, Economist Stacey Tevlin,2 Economist Beth Anne Wilson, Economist Shaghil Ahmed, Kartik B. Athreya, James A. Clouse, Brian M. Doyle, Edward S. Knotek II, David E. Lebow, Paula Tkac, and William Wascher, Associate Economists Roberto Perli, Manager, System Open Market Account Julie Ann Remache, Deputy Manager, System Open Market Account Stephanie R. Aaronson, Senior Associate Director, Division of Research and Statistics, Board Jose Acosta, Senior System Administrator II, Division of Information Technology, Board Roc Armenter, Executive Vice President, Federal Reserve Bank of Philadelphia Ayelen Banegas, Principal Economist, Division of Monetary Affairs, Board Michele Cavallo, Principal Economist, Division of Monetary Affairs, Board Stephanie E. Curcuru, Deputy Director, Division of International Finance, Board Stefania D'Amico,3 Senior Economist and Research Advisor, Federal Reserve Bank of Chicago Ryan Decker, Special Adviser to the Board, Division of Board Members, Board Rochelle M. Edge, Deputy Director, Division of Monetary Affairs, Board Eric M. Engen, Senior Associate Director, Division of Research and Statistics, Board Michele Taylor Fennell,4 Deputy Associate Secretary, Office of the Secretary, Board Glenn Follette, Associate Director, Division of Research and Statistics, Board Jenn Gallagher, Assistant to the Board, Division of Board Members, Board Carlos Garriga, Senior Vice President, Federal Reserve Bank of St. Louis Michael S. Gibson, Director, Division of Supervision and Regulation, Board David Glancy, Principal Economist, Division of Monetary Affairs, Board Francois J. Gourio, Senior Economist and Economic Advisor, Federal Reserve Bank of Chicago Olesya Grishchenko, Principal Economist, Division of Monetary Affairs, Board Christopher J. Gust, Associate Director, Division of Monetary Affairs, Board Valerie S. Hinojosa, Section Chief, Division of Monetary Affairs, Board Jasper J. Hoek, Deputy Associate Director, Division of International Finance, Board Sara J. Hogan,3 Senior Financial Institution Policy Analyst I, Division of Reserve Bank Operations and Payment Systems, Board Jane E. Ihrig, Special Adviser to the Board, Division of Board Members, Board Michael T. Kiley, Deputy Director, Division of Financial Stability, Board Don H. Kim,3 Senior Adviser, Division of Monetary Affairs, Board Andreas Lehnert, Director, Division of Financial Stability, Board Paul Lengermann, Deputy Associate Director, Division of Research and Statistics, Board Kurt F. Lewis, Special Adviser to the Chair, Division of Board Members, Board Dan Li, Assistant Director, Division of Monetary Affairs, Board Laura Lipscomb, Special Adviser to the Board, Division of Board Members, Board David López-Salido, Senior Associate Director, Division of Monetary Affairs, Board Thomas Lubik, Senior Advisor, Federal Reserve Bank of Richmond Benjamin Malin, Vice President, Federal Reserve Bank of Minneapolis Benjamin W. McDonough, Deputy Secretary and Ombudsman, Office of the Secretary, Board Karel Mertens, Senior Vice President, Federal Reserve Bank of Dallas Michelle M. Neal, Head of Markets, Federal Reserve Bank of New York Edward Nelson, Senior Adviser, Division of Monetary Affairs, Board Alyssa O'Connor, Special Adviser to the Board, Division of Board Members, Board Matthias Paustian, Assistant Director, Division of Research and Statistics, Board Karen M. Pence, Deputy Associate Director, Division of Research and Statistics, Board Karen A. Pennell, First Vice President, Federal Reserve Bank of Boston Damjan Pfajfar, Group Manager, Division of Monetary Affairs, Board Eugenio P. Pinto, Special Adviser to the Board, Division of Board Members, Board Odelle Quisumbing,5 Assistant to the Secretary, Office of the Secretary, Board Gisela Rua, Principal Economist, Division of Research and Statistics, Board Achilles Sangster II, Senior Information Manager, Division of Monetary Affairs, Board A. Lee Smith, Senior Vice President, Federal Reserve Bank of Kansas City Robert G. Valletta, Senior Vice President, Federal Reserve Bank of San Francisco Francisco Vazquez-Grande, Group Manager, Division of Monetary Affairs, Board Clara Vega, Special Adviser to the Board, Division of Board Members, Board Annette Vissing-Jørgensen, Senior Adviser, Division of Monetary Affairs, Board Jeffrey D. Walker,3 Associate Director, Division of Reserve Bank Operations and Payment Systems, Board Paul R. Wood, Special Adviser to the Board, Division of Board Members, Board Egon Zakrajsek, Executive Vice President, Federal Reserve Bank of Boston Rebecca Zarutskie, Special Adviser to the Board, Division of Board Members, Board Developments in Financial Markets and Open Market Operations The manager turned first to a review of developments in financial markets. Financial conditions eased modestly over the intermeeting period mainly because of higher equity prices. Taking a somewhat longer perspective, the manager noted that financial conditions had changed little since March but eased notably since the fall. The main drivers of that easing were again higher equity prices, which appeared to respond to the reductions in the perceived odds of a recession, and a consensus among market participants that the federal funds rate has reached its peak. Nominal Treasury yields declined moderately across the curve, on net, but continued to be very sensitive to incoming data surprises, especially those pertaining to inflation and the labor market. The net decline in nominal yields over the period was primarily due to lower real yields. Inflation compensation also fell somewhat, especially at shorter horizons. Longer-term inflation expectations remained well anchored. The manager turned next to policy rate expectations. The path of the federal funds rate implied by futures prices shifted a bit lower over the intermeeting period and indicated one and one-half 25 basis point cuts by year-end. This shift appeared to reflect mostly changes in perceived risks rather than base-case expectations because the modal path implied by options was virtually unchanged and remained consistent with, at most, one cut this year. The median of modal paths of the federal funds rate obtained from the Open Market Desk's Survey of Primary Dealers and Survey of Market Participants—taken before the May employment report—was also little changed. The manager then discussed expectations regarding balance sheet policy. Responses to the Desk surveys showed a median expected timing for the end of balance sheet runoff of April 2025, one month later than in the previous surveys, though individual respondents' views of the exact timing remained dispersed. Respondents' expectations about the size of the portfolio at the end of runoff had changed little in recent surveys. In international developments, the European Central Bank (ECB) and the Bank of Canada (BOC) initiated rate-cutting cycles this period, as generally expected. Market participants reportedly had not expected easing cycles to begin at the same time across economies but appeared to expect that most advanced-economy central banks will have started easing policy within the next several months. The manager then turned to money markets and Desk operations. Unsecured overnight rates were stable over the intermeeting period. In secured funding markets, repurchase agreement (repo) rates remained steady for most of the period but firmed close to the end of May because of month-end pressures and the effect of large settlements of Treasury coupon securities. Rate firmness around reporting and settlement dates was consistent with historical patterns. Use of the overnight reverse repurchase agreement (ON RRP) facility remained sensitive to market rates and the availability of alternative investments. Usage was little changed over much of the period but dipped late in the period, coincident with the month-end firming in private repo rates. The staff projected ON RRP usage to decline in coming months, as net Treasury bill issuance was expected to turn positive and private repo rates were expected to continue to move higher relative to administered rates amid large issuance of Treasury coupon securities. The staff also projected that reserves will not change much in the near term, with the exception of quarter-end dates, and then will decline about in line with the shrinking of the Federal Reserve's portfolio after ON RRP balances are nearly fully drained. The uncertainty surrounding both projections, however, was considerable. The manager also discussed the responses to a Desk survey question about the most likely spread between the effective federal funds rate and the interest rate on reserve balances at different levels of the sum of reserves and ON RRP balances. The responses indicated considerable uncertainty and dispersion of views about when and how the spread would move as the sum declines. The manager observed that indicators based on market prices and activity were likely the best gauges of how quickly reserves are transitioning from abundant to ample. Over the intermeeting period, the federal funds market continued to be insensitive to day-to-day changes in the supply of reserves; various other indicators suggested that reserves remained abundant and that the risk of money market strains in the near term was low. 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 available at the time of the meeting suggested that U.S. economic activity had expanded at a solid pace so far this year. Labor market conditions remained solid. Job gains continued to be strong, while the unemployment rate had edged up but was still low. Consumer price inflation was running well below where it was a year earlier, but further progress toward the Committee's 2 percent inflation objective had been modest in recent months. Consumer price inflation—as measured by the 12-month change in the price index for personal consumption expenditures (PCE)—was about the same in April as at the end of last year, although recent month-over-month readings of PCE prices were lower than earlier this year. Total PCE price inflation was 2.7 percent in April, and core PCE price inflation—which excludes changes in energy prices and many consumer food prices—was 2.8 percent. The consumer price index (CPI) in May showed that the 12-month change measure of total CPI inflation was 3.3 percent and core CPI inflation was 3.4 percent, and recent monthly CPI readings were lower than earlier this year. Al­though some survey-based measures of short-term inflation expectations had moved up, longer-term expectations were little changed and stood at levels consistent with those that prevailed just before the pandemic. Labor demand and supply continued to move into better balance. Total nonfarm payroll employment increased at only a somewhat slower average monthly pace over April and May than the strong rate recorded in the first quarter. The recently released fourth-quarter data from the Quarterly Census of Employment and Wages suggested that while the strong reported rate of payroll increases last year may have been overstated, job gains were still solid. In May, the unemployment rate ticked up further to 4.0 percent, while the labor force participation rate and the employment-to-population ratio both moved down a little. The unemployment rates for African Americans and for Hispanics were somewhat higher in May than in the first quarter; both rates were above those for Asians and for Whites. The ratio of job vacancies to unemployment declined further to 1.2 in May, about the same as its pre-pandemic level. Most measures of the increase in nominal wages from a year earlier continued to trend down, including the 12-month change in average hourly earnings for all employees, which was 4.1 percent in May, 0.2 percentage point lower than at the end of last year. Real gross domestic product (GDP) rose modestly in the first quarter, held down by significant negative contributions from inventory investment and net exports, which tend to be volatile components. In contrast, private domestic final purchases (PDFP)—which comprises PCE and private fixed investment and which often provides a better signal than GDP of underlying economic momentum—increased at a solid pace, similar to last year. Recent spending indicators suggested that GDP and PDFP were increasing at solid rates in the second quarter. Real exports of goods edged up in April relative to March, following tepid growth in the first quarter. Real imports of goods jumped in April, driven by higher imports of autos and capital goods. Overall, the nominal U.S. international trade deficit widened in April, as imports of goods and services rose more than exports. Foreign GDP growth firmed in the first quarter. A buoyant service sector helped Europe recover from a modest contraction in the second half of last year. In emerging market economies (EMEs), including China, growth was supported by strong external demand. The first-quarter surge in economic activity in China was also boosted by policy support, especially from fiscal policy. More recent Chinese data, however, especially a steep drop in lending to households and businesses in April, pointed to a considerable slowdown in China's economic activity in this quarter. Headline inflation continued to ease in the advanced foreign economies (AFEs) through May, albeit at a slower pace than last year. While core inflation had slowed significantly, the core nonhousing services component remained elevated in several regions, partly reflecting strong nominal wage growth. Inflation inched up in EMEs, in part because of weather-related increases in food prices in some countries. The Riksbank, the BOC, and the ECB cut their policy rates as market participants expected, amid easing inflation. Communications about future policy decisions varied and were focused on domestic economic conditions. Staff Review of the Financial Situation Over the intermeeting period, the market-implied path for the federal funds rate beyond the next few months edged down. Options on interest rate futures suggested that market participants were placing higher odds on policy easing by early 2025 than they did just before the April FOMC meeting. Consistent with the slight downward shift in the implied policy path, nominal Treasury yields at all maturities also moved down moderately, driven primarily by declines in real Treasury yields. Inflation compensation also fell some, with larger declines at nearer horizons. Market-based measures of interest rate uncertainty ticked down but remained elevated by historical standards. Broad stock price indexes increased substantially, on net, amid a positive investor outlook on corporate profits and economic activity. Yield spreads on investment- and speculative-grade corporate bonds were little changed, remaining at about the lowest decile of their respective historical distributions. The one-month option-implied volatility on the S&P 500 index remained low by historical standards, suggesting that investors perceived only modest near-term risks to the economic outlook. Changes in AFE yields were mixed, as spillovers from declines in U.S. yields were partly offset by upside surprises in economic data releases in Europe and by somewhat more restrictive-than-expected communications by the ECB. The dollar depreciated against most AFE currencies as differentials between U.S. and AFE yields narrowed. Nonetheless, the broad dollar index slightly increased as the dollar appreciated sharply against the Mexican peso amid heightened policy uncertainty following Mexico's presidential election results. On balance, moves in foreign risky asset prices were mixed and modest, and EME funds saw small inflows. Conditions in U.S. short-term funding markets remained stable over the intermeeting period. Average usage of the ON RRP facility was little changed, primarily reflecting the portfolio decisions of money market funds amid lower net Treasury bill supply. Banks' total deposit levels were roughly unchanged over the intermeeting period, as outflows of core deposits were about offset by inflows of large time deposits. In domestic credit markets, borrowing costs remained elevated despite declining modestly over the intermeeting period. Rates on 30-year conforming residential mortgages edged down, on net, over the intermeeting period but remained near recent high levels. Interest rates on new credit card offers were little changed in April at high levels, as were rates on new auto loans. Interest rates on commercial and industrial (C&I) loans and small business loans also remained elevated. Yields on an array of fixed-income securities, including commercial mortgage-backed securities (CMBS), investment- and speculative-grade corporate bonds, and residential mortgage-backed securities, moved lower to still-elevated levels relative to recent history. Financing was readily accessible for public corporations and large and middle-market private corporations through capital markets and nonbank lenders. Credit availability for leveraged loan borrowers remained solid over the intermeeting period, while in private credit markets, loan issuance through direct lending was strong. Bank C&I loan balances picked up in April and May. For small firms, the volume of loan originations ticked down in April, and credit availability remained tight. Credit remained largely available to commercial real estate (CRE) borrowers outside of construction and land development loans. CRE loans at banks continued to increase in April and May, driven by growth in multifamily and nonfarm nonresidential loans. Agency and non-agency CMBS issuance rose in April and May, as falling yields extended the recent wave of refinancing. Consumer credit remained generally available over the intermeeting period despite some signs of tightening. In the residential mortgage market, access to credit was little changed and continued to depend on borrowers' credit risk attributes. Although credit card limits continued to rise through March, credit card balances at banks leveled off in April and May. Auto lending at finance companies continued to grow at a moderate pace through April, more than offsetting the decline in auto loan balances at banks and credit unions on net. Credit quality continued to be solid for large and midsize firms, home mortgage borrowers, and municipalities but deteriorated further for other sectors in recent months. While delinquency rates on residential mortgages remained near pre-pandemic lows, credit card and auto loan delinquency rates continued to rise in the first quarter, signaling a further deterioration of balance sheets of some households. The credit quality of nonfinancial firms borrowing in the corporate bond and leveraged loan markets remained stable overall. Available indicators suggested that delinquency rates for the private credit market and for bank C&I loans remained comparable to the levels just before the pandemic despite ticking up further in the first quarter. For small business loans, delinquency rates stayed slightly above pre-pandemic levels. In the CRE market, credit quality deteriorated further, as the average CMBS delinquency rate rose in April and May to the highest levels since 2021, driven by the office, hotel, and retail sectors, and the credit quality of CRE borrowers at banks weakened slightly further in the first quarter. Staff Economic Outlook The economic forecast prepared by the staff for the June meeting was similar to the projection at the time of the previous meeting. The economy was expected to maintain a high rate of resource utilization over the next few years, with real GDP growth projected to be roughly similar to the staff's estimate of potential output growth. The unemployment rate was expected to edge down slightly over the remainder of this year and the next and then to remain roughly flat in 2026. Total and core PCE price inflation were both projected to be lower at the end of this year than they were at the end of last year. The staff's inflation projections for this year—which included a preliminary reaction to the May CPI data—were little changed, on balance, from the inflation forecast at the time of the previous meeting. The inflation forecast was higher, however, than at the time of the March meeting and the March Summary of Economic Projections (SEP) submissions. Inflation was still expected to decline further in 2025 and 2026, as demand and supply in product and labor markets continued to move into better balance; by 2026, total and core PCE price inflation were expected to be close to 2 percent. The staff continued to view the uncertainty around the baseline projection as close to the average over the past 20 years. Risks to the inflation forecast were seen as tilted to the upside, reflecting the possibility that more persistent inflation dynamics or supply-side disruptions could unexpectedly materialize. The risks around the forecast for economic activity were seen as skewed to the downside on the grounds that more-persistent inflation could result in tighter financial conditions than in the staff's baseline projection; in addition, deteriorating household financial positions, especially for lower-income households, might prove to have a larger negative effect on economic activity than the staff anticipated. Participants' Views on Current Conditions and the Economic Outlook In conjunction with this FOMC meeting, participants submitted their projections of the most likely outcomes for real GDP growth, the unemployment rate, and inflation for each year from 2024 through 2026 and over the longer run. These projections were based on their individual assessments of appropriate monetary policy, including their projections of the federal funds rate. The longer-run projections represented each participant's assessment of the rate to which each variable would tend to converge under appropriate monetary policy and in the absence of further shocks to the economy. The SEP was released to the public after the meeting. In their discussion of inflation developments, participants noted that after a significant decline in inflation during the second half of 2023, the early part of this year had seen a lack of further progress toward the Committee's 2 percent objective. Participants judged that although inflation remained elevated, there had been modest further progress toward the 2 percent goal in recent months. Participants observed that some of this progress was evident in the smaller monthly change in the core PCE price index and a lower trimmed mean inflation rate for April, with the May CPI reading providing additional evidence. Recent data had also indicated improvements across a range of price categories, including market-based services. Some participants commented that sustained achievement of the 2 percent inflation objective would be aided by lower overall services price inflation, and some noted that shelter price inflation had so far been slow to come down. A few participants also highlighted the strong increases recorded this year in core import prices. Nevertheless, participants suggested that a number of developments in the product and labor markets supported their judgment that price pressures were diminishing. In particular, a few participants emphasized that nominal wage growth, though still above rates consistent with price stability, had declined, notably in labor-intensive sectors. A few participants also noted reports that various retailers had cut prices and offered discounts. Participants further indicated that business contacts reported that their pricing power had declined. Participants suggested that evidence of firms' reduced pricing power reflected increased customer resistance to price increases, slower growth in economic activity, and a reassessment by businesses of prospective economic conditions. With regard to the outlook for inflation, participants emphasized that they were strongly committed to their 2 percent objective and that they remained concerned that elevated inflation continued to harm the purchasing power of households, especially those least able to meet the higher costs of essentials like food, housing, and transportation. Participants highlighted a variety of factors that were likely to help contribute to continued disinflation in the period ahead. The factors included continued easing of demand–supply pressures in product and labor markets, lagged effects on wages and prices of past monetary policy tightening, the delayed response of measured shelter prices to rental market developments, or the prospect of additional supply-side improvements. The latter prospect included the possibility of a boost to productivity associated with businesses' deployment of artificial intelligence–related technology. Participants observed that longer-term inflation expectations had remained well anchored and viewed this anchoring as underpinning the disinflation process. Participants affirmed that additional favorable data were required to give them greater confidence that inflation was moving sustainably toward 2 percent. Participants remarked that demand and supply in the labor market had continued to come into better balance. Participants observed that many labor market indicators pointed to a reduced degree of tightness in labor market conditions. These included a declining job openings rate, a lower quits rate, increases in part-time employment for economic reasons, a lower hiring rate, a further step-down in the ratio of job vacancies to unemployed workers, and a gradual uptick in the unemployment rate. In addition, a few participants indicated that business contacts were reporting less difficulty in hiring and retaining workers, although contacts in several Districts continued to report tight labor market conditions in certain sectors, such as health care, construction, or specialty manufacturing. Many participants noted that labor supply had been boosted by increased labor force participation rates as well as by immigration. A few participants noted that it was unlikely that immigration would continue at the pace seen in recent years. However, several participants judged that, with recent immigrants gradually becoming part of the workforce, past immigration likely would continue to add to labor supply. A few participants observed that increases in labor force participation would likely now be limited and so would not be a major source of additional labor supply. In considering recent payrolls data, some participants observed that, although increases in payrolls had continued to be strong, the monthly increase in employment consistent with labor market equilibrium might now be higher than in the past because of immigration. Several participants also suggested that the establishment survey may have overstated actual job gains. Several participants remarked that a variety of indicators, including wage gains for job switchers, suggested that nominal wage growth was slowing, consistent with easing labor market pressures. A number of participants noted that, although the labor market remained strong, the ratio of vacancies to unemployment had returned to pre-pandemic levels and there was some risk that further cooling in labor market conditions could be associated with an increased pace of layoffs. Some participants observed that, with the risks to the Committee's dual-mandate goals having now come into better balance, labor market conditions would need careful monitoring. Participants generally observed that continued labor market strength could be consistent with the Committee achieving both its employment and inflation goals, though they noted that some further gradual cooling in the labor market may be required. Participants noted that recent indicators suggested that economic activity had continued to expand at a solid pace. Participants expected that real GDP growth this year would be below the strong pace recorded in 2023, and they remarked that recent data on economic activity were largely consistent with the anticipated slowing. Participants observed that a lower rate of output growth this year could aid the disinflation process while also being consistent with a strong labor market. Participants generally viewed the Committee's restrictive monetary policy stance as having a restraining effect on growth in consumption and investment spending and as contributing to a gradual slowing in the pace of economic activity. A couple of participants particularly stressed that the Committee's past policy tightening had contributed to higher rates for home mortgage loans and other longer-term borrowing, which were moderating spending and production, including households' discretionary purchases and residential construction activity. A few participants remarked that spending by some higher-income households was likely being bolstered by increasing asset prices. Many participants observed that, in contrast, lower- and moderate-income households were encountering increasing strains as they attempted to meet higher living costs after having largely run down savings accumulated during the pandemic. These participants noted that such strains, which were evident in rising credit card utilization and delinquency rates as well as motor vehicle loan delinquencies, were a significant concern. Participants continued to assess that the risks to achieving their employment and inflation goals had moved toward better balance over the past year. Participants cited a number of downside risks to economic activity, including those associated with a sharper-than-anticipated slowing in aggregate demand alongside a marked deterioration in labor market conditions, or with strains on lower- and moderate-income households' budgets leading to an abrupt curtailment of consumer spending. A few participants pointed to downside risks to economic activity associated with the fragility of some parts of the CRE sector or the vulnerable balance sheet positions of some banks. Some participants highlighted reasons why inflation could remain above 2 percent for longer than expected. These participants pointed to risks that inflation could stay elevated as a result of worsening geopolitical developments, heightened trade tensions, more persistent shelter price inflation, financial conditions that might be or could become insufficiently restrictive, or U.S. fiscal policy becoming more expansionary than expected; the latter two scenarios were also seen as implying upside risks to economic activity. Several participants also cited the risk of an unanchoring of longer-term inflation expectations. In their consideration of monetary policy at this meeting, participants observed that incoming data indicated continued solid growth in economic activity and a strong labor market while also pointing to modest further progress toward the Committee's 2 percent inflation objective in recent months. Participants remained highly attentive to inflation risks. All participants judged that, in light of current economic conditions and their implications for the outlook for employment and inflation, as well as the balance of risks, it was appropriate to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent. Participants furthermore judged that it was appropriate to continue the process of reducing the Federal Reserve's securities holdings. In discussing the outlook for monetary policy, participants noted that progress in reducing inflation had been slower this year than they had expected last December. They emphasized that they did not expect that it would be appropriate to lower the target range for the federal funds rate until additional information had emerged to give them greater confidence that inflation was moving sustainably toward the Committee's 2 percent objective. In discussing their individual outlooks for the target range for the federal funds rate, participants emphasized the importance of conditioning future policy decisions on incoming data, the evolving economic outlook, and the balance of risks. Several participants noted that financial market reactions to data and feedback received from contacts suggested that the Committee's policy approach was generally well understood. Some participants suggested that further clarity about the FOMC's reaction function might be provided by communications that emphasized the Committee's data-dependent approach, with monetary policy decisions being conditional on the evolution of the economy rather than being on a preset path. A couple of participants remarked that providing more information about the Committee's views on the economic outlook and the risks around the outlook would improve the public's understanding of the Committee's decisions. In discussing risk-management considerations that could bear on the outlook for monetary policy, participants assessed that, with labor market tightness having eased and inflation having declined over the past year, the risks to achieving the Committee's employment and inflation goals had moved toward better balance, leaving monetary policy well positioned to deal with the risks and uncertainties faced in pursuing both sides of the Committee's dual mandate. The vast majority of participants assessed that growth in economic activity appeared to be gradually cooling, and most participants remarked that they viewed the current policy stance as restrictive. Some participants noted that there was uncertainty about the degree of restrictiveness of current policy. Some remarked that the continued strength of the economy, as well as other factors, could mean that the longer-run equilibrium interest rate was higher than previously assessed, in which case both the stance of monetary policy and overall financial conditions may be less restrictive than they might appear. A couple of participants noted that the longer-run equilibrium interest rate was a better guide for determining where the federal funds rate may need to move over the longer run than for assessing the restrictiveness of current policy. Participants noted the uncertainty associated with the economic outlook and with how long it would be appropriate to maintain a restrictive policy stance. Some participants emphasized the need for patience in allowing the Committee's restrictive policy stance to restrain aggregate demand and further moderate inflation pressures. Several participants observed that, were inflation to persist at an elevated level or to increase further, the target range for the federal funds rate might need to be raised. A number of participants remarked that monetary policy should stand ready to respond to unexpected economic weakness. Several participants specifically emphasized that with the labor market normalizing, a further weakening of demand may now generate a larger unemployment response than in the recent past when lower demand for labor was felt relatively more through fewer job openings. Committee Policy Actions In their discussions of monetary policy for this meeting, members agreed that economic activity continued to expand at a solid pace. Job gains remained strong, and the unemployment rate remained low. Inflation eased over the past year but remained elevated. Members concurred that, in recent months, there was modest further progress toward the Committee's 2 percent inflation objective and agreed to acknowledge this development in the postmeeting statement. Members judged that the risks to achieving the Committee's employment and inflation goals had moved toward better balance over the past year. Members viewed the economic outlook as uncertain and agreed that they remained highly attentive to inflation risks. In support of the Committee's goals to achieve maximum employment and inflation at the rate of 2 percent over the longer run, members agreed to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent. Members concurred that, in considering any adjustments to the target range for the federal funds rate, they would carefully assess incoming data, the evolving outlook, and the balance of risks. Members agreed that they did not expect that it would be appropriate to reduce the target range until they have gained greater confidence that inflation is moving sustainably toward 2 percent. In addition, members agreed to continue to reduce the Federal Reserve's holdings of Treasury securities and agency debt and agency mortgage-backed securities. All members affirmed their strong commitment to returning inflation to the Committee's 2 percent objective. Members agreed that, in assessing the appropriate stance of monetary policy, they would continue to monitor the implications of incoming information for the economic outlook. They would be prepared to adjust the stance of monetary policy as appropriate if risks emerged that could impede the attainment of the Committee's goals. Members also agreed that their assessments would take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments. At the conclusion of the discussion, the Committee voted to 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, for release at 2:00 p.m.: "Effective June 13, 2024, 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 5-1/4 to 5-1/2 percent. Conduct standing overnight repurchase agreement operations with a minimum bid rate of 5.5 percent and with an aggregate operation limit of $500 billion. Conduct standing overnight reverse repurchase agreement operations at an offering rate of 5.3 percent and with a per-counterparty limit of $160 billion per day. Roll over at auction the amount of principal payments from the Federal Reserve's holdings of Treasury securities maturing in each calendar month that exceeds a cap of $25 billion per month. Redeem Treasury coupon securities up to this monthly cap and Treasury bills to the extent that coupon principal payments are less than the monthly cap. Reinvest the amount of principal payments from the Federal Reserve's holdings of agency debt and agency mortgage-backed securities (MBS) received in each calendar month that exceeds a cap of $35 billion per month into Treasury securities to roughly match the maturity composition of Treasury securities outstanding. Allow modest deviations from stated amounts for reinvestments, if needed for operational reasons. Engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions." The vote also encompassed approval of the statement below for release at 2:00 p.m.: "Recent indicators suggest that economic activity has continued to expand at a solid pace. Job gains have remained strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated. In recent months, there has been modest further progress toward the Committee's 2 percent inflation objective. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee judges that the risks to achieving its employment and inflation goals have moved toward better balance over the past year. The economic outlook is uncertain, and the Committee remains highly attentive to inflation risks. In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent. In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities. The Committee is strongly committed to returning inflation to its 2 percent objective. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments." Voting for this action: Jerome H. Powell, John C. Williams, Thomas I. Barkin, Michael S. Barr, Raphael W. Bostic, Michelle W. Bowman, Lisa D. Cook, Mary C. Daly, Philip N. Jefferson, Adriana D. Kugler, Loretta J. Mester, and Christopher J. Waller. 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 of the Federal Reserve System voted unanimously to maintain the interest rate paid on reserve balances at 5.4 percent, effective June 13, 2024. The Board of Governors of the Federal Reserve System voted unanimously to approve the establishment of the primary credit rate at the existing level of 5.5 percent, effective June 13, 2024. It was agreed that the next meeting of the Committee would be held on Tuesday–Wednesday, July 30–31, 2024. The meeting adjourned at 10:55 a.m. on June 12, 2024. Notation Vote By notation vote completed on May 21, 2024, the Committee unanimously approved the minutes of the Committee meeting held on April 30–May 1, 2024. _______________________ Joshua Gallin Secretary 1. The Federal Open Market Committee is referenced as the "FOMC" and the "Committee" in these minutes; the Board of Governors of the Federal Reserve System is referenced as the "Board" in these minutes. Return to text 2. Attended Tuesday's session only. Return to text 3. Attended through the discussion of developments in financial markets and open market operations. Return to text 4. Attended the discussion of the economic and financial situation only. Return to text 5. Attended through the discussion of the economic and financial situation. Return to text

2024-05-01

Statement

Recent indicators suggest that economic activity has continued to expand at a solid pace. Job gains have remained strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated. In recent months, there has been a lack of further progress toward the Committee's 2 percent inflation objective. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee judges that the risks to achieving its employment and inflation goals have moved toward better balance over the past year. The economic outlook is uncertain, and the Committee remains highly attentive to inflation risks. In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent. In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities. Beginning in June, the Committee will slow the pace of decline of its securities holdings by reducing the monthly redemption cap on Treasury securities from $60 billion to $25 billion. The Committee will maintain the monthly redemption cap on agency debt and agency mortgage‑backed securities at $35 billion and will reinvest any principal payments in excess of this cap into Treasury securities. The Committee is strongly committed to returning inflation to its 2 percent objective. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments. Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Thomas I. Barkin; Michael S. Barr; Raphael W. Bostic; Michelle W. Bowman; Lisa D. Cook; Mary C. Daly; Philip N. Jefferson; Adriana D. Kugler; Loretta J. Mester; and Christopher J. Waller. For media inquiries, please email [email protected] or call 202-452-2955. Implementation Note issued May 1, 2024

2024-05-22

Minute

Minutes of the Federal Open Market Committee April 30-May 1, 2024 A joint meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve System was held in the offices of the Board of Governors on Tuesday, April 30, 2024, at 10:00 a.m. and continued on Wednesday, May 1, 2024, at 9:00 a.m.1 Attendance Jerome H. Powell, Chair John C. Williams, Vice Chair Thomas I. Barkin Michael S. Barr Raphael W. Bostic Michelle W. Bowman Lisa D. Cook Mary C. Daly Philip N. Jefferson Adriana D. Kugler Loretta J. Mester Christopher J. Waller Susan M. Collins, Austan D. Goolsbee, Alberto G. Musalem, Jeffrey R. Schmid, and Sushmita Shukla, Alternate Members of the Committee Patrick Harker, Neel Kashkari, and Lorie K. Logan, Presidents of the Federal Reserve Banks of Philadelphia, Minneapolis, and Dallas, respectively Joshua Gallin, Secretary Matthew M. Luecke, Deputy Secretary Brian J. Bonis, Assistant Secretary Michelle A. Smith, Assistant Secretary Mark E. Van Der Weide, General Counsel Richard Ostrander, Deputy General Counsel Trevor A. Reeve, Economist Stacey Tevlin, Economist Beth Anne Wilson, Economist Shaghil Ahmed, James A. Clouse, Brian M. Doyle, William Wascher, and Alexander L. Wolman, Associate Economists Roberto Perli, Manager, System Open Market Account Julie Ann Remache, Deputy Manager, System Open Market Account Jose Acosta, Senior System Administrator II, Division of Information Technology, Board Alyssa Arute,2 Manager, Division of Reserve Bank Operations and Payment Systems, Board Ayelen Banegas, Principal Economist, Division of Monetary Affairs, Board Becky C. Bareford, First Vice President, Federal Reserve Bank of Richmond Penelope A. Beattie,3 Section Chief, Office of the Secretary, Board Carol C. Bertaut, Senior Adviser, Division of International Finance, Board David Bowman, Senior Associate Director, Division of Monetary Affairs, Board Marco Cipriani, Research Department Head, Federal Reserve Bank of New York Todd E. Clark, Senior Vice President, Federal Reserve Bank of Cleveland Juan C. Climent, Special Adviser to the Board, Division of Board Members, Board Daniel M. Covitz, Deputy Director, Division of Research and Statistics, Board Stephanie E. Curcuru, Deputy Director, Division of International Finance, Board Ryan Decker, Special Adviser to the Board, Division of Board Members, Board Wendy E. Dunn, Adviser, Division of Research and Statistics, Board Rochelle M. Edge, Deputy Director, Division of Monetary Affairs, Board Eric C. Engstrom, Associate Director, Division of Monetary Affairs, Board Charles A. Fleischman, Senior Adviser, Division of Research and Statistics, Board Jenn Gallagher, Assistant to the Board, Division of Board Members, Board Peter M. Garavuso, Lead Information Manager, Division of Monetary Affairs, Board Carlos Garriga, Senior Vice President, Federal Reserve Bank of St. Louis Michael S. Gibson, Director, Division of Supervision and Regulation, Board Joseph W. Gruber, Executive Vice President, Federal Reserve Bank of Kansas City Valerie S. Hinojosa, Section Chief, Division of Monetary Affairs, Board Jane E. Ihrig, Special Adviser to the Board, Division of Board Members, Board Benjamin K. Johannsen, Assistant Director, Division of Monetary Affairs, Board Michael T. Kiley, Deputy Director, Division of Financial Stability, Board Don H. Kim,2 Senior Adviser, Division of Monetary Affairs, Board Andreas Lehnert, Director, Division of Financial Stability, Board Kurt F. Lewis, Special Adviser to the Chair, Division of Board Members, Board Dan Li, Assistant Director, Division of Monetary Affairs, Board Laura Lipscomb, Special Adviser to the Board, Division of Board Members, Board David López-Salido, Senior Associate Director, Division of Monetary Affairs, Board Joshua S. Louria, Group Manager, Division of Monetary Affairs, Board Benjamin W. McDonough, Deputy Secretary and Ombudsman, Office of the Secretary, Board Ann E. Misback, Secretary, Office of the Secretary, Board Raven Molloy, Deputy Associate Director, Division of Research and Statistics, Board Norman J. Morin, Associate Director, Division of Research and Statistics, Board Makoto Nakajima, Vice President, Federal Reserve Bank of Philadelphia Michelle M. Neal, Head of Markets, Federal Reserve Bank of New York Anna Paulson, Executive Vice President, Federal Reserve Bank of Chicago Eugenio P. Pinto, Special Adviser to the Board, Division of Board Members, Board Odelle Quisumbing,3 Assistant to the Secretary, Office of the Secretary, Board Andrea Raffo, Senior Vice President, Federal Reserve Bank of Minneapolis Samuel Schulhofer-Wohl, Senior Vice President, Federal Reserve Bank of Dallas Zeynep Senyuz, Deputy Associate Director, Division of Monetary Affairs, Board Mark Spiegel, Senior Policy Advisor, Federal Reserve Bank of San Francisco John J. Stevens, Senior Associate Director, Division of Research and Statistics, Board Balint Szoke,4 Senior Economist, Division of Monetary Affairs, Board Yannick Timmer, Senior Economist, Division of Monetary Affairs, Board Clara Vega, Special Adviser to the Board, Division of Board Members, Board Annette Vissing-Jørgensen, Senior Adviser, Division of Monetary Affairs, Board Jeffrey D. Walker,2 Associate Director, Division of Reserve Bank Operations and Payment Systems, Board Jonathan Willis, Vice President, Federal Reserve Bank of Atlanta Paul R. Wood, Special Adviser to the Board, Division of Board Members, Board Egon Zakrajsek, Executive Vice President, Federal Reserve Bank of Boston Rebecca Zarutskie, Special Adviser to the Board, Division of Board Members, Board Developments in Financial Markets and Open Market Operations The manager turned first to a review of developments in financial markets. Domestic data releases over the intermeeting period pointed to inflation being more persistent than previously expected and to a generally resilient economy. Policy expectations shifted materially in response. The policy rate path derived from futures prices implied fewer than two 25 basis point rate cuts by year-end. The modal path based on options prices was quite flat, suggesting at most one such rate cut in 2024. The median of the modal paths of the federal funds rate obtained from the Open Market Desk's Survey of Primary Dealers and Survey of Market Participants also indicated fewer cuts this year than previously thought. Respondents' baseline expectations for the timing of the first rate cut—which had been concentrated around June in the March surveys—shifted out significantly and became more diffuse. Treasury yields rose materially over the intermeeting period. At shorter maturities, the increase appeared to largely reflect higher inflation compensation, while at longer maturities, it was attributable mostly to a higher expected path for the real policy rate and higher real risk premiums. Model estimates suggested that inflation expectations rose some, but mostly at shorter horizons. Longer-term inflation expectations appeared to remain well anchored. Broad equity prices fell over the period, as higher interest rates weighed on valuations, while recent earnings reports, which were generally solid, provided some support. The dollar strengthened as several foreign central banks were expected to start easing policy before the Federal Reserve. Overall, higher yields and lower equity prices, together with the stronger dollar, resulted in a tightening of financial conditions over the period. The manager then discussed expectations regarding balance sheet policy. Respondents to the Desk surveys expected a slowing in the pace of balance sheet reduction to begin soon; the median respondent projected that the slowdown would start in June, one month earlier than in the March surveys. The average probability distribution of the size of the System Open Market Account (SOMA) portfolio at the end of runoff had become a bit more concentrated, and its probability-weighted mean was slightly lower than in the March surveys. Overall, the survey results suggested that respondents' expectations for a slowdown of balance sheet runoff had been decoupled from expectations about the timing and extent of rate cuts, and that respondents understood that a slowdown in the pace of runoff was not likely to translate to a higher terminal size of the portfolio. The manager then turned to money markets and Desk operations. Unsecured overnight rates were stable over the intermeeting period. In secured funding markets, rates on overnight repurchase agreements firmed somewhat over the March quarter-end reporting date, in line with recent history. Market participants generally reported that the return of somewhat higher rates around reporting dates had not been associated with any issues in market functioning. Despite the ongoing balance sheet runoff, take-up at the overnight reverse repurchase agreement (ON RRP) facility was largely steady over the period, likely reflecting fewer attractive private-market alternatives for money market funds (MMFs) amid a recent reduction in Treasury bills outstanding as well as a decrease in MMFs' weighted average maturities. ON RRP usage was also likely supported by typical month-end dynamics. The staff and respondents to the Desk's Survey of Primary Dealers expected ON RRP take-up to decline in coming months. The manager provided an update on reserve conditions. Over the intermeeting period, the federal funds market continued to be insensitive to day-to-day changes in the supply of reserves and suggested that reserves remained abundant. The manager discussed various other indicators that supported the same conclusion. 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 occur 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 available at the time of the April 30–May 1 meeting indicated that growth in U.S. real gross domestic product (GDP) stepped down in the first quarter of 2024 from the robust pace seen over the second half of 2023. Labor market conditions remained strong. Consumer price inflation—as measured by the 12‑month change in the price index for personal consumption expenditures (PCE)—slowed significantly over the past year but had moved up slightly in recent months and remained above 2 percent. Labor demand and supply continued to move into better balance, though the speed of this realignment appeared to have slowed in recent months. Total nonfarm payroll employment increased at a faster average monthly pace in the first quarter of 2024 than in the fourth quarter of 2023. The unemployment rate ticked down to 3.8 percent in March, while the labor force participation rate and the employment-to-population ratio both moved up 0.2 percentage point. The unemployment rate for African Americans increased, and the rate for Hispanics moved down; both rates were higher than those for Asians and for Whites. The 12-month changes in the employment cost index (ECI) and average hourly earnings for all employees both declined in March relative to a year earlier, but the 3‑month change in the ECI stepped up noticeably from the average pace that prevailed over the second half of 2023. Regarding consumer price inflation, total PCE prices increased 2.7 percent over the 12 months ending in March, while core PCE price inflation—which excludes changes in energy prices and many consumer food prices—was 2.8 percent over the same period. Both inflation measures were considerably lower than their year-earlier levels but had surprised to the upside. Al­though some measures of short-term inflation expectations had moved up, longer-term expectations were little changed and stood at levels consistent with those that prevailed before the pandemic. According to the advance estimate, real GDP rose modestly in the first quarter. However, private domestic final purchases (PDFP)—which comprises PCE and private fixed investment and which often provides a better signal than GDP of underlying economic momentum—posted an increase that was similar to the solid gains seen over the second half of 2023. Real exports of goods and services grew at a tepid pace overall in the first quarter, with gains in exports of foods, consumer goods, and capital goods being mostly offset by declines in exports of industrial supplies. By contrast, real imports rose at a brisk pace, boosted in part by a large increase in imports of capital goods. All told, net exports made a significant negative contribution to U.S. GDP growth in the first quarter. Foreign GDP growth is estimated to have picked up in the first quarter from its subdued pace in the previous quarter. In Europe, economic activity resumed expanding following modest contractions in several economies amid monetary policy restraint and the repercussions of the 2022 energy shock. Growth stepped up in China, led by strong exports, but property-sector indicators remained weak. Elsewhere in emerging Asia, exports rebounded further from last year's lows, lifted by robust global demand for high-tech goods. Headline inflation eased modestly further in the advanced foreign economies (AFEs) in the first quarter, but inched up in the emerging market economies in part because of food price pressure caused by adverse weather in some countries. Most major AFE central banks kept their policy rates unchanged over the intermeeting period, and some reiterated that policy rate cuts could be appropriate at coming meetings. Staff Review of the Financial Situation Over the intermeeting period, the market-implied path for the federal funds rate through 2024 increased markedly, and federal funds futures rates suggested that market participants were placing lower odds on significant policy easing in 2024 than they did just before the March FOMC meeting. Consistent with the rise in the implied policy path, nominal Treasury yields at all maturities also rose substantially as investors appeared to reassess the persistence of inflation and the implications for monetary policy. Market-based measures of interest rate uncertainty remained elevated by historical standards. Broad stock price indexes declined moderately, on net, over the intermeeting period. Yield spreads on investment-grade corporate bonds were about unchanged, and those on speculative-grade corporate bonds increased moderately. The one-month option-implied volatility on the S&P 500 increased significantly over the period, apparently reflecting rising geopolitical tensions, but remained at moderate levels by historical standards. Over the intermeeting period, incoming foreign economic data and central bank communications were largely consistent with market participants' expectations that most AFE central banks will lower policy rates at coming meetings. Nonetheless, AFE sovereign bond yields rose, primarily reflecting spillovers from higher U.S. yields. Wider U.S.–AFE yield differentials and, to a lesser extent, heightened geopolitical tensions in the Middle East contributed to a moderate increase in the broad dollar index. Though geopolitical tensions weighed on risk sentiment at times, prices of foreign risky assets were little changed on balance. Conditions in U.S. short-term funding markets remained stable over the intermeeting period, with typical dynamics observed surrounding quarter-end. Usage of the ON RRP facility leveled off during the first few weeks of the period, primarily reflecting MMFs slowing their re-allocation into Treasury bills. In domestic credit markets, borrowing costs generally rose somewhat over the intermeeting period from already elevated levels. Rates on 30-year conforming residential mortgages increased and remained near recent high levels. In contrast, interest rates on new credit card offers edged down in February. Interest rates on small business loans increased in March and remained at elevated levels. Meanwhile, price terms for commercial and industrial (C&I) loans were little changed, on net, in the first quarter of 2024 after several quarters of tightening. Yields rose on a broad array of fixed-income securities, including commercial mortgage-backed securities (CMBS), investment- and speculative-grade corporate bonds, and residential mortgage-backed securities. Financing through capital markets and nonbank lenders was readily accessible for public corporations and large and middle-market private corporations, and credit availability for leveraged loan borrowers appeared to improve further over the intermeeting period. For small firms, the volume of loan originations ticked up in February despite the tightening of credit standards. Meanwhile, C&I loan balances declined in the first quarter, in line with the cumulative tightening in standards over the past two years. In the April Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS), large banks kept standards and most lending terms for C&I loans unchanged, on net, while smaller banks continued to tighten standards and terms on net. Banks reported tightening standards further in the April SLOOS for all loan categories of commercial real estate (CRE) loans. The growth of bank CRE loan balances slowed notably over the past year, reflecting the tightening of credit standards over this period, though growth of CRE loan balances picked up modestly in the first quarter. Credit remained available for most consumers, despite some signs of recent tightening. For residential real estate borrowers, conforming and government-backed loans remained generally available. Credit card balances continued to grow at a robust pace, though a significant net share of SLOOS respondents indicated that lending standards for credit cards tightened further in the first quarter. Growth in auto lending moderated in January and February, and a modest net share of banks reported in the SLOOS that they tightened lending standards on auto loans in the first quarter. Al­though credit quality for household loans remained solid, on balance, delinquency rates for credit cards and auto loans in the fourth quarter remained notably above their levels just before the pandemic. For residential mortgages, delinquency rates across loan types were largely unchanged in February. The credit quality of nonfinancial firms borrowing in the corporate bond and leveraged loan markets remained stable overall. The average delinquency rate for loans in CMBS pools ticked down in March but remained at elevated levels. Meanwhile, the share of nonperforming CRE loans at banks—defined as loans past due 90 days or in nonaccrual status—rose further through March, especially for loans secured by office buildings. The staff provided an update on its assessment of the stability of the U.S. financial system. On balance, the staff continued to characterize the system's financial vulnerabilities as notable but raised the assessment of vulnerabilities in asset valuations to elevated, as valuations across a range of markets appeared high relative to risk-adjusted cash flows. House prices remained elevated relative to fundamentals such as rents and Treasury yields, though the fraction of mortgage borrowers with small equity positions remained low. CRE prices continued to decline, especially in the multifamily and office sectors, and vacancy rates in these sectors remained elevated. Vulnerabilities associated with business and household debt were characterized as moderate. Nonfinancial business leverage was high, but the ability of firms to service their debt remained solid, partly due to robust earnings. Leverage in the financial sector was characterized as notable. Regulatory capital ratios in the banking sector remained high. However, the fair value of bank assets was estimated to have fallen further in the first quarter, reflecting the substantial duration risk on bank balance sheets. For the nonbank sector, the prevalence of the basis trade by hedge funds appeared to have declined from its peak but remained elevated by historical standards. Funding risks were also characterized as notable. Assets in prime MMFs and other cash management vehicles continued to grow steadily. The staff assessed that the financial stability risks associated with the fast-growing private credit sector were limited so far because of the modest leverage used by private debt funds and business development companies and the limited maturity mismatch present in their funding vehicles. However, the staff also noted the growing connections between private credit and the banking sector, the growth of some forms of private credit, and the fact that the private credit market has yet to experience a severe credit downturn. Staff Economic Outlook The economic forecast prepared by the staff for the April–May meeting was similar to the March projection. The economy was expected to maintain its high rate of resource utilization over the next few years, with projected output growth roughly similar to the staff's estimate of potential growth. The unemployment rate was expected to edge down slightly over 2024 as labor market functioning improved further, and to remain roughly steady thereafter. Total and core PCE price inflation were both projected to move lower this year relative to last year, though the expected pace of disinflation was slower than in the March projection, as incoming data pointed to more persistence in inflation in coming months. Inflation was expected to decline further beyond this year as demand and supply in product and labor markets continued to move into better balance; by 2026, total and core PCE price inflation were expected to be close to 2 percent. The staff continued to view the uncertainty around the baseline projection as close to the average over the past 20 years. Risks to the inflation forecast were seen as tilted to the upside, reflecting the possibility that supply-side disruptions or unexpectedly persistent inflation dynamics could materialize. The risks around the forecast for economic activity were seen as skewed to the downside on the grounds that more-persistent inflation could result in tighter financial conditions than in the staff's baseline projection; in addition, deteriorating household financial positions, especially for lower-income households, might prove to be a larger drag on activity than the staff anticipated. Participants' Views on Current Conditions and the Economic Outlook Participants observed that while inflation had eased over the past year, in recent months there had been a lack of further progress toward the Committee's 2 percent objective. The recent monthly data had showed significant increases in components of both goods and services price inflation. In particular, inflation for core services excluding housing had moved up in the first quarter compared with the fourth quarter of last year, and prices of core goods posted their first three-month increase in several months. In addition, housing services inflation had slowed less than had been anticipated based on the smaller increases in measures of market rents over the past year. A few participants remarked that unusually large seasonal patterns could have contributed to January's large increase in PCE inflation, and several participants noted that some components that typically display volatile price changes had boosted recent readings. However, some participants emphasized that the recent increases in inflation had been relatively broad based and therefore should not be overly discounted. Participants generally commented that they remained highly attentive to inflation risks. They also remained concerned that elevated inflation continued to harm the purchasing power of households, especially those least able to meet the higher costs of essentials like food, housing, and transportation. Participants noted that they continued to expect that inflation would return to 2 percent over the medium term. However, recent data had not increased their confidence in progress toward 2 percent and, accordingly, had suggested that the disinflation process would likely take longer than previously thought. Participants discussed several factors that, in conjunction with appropriately restrictive monetary policy, could support the return of inflation to the Committee's goal over time. One was a further reduction in housing services price inflation as lower readings for rent growth on new leases continued to pass through to this category of inflation. However, many participants commented that the pass-through would likely take place only gradually or noted that a reacceleration of market rents could reduce the effect. Several participants stated that core nonhousing services price inflation could resume its decline as wage growth slows further with labor demand and supply moving into better balance, aided by higher labor force participation and strong immigration flows. In addition, many participants commented that ongoing increases in productivity growth would support disinflation if sustained, though the outlook for productivity growth was regarded as uncertain. Several participants said that business contacts in their Districts reported increased difficulty in raising their output prices, while a few participants reported a continued ability of firms in their Districts to pass on higher costs to consumers. Al­though some measures of short-term inflation expectations from surveys of consumers had increased in recent months, medium- and longer-term measures of expected inflation had remained well anchored, which was seen as crucial for meeting the Committee's inflation goal on a sustained basis. While supply chain improvements had supported disinflation for goods prices over the previous year, participants commented that an expected more gradual pace of such improvements could slow progress on inflation. Several participants commented that growth of aggregate demand would likely have to slow from its strong pace in recent quarters for inflation to move sustainably toward the Committee's goal. Participants assessed that demand and supply in the labor market, on net, were continuing to come into better balance, though at a slower rate. Nevertheless, they saw conditions as having generally remained tight amid recent strong payroll growth and a still-low unemployment rate. Participants cited a variety of indicators that suggested some easing in labor market tightness, including declining job vacancies, a lower quits rate, and a reduced ratio of job openings to unemployed workers. Some participants indicated that business contacts had reported less difficulty in hiring or retaining workers, al­though contacts in several Districts continued to report tight labor conditions, especially in the health care and construction sectors. Many participants commented that the better balance between labor demand and supply had contributed to an easing of nominal wage pressures. Even so, a number of participants noted that some measures of labor cost growth, including the ECI, had not eased in recent months, and a couple of participants remarked that negotiated compensation agreements had added to wage pressures in their Districts. Many participants noted that, during the past year, labor supply had been boosted by increased labor force participation rates as well as by immigration. Participants further commented that recent estimates of greater immigration in the past few years and an overall increase in labor supply could help explain the strength in employment gains even as the unemployment rate had remained roughly flat and wage pressures had eased. Participants noted that recent indicators suggested that economic activity had continued to expand at a solid pace. Real GDP growth in the first quarter had moderated relative to the second half of last year, but PDFP growth maintained a strong pace. High interest rates appeared to weigh on consumer durables purchases in the first quarter, and growth of business fixed investment remained modest. Despite the high interest rates, residential investment grew more strongly in the first quarter than its modest pace in the second half of last year. Al­though recent PDFP data suggested continued strong economic momentum, participants generally did not interpret the data as indicating a further acceleration of activity and expected that GDP growth would slow from last year's strong pace. A number of participants commented that high rates of immigration could support economic activity by boosting labor supply and contributing to aggregate demand. Participants noted the important influence of productivity growth for the economic outlook. Some participants suggested that the recent increase in productivity growth might not persist because it reflected one-time adjustments to the level of productivity or reflected continued elevated volatility in the data over the past several years. A few participants commented that higher productivity growth might be sustained by the incorporation of technologies such as artificial intelligence into existing business operations or by high rates of new business formation in the technology sector. In their discussion of the outlook for the household sector, participants observed that consumer spending remained firm in the first quarter, supported by low unemployment and solid income growth. A number of participants judged that consumption growth was likely to moderate this year, as growth in labor income was expected to slow and the financial positions of many households were expected to weaken. Many participants noted signs that the finances of low- and moderate-income households were increasingly coming under pressure, which these participants saw as a downside risk to the outlook for consumption. They pointed to increased usage of credit cards and buy-now-pay-later services, as well as increased delinquency rates for some types of consumer loans. In addition, elevated housing costs were adding to financial strains for lower-income households. A couple of participants noted that financial conditions appeared favorable for wealthier households, which account for a large portion of aggregate consumption, with hefty wealth gains resulting from recent equity and house price increases. Business contacts in many Districts reported a steady or stable pace of economic activity, while contacts in a couple of Districts conveyed increased optimism about the outlook. A few participants noted that government spending was supporting business expansion in their Districts. Consistent with a solid outlook for businesses, a couple of participants noted that their contacts had reported increased investment in technology or in business process improvements that were enhancing productive capacity. Regarding the agricultural sector, a couple of participants noted that lower commodity prices were weighing on farm incomes. Participants discussed the risks and uncertainties around the economic outlook. They generally noted their uncertainty about the persistence of inflation and agreed that recent data had not increased their confidence that inflation was moving sustainably toward 2 percent. Some participants pointed to geopolitical events or other factors resulting in more severe supply bottlenecks or higher shipping costs, which could put upward pressure on prices and weigh on economic growth. The possibility that geopolitical events could generate commodity price increases was also seen as an upside risk to inflation. A number of participants noted uncertainty regarding the degree of restrictiveness of current financial conditions and the associated risk that such conditions were insufficiently restrictive on aggregate demand and inflation. Several participants commented that increased efficiencies and technological innovations could raise productivity growth on a sustained basis, which might allow the economy to grow faster without raising inflation. Participants also noted downside risks to economic activity, including slowing economic growth in China, a deterioration in conditions in domestic CRE markets, or a sharp tightening in financial conditions. In their discussion of financial stability, participants who commented noted vulnerabilities to the financial system that they assessed warranted monitoring. Participants discussed a range of risks emanating from the banking sector, including unrealized losses on assets resulting from the rise in longer-term yields, high CRE exposure, significant reliance by some banks on uninsured deposits, cyber threats, or increased financial interconnections among banks. Several participants commented on the rapid growth of private credit markets, noting that such developments should be monitored because the sector was becoming more interconnected with other parts of the financial system and that some associated risks may not yet be apparent. A few participants also commented on the importance of measures aimed at increasing resilience in the Treasury market, such as central clearing, or on potential vulnerabilities posed by leveraged investors in the Treasury market. A couple of participants commented that the Federal Reserve should continue to improve the operational efficiency of the discount window. Participants generally noted that high interest rates could contribute to vulnerabilities in the financial system. In that context, a number of participants emphasized that monetary policy should be guided by the outlook for employment and inflation and that other tools should be the primary means to address financial stability risks. In their consideration of monetary policy at this meeting, all participants judged that, in light of current economic conditions and their implications for the outlook for employment and inflation, as well as the balance of risks, it was appropriate to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent. Participants assessed that maintaining the current target range for the federal funds rate at this meeting was supported by intermeeting data indicating continued solid economic growth and a lack of further progress toward the Committee's 2 percent inflation objective in recent months. Participants also discussed the process of reducing the Federal Reserve's securities holdings. Participants judged that balance sheet reduction had proceeded smoothly. Almost all participants expressed support for the decision to begin to slow the pace of decline of the Federal Reserve's securities holdings in June by reducing the monthly redemption cap on Treasury securities from $60 billion to $25 billion, maintaining the monthly redemption cap on agency debt and agency mortgage‑backed securities (MBS) at $35 billion, and reinvesting any principal payments in excess of the $35 billion cap into Treasury securities. A few participants indicated that they could have supported a continuation of the current pace of balance sheet runoff at this time or a slightly higher redemption cap on Treasury securities than was decided upon. Various participants emphasized that the decision to slow the pace of runoff does not have implications for the stance of monetary policy. Several participants also emphasized that slowing the pace of balance sheet runoff did not mean that the balance sheet would ultimately shrink by less than it would otherwise. Some participants commented that slowing the pace of balance sheet runoff would help facilitate a smooth transition from abundant to ample reserve balances by reducing the likelihood that money markets experience undue stress that could require an early end to runoff. Participants generally assessed that it would be important to continue to monitor indicators of reserve conditions as balance sheet runoff continued. In addition, a few participants commented that the existing redemption cap on agency debt and agency MBS was unlikely to bind at any point over the coming years, but the decision to reinvest any principal payments above that cap into Treasury securities was consistent with the Committee's longer-run intention to hold a portfolio that consists primarily of Treasury securities. A couple of participants commented that it would be useful to begin discussions regarding the appropriate longer-run maturity composition of the SOMA portfolio. In discussing the policy outlook, participants remarked that the future path of the policy rate would depend on incoming data, the evolving outlook, and the balance of risks. Many participants commented that the public appeared to have a good understanding of the Committee's data-dependent approach in formulating monetary policy and its commitment to achieving its dual-mandate goals of maximum employment and price stability. Various participants also emphasized the importance of continuing to communicate this message. Participants noted disappointing readings on inflation over the first quarter and indicators pointing to strong economic momentum, and assessed that it would take longer than previously anticipated for them to gain greater confidence that inflation was moving sustainably toward 2 percent. In discussing risk-management considerations that could bear on the policy outlook, participants generally assessed that risks to the achievement of the Committee's employment and inflation goals had moved toward better balance over the past year. Participants remained highly attentive to inflation risks and noted the uncertainty associated with the economic outlook. Al­though monetary policy was seen as restrictive, many participants commented on their uncertainty about the degree of restrictiveness. These participants saw this uncertainty as coming from the possibility that high interest rates may be having smaller effects than in the past, that longer-run equilibrium interest rates may be higher than previously thought, or that the level of potential output may be lower than estimated. Participants assessed, however, that monetary policy remained well positioned to respond to evolving economic conditions and risks to the outlook. Participants discussed maintaining the current restrictive policy stance for longer should inflation not show signs of moving sustainably toward 2 percent or reducing policy restraint in the event of an unexpected weakening in labor market conditions. Various participants mentioned a willingness to tighten policy further should risks to inflation materialize in a way that such an action became appropriate. Committee Policy Actions In their discussions of monetary policy for this meeting, members agreed that economic activity continued to expand at a solid pace. Job gains remained strong, and the unemployment rate remained low. Inflation eased over the past year but remained elevated. Members also concurred that, in recent months, there was a lack of further progress toward the Committee's 2 percent inflation objective and agreed to acknowledge this development in the postmeeting statement. Members judged that the risks to achieving the Committee's employment and inflation goals had moved toward better balance over the past year. Members viewed the economic outlook as uncertain and agreed that they remained highly attentive to inflation risks. In support of the Committee's goals to achieve maximum employment and inflation at the rate of 2 percent over the longer run, members agreed to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent. Members concurred that, in considering any adjustments to the target range for the federal funds rate, they would carefully assess incoming data, the evolving outlook, and the balance of risks. Members agreed that they did not expect that it would be appropriate to reduce the target range until they have gained greater confidence that inflation is moving sustainably toward 2 percent. In addition, members agreed to continue to reduce the Federal Reserve's holdings of Treasury securities and agency debt and agency MBS. Members decided that, beginning in June, the Committee would slow the pace of decline of its securities holdings by reducing the monthly redemption cap on Treasury securities from $60 billion to $25 billion. In addition, members decided that the Committee would maintain the monthly redemption cap on agency debt and agency MBS at $35 billion and, beginning in June, would reinvest any principal payments in excess of this cap into Treasury securities. All members affirmed their strong commitment to returning inflation to the Committee's 2 percent objective. Members agreed that, in assessing the appropriate stance of monetary policy, they would continue to monitor the implications of incoming information for the economic outlook. They would be prepared to adjust the stance of monetary policy as appropriate if risks emerged that could impede the attainment of the Committee's goals. Members also agreed that their assessments would take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments. At the conclusion of the discussion, the Committee voted to 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, for release at 2:00 p.m.: "Effective May 2, 2024, 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 5-1/4 to 5-1/2 percent. Conduct standing overnight repurchase agreement operations with a minimum bid rate of 5.5 percent and with an aggregate operation limit of $500 billion. Conduct standing overnight reverse repurchase agreement operations at an offering rate of 5.3 percent and with a per-counterparty limit of $160 billion per day. Roll over at auction the amount of principal payments from the Federal Reserve's holdings of Treasury securities maturing in May that exceeds a cap of $60 billion per month. Beginning on June 1, roll over at auction the amount of principal payments from the Federal Reserve's holdings of Treasury securities maturing in each calendar month that exceeds a cap of $25 billion per month. Redeem Treasury coupon securities up to these monthly caps and Treasury bills to the extent that coupon principal payments are less than the monthly caps. Reinvest into agency mortgage-backed securities (MBS) the amount of principal payments from the Federal Reserve's holdings of agency debt and agency MBS received in May that exceeds a cap of $35 billion per month. Beginning on June 1, reinvest the amount of principal payments from the Federal Reserve's holdings of agency debt and agency MBS received in each calendar month that exceeds a cap of $35 billion per month into Treasury securities to roughly match the maturity composition of Treasury securities outstanding. Allow modest deviations from stated amounts for reinvestments, if needed for operational reasons. Engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions." The vote also encompassed approval of the statement below for release at 2:00 p.m.: "Recent indicators suggest that economic activity has continued to expand at a solid pace. Job gains have remained strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated. In recent months, there has been a lack of further progress toward the Committee's 2 percent inflation objective. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee judges that the risks to achieving its employment and inflation goals have moved toward better balance over the past year. The economic outlook is uncertain, and the Committee remains highly attentive to inflation risks. In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent. In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities. Beginning in June, the Committee will slow the pace of decline of its securities holdings by reducing the monthly redemption cap on Treasury securities from $60 billion to $25 billion. The Committee will maintain the monthly redemption cap on agency debt and agency mortgage‑backed securities at $35 billion and will reinvest any principal payments in excess of this cap into Treasury securities. The Committee is strongly committed to returning inflation to its 2 percent objective. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments." Voting for this action: Jerome H. Powell, John C. Williams, Thomas I. Barkin, Michael S. Barr, Raphael W. Bostic, Michelle W. Bowman, Lisa D. Cook, Mary C. Daly, Philip N. Jefferson, Adriana D. Kugler, Loretta J. Mester, and Christopher J. Waller. 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 of the Federal Reserve System voted unanimously to maintain the interest rate paid on reserve balances at 5.4 percent, effective May 2, 2024. The Board of Governors of the Federal Reserve System voted unanimously to approve the establishment of the primary credit rate at the existing level of 5.5 percent, effective May 2, 2024. It was agreed that the next meeting of the Committee would be held on Tuesday–Wednesday, June 11–12, 2024. The meeting adjourned at 10:05 a.m. on May 1, 2024. Notation Vote By notation vote completed on April 9, 2024, the Committee unanimously approved the minutes of the Committee meeting held on March 19–20, 2024. _______________________ Joshua Gallin Secretary 1. The Federal Open Market Committee is referenced as the "FOMC" and the "Committee" in these minutes; the Board of Governors of the Federal Reserve System is referenced as the "Board" 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 economic and financial situation. Return to text 4. Attended Tuesday's session only. Return to text

2024-03-20

Statement

Recent indicators suggest that economic activity has been expanding at a solid pace. Job gains have remained strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee judges that the risks to achieving its employment and inflation goals are moving into better balance. The economic outlook is uncertain, and the Committee remains highly attentive to inflation risks. In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent. In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2 percent objective. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments. Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Thomas I. Barkin; Michael S. Barr; Raphael W. Bostic; Michelle W. Bowman; Lisa D. Cook; Mary C. Daly; Philip N. Jefferson; Adriana D. Kugler; Loretta J. Mester; and Christopher J. Waller. For media inquiries, please email [email protected] or call 202-452-2955. Implementation Note issued March 20, 2024

2024-04-10

Minute

Minutes of the Federal Open Market Committee March 19–20, 2024 A joint meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve System was held in the offices of the Board of Governors on Tuesday, March 19, 2024, at 9:00 a.m. and continued on Wednesday, March 20, 2024, at 9:00 a.m.1 Attendance Jerome H. Powell, Chair John C. Williams, Vice Chair Thomas I. Barkin Michael S. Barr Raphael W. Bostic Michelle W. Bowman Lisa D. Cook Mary C. Daly Philip N. Jefferson Adriana D. Kugler Loretta J. Mester Christopher J. Waller Susan M. Collins, Austan D. Goolsbee, Kathleen O'Neill, and Jeffrey R. Schmid, Alternate Members of the Committee Patrick Harker, Neel Kashkari, and Lorie K. Logan, Presidents of the Federal Reserve Banks of Philadelphia, Minneapolis, and Dallas, respectively Joshua Gallin, Secretary Matthew M. Luecke, Deputy Secretary Brian J. Bonis, Assistant Secretary Michelle A. Smith, Assistant Secretary Mark E. Van Der Weide, General Counsel Richard Ostrander, Deputy General Counsel Trevor A. Reeve, Economist Stacey Tevlin, Economist Shaghil Ahmed, Kartik B. Athreya, James A. Clouse, Edward S. Knotek II, Sylvain Leduc, and William Wascher, Associate Economists Roberto Perli, Manager, System Open Market Account Julie Ann Remache, Deputy Manager, System Open Market Account Jose Acosta, Senior System Administrator II, Division of Information Technology, Board Oladoyin Ajifowoke, Program Management Analyst, Division of Monetary Affairs, Board David Altig, Executive Vice President, Federal Reserve Bank of Atlanta Andre Anderson, First Vice President, Federal Reserve Bank of Atlanta Roc Armenter, Executive Vice President, Federal Reserve Bank of Philadelphia Alyssa Arute,2 Manager, Division of Reserve Bank Operations and Payment Systems, Board Penelope A. Beattie,2 Section Chief, Office of the Secretary, Board Carol C. Bertaut, Senior Adviser, Division of International Finance, Board David Bowman,2 Senior Associate Director, Division of Monetary Affairs, Board Ellen J. Bromagen, First Vice President, Federal Reserve Bank of Chicago Isabel Cairó, Principal Economist, Division of Monetary Affairs, Board Mark A. Carlson, Adviser, Division of Monetary Affairs, Board Juan C. Climent, Special Adviser to the Board, Division of Board Members, Board Stephanie E. Curcuru, Deputy Director, Division of International Finance, Board Ryan Decker, Special Adviser to the Board, Division of Board Members, Board Rochelle M. Edge, Deputy Director, Division of Monetary Affairs, Board Eric M. Engen, Senior Associate Director, Division of Research and Statistics, Board Giovanni Favara, Assistant Director, Division of Monetary Affairs, Board Ron Feldman, First Vice President, Federal Reserve Bank of Minneapolis Erin E. Ferris,2 Principal Economist, Division of Monetary Affairs, Board Andrew Figura, Associate Director, Division of Research and Statistics, Board Charles A. Fleischman, Senior Adviser, Division of Research and Statistics, Board Glenn Follette, Associate Director, Division of Research and Statistics, Board Jenn Gallagher, Assistant to the Board, Division of Board Members, Board Michael S. Gibson, Director, Division of Supervision and Regulation, Board Joseph W. Gruber, Executive Vice President, Federal Reserve Bank of Kansas City Luca Guerrieri, Associate Director, Division of International Finance, Board Christopher J. Gust,2 Associate Director, Division of Monetary Affairs, Board Valerie S. Hinojosa, Section Chief, Division of Monetary Affairs, Board Jasper J. Hoek, Deputy Associate Director, Division of International Finance, Board Andreas L. Hornstein, Senior Advisor, Federal Reserve Bank of Richmond Jane E. Ihrig, Special Adviser to the Board, Division of Board Members, Board Sebastian Infante, Section Chief, Division of Monetary Affairs, Board Michael T. Kiley, Deputy Director, Division of Financial Stability, Board Kevin L. Kliesen, Research Officer, Federal Reserve Bank of St. Louis Spencer Krane, Senior Vice President, Federal Reserve Bank of Chicago Andreas Lehnert, Director, Division of Financial Stability, Board Paul Lengermann, Deputy Associate Director, Division of Research and Statistics, Board Deborah L. Leonard, Capital Markets Trading Director, Federal Reserve Bank of New York Kurt F. Lewis, Special Adviser to the Chair, Division of Board Members, Board Laura Lipscomb, Special Adviser to the Board, Division of Board Members, Board David López-Salido, Senior Associate Director, Division of Monetary Affairs, Board Joshua S. Louria, Group Manager, Division of Monetary Affairs, Board Byron Lutz, Deputy Associate Director, Division of Research and Statistics, Board Karel Mertens, Interim Director of Research, Federal Reserve Bank of Dallas Ann E. Misback, Secretary, Office of the Secretary, Board Michelle M. Neal, Head of Markets, Federal Reserve Bank of New York Edward Nelson,2 Senior Adviser, Division of Monetary Affairs, Board Michael G. Palumbo, Senior Associate Director, Division of Research and Statistics, Board Eugenio P. Pinto, Special Adviser to the Board, Division of Board Members, Board Odelle Quisumbing,2 Assistant to the Secretary, Office of the Secretary, Board Andrea Raffo, Senior Vice President, Federal Reserve Bank of Minneapolis Nellisha D. Ramdass, Deputy Director, Division of Monetary Affairs, Board Jeanne Rentezelas, First Vice President, Federal Reserve Bank of Philadelphia Achilles Sangster II, Senior Information Manager, Division of Monetary Affairs, Board Bernd Schlusche, Principal Economist, Division of Monetary Affairs, Board Andres Schneider, Principal Economist, Division of Monetary Affairs, Board Zeynep Senyuz,2 Deputy Associate Director, Division of Monetary Affairs, Board Robert J. Tetlow, Senior Adviser, Division of Monetary Affairs, Board Clara Vega, Special Adviser to the Board, Division of Board Members, Board Jeffrey D. Walker,2 Associate Director, Division of Reserve Bank Operations and Payment Systems, Board Min Wei, Senior Associate Director, Division of Monetary Affairs, Board Paul R. Wood, Special Adviser to the Board, Division of Board Members, Board Egon Zakrajsek, Executive Vice President, Federal Reserve Bank of Boston Rebecca Zarutskie, Special Adviser to the Board, Division of Board Members, Board Developments in Financial Markets and Open Market Operations The manager turned first to a review of developments in financial markets over the intermeeting period. U.S. financial conditions had eased modestly since the January FOMC meeting, with higher equity prices more than offsetting increases in interest rates. Nominal Treasury yields had risen over the intermeeting period. At shorter maturities, most of the increase was attributable to a rise in inflation compensation, prompted by indications that the decline in inflation was proceeding somewhat more slowly than markets in recent months had been expecting. In contrast, at longer maturities, much of the increase in Treasury yields was due to a rise in real rates, reflecting solid labor market readings and stronger-than-expected data on economic activity. The manager turned next to policy rate expectations. An estimate of the expected federal funds rate path derived from futures prices shifted up significantly over the intermeeting period. The modal federal funds rate path implied by options prices had also risen, but by substantially less than the futures-implied path. The move up in the futures-implied path reflected in part some shift in expectations toward policy rate cuts beginning later in the year, and cumulating to a smaller rate reduction in 2024, than previously assessed. Investors also appeared to have considerably lowered the perceived probability of more substantial rate cuts than in their baseline expectations. This lowering was evident in significantly more concentrated probability distributions for the federal funds rate over coming quarters. The changes in policy rate expectations over the intermeeting period occurred in the wake of stronger economic data, perceptions that disinflation might be proceeding more slowly than previously thought, and Federal Reserve communications. The median of modal paths of the federal funds rate obtained from the Open Market Desk's Survey of Primary Dealers and Survey of Market Participants was also slightly higher. Responses still indicated substantial differences among survey participants in their assessments of the total amount of rate cuts likely to occur this year. The manager then discussed expectations regarding balance sheet policy. Survey responses reflected judgments that the Committee's slowing of balance sheet runoff would begin slightly later than previously expected, with the majority of survey participants now expecting the slowing to start around midyear. Balance sheet runoff was expected to continue for some time thereafter, and survey responses suggested a slightly smaller balance sheet size at the end of runoff than respondents had previously assessed. The manager noted that broad equity prices had reached new highs over the intermeeting period. This growth was again driven primarily by the strong increases in valuations of large-capitalization technology companies, while broader equity price gains were more measured. Recent bank equity price behavior reflected renewed market attention on the challenges faced by the regional banking sector, particularly that sector's exposures to commercial real estate (CRE). In global financial markets, the expected policy rate path in most advanced foreign economies (AFEs) shifted up over the intermeeting period. At the end of the intermeeting period, the Bank of Japan (BOJ) announced that it would discontinue its policies of a negative short-term interest rate and yield curve control; this decision was largely expected by investors, and the BOJ's announcement had a limited effect on global financial markets. Conditions in U.S. money markets had been stable over the intermeeting period, with less upward pressure on repurchase agreement (repo) rates than in recent intermeeting periods. The usage of the overnight reverse repurchase agreement (ON RRP) facility had continued to decline, albeit at a somewhat slower pace than that seen over the second half of 2023. Staff projections suggested that total ON RRP balances might stabilize in coming months at either zero or a low level. This assessment was also supported by information acquired in Desk outreach efforts. The manager provided an update on indicators of reserve conditions. Over the past few years, rate control had been effective, with the effective federal funds rate being firmly within the Committee's target range. The staff assessed that, over the intermeeting period, the federal funds rate continued to be insensitive to day-to-day changes in the supply of reserves. This outcome, together with various other indicators of reserve conditions, supported the conclusion that reserves remained abundant. The manager noted that there was nevertheless significant uncertainty about the demand for reserves and that, under the current pace of runoff of the Federal Reserve's securities portfolio, stabilization in total ON RRP balances would, all else equal, cause reserves to start declining at a rapid 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 during the intermeeting period. Considerations for Slowing the Pace of Balance Sheet Reduction Participants began a discussion related to slowing the pace of balance sheet runoff consistent with the Committee's Plans for Reducing the Size of the Federal Reserve's Balance Sheet announced in May 2022. Those plans indicated that in order to ensure a smooth transition, the Committee intends to slow and then stop the decline in the size of the balance sheet when reserve balances are somewhat above the level it judges to be consistent with ample reserves. Since balance sheet runoff began in June 2022, the Federal Reserve's total securities holdings had declined roughly $1.5 trillion. In light of the ongoing sizable decline in the balance sheet, and the prospect of a more rapid decline in reserve balances, participants agreed that their discussions at this meeting would help inform the Committee's future decisions regarding how and when to slow the pace of runoff. No decisions about adjusting the pace of balance sheet runoff were made at the meeting. The participants' discussion was preceded by staff presentations. The staff reviewed the 2017–19 balance sheet runoff episode and the lessons learned from that experience, including the importance of monitoring money market conditions in light of the uncertainty surrounding the level of reserves consistent with operating in an ample-reserves regime. The staff presented a set of simulations in which the current monthly pace of securities runoff was reduced to illustrate how the choice of when to start slowing the pace of runoff could affect the paths for the balance sheet and reserve balances. The simulations showed how various options for when to slow the pace of runoff could affect the duration of each of the expected phases of the transition to an ample level of reserves. Participants observed that balance sheet runoff was proceeding smoothly. Nevertheless, taking into account the experience around the end of the 2017–19 balance sheet runoff episode, participants broadly assessed it would be appropriate to take a cautious approach to further runoff. The vast majority of participants thus judged it would be prudent to begin slowing the pace of runoff fairly soon. Most of these participants noted that, despite significant balance sheet reduction, reserve balances had remained elevated because the decline in usage of the ON RRP facility had shifted Federal Reserve liabilities toward reserves. However, with the extent of future declines in ON RRP take-up becoming more limited, further balance sheet runoff will likely translate more directly into declines in reserve balances, potentially at a rapid pace. In light of the uncertainty regarding the level of reserves consistent with operating in an ample-reserves regime, slowing the pace of balance sheet runoff sooner rather than later would help facilitate a smooth transition from abundant to ample reserve balances. Slower runoff would give the Committee more time to assess market conditions as the balance sheet continues to shrink. It would allow banks, and short-term funding markets more generally, additional time to adjust to the lower level of reserves, thus reducing the probability that money markets experience undue stress that could require an early end to runoff. Therefore, the decision to slow the pace of runoff does not mean that the balance sheet will ultimately shrink by less than it would otherwise. Rather, a slower pace of runoff would facilitate ongoing declines in securities holdings consistent with reaching ample reserves. A few participants, however, indicated that they preferred to continue with the current pace of balance sheet runoff until market indicators begin to show signs that reserves are approaching an ample level. All participants emphasized the importance of communicating that a decision to slow the pace of runoff would have no implications for the stance of monetary policy, as it would mean implementing one of the transitional steps previously announced in the Committee's balance sheet plans. In their discussions regarding how to adjust the pace of runoff, participants generally favored reducing the monthly pace of runoff by roughly half from the recent overall pace. With redemptions of agency debt and agency mortgage-backed securities (MBS) expected to continue to run well below the current monthly cap, participants saw little need to adjust this cap, which also would be consistent with the Committee's intention to hold primarily Treasury securities in the longer run. Accordingly, participants generally preferred to maintain the existing cap on agency MBS and adjust the redemption cap on U.S. Treasury securities to slow the pace of balance sheet runoff. Participants also shared their initial perspectives on longer-term aspects of balance sheet policy beyond the more immediate issues concerning slowing the pace of runoff. Although they saw the current level of reserves as abundant, participants emphasized the underlying uncertainty about the level of reserves consistent with operating in an ample-reserves regime. They noted various price and quantity metrics that they saw as important real-time indicators of conditions in short-term funding markets that could provide signals that reserves are approaching a level somewhat above ample. Some participants also mentioned the importance of both the discount window and the standing repo facility as liquidity backstops as reserves decline. Many participants commented on aspects of the composition of the Federal Reserve's securities holdings, including the appropriate longer-run maturity composition of the System Open Market Account portfolio and options to achieve in the longer run a portfolio that consists primarily of Treasury securities. Staff Review of the Economic Situation The information available at the time of the March 19–20 meeting suggested that U.S. real gross domestic product (GDP) was expanding at a solid rate in the first quarter, although slower than its robust fourth-quarter pace. Labor market conditions remained strong in recent months. Consumer price inflation—as measured by the 12-month change in the price index for personal consumption expenditures (PCE)—continued to trend down, though it remained above 2 percent. Labor demand and supply appeared to continue to move into better balance, although recent indicators were mixed. Total nonfarm payroll employment increased at a faster average monthly pace over January and February than in the fourth quarter. In contrast, the unemployment rate edged up to 3.9 percent in February, while the labor force participation rate and the employment-to-population ratio were essentially unchanged. The unemployment rate for African Americans increased, and the rate for Hispanics was unchanged; both rates were higher than those for Asians and for Whites. The private-sector job openings rate and the quits rate were little changed in January, and both rates were far below their year-earlier levels. The 12-month change in average hourly earnings for all employees was essentially the same in February as it was at the end of last year, and it remained well below its level a year ago. The Wage Growth Tracker constructed by the Federal Reserve Bank of Atlanta was lower over the past two months than readings last year. Consumer price inflation continued to decline, but recent progress was uneven. Total PCE prices increased 2.5 percent over the 12 months ending in January, while core PCE price inflation—which excludes changes in energy prices and many consumer food prices—was 2.9 percent over the same period. Both of those 12-month measures continued to trend down, although the month-over-month readings for January had moved up. The trimmed mean measure of 12-month PCE price inflation constructed by the Federal Reserve Bank of Dallas was 3.2 percent in January, lower than its level a year earlier. Over the 12 months ending in February, the consumer price index (CPI) increased 3.2 percent and core CPI rose 3.8 percent; both 12-month measures were below their year-ago levels even though the recent month-over-month CPI readings had firmed a bit. Recent survey measures of consumers' inflation expectations at both shorter- and longer-term horizons were broadly in line with the levels seen in the decade before the pandemic. Recent indicators suggested that real GDP was increasing at a solid pace in the first quarter, although more slowly than its robust fourth-quarter rate. Incoming data pointed to some slowing in PCE growth, as expenditures declined in January and the components of the retail sales data used to estimate PCE were soft in February. January's readings on orders and shipments of nondefense capital goods excluding aircraft and on nonresidential construction spending suggested some deceleration in business fixed investment. In contrast, starts and permits for single-family homes in January and February pointed to a modest pickup in residential investment growth. Real exports of goods stepped down in January relative to December following rapid growth last quarter. By contrast, real goods imports picked up in January, as higher imports of capital goods and automotive products more than offset lower imports of consumer goods. Overall, the nominal U.S. international trade deficit widened in January, as goods and services imports expanded more than exports, which increased only slightly. In contrast to strong U.S. GDP growth in the fourth quarter, economic growth in foreign economies was generally weak amid tight monetary policy, the erosion in real household incomes from high inflation, and the ongoing repercussions of the 2022 energy shock in Europe. More recently, purchasing managers indexes in Europe through February and other indicators provided tentative signs of some firming in the region's economic activity. In China, economic data for January and February were somewhat mixed. Although exports, investment, and industrial production were strong, household demand remained depressed amid China's ongoing property-sector slump. On the other hand, some economies in emerging Asia performed well, in part reflecting strong demand for leading-edge semiconductors. Foreign headline inflation picked up early in the year as the downward pressure from previous energy price declines waned and some emerging market economies (EMEs) experienced renewed food price pressures due to adverse weather. Most major foreign central banks kept their policy rates unchanged over the intermeeting period and emphasized the need for greater confidence that inflation was falling back to target before easing policy. Staff Review of the Financial Situation Over the intermeeting period, the market-implied path for the federal funds rate through 2024 increased markedly, reversing the declines that had occurred since late last year. Consistent with the increase in the implied policy rate path, intermediate- and longer-term Treasury yields moved up over the period, with larger increases concentrated at shorter maturities. Most of the increase in short-term Treasury yields was attributed to a rise in near-term inflation compensation. Market-based measures of near-term interest rate uncertainty for shorter-term yields remained elevated by historical standards, in part reflecting investors' continued uncertainty about the path of policy rates. Despite the rise in interest rates, broad stock price indexes increased notably amid upbeat corporate earnings reports, particularly for the largest firms. Yield spreads on investment-grade corporate bonds were little changed, and those on speculative-grade bonds narrowed slightly. The one-month option-implied volatility on the S&P 500 index increased slightly over the period but remained low by historical standards. Changes in foreign financial asset prices over the intermeeting period were largely driven by spillovers from U.S. financial markets. Risk appetite generally improved, leading to increases in foreign equity indexes and a narrowing of EME credit spreads. Short-term yields in the AFEs were also boosted by less-accommodative-than-expected communications by European Central Bank officials. Longer-term AFE yields and the broad dollar index were little changed on net. At its meeting on March 19, the BOJ exited negative interest rate policy and increased its overnight policy rate from negative 0.1 percent to a range of 0 to 0.1 percent. This policy rate hike was the first by the BOJ in 17 years. The BOJ also ended its yield curve control policy but indicated that it would continue bond purchases. The changes were widely expected, and market reactions were limited. Conditions in U.S. short-term funding markets remained stable over the intermeeting period. Usage of the ON RRP facility continued to decline. However, the decline in average take-up was less than in the two previous periods, suggesting that the rate of decline could be slowing. The continuing decline in ON RRP take-up primarily reflected money market funds' (MMFs) ongoing reallocation of assets to Treasury bills amid continued bill issuance and relatively attractive bill yields. Banks' total deposit levels edged up further in January and February, likely reflecting, in part, rising nominal income and somewhat more competitive deposit rates. MMFs continued to provide relatively attractive yields to investors and experienced modest inflows since the January FOMC meeting. In domestic credit markets, over the intermeeting period, borrowing costs remained elevated. Rates on loans to households generally rose in recent months, including those for 30-year conforming residential mortgages. Interest rates on credit card offers increased through December, while rates on new auto loans remained elevated through late February, near their recent highs. Yields moved higher on a variety of fixed-income securities, including commercial mortgage-backed securities (CMBS), investment- and speculative-grade corporate bonds, and residential MBS. Yields on leveraged loans, which are generally linked to the Secured Overnight Financing Rate, declined somewhat in line with the narrowing of credit spreads. In addition, interest rates on small business loans ticked down in January but remained elevated. Credit continued to be available to most businesses, households, and municipalities. Large nonfinancial corporations continued to find credit generally accessible. Capital market financing was robust during the intermeeting period, while commercial and industrial loan balances expanded modestly. For small firms, loan originations were stable despite the tightening of credit standards. Credit in the residential mortgage market remained generally available, although mortgage originations remained subdued. Consumer credit remained easily available as credit card balances expanded robustly in January and February, and credit card limits continued to increase broadly. Growth in auto lending at finance companies was muted in January following robust growth last year. CRE borrowers continued to find credit readily accessible over the period. CRE loans at banks picked up moderately in January and February, driven by growth in multifamily and residential loans. Non-agency CMBS issuance volume was moderate, on average, in January and February. Credit quality for large firms and home mortgage borrowers remained solid but generally deteriorated further in sectors such as CRE and credit cards. The trailing six-month default rates on corporate borrowers' bonds and loans remained low in February. In contrast, credit rating downgrades outpaced upgrades for leveraged loans and corporate bonds in January and February. Credit quality of small businesses deteriorated further in recent months. Mortgage delinquency rates for conventional and Department of Veterans Affairs loans were largely unchanged in December and January, but delinquency rates on Federal Housing Administration loans picked up slightly. Credit card delinquency rates increased a bit further in the fourth quarter and stood above levels seen just before the pandemic. The upward trend in the auto delinquency rate appeared to have stopped in the second half of last year, with the delinquency rate in the fourth quarter remaining a little above its pre-pandemic average. Delinquency rates for nonfarm nonresidential loans at banks increased at the end of 2023 to a level last seen in late 2014. The delinquency rate for office properties in CMBS pools continued to increase in January and February. Delinquency rates would have been higher had many borrowers with loans maturing last year not received extensions. CMBS delinquency rates for most other property types were stable at normal-to-low levels, partly because many of these borrowers were also able to extend their loans when they reached maturity last year. The deterioration in CRE credit quality sparked investor concerns about the health of a few small U.S. and foreign banks over the intermeeting period. Staff Economic Outlook The economic projection prepared by the staff for the March meeting was stronger than the January forecast. The upward revision in the forecast primarily reflected the staff's incorporation of a higher projected path for population due to a boost from immigration. The lagged effects of earlier monetary policy actions, through their continued contribution to tight financial and credit conditions, were still expected to hold output growth in 2024 below the staff's estimate of potential growth. As those policy effects waned, output was expected to rise in line with potential in 2025 and 2026. The unemployment rate was forecast to remain roughly flat over the next several years. Total and core PCE price inflation were both projected to edge down in 2024, ending the year around 2-1/2 percent, as demand and supply in product and labor markets continued to move into better balance. By 2026, total and core PCE price inflation were expected to be close to 2 percent. The staff viewed uncertainty around the baseline projection as close to the average over the past 20 years, as uncertainty was judged to have diminished substantially over the past year. Risks around the inflation forecast were seen as tilted slightly to the upside, as supply-side disruptions—from developments domestically or abroad—or unexpectedly persistent inflation dynamics could materialize. The risks around the forecast for economic activity were viewed as skewed a little to the downside, as any substantial setback in reducing inflation might lead to a tightening of financial conditions that would slow the pace of economic activity by more than the staff anticipated in their baseline forecast. Participants' Views on Current Conditions and the Economic Outlook In conjunction with this FOMC meeting, participants submitted their projections of the most likely outcomes for real GDP growth, the unemployment rate, and inflation for each year from 2024 through 2026 and over the longer run. The projections were based on their individual assessments of appropriate monetary policy, including the path of 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. A Summary of Economic Projections was released to the public following the conclusion of the meeting. In their discussion of inflation, participants observed that significant progress had been made over the past year toward the Committee's 2 percent inflation objective even though the two most recent monthly readings on core and headline inflation had been firmer than expected. Some participants noted that the recent increases in inflation had been relatively broad based and therefore should not be discounted as merely statistical aberrations. However, a few participants noted that residual seasonality could have affected the inflation readings at the start of the year. Participants generally commented that they remained highly attentive to inflation risks but that they had also anticipated that there would be some unevenness in monthly inflation readings as inflation returned to target. In their outlook for inflation, participants noted that they continued to expect that inflation would return to 2 percent over the medium term. They remained concerned that elevated inflation continued to harm households, especially those least able to meet the higher costs of essentials like food, housing, and transportation. A few participants remarked that they expected core nonhousing services inflation to decline as the labor market continued to move into better balance and wage growth moderated further. Participants discussed the still-elevated rate of housing services inflation and commented on the uncertainty regarding when and by how much lower readings for rent growth on new leases would pass through to this category of inflation. Several participants noted that the disinflationary pressure for core goods that had resulted from the receding of supply chain bottlenecks was likely to moderate. Other factors related to aggregate supply, such as increases in the labor force or better productivity growth, were viewed by several participants as likely to support continued disinflation. Some participants reported that business contacts had indicated that they were less able to pass on price increases or that consumers were becoming more sensitive to price changes. Some participants observed that longer-term inflation expectations appeared to remain well anchored, as reflected in a broad range of surveys of households, businesses, and forecasters, as well as measures from financial markets. Participants expected that economic growth would slow from last year's strong pace. With regard to the household sector, participants noted that consumption spending generally remained solid, although many commented that recent readings on retail sales had been soft. Several participants pointed to the strong labor market, ongoing wage gains, and a generally healthy household-sector balance sheet as likely to continue to support consumption. Participants noted mixed reports about the pace of homebuilding amid still-elevated financing costs for developers, despite strong housing demand and a limited supply of affordable housing. Some participants noted that increased immigration, which had likely been boosting the growth of personal consumption spending, may also have been adding to the demand for housing. Many participants pointed to indicators such as higher credit card balances, greater use of buy-now-pay-later programs, or rising delinquency rates on some types of consumer loans as evidence that the finances of some lower- and moderate-income households might be coming under pressure; these developments were seen by these participants as a downside risk to the outlook for consumption spending. Reports from business contacts in some industries and Districts conveyed increased optimism about the outlook, while contacts in a couple of other Districts reported only a steady or stable pace of economic activity. Restrictive credit conditions were cited by a few participants as restraining sectors such as equipment investment and residential investment. However, several participants noted that their contacts had reported increased investment in technology or in business process improvements that were enhancing productive capacity and helping businesses ameliorate the effects of a tight labor market. Manufacturing activity was characterized as stable. A couple of participants noted that high input costs and lower expected commodity prices were weighing on farm incomes. Participants assessed that demand and supply in the labor market were continuing to come into better balance, although conditions generally remained tight. Participants noted strong recent payroll growth, while the unemployment rate remained low. Participants cited a variety of indicators that suggested some easing in labor market conditions, including declining job vacancies, a lower quits rate, and a reduced ratio of job openings to unemployed workers. Some participants indicated that business contacts had reported less difficulty in hiring or retaining workers. Several participants noted that the better balance between labor supply and demand had contributed to an easing of nominal wage pressures. Nevertheless, some participants observed that portions of the labor market, such as the health-care sector and in less urban areas, remained very tight. Most participants noted that, during the past year, labor supply had been boosted by increased labor force participation as well as by immigration. Participants further commented that recent estimates of greater immigration in the past few years and an overall increase in labor supply could help explain the strength in employment gains even as the unemployment rate had remained roughly flat and wage pressures had eased. Participants discussed the uncertainties around the economic outlook. Participants generally noted their uncertainty about the persistence of high inflation and expressed the view that recent data had not increased their confidence that inflation was moving sustainably down to 2 percent. Some participants pointed to geopolitical risks that might result in more severe supply bottlenecks or higher shipping costs that could put upward pressure on prices, and observed that those developments could also weigh on economic growth. The possibility that geopolitical events or surges in domestic demand could generate increased energy prices was also seen as an upside risk to inflation. Some participants noted the uncertainties regarding the restrictiveness of financial conditions and the associated risk that conditions were or could become less restrictive than desired, which could add momentum to aggregate demand and put upward pressure on inflation. Several participants commented that increased efficiencies and technological innovations had the potential to raise productivity growth, which might allow the economy to grow faster without raising inflation. Participants also noted downside risks to economic activity, including slowing economic growth in China, a deterioration in conditions in domestic CRE markets, a potential reemergence of stresses in the banking sector, or the possibility that a pickup in layoffs could result in a relatively rapid rise in unemployment. Many participants pointed to the difficulty in assessing how recent immigration trends would influence the evolution of labor supply, aggregate demand, and overall economic activity. In their consideration of monetary policy at this meeting, all participants judged that, in light of current economic conditions, the outlook for economic activity and inflation, and the balance of risks, it was appropriate to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent. Participants also agreed that it was appropriate to continue the process of reducing the Federal Reserve's securities holdings, as described in the previously announced Plans for Reducing the Size of the Federal Reserve's Balance Sheet. Participants commented that maintaining the current target range for the federal funds rate at this meeting would support the Committee's progress to return inflation to the 2 percent objective and keep longer-term inflation expectations well anchored. In discussing the policy outlook, participants judged that the policy rate was likely at its peak for this tightening cycle, and almost all participants judged that it would be appropriate to move policy to a less restrictive stance at some point this year if the economy evolved broadly as they expected. In support of this view, they noted that the disinflation process was continuing along a path that was generally expected to be somewhat uneven. They also pointed to the Committee's policy actions together with the ongoing improvements in supply conditions as factors working to move supply and demand into better balance. Participants noted indicators pointing to strong economic momentum and disappointing readings on inflation in recent months and commented that they did not expect it would be appropriate to reduce the target range for the federal funds rate until they had gained greater confidence that inflation was moving sustainably toward 2 percent. Participants remarked that in considering any adjustments to the target range for the federal funds rate at future meetings, they would carefully assess incoming data, the evolving outlook, and the balance of risks. Participants noted the importance of continuing to communicate clearly the Committee's data-dependent approach in formulating monetary policy and the strong commitment to achieve its dual-mandate objectives of maximum employment and price stability. In discussing risk-management considerations that could bear on the policy outlook, participants generally judged that risks to the achievement of the Committee's employment and inflation goals were moving into better balance. They remarked that it was important to weigh the risks of maintaining a restrictive stance for too long, which could unduly weaken economic activity and employment, against the risks of easing policy too quickly, which could stall or even reverse progress in returning inflation to the Committee's 2 percent inflation objective. Regarding the latter risk, participants emphasized the importance of carefully assessing incoming data to judge whether inflation is moving down sustainably to 2 percent. Participants noted various sources of uncertainty associated with their outlooks for economic activity, the labor market, and inflation, with some participants additionally mentioning uncertainty about the extent to which past monetary policy actions or the current stance of policy would weigh further on aggregate demand. Participants agreed, however, that monetary policy remained well positioned to respond to evolving economic conditions and risks to the outlook, including the possibility of maintaining the current restrictive policy stance for longer should the disinflation process slow, or reducing policy restraint in the event of an unexpected weakening in labor market conditions. Committee Policy Actions In their discussions of monetary policy for this meeting, members agreed that economic activity had been expanding at a solid pace. Job gains had remained strong, and the unemployment rate had remained low. Inflation had eased over the past year but remained elevated. Members judged that the risks to achieving the Committee's employment and inflation goals were moving into better balance. Members viewed the economic outlook as uncertain and agreed that they remained highly attentive to inflation risks. In support of the Committee's goals to achieve maximum employment and inflation at the rate of 2 percent over the longer run, members agreed to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent. Members concurred that, in considering any adjustments to the target range for the federal funds rate, they would carefully assess incoming data, the evolving outlook, and the balance of risks. Members agreed that they did not expect that it would be appropriate to reduce the target range until they have gained greater confidence that inflation is moving sustainably toward 2 percent. In addition, members agreed to continue to reduce the Federal Reserve's holdings of Treasury securities and agency debt and agency MBS, as described in its previously announced plans. All members affirmed their strong commitment to returning inflation to the Committee's 2 percent objective. Members agreed that, in assessing the appropriate stance of monetary policy, they would continue to monitor the implications of incoming information for the economic outlook. They would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. Members also agreed that their assessments would take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments. At the conclusion of the discussion, the Committee voted to 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, for release at 2:00 p.m.: "Effective March 21, 2024, 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 5-1/4 to 5-1/2 percent. Conduct standing overnight repurchase agreement operations with a minimum bid rate of 5.5 percent and with an aggregate operation limit of $500 billion. Conduct standing overnight reverse repurchase agreement operations at an offering rate of 5.3 percent and with a per-counterparty limit of $160 billion per day. Roll over at auction the amount of principal payments from the Federal Reserve's holdings of Treasury securities maturing in each calendar month that exceeds a cap of $60 billion per month. Redeem Treasury coupon securities up to this monthly cap and Treasury bills to the extent that coupon principal payments are less than the monthly cap. Reinvest into agency mortgage-backed securities (MBS) the amount of principal payments from the Federal Reserve's holdings of agency debt and agency MBS received in each calendar month that exceeds a cap of $35 billion per month. Allow modest deviations from stated amounts for reinvestments, if needed for operational reasons. Engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions." The vote also encompassed approval of the statement below for release at 2:00 p.m.: "Recent indicators suggest that economic activity has been expanding at a solid pace. Job gains have remained strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee judges that the risks to achieving its employment and inflation goals are moving into better balance. The economic outlook is uncertain, and the Committee remains highly attentive to inflation risks. In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent. In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2 percent objective. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments." Voting for this action: Jerome H. Powell, John C. Williams, Thomas I. Barkin, Michael S. Barr, Raphael W. Bostic, Michelle W. Bowman, Lisa D. Cook, Mary C. Daly, Philip N. Jefferson, Adriana D. Kugler, Loretta J. Mester, and Christopher J. Waller. 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 of the Federal Reserve System voted unanimously to maintain the interest rate paid on reserve balances at 5.4 percent, effective March 21, 2024. The Board of Governors of the Federal Reserve System voted unanimously to approve the establishment of the primary credit rate at the existing level of 5.5 percent, effective March 21, 2024. It was agreed that the next meeting of the Committee would be held on Tuesday–Wednesday, April 30–May 1, 2024. The meeting adjourned at 9:55 a.m. on March 20, 2024. Notation Vote By notation vote completed on February 20, 2024, the Committee unanimously approved the minutes of the Committee meeting held on January 30–31, 2024. _______________________ Joshua Gallin Secretary 1. The Federal Open Market Committee is referenced as the "FOMC" and the "Committee" in these minutes; the Board of Governors of the Federal Reserve System is referenced as the "Board" in these minutes. Return to text 2. Attended through the discussion of considerations for slowing the pace of balance sheet reduction. Return to text

2024-01-31

Statement

Recent indicators suggest that economic activity has been expanding at a solid pace. Job gains have moderated since early last year but remain strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee judges that the risks to achieving its employment and inflation goals are moving into better balance. The economic outlook is uncertain, and the Committee remains highly attentive to inflation risks. In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent. In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2 percent objective. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments. Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Thomas I. Barkin; Michael S. Barr; Raphael W. Bostic; Michelle W. Bowman; Lisa D. Cook; Mary C. Daly; Philip N. Jefferson; Adriana D. Kugler; Loretta J. Mester; and Christopher J. Waller. For media inquiries, please email [email protected] or call 202-452-2955. Implementation Note issued January 31, 2024

2024-02-21

Minute

Minutes of the Federal Open Market Committee January 30–31, 2024 A joint meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve System was held in the offices of the Board of Governors on Tuesday, January 30, 2024, at 10:00 a.m. and continued on Wednesday, January 31, 2024, at 9:00 a.m.1 Attendance Jerome H. Powell, Chair John C. Williams, Vice Chair Thomas I. Barkin Michael S. Barr Raphael W. Bostic Michelle W. Bowman Lisa D. Cook Mary C. Daly Philip N. Jefferson Adriana D. Kugler Loretta J. Mester Christopher J. Waller Susan M. Collins, Austan D. Goolsbee, Kathleen O'Neill, Jeffrey R. Schmid, and Sushmita Shukla, Alternate Members of the Committee Patrick Harker, Neel Kashkari, and Lorie K. Logan, Presidents of the Federal Reserve Banks of Philadelphia, Minneapolis, and Dallas, respectively Joshua Gallin, Secretary Matthew M. Luecke, Deputy Secretary Brian J. Bonis, Assistant Secretary Michelle A. Smith, Assistant Secretary Mark E. Van Der Weide, General Counsel Richard Ostrander, Deputy General Counsel Trevor A. Reeve, Economist Stacey Tevlin, Economist Beth Anne Wilson, Economist Shaghil Ahmed, James A. Clouse, Edward S. Knotek II, David E. Lebow, Sylvain Leduc, Paula Tkac, and William Wascher, Associate Economists Roberto Perli, Manager, System Open Market Account Julie Ann Remache, Deputy Manager, System Open Market Account Stephanie R. Aaronson, Senior Associate Director, Division of Research and Statistics, Board Jose Acosta, Senior System Administrator II, Division of Information Technology, Board Isaiah C. Ahn, Information Management Analyst, Division of Monetary Affairs, Board Roc Armenter, Executive Vice President, Federal Reserve Bank of Philadelphia Alyssa Arute, Manager, Division of Reserve Bank Operations and Payment Systems, Board Penelope A. Beattie,2 Section Chief, Office of the Secretary, Board David Bowman, Senior Associate Director, Division of Monetary Affairs, Board Celso Brunetti,3 Assistant Director, Division of Research and Statistics, Board Juan C. Climent, Special Adviser to the Board, Division of Board Members, Board Daniel M. Covitz, Deputy Director, Division of Research and Statistics, Board Jennifer S. Crystal, Senior Adviser, Division of International Finance, Board Stephanie E. Curcuru, Deputy Director, Division of International Finance, Board Ryan Decker, Special Adviser to the Board, Division of Board Members, Board Sarah Devany, First Vice President, Federal Reserve Bank of San Francisco Rochelle M. Edge, Deputy Director, Division of Monetary Affairs, Board Eric C. Engstrom, Associate Director, Division of Research and Statistics, Board Jon Faust, Senior Special Adviser to the Chair, Division of Board Members, Board Jenn Gallagher, Assistant to the Board, Division of Board Members, Board Carlos Garriga, Senior Vice President, Federal Reserve Bank of St. Louis Michael S. Gibson, Director, Division of Supervision and Regulation, Board Joseph W. Gruber, Executive Vice President, Federal Reserve Bank of Kansas City Luca Guerrieri, Associate Director, Division of International Finance, Board Christopher J. Gust, Associate Director, Division of Monetary Affairs, Board Andrew Haughwout, Acting Director of Research, Federal Reserve Bank of New York Valerie S. Hinojosa, Section Chief, Division of Monetary Affairs, Board Jane E. Ihrig, Special Adviser to the Board, Division of Board Members, Board Michael T. Kiley, Deputy Director, Division of Financial Stability, Board Kyungmin Kim, Principal Economist, Division of Monetary Affairs, Board Elizabeth K. Kiser, Senior Associate Director, Division of Research and Statistics, Board Andreas Lehnert, Director, Division of Financial Stability, Board Kurt F. Lewis, Special Adviser to the Chair, Division of Board Members, Board Dan Li,4 Assistant Director, Division of Monetary Affairs, Board Laura Lipscomb, Special Adviser to the Board, Division of Board Members, Board Ann E. Misback, Secretary, Office of the Secretary, Board Phillip Monin, Senior Economist, Division of Monetary Affairs, Board Michelle M. Neal, Head of Markets, Federal Reserve Bank of New York Christopher J. Nekarda, Principal Economist, Division of Research and Statistics, Board Anna Paulson, Executive Vice President, Federal Reserve Bank of Chicago Eugenio P. Pinto, Special Adviser to the Board, Division of Board Members, Board Andrea Raffo, Senior Vice President, Federal Reserve Bank of Minneapolis Andres Schneider, Principal Economist, Division of Monetary Affairs, Board Samuel Schulhofer-Wohl, Senior Vice President, Federal Reserve Bank of Dallas Felipe F. Schwartzman, Senior Economist, Federal Reserve Bank of Richmond Chiara Scotti,3 Senior Vice President, Federal Reserve Bank of Dallas Zeynep Senyuz, Deputy Associate Director, Division of Monetary Affairs, Board Arsenios Skaperdas, Senior Economist, Division of Monetary Affairs, Board Balint Szoke, Senior Economist, Division of Monetary Affairs, Board Clara Vega, Special Adviser to the Board, Division of Board Members, Board Annette Vissing-Jørgensen, Senior Adviser, Division of Monetary Affairs, Board Jeffrey D. Walker, Associate Director, Division of Reserve Bank Operations and Payment Systems, Board Fabian Winkler, Principal Economist, Division of Monetary Affairs, Board Paul R. Wood, Special Adviser to the Board, Division of Board Members, Board Egon Zakrajsek, Executive Vice President, Federal Reserve Bank of Boston Rebecca Zarutskie, Special Adviser to the Board, Division of Board Members, Board Annual Organizational Matters5 The agenda for this meeting 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, 2024, were received and that these individuals executed their oaths of office. The elected members and alternate members were as follows: John C. Williams, President of the Federal Reserve Bank of New York, with Sushmita Shukla, 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 Susan M. Collins, President of the Federal Reserve Bank of Boston, as alternate; Loretta J. Mester, President of the Federal Reserve Bank of Cleveland, with Austan D. Goolsbee, President of the Federal Reserve Bank of Chicago, as alternate; Raphael W. Bostic, President of the Federal Reserve Bank of Atlanta, with Kathleen O'Neill, Interim President of the Federal Reserve Bank of St. Louis, as alternate; Mary C. Daly, President of the Federal Reserve Bank of San Francisco, with Jeffrey R. Schmid, 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 2025: Jerome H. Powell Chair John C. Williams Vice Chair Joshua Gallin Secretary Matthew M. Luecke Deputy Secretary Brian J. Bonis Assistant Secretary Michelle A. Smith Assistant Secretary Mark E. Van Der Weide General Counsel Richard Ostrander Deputy General Counsel Charles C. Gray Assistant General Counsel Trevor A. Reeve Economist Stacey Tevlin Economist Beth Anne Wilson Economist     Shaghil Ahmed Kartik B. Athreya6 James A. Clouse Brian M. Doyle Edward S. Knotek II David E. Lebow Sylvain Leduc Paula Tkac William Wascher Alexander L. Wolman Associate Economists By unanimous vote, the Committee selected the Federal Reserve Bank of New York to execute transactions for the System Open Market Account (SOMA). By unanimous vote, the Committee selected Roberto Perli and Julie Ann Remache 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 being satisfactory to the Federal Reserve Bank of New York. Secretary's note: The Federal Reserve Bank of New York subsequently sent advice that the selections indicated previously were satisfactory. By unanimous vote, the Committee approved the FOMC Authorizations and Continuing Directives for Open Market Operations, with a revision to Section II, Continuing Directive for Domestic Open Market Operations, to add a standing seven-day term option to the existing standing Foreign and International Monetary Authorities Repurchase Agreement Operations. Ahead of the vote on policies relating to investment and trading, information security, and external communications, the Chair commented on the critical importance of earning and keeping the public's trust in the impartiality of the Committee's decisionmaking. A revised investment and trading policy was proposed which expanded the scope of employees subject to the Committee's investment and trading rules, and introduced new investment restrictions on all employees with access to FOMC information. All participants indicated support for, and agreed to abide by, the FOMC Policy on Investment and Trading for Committee Participants and Federal Reserve System Staff, the Program for Security of FOMC Information, the FOMC Policy on External Communications of Committee Participants, and the FOMC Policy on External Communications of Federal Reserve System Staff. The Committee voted unanimously to approve those four policies.5 Ahead of the vote on the Statement on Longer-Run Goals and Monetary Policy Strategy, the Chair indicated the next five-year review of the statement would begin in the latter half of this year, and the results would be announced about a year later. All participants indicated support for the Statement on Longer-Run Goals and Monetary Policy Strategy, and the Committee voted unanimously to reaffirm it without revision.5 Developments in Financial Markets and Open Market Operations The manager turned first to a review of developments in financial markets over the intermeeting period. Financial conditions eased modestly but remained about as tight as they were last summer and much tighter than when the hiking cycle began. Over the intermeeting period, declines in nominal Treasury yields were concentrated at the front end of the yield curve. Staff models suggested that the declines in shorter-term yields were mostly attributable to a lower expected policy rate path and were concentrated in expected real rates, while expected inflation was little changed. Pricing of inflation derivatives continued to suggest a near-term path of inflation consistent with a return to 2 percent later this year. Broad equity prices reached new highs over the intermeeting period, but they were driven mostly by the strong gains of large-capitalization technology companies; broader measures of equity valuations were more subdued. Still, equities appeared priced for continued economic resilience. The manager turned next to expectations for monetary policy. Market participants broadly viewed recent inflation data and the December Summary of Economic Projections (SEP) as increasing the odds that rate cuts might start sooner than previously thought. The modal path of the federal funds rate from the Open Market Desk's Survey of Primary Dealers and Survey of Market Participants was little changed from December but showed an increased likelihood of earlier rate cuts. The modal path implied by options prices declined some over the intermeeting period. Both modal paths were closer to the December median SEP projection than the average path for the policy rate implied by futures prices, which had declined more substantially over the period. The futures-based path likely reflected the effect of investors' perceived probability of more substantial rate cuts rather than their baseline expectations. Communications over the period heightened market attention around a potential slowing of balance sheet runoff. Most Desk survey respondents expected a slowing of the pace to start by July, al­though there was considerable uncertainty about the exact start date. The average expected timing for the end of runoff shifted slightly earlier, and the portfolio size at the end of runoff was slightly higher than in the December surveys. Regarding developments in money markets and Desk operations, the effective federal funds rate was stable over the intermeeting period. While the Secured Overnight Financing Rate experienced temporary and modest upward pressure over the past few month-ends, including the year-end, such a pattern was common before the pandemic. The usage of the overnight reverse repurchase agreement (ON RRP) facility continued to fall over the period, with balances below $600 billion in late January. Since June 2023, when the debt ceiling was suspended, usage of the ON RRP facility had declined at a much faster pace than the Federal Reserve securities portfolio, and reserve balances had increased some. As part of its ongoing market surveillance, the staff continued to monitor a wide range of money market indicators; those gauges suggested that the supply of reserves remained abundant. The staff also noted that once the ON RRP facility is either depleted or stabilized at a low level, reserves will decline at a pace comparable with the runoff of the Federal Reserve's securities portfolio, all else equal. 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 data available at the time of the January 30–31 meeting indicated that growth in U.S. real gross domestic product (GDP) was solid in the fourth quarter of 2023 but had stepped down from the third quarter's strong pace. Labor market conditions continued to be tight but showed further signs of easing. Consumer price inflation had declined markedly over the course of the year, though it remained above 2 percent. Labor demand and supply continued to gradually move into better alignment. The average monthly pace of nonfarm payroll employment gains in the fourth quarter was slower than in the third quarter. The unemployment rate remained at 3.7 percent in December, the same as its third-quarter average. However, the labor force participation rate moved down, as did the employment-to-population ratio. The African American unemployment rate declined, and the rate for Hispanics rose; both rates were higher than those for Asians and for whites. The private-sector job openings rate was little changed in November and December, and the quits rate edged down; both rates were below their levels at the start of 2023. Easing labor market imbalances were also apparent in the wage data, with the December 12-month changes in the employment cost index and in average hourly earnings for all employees each below their year-earlier levels. Consumer price inflation continued to slow. The price index for total personal consumption expenditures (PCE) increased 2.6 percent over the 12 months ending in December, while core PCE price inflation—which excludes changes in energy prices and many consumer food prices—was 2.9 percent over the same period. Both total and core PCE price inflation were well below their year-earlier levels. The trimmed mean measure of 12-month PCE price inflation constructed by the Federal Reserve Bank of Dallas was 3.3 percent in December, also lower than its level a year earlier. Survey measures of consumers' short-run inflation expectations moved lower in December, while survey measures of medium- to longer-term inflation expectations were broadly in line with the levels seen in the decade before the pandemic. According to the advance estimate, real GDP rose at a solid pace in the fourth quarter. Private domestic final purchases—which comprises PCE and private fixed investment and which often provides a better signal than GDP of underlying economic momentum—also rose solidly, though at a slower rate. Real exports grew robustly in the fourth quarter of 2023, driven in part by a jump in exports of industrial supplies, which had declined markedly earlier last year. By contrast, real imports grew at a tepid pace, as gains in imports of capital goods and services were partially offset by declines in imports of consumer goods and autos. All told, net exports contributed about 1/2 percentage point to U.S. GDP growth in the fourth quarter after making roughly neutral contributions in the preceding two quarters. Foreign economic growth remained subdued in the fourth quarter. In the advanced foreign economies (AFEs), a significant tightening of monetary policy over the past two years, the erosion of real household incomes from high inflation rates, and the repercussions of last year's energy shock in Europe continued to weigh on economic activity. In China, a property-sector slump and depressed consumer confidence continued to weigh on domestic demand, with the government rolling out a series of policy measures to support growth. Economic activity in Asia excluding China firmed, supported in part by rebounding global demand for high-tech products. Foreign headline inflation continued to fall. However, the pace of decline had varied across countries as well as sectors, with a moderation in goods prices generally having outpaced that in services prices. Most major foreign central banks kept their policy rates unchanged over the intermeeting period and emphasized the need to maintain a stance of policy that is sufficiently restrictive to ensure that inflation falls back to their targets. Staff Review of the Financial Situation Over the intermeeting period, nominal Treasury yields declined, and the expected market-implied path for the federal funds rate through 2024 shifted downward, as market participants viewed monetary policy communications, on balance, as pointing to notably less restrictive policy than expected. Indicators of broad financial conditions eased over the period, but the staff's Financial Conditions Impulse on Growth index remained restrictive. Similarly, financing conditions for households and businesses continued to be moderately restrictive, as borrowing costs remained elevated. The market-implied path for the federal funds rate through 2024 decreased over the intermeeting period. A straight read of federal funds futures rates suggested that market participants were placing higher odds on significant policy easing in 2024 than they did just before the December FOMC meeting. Beyond 2024, the policy rate path implied by overnight index swap quotes declined. Consistent with the decline in the implied policy path, short- and intermediate-term Treasury yields also declined notably. Real yields declined more than nominal yields, implying somewhat higher measures of inflation compensation. Market-based measures of interest rate uncertainty remained highly elevated by historical standards. Broad stock price indexes increased, and spreads on investment- and speculative-grade bonds narrowed modestly over the intermeeting period. The one-month option-implied volatility on the S&P 500 increased somewhat over the period but remained low by historical standards. Movements in foreign markets over the intermeeting period were modest, on net, with most foreign asset prices and the exchange value of the dollar little changed. Market participants generally considered current levels of most AFE policy rates to be at the peaks of their respective tightening cycles. Declines in market-based measures of U.S. policy expectations contributed to a moderate step-down in short-term yields in most AFEs, while longer-term foreign yields were little changed. Major AFE equity indexes increased slightly. Conditions in short-term funding markets remained stable over the intermeeting period, with typical dynamics observed surrounding year-end. Usage of the ON RRP facility continued to decline over the period, primarily reflecting money market funds reallocating their assets to Treasury bills and private-market repurchase agreements, which offered slightly more attractive market rates relative to the ON RRP rate. Banks' total deposit levels were roughly unchanged in the fourth quarter of last year, as outflows of core deposits were about offset by inflows of large time deposits. In domestic credit markets, borrowing costs for most businesses, households, and municipalities decreased moderately over the intermeeting period but remained elevated. Rates on loans to households declined over the intermeeting period but remained relatively high, while interest rates on existing credit card accounts were little changed. Interest rates on commercial and industrial (C&I) loans and small business loans increased over the intermeeting period. Yields declined on a broad array of fixed-income securities, including investment- and speculative-grade corporate bonds, residential and commercial mortgage-backed securities (CMBS), and municipal bonds. The declines were largely driven by decreases in Treasury yields and, to some extent, by narrower spreads. Credit continued to be generally available to businesses, households, and municipalities. However, credit availability for smaller firms continued to tighten. Total core loans at banks increased slightly in the fourth quarter. Financing in capital markets continued to be available, al­though issuance in most markets remained at moderate levels. In the January Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS), banks reported tightening standards and terms on C&I loans to firms of all sizes over the fourth quarter. Regarding commercial real estate (CRE), banks reported tightening standards across all loan categories in the fourth quarter. Banks reported that they expected to keep lending standards unchanged for C&I loans and to tighten standards for CRE loans during 2024. Credit in the residential mortgage market remained easily available for high-credit-score borrowers who met standard conforming loan criteria, and consumer credit remained available for most borrowers. Growth in credit card balances was strong in November, though SLOOS respondents indicated that standards for credit cards tightened in the fourth quarter and were expected to tighten further over 2024. Auto loan balances grew modestly in November. A modest share of banks reported in the SLOOS that they tightened standards on auto loans in the fourth quarter and expected to tighten them further over 2024. The credit quality of businesses and households deteriorated slightly but remained broadly solid, as delinquency rates in most sectors were relatively low. Delinquency rates on conventional mortgages remained low, while delinquency rates on credit cards and auto loans rose in the third quarter to levels notably above those just before the pandemic. The credit quality of nonfinancial firms borrowing in the corporate bond and leveraged loan markets remained sound overall. Aggregate delinquency rates on CMBS backed by office properties continued to be elevated in November. In the January SLOOS, banks reported that credit quality was expected to deteriorate somewhat across loan categories over 2024. The staff provided an update on its assessment of the stability of the U.S. financial system and, on balance, characterized the system's financial vulnerabilities as notable. The staff judged that asset valuation pressures remained notable, as valuations across a range of markets appeared high relative to fundamentals. House prices increased to the upper end of their historical range, relative to rents and Treasury yields, though underwriting standards remained restrictive. CRE prices continued to decline, especially in the multifamily and office sectors, and low levels of transactions in the office sector likely indicated that prices had not yet fully reflected the sector's weaker fundamentals. Vulnerabilities associated with business and household debt were characterized as moderate. Nonfinancial business debt growth declined, and the ability of firms to service their debt remained high relative to history. Leverage in the financial sector was characterized as notable. In the banking sector, regulatory risk-based capital ratios continued to increase and indicated ample loss-bearing capacity in the banking system. The fair value of banks' longer-term fixed-rate assets, including loans, increased in the fourth quarter as longer-term interest rates decreased, though banks remained vulnerable to significant increases in longer-term interest rates. Insurers had been increasing their investments in risky corporate debt. Funding risks were also characterized as notable. Uninsured deposits declined in the aggregate but remained high for some banks. Assets in prime money market mutual funds and other cash management vehicles continued to increase. Staff Economic Outlook The economic forecast prepared by the staff for the January meeting was slightly stronger than the December projection, as the upward revision to 2023 GDP growth implied by incoming data boosted the level of output throughout the projection period. The lagged effects of earlier monetary policy actions, through their continued contribution to tight financial and credit conditions, were still expected to push output growth in 2024 and 2025 below the staff's estimate of potential growth; in 2026, output was expected to rise in line with potential. The projected path for the unemployment rate was revised down slightly, reflecting the upward revision to the level of output. Total and core PCE price inflation were both projected to step down in 2024 as demand and supply in product and labor markets moved into better alignment. By 2026, total and core PCE price inflation were expected to be close to 2 percent. The staff continued to view the uncertainty around the baseline projection as elevated but noted that this uncertainty had diminished substantially over the past year. Risks around the inflation forecast were seen as tilted slightly to the upside; al­though inflation had come in close to expectations throughout most of 2023, the staff placed some weight on the possibility that further progress in reducing inflation could take longer than expected. The risks around the forecast for real activity were viewed as skewed to the downside, as any substantial setback in reducing inflation might lead to a tightening of financial conditions that would slow the pace of real activity by more than the staff anticipated in their baseline forecast. In addition, the possibility of a larger-than-expected erosion of households' financial positions was seen as a downside risk to the projection for real activity. Participants' Views on Current Conditions and the Economic Outlook In their discussion of current economic conditions, participants noted that recent indicators suggested that economic activity had been expanding at a solid pace. Real GDP growth in the fourth quarter of last year came in above 3 percent at an annual rate, below the strong growth posted in the third quarter but still above most forecasters' expectations. Participants observed that the unexpected strength in real GDP growth in the fourth quarter reflected stronger-than-expected net exports and inventory investment, which tend to be volatile and may carry little signal for future growth. Still, consumption continued to grow at a solid pace. In addition to strong demand, many participants attributed the recent expansion in economic activity to favorable supply developments. Participants noted that the pace of job gains had moderated since early last year but remained strong and that the unemployment rate had remained low. Inflation had eased over the past year but remained elevated. Regarding the economic outlook, participants judged that the current stance of monetary policy was restrictive and would continue to put downward pressure on economic activity and inflation. Accordingly, they expected that supply and demand in product and labor markets would continue to move into better balance. In light of the policy restraint in place, along with more favorable inflation data amid ongoing improvements in supply conditions, participants viewed the risks to achieving the Committee's employment and inflation goals as moving into better balance. However, participants noted that the economic outlook was uncertain and that they remained highly attentive to inflation risks. In their discussion of inflation, participants observed that inflation had eased over the past year but remained above the Committee's 2 percent inflation objective. They remained concerned that elevated inflation continued to harm households, especially those with limited means to absorb higher prices. While the inflation data had indicated significant disinflation in the second half of last year, participants observed that they would be carefully assessing incoming data in judging whether inflation was moving down sustainably toward 2 percent. Participants noted improvements in both headline and core inflation and discussed the underlying components of these series. Al­though total PCE inflation in December remained above the Committee's 2 percent objective on a 12-month basis, on a 6-month basis, total PCE inflation was near 2 percent at an annual rate, and core PCE inflation was just below 2 percent. Participants judged that some of the recent improvement in inflation reflected idiosyncratic movements in a few series. Nevertheless, they viewed that there had been significant progress recently on inflation returning to the Committee's longer-run goal. Many participants indicated that they expected core nonhousing services inflation to gradually decline further as the labor market continued to move into better balance and wage growth moderated further. Various participants noted that housing services inflation was likely to fall further as the deceleration in rents on new leases continued to pass through to measures of such inflation. While many participants pointed to disinflationary pressures associated with improvements in aggregate supply—such as increases in the labor force or better productivity growth—a couple of participants judged that the downward pressure on core goods prices from the normalization of supply chains was likely to moderate. Participants observed that longer-term inflation expectations had remained well anchored at a level consistent with the Committee's 2 percent inflation objective. Measures of near-term inflation expectations had also declined recently, in some cases to within their ranges in the years before the pandemic. Some participants pointed to reports from contacts that firms could not as easily pass on price increases to consumers or were making less frequent price adjustments than they had in recent years. In their discussion of the household sector, participants observed that consumer spending had been stronger than expected, supported by low unemployment and solid income growth. A number of participants judged that consumption growth was likely to moderate this year, as growth in labor income was expected to slow and pandemic-related excess savings were expected to diminish. In addition, some participants noted signs that the finances of some households—especially those in the low- and moderate-income categories—were increasingly coming under pressure, which these participants saw as a downside risk to the outlook for consumption. In particular, they pointed to increased usage of credit card revolving balances and buy-now-pay-later services, as well as increased delinquency rates for some types of consumer loans. The reports of business contacts cited by participants varied across industries and Districts. In a few Districts, contacts reported that the pace of economic activity was steady or solid, while in several others, contacts expressed increased optimism about the economic outlook and prospects for investment. District reports from manufacturers were mixed, as some contacts saw increased activity, whereas others saw subdued or weakening activity. A couple of participants noted that al­though soft commodity prices and elevated borrowing costs had contributed to a decline in farm incomes recently, agricultural land values remained resilient, and delinquencies on farm loans continued to be low. A few participants remarked that financing and credit conditions were particularly challenging for small businesses. Participants noted that the labor market remained tight, but demand and supply in that market had continued to come into better balance. Payroll growth had remained strong in the last few months of 2023 but had slowed from its pace seen a year ago, while the unemployment rate remained low. Participants also observed that the ratio of job openings to unemployed workers had declined over the past year but still remained somewhat above its pre-pandemic level. Consistent with a reduction in labor market tightness, business contacts in several Districts reported an easing in wage pressures or an increased ability to hire and retain workers. Participants mentioned several developments that had boosted labor supply last year, including higher labor force participation, immigration, and an improved job-matching process; however, a few participants judged that further increases in labor supply may be limited, pointing, for instance, to the decline in labor force participation in December. While labor market conditions were generally seen as strong, several participants noted that recent job gains were concentrated in a few sectors, which, in their view, pointed to downside risks to the outlook for employment. Participants discussed the uncertainty surrounding the economic outlook. As an upside risk to both inflation and economic activity, participants noted that momentum in aggregate demand may be stronger than currently assessed, especially in light of surprisingly resilient consumer spending last year. Furthermore, several participants mentioned the risk that financial conditions were or could become less restrictive than appropriate, which could add undue momentum to aggregate demand and cause progress on inflation to stall. Participants also noted some other sources of upside risks to inflation, including possible disruptions to supply chains from geopolitical developments, a potential rebound in core goods prices as the effects of supply-side improvements dissipate, or the possibility that wage growth remains elevated. Downside risks to inflation and economic activity noted by participants included geopolitical risks that could result in a material pullback in demand, possible negative spillovers from lower growth in some foreign economies, the risk that financial conditions could remain restrictive for too long, or the possibility that a weakening of household balance sheets could contribute to a greater-than-expected deceleration in consumption. A few participants mentioned the possibility that economic activity could surprise to the upside and inflation to the downside because of more-favorable-than-expected supply-side developments. In the discussion of financial stability, participants observed that risks to the banking system had receded notably since last spring, though they noted vulnerabilities at some banks that they assessed warranted monitoring. These participants noted potential risks for some banks associated with increased funding costs, significant reliance on uninsured deposits, unrealized losses on assets resulting from the rise in longer-term interest rates, or high CRE exposures. Participants judged that liquidity in the financial system remained more than ample and discussed the importance of considering liquidity conditions as the Federal Reserve's balance sheet continues to normalize. While participants noted that they were not seeing any signs of liquidity pressures at banks, several participants noted that, as a matter of prudent contingency planning, banks should continue to improve their readiness to use the Federal Reserve's discount window, and that the Federal Reserve should continue to improve the operational efficiency of the window. In addition, some participants commented on the difficulties associated with banks relying on some forms of private wholesale funding during times of stress. A few participants remarked on the importance of measures aimed at increasing the resilience of the Treasury market. A few participants noted cyber risks and the importance of firms being able to recover from cyber events. A few participants also commented on the financial condition of low- and moderate-income households who have exhausted their savings, as well as the importance of monitoring data on rising delinquencies on credit cards and autos. In their consideration of appropriate monetary policy actions at this meeting, participants noted that recent indicators suggested that economic activity had been expanding at a solid pace. Job gains had moderated since early last year but remained strong, and the unemployment rate had remained low. Inflation had eased over the past year but remained elevated. Participants also noted that the risks to achieving the Committee's employment and inflation goals were moving into better balance and that the Committee remained highly attentive to inflation risks. Participants continued to be resolute in their commitment to bring inflation down to the Committee's 2 percent objective. In light of current economic conditions and their implications for the outlook for economic activity and inflation, as well as the balance of risks, all participants judged it appropriate to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent at this meeting. All participants also judged it appropriate to continue the process of reducing the Federal Reserve's securities holdings, as described in the previously announced Plans for Reducing the Size of the Federal Reserve's Balance Sheet. Participants viewed maintaining the current stance of policy as appropriate given the incoming data, which indicated that inflation had continued to move toward the Committee's 2 percent objective and that demand and supply in the labor market had continued to move into better balance. Participants commented that maintaining the target range for the federal funds rate at this meeting would promote further progress toward the Committee's goals and allow participants to gather additional information to evaluate this progress. In discussing the policy outlook, participants judged that the policy rate was likely at its peak for this tightening cycle. They pointed to the decline in inflation seen during 2023 and to growing signs of demand and supply coming into better balance in product and labor markets as informing that view. Participants generally noted that they did not expect it would be appropriate to reduce the target range for the federal funds rate until they had gained greater confidence that inflation was moving sustainably toward 2 percent. Many participants remarked that the Committee's past policy actions and ongoing improvements in supply conditions were working together to move supply and demand into better balance. Participants noted that the future path of the policy rate would depend on incoming data, the evolving outlook, and the balance of risks. Several participants emphasized the importance of continuing to communicate clearly about the Committee's data-dependent approach. In discussing risk-management considerations that could bear on the policy outlook, participants remarked that while the risks to achieving the Committee's employment and inflation goals were moving into better balance, they remained highly attentive to inflation risks. In particular, they saw upside risks to inflation as having diminished but noted that inflation was still above the Committee's longer-run goal. Some participants noted the risk that progress toward price stability could stall, particularly if aggregate demand strengthened or supply-side healing slowed more than expected. Participants highlighted the uncertainty associated with how long a restrictive monetary policy stance would need to be maintained. Most participants noted the risks of moving too quickly to ease the stance of policy and emphasized the importance of carefully assessing incoming data in judging whether inflation is moving down sustainably to 2 percent. A couple of participants, however, pointed to downside risks to the economy associated with maintaining an overly restrictive stance for too long. Participants observed that the continuing process of reducing the size of the Federal Reserve's balance sheet was an important part of the Committee's overall approach to achieving its macroeconomic objectives and that balance sheet runoff had so far proceeded smoothly. In light of ongoing reductions in usage of the ON RRP facility, many participants suggested that it would be appropriate to begin in-depth discussions of balance sheet issues at the Committee's next meeting to guide an eventual decision to slow the pace of runoff. Some participants remarked that, given the uncertainty surrounding estimates of the ample level of reserves, slowing the pace of runoff could help smooth the transition to that level of reserves or could allow the Committee to continue balance sheet runoff for longer. In addition, a few participants noted that the process of balance sheet runoff could continue for some time even after the Committee begins to reduce the target range for the federal funds rate. Committee Policy Actions In their discussions of monetary policy for this meeting, members agreed that economic activity had been expanding at a solid pace. Job gains had moderated since early last year but remained strong, and the unemployment rate had remained low. Inflation had eased over the past year but remained elevated. Members judged that the risks to achieving the Committee's employment and inflation goals were moving into better balance. Members viewed the economic outlook to be uncertain and agreed that they remained highly attentive to inflation risks. In support of the Committee's goals to achieve maximum employment and inflation at the rate of 2 percent over the longer run, members agreed to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent. Members concurred that, in considering any adjustments to the target range for the federal funds rate, they would carefully assess incoming data, the evolving outlook, and the balance of risks. Members agreed that they did not expect that it would be appropriate to reduce the target range until they have gained greater confidence that inflation is moving sustainably toward 2 percent. In addition, members agreed to continue to reduce the Federal Reserve's holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. All members affirmed their strong commitment to returning inflation to the Committee's 2 percent objective. Members agreed that, in assessing the appropriate stance of monetary policy, they would continue to monitor the implications of incoming information for the economic outlook. They would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. Members also agreed that their assessments would take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments. Given that the stresses that emerged at some banks early last year have subsided, members agreed to remove from the statement the reference to the resilience of the U.S. banking system as well as to tighter financial and credit conditions and their effects on the economic outlook. Members also agreed to note the progress made toward the 2 percent inflation objective and the resilience of economic activity over the past year by stating that the Committee "judges that the risks to achieving its employment and inflation goals are moving into better balance." Regarding considerations relevant for future policy actions, members agreed, given their assessment of the policy rate being likely at its peak for this tightening cycle, to remove the reference to "the extent of any additional policy firming that may be appropriate to return inflation to 2 percent over time," as was included in the December statement. In its place, they agreed to adopt phrasing referencing their "considering any adjustments to the target range for the federal funds rate." Members also agreed that the statement should convey that "the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks" and that it "does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent." At the conclusion of the discussion, the Committee voted to 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, for release at 2:00 p.m.: "Effective February 1, 2024, 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 5-1/4 to 5-1/2 percent. Conduct standing overnight repurchase agreement operations with a minimum bid rate of 5.5 percent and with an aggregate operation limit of $500 billion. Conduct standing overnight reverse repurchase agreement operations at an offering rate of 5.3 percent and with a per-counterparty limit of $160 billion per day. Roll over at auction the amount of principal payments from the Federal Reserve's holdings of Treasury securities maturing in each calendar month that exceeds a cap of $60 billion per month. Redeem Treasury coupon securities up to this monthly cap and Treasury bills to the extent that coupon principal payments are less than the monthly cap. Reinvest into agency mortgage-backed securities (MBS) the amount of principal payments from the Federal Reserve's holdings of agency debt and agency MBS received in each calendar month that exceeds a cap of $35 billion per month. Allow modest deviations from stated amounts for reinvestments, if needed for operational reasons. Engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions." The vote also encompassed approval of the statement below for release at 2:00 p.m.: "Recent indicators suggest that economic activity has been expanding at a solid pace. Job gains have moderated since early last year but remain strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee judges that the risks to achieving its employment and inflation goals are moving into better balance. The economic outlook is uncertain, and the Committee remains highly attentive to inflation risks. In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent. In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2 percent objective. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments." Voting for this action: Jerome H. Powell, John C. Williams, Thomas I. Barkin, Michael S. Barr, Raphael W. Bostic, Michelle W. Bowman, Lisa D. Cook, Mary C. Daly, Philip N. Jefferson, Adriana D. Kugler, Loretta J. Mester, and Christopher J. Waller. 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 of the Federal Reserve System voted unanimously to maintain the interest rate paid on reserve balances at 5.4 percent, effective February 1, 2024. The Board of Governors of the Federal Reserve System voted unanimously to approve the establishment of the primary credit rate at the existing level of 5.5 percent, effective February 1, 2024. It was agreed that the next meeting of the Committee would be held on Tuesday–Wednesday, March 19–20, 2024. The meeting adjourned at 10:25 a.m. on January 31, 2024. Notation Vote By notation vote completed on January 2, 2024, the Committee unanimously approved the minutes of the Committee meeting held on December 12–13, 2023. _______________________ Joshua Gallin Secretary 1. The Federal Open Market Committee is referenced as the "FOMC" and the "Committee" in these minutes; the Board of Governors of the Federal Reserve System is referenced as the "Board" in these minutes. Return to text 2. Attended through the discussion of the economic and financial situation. Return to text 3. Attended opening remarks for Tuesday's session only. Return to text 4. Attended Tuesday's session only. Return to text 5. Committee organizational documents are available at www.federalreserve.gov/monetarypolicy/rules_authorizations.htm. Return to text 6. Kartik B. Athreya's selection was effective upon employment at the Federal Reserve Bank of New York. Return to text

2023-12-13

Statement

Recent indicators suggest that growth of economic activity has slowed from its strong pace in the third quarter. Job gains have moderated since earlier in the year but remain strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated. The U.S. banking system is sound and resilient. Tighter financial and credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent. The Committee will continue to assess additional information and its implications for monetary policy. In determining the extent of any additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2 percent objective. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments. Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Michelle W. Bowman; Lisa D. Cook; Austan D. Goolsbee; Patrick Harker; Philip N. Jefferson; Neel Kashkari; Adriana D. Kugler; Lorie K. Logan; and Christopher J. Waller. For media inquiries, please email [email protected] or call 202-452-2955. Implementation Note issued December 13, 2023

2024-01-03

Minute

Minutes of the Federal Open Market Committee December 12–13, 2023 A joint meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve System was held in the offices of the Board of Governors on Tuesday, December 12, 2023, at 10:30 a.m. and continued on Wednesday, December 13, 2023, at 9:00 a.m.1 Attendance Jerome H. Powell, Chair John C. Williams, Vice Chair Michael S. Barr Michelle W. Bowman Lisa D. Cook Austan D. Goolsbee Patrick Harker Philip N. Jefferson Neel Kashkari Adriana D. Kugler Lorie K. Logan Christopher J. Waller Thomas I. Barkin, Raphael W. Bostic, Mary C. Daly, and Loretta J. Mester, Alternate Members of the Committee Susan M. Collins and Jeffrey R. Schmid, Presidents of the Federal Reserve Banks of Boston and Kansas City, respectively Kathleen O'Neill Paese, Interim President of the Federal Reserve Bank of St. Louis Joshua Gallin, Secretary Matthew M. Luecke, Deputy Secretary Brian J. Bonis, Assistant Secretary Michelle A. Smith, Assistant Secretary Mark E. Van Der Weide, General Counsel Richard Ostrander, Deputy General Counsel Trevor A. Reeve, Economist Stacey Tevlin, Economist Beth Anne Wilson, Economist Shaghil Ahmed, Roc Armenter, James A. Clouse, Eric M. Engen, Anna Paulson, Andrea Raffo, Chiara Scotti, and William Wascher, Associate Economists Roberto Perli, Manager, System Open Market Account Julie Ann Remache, Deputy Manager, System Open Market Account Jose Acosta, Senior System Administrator II, Division of Information Technology, Board David Altig, Executive Vice President, Federal Reserve Bank of Atlanta Alyssa Arute,2 Manager, Division of Reserve Bank Operations and Payment Systems, Board Kimberly N. Bayard, Section Chief, Division of Research and Statistics, Board Penelope A. Beattie,3 Section Chief, Office of the Secretary, Board Paola Boel, Vice President, Federal Reserve Bank of Cleveland David Bowman, Senior Associate Director, Division of Monetary Affairs, Board Celso Brunetti, Assistant Director, Division of Research and Statistics, Board Jennifer J. Burns, Deputy Director, Division of Supervision and Regulation, Board Juan C. Climent, Special Adviser to the Board, Division of Board Members, Board Edmund S. Crawley, Senior Economist, Division of Monetary Affairs, Board Stephanie E. Curcuru, Deputy Director, Division of International Finance, Board Ryan Decker, Special Adviser to the Board, Division of Board Members, Board Riccardo DiCecio, Economic Policy Advisor, Federal Reserve Bank of St. Louis Cynthia L. Doniger, Principal Economist, Division of Monetary Affairs, Board Rochelle M. Edge, Deputy Director, Division of Monetary Affairs, Board Jon Faust, Senior Special Adviser to the Chair, Division of Board Members, Board Glenn Follette, Associate Director, Division of Research and Statistics, Board Joseph W. Gruber, Executive Vice President, Federal Reserve Bank of Kansas City Valerie S. Hinojosa, Section Chief, Division of Monetary Affairs, Board Jasper J. Hoek, Deputy Associate Director, Division of International Finance, Board Jane E. Ihrig, Special Adviser to the Board, Division of Board Members, Board Elizabeth Klee, Senior Associate Director, Division of Financial Stability, Board David E. Lebow, Senior Associate Director, Division of Research and Statistics, Board Andreas Lehnert, Director, Division of Financial Stability, Board Eric LeSueur,2 Policy and Market Analysis Advisor, Federal Reserve Bank of New York Kurt F. Lewis, Special Adviser to the Chair, Division of Board Members, Board Laura Lipscomb, Special Adviser to the Board, Division of Board Members, Board David López-Salido, Senior Associate Director, Division of Monetary Affairs, Board Thomas Lubik, Senior Advisor, Federal Reserve Bank of Richmond Byron Lutz, Deputy Associate Director, Division of Research and Statistics, Board Mark Meder, First Vice President, Federal Reserve Bank of Cleveland Ann E. Misback, Secretary, Office of the Secretary, Board Michelle M. Neal, Head of Markets, Federal Reserve Bank of New York Edward Nelson, Senior Adviser, Division of Monetary Affairs, Board Lubomir Petrasek,4 Section Chief, Division of Monetary Affairs, Board Achilles Sangster II, Senior Information Manager, Division of Monetary Affairs, Board Adam H. Shapiro, Vice President, Federal Reserve Bank of San Francisco Shane M. Sherlund, Associate Director, Division of Research and Statistics, Board Nitish Ranjan Sinha, Special Adviser to the Board, Division of Board Members, Board Balint Szoke, Senior Economist, Division of Monetary Affairs, Board Giorgio Topa, Economic Research Advisor, Federal Reserve Bank of New York Clara Vega, Special Adviser to the Board, Division of Board Members, Board Annette Vissing-Jørgensen, Senior Adviser, Division of Monetary Affairs, Board Jeffrey D. Walker,2 Associate Director, Division of Reserve Bank Operations and Payment Systems, Board Paul R. Wood, Special Adviser to the Board, Division of Board Members, Board Egon Zakrajsek, Executive Vice President, Federal Reserve Bank of Boston Rebecca Zarutskie, Special Adviser to the Board, Division of Board Members, Board Developments in Financial Markets and Open Market Operations The manager turned first to a review of developments in financial markets over the intermeeting period. Financial conditions eased, driven by a decline in interest rates, an increase in equity prices, and a depreciation in the dollar. The rise in equity prices was supported by the decline in Treasury yields and by earnings growth that exceeded consensus expectations. Implied volatility for equities diminished notably. The easing in financial conditions reversed some of the tightening that occurred over the summer and much of the fall. Yields on nominal Treasury securities declined sharply over the intermeeting period—more so at longer maturities—after having increased notably during the previous intermeeting period, as investors appeared to interpret incoming data as reducing risks of prolonged inflation pressures. In addition, market participants interpreted communications from FOMC participants as solidifying the view that the Committee's policy rate may be at its peak. Early in the period, the market also reacted to communications from the Treasury Department indicating that issuance of Treasury securities was likely to be more skewed toward shorter-dated maturities than previously expected. Models, on average, suggested that about two-thirds of the decline in longer-term yields on Treasury securities over the period was attributable to a reduction in term premiums and about one-third to a decline in expectations for the policy rate. Pricing of inflation derivatives over the intermeeting period suggested that investors had become more optimistic about the near-term outlook for inflation. The manager turned next to expectations for monetary policy. Respondents to the Open Market Desk's Survey of Primary Dealers and Survey of Market Participants largely converged around the view that the peak level of the federal funds rate for this tightening cycle had been reached. The modal path from the Desk surveys suggested that the first reduction in the policy rate would occur in June, unchanged from the October surveys. The average path for the policy rate implied by market pricing shifted down considerably over the period. Regarding developments in money markets and Desk operations, usage of the overnight reverse repurchase agreement (ON RRP) facility continued to fall over the period; take-up at the facility had dropped about $1.3 trillion since early June. The decline was again driven primarily by lower participation by money market mutual funds, as such funds found it more attractive to invest in Treasury bills and, increasingly, the private market for repurchase agreement (repo) transactions. Overnight repo rates continued to experience some modest upward pressure over the period. As reflected by a rise in the Secured Overnight Financing Rate, there was some tightening of conditions in repo markets in late November and early December in response to typical lending dynamics around month-end, the settlement of a large amount of Treasury issuance, and increased demand for Treasury financing. The market absorbed this episode well. The manager expected that private-market repo rates would likely remain above the rate offered at the ON RRP facility, which should continue to induce a reduction in usage of the facility. Respondents to the Desk surveys again reduced their expectations for the trajectory for ON RRP balances and correspondingly raised their expectations for the trajectory of reserve balances. Aggregate reserves across the banking system remained abundant, and no signs of pressures were evident. As part of their ongoing market surveillance, the staff will continue to monitor a wide range of indicators of money market conditions, including the composition of borrowers in money markets, borrowing demand for various sources of liquidity, the distribution of reserve balances across the financial system, the pricing of money market investments relative to the Federal Reserve's administered rates, and the sensitivity of money market rates to changes in aggregate reserves. 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 data available at the time of the December 12–13 meeting suggested that growth in U.S. real gross domestic product (GDP) was slowing from its strong third-quarter pace. Labor market conditions continued to be tight, with moderating but still-strong job gains and a low unemployment rate. Consumer price inflation had eased over the past year but remained elevated. Labor demand and supply continued to move gradually into better alignment. Total nonfarm payroll employment expanded at a slower pace, on balance, over October and November than its average monthly rate in the third quarter. The unemployment rate was little changed, on net, and stood at 3.7 percent in November, the same as its third-quarter average. The labor force participation rate was essentially flat over the past two months, remaining above its level early in the year, while the employment-to-population ratio rose slightly on balance. The unemployment rates for African Americans and for Hispanics were little changed, and both rates were higher than those for Asians and for Whites. The job openings rate continued to trend down, and the quits rate was flat; both rates were below their levels earlier this year. The lessening of labor market imbalances was apparent in recent wage data, as the 12‑month change in average hourly earnings for all employees was well below its year-earlier level and the Wage Growth Tracker constructed by the Federal Reserve Bank of Atlanta was trending down and lower than a year ago. Consumer price inflation remained elevated but continued to show notable signs of easing. The price index for total personal consumption expenditures (PCE) increased 3.0 percent over the 12 months ending in October, while core PCE inflation—which excludes changes in energy prices and many consumer food prices—was 3.5 percent over the same period; both total and core PCE inflation were well below their year-earlier levels. The six-month change measures of total and core PCE inflation in October were each 2.5 percent, down from their levels six months earlier. The trimmed mean measure of 12-month PCE inflation constructed by the Federal Reserve Bank of Dallas was 3.6 percent in October, also down from its level a year ago. In November, the 12-month change in the consumer price index (CPI) was 3.1 percent, core CPI rose 4.0 percent over the same period, and both measures were well below their year-earlier levels. Recent survey measures of medium- to longer-term inflation expectations were in the range seen in the decade before the pandemic. In contrast, survey measures of consumers' short-run inflation expectations remained above their pre-pandemic levels. Available indicators suggested that real GDP growth was slowing from its strong third-quarter pace, which had been led by a sizable increase in consumer spending. In October, PCE growth slowed from its average monthly rate in the third quarter. As for business investment, nominal shipments of nondefense capital goods excluding aircraft were essentially flat in October, al­though nonresidential construction spending by businesses edged up. Residential housing starts moved mostly sideways, and home sales continued to fall. Manufacturing production declined in October, and factory output was weak, even after excluding the decrease in motor vehicle assemblies caused by the autoworkers' strike. The nominal trade deficit widened in October, as exports declined and imports rose slightly. Foreign economic growth slowed in the third quarter, and available indicators pointed to subdued growth in the fourth quarter. The significant tightening of monetary policy by foreign central banks over the past two years and the repercussions of last year's energy shock in Europe continued to weigh on foreign economic activity. Chinese economic indicators, such as retail sales and industrial production, pointed to economic growth remaining modest. By contrast, economic activity in Asia excluding China stepped up, supported in part by a recovery in industrial production, especially in the high-tech sector. While inflation was still elevated in most major economies, incoming data indicated that it had moved down markedly. These decreases reflected notable step-downs in both energy and core inflation amid slowing aggregate demand and declines in oil prices. Most major foreign central banks kept their policy rates unchanged over the intermeeting period and emphasized the need to maintain a sufficiently restrictive stance of policy to ensure that inflation fell back to their targets. Staff Review of the Financial Situation Over the intermeeting period, some softer-than-expected data releases appeared to lessen the perception among investors that policy may need to tighten further in order to bring inflation down to 2 percent over time. Market participants also viewed monetary policy communications, on balance, as pointing to somewhat less restrictive policy than expected. As a result, nominal Treasury yields declined significantly and the expected market-implied path for the federal funds rate beyond the next few months shifted downward. Meanwhile, broad equity price indexes were boosted by many of the same factors that lowered Treasury yields, and spreads on investment- and speculative-grade corporate bonds narrowed. Financing conditions remained moderately restrictive, as borrowing costs remained elevated despite declining over the intermeeting period. The market-implied path for the federal funds rate beyond the next few months moved down notably over the intermeeting period. A straight read of federal funds futures rates suggested that market participants expected the federal funds rate to be 25 basis points below its current level by the May 2024 FOMC meeting, two meetings earlier than at the time of the October–November FOMC meeting. The policy rate path implied by overnight index swap quotes moved down 45 basis points to 4.2 percent by the end of 2024. Similarly, nominal Treasury yields declined significantly. The decline in nominal yields mostly reflected a decrease in real yields, while measures of inflation compensation were moderately lower, on net, amid softer-than-expected data releases. Measures of uncertainty about the path of interest rates decreased notably, consistent with the tempering of concerns about inflation, but remained elevated by historical standards. Broad stock price indexes increased markedly over the intermeeting period, and spreads on investment-grade bonds narrowed moderately, while those on speculative-grade corporate bonds declined more notably. The one-month option-implied volatility on the S&P 500 decreased moderately and reached its lowest level since January 2020. Spillovers from falling U.S. yields, below-expectations readings on global inflation, and oil price drops led to large declines in foreign yields. These declines were accompanied by an improvement in market sentiment, with foreign equity prices increasing, foreign credit spreads narrowing, and outflows from funds investing in emerging market economies slowing notably. The improvement in sentiment and declines in U.S. yields contributed to a broad depreciation of the foreign exchange value of the dollar. Conditions in U.S. short-term funding markets remained largely stable over the intermeeting period. Usage of the ON RRP facility continued to decline over the period. The decline in usage primarily reflected money market mutual funds reallocating their assets to Treasury bills and private-market repo, which offered slightly more attractive market rates relative to the ON RRP rate amid continued increases in net Treasury bill issuance and Federal Reserve balance sheet reduction. Banks' total deposit levels were roughly unchanged over the intermeeting period, as outflows of core deposits were about offset by inflows of large time deposits. In domestic credit markets, borrowing costs for most businesses, households, and municipalities declined over the intermeeting period, reflecting both lower longer-maturity Treasury yields and narrower credit spreads, al­though borrowing costs remained significantly elevated. Rates on loans to households, including those for 30-year conforming residential mortgages and new auto loans, declined over the intermeeting period, while interest rates on commercial and industrial (C&I) loans and small business loans were little changed. Yields on corporate bonds fell more than Treasury yields, particularly for speculative-grade bonds. Bank credit conditions appeared to tighten somewhat over the intermeeting period, but credit to businesses and households generally remained accessible. C&I loan balances contracted through November, on balance, while expansion of commercial real estate (CRE) loans stepped down appreciably across most categories from an already moderating pace in the third quarter. Credit remained available for most consumers, al­though consumer credit flows softened in recent months. Growth of credit card balances moderated significantly through November from the brisk pace seen in the summer. For residential real estate borrowers, credit availability was little changed. Credit conditions for small businesses appeared to have tightened further in recent months. Data from the Federal Reserve's Small Business Lending Survey showed that originations had been roughly flat since mid-2022 before ticking down in the third quarter. Credit continued to be generally accessible through capital markets, al­though issuance was slow in many markets, including those for corporate bonds, leveraged loans, and agency and non-agency commercial mortgage-based securities (CMBS). Credit quality remained broadly solid but deteriorated further for some sectors in recent months. Delinquency rates on nonfarm nonresidential CRE bank loans rose further in the third quarter, and delinquency rates for construction and land development as well as multifamily loans ticked up. After increases over the first three quarters of the year, delinquency rates for loans in CMBS pools edged lower in October, but the large volume of loans scheduled to mature over the next few quarters suggested that delinquencies would likely surge again. The delinquency rate for small business loans continued to tick up in September and was above levels observed just before the pandemic. Credit card delinquency rates also increased further, while delinquency rates on auto loans were little changed in the third quarter. The trailing default rates for investment- and speculative-grade corporate bonds were little changed on net, and the trailing default rate for leveraged loans increased a bit. Staff Economic Outlook The economic forecast prepared by the staff for the December meeting was broadly similar to the projection for the previous meeting. The staff continued to expect that GDP growth would slow markedly in the fourth quarter from its outsized third-quarter rate but that economic growth for 2023 as a whole would still be solid. The lagged effects of earlier monetary policy actions, through their contributions to continued tight financial and credit conditions, were expected to show through more fully in restraining economic activity in the coming years. Real GDP was projected to increase more slowly than the staff's estimate of potential over the next two years before rising in line with potential in 2026. The unemployment rate was expected to be roughly flat through 2026 as the effects of below-potential output growth were offset by the effects of further improvements in labor market functioning. The staff revised down their inflation forecast, reflecting lower-than-expected incoming data—including the November CPI and producer price index—and their judgment that inflation would be less persistent than in the previous projection. Measured on a four-quarter change basis, total PCE price inflation was expected to be somewhat below 3 percent this year, with core PCE price inflation somewhat above 3 percent. Inflation was projected to move lower in coming years as demand and supply in product and labor markets moved into better alignment; by 2026, total and core PCE price inflation were expected to be close to 2 percent. The staff continued to view uncertainty around the baseline projection as elevated, al­though they observed that the volatility of incoming data and staff forecast errors generally had become less pronounced over the past year. Risks around the inflation forecast were seen as skewed to the upside, given that inflation was still elevated and the possibility that inflation might prove to be more persistent than expected or that adverse shocks to supply conditions might occur. The risks around the forecast for economic activity were viewed to be tilted to the downside. In particular, the additional monetary policy tightening that could be put in place if upside inflation risks were to materialize, with the potential for a greater tightening of financial conditions, represented a downside risk to the projection for economic activity. Participants' Views on Current Conditions and the Economic Outlook In conjunction with this FOMC meeting, participants submitted their projections of the most likely outcomes for real GDP growth, the unemployment rate, and inflation for each year from 2023 through 2026 and over the longer run. The projections were based on their individual assessments of appropriate monetary policy, including the path of 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. A Summary of Economic Projections (SEP) was released to the public following the conclusion of the meeting. In their discussion of current economic conditions, participants observed that after stronger than expected growth of real GDP in the third quarter, recent indicators suggested that growth in economic activity had slowed. While still strong, job gains had moderated since earlier this year, and the unemployment rate had remained low. Participants observed that inflation had eased over the past year but remained elevated and above the Committee's longer-run goal of 2 percent. Regarding the economic outlook, participants generally judged that, in 2024, real GDP growth would cool and that rebalancing of the labor market would continue, with the unemployment rate rising somewhat from its current level. Based on better-than-expected data on inflation, participants revised down their inflation projections for 2023 and, to a lesser extent, in subsequent years. Participants judged that the current stance of monetary policy was restrictive and appeared to be restraining economic activity and inflation. In light of the policy restraint in place, along with more favorable data on inflation, participants generally viewed risks to inflation and employment as moving toward greater balance. However, participants remained highly attentive to inflation risks. In their discussion of inflation, all participants observed that clear progress had been made in 2023 toward the Committee's 2 percent inflation objective. They remained concerned that elevated inflation continued to harm households, especially those with limited means to absorb higher prices. Participants observed that inflation remained above the Committee's objective and that they would need to see more evidence that inflation pressures were abating to become confident in a sustained return of inflation to 2 percent. In reviewing progress to date in reducing inflation, participants noted the improvement in both headline and core inflation and discussed the developments in components of these aggregate measures. They observed that progress had been uneven across components, with energy and core goods prices falling or changing little recently, but core services prices still increasing at an elevated pace. Several participants observed that the ongoing rebalancing of labor supply and demand would help reduce core services inflation. Several participants assessed that housing services inflation would fall further over time as the earlier deceleration in rents on new leases continued to pass through to broader rent measures. Participants also discussed the role played by various supply and demand factors in the progress on reducing inflation thus far. They assessed that the contribution of improved supply had come from supply chain normalization, boosts to labor supply due to a higher labor force participation rate and immigration, better productivity growth, or increased domestic oil production. They also noted that restrictive monetary policy had helped restrain growth of demand, particularly in interest-sensitive sectors such as business fixed investment, housing, and autos and other durable goods. Several participants assessed that healing in supply chains and labor supply was largely complete, and therefore that continued progress in reducing inflation may need to come mainly from further softening in product and labor demand, with restrictive monetary policy continuing to play a central role. A few others saw potential for further improvements in supply. Several participants noted that longer-term inflation expectations remained well anchored and that near-term inflation expectations of households had declined recently. In their comments about the household sector, participants observed that consumer spending had been strong, supported by the healthy balance sheets of many households, a strong labor market, and robust income growth. Retail sales growth had stepped down noticeably in October, though a few participants remarked that contacts reported strong sales in November, notably related to holiday spending. Participants mentioned several factors that may contribute to softer consumer spending, including slower growth of labor income and diminishing pandemic-related excess savings. Relatedly, many participants noted increased usage of credit by households, including from credit cards, buy-now-pay-later borrowing, and payday loans, as well as increased delinquency rates for many types of consumer loans. Reports from participants' business-sector contacts were mixed, with some contacts remaining relatively optimistic and others expecting slower growth for 2024. Several participants observed that higher interest rates were leading firms to reassess future projects and were contributing to softer business investment and hiring. A couple of participants commented on small businesses, noting that such businesses were experiencing tighter credit conditions and increasing delinquencies. A few participants noted that contacts in manufacturing reported slowing growth, while a couple of participants expected that low prices for some commodities and drought conditions would reduce agricultural incomes this year. Regarding concerns about CRE, several participants noted that a significant share of properties would need to be refinanced in 2024 against a backdrop of higher interest rates, continued weakness in the office sector, and balance sheet pressures faced by some lenders. Participants assessed that while the labor market remained tight, it continued to come into better balance. Many noted that nominal wage growth had continued to slow broadly and that business contacts expected a further reduction in wage growth. A few participants observed that payroll growth had slowed substantially since the beginning of the year. Some participants remarked that their contacts reported larger applicant pools for vacancies, and some participants highlighted that the ratio of vacancies to unemployed workers had declined to a value only modestly above its level just before the pandemic. Participants viewed improvements in labor supply and the easing of labor demand as both having contributed to the labor market coming into better balance. Supply had improved because of higher labor force participation and immigration, with continued solid productivity growth also supporting the productive capacity of the economy. As evidence for the softening of the growth of labor demand during 2023, many participants noted the decline in job openings, and a few remarked on the lower quits rate. Several participants noted the risk that, if labor demand were to weaken substantially further, the labor market could transition quickly from a gradual easing to a more abrupt downshift in conditions. Participants generally perceived a high degree of uncertainty surrounding the economic outlook. As an upside risk to both inflation and economic activity, participants noted that the momentum of economic activity may be stronger than currently assessed, possibly on account of the continued balance sheet strength of many households. Furthermore, participants observed that, after a sharp tightening since the summer, financial conditions had eased over the intermeeting period. Many participants remarked that an easing in financial conditions beyond what is appropriate could make it more difficult for the Committee to reach its inflation goal. Participants also noted other sources of upside risks to inflation, including possible effects on global energy and food prices of geopolitical developments, a potential rebound in core goods prices following the period of supply chain improvements, or the effects of nearshoring and onshoring activities on labor demand and inflation. Downside risks to economic activity noted by participants included the possibility that effects of past policy tightening may be larger than expected, the risk of a marked weakening of household balance sheets, possible negative spillovers from lower growth in some foreign economies, geopolitical risks, and lingering risks of further tightening in bank credit. Relatedly, several participants noted that the weakness in gross domestic income growth relative to GDP growth over the past few quarters may suggest that economic momentum during that period was not as strong as indicated by the GDP readings. In their consideration of appropriate monetary policy actions at this meeting, participants noted that recent indicators suggested that growth of economic activity had slowed from its strong pace in the third quarter. Job gains had moderated since earlier in the year but remained strong, the unemployment rate had remained low, and there were continuing signs that supply and demand in the labor market were coming into better balance. Inflation had eased over the past year but remained elevated. Participants also noted that tighter financial and credit conditions facing households and businesses would likely weigh on economic activity, hiring, and inflation, al­though the extent of these effects remained uncertain. Participants continued to be resolute in their commitment to bring inflation down to the Committee's 2 percent objective. In light of current economic conditions and their implications for the outlook for economic activity and inflation, as well as the balance of risks, all participants judged it appropriate to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent at this meeting. All participants also agreed that it was appropriate to continue the process of reducing the Federal Reserve's securities holdings, as described in the previously announced Plans for Reducing the Size of the Federal Reserve's Balance Sheet. Participants assessed that maintaining the current policy stance was supported by intermeeting data indicating that inflation had continued to move toward the Committee's 2 percent objective and that the labor market had continued to move into better balance. They judged that maintaining the target range for the federal funds rate at this meeting would promote further progress toward the Committee's goals and allow participants more time to gather additional information to evaluate this progress. In discussing the policy outlook, participants viewed the policy rate as likely at or near its peak for this tightening cycle, though they noted that the actual policy path will depend on how the economy evolves. Participants pointed to the decline in inflation seen during 2023, noting the recent shift down in six-month inflation readings in particular, and to growing signs of demand and supply coming into better balance in product and labor markets as informing that view. Several participants remarked that the Committee's past policy actions were having their intended effect of helping to slow the growth of aggregate demand and cool labor market conditions. They judged that, in combination with improvements in the supply situation, these developments were helping to bring inflation back to 2 percent over time. Most participants noted that, as indicated in their submissions to the SEP, they expected the Committee's restrictive policy stance to continue to soften household and business spending, helping to promote further reductions in inflation over the next few years. In their submitted projections, almost all participants indicated that, reflecting the improvements in their inflation outlooks, their baseline projections implied that a lower target range for the federal funds rate would be appropriate by the end of 2024. Participants also noted, however, that their outlooks were associated with an unusually elevated degree of uncertainty and that it was possible that the economy could evolve in a manner that would make further increases in the target range appropriate. Several also observed that circumstances might warrant keeping the target range at its current value for longer than they currently anticipated. Participants generally stressed the importance of maintaining a careful and data-dependent approach to making monetary policy decisions and reaffirmed that it would be appropriate for policy to remain at a restrictive stance for some time until inflation was clearly moving down sustainably toward the Committee's objective. Participants discussed several risk-management considerations that could bear on future policy decisions. Participants saw upside risks to inflation as having diminished but noted that inflation was still well above the Committee's longer-run goal and that a risk remained that progress toward price stability would stall. A number of participants highlighted the uncertainty associated with how long a restrictive monetary policy stance would need to be maintained, and pointed to the downside risks to the economy that would be associated with an overly restrictive stance. A few suggested that the Committee potentially could face a tradeoff between its dual-mandate goals in the period ahead. Participants observed that the continuing process of reducing the size of the Federal Reserve's balance sheet was an important part of the Committee's overall approach to achieving its macroeconomic objectives and that balance sheet runoff had so far proceeded smoothly. Several participants noted that, amid the ongoing balance sheet normalization, there had been a further decline over the intermeeting period in use of the ON RRP facility and that this reduced usage largely reflected portfolio shifts by money market mutual funds toward higher-yielding investments, including Treasury bills and private-market repo. Several participants remarked that the Committee's balance sheet plans indicated that it would slow and then stop the decline in the size of the balance sheet when reserve balances are somewhat above the level judged consistent with ample reserves. These participants suggested that it would be appropriate for the Committee to begin to discuss the technical factors that would guide a decision to slow the pace of runoff well before such a decision was reached in order to provide appropriate advance notice to the public. Committee Policy Actions In their discussions of monetary policy for this meeting, members agreed that recent indicators suggested that growth of economic activity had slowed from its strong pace in the third quarter. Job gains had moderated since earlier in the year but remained strong, and the unemployment rate had remained low. Inflation had eased over the past year but remained elevated. Members concurred that the U.S. banking system was sound and resilient. They also agreed that tighter financial and credit conditions for households and businesses were likely to weigh on economic activity, hiring, and inflation but that the extent of these effects was uncertain. Members agreed that they remained highly attentive to inflation risks. In support of the Committee's objective to achieve maximum employment and inflation at the rate of 2 percent over the longer run, members agreed to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent. They also agreed that they would continue to assess additional information and its implications for monetary policy. In determining the extent of any additional policy firming that may be appropriate to return inflation to 2 percent over time, members concurred that they would take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, members agreed to continue to reduce the Federal Reserve's holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. All members affirmed their strong commitment to returning inflation to their 2 percent objective. Members agreed that, in assessing the appropriate stance of monetary policy, they would continue to monitor the implications of incoming information for the economic outlook. They would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. Members also agreed that their assessments would take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments. Members agreed that their postmeeting statement should acknowledge the slowing of economic activity from its strong pace in the third quarter as well as the fact that inflation had eased over the past year but remained elevated. Members also agreed to modify the sentence in their postmeeting statement discussing the considerations relevant for future policy actions to indicate that the Committee would determine "the extent of any additional policy firming that may be appropriate to return inflation to 2 percent over time." Members generally viewed the addition of the word "any" to this sentence as appropriately relaying their judgment that the target range for the federal funds rate was likely now at or near its peak for this policy tightening cycle while leaving open the possibility of further increases in the target range if these were warranted by the totality of the incoming data, the evolving outlook, and the balance of risks. At the conclusion of the discussion, the Committee voted to direct the Federal Reserve Bank of New York, until instructed otherwise, to execute transactions in the System Open Market Account in accordance with the following domestic policy directive, for release at 2:00 p.m.: "Effective December 14, 2023, 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 5-1/4 to 5-1/2 percent. Conduct standing overnight repurchase agreement operations with a minimum bid rate of 5.5 percent and with an aggregate operation limit of $500 billion. Conduct standing overnight reverse repurchase agreement operations at an offering rate of 5.3 percent and with a per-counterparty limit of $160 billion per day. Roll over at auction the amount of principal payments from the Federal Reserve's holdings of Treasury securities maturing in each calendar month that exceeds a cap of $60 billion per month. Redeem Treasury coupon securities up to this monthly cap and Treasury bills to the extent that coupon principal payments are less than the monthly cap. Reinvest into agency mortgage-backed securities (MBS) the amount of principal payments from the Federal Reserve's holdings of agency debt and agency MBS received in each calendar month that exceeds a cap of $35 billion per month. Allow modest deviations from stated amounts for reinvestments, if needed for operational reasons. Engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions." The vote also encompassed approval of the statement below for release at 2:00 p.m.: "Recent indicators suggest that growth of economic activity has slowed from its strong pace in the third quarter. Job gains have moderated since earlier in the year but remain strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated. The U.S. banking system is sound and resilient. Tighter financial and credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent. The Committee will continue to assess additional information and its implications for monetary policy. In determining the extent of any additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2 percent objective. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments." Voting for this action: Jerome H. Powell, John C. Williams, Michael S. Barr, Michelle W. Bowman, Lisa D. Cook, Austan D. Goolsbee, Patrick Harker, Philip N. Jefferson, Neel Kashkari, Adriana D. Kugler, Lorie K. Logan, and Christopher J. Waller. 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 of the Federal Reserve System voted unanimously to maintain the interest rate paid on reserve balances at 5.4 percent, effective December 14, 2023. The Board of Governors of the Federal Reserve System voted unanimously to approve the establishment of the primary credit rate at the existing level of 5.5 percent, effective December 14, 2023. It was agreed that the next meeting of the Committee would be held on Tuesday–Wednesday, January 30–31, 2024. The meeting adjourned at 10:15 a.m. on December 13, 2023. Notation Vote By notation vote completed on November 20, 2023, the Committee unanimously approved the minutes of the Committee meeting held on October 31–November 1, 2023. _______________________ Joshua Gallin Secretary 1. The Federal Open Market Committee is referenced as the "FOMC" and the "Committee" in these minutes; the Board of Governors of the Federal Reserve System is referenced as the "Board" 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 economic and financial situation. Return to text 4. Attended Tuesday's session only. Return to text

2023-11-21

Minute

Minutes of the Federal Open Market Committee October 31–November 1, 2023 A joint meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve System was held in the offices of the Board of Governors on Tuesday, October 31, 2023, at 10:00 a.m. and continued on Wednesday, November 1, 2023, at 9:00 a.m.1 Attendance Jerome H. Powell, Chair John C. Williams, Vice Chair Michael S. Barr Michelle W. Bowman Lisa D. Cook Austan D. Goolsbee Patrick Harker Philip N. Jefferson Neel Kashkari Adriana D. Kugler Lorie K. Logan Christopher J. Waller Thomas I. Barkin, Raphael W. Bostic, Mary C. Daly,2 Loretta J. Mester, and Sushmita Shukla, Alternate Members of the Committee Susan M. Collins and Jeffrey R. Schmid, Presidents of the Federal Reserve Banks of Boston and Kansas City, respectively Kathleen O'Neill Paese, Interim President of the Federal Reserve Bank of St. Louis Joshua Gallin, Secretary Matthew M. Luecke, Deputy Secretary Brian J. Bonis, Assistant Secretary Michelle A. Smith, Assistant Secretary Mark E. Van Der Weide, General Counsel Richard Ostrander, Deputy General Counsel Trevor A. Reeve, Economist Stacey Tevlin, Economist Beth Anne Wilson, Economist Shaghil Ahmed, James A. Clouse, Brian M. Doyle, Anna Paulson, Andrea Raffo, Chiara Scotti, and William Wascher, Associate Economists Roberto Perli, Manager, System Open Market Account Julie Ann Remache, Deputy Manager, System Open Market Account Stephanie R. Aaronson, Senior Associate Director, Division of Research and Statistics, Board Jose Acosta, Senior System Administrator II, Division of Information Technology, Board Alyssa Arute,3 Manager, Division of Reserve Bank Operations and Payment Systems, Board Kartik B. Athreya, Executive Vice President, Federal Reserve Bank of Richmond Penelope A. Beattie,4 Section Chief, Office of the Secretary, Board David Bowman, Senior Associate Director, Division of Monetary Affairs, Board Yao-Chin Chao, Deputy Associate Secretary, Office of the Secretary, Board Satyajit Chatterjee, Vice President, Federal Reserve Bank of Philadelphia Juan C. Climent, Special Adviser to the Board, Division of Board Members, Board Stephanie E. Curcuru, Deputy Director, Division of International Finance, Board Ryan Decker, Special Adviser to the Board, Division of Board Members, Board Cynthia L. Doniger, Principal Economist, Division of Monetary Affairs, Board Rochelle M. Edge, Deputy Director, Division of Monetary Affairs, Board Matthew J. Eichner,3 Director, Division of Reserve Bank Operations and Payment Systems, Board Eric C. Engstrom, Associate Director, Division of Monetary Affairs, Board Jon Faust, Senior Special Adviser to the Chair, Division of Board Members, Board Ron Feldman, First Vice President, Federal Reserve Bank of Minneapolis Andrew Figura, Associate Director, Division of Research and Statistics, Board Glenn Follette, Associate Director, Division of Research and Statistics, Board Jenn Gallagher, Assistant to the Board, Division of Board Members, Board Michael S. Gibson, Director, Division of Supervision and Regulation, Board Christine Graham,4 Special Adviser to the Board, Division of Board Members, Board Joseph W. Gruber, Executive Vice President, Federal Reserve Bank of Kansas City Michael Hendley,3 Associate Director, Federal Reserve Bank of New York Valerie S. Hinojosa, Section Chief, Division of Monetary Affairs, Board Matteo Iacoviello, Senior Associate Director, Division of International Finance, Board Jane E. Ihrig, Special Adviser to the Board, Division of Board Members, Board Michael T. Kiley, Deputy Director, Division of Financial Stability, Board Don H. Kim, Senior Adviser, Division of Monetary Affairs, Board Christopher Kurz, Assistant Director and Chief, Division of Research and Statistics, Board Sylvain Leduc, Director of Research, Federal Reserve Bank of San Francisco Andreas Lehnert, Director, Division of Financial Stability, Board Kurt F. Lewis, Special Adviser to the Chair, Division of Board Members, Board Laura Lipscomb, Special Adviser to the Board, Division of Board Members, Board Joshua Louria, Group Manager, Division of Monetary Affairs, Board Andrew Meldrum, Assistant Director, Division of Monetary Affairs, Board Kenneth C. Montgomery, First Vice President, Federal Reserve Bank of Boston Norman J. Morin, Deputy Associate Director, Division of Research and Statistics, Board Michelle M. Neal, Head of Markets, Federal Reserve Bank of New York Fernanda Nechio, Vice President, Federal Reserve Bank of San Francisco Matthias Paustian, Assistant Director, Division of Research and Statistics, Board Argia Sbordone, Research Department Head, Federal Reserve Bank of New York Nitish Ranjan Sinha, Special Adviser to the Board, Division of Board Members, Board Ellis W. Tallman, Executive Vice President, Federal Reserve Bank of Cleveland Robert J. Tetlow, Senior Adviser, Division of Monetary Affairs, Board Skander Van den Heuvel, Associate Director, Division of Financial Stability, Board Francisco Vazquez-Grande, Group Manager, Division of Monetary Affairs, Board Clara Vega, Special Adviser to the Board, Division of Board Members, Board David C. Wheelock, Senior Vice President, Federal Reserve Bank of St. Louis Randall A. Williams, Group Manager, Division of Monetary Affairs, Board Jonathan Willis, Vice President, Federal Reserve Bank of Atlanta Paul R. Wood, Special Adviser to the Board, Division of Board Members, Board Egon Zakrajsek, Executive Vice President, Federal Reserve Bank of Boston Rebecca Zarutskie, Special Adviser to the Board, Division of Board Members, Board Andrei Zlate, Group Manager, Division of Monetary Affairs, Board Developments in Financial Markets and Open Market Operations The manager turned first to a review of developments in financial markets over the intermeeting period. Financial conditions continued to tighten, driven by higher yields on Treasury securities as well as by lower equity prices and a stronger dollar, which themselves partly reflected higher interest rates. Because earnings expectations had held up well in recent months, the effect of higher interest rates on equity prices likely took place largely through valuations. The rise since July in yields on longer-dated nominal Treasury securities was mostly attributable to increases in real yields. There were small increases in inflation compensation, but the levels of spot and forward rates were within historical ranges. The manager also noted that survey measures pointed to generally stable inflation expectations, especially at longer horizons, and that inflation expectations remained well anchored. Staff analysis and responses from the Open Market Desk's Survey of Primary Dealers and Survey of Market Participants suggested that the bulk of the increase since July in the 10-year nominal Treasury yield could be attributed to a higher term premium, though higher policy expectations at longer horizons could also have played a role. The manager also noted that liquidity conditions in the Treasury market had not changed materially since July, suggesting that Treasury market liquidity had not been an important driver of the increase in yields. The manager turned next to expectations for monetary policy. Both market pricing and responses to the Desk's surveys implied that market participants expected that the federal funds rate was at or near its peak and would be held there at least until the June 2024 FOMC meeting; there was a roughly 30 percent probability of a 25 basis point increase at either the December or January FOMC meeting. Regarding balance sheet policy, the surveys showed that respondents had pushed out the date they expected balance sheet runoff to stop, perhaps partly in response to policymakers' communications that balance sheet runoff could continue even after the Committee begins to reduce the target range for the federal funds rate. The manager then turned to developments in money markets and Desk operations. Balance sheet runoff continued to proceed smoothly over the intermeeting period through reduced holdings of Treasury securities, agency debt, and agency mortgage-backed securities. The continued repayment by the Federal Deposit Insurance Corporation of discount window loans extended to banks that were placed into receivership also contributed to reduced Federal Reserve assets. On the liabilities side of the balance sheet, usage of the overnight reverse repurchase agreement (ON RRP) facility declined further, as money market mutual funds continued to absorb new Treasury bill issuance and appeared to increase investment in the private market for repurchase agreements (repos) as well. Overall, the reduced usage of the ON RRP facility released more reserves than the reduction in Federal Reserve assets and the increase in the Treasury General Account absorbed. On net, reserves expanded over the period, and available indicators pointed to them remaining abundant. Primary dealers indicated that reserves were projected to remain within their recent range for the next several quarters. The manager also noted that 23 banks, in addition to all primary dealers, were already counterparties to the standing repo facility (SRF) and that several more were in the onboarding process. Together, these banks held the vast majority of SRF-eligible securities in the banking system. The SRF, in addition to the discount window, may therefore prove helpful for supplying liquidity to the banking system should funding pressures emerge. 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 data available at the time of the October 31–November 1 meeting indicated that U.S. real gross domestic product (GDP) had expanded at a strong pace in the third quarter. Labor market conditions remained tight, with continued strong job gains and a low unemployment rate. Consumer price inflation remained elevated. Labor demand and supply were slowly moving into better alignment. Easing labor market imbalances were apparent in the wage data, with the 12‑month changes in average hourly earnings and the employment cost index each below their year-earlier levels. Al­though total nonfarm payroll employment rose at a faster pace in September than in previous months, the unemployment rate was unchanged at 3.8 percent; the labor force participation rate and the employment-to-population ratio were also unchanged in September. The unemployment rate for African Americans rose, while the jobless rate for Hispanics declined; both rates were higher than the national average. Consumer price inflation remained elevated but continued to show signs of slowing. The price index for total personal consumption expenditures (PCE) increased 3.4 percent over the 12 months ending in September, while core PCE price inflation, which excludes changes in energy prices and many consumer food prices, was 3.7 percent over the same period; both total and core PCE price inflation were well below their year-earlier levels. The trimmed mean measure of 12-month PCE price inflation constructed by the Federal Reserve Bank of Dallas was 3.8 percent in September, also down from the level posted a year ago. Survey measures of consumers' short-run inflation expectations remained above their pre-pandemic levels. In contrast, survey measures of medium- to longer-term inflation expectations remained in the range seen in the decade before the pandemic. According to the advance estimate, real GDP posted a strong gain in the third quarter. Private domestic final purchases, which includes PCE and private fixed investment and often provides a better signal than GDP of underlying economic momentum, posted a smaller but still-solid increase. Real exports and imports of goods and services grew at a robust pace in the third quarter after falling sharply in the second quarter, reflecting broad-based strength across categories. Net exports made a slightly negative contribution to U.S. GDP growth in the third quarter, while the nominal trade deficit narrowed somewhat. Foreign economic growth remained subdued in the third quarter. Monetary policy restraint weighed on activity abroad, especially in Europe, where euro-area GDP growth registered a small decline and the latest European Central Bank lending survey pointed to a contraction in credit from a year ago. Al­though GDP growth in China improved in the third quarter, supported by an increase in industrial production, Chinese retail sales continued to be held back by low consumer confidence and weakness in the residential property sector. Inflation abroad remained elevated. While core inflation continued to ease amid slowing aggregate demand, energy price inflation increased in many foreign economies. With inflation still high, most major foreign central banks, while keeping their policy rates unchanged, indicated their intentions to hold these rates at sufficiently restrictive levels to bring inflation back to target rates. Staff Review of the Financial Situation Over the intermeeting period, longer-term Treasury yields rose notably, while shorter-term yields were little changed, and the market-implied path for the federal funds rate through 2024 declined slightly. The increase in longer-term Treasury yields appeared to be mostly attributable to higher term premiums, as stronger-than-expected economic data seemed to increase the uncertainty regarding how long policy rates might need to remain high. Meanwhile, equity prices decreased, and spreads on investment- and speculative-grade corporate bonds widened. Financing conditions tightened further, and borrowing costs continued to rise. The market-implied path for the federal funds rate through 2024 declined slightly over the intermeeting period. Beyond 2024, the policy rate path implied by overnight index swap quotes increased, likely reflecting, in part, higher term premiums. The rise in longer-term nominal Treasury yields was driven by real yields. Short-term inflation compensation fluctuated notably over the intermeeting period, largely following the changes in energy prices, but ended the period modestly lower. Broad stock price indexes declined over the intermeeting period. Equity prices in interest rate–sensitive sectors, such as real estate and utilities, underperformed the broader market. Stock prices of banks also declined more than broader equity indexes. The one-month option-implied volatility on the S&P 500 index increased notably over the intermeeting period but remained below the peaks observed in the first quarter of 2023. Over the intermeeting period, foreign asset prices were largely driven by spillovers from the rise in longer-term U.S. Treasury yields. Longer-term sovereign bond yields for advanced foreign economies rose, foreign equity prices declined, foreign credit spreads generally widened, and investors continued to withdraw from emerging market economy funds. Stronger-than-expected U.S. data on economic activity and widening interest rate differentials between the U.S. and the rest of the world contributed to an increase in the staff's broad dollar index. The Bank of Japan increased the flexibility of its yield curve control framework, which contributed to the rise in longer-term Japanese government bond yields. The armed conflict between Israel and Hamas left a limited net imprint on foreign financial markets over this period. Conditions in short-term funding markets remained stable over the intermeeting period. Take-up in the ON RRP facility continued to decline over the period. That decline primarily reflected money market funds reducing their usage of the facility and increasing their holdings of Treasury bills and private market repos in response to slightly more attractive rates on these alternative investments. Banks' total deposit levels were roughly unchanged over the intermeeting period, as outflows of core deposits were about offset by inflows of large time deposits, which tend to be more expensive sources of funding. Wholesale borrowing by large banks increased over the intermeeting period. In domestic credit markets, borrowing costs for businesses, households, and municipalities continued to rise from already elevated levels over the intermeeting period, primarily reflecting increases in longer-term Treasury yields. Interest rates on commercial and industrial (C&I) loans and small business loans increased, as did rates on loans to households, including for 30-year conforming residential mortgages, new auto loans, and credit cards. Rates also moved up on a broad array of fixed-income securities, including residential and commercial mortgage-backed securities, municipal bonds, and corporate bonds. Yields on corporate bonds rose more than Treasury yields, particularly for speculative-grade bonds. Credit continued to be generally available to businesses, households, and municipalities. Total core loans on banks' books continued to increase in the third quarter, al­though at a slower pace than earlier in the year. However, smaller firms were finding it harder to obtain credit, with the share of small firms reporting in September that it was more difficult to obtain credit compared with three months earlier rising from an already elevated level. Capital market financing continued to be available, al­though issuance in most markets was below typical levels. In the October Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS), banks reported tightening standards and terms on C&I loans to firms of all sizes in the third quarter. The most frequently cited reasons for tightening C&I standards and terms included concerns about the economic outlook, a less favorable or more uncertain economic outlook, and the effects of potential legislative changes, supervisory actions, or changes in accounting standards. Banks also reported that demand for C&I loans weakened in the third quarter, with the most frequently cited reasons being decreased investment in plant or equipment and decreased inventory financing needs. Similarly, banks indicated that commercial real estate (CRE) loan standards continued to tighten and demand weakened further in the third quarter. Credit in the residential mortgage market remained easily available for high-credit-score borrowers who met standard conforming loan criteria. However, in the October SLOOS, banks reported tighter standards and weaker demand for almost all categories of residential real estate loans in the third quarter. Consumer credit remained readily available for most borrowers, al­though there were signs of tightening standards. Credit card balances grew at a strong pace in August, while auto credit continued to grow at a modest pace. However, respondents to the October SLOOS reported tighter standards for all consumer loan categories in the third quarter. Meanwhile, outstanding student loan balances declined significantly in August, driven by the cancellation of student loan debt for certain borrowers. The credit quality of businesses, households, and municipalities continued to show signs of deterioration in most sectors, as delinquency rates rose. The credit quality of nonfinancial firms borrowing in the corporate bond market remained sound overall, albeit with pockets of deterioration. The credit quality of C&I and CRE loans on banks' balance sheets remained generally stable through August. However, delinquency rates for nonfarm nonresidential CRE loans recently picked up. In the October SLOOS, banks frequently cited concerns about credit quality, including for both C&I and CRE loans, as reasons for tightening standards over the third quarter. The staff provided an update on its assessment of the stability of the financial system and, on balance, judged that the financial vulnerabilities of the U.S. financial system were notable. The staff characterized asset valuation pressures as notable. In particular, the staff noted that valuations in equities, housing, and CRE were high. The forward price-to-earnings ratio for S&P 500 firms increased to the upper quartile of its historical distribution. House prices increased to the upper end of their historical range, relative to fundamentals, despite tight credit conditions in the mortgage market. While CRE prices declined, valuations remained stretched, with capitalization rates remaining near historical lows. Fundamentals in the office sector remained weak given the shift toward telework in many industries, especially for central business districts and coastal cities. Delinquency rates on commercial mortgage-backed securities moved up as office and retail loan performance deteriorated. Vulnerabilities associated with business and household debt were characterized as moderate. Leverage in the financial sector was characterized as notable. In the banking sector, holdings of liquid assets remained high, and regulatory risk-based capital ratios indicated ample loss-bearing capacity in the banking system. However, the fair value of banks' longer-term fixed-rate assets, including loans, decreased in the third quarter as longer-term interest rates rose. Hedge fund leverage remained above historical averages, particularly for the largest funds. Funding risks were also characterized as notable. Reliance on uninsured deposits declined in the aggregate but remained high for some banks, and short-term nondeposit funding had increased. Staff Economic Outlook The economic forecast prepared by the staff for the October–November meeting was similar to the September projection. The staff expected fourth-quarter GDP growth to slow markedly from its third-quarter rate. All told, however, average GDP growth over the second half of the year was projected to be a little faster than the first half's pace. The staff also expected output in the fourth quarter to be temporarily restrained by the autoworkers' strike before being boosted in the first quarter as lost production begins to be made up. The size and timing of these effects were highly uncertain, however. With the lagged effects of monetary policy actions expected to restrain activity, real GDP was projected to rise more slowly than the staff's estimate of potential over the next two years before rising in line with potential in 2026. The unemployment rate was expected to be roughly flat through 2026 as the effects of below-potential output growth were offset by the effects of further improvements in labor market functioning. Total PCE price inflation was expected to be close to 3.0 percent by the end of this year, and core PCE inflation was expected to be around 3.5 percent. Inflation was projected to move lower in coming years as demand and supply in product and labor markets moved into better alignment; in 2026, total and core PCE price inflation rates were expected to be close to 2 percent. The staff continued to view the uncertainty around the baseline projection as elevated. Risks around the inflation forecast were seen as skewed to the upside, given the possibility that inflation might prove to be more persistent than expected or that additional adverse shocks to supply conditions might occur. The risks to the forecast for real activity were viewed to be skewed to the downside. Moreover, the additional monetary policy tightening that would be necessitated by higher or more persistent inflation, and the potential for a greater tightening of financial conditions, represented a downside risk to the projection for real activity. Participants' Views on Current Conditions and the Economic Outlook Participants noted that real GDP had expanded at an unexpectedly strong pace in the third quarter, boosted by a surge in consumer spending. Nevertheless, participants judged that aggregate demand and aggregate supply continued to come into better balance, as a result of the current restrictive stance of monetary policy and the continued normalization of aggregate supply conditions. Participants assessed that while labor market conditions remained tight, they had eased since earlier in the year, partly as a result of recent increases in labor supply. Participants judged that the current stance of monetary policy was restrictive and was putting downward pressure on economic activity and inflation. In addition, they noted that financial conditions had tightened significantly in recent months. Participants noted that inflation had moderated over the past year but stressed that current inflation remained unacceptably high and well above the Committee's longer-run goal of 2 percent. They also stressed that further evidence would be required for them to be confident that inflation was clearly on a path to the Committee's 2 percent objective. Participants continued to view a period of below-potential growth in real GDP and some further softening in labor market conditions as likely to be needed to reduce inflation pressures sufficiently to return inflation to 2 percent over time. In their discussion of the household sector, participants observed that the incoming data on consumer spending had again surprised to the upside, likely supported by a strong labor market and by generally solid household balance sheets. Nevertheless, some participants remarked that the finances of some households—especially those in the low- and moderate-income categories—were increasingly coming under pressure amid high prices for food and other essentials as well as tight credit conditions. Several participants added that delinquencies on auto loans and credit cards had risen for these households. Some participants commented that their District contacts reported a somewhat weaker picture of consumer demand than indicated by the incoming aggregate data. Several participants, however, noted that repeated upside surprises in the aggregate spending data could indicate that considerable momentum could be sustained. A couple of these participants commented that the aggregate household sector may have more financial resources than previously thought, which could help account for the strength in spending. A few participants observed that activity in the housing sector had flattened out in recent months, likely reflecting the effects of further increases in mortgage rates from already elevated levels. Business fixed investment was flat in the third quarter, and participants observed that conditions reported by their business contacts varied across industries and Districts. Some participants noted that businesses were benefiting from an increased ability to hire and retain workers, better-functioning supply chains, or reduced input cost pressures. A few participants commented that their business contacts had reported that cost increases could not be easily passed on to customers. Several participants commented that the apparent resolution of the United Auto Workers strike would reduce business-sector uncertainty. Several participants noted that an increasing number of District businesses were reporting that higher interest rates were affecting their businesses or that firms were increasingly cutting or delaying their investment plans because of higher borrowing costs and tighter bank lending conditions. A few participants noted that the tighter financial and credit conditions could be particularly challenging for small businesses. A few participants observed that higher interest rates were also affecting the agricultural sector, with their contacts noting that high financing costs were likely weighing on purchases of heavy agricultural equipment. Regarding the energy sector, a few participants observed that energy markets had calmed after significant volatility at the start of the current armed conflict between Israel and Hamas. Participants observed that the labor market remained tight. Payroll growth was unexpectedly strong in September, and the unemployment rate remained low. Nevertheless, participants assessed that labor supply and labor demand were continuing to come into better balance. Measures of labor supply had moved up, with the labor force participation rate for prime-age workers rising this year, especially for women, and immigration also boosting labor supply. A few participants expressed concern that the recent pace of increases in labor supply might not be sustainable in light of challenges regarding the availability of childcare and the uncertainty regarding the extent to which immigration would continue to boost the growth of labor supply. Regarding labor demand, various measures appeared to indicate some easing, including a downward trend in job openings, a lower quits rate, and reduced wage premiums offered to job switchers. Consistent with the gradual rebalancing of labor market conditions, participants commented that the pace of nominal wage increases had continued to moderate. A few participants noted, however, that nominal wages were still rising at rates above levels generally assessed to be consistent with the sustained achievement of the Committee's 2 percent inflation objective, given current estimates of trend productivity growth. Participants observed that inflation had continued to moderate since the middle of last year. Both the 6- and 12-month change measures of core PCE price inflation had come down somewhat in recent months, despite a less favorable monthly reading in September. Participants pointed to the softening of core goods prices in recent months, as well as the continued gradual decline in housing services inflation. However, participants also noted that there had been only limited progress in bringing down inflation in core services excluding housing. Participants noted that longer-term inflation expectations remained well anchored. Participants observed that, notwithstanding the moderation of inflation so far, inflation remained well above the Committee's 2 percent longer-run objective and that elevated inflation was continuing to harm businesses and households, particularly low-income households. Participants stressed that they would need to see more data indicating that inflation pressures were abating to be more confident that inflation was on course to return to 2 percent over time. Participants noted that in recent months, financial conditions had tightened significantly because of a substantial run-up in longer-term Treasury yields, among other factors. Higher Treasury yields contributed to an increase in 30-year mortgage rates to levels not seen in many years and led to higher corporate borrowing rates. Many participants observed that a range of measures suggested that the rise in longer-term yields had been driven primarily or substantially by a rise in the term premiums on Treasury securities. Participants generally viewed factors such as a fiscal outlook that suggested greater future supply of Treasury securities than previously thought and increased uncertainty about the economic and policy outlooks as likely having contributed to the rise in the term premiums. Some participants noted that the rise in longer-term yields may also have been driven by expectations for a higher path of the federal funds rate in light of the surprising resilience of the economy or a possible rise in the neutral policy rate. Participants highlighted that longer-term yields could be volatile and that the factors behind the recent increase, as well as their persistence, were uncertain. However, they also noted that, whatever the source of the rise in longer-term yields, persistent changes in financial conditions could have implications for the path of monetary policy and that it would therefore be important to continue to monitor market developments closely. Participants generally noted a high degree of uncertainty surrounding the economic outlook. As upside risks to economic activity, participants noted that the factors behind the resilience in spending could persist longer than expected. As downside risks, participants cited the possibility that the effects on households and businesses of the cumulative policy tightening and tighter financial conditions could be larger than expected, disruptions from a potential government shutdown, and the possibility that the resumption of student loan repayments could weigh on household spending by more than was expected. As upside risks to inflation, participants cited the possibility that progress on disinflation stalls or inflation reaccelerates because of continued momentum in economic activity. A potential for a broadening of the armed conflict in the Middle East was seen as presenting upside risk to inflation through its potential effect on oil prices as well as downside risk to economic activity. In their discussion of financial stability, participants observed that the banking system was sound and resilient and that banking stresses had subsided. However, many participants commented that unrealized losses on assets resulting from the rise in longer-term interest rates, significant reliance by some banks on uninsured deposits, and increased funding costs at banks warranted monitoring. Many participants also commented on risks associated with a potential sharp decline in CRE valuations, which could adversely affect some banks and other financial institutions. Several participants noted potential cyber risks and emphasized the importance of firms, particularly providers of critical infrastructure, being prepared to recover from such threats. A few participants also discussed the importance of monitoring Treasury market functioning and potential vulnerabilities posed by the amount of leverage being used by hedge funds in this market. In addition, several participants emphasized the need for banks to establish readiness to use Federal Reserve liquidity facilities and for the Federal Reserve to ensure its own readiness to provide liquidity during periods of stress. In their consideration of appropriate monetary policy actions at this meeting, participants noted that economic activity expanded at a strong pace in the third quarter and had been resilient. While the labor market remained tight, job gains had moderated, on balance, since earlier in the year, and there were continuing signs that supply and demand in the labor market were coming into better balance. While inflation had moderated since the middle of last year, it remained well above the Committee's longer-run goal of 2 percent, and participants remained resolute in their commitment to bring inflation down to the Committee's 2 percent objective. Participants also noted that tighter financial and credit conditions facing households and businesses would likely weigh on economic activity, hiring, and inflation, al­though the extent of these effects remained uncertain. Participants commented on the significant tightening in financial conditions in recent months, driven by higher longer-term yields, with many noting that it was uncertain whether this tightening of financial conditions would persist and to what extent it reflected expectations for tighter policy or other factors. Amid these economic conditions, all participants judged it appropriate to maintain the target range for the federal funds rate at 5¼ to 5½ percent at this meeting. Participants judged that maintaining this restrictive stance of policy at this meeting would support further progress toward the Committee's goals while allowing more time to gather additional information to evaluate this progress. All participants agreed that it was appropriate to continue the process of reducing the Federal Reserve's securities holdings, as described in the previously announced Plans for Reducing the Size of the Federal Reserve's Balance Sheet. In discussing the policy outlook, participants continued to judge that it was critical that the stance of monetary policy be kept sufficiently restrictive to return inflation to the Committee's 2 percent objective over time. All participants agreed that the Committee was in a position to proceed carefully and that policy decisions at every meeting would continue to be based on the totality of incoming information and its implications for the economic outlook as well as the balance of risks. Participants noted that further tightening of monetary policy would be appropriate if incoming information indicated that progress toward the Committee's inflation objective was insufficient. Participants expected that the data arriving in coming months would help clarify the extent to which the disinflation process was continuing, aggregate demand was moderating in the face of tighter financial and credit conditions, and labor markets were reaching a better balance between demand and supply. Participants noted the importance of continuing to communicate clearly about the Committee's data-dependent approach and its firm commitment to bring inflation down to 2 percent. All participants judged that it would be appropriate for policy to remain at a restrictive stance for some time until inflation is clearly moving down sustainably toward the Committee's objective. Participants also observed that the continuing process of reducing the size of the Federal Reserve's balance sheet was an important part of the overall approach to achieving their macroeconomic objectives. A few participants noted that the process of balance sheet runoff could continue for some time, even after the Committee begins to reduce the target range for the federal funds rate. Several participants commented on the recent decline in the use of the ON RRP facility, noting that the use of the facility had been responsive to market conditions. Participants discussed several risk-management considerations that could bear on future policy decisions. Participants generally judged that, with the stance of monetary policy in restrictive territory, risks to the achievement of the Committee's goals had become more two sided. But with inflation still well above the Committee's longer-run goal and the labor market remaining tight, most participants continued to see upside risks to inflation. These risks included the possibility that the imbalance of aggregate demand and supply could persist longer than expected and slow the progress on inflation, geopolitical tensions and risks emanating from global oil markets, the effects of a tight housing market on shelter inflation, and the potential for more limited declines in goods prices. Many participants commented that even though economic activity had been resilient and the labor market had continued to be strong, downside risks to economic activity remained. Such risks included potentially larger-than-expected effects of the tightening in financial and credit conditions on aggregate demand and on bank, business, and household balance sheets; continued weakness in the CRE sector; and potential disruptions to global oil markets. Committee Policy Actions In their discussion of monetary policy for this meeting, members agreed that economic activity had expanded at a strong pace in the third quarter, job gains had moderated since earlier in the year but remained strong, and the unemployment rate had remained low. Inflation had remained elevated. Members concurred that the U.S. banking system was sound and resilient. They also agreed that tighter financial and credit conditions for households and businesses were likely to weigh on economic activity, hiring, and inflation but that the extent of these effects was uncertain. Members agreed that they remained highly attentive to inflation risks. In support of the Committee's objectives to achieve maximum employment and inflation at the rate of 2 percent over the longer run, members agreed to maintain the target range for the federal funds rate at 5¼ to 5½ percent. They also agreed that they would continue to assess additional information and its implications for monetary policy. In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, members concurred that they would take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, members agreed to continue to reduce the Federal Reserve's holdings of Treasury securities and agency debt and mortgage-backed securities, as described in its previously announced plans. All members affirmed that they are strongly committed to returning inflation to their 2 percent objective. Members agreed that, in assessing the appropriate stance of monetary policy, they would continue to monitor the implications of incoming information for the economic outlook. They would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. Members also agreed that their assessments would take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments. At the conclusion of the discussion, the Committee voted to direct the Federal Reserve Bank of New York, until instructed otherwise, to execute transactions in the System Open Market Account in accordance with the following domestic policy directive, for release at 2:00 p.m.: "Effective November 2, 2023, 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 5-1/4 to 5-1/2 percent. Conduct standing overnight repurchase agreement operations with a minimum bid rate of 5.5 percent and with an aggregate operation limit of $500 billion. Conduct standing overnight reverse repurchase agreement operations at an offering rate of 5.3 percent and with a per-counterparty limit of $160 billion per day. Roll over at auction the amount of principal payments from the Federal Reserve's holdings of Treasury securities maturing in each calendar month that exceeds a cap of $60 billion per month. Redeem Treasury coupon securities up to this monthly cap and Treasury bills to the extent that coupon principal payments are less than the monthly cap. Reinvest into agency mortgage-backed securities (MBS) the amount of principal payments from the Federal Reserve's holdings of agency debt and agency MBS received in each calendar month that exceeds a cap of $35 billion per month. Allow modest deviations from stated amounts for reinvestments, if needed for operational reasons. Engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions." The vote also encompassed approval of the statement below for release at 2:00 p.m.: "Recent indicators suggest that economic activity expanded at a strong pace in the third quarter. Job gains have moderated since earlier in the year but remain strong, and the unemployment rate has remained low. Inflation remains elevated. The U.S. banking system is sound and resilient. Tighter financial and credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent. The Committee will continue to assess additional information and its implications for monetary policy. In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2 percent objective. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments." Voting for this action: Jerome H. Powell, John C. Williams, Michael S. Barr, Michelle W. Bowman, Lisa D. Cook, Austan D. Goolsbee, Patrick Harker, Philip N. Jefferson, Neel Kashkari, Adriana D. Kugler, Lorie K. Logan, and Christopher J. Waller. 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 of the Federal Reserve System voted unanimously to maintain the interest rate paid on reserve balances at 5.4 percent, effective November 2, 2023. The Board of Governors of the Federal Reserve System voted unanimously to approve the establishment of the primary credit rate at the existing level of 5.5 percent, effective November 2, 2023. It was agreed that the next meeting of the Committee would be held on Tuesday–Wednesday, December 12–13, 2023. The meeting adjourned at 10:05 a.m. on November 1, 2023. Notation Vote By notation vote completed on October 10, 2023, the Committee unanimously approved the minutes of the Committee meeting held on September 19–20, 2023. _______________________ Joshua Gallin Secretary 1. The Federal Open Market Committee is referenced as the "FOMC" and the "Committee" in these minutes; the Board of Governors of the Federal Reserve System is referenced as the "Board" in these minutes. Return to text 2. Attended Wednesday's 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 of the economic and financial situation. Return to text

2023-11-01

Statement

Recent indicators suggest that economic activity expanded at a strong pace in the third quarter. Job gains have moderated since earlier in the year but remain strong, and the unemployment rate has remained low. Inflation remains elevated. The U.S. banking system is sound and resilient. Tighter financial and credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent. The Committee will continue to assess additional information and its implications for monetary policy. In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2 percent objective. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments. Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Michelle W. Bowman; Lisa D. Cook; Austan D. Goolsbee; Patrick Harker; Philip N. Jefferson; Neel Kashkari; Adriana D. Kugler; Lorie K. Logan; and Christopher J. Waller. For media inquiries, please email [email protected] or call 202-452-2955. Implementation Note issued November 1, 2023

2023-09-20

Statement

Recent indicators suggest that economic activity has been expanding at a solid pace. Job gains have slowed in recent months but remain strong, and the unemployment rate has remained low. Inflation remains elevated. The U.S. banking system is sound and resilient. Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent. The Committee will continue to assess additional information and its implications for monetary policy. In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2 percent objective. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments. Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Michelle W. Bowman; Lisa D. Cook; Austan D. Goolsbee; Patrick Harker; Philip N. Jefferson; Neel Kashkari; Adriana D. Kugler; Lorie K. Logan; and Christopher J. Waller. For media inquiries, please email [email protected] or call 202-452-2955. Implementation Note issued September 20, 2023

2023-10-11

Minute

Minutes of the Federal Open Market Committee September 19-20, 2023 A joint meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve System was held in the offices of the Board of Governors on Tuesday, September 19, 2023, at 10:30 a.m. and continued on Wednesday, September 20, 2023, at 9:00 a.m.1 Attendance Jerome H. Powell, Chair John C. Williams, Vice Chair Michael S. Barr Michelle W. Bowman Lisa D. Cook Austan D. Goolsbee Patrick Harker Philip N. Jefferson Neel Kashkari Adriana D. Kugler Lorie K. Logan Christopher J. Waller Thomas I. Barkin, Raphael W. Bostic, Mary C. Daly, and Loretta J. Mester, Alternate Members of the Committee Susan M. Collins and Jeffrey R. Schmid, Presidents of the Federal Reserve Banks of Boston and Kansas City, respectively Kathleen O'Neill Paese, Interim President of the Federal Reserve Bank of St. Louis Joshua Gallin, Secretary Matthew M. Luecke, Deputy Secretary Brian J. Bonis, Assistant Secretary Michelle A. Smith, Assistant Secretary Mark E. Van Der Weide, General Counsel Richard Ostrander, Deputy General Counsel Trevor A. Reeve, Economist Stacey Tevlin, Economist Beth Anne Wilson, Economist Shaghil Ahmed,2 Roc Armenter, James A. Clouse, Brian M. Doyle, Eric M. Engen,3 Andrea Raffo, Chiara Scotti, and William Wascher, Associate Economists Roberto Perli, Manager, System Open Market Account Julie Ann Remache, Deputy Manager, System Open Market Account Stephanie R. Aaronson, Senior Associate Director, Division of Research and Statistics, Board Jose Acosta, Senior System Administrator II, Division of Information Technology, Board Andrea Ajello, Section Chief, Division of Monetary Affairs, Board Penelope A. Beattie,4 Section Chief, Office of the Secretary, Board Ellen J. Bromagen, First Vice President, Federal Reserve Bank of Chicago Mark A. Carlson, Adviser, Division of Monetary Affairs, Board Daniel Cooper, Vice President, Federal Reserve Bank of Boston Daniel M. Covitz, Deputy Director, Division of Research and Statistics, Board Stephanie E. Curcuru, Deputy Director, Division of International Finance, Board Rochelle M. Edge, Deputy Director, Division of Monetary Affairs, Board Matthew J. Eichner,5 Director, Division of Reserve Bank Operations and Payment Systems, Board Eric C. Engstrom, Associate Director, Division of Monetary Affairs, Board Jon Faust, Senior Special Adviser to the Chair, Division of Board Members, Board Charles A. Fleischman, Adviser, Division of Research and Statistics, Board Glenn Follette, Associate Director, Division of Research and Statistics, Board Jennifer Gallagher, Assistant to the Board, Division of Board Members, Board Carlos Garriga, Senior Vice President, Federal Reserve Bank of St. Louis Michael S. Gibson, Director, Division of Supervision and Regulation, Board Joseph W. Gruber, Executive Vice President, Federal Reserve Bank of Kansas City Valerie S. Hinojosa, Section Chief, Division of Monetary Affairs, Board Matteo Iacoviello,3 Senior Associate Director, Division of International Finance, Board Jane E. Ihrig, Special Adviser to the Board, Division of Board Members, Board Michael T. Kiley, Deputy Director, Division of Financial Stability, Board Don H. Kim,5 Senior Adviser, Division of Monetary Affairs, Board Edward S. Knotek II, Senior Vice President, Federal Reserve Bank of Cleveland Spencer Krane, Senior Vice President, Federal Reserve Bank of Chicago Andreas Lehnert, Director, Division of Financial Stability, Board Paul Lengermann, Assistant Director, Division of Research and Statistics, Board Kurt F. Lewis, Special Adviser to the Board, Division of Board Members, Board Dan Li, Assistant Director, Division of Monetary Affairs, Board Laura Lipscomb, Special Adviser to the Board, Division of Board Members, Board Zheng Liu, Vice President, Federal Reserve Bank of San Francisco David López-Salido, Senior Associate Director, Division of Monetary Affairs, Board Jonathan P. McCarthy, Economic Research Advisor, Federal Reserve Bank of New York Ann E. Misback, Secretary, Office of the Secretary, Board Raven Molloy, Deputy Associate Director, Division of Research and Statistics, Board Michelle M. Neal, Head of Markets, Federal Reserve Bank of New York Anna Orlik, Principal Economist, Division of Monetary Affairs, Board Damjan Pfajfar, Group Manager, Division of Monetary Affairs, Board Pierre-Daniel G. Sarte, Senior Advisor, Federal Reserve Bank of Richmond Nitish Ranjan Sinha, Special Adviser to the Board, Division of Board Members, Board Dafina Stewart, Special Adviser to the Board, Division of Board Members, Board Clara Vega, Special Adviser to the Board, Division of Board Members, Board Jeffrey D. Walker,5 Associate Director, Division of Reserve Bank Operations and Payment Systems, Board Min Wei, Special Adviser to the Board, Division of Board Members, Board Jonathan Willis, Vice President, Federal Reserve Bank of Atlanta Donielle A. Winford, Information Manager, Division of Monetary Affairs, Board Paul R. Wood, Special Adviser to the Board, Division of Board Members, Board Rebecca Zarutskie, Special Adviser to the Board, Division of Board Members, Board Andrei Zlate, Group Manager, Division of Monetary Affairs, Board Developments in Financial Markets and Open Market Operations The manager turned first to a review of developments in financial markets over the intermeeting period. U.S. data releases generally pointed to greater economic resilience than previously thought, and the reaction in market pricing implied both a higher expected trajectory for the policy rate at longer horizons and higher term premiums. Policy-sensitive rates rose moderately, and longer-dated forward rates displayed larger increases. Ten-year Treasury yields ended the period more than 40 basis points higher, and broad measures of equity prices fell. Bank equity prices underperformed over the period, but taking a somewhat longer view, investor sentiment toward the banking sector appeared to have largely stabilized, with less differentiation of equity price movements across bank types. The dollar broadly appreciated against advanced-economy currencies over the period, as stronger U.S. data supported moderately increased yield differentials against these economies amid perceptions that policy rates were at or near their peaks. In China, signs of strain in the property sector increased, and optimism about growth diminished further, on net, although broader markets, including global commodity markets, did not appear to show elevated concern about China-related risks. U.S. financial conditions tightened, with higher longer-term rates, lower equity prices, and a stronger dollar contributing roughly equally to the increase in various financial conditions indexes. In addressing the increase in nominal yields on longer-run Treasury securities over the intermeeting period, the manager noted that the rise in real yields exceeded that of nominal yields over the period, implying a small decline in inflation compensation. Inflation expectations appeared to remain very well anchored. Market participants cited various factors for the rise in longer-term nominal yields, including stronger-than-expected economic data, a possible increase in the neutral policy rate, greater economic and policy uncertainty, and larger-than-expected borrowing by the Treasury. Household and corporate borrowing rates increased over the period, generally rising in line with Treasury yields. Still, market participants noted that, with household and corporate borrowers having a limited need to refinance debt in the near term, it could take more time for past monetary policy actions to fully pass through to these sectors. Regarding expectations for the September FOMC meeting, the manager noted that responses to the Open Market Desk's Survey of Primary Dealers and Survey of Market Participants and market pricing all pointed to a virtual certainty of no change in the policy rate. In addition, modal expectations for the policy rate from the surveys were that the current target range would be maintained until the May 2024 FOMC meeting, compared with March in the previous survey, with a roughly one-in-three chance of a 25 basis point increase by the November FOMC meeting. For horizons beyond the middle of next year, the modal path from the surveys was notably lower than the market-implied path. The manager turned next to developments in money markets and Desk operations. Usage of the overnight reverse repurchase agreement (ON RRP) facility continued to decline over the intermeeting period, largely reflecting reduced participation by government and prime money market funds even as these funds continued to see inflows. Increased supply of money market instruments, especially Treasury bills, contributed to a slight increase in money market rates, which appeared to induce money funds to shift away from ON RRP toward other instruments. However, the ON RRP facility continued to provide an effective floor for the federal funds rate. With ON RRP balances falling more than Federal Reserve assets, reserve balances grew over the period. At more than $3.3 trillion, reserves remained abundant. In the September Survey of Primary Dealers, respondents generally saw a lower path for ON RRP participation and a higher path for reserves, compared with the July survey. 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 data available at the time of the September 19-20 meeting suggested that real gross domestic product (GDP) was rising at a solid pace in the third quarter. The labor market continued to be tight, with the unemployment rate low and job gains slowing but remaining strong. Consumer price inflation was still elevated. The imbalance between labor demand and supply appeared to be easing. Total nonfarm payroll employment increased at a slower pace over July and August than in the second quarter. The private-sector job openings rate and the quits rate, both measured by the Job Openings and Labor Turnover Survey, moved down further through July. Over July and August, the unemployment rate edged up, on net, and stood at 3.8 percent in August, and both the labor force participation rate (LFPR) and the employment-to-population ratio rose slightly. The unemployment rate for African Americans declined, while the jobless rate for Hispanics rose, and both rates were still above the national average. The easing of labor market imbalances was also evident in the recent wage data, with the 12-month changes in average hourly earnings and the employment cost index, and the four-quarter change in business-sector compensation per hour all lower than their year-earlier levels. Consumer price inflation remained elevated but continued to show signs of slowing. The total price index for personal consumption expenditures (PCE) increased 3.3 percent over the 12 months ending in July, and core PCE price inflation, which excludes changes in energy prices and many consumer food prices, was 4.2 percent over the same period; both total and core PCE price inflation were lower than a year earlier. The trimmed mean measure of 12-month PCE price inflation constructed by the Federal Reserve Bank of Dallas was 4.1 percent in July, down from its level earlier in the year. In August, the 12‑month change in the consumer price index (CPI) was 3.7 percent, while core CPI inflation was 4.3 percent over the same period, and both total and core CPI inflation were well below their year-earlier levels. Survey measures of consumers' short-term inflation expectations had moved down alongside actual inflation but remained above pre-pandemic levels. In contrast, survey measures of medium- to longer-term inflation expectations remained in the range seen in the decade before the pandemic. Available indicators suggested that real GDP was expanding at a solid pace in the third quarter. Private domestic final purchases—which includes PCE, residential investment, and business fixed investment (BFI) and often provides a better signal of underlying economic momentum than does GDP—also looked to be rising solidly, led by gains in both PCE and BFI. After falling in the second quarter, real goods exports increased in July, supported by higher exports of automotive products. Real goods imports also rose, as imports of consumer goods and capital goods partially recovered from their declines in recent months. The nominal U.S. international trade deficit widened, as growth in imports of goods and services outpaced that of exports. Foreign economic growth slowed in the second quarter, as troubles in the property sector weighed on economic activity in China and monetary policy restraint contributed to the slowing in economic growth in Europe. Available data for the third quarter, such as purchasing managers indexes and measures of business confidence, pointed to a continued subdued pace of economic activity abroad. Foreign headline inflation continued to fall but remained elevated. In several economies, though, energy prices turned up again. In the context of still-high core inflation, some central banks in advanced foreign economies (AFEs) raised their policy rates, despite a slowdown in economic activity, and indicated their intention to hold these rates at sufficiently restrictive levels to bring inflation back to target rates. In contrast, central banks of emerging market economies largely remained on hold, and some even began to cut rates amid easing inflationary pressures. Staff Review of the Financial Situation Over the intermeeting period, generally robust economic data led to moderate increases in the market- implied path of the federal funds rate and yields on shorter-term Treasury securities. Yields on medium- and longer-term nominal Treasury securities rose more substantially, mainly reflecting higher term premiums and higher real yields. Stock prices declined somewhat, but spreads on investment- and speculative-grade corporate bonds were little changed. Financing conditions tightened somewhat, and borrowing costs increased moderately. Market participants pointed to a range of factors that may have contributed to the increase in longer-term forward rates, including higher term premiums and upward revisions to market views of the likely path of Treasury debt over time. Real yields increased almost as much as or a little more than nominal yields, leaving implied measures of inflation compensation modestly changed. The market-implied path for the federal funds rate in the near term was up slightly since the July FOMC meeting, and the expected path further out, implied by overnight index swap contracts, rose moderately. Broad equity price indexes declined somewhat, and the one-month option-implied volatility on the S&P 500 index edged up slightly, on net, and stood near the 25th percentile of its historical distribution. Conditions in domestic short-term funding markets remained stable over the intermeeting period. Both prime and government money market funds experienced moderate inflows since the July FOMC meeting. Against a backdrop of heavy issuance of Treasury bills and the modest associated upward pressure on Treasury bill yields, take-up in the ON RRP facility continued to decline over the period and fell below $1.5 trillion late in the period. Over the intermeeting period, the dollar appreciated, as U.S. economic data came in stronger than expected, while foreign data suggested slowing economic growth abroad. Long-term yields in AFEs ended the period higher, reflecting spillovers from higher U.S. yields and, to a lesser extent, the increase in Japanese yields following the decision by the Bank of Japan to effectively widen its target range for the 10-year Japanese yield. Global equity prices declined moderately, reflecting higher long-term yields and increased concerns about the foreign economic outlook. Bond and equity funds focused on emerging markets saw moderate outflows. In domestic credit markets, borrowing rates for businesses, households, and municipalities increased moderately over the intermeeting period, mostly reflecting a pass-through of higher yields on longer-maturity Treasury securities to those borrowing rates. Interest rates on newly originated bank loans to businesses and households increased over the second quarter, interest rates on credit card offers increased in July, and interest rates on auto loans increased in July and August. Bank credit conditions appeared to tighten somewhat over the intermeeting period, but credit to businesses and households remained generally accessible. Commercial and industrial loan balances contracted, but outstanding commercial real estate (CRE) loans increased from July through late August, though at a slower pace than earlier in the year. Within the category of CRE loans, nonfarm nonresidential loans contracted over the summer for the first time since March 2022. Bank funding conditions were generally stable. Core deposits declined but were offset by inflows of large time deposits. Credit was available for most consumers. Credit card balances grew in the second quarter through late August. For residential real estate borrowers, credit availability was little changed. Credit conditions for small businesses were also fairly stable. The PayNet Small Business Lending Index indicated that loan originations edged up in July and stood above the median of its pre-pandemic level. Credit was generally accessible through capital markets, although issuance was subdued. Issuance of nonfinancial investment- and speculative-grade bonds was muted in July but picked up modestly in August, and issuance of municipal bonds was weak in July. New issuance of leveraged loans was subdued in July, and issuance of agency and non-agency commercial mortgage-backed securities (CMBS) was soft in July and August. Credit quality deteriorated a little further across many sectors in recent months but remained broadly solid. In the CRE sector, delinquency rates on nonfarm nonresidential CRE bank loans rose over the second quarter, while delinquency rates on construction, land development, and multifamily loans were roughly unchanged. Delinquency rates of loans in CMBS pools increased, driven by the office and retail sectors. The office delinquency rate rose more than 2 percentage points since January but remained below its pre-pandemic average. The delinquency rate for small business loans ticked up in June and July. Delinquency rates for credit cards and auto loans increased further in the second quarter and stood a bit above their average levels in the years leading up to the pandemic. The fraction of potential borrowers with a prime credit score expanded through the second quarter, moving further above its pre-pandemic level. The trailing default rates for investment- and speculative-grade corporate bonds increased in July but remained at historically low levels. The trailing default rate for leveraged loans was little changed, on net, but downgrades of leveraged loans surpassed upgrades in July and August. In contrast to many other types of loans, the payment performance of home mortgages improved. Delinquency rates of Federal Housing Administration and Department of Veterans Affairs loans in July were lower than levels seen earlier this year, and delinquency rates of conventional loans remained at historical lows. Credit quality was also strong for municipal borrowers. Staff Economic Outlook The economic forecast prepared by the staff for the September FOMC meeting was stronger than the July projection, as consumer and business spending appeared to be more resilient to tight financial conditions than previously expected. The staff assumed that GDP growth for the rest of this year would be damped a bit by the autoworkers' strike, with these effects unwound by a small boost to GDP growth next year. The size and timing of these effects were highly uncertain. In all, the staff projected that real GDP growth in 2024 through 2026 would be slower, on average, than this year and would run below the staff's estimate of potential output growth, restrained over the next couple of years by the lagged effects of monetary policy actions. The unemployment rate was projected to remain roughly flat through 2026, as upward pressure from below-potential output growth was offset by downward pressure from further improvements in labor market functioning. Total and core PCE price inflation were forecast to be around 3.5 percent at the end of this year, and inflation was projected to move lower in coming years, as demand and supply in product and labor markets continued to move into better alignment. Total and core PCE price inflation were expected to be close to 2 percent in 2026. The staff continued to view the uncertainty around the baseline projection as considerable. Risks around the inflation forecast were seen as skewed to the upside, given the possibility that inflation could prove to be more persistent than expected or that further adverse shocks to supply conditions might occur. Should these upside inflation risks materialize, the response of monetary policy could, if coupled with an adverse reaction in financial markets, tilt the risks around the forecast for economic activity to the downside. Participants' Views on Current Conditions and the Economic Outlook In conjunction with this FOMC meeting, participants submitted their projections of the most likely outcomes for real GDP growth, the unemployment rate, and inflation for each year from 2023 through 2026 and over the longer run. The projections were based on their individual assessments of appropriate monetary policy, including the path of 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. A Summary of Economic Projections (SEP) was released to the public following the conclusion of the meeting. Regarding the economic outlook, participants assessed that real GDP had been expanding at a solid pace and had been more resilient than expected. Nevertheless, participants also noted that they expected that real GDP growth would slow in the near term. Participants judged that the current stance of monetary policy was restrictive and that it broadly appeared to be restraining the economy as intended. Participants stressed that current inflation remained unacceptably high while acknowledging that it had moderated somewhat over the past year. They also noted that further evidence would be required for them to be confident that inflation was clearly on a path to the Committee's 2 percent objective. Participants continued to view a period of below-trend growth in real GDP and some softening in labor market conditions as likely to be needed to bring aggregate demand and aggregate supply into better balance and reduce inflation pressures sufficiently to return inflation to 2 percent over time. In their discussion of the household sector, participants observed that aggregate consumer spending had continued to exhibit considerable strength, supported by the strong labor market and by generally strong household balance sheets. However, many participants remarked that the finances of some households were coming under pressure amid high inflation and declining savings and that there had been an increasing reliance on credit to finance expenditures. In addition, tighter credit conditions, waning fiscal support for families, and a resumption of student loan payments were viewed by several participants as having the potential to weigh on the growth of consumption. While household credit quality was seen as generally strong, a few participants noted rising delinquency rates on some types of consumer credit. A couple of participants also remarked that households were becoming increasingly price sensitive. Some participants noted that housing demand was resilient despite higher interest rates; new home construction was solid, in part reflecting the limited inventory of homes available for sale. Regarding the business sector, participants noted that activity continued to be solid, though several pointed to signs of softening conditions. Many participants noted improved business conditions from an increased ability to hire and retain workers, better-functioning supply chains, or reduced input cost pressures. A few participants commented that their business contacts had reported difficulties passing on cost increases to customers. Several participants judged that, over coming quarters, business activity would be restrained by tighter financial conditions, such as higher interest rates and more constrained access to bank credit. Several participants noted, however, that the tightening of credit conditions resulting from the banking stresses earlier in the year was likely to be less severe than they previously expected. A number of participants expressed concerns about vulnerabilities in the CRE sector. Many participants commented that they expected that the autoworkers' strike would, in the near term, result in a slowdown in production of motor vehicles and parts and possibly put upward pressure on automobile prices, but that these effects would be temporary. With respect to the agricultural sector, a few participants noted that conditions were mixed, as crop prices had declined amid higher production estimates and as supply and demand imbalances pushed up the prices of some types of livestock and held down the prices of others. Participants observed that the labor market was tight but that supply and demand conditions were continuing to come into better balance. Most participants remarked that a range of indicators of labor demand were easing—as could be seen by declines in job openings, a narrowing of the jobs-to-workers gap, lower quits rates, and a reduction in average weekly hours worked to levels at or below those seen before the pandemic. However, several participants noted that labor markets remained very tight in some sectors of the economy, such as health-care services and education. Many participants also observed that measures of labor supply, especially the LFPR, had moved up. Some participants commented that the increase in the LFPR for women had been particularly notable, although they expressed concern that challenges regarding the availability of childcare could affect the sustainability of this increase in participation. Several participants noted that immigration had also been boosting labor supply. Some participants observed that payroll growth remained strong but had slowed in recent months to a pace closer to that consistent with maintaining a constant unemployment rate over time. Most participants commented that the pace of nominal wage increases had moderated, and a few also mentioned that the wage premium for job switchers had come down. They noted, however, that nominal wages were still rising at rates above levels generally assessed to be consistent with the sustained achievement of the Committee's 2 percent inflation objective, given current estimates of trend productivity growth. Participants noted that the data received over the past several months generally suggested that inflation was slowing. Even with these favorable developments, they emphasized that further progress was needed to get inflation sustainably to 2 percent. Participants pointed to the softening of price inflation for goods amid improving supply conditions and to declining housing services inflation. Several participants remarked that, despite the recent rise in energy prices, food and energy prices over the past year had contributed to a decline in overall inflation. However, participants also noted that significant progress in reducing inflation had yet to become apparent in the prices of core services excluding housing. Participants noted that longer-term inflation expectations remained well anchored and that shorter-term inflation expectations had been moving down from elevated levels. Participants observed that, notwithstanding recent favorable developments, inflation remained well above the Committee's 2 percent longer-run objective and that elevated inflation was continuing to harm businesses and households—particularly low-income households. Participants stressed that they would need to see more data indicating that inflation pressures were abating to be more confident that inflation was on course to return to 2 percent over time. Participants generally noted there was still a high degree of uncertainty surrounding the economic outlook. One new source of uncertainty was that associated with the autoworkers' strike, and many participants observed that an intensification of the strike posed both an upside risk to inflation and a downside risk to activity. A majority of participants pointed to upside risks to inflation from rising energy prices that could undo some of the recent disinflation or to the risk that inflation would prove more persistent than expected. Various participants noted downside risks to economic activity, including that credit conditions might tighten more than expected if the domestic banking sector experienced further strains; the possibility that the economic slowdown in China could result in a drag on global economic growth; or that an extended U.S. government shutdown could have negative, albeit temporary, consequences for growth. Some participants remarked that an upside risk to their projections for economic activity was that the unexpected resilience that the economy had demonstrated so far could persist. Several participants commented that a government shutdown might result in the delayed release of some economic data and that this outcome would make it more difficult to assess economic conditions. A few participants observed that there were challenges in assessing the state of the economy because some data continued to be volatile and subject to large revisions. In their consideration of appropriate monetary policy actions at this meeting, participants concurred that economic activity had been expanding at a solid pace and had been resilient. While the labor market remained tight, job gains had slowed, and there were continuing signs that supply and demand in the labor market were coming into better balance. Participants also noted that tighter credit conditions facing households and businesses were a source of headwinds for the economy and would likely weigh on economic activity, hiring, and inflation. However, the extent of these effects remained uncertain. Although inflation had moderated since the middle of last year, it remained well above the Committee's longer-run goal of 2 percent, and participants remained resolute in their commitment to bring inflation down to the Committee's 2 percent objective. Amid these economic conditions, and in consideration of the significant cumulative tightening in the stance of monetary policy and the lags with which policy affects economic activity and inflation, almost all participants judged it appropriate to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent at this meeting. Participants judged that maintaining this restrictive stance of policy would support further progress toward the Committee's goals while allowing the Committee time to gather additional data to evaluate this progress. All participants agreed that it was appropriate to continue the process of reducing the Federal Reserve's securities holdings, as described in its previously announced Plans for Reducing the Size of the Federal Reserve's Balance Sheet. In discussing the policy outlook, participants continued to judge that it was critical that the stance of monetary policy be kept sufficiently restrictive to return inflation to the Committee's 2 percent objective over time. A majority of participants judged that one more increase in the target federal funds rate at a future meeting would likely be appropriate, while some judged it likely that no further increases would be warranted. All participants agreed that the Committee was in a position to proceed carefully and that policy decisions at every meeting would continue to be based on the totality of incoming information and its implications for the economic outlook as well as the balance of risks. Participants expected that the data arriving in coming months would help clarify the extent to which the disinflation process was continuing and labor markets were reaching a better balance between demand and supply. This information would be valuable in determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time. Some participants also emphasized the importance of continuing to communicate clearly to the public about the Committee's data-dependent approach to policy and its firm commitment to bring inflation down to 2 percent. All participants agreed that policy should remain restrictive for some time until the Committee is confident that inflation is moving down sustainably toward its objective. A few participants noted that the pace at which inflation was returning to the Committee's 2 percent goal would influence their views of the sufficiently restrictive level of the policy rate and how long to keep policy restrictive. Several participants commented that, with the policy rate likely at or near its peak, the focus of monetary policy decisions and communications should shift from how high to raise the policy rate to how long to hold the policy rate at restrictive levels. A few participants noted that it would be important to monitor the real federal funds rate in gauging the stance of monetary policy over time. Most participants observed that postmeeting communications, including the SEP, would help clarify to the public how participants assessed the likely evolution of the stance of monetary policy. Participants observed that the continuing process of reducing the size of the Federal Reserve's balance sheet was an important part of the overall approach to achieving their macroeconomic objectives. Several participants noted that the process of balance sheet runoff could continue for some time, even after the Committee begins to reduce the target range for the federal funds rate. A vast majority of participants continued to judge the future path of the economy as highly uncertain. Many noted data volatility and potential data revisions, or the difficulty of estimating the neutral policy rate, as supporting the case for proceeding carefully in determining the extent of additional policy firming that may be appropriate. Participants discussed several risk-management considerations that could bear on future policy decisions. Participants generally judged that, with the stance of monetary policy in restrictive territory, risks to the achievement of the Committee's goals had become more two sided. But with inflation still well above the Committee's longer-run goal and the labor market remaining tight, most participants continued to see upside risks to inflation. These risks included the imbalance of aggregate demand and supply persisting longer than expected, as well as risks emanating from global oil markets, the potential for upside shocks to food prices, the effects of a strong housing market on shelter inflation, and the potential for more limited declines in goods prices. Many participants commented that even though economic activity had been resilient and the labor market had remained strong, there continued to be downside risks to economic activity and upside risks to the unemployment rate. Such risks included larger-than-anticipated lagged macroeconomic effects from the tightening in financial conditions, the effect of labor union strikes, slowing global growth, and continued weakness in the CRE sector. Participants generally noted that it was important to balance the risk of overtightening against the risk of insufficient tightening. Committee Policy Actions In their discussion of monetary policy for this meeting, members agreed that economic activity had been expanding at a solid pace, and, accordingly, that the corresponding language in the postmeeting statement should be changed from "moderate" to "solid." They also concurred that job gains had slowed in recent months but remained strong, and the unemployment rate had remained low. Inflation had remained elevated. Members concurred that the U.S. banking system was sound and resilient. They also agreed that tighter credit conditions for households and businesses were likely to weigh on economic activity, hiring, and inflation but that the extent of these effects was uncertain. Members also concurred that they remained highly attentive to inflation risks. In support of the Committee's objectives to achieve maximum employment and inflation at the rate of 2 percent over the longer run, members agreed to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent. They also agreed that they would continue to assess additional information and its implications for monetary policy. In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, members concurred that they would take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, members agreed to continue to reduce the Federal Reserve's holdings of Treasury securities and agency debt and mortgage-backed securities, as described in its previously announced plans. All members affirmed that they are strongly committed to returning inflation to their 2 percent objective. Members agreed that, in assessing the appropriate stance of monetary policy, they would continue to monitor the implications of incoming information for the economic outlook. They would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. Members also agreed that their assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments. At the conclusion of the discussion, the Committee voted to direct the Federal Reserve Bank of New York, until instructed otherwise, to execute transactions in the System Open Market Account in accordance with the following domestic policy directive, for release at 2:00 p.m.: "Effective September 21, 2023, 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 5-1/4 to 5-1/2 percent. Conduct standing overnight repurchase agreement operations with a minimum bid rate of 5.5 percent and with an aggregate operation limit of $500 billion. Conduct standing overnight reverse repurchase agreement operations at an offering rate of 5.3 percent and with a per-counterparty limit of $160 billion per day. Roll over at auction the amount of principal payments from the Federal Reserve's holdings of Treasury securities maturing in each calendar month that exceeds a cap of $60 billion per month. Redeem Treasury coupon securities up to this monthly cap and Treasury bills to the extent that coupon principal payments are less than the monthly cap. Reinvest into agency mortgage-backed securities (MBS) the amount of principal payments from the Federal Reserve's holdings of agency debt and agency MBS received in each calendar month that exceeds a cap of $35 billion per month. Allow modest deviations from stated amounts for reinvestments, if needed for operational reasons. Engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions." The vote also encompassed approval of the statement below for release at 2:00 p.m.: "Recent indicators suggest that economic activity has been expanding at a solid pace. Job gains have slowed in recent months but remain strong, and the unemployment rate has remained low. Inflation remains elevated. The U.S. banking system is sound and resilient. Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent. The Committee will continue to assess additional information and its implications for monetary policy. In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2 percent objective. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments." Voting for this action: Jerome H. Powell, John C. Williams, Michael S. Barr, Michelle W. Bowman, Lisa D. Cook, Austan D. Goolsbee, Patrick Harker, Philip N. Jefferson, Neel Kashkari, Adriana D. Kugler, Lorie K. Logan, and Christopher J. Waller. 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 of the Federal Reserve System voted unanimously to maintain the interest rate paid on reserve balances at 5.4 percent, effective September 21, 2023. The Board of Governors of the Federal Reserve System voted unanimously to approve the establishment of the primary credit rate at the existing level of 5.5 percent, effective September 21, 2023. It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, October 31-November 1, 2023. The meeting adjourned at 10:10 a.m. on September 20, 2023. Notation Vote By notation vote completed on August 15, 2023, the Committee unanimously approved the minutes of the Committee meeting held on July 25-26, 2023. _______________________ Joshua Gallin Secretary 1. The Federal Open Market Committee is referenced as the "FOMC" and the "Committee" in these minutes; the Board of Governors of the Federal Reserve System is referenced as the "Board" in these minutes. Return to text 2. Attended Wednesday's session only. Return to text 3. Attended Tuesday's session only. Return to text 4. Attended through the discussion of the economic and financial situation. Return to text 5. Attended through the discussion of developments in financial markets and open market operations. Return to text

2023-07-26

Statement

Recent indicators suggest that economic activity has been expanding at a moderate pace. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated. The U.S. banking system is sound and resilient. Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 5-1/4 to 5-1/2 percent. The Committee will continue to assess additional information and its implications for monetary policy. In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2 percent objective. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments. Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Michelle W. Bowman; Lisa D. Cook; Austan D. Goolsbee; Patrick Harker; Philip N. Jefferson; Neel Kashkari; Lorie K. Logan; and Christopher J. Waller. For media inquiries, please email [email protected] or call 202-452-2955. Implementation Note issued July 26, 2023

2023-08-16

Minute

Minutes of the Federal Open Market Committee July 25-26, 2023 A joint meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve System was held in the offices of the Board of Governors on Tuesday, July 25, 2023, at 10:00 a.m. and continued on Wednesday, July 26, 2023, at 9:00 a.m.1 Attendance Jerome H. Powell, Chair John C. Williams, Vice Chair Michael S. Barr Michelle W. Bowman Lisa D. Cook Austan D. Goolsbee Patrick Harker Philip N. Jefferson Neel Kashkari Lorie K. Logan Christopher J. Waller Thomas I. Barkin, Raphael W. Bostic, Mary C. Daly, and Loretta J. Mester, Alternate Members of the Committee Susan M. Collins, President of the Federal Reserve Bank of Boston Kelly J. Dubbert and Kathleen O'Neill Paese, Interim Presidents of the Federal Reserve Banks of Kansas City and St. Louis, respectively Joshua Gallin, Secretary Brian J. Bonis, Assistant Secretary Michelle A. Smith, Assistant Secretary Mark E. Van Der Weide, General Counsel Richard Ostrander, Deputy General Counsel Trevor A. Reeve, Economist Stacey Tevlin, Economist Beth Anne Wilson, Economist Shaghil Ahmed, James A. Clouse, Eric M. Engen, Anna Paulson, Andrea Raffo, and William Wascher, Associate Economists Roberto Perli, Manager, System Open Market Account Julie Ann Remache, Deputy Manager, System Open Market Account David Altig, Executive Vice President, Federal Reserve Bank of Atlanta Penelope A. Beattie,2 Section Chief, Office of the Secretary, Board Brent Bundick, Senior Research and Policy Advisor, Federal Reserve Bank of Kansas City Juan C. Climent, Special Adviser to the Board, Division of Board Members, Board Stephanie E. Curcuru,3 Deputy Director, Division of International Finance, Board Rochelle M. Edge, Deputy Director, Division of Monetary Affairs, Board Matthew J. Eichner,4 Director, Division of Reserve Bank Operations and Payment Systems, Board Eric C. Engstrom, Associate Director, Division of Monetary Affairs and Division of Research and Statistics, Board Huberto M. Ennis, Group Vice President, Federal Reserve Bank of Richmond Erin E. Ferris, Principal Economist, Division of Monetary Affairs, Board Glenn Follette, Associate Director, Division of Research and Statistics, Board Jennifer Gallagher, Assistant to the Board, Division of Board Members, Board Peter M. Garavuso, Senior Information Manager, Division of Monetary Affairs, Board Carlos Garriga, Senior Vice President, Federal Reserve Bank of St. Louis Michael S. Gibson, Director, Division of Supervision and Regulation, Board Christine Graham,5 Special Adviser to the Board, Division of Board Members, Board Luca Guerrieri, Associate Director, Division of International Finance, Board Christopher J. Gust, Associate Director, Division of Monetary Affairs, Board Valerie S. Hinojosa, Section Chief, Division of Monetary Affairs, Board Jane E. Ihrig, Special Adviser to the Board, Division of Board Members, Board Callum Jones, Senior Economist, Division of Monetary Affairs, Board Michael T. Kiley, Deputy Director, Division of Financial Stability, Board David E. Lebow, Senior Associate Director, Division of Research and Statistics, Board Sylvain Leduc, Director of Research, Federal Reserve Bank of San Francisco Andreas Lehnert, Director, Division of Financial Stability, Board Kurt F. Lewis, Special Adviser to the Board, Division of Board Members, Board Dan Li, Assistant Director, Division of Monetary Affairs, Board Laura Lipscomb, Special Adviser to the Board, Division of Board Members, Board David López-Salido, Senior Associate Director, Division of Monetary Affairs, Board Ann E. Misback, Secretary, Office of the Secretary, Board Juan M. Morelli, Economist, Division of Monetary Affairs, Board Norman J. Morin, Deputy Associate Director, Division of Research and Statistics, Board Michelle M. Neal, Head of Markets, Federal Reserve Bank of New York Edward Nelson, Senior Adviser, Division of Monetary Affairs, Board Paolo A. Pesenti, Director of Monetary Policy Research, Federal Reserve Bank of New York Damjan Pfajar, Group Manager, Division of Monetary Affairs, Board Samuel Schulhofer-Wohl, Senior Vice President, Federal Reserve Bank of Dallas Donald Keith Sill, Senior Vice President, Federal Reserve Bank of Philadelphia Nitish Ranjan Sinha, Special Adviser to the Board, Division of Board Members, Board Dafina Stewart, Special Adviser to the Board, Division of Board Members, Board Gustavo A. Suarez, Assistant Director, Division of Research and Statistics, Board Brett Takacs, Senior Communications Analyst, Division of Information Technology, Board Jenny Tang, Vice President, Federal Reserve Bank of Boston Willem Van Zandweghe, Assistant Vice President, Federal Reserve Bank of Cleveland Annette Vissing-Jørgensen, Senior Adviser, Division of Monetary Affairs, Board Jeffrey D. Walker,4 Associate Director, Division of Reserve Bank Operations and Payment Systems, Board Paul R. Wood, Special Adviser to the Board, Division of Board Members, Board Rebecca Zarutskie, Special Adviser to the Board, Division of Board Members, Board Developments in Financial Markets and Open Market Operations The manager turned first to a review of developments in financial markets over the intermeeting period. Market participants interpreted data releases as generally demonstrating economic resilience and a further easing of inflation pressures. The market-implied peak for the federal funds rate rose in response to data pointing to a robust economy but retraced part of that move after the June consumer price index (CPI) release was interpreted by market participants as softer than anticipated. Even as market prices shifted to indicate a slightly more restrictive expected policy path, broader financial conditions eased a bit, reflecting in large part gains in equity prices and tighter credit spreads. Notably, share prices for bank equity also appreciated over the intermeeting period as concerns about the banking sector continued to dissipate. Spot and forward measures of inflation compensation based on Treasury Inflation-Protected Securities were little changed over the intermeeting period at levels broadly consistent with the Committee's 2 percent longer-run goal, and longer-term survey- and market-based measures continued to point to inflation expectations being firmly anchored. Market-implied peak policy rates in most advanced foreign economies (AFEs) rose further this period, and the dollar depreciated modestly. Respondents to the Open Market Desk's Survey of Primary Dealers and Survey of Market Participants in July continued to place significant probability of a recession occurring by the end of 2024. However, the timing of a recession expected by survey respondents was again pushed later, and the probability of avoiding a recession through 2024 grew noticeably. Survey respondents anticipated that both headline and core personal consumption expenditures (PCE) inflation will decline to 2 percent by the end of 2025. There was a strong anticipation, evident in both market-based measures and responses to the Desk's surveys, that the Committee would raise the target range 25 basis points at the July FOMC meeting. Most survey respondents had a modal expectation that a July rate hike would be the last of this tightening cycle, although most respondents also perceived that additional monetary policy tightening after the July FOMC meeting was possible. As inferred from their responses, survey respondents expected real rates to increase through the first half of 2024 and to remain above their expectations for the long-run neutral levels for a few years. The manager then turned to money market developments and policy implementation. The overnight reverse repurchase agreement (ON RRP) facility continued to work as intended over the intermeeting period and had been instrumental in providing an effective floor under the federal funds rate and supporting other money market rates; those rates remained stable over the period. Following the suspension of the debt ceiling in early June, the Treasury Department issued securities, notably Treasury bills, to replenish the Treasury General Account (TGA). The resulting greater availability of Treasury bills, which were priced at rates slightly above the current and expected ON RRP rates, induced a net decline in ON RRP balances for the period. A further decline in ON RRP balances was deemed probable amid sustained projected Treasury bill issuance, further reductions in the size of the Federal Reserve's balance sheet in accordance with the previously announced Plans for Reducing the Size of the Federal Reserve's Balance Sheet, and a possible further reduction in policy uncertainty that could incentivize money funds to extend the duration of their portfolios. In the July Desk Survey of Primary Dealers, respondents expected lower ON RRP balances and higher bank reserves by the end of the year, compared with the June survey. 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 available at the time of the July 25–26 meeting suggested that real gross domestic product (GDP) rose at a moderate pace over the first half of the year. The labor market remained very tight, though the imbalance between demand and supply in the labor market was gradually diminishing. Consumer price inflation—as measured by the 12-month percent change in the price index for PCE—remained elevated in May, and available information suggested that inflation declined but remained elevated in June. In the second quarter, total nonfarm payroll employment posted its slowest average monthly increase since the recovery began in mid-2020, though payroll gains remained robust compared with those seen before the pandemic. Similarly, the private-sector job openings rate, as measured by the Job Openings and Labor Turnover Survey, fell in May to its lowest level since March 2021 but remained well above pre-pandemic levels. The unemployment rate edged down to 3.6 percent in June, while the labor force participation rate and the employment-to-population ratio were both unchanged. The unemployment rates for African Americans and Hispanics, however, both rose and were well above the national average. Average hourly earnings rose 4.4 percent over the 12 months ending in June, compared with a year­-earlier increase of 5.4 percent. Consumer price inflation continued to show signs of easing but remained elevated. Total PCE price inflation was 3.8 percent over the 12 months ending in May, and core PCE price inflation, which excludes changes in energy prices and many consumer food prices, was 4.6 percent over the same period. The trimmed mean measure of 12-month PCE price inflation constructed by the Federal Reserve Bank of Dallas was 4.6 percent in May. In June, the 12‑month change in the CPI was 3.0 percent, while core CPI inflation was 4.8 percent over the same period. Measures of short-term inflation expectations had moved down alongside actual inflation but remained above pre-pandemic levels. In contrast, measures of medium- to longer-term inflation expectations were in the range seen in the decade before the pandemic. Available indicators suggested that real GDP rose in the second quarter at a pace similar to the one posted in the first quarter. However, private domestic final purchases—which includes PCE, residential investment, and business fixed investment and which often provides a better signal of underlying economic momentum than does GDP—appeared to have decelerated in the second quarter. Manufacturing output rose in the second quarter, supported by a robust increase in motor vehicle production. After falling sharply in April, real exports of goods picked up in May, led by higher exports of industrial supplies and automotive products. Real goods imports fell, as lower imports of consumer goods and industrial supplies more than offset higher imports of capital goods. The nominal U.S. international trade deficit narrowed, as a sharp decline in nominal imports of goods and services outpaced a decline in exports. The available data suggested that net exports subtracted from U.S. GDP growth in the second quarter. Indicators of economic activity, such as purchasing managers indexes (PMIs), pointed to a step-down in the pace of foreign growth in the second quarter, reflecting fading of the impetus from China's reopening, continued anemic growth in Europe, some weakening of activity in Canada and Mexico, as well as weak external demand and the slump in the high-tech industry weighing on many Asian economies. Incoming data also indicated that global manufacturing activity remained weak during the intermeeting period. Foreign headline inflation continued to fall, reflecting, in part, the pass-through of previous declines in commodity prices to retail energy and food prices. Core inflation edged down in many countries but generally remained high. In this context, and amid tight labor market conditions, many AFE central banks raised policy rates and underscored the need to raise rates further, or hold them at sufficiently restrictive levels, to bring inflation in their countries back to their targets. In contrast, central banks of emerging market economies largely remained on hold, and some indicated that a rate cut is possible at their next meeting. Staff Review of the Financial Situation Over the intermeeting period, market participants interpreted domestic economic data releases as indicating continued resilience of economic activity and some easing of inflationary pressures, and they viewed monetary policy communications as pointing to somewhat more restrictive policy than expected. The market-implied path for the federal funds rate rose modestly, and nominal Treasury yields increased somewhat at shorter maturities. Meanwhile, broad equity prices increased, and spreads on investment- and speculative-grade corporate bonds narrowed moderately. Financing conditions continued to be generally restrictive, and borrowing costs remained elevated. Over the intermeeting period, the market-implied path for the federal funds rate rose modestly, while the timing of the path's slightly higher peak moved a little later, to just after the November meeting. Beyond this year, the policy rate path implied by overnight index swap (OIS) quotes ended the period modestly higher. Yields on Treasury securities increased modestly at shorter maturities but only a bit at longer maturities. Measures of inflation compensation rose only slightly for near-term and longer maturities. Measures of uncertainty about the path of the policy rate derived from interest rate options remained very elevated by historical standards. Broad stock price indexes increased and spreads on investment- and speculative-grade corporate bonds narrowed moderately over the intermeeting period. The VIX—the one-month option-implied volatility on the S&P 500—edged down and ended the period near the 25th percentile of its historical distribution. Bank equity prices increased and outperformed the S&P 500 modestly. Stock prices for the largest banks fully recovered from their declines in the immediate wake of the failure of Silicon Valley Bank, while those for regional banks remained below the levels seen in early March. Short-term interest rates in the AFEs increased modestly, on net, over the intermeeting period as foreign central banks continued to raise policy rates and signal the potential for further tightening. Increases in yields were tempered, however, by downside surprises to both inflation and PMIs from some economies. Risk sentiment in foreign markets improved somewhat, with most foreign equity indexes increasing and foreign corporate and emerging market sovereign bond spreads narrowing. The staff's trade-weighted broad dollar index declined moderately, with the largest moves following releases of weaker-than-expected U.S. labor market data and lower-than-expected U.S. inflation data. Conditions in domestic short-term funding markets remained generally stable over the intermeeting period. Spreads in unsecured markets narrowed modestly amid slight increases in OIS rates. Following the suspension of the debt limit, the Treasury Department partly replenished the TGA via a large net increase in bill issuance. Auctions of Treasury bills were met with robust demand, as shorter-term bill yields increased relative to other money market rates. Money market funds increased their holdings of Treasury bills and reduced their investments with the ON RRP facility. ON RRP take-up declined notably—about $390 billion—over the intermeeting period, reflecting more attractive rates on some alternatives to investing in the ON RRP facility. Despite reduced ON RRP take-up, money funds maintained relatively high asset allocations in overnight repurchase agreement investments amid still-elevated uncertainty about the future path of policy. In domestic credit markets, borrowing costs for businesses, households, and municipalities were little changed over the intermeeting period and remained elevated by historical standards. Yields on agency commercial mortgage-backed securities (CMBS) were little changed. The banking sector's ability to fund loans to businesses and consumers was generally stable during the intermeeting period. Core deposit volumes at both large and other domestic banks held steady at the levels that they reached in early May, after having declined sharply in March and April amid the banking-sector turmoil. Banks continued to attract inflows of large time deposits, reflecting higher interest rates offered on new certificates of deposit. Meanwhile, wholesale borrowing—which primarily consists of advances from Federal Home Loan Banks, loans from the Bank Term Funding Program, and other credit extended by the Federal Reserve—had fallen since May by domestic banks of all sizes, partially reversing the surge at the onset of the bank turmoil in March. Credit availability for businesses appeared to tighten somewhat in recent months. Credit from capital markets was somewhat subdued but overall remained accessible for larger corporations. Issuance of leveraged loans remained limited, reflecting low levels of leveraged buyout and merger and acquisition activity as well as weak investor demand. In the municipal bond market, gross issuance was solid in June, as both refundings and new capital issuance picked up from a somewhat subdued May. Commercial and industrial (C&I) loan balances contracted modestly in the second quarter, and commercial real estate (CRE) loan growth on banks' books continued to moderate. In the July Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS), banks reported having tightened standards and terms on C&I loans to firms of all sizes in the second quarter. The most cited reason for tightening C&I standards and terms continued to be concerns about the economic outlook. Banks also reported expecting to tighten C&I standards further over the remainder of the year. The July SLOOS also indicated that standards across all CRE loan categories tightened further in the second quarter and that banks expected to tighten CRE standards further over the second half of the year. Meanwhile, CMBS issuance picked up a bit in May and then ticked down in June after recording low volumes earlier in the year. Credit in the residential mortgage market remained broadly available for high-credit-score borrowers who met standard conforming loan criteria. Only modest net percentages of banks in the July SLOOS reported tightening standards for mortgage loans eligible to be purchased by government-sponsored enterprises, while a moderate net percentage of banks reported expecting to tighten lending standards further for these loans over the second half of the year. Meanwhile, the availability of mortgage credit remained tighter for households with lower credit scores, at levels close to those prevailing before the pandemic. Banks reported in the SLOOS that they had tightened standards for certain categories of residential real estate loans to be held on their balance sheets, such as jumbo loans and home equity lines of credit. In addition, banks reported expecting to tighten standards for jumbo loans during the remainder of 2023. Conditions remained generally accommodative in consumer credit markets, with credit available for most borrowers. Credit card balances increased in the second quarter, though at a somewhat slower pace than in previous months. In the July SLOOS, banks reported expecting to continue tightening lending standards for credit card loans. Overall, the credit quality of most businesses and households remained solid. While there were signs of deterioration in credit quality in some sectors, such as the office segment of CRE, delinquency rates generally remained near their pre-pandemic lows. The credit quality of C&I and CRE loans on banks' balance sheets remained sound as of the end of the first quarter of 2023. However, in the July SLOOS, banks frequently cited concerns about the credit quality of both CRE and other loans as reasons for expecting to tighten their lending standards over the remainder of the year. Aggregate delinquency rates on pools of commercial mortgages backing CMBS increased in May and June. The staff provided an update on its assessment of the stability of the financial system and, on balance, characterized the financial vulnerabilities of the U.S. financial system as notable. The staff judged that asset valuation pressures remained notable. In particular, measures of valuations in both residential and commercial property markets remained high relative to fundamentals. House prices, while having cooled earlier this year, started to rise again, and price-to-rent ratios remained at elevated levels and near those seen in the mid-2000s. Al­though commercial property prices moved down, developments in the CRE sector following the pandemic may have produced a permanent shift away from traditional working patterns. If so, fundamentals in the sector could decline notably and contribute to a deterioration in credit quality. The staff assessed that vulnerabilities associated with household and nonfinancial business leverage remained moderate overall. Aggregate household debt growth remained in line with income growth. While nonfinancial businesses remained highly leveraged and thus vulnerable to shocks, firms' debt growth has been relatively subdued recently, and their ability to service that debt has been quite high, even among lower-rated firms. Leverage in the financial sector was characterized as notable. In the banking sector, regulatory risk-based capital ratios showed the system remained well capitalized. However, while the overall banking system retained ample loss-bearing capacity, some banks experienced sizable declines in the fair value of their assets as a consequence of rising interest rates. Vulnerabilities associated with funding risks were also characterized as notable. Al­though a small number of banks saw notable outflows of deposits late in the first quarter and early in the second quarter, deposit flows later stabilized. Staff Economic Outlook The economic forecast prepared by the staff for the July FOMC meeting was stronger than the June projection. Since the emergence of stress in the banking sector in mid-March, indicators of spending and real activity had come in stronger than anticipated; as a result, the staff no longer judged that the economy would enter a mild recession toward the end of the year. However, the staff continued to expect that real GDP growth in 2024 and 2025 would run below their estimate of potential output growth, leading to a small increase in the unemployment rate relative to its current level. The staff continued to project that total and core PCE price inflation would move lower in coming years. Much of the step-down in core inflation was expected to occur over the second half of 2023, with forward-looking indicators pointing to a slowing in the rate of increase of housing services prices and with core nonhousing services prices and core goods prices expected to decelerate over the remainder of 2023. Inflation was anticipated to ease further over 2024 as demand–supply imbalances continued to resolve; by 2025, total PCE price inflation was expected to be 2.2 percent, and core inflation was expected to be 2.3 percent. The staff continued to judge that the risks to the baseline projection for real activity were tilted to the downside. Risks to the staff's baseline inflation forecast were seen as skewed to the upside, given the possibility that inflation dynamics would prove to be more persistent than expected or that further adverse shocks to supply conditions might occur. Moreover, the additional monetary policy tightening that would be necessitated by higher or more persistent inflation represented a downside risk to the projection for real activity. Participants' Views on Current Conditions and the Economic Outlook In their discussion of current economic conditions, participants noted that economic activity had been expanding at a moderate pace. Job gains had been robust in recent months, and the unemployment rate remained low. Inflation remained elevated. Participants agreed that the U.S. banking system was sound and resilient. They commented that tighter credit conditions for households and businesses were likely to weigh on economic activity, hiring, and inflation. However, participants agreed that the extent of these effects remained uncertain. Against this background, the Committee remained highly attentive to inflation risks. In assessing the economic outlook, participants noted that real GDP growth had continued to exhibit resilience in the first half of the year and that the economy had been showing considerable momentum. A gradual slowdown in economic activity nevertheless appeared to be in progress, consistent with the restraint placed on demand by the cumulative tightening of monetary policy since early last year and the associated effects on financial conditions. Participants remarked on the uncertainty about the lags in the effects of monetary policy on the economy and discussed the extent to which the effects on the economy stemming from the tightening that the Committee had undertaken had already materialized. Participants commented that monetary policy tightening appeared to be working broadly as intended and that a continued gradual slowing in real GDP growth would help reduce demand–supply imbalances in the economy. Participants assessed that the ongoing tightening of credit conditions in the banking sector, as evidenced in the most recent surveys of banks, also would likely weigh on economic activity in coming quarters. Participants noted the recent reduction in total and core inflation rates. However, they stressed that inflation remained unacceptably high and that further evidence would be required for them to be confident that inflation was clearly on a path toward the Committee's 2 percent objective. Participants continued to view a period of below-trend growth in real GDP and some softening in labor market conditions as needed to bring aggregate supply and aggregate demand into better balance and reduce inflation pressures sufficiently to return inflation to 2 percent over time. Participants noted that consumer spending had recently exhibited considerable resilience, underpinned by, in aggregate, strong household balance sheets, robust job and income gains, a low unemployment rate, and rising consumer confidence. Nevertheless, tight financial conditions, primarily reflecting the cumulative effect of the Committee's shift to a restrictive policy stance, were expected to contribute to slower growth in consumption in the period ahead. Participants cited other factors that were likely leading to, or appeared consistent with, a slowdown in consumption, including the declining stock of excess savings, softening labor market conditions, and increased price sensitivity on the part of customers. Some participants observed that recent increases in home prices suggested that the housing sector's response to monetary policy restraint may have peaked. In their discussion of the business sector, participants cited various improvements in firms' cost structures. These included better-functioning supply chains, lower input costs, and an increased ability to hire and retain workers. Participants also discussed conditions that could lead to higher economic activity—such as leaner inventories and reduced expectations of a sharp economic slowdown—and factors that could lead to lower economic activity—such as continuing economic uncertainty, the vulnerabilities of the CRE market, and the ongoing weakness of manufacturing output. Participants judged that, over coming quarters, firms would reduce the pace of their investment spending and hiring in response to tight financial conditions and the slowing of economic activity. Participants remarked that the labor market continued to be very tight but pointed to signs that demand and supply were coming into better balance. They noted evidence that labor demand was easing—including declines in job openings, lower quits rates, more part-time work, slower growth in hours worked, higher unemployment insurance claims, and more moderate rates of nominal wage growth. In addition, they remarked on indications of increasing labor supply, including a further rise in the prime-age participation rate to a post-pandemic high. Participants also observed, however, that although growth in payrolls had slowed recently, it continued to exceed values consistent over time with an unchanged unemployment rate, and that nominal wages were still rising at rates above levels assessed to be consistent with the sustained achievement of the Committee's 2 percent inflation objective. Participants judged that further progress toward a balancing of demand and supply in the labor market was needed, and they expected that additional softening in labor market conditions would take place over time. Participants cited a number of tentative signs that inflation pressures could be abating. These signs included some softening in core goods prices, lower online prices, evidence that firms were raising prices by smaller amounts than previously, slower increases in shelter prices, and recent declines in survey estimates of shorter-term inflation expectations and of inflation uncertainty. Various participants discussed the continued stability of longer-term inflation expectations at levels consistent with 2 percent inflation over time and the role that the Committee's policy tightening had played in delivering this outcome. Nonetheless, several participants commented that significant disinflationary pressures had yet to become apparent in the prices of core services excluding housing. Participants observed that, notwithstanding recent favorable developments, inflation remained well above the Committee's 2 percent longer-term objective and that elevated inflation was continuing to harm businesses and households—low-income families in particular. Participants stressed that the Committee would need to see more data on inflation and further signs that aggregate demand and aggregate supply were moving into better balance to be confident that inflation pressures were abating and that inflation was on course to return to 2 percent over time. Participants generally noted a high degree of uncertainty regarding the cumulative effects on the economy of past monetary policy tightening. Participants cited upside risks to inflation, including those associated with scenarios in which recent supply chain improvements and favorable commodity price trends did not continue or in which aggregate demand failed to slow by an amount sufficient to restore price stability over time, possibly leading to more persistent elevated inflation or an unanchoring of inflation expectations. In discussing downside risks to economic activity and inflation, participants considered the possibility that the cumulative tightening of monetary policy could lead to a sharper slowdown in the economy than expected, as well as the possibility that the effects of the tightening of bank credit conditions could prove more substantial than anticipated. In their discussion of financial stability, participants observed that the banking system was sound and resilient and that banking stress had calmed in recent months. Participants also noted that the most recent stress-test results indicated that large banks appeared to be well positioned to withstand a severe recession. Various participants commented on risks that could affect some banks, including unrealized losses on assets resulting from rising interest rates, significant reliance on uninsured deposits, and increased funding costs. Participants also commented on risks associated with a potential sharp decline in CRE valuations that could adversely affect some banks and other financial institutions, such as insurance companies, that are heavily exposed to CRE. Several participants noted the susceptibility of some nonbank financial institutions, such as money market funds or digital asset entities, to runs or instability. In addition, several participants emphasized the need for banks to establish readiness to use Federal Reserve liquidity facilities and for the Federal Reserve to ensure its own readiness to provide liquidity during periods of stress. In their consideration of appropriate monetary policy actions at this meeting, participants concurred that economic activity had been expanding at a moderate pace. The labor market remained very tight, with robust job gains in recent months and the unemployment rate still low, but there were continuing signs that supply and demand in the labor market were coming into better balance. Participants also noted that tighter credit conditions facing households and businesses were a source of headwinds for the economy and would likely weigh on economic activity, hiring, and inflation. However, the extent of these effects remained uncertain. Although inflation had moderated since the middle of last year, it remained well above the Committee's longer-run goal of 2 percent, and participants remained resolute in their commitment to bring inflation down to the Committee's 2 percent objective. Amid these economic conditions, almost all participants judged it appropriate to raise the target range for the federal funds rate to 5-1/4 to 5-1/2 percent at this meeting. Participants noted that this action would put the stance of monetary policy further into restrictive territory, consistent with reducing demand–supply imbalances in the economy and helping to restore price stability. A couple of participants indicated that they favored leaving the target range for the federal funds rate unchanged or that they could have supported such a proposal. They judged that maintaining the current degree of restrictiveness at this time would likely result in further progress toward the Committee's goals while allowing the Committee time to further evaluate this progress. All participants agreed that it was appropriate to continue the process of reducing the Federal Reserve's securities holdings, as described in its previously announced Plans for Reducing the Size of the Federal Reserve's Balance Sheet. A number of participants noted that balance sheet runoff need not end when the Committee eventually begins to reduce the target range for the federal funds rate. In discussing the policy outlook, participants continued to judge that it was critical that the stance of monetary policy be sufficiently restrictive to return inflation to the Committee's 2 percent objective over time. They noted that uncertainty about the economic outlook remained elevated and agreed that policy decisions at future meetings should depend on the totality of the incoming information and its implications for the economic outlook and inflation as well as for the balance of risks. Participants expected that the data arriving in coming months would help clarify the extent to which the disinflation process was continuing and product and labor markets were reaching a better balance between demand and supply. This information would be valuable in determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time. Participants also emphasized the importance of communicating as clearly as possible about the Committee's data-dependent approach to policy and its firm commitment to bring inflation down to its 2 percent objective. Participants discussed several risk-management considerations that could bear on future policy decisions. With inflation still well above the Committee's longer-run goal and the labor market remaining tight, most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy. Some participants commented that even though economic activity had been resilient and the labor market had remained strong, there continued to be downside risks to economic activity and upside risks to the unemployment rate; these included the possibility that the macroeconomic effects of the tightening in financial conditions since the beginning of last year could prove more substantial than anticipated. A number of participants judged that, with the stance of monetary policy in restrictive territory, risks to the achievement of the Committee's goals had become more two sided, and it was important that the Committee's decisions balance the risk of an inadvertent overtightening of policy against the cost of an insufficient tightening. Committee Policy Actions In their discussion of monetary policy for this meeting, members agreed that economic activity had been expanding at a moderate pace. They also concurred that job gains had been robust in recent months, and the unemployment rate had remained low. Inflation had remained elevated. Members concurred that the U.S. banking system was sound and resilient. They also agreed that tighter credit conditions for households and businesses were likely to weigh on economic activity, hiring, and inflation but that the extent of these effects was uncertain. Members also concurred that they remained highly attentive to inflation risks. In support of the Committee's objectives to achieve maximum employment and inflation at the rate of 2 percent over the longer run, members agreed to raise the target range for the federal funds rate to 5-1/4 to 5-1/2 percent. They also agreed that they would continue to assess additional information and its implications for monetary policy. In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, members concurred that they will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, members agreed to continue to reduce the Federal Reserve's holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. All members affirmed that they are strongly committed to returning inflation to their 2 percent objective. Members agreed that, in assessing the appropriate stance of monetary policy, they would continue to monitor the implications of incoming information for the economic outlook. They would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. Members also agreed that their assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments. At the conclusion of the discussion, the Committee voted to direct the Federal Reserve Bank of New York, until instructed otherwise, to execute transactions in the System Open Market Account in accordance with the following domestic policy directive, for release at 2:00 p.m.: "Effective July 27, 2023, 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 5-1/4 to 5-1/2 percent. Conduct standing overnight repurchase agreement operations with a minimum bid rate of 5.5 percent and with an aggregate operation limit of $500 billion. Conduct standing overnight reverse repurchase agreement operations at an offering rate of 5.3 percent and with a per-counterparty limit of $160 billion per day. Roll over at auction the amount of principal payments from the Federal Reserve's holdings of Treasury securities maturing in each calendar month that exceeds a cap of $60 billion per month. Redeem Treasury coupon securities up to this monthly cap and Treasury bills to the extent that coupon principal payments are less than the monthly cap. Reinvest into agency mortgage-backed securities (MBS) the amount of principal payments from the Federal Reserve's holdings of agency debt and agency MBS received in each calendar month that exceeds a cap of $35 billion per month. Allow modest deviations from stated amounts for reinvestments, if needed for operational reasons. Engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions." The vote also encompassed approval of the statement below for release at 2:00 p.m.: "Recent indicators suggest that economic activity has been expanding at a moderate pace. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated. The U.S. banking system is sound and resilient. Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 5-1/4 to 5-1/2 percent. The Committee will continue to assess additional information and its implications for monetary policy. In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2 percent objective. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments." Voting for this action: Jerome H. Powell, John C. Williams, Michael S. Barr, Michelle W. Bowman, Lisa D. Cook, Austan D. Goolsbee, Patrick Harker, Philip N. Jefferson, Neel Kashkari, Lorie K. Logan, and Christopher J. Waller. 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 of the Federal Reserve System voted unanimously to raise the interest rate paid on reserve balances to 5.4 percent, effective July 27, 2023. The Board of Governors of the Federal Reserve System voted unanimously to approve a 1/4 percentage point increase in the primary credit rate to 5.5 percent, effective July 27, 2023.6 It was agreed that the next meeting of the Committee would be held on Tuesday–Wednesday, September 19–20, 2023. The meeting adjourned at 10:05 a.m. on July 26, 2023. Notation Vote By notation vote completed on July 3, 2023, the Committee unanimously approved the minutes of the Committee meeting held on June 13–14, 2023. _______________________ Joshua Gallin Secretary 1. The Federal Open Market Committee is referenced as the "FOMC" and the "Committee" in these minutes; the Board of Governors of the Federal Reserve System is referenced as the "Board" in these minutes. Return to text 2. Attended through the discussion of the economic and financial situation and all of Wednesday's session. Return to text 3. Attended Tuesday's session only. Return to text 4. Attended through the discussion of developments in financial markets and open market operations. Return to text 5. Attended through the discussion of the economic and financial situation. Return to text 6. In taking this action, the Board approved requests to establish that rate submitted by the Boards of Directors of the Federal Reserve Banks of Boston, Philadelphia, Cleveland, Richmond, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco. The vote also encompassed approval by the Board of Governors of the establishment of a 5.5 percent primary credit rate by the remaining Federal Reserve Banks, effective on the later of July 27, 2023, or the date such Reserve Banks inform the Secretary of the Board of such a request. (Secretary's note: Subsequently, the Federal Reserve Banks of New York and Atlanta were informed of the Board's approval of their establishment of a primary credit rate of 5.5 percent, effective July 27, 2023.) Return to text

2023-07-05

Minute

Minutes of the Federal Open Market Committee June 13–14, 2023 A joint meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve System was held in the offices of the Board of Governors on Tuesday, June 13, 2023, at 10:30 a.m. and continued on Wednesday, June 14, 2023, at 9:00 a.m.1 Attendance Jerome H. Powell, Chair John C. Williams, Vice Chair Michael S. Barr Michelle W. Bowman Lisa D. Cook Austan D. Goolsbee Patrick Harker Philip N. Jefferson Neel Kashkari Lorie K. Logan Christopher J. Waller Thomas I. Barkin, Raphael W. Bostic, Mary C. Daly, and Loretta J. Mester, Alternate Members of the Committee James Bullard and Susan M. Collins, Presidents of the Federal Reserve Banks of St. Louis and Boston, respectively Kelly J. Dubbert, Interim President of the Federal Reserve Bank of Kansas City Joshua Gallin, Secretary Matthew M. Luecke, Deputy Secretary Brian J. Bonis, Assistant Secretary Michelle A. Smith, Assistant Secretary Mark E. Van Der Weide, General Counsel Richard Ostrander, Deputy General Counsel Trevor A. Reeve, Economist Stacey Tevlin, Economist Beth Anne Wilson, Economist Roc Armenter, James A. Clouse, Brian M. Doyle, Beverly J. Hirtle, Andrea Raffo, Chiara Scotti, and William Wascher, Associate Economists Roberto Perli, Manager, System Open Market Account Julie Ann Remache, Deputy Manager, System Open Market Account Jose Acosta, Senior Communications Analyst, Division of Information Technology, Board Gianni Amisano, Assistant Director, Division of Research and Statistics, Board Philippe Andrade, Senior Economist and Policy Advisor, Federal Reserve Bank of Boston Alyssa Arute,2 Manager, Division of Reserve Bank Operations and Payment Systems, Board Penelope A. Beattie,3 Section Chief, Office of the Secretary, Board Carol C. Bertaut, Senior Adviser, Division of International Finance, Board Jennifer J. Burns, Deputy Director, Division of Supervision and Regulation, Board Marco Cagetti, Assistant Director, Division of Research and Statistics, Board Mark A. Carlson, Adviser, Division of Monetary Affairs, Board Juan C. Climent, Special Adviser to the Board, Division of Board Members, Board Daniel M. Covitz, Deputy Director, Division of Research and Statistics, Board Stephanie E. Curcuru, Deputy Director, Division of International Finance, Board Ahmet Degerli, Economist, Division of Monetary Affairs, Board Cynthia L. Doniger, Principal Economist, Division of Monetary Affairs, Board Rochelle M. Edge, Deputy Director, Division of Monetary Affairs, Board Jon Faust, Senior Special Adviser to the Chair, Division of Board Members, Board Erin E. Ferris, Principal Economist, Division of Monetary Affairs, Board Jonas Fisher, Senior Vice President, Federal Reserve Bank of Chicago Glenn Follette, Associate Director, Division of Research and Statistics, Board Jennifer Gallagher, Assistant to the Board, Division of Board Members, Board Carlos Garriga, Senior Vice President, Federal Reserve Bank of St. Louis David Glancy,4 Principal Economist, Division of Monetary Affairs, Board Christopher J. Gust, Associate Director, Division of Monetary Affairs, Board Valerie S. Hinojosa, Section Chief, Division of Monetary Affairs, Board Jane E. Ihrig, Special Adviser to the Board, Division of Board Members, Board Michael T. Kiley, Deputy Director, Division of Financial Stability, Board Don H. Kim,2 Senior Adviser, Division of Monetary Affairs, Board Edward S. Knotek II, Senior Vice President, Federal Reserve Bank of Cleveland Andreas Lehnert, Director, Division of Financial Stability, Board Paul Lengermann, Assistant Director, Division of Research and Statistics, Board Kurt F. Lewis, Special Adviser to the Board, Division of Board Members, Board Geng Li, Assistant Director, Division of Research and Statistics, Board Laura Lipscomb, Special Adviser to the Board, Division of Board Members, Board Brent Meyer, Assistant Vice President, Federal Reserve Bank of Atlanta Bernardo C. Morais, Principal Economist, Division of International Finance, Board Michelle M. Neal, Head of Markets, Federal Reserve Bank of New York Edward Nelson, Senior Adviser, Division of Monetary Affairs, Board Nicolas Petrosky-Nadeau, Vice President, Federal Reserve Bank of San Francisco Achilles Sangster II, Senior Information Manager, Division of Monetary Affairs, Board Zeynep Senyuz, Deputy Associate Director, Division of Monetary Affairs, Board Margie Shanks, Deputy Secretary, Office of the Secretary, Board Nitish Ranjan Sinha, Special Adviser to the Board, Division of Board Members, Board A. Lee Smith, Senior Vice President, Federal Reserve Bank of Kansas City Hiroatsu Tanaka,5 Senior Economist, Division of Monetary Affairs, Board Mary H. Tian, Group Manager, Division of Monetary Affairs, Board Robert L. Triplett III, First Vice President, Federal Reserve Bank of Dallas Clara Vega, Special Adviser to the Board, Division of Board Members, Board Daniel J. Vine, Principal Economist, Division of Research and Statistics, Board Jeffrey D. Walker,2 Associate Director, Division of Reserve Bank Operations and Payment Systems, Board Fabian Winkler, Principal Economist, Division of Monetary Affairs, Board Alexander L. Wolman, Vice President, Federal Reserve Bank of Richmond Paul R. Wood, Special Adviser to the Board, Division of Board Members, Board Rebecca Zarutskie, Special Adviser to the Board, Division of Board Members, Board Developments in Financial Markets and Open Market Operations The manager turned first to a review of developments in financial markets. Policy-sensitive rates increased over the intermeeting period, reflecting indications of continued resilience in the economy, persistently elevated core inflation, and reduced downside tail risks following the resolution of the debt limit. The shift in policy expectations contributed significantly to higher Treasury yields. The increase in nominal yields primarily reflected higher real rates rather than inflation compensation. Broad equity prices rose, al­though the outperformance was concentrated in a handful of companies with a large market capitalization. Cyclical sectors fared better than sectors that tend to appreciate in a downturn, suggesting some reduced investor concern about downside risks to growth. Investor sentiment about the banking sector improved as perceived tail risks regarding regional banks appeared to have receded. Equity prices for regional banks rose over the intermeeting period but were still well below early March levels. Financial conditions indexes were roughly unchanged, as higher rates and a stronger dollar were offset by higher equity prices and narrower credit spreads. The vast majority of respondents to the Open Market Desk's Surveys of Primary Dealers and Market Participants expected no rate change at this meeting. While the median path from the surveys pointed to no rate changes through early 2024, there was significant dispersion across respondents, and respondents saw a clear probability of additional tightening at coming meetings. Respondents' average probability distribution for the level of the peak policy rate shifted higher since the May meeting and respondents on average assigned about 60 percent probability to the peak being above the current target range. The market-implied path for the policy rate continued to show some decline this year but less so than it had in recent months. Measures of uncertainty about the path of the policy rate derived from options remained very elevated, though they came down some over the intermeeting period. Desk survey respondents still saw a recession occurring in the near term as quite likely, but the expected timing was again pushed later, as economic data pointed to the continued resilience of economic activity. Overall, respondents generally continued to expect that any downturn would be neither deep nor prolonged. With regard to inflation expectations, respondents marked up their projections for quarterly core personal consumption expenditures (PCE) inflation in the second and third quarters of this year, while projections for later quarters were little changed. The manager then turned to money market developments and policy implementation. The median respondent to the Desk surveys expected the three-month bill yield to increase slightly relative to the similar-maturity overnight index swap (OIS) rate and to remain above it into the fourth quarter. This expectation likely reflected a combination of rising net supply of bills as part of the Treasury Department's plan to rebuild the Treasury General Account (TGA) following the resolution of the debt limit and expectations for healthy investor demand for bills. The overnight reverse repurchase agreement (ON RRP) facility, which continued to support effective policy implementation and control over the federal funds rate, saw somewhat lower participation since the resolution of the debt limit, consistent with the historical experience that ON RRP participation is typically responsive to changes in money market conditions. The median respondent to the Desk's Survey of Primary Dealers expected ON RRP participation to trend lower over the rest of this year. The staff assessed that the replenishment of the TGA and the ongoing balance sheet runoff, among other factors, were likely to subtract from reserves more than the decline in ON RRP participation would add to them. On net, the staff judged that reserves at the end of the year were likely to remain abundant. Uncertainty surrounding the outlooks for both reserves and ON RRP participation was substantial. 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 available at the time of the June 13–14 meeting suggested that real gross domestic product (GDP) was expanding at a modest pace in the second quarter. Labor market conditions remained tight in recent months, as job gains were robust and the unemployment rate was low. Consumer price inflation—as measured by the 12-month percent change in the price index for PCE—continued to be elevated in April. Labor market conditions remained tight in April and May. Total nonfarm payroll employment increased at a robust pace during those two months. The unemployment rate edged up, on net, but was still at a low level of 3.7 percent in May. On balance, the unemployment rate for African Americans moved up to 5.6 percent, while the jobless rate for Hispanics moved down to 4.0 percent. In aggregate, the labor force participation rate held steady in April and May, and the employment-to-population ratio ticked down. The private-sector job openings rate in April—as measured by the Job Openings and Labor Turnover Survey—was unchanged from its relatively high first-quarter average, though it was lower than a year earlier. Recent measures of nominal wage growth continued to be elevated, al­though lower than their highs last year. Over the 12 months ending in May, average hourly earnings for all employees increased 4.3 percent, below its peak of 5.9 percent early last year. Over the year ending in the first quarter, compensation per hour in the business sector increased 3.2 percent, down from 5.5 percent a year earlier. Consumer price inflation remained elevated. Total PCE price inflation had eased since the middle of last year, reflecting declines in consumer energy prices and softening consumer food price inflation, but recent readings for core PCE price inflation—which excludes changes in consumer energy prices and most consumer food prices and usually provides a better signal about future inflation than the more volatile total inflation measure—were little changed. Total PCE price inflation was 4.4 percent over the 12 months ending in April, and core PCE price inflation was 4.7 percent—the same as the 12-month percent change recorded in January. In May, the 12-month change in the consumer price index (CPI) was 4.0 percent, and core CPI inflation was 5.3 percent—only slightly below its January reading. The trimmed mean measure of 12‑month PCE price inflation constructed by the Federal Reserve Bank of Dallas was 4.8 percent in April. Survey-based measures of longer-term inflation expectations in May from the University of Michigan Surveys of Consumers and the Federal Reserve Bank of New York's Survey of Consumer Expectations remained within the range of their values reported in the decade before the pandemic; near-term measures of inflation expectations from these surveys moved down in May and continued to be below their peaks seen last year. Real GDP appeared to be increasing modestly in the second quarter following its stronger first-quarter gain. Private domestic final purchases (PDFP)—which includes PCE, residential investment, and business fixed investment and often provides a better signal of underlying economic momentum than GDP—looked to be expanding more slowly in the second quarter than its robust first-quarter pace. For the first half as a whole, PDFP growth seemed to be more resilient than in the second half of last year. The annual revisions to international trade statistics suggested that net exports contributed positively to U.S. real GDP growth in the first quarter, with real exports rebounding more strongly than real imports following their fourth-quarter declines. In April, however, the nominal trade deficit widened notably, as nominal exports decreased and nominal imports rose further. Foreign economic growth rebounded in the first quarter, reflecting in part the reopening of China's economy from its COVID-19-related shutdowns and strong services-sector activity in other Asian countries, Canada, and Mexico. In the euro area, however, real GDP contracted modestly for a second consecutive quarter amid a pullback in consumer spending. Indicators pointed to a step-down in the pace of foreign economic growth in the second quarter, with the impetus from China's reopening dissipating and global manufacturing activity remaining weak. Global prices for energy and agricultural commodities were little changed, on net, over the intermeeting period, while prices for metals fell further. Declines in retail energy prices since the beginning of the year contributed to a notable easing in headline consumer price inflation in the foreign economies. By contrast, core inflation had yet to materially decline from its recent highs in many economies. In this context, and with tight labor market conditions, foreign central banks underscored the need to raise policy rates further or hold them at sufficiently restrictive levels to bring inflation back to their respective targets and be well positioned in case inflation failed to decline as expected. Staff Review of the Financial Situation Over the intermeeting period, market participants appeared to interpret incoming data as signaling, on balance, more resilience in economic activity than previously assumed and viewed communications from FOMC participants overall as pointing to a tighter path for policy than expected. As a result, Treasury yields and the expected future path for the federal funds rate shifted upward significantly. Meanwhile, broad equity prices also increased notably. Financing conditions remained moderately restrictive, but credit availability generally remained solid. The expected path of the policy rate implied by market quotes moved up notably over the intermeeting period. A straight read of federal funds futures rates suggested that market participants expected that the federal funds rate would be roughly flat over the course of the rest of this year. The year-end expected rate was about 70 basis points higher than the year-end expectation before the May FOMC meeting. Beyond this year, the policy rate path implied by OIS quotes also moved up, to about 3.7 percent by the end of 2024. Similarly, nominal Treasury yields rose significantly. The rise in nominal yields mostly reflected an increase in real yields, as measures of inflation compensation were little changed, on net, amid somewhat mixed news on inflation. Measures of uncertainty about the path of interest rates remained very elevated by historical standards. The S&P 500 stock price index increased sizably, on net, over the intermeeting period, led by technology-related stocks. The VIX—the one-month option-implied volatility on the S&P 500 index—edged down, on balance, and ended the period near the 30th percentile of its historical distribution. Bank equity price indexes moved up notably, on net, over the intermeeting period. Stock prices for large banks were only somewhat below their levels before the failure of Silicon Valley Bank (SVB), while those for regional banks remained below their levels in early March. Market-based policy rate expectations rose notably in most advanced foreign economies, as core inflation data surprised to the upside in some countries and central bank communications were perceived as pointing to more restrictive policy than expected. Notwithstanding the rise in global yields, foreign equity prices, credit spreads, and risk sentiment in foreign markets were little changed over the intermeeting period. The staff's trade-weighted broad dollar index was also little changed, on net, but the exchange value of the dollar appreciated significantly against the Chinese renminbi amid increased investor concerns over China's economic growth prospects. Conditions in overnight bank funding and repurchase agreement markets remained generally stable over the intermeeting period. The 25 basis point increase in administered rates at the May FOMC meeting fully passed through to overnight money market rates. Spreads and issuance volumes in unsecured short-term funding markets stayed within their typical ranges. In May, yields of Treasury bills maturing in June and thus potentially affected by the federal debt limit rose sharply before largely retracing those increases after an agreement was reached to suspend the debt limit. In domestic credit markets, borrowing costs for businesses, households, and municipalities increased notably over the intermeeting period. Interest rates on newly originated bank loans to businesses and households in the first quarter rose further above their peaks from the previous tightening cycle, and yields on leveraged loans also rose, reaching levels close to their peak at the onset of the pandemic. Rates also moved up on a broad array of fixed-income securities, including investment- and speculative-grade corporate bonds, municipal bonds, both agency and non-agency commercial mortgage-backed securities (CMBS), and agency residential mortgage-backed securities. The increases in yields on these instruments over the intermeeting period were generally in line with, or less than, the changes in their Treasury benchmarks. Small businesses and households saw continued increases in their borrowing costs. Rates on 30-year conforming residential mortgages stepped up, broadly in line with increases in comparable-duration Treasury yields. Interest rates on credit card offers continued to rise through April, and auto loan interest rates moved sideways during the intermeeting period. Both credit card and auto loan interest rates stood at, or near, their highest levels since the Global Financial Crisis. Banks' ability to fund loans to businesses and consumers appeared to have stabilized in recent weeks but remained somewhat strained relative to before the closure of SVB in March. Al­though banks continued to experience outflows of core deposits, the pace of those outflows moderated substantially relative to March, suggesting some easing of bank funding pressures. Banks also continued to attract inflows of large time deposits, reflecting higher interest rates on new certificates of deposit. Total bank assets were little changed, on net, over the intermeeting period. In capital markets, funding had generally been resilient. Issuance of nonfinancial investment-grade corporate bonds rose at a robust pace in May after slowing in April, partly due to the "earnings blackout" period. Speculative-grade issuance increased in late April and in May but remained subdued by historical standards. Gross issuance of municipal bonds was solid in April and May. Conditions in the leveraged loan and CMBS markets were somewhat more strained. Leveraged loan issuance remained subdued, reflecting weak investor demand amid concerns over the credit worthiness of borrowers. Both agency and non-agency CMBS issuance volumes were low in May relative to pre-pandemic levels. In addition, for small businesses, credit availability continued to show signs of tightening. Credit remained easily available in the residential mortgage market for high credit score borrowers who met standard conforming loan criteria. For borrowers with lower scores, credit availability tightened slightly in April but remained close to pre-pandemic levels. In consumer credit markets, conditions stayed generally accommodative, with credit available for most borrowers. The credit quality of most businesses and households remained solid, although market participants appeared to expect some deterioration in the coming quarters, which could weaken lender balance sheets and possibly weigh on credit availability. A measure of the May CMBS delinquency rate showed about a 50 basis point increase, driven by a sharp rise in the delinquency rate for office buildings. Staff Economic Outlook The economic forecast prepared by the staff for the June FOMC meeting continued to assume that the effects of the expected further tightening in bank credit conditions, amid already tight financial conditions, would lead to a mild recession starting later this year, followed by a moderately paced recovery. Real GDP was projected to decelerate in the current quarter and the next one before declining modestly in both the fourth quarter of this year and first quarter of next year. Real GDP growth over 2024 and 2025 was projected to be below the staff's estimate of potential output growth. The unemployment rate was forecast to increase this year, peak next year, and remain near that level through 2025. Current tight resource utilization in both product and labor markets was forecast to ease, with the level of real output moving below the staff's estimate of potential output in 2025 and the unemployment rate rising above the staff's estimate of its natural rate at that time. The staff's inflation forecast was little revised relative to the previous projection, and supply–demand imbalances in both goods markets and labor markets were still judged to be easing only slowly. On a four-quarter change basis, total PCE price inflation was projected to be 3.0 percent this year, with core inflation at 3.7 percent. Core goods inflation was forecast to move down further this year and then remain subdued. Housing services inflation was considered to have about peaked and was expected to move down over the rest of the year. Core nonhousing services inflation was projected to slow gradually as nominal wage growth eased further. Reflecting the effects of the easing in resource utilization over the projection, core inflation was forecast to slow through next year but remain moderately above 2 percent. With expected declines in consumer energy prices and further moderation in food price inflation, total inflation was projected to run below core inflation this year and the next. In 2025, both total and core PCE price inflation were expected to be close to 2 percent. The staff continued to judge that uncertainty around the baseline projection was considerable and still viewed the risks as being influenced importantly by the potential macroeconomic implications of banking-sector developments, which could end up being more, or less, negative than assumed in the baseline. Given the continued strength in labor market conditions and the resilience of consumer spending, however, the staff saw the possibility of the economy continuing to grow slowly and avoiding a downturn as almost as likely as the mild‑recession baseline. On balance, the staff saw the risks around the baseline inflation forecast as tilted to the upside, as economic scenarios with higher inflation appeared more likely than scenarios with lower inflation and because inflation could continue to be more persistent than expected and inflation expectations could become unanchored after a long period of elevated inflation. Participants' Views on Current Conditions and the Economic Outlook In conjunction with this FOMC meeting, participants submitted their projections of the most likely outcomes for real GDP growth, the unemployment rate, and inflation for each year from 2023 through 2025 and over the longer run. The projections were based on their individual assessments of appropriate monetary policy, including the path of 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. A Summary of Economic Projections (SEP) was released to the public following the conclusion of the meeting. In their discussion of current economic conditions, participants noted that economic activity had continued to expand at a modest pace. Nonetheless, job gains had been robust in recent months, and the unemployment rate had remained low. Inflation remained elevated. Participants agreed that the U.S. banking system was sound and resilient. They commented that tighter credit conditions for households and businesses were likely to weigh on economic activity, hiring, and inflation. However, participants agreed that the extent of these effects remained uncertain. Against this background, participants concurred that they remained highly attentive to inflation risks. In assessing the economic outlook, most participants noted that real GDP growth had been resilient in recent quarters. Participants generally judged that growth would be subdued over the remainder of this year. They assessed that the cumulative tightening of monetary policy over the past year had contributed significantly to more restrictive financial conditions and lower demand in the most interest rate sensitive sectors of the economy, especially housing and business investment. Participants also acknowledged uncertainty about the lags with which monetary policy affects the economy and discussed the extent to which the full effects of monetary tightening on the economy had been realized. While total inflation had moderated over the past year, core inflation had not shown a sustained easing since the beginning of the year. With inflation well above the Committee's longer-run 2 percent objective, participants expected that a period of below-trend growth in real GDP and some softening in labor market conditions would be needed to bring aggregate supply and aggregate demand into better balance and reduce inflationary pressures sufficiently to return inflation to 2 percent over time. Participants generally noted that banking stresses had receded and conditions in the banking sector were much improved since early March. Participants generally continued to judge that a tightening in credit conditions spurred by banking-sector stress earlier in the year would likely weigh further on economic activity, but the extent remained uncertain. Several participants mentioned that credit conditions had not appeared to have tightened significantly beyond what would be expected in response to the monetary policy actions taken since early last year. Some participants judged that it was still too early to assess with confidence the eventual effects of tighter bank credit conditions on economic activity and noted that it would be important to monitor closely the potential effects of banking-sector developments on credit conditions and economic activity. In their discussion of the household sector, participants generally noted that consumer spending so far this year had been stronger than expected. Several participants noted that aggregate household wealth remained high, as equity and home prices had not declined much from their recent highs. A few participants mentioned that while, overall, the household sector still retained much of the excess savings it had accumulated during the pandemic, there were signs that consumers were facing increasingly tighter budget constraints, given high inflation and, especially for low-income households, depleted savings. Regarding the business sector, various participants said that reports from their contacts were mixed, with some pointing to softening economic conditions and others indicating greater-than-expected strength. Many participants noted that developments in the banking sector appeared to have had only a modest effect so far on credit availability for firms. Some participants remarked that the effect of high interest rates on the housing sector appeared to be bottoming out, with home sales, builder sentiment, and new construction all having improved a little since the start of the year. In their discussion of economic activity, several participants pointed out that recent GDP readings had been stronger than expected earlier in the year, while gross domestic income (GDI) readings had been weak. Of those who noted the discrepancy between GDP and GDI, most suggested that economic momentum may not be as strong as indicated by the GDP readings. In discussing that possibility, a couple of these participants also cited the recent subdued growth in aggregate hours worked. Participants noted that labor market conditions remained very tight, with robust payroll gains and the unemployment rate still near historically low levels. Nevertheless, they noted some signs that supply and demand in the labor market were coming into better balance, with the prime-age labor force participation rate moving up in recent months and further reductions in rates of job openings and quits, and declines in average weekly hours. A couple of participants conveyed that they heard at a recent Fed Listens event that, in various parts of the country, the lack of affordable housing in the area was preventing some lower-income workers from relocating to accept jobs. Similarly, a few participants noted that their District contacts reported less difficulty in hiring and retaining workers, lower turnover rates, and some layoffs. Some participants pointed out that payroll gains had remained robust but noted that some other measures of employment—such as those based on the Bureau of Labor Statistics' household survey, the Quarterly Census of Employment and Wages, or the Board staff's measure of private employment using data from the payroll processing firm ADP—suggested that job growth may have been weaker than indicated by payroll employment. Participants anticipated that employment growth would likely slow further, consistent with their projections of below-trend economic growth. Participants noted that nominal wage growth had shown signs of easing but observed that it was still running at a pace that, given current estimates of trend productivity growth, was above what would be consistent over the longer run with the Committee's 2 percent inflation objective. Participants expected supply and demand conditions in the labor market to come into better balance over time, easing pressures on wages and prices. Participants agreed that inflation was unacceptably high and noted that the data, including the CPI for May, indicated that declines in inflation had been slower than they had expected. Participants observed that although core goods inflation had moderated since the middle of last year, it had slowed less rapidly than expected in recent months, despite data and reports from business contacts indicating that supply chain constraints had continued to ease. Some participants noted the recent moderation in housing services inflation and expected this trend to continue. However, a few participants pointed to upside risks to the outlook for housing services inflation associated with near-record low inventories of homes for sale, solid housing demand, and less-than-expected deceleration recently in measures of rents for leases signed by new tenants. Additionally, some participants remarked that core nonhousing services inflation had shown few signs of slowing in the past few months. Several participants noted that longer-term measures of inflation expectations from surveys of households and businesses remained well anchored. Participants emphasized that, with appropriate firming of monetary policy, well-anchored longer-term inflation expectations would support a return of inflation to the Committee's 2 percent longer-run goal over time. Participants generally noted a high degree of uncertainty regarding the cumulative effects on the economy from both already-enacted monetary policy tightening and the potential additional tightening in credit conditions stemming from recent banking-sector developments. Participants noted that the full effects of monetary tightening had likely yet to be observed, though several highlighted the possibility that much of the effect of past monetary policy tightening may have already been realized. Regarding downside risks to economic activity, participants noted the possibility that the cumulative and rapid tightening of monetary policy would eventually affect economic activity more than expected, and that the additional effects of the tightening of bank credit conditions could prove more substantial than anticipated. Regarding risks to inflation, with inflation remaining well above the Committee's longer-run goal, some participants mentioned the possibility that longer-term inflation expectations could become unanchored, particularly in light of stronger-than-expected consumer demand and a still-tight labor market. Several participants cited the possibility of delayed effects of tighter credit conditions potentially contributing to a slowdown in economic activity that reduces inflationary pressures. In their consideration of appropriate monetary policy actions at this meeting, participants concurred that while inflation had moderated since the middle of 2022, it remained well above the Committee's longer-run goal of 2 percent. Economic activity had continued to expand at a modest pace. The labor market remained very tight, with robust job gains in recent months and the unemployment rate still low, but there were some signs that supply and demand in the labor market were coming into better balance. The economy was facing headwinds from tighter credit conditions, including higher interest rates, for households and businesses, which would likely weigh on economic activity, hiring, and inflation, al­though the extent of these effect remained uncertain. Against this backdrop, and in consideration of the significant cumulative tightening in the stance of monetary policy and the lags with which policy affects economic activity and inflation, almost all participants judged it appropriate or acceptable to maintain the target range for the federal funds rate at 5 to 5-1/4 percent at this meeting. Most of these participants observed that leaving the target range unchanged at this meeting would allow them more time to assess the economy's progress toward the Committee's goals of maximum employment and price stability. Some participants indicated that they favored raising the target range for the federal funds rate 25 basis points at this meeting or that they could have supported such a proposal. The participants favoring a 25 basis point increase noted that the labor market remained very tight, momentum in economic activity had been stronger than earlier anticipated, and there were few clear signs that inflation was on a path to return to the Committee's 2 percent objective over time. All participants agreed that it was appropriate to continue the process of reducing the Federal Reserve's securities holdings, as described in its previously announced Plans for Reducing the Size of the Federal Reserve's Balance Sheet. In discussing the policy outlook, all participants continued to anticipate that, with inflation still well above the Committee's 2 percent goal and the labor market remaining very tight, maintaining a restrictive stance for monetary policy would be appropriate to achieve the Committee's objectives. Almost all participants noted that in their economic projections that they judged that additional increases in the target federal funds rate during 2023 would be appropriate. Most participants observed that uncertainty about the outlook for the economy and inflation remained elevated and that additional information would be valuable for considering the appropriate stance of monetary policy. Many also noted that, after rapidly tightening the stance of monetary policy last year, the Committee had slowed the pace of tightening and that a further moderation in the pace of policy firming was appropriate in order to provide additional time to observe the effects of cumulative tightening and assess their implications for policy. Participants agreed that their policy decisions at every meeting would continue to be based on the totality of incoming information and its implications for the economic outlook as well as the balance of risks. They also emphasized the importance of communicating to the public their data-dependent approach. Most participants observed that postmeeting communications, including the SEP, would help clarify their assessment regarding the stance of monetary policy that is likely to be appropriate to bring inflation down to 2 percent over time. Participants also discussed several risk-management considerations that could bear on future policy decisions. Almost all participants stated that, with inflation still well above the Committee's longer-run goal and the labor market remaining tight, upside risks to the inflation outlook or the possibility that persistently high inflation might cause inflation expectations to become unanchored remained key factors shaping the policy outlook. Even though economic activity had been resilient recently and that the labor market remained strong, some participants commented that there continued to be downside risks to economic growth and upside risks to unemployment. Despite the receding of the stresses in the banking sector, some participants commented that it would be important to monitor whether developments in the banking sector lead to further tightening of credit conditions and weigh on economic activity. Some participants noted concerns about the potential risks stemming from weakness in commercial real estate. A number of participants observed that the resolution of the federal government debt limit had removed one source of significant uncertainty for the economic outlook. A few participants noted that there could be some upward pressure on money market rates in the near term as the Treasury issued more bills to meet expenditures and return the balance in the TGA to the Treasury's preferred level. Those participants observed that upward pressure on money market rates relative to the rate offered on the ON RRP facility could lead to a decline in usage of the facility. Committee Policy Actions In their discussion of monetary policy for this meeting, members agreed that economic activity had continued to expand at a modest pace. They also concurred that job gains had been robust in recent months, and the unemployment rate had remained low. Inflation had remained elevated. Members concurred that the U.S. banking system was sound and resilient. They also agreed that tighter credit conditions for households and businesses were likely to weigh on economic activity, hiring, and inflation, but that the extent of these effects was uncertain. Members also concurred that they remained highly attentive to inflation risks. Members agreed that the Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the members agreed to maintain the target range for the federal funds rate at 5 to 5-1/4 percent. Members agreed that holding the target range steady at this meeting allowed the Committee to assess additional information and its implications for monetary policy. In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, members concurred that they will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, members agreed that the Committee will continue to reduce the Federal Reserve's holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. All members affirmed that they are strongly committed to returning inflation to their 2 percent objective. Members agreed that, in assessing the appropriate stance of monetary policy, they would continue to monitor the implications of incoming information for the economic outlook. They would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. Members also agreed that their assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments. At the conclusion of the discussion, the Committee voted to direct the Federal Reserve Bank of New York, until instructed otherwise, to execute transactions in the System Open Market Account in accordance with the following domestic policy directive, for release at 2:00 p.m.: "Effective June 15, 2023, 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 5 to 5-1/4 percent. Conduct standing overnight repurchase agreement operations with a minimum bid rate of 5.25 percent and with an aggregate operation limit of $500 billion. Conduct standing overnight reverse repurchase agreement operations at an offering rate of 5.05 percent and with a per-counterparty limit of $160 billion per day. Roll over at auction the amount of principal payments from the Federal Reserve's holdings of Treasury securities maturing in each calendar month that exceeds a cap of $60 billion per month. Redeem Treasury coupon securities up to this monthly cap and Treasury bills to the extent that coupon principal payments are less than the monthly cap. Reinvest into agency mortgage-backed securities (MBS) the amount of principal payments from the Federal Reserve's holdings of agency debt and agency MBS received in each calendar month that exceeds a cap of $35 billion per month. Allow modest deviations from stated amounts for reinvestments, if needed for operational reasons. Engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions." The vote also encompassed approval of the statement below for release at 2:00 p.m.: "Recent indicators suggest that economic activity has continued to expand at a modest pace. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated. The U.S. banking system is sound and resilient. Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 5 to 5-1/4 percent. Holding the target range steady at this meeting allows the Committee to assess additional information and its implications for monetary policy. In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2 percent objective. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments." Voting for this action: Jerome H. Powell, John C. Williams, Michael S. Barr, Michelle W. Bowman, Lisa D. Cook, Austan D. Goolsbee, Patrick Harker, Philip N. Jefferson, Neel Kashkari, Lorie K. Logan, and Christopher J. Waller. Voting against this action: None. Consistent with the Committee's decision to leave the target range for the federal funds rate unchanged, the Board voted unanimously to maintain the interest rate paid on reserve balances at 5.15 percent, effective June 15, 2023. The Board also voted unanimously to approve the establishment of the primary credit rate at the existing level of 5.25 percent. It was agreed that the next meeting of the Committee would be held on Tuesday–Wednesday, July 25–26, 2023. The meeting adjourned at 10:20 a.m. on June 14, 2023. Notation Vote By notation vote completed on May 23, 2023, the Committee unanimously approved the minutes of the Committee meeting held on May 2–3, 2023. _______________________ Joshua Gallin Secretary 1. The Federal Open Market Committee is referenced as the "FOMC" and the "Committee" in these minutes; the Board of Governors of the Federal Reserve System is referenced as the "Board" 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 economic and financial situation and all of Wednesday's session. Return to text 4. Attended Tuesday's session only. Return to text 5. Attended from the discussion of the economic and financial situation through the end of Tuesday's session. Return to text

2023-06-14

Statement

Recent indicators suggest that economic activity has continued to expand at a modest pace. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated. The U.S. banking system is sound and resilient. Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 5 to 5-1/4 percent. Holding the target range steady at this meeting allows the Committee to assess additional information and its implications for monetary policy. In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2 percent objective. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments. Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Michelle W. Bowman; Lisa D. Cook; Austan D. Goolsbee; Patrick Harker; Philip N. Jefferson; Neel Kashkari; Lorie K. Logan; and Christopher J. Waller. For media inquiries, please email [email protected] or call 202-452-2955. Implementation Note issued June 14, 2023

2023-05-03

Statement

Economic activity expanded at a modest pace in the first quarter. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated. The U.S. banking system is sound and resilient. Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 5 to 5-1/4 percent. The Committee will closely monitor incoming information and assess the implications for monetary policy. In determining the extent to which additional policy firming may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2 percent objective. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments. Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Michelle W. Bowman; Lisa D. Cook; Austan D. Goolsbee; Patrick Harker; Philip N. Jefferson; Neel Kashkari; Lorie K. Logan; and Christopher J. Waller. For media inquiries, please email [email protected] or call 202-452-2955. Implementation Note issued May 3, 2023

2023-05-24

Minute

Minutes of the Federal Open Market Committee May 2-3, 2023 A joint meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve System was held in the offices of the Board of Governors on Tuesday, May 2, 2023, at 10:00 a.m. and continued on Wednesday, May 3, 2023, at 9:00 a.m.1 Attendance Jerome H. Powell, Chair John C. Williams, Vice Chair Michael S. Barr Michelle W. Bowman Lisa D. Cook Austan D. Goolsbee Patrick Harker Philip N. Jefferson Neel Kashkari Lorie K. Logan Christopher J. Waller Thomas I. Barkin, Raphael W. Bostic, Mary C. Daly, Loretta J. Mester, and Sushmita Shukla, Alternate Members of the Committee James Bullard and Susan M. Collins, Presidents of the Federal Reserve Banks of St. Louis and Boston, respectively Kelly J. Dubbert, Interim President of the Federal Reserve Bank of Kansas City Joshua Gallin, Secretary Matthew M. Luecke, Deputy Secretary Brian J. Bonis, Assistant Secretary Michelle A. Smith, Assistant Secretary Mark E. Van Der Weide, General Counsel Richard Ostrander, Deputy General Counsel Trevor A. Reeve, Economist Stacey Tevlin, Economist Beth Anne Wilson, Economist Shaghil Ahmed, James A. Clouse, Anna Paulson, Andrea Raffo, Chiara Scotti, and William Wascher, Associate Economists Roberto Perli, Manager, System Open Market Account Julie Ann Remache, Deputy Manager, System Open Market Account Stephanie R. Aaronson,2 Senior Associate Director, Division of Research and Statistics, Board Jose Acosta, Senior Communications Analyst, Division of Information Technology, Board Andre Anderson, First Vice President, Federal Reserve Bank of Atlanta Kartik B. Athreya, Executive Vice President, Federal Reserve Bank of Richmond Penelope A. Beattie,2 Section Chief, Office of the Secretary, Board Daniel O. Beltran, Deputy Associate Director, Division of International Finance, Board Carol C. Bertaut, Senior Adviser, Division of International Finance, Board Mark A. Carlson,2 Adviser, Division of Monetary Affairs, Board Michele Cavallo, Principal Economist, Division of Monetary Affairs, Board Juan C. Climent, Special Adviser to the Board, Division of Board Members, Board Stephanie E. Curcuru, Deputy Director, Division of International Finance, Board Ahmet Degerli, Economist, Division of Monetary Affairs, Board John C. Driscoll,2 Principal Economist, Division of Research and Statistics, Board Wendy E. Dunn,2 Adviser, Division of Research and Statistics, Board Burcu Duygan-Bump, Associate Director, Division of Research and Statistics, Board Rochelle M. Edge, Deputy Director, Division of Monetary Affairs, Board Matthew J. Eichner,3 Director, Division of Reserve Bank Operations and Payment Systems, Board Eric C. Engstrom, Associate Director, Division of Monetary Affairs, Board Jon Faust, Senior Special Adviser to the Chair, Division of Board Members, Board Giovanni Favara, Assistant Director, Division of Monetary Affairs, Board Glenn Follette, Associate Director, Division of Research and Statistics, Board Jennifer Gallagher, Assistant to the Board, Division of Board Members, Board Peter M. Garavuso, Senior Information Manager, Division of Monetary Affairs, Board Carlos Garriga, Senior Vice President, Federal Reserve Bank of St. Louis Michael S. Gibson, Director, Division of Supervision and Regulation, Board Christine Graham,2 Special Adviser to the Board, Division of Board Members, Board Joseph W. Gruber, Executive Vice President, Federal Reserve Bank of Kansas City Valerie S. Hinojosa, Section Chief, Division of Monetary Affairs, Board Jane E. Ihrig, Special Adviser to the Board, Division of Board Members, Board Ghada M. Ijam, System Chief Information Officer, Federal Reserve Bank of Richmond Michael T. Kiley, Deputy Director, Division of Financial Stability, Board Kyungmin Kim, Senior Economist, Division of Monetary Affairs, Board David E. Lebow, Senior Associate Director, Division of Research and Statistics, Board Sylvain Leduc, Director of Research, Federal Reserve Bank of San Francisco Andreas Lehnert, Director, Division of Financial Stability, Board Kurt F. Lewis, Special Adviser to the Board, Division of Board Members, Board Laura Lipscomb, Special Adviser to the Board, Division of Board Members, Board David López-Salido, Senior Associate Director, Division of Monetary Affairs, Board Kurt Lunsford, Senior Research Economist, Federal Reserve Bank of Cleveland Patrick E. McCabe, Deputy Associate Director, Division of Research and Statistics, Board Davide Melcangi, Research Economist, Federal Reserve Bank of New York Ann E. Misback, Secretary, Office of the Secretary, Board David Na, Lead Financial Institution and Policy Analyst, Division of Monetary Affairs, Board Makoto Nakajima, Vice President, Federal Reserve Bank of Philadelphia Michelle M. Neal, Head of Markets, Federal Reserve Bank of New York Giovanni Olivei, Senior Vice President, Federal Reserve Bank of Boston Michael G. Palumbo, Senior Associate Director, Division of Research and Statistics, Board Marcel A. Priebsch, Principal Economist, Division of Monetary Affairs, Board Nitish Ranjan Sinha, Special Adviser to the Board, Division of Board Members, Board John J. Stevens, Senior Associate Director, Division of Research and Statistics, Board Paula Tkac, Senior Vice President, Federal Reserve Bank of Atlanta Clara Vega, Special Adviser to the Board, Division of Board Members, Board Annette Vissing-Jørgensen, Senior Adviser, Division of Monetary Affairs, Board Jeffrey D. Walker,3 Associate Director, Division of Reserve Bank Operations and Payment Systems, Board Min Wei,2 Senior Associate Director, Division of Monetary Affairs, Board Paul R. Wood, Special Adviser to the Board, Division of Board Members, Board Rebecca Zarutskie, Special Adviser to the Board, Division of Board Members, Board Developments in Financial Markets and Open Market Operations The manager turned first to a review of developments in financial markets. Asset prices were less volatile and financial market conditions eased somewhat over the intermeeting period as investor sentiment around the banking system stabilized. On net, nominal Treasury yields declined, equities appreciated, credit spreads tightened, and the trade-weighted value of the dollar depreciated. Measures of implied volatility declined across markets. Policy-sensitive rates, however, fluctuated a fair amount over the period, particularly in response to economic data but also because of market perceptions of risk and liquidity conditions. Treasury market liquidity improved somewhat over the period but remained challenged. Treasury cash and futures markets continued to function in an orderly manner despite the lower-than-normal liquidity. Regarding developments late in the intermeeting period, the closure and acquisition of First Republic Bank were seen as orderly, though investors remained focused on stresses in the banking sector. In addition, the U.S. Treasury Department announced it may not be able to fully satisfy the federal government's obligations as early as June 1 if the debt limit is not raised or suspended, but that the actual date this event would occur might come a number of weeks later. Yields on Treasury bills and coupon securities maturing in the first half of June increased notably amid significant volatility. Deposit outflows from small and mid-sized banks largely stopped in late March and April. Al­though equity prices for regional banks fell further over the period, for the vast majority of banks these declines appeared primarily to reflect expectations for lower profitability rather than solvency concerns. Market participants remained alert to the possibility of another intensification of banking stress. Responses to the Open Market Desk's Survey of Primary Dealers and Survey of Market Participants suggest that investors' macroeconomic outlooks were little changed from March despite ongoing focus on the implications of the expected tightening of credit. Respondents saw upside inflation risks, albeit less than in March. Market participants broadly expected a 25 basis point rate increase at the May meeting and saw the resulting rate as the likely peak for the current tightening cycle. Survey respondents assigned a much higher probability to the peak federal funds rate being between 5 and 5.25 percent than they did in March. However, respondents still assigned a substantial probability that the peak rate may turn out to be above 5.25 percent. Respondents expected the peak rate to be maintained through the January 2024 FOMC meeting. Regarding the balance sheet and money markets, balance sheet runoff continued to proceed smoothly and overnight secured and unsecured rates continued to trade well within the target range for the federal funds rate. Respondents to the Desk's surveys generally expected that overnight reverse repurchase agreement (ON RRP) balances will remain elevated in the near term before declining later this year. The ON RRP facility continued to support effective policy implementation and control over the federal funds rate, providing a strong floor for money market rates. Balances at the ON RRP facility remained within their recent range, indicating that use of the facility was not an important factor driving outflows of deposits from the banking system. Use of the ON RRP facility declined at times over the intermeeting period in response to increases in rates on overnight secured money market instruments and on short-term Federal Home Loan Bank debt. 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 occur 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 available at the time of the May 2‍–‍3 meeting indicated that real gross domestic product (GDP) had expanded at a modest pace in the first quarter. Labor market conditions remained tight in March, as job gains were robust and the unemployment rate was low. Consumer price inflation—as measured by the 12‑month percent change in the price index for personal consumption expenditures (PCE)—continued to be elevated in March. Limited data were available on economic activity during the period after the onset of banking-sector stress in mid-March, al­though several recent surveys—such as the Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS) in April, the National Federation of Independent Business's survey in March, and the Federal Reserve Bank of New York's Survey of Consumer Expectations in March—indicated that bank credit conditions were tightening further. The pace of increases in total nonfarm payroll employment slowed in March but was still robust, and the unemployment rate ticked down to 3.5 percent. The unemployment rate for African Americans fell to 5.0 percent, and the jobless rate for Hispanics dropped to 4.6 percent. The aggregate measures of both the labor force participation rate and the employment-to-population ratio edged up. The private-sector job openings rate—as measured by the Job Openings and Labor Turnover Survey—moved down markedly during February and March but remained high. Recent measures of nominal wage growth continued to ease from their peaks recorded last year but were still elevated. Over the 12 months ending in March, average hourly earnings for all employees rose 4.2 percent, well below its peak of 5.9 percent a year earlier. Over the year ending in March, the employment cost index (ECI) for private-sector workers increased 4.8 percent, down from its peak of 5.5 percent over the year ending in June of last year. Consumer price inflation remained elevated in March but continued to slow. Total PCE price inflation was 4.2 percent over the 12 months ending in March, and core PCE price inflation—which excludes changes in consumer energy prices and many consumer food prices—was 4.6 percent; the total inflation measure was down markedly from its level in January, while the core measure was only slightly lower. The trimmed mean measure of 12-month PCE price inflation constructed by the Federal Reserve Bank of Dallas was 4.7 percent in March. The latest survey-based measures of longer-term inflation expectations from the University of Michigan Surveys of Consumers in April and the Federal Reserve Bank of New York's Survey of Consumer Expectations in March remained within the range of their values reported in recent months; near-term measures of inflation expectations from these surveys moved up but were still below their peaks seen last year. Real GDP growth was modest in the first quarter, led by an increase in PCE. Gains in consumer spending picked up for the quarter as a whole, driven by a surge in January that was followed by a small net decline over February and March. Light motor vehicle sales, however, picked up notably in April. Growth in business fixed investment slowed further in the first quarter, and new orders for nondefense capital goods excluding aircraft continued to decline in March, pointing to weakness in capital goods shipments in the near term. Residential investment declined further in the first quarter but at a slower pace than last year. Net exports made a small positive contribution to GDP growth in the first quarter, as exports rebounded more strongly than imports from their fourth-quarter declines. U.S. manufacturing output fell in March, and near-term indicators—such as national and regional indexes for new orders—pointed to more softening in factory output in the coming months. Foreign economic activity rebounded in the first quarter, reflecting the reopening of China's economy from its COVID-19-related shutdowns, a pickup in the economies of Canada and Mexico, and the resilience of Europe's economy to the energy price shock from Russia's war on Ukraine; a mild winter also helped reduce energy demand in Europe. In contrast, economic growth elsewhere in emerging Asia was weak in the first quarter mainly due to a pronounced tech-cycle slowdown. Oil prices edged down amid concerns about the global economic outlook. A slowing of retail energy inflation continued to contribute to an easing of headline consumer price inflation in many advanced foreign economies (AFEs). Core inflation showed signs of easing in some foreign economies but remained persistently elevated amid tight labor markets. Accordingly, many foreign central banks continued their monetary policy tightening. That said, some central banks paused their policy rate increases or altered their forward guidance amid uncertainty about the global economic outlook and the recent banking-sector stress. Some also signaled a shift toward a more data-dependent approach in future decisions. Staff Review of the Financial Situation Market sentiment improved over the intermeeting period, with concerns about a sharp near-term deceleration in economic activity appearing to recede as stress in the banking sector declined. The market-implied path for the federal funds rate in 2023 increased modestly over the period. Broad equity price indexes increased, al­though equity prices of some regional banks were lower, and equity market volatility declined. Financing conditions continued to be restrictive, and borrowing costs remained elevated. Over the intermeeting period, the market-implied path for the federal funds rate in 2023 rose modestly, partially unwinding the sharp decline observed in early March due to the banking-sector stress. For 2024 and 2025, the implied policy path based on overnight index swaps fluctuated amid mixed economic data releases, and declined slightly on net. Yields on nominal Treasury securities with maturities greater than one year moved lower, and inflation compensation at medium- and long-term horizons edged down slightly. Measures of uncertainty about the path of interest rates declined modestly but remained substantially elevated by historical standards. Broad stock price indexes increased moderately, and the VIX—the one-month option-implied volatility on the S&P 500—decreased notably over the intermeeting period. However, market participants remained attentive to developments at regional banks. Equity prices at such banks broadly declined over the intermeeting period in part because of higher funding costs, as well as concerns about profitability and a possible deterioration in the performance of commercial real estate (CRE) loans. Risk sentiment in foreign financial markets also improved, on net, over the intermeeting period amid reduced investor concerns about the banking sector, leading to moderate increases in broad equity indexes and declines in option-implied measures of equity volatility. That said, equity prices for euro-area banks declined somewhat, on net, and remained significantly lower than their levels before the onset of banking stresses in early March. Market expectations of policy rates and sovereign yields were little changed in most AFEs but rose notably in the U.K., in part because of higher-than-expected wage and inflation data. The dollar continued its earlier depreciation as differentials between U.S. and AFE sovereign yields narrowed and global risk sentiment improved. Outflows from funds dedicated to emerging markets slowed to near zero over the intermeeting period, while sovereign credit spreads for emerging market economies were little changed on net. U.S. markets for commercial paper (CP) and negotiable certificates of deposit (NCDs) stabilized over the intermeeting period. Spreads for lower-rated nonfinancial CP, which spiked following Silicon Valley Bank's closure, narrowed significantly. Outstanding levels of CP and NCDs increased modestly over the intermeeting period, while the share of short-maturity unsecured issuance of CP and NCDs fell to normal levels, reflecting a net easing of stress associated with regional banks. Conditions in overnight bank funding and repurchase agreement markets remained stable over the intermeeting period, and the increase of 25 basis points in the Federal Reserve's administered rates following the March FOMC meeting fully passed through to overnight money market rates. The effective federal funds rate printed at 4.83 percent every day during the period, while the Secured Overnight Financing Rate averaged 4.81 percent—slightly above the offering rate at the ON RRP facility. Daily take-up in the ON RRP facility remained elevated, reflecting continued significant usage by money market mutual funds, ongoing uncertainty around the policy path, and limited supply of alternative investments such as Treasury bills. In domestic credit markets, borrowing costs for businesses and households eased modestly in some markets but remained at elevated levels. Over the intermeeting period, yields on corporate bonds declined moderately, and yields on agency residential mortgage-backed securities and 30-year conforming residential mortgage rates moved a little lower. However, interest rates on short-term small business loans continued to rise through March and reached their highest levels since the Global Financial Crisis. Credit flows for businesses and households slowed moderately, as high borrowing costs and market volatility amid stress in the banking sector appeared to weigh on financing volumes in some markets. While issuance of nonfinancial corporate bonds and leveraged loans slowed notably in mid-March amid stress in the banking sector, issuance normalized over the intermeeting period as that stress abated later in the month and broader market sentiment rebounded. In April, speculative-grade nonfinancial bond issuance was solid, while investment-grade nonfinancial bond issuance was subdued, in part due to seasonal factors. Growth in commercial and industrial (C&I) loans on banks' books was weak in the first quarter of 2023 relative to its pace in 2022. In the April SLOOS, banks reported further tightening of standards for most loan categories over the past three months, following widespread tightening in previous quarters. Banks of all sizes expected their lending standards to tighten further for the rest of 2023. The most cited reason for tightening C&I standards and terms was a less favorable or more uncertain economic outlook. Mid-sized banks—those that have total consolidated assets in the range of $50 billion to $250 billion—tightened C&I standards more than other banks and additionally reported that a deterioration in their current or expected liquidity position was an important reason for their tightening. Such banks account for a bit over one-fourth of C&I lending. Banks of all sizes expected to tighten C&I standards further over the remainder of the year, with small and mid-sized banks more widely reporting this expectation. Al­though CRE loan growth on banks' balance sheets remained robust in the first quarter, the April SLOOS indicated that loan standards across all CRE loan categories tightened further in the first quarter. The reported tightening in standards over the first quarter was particularly widespread for mid-sized banks. Banks also reported that they expected to tighten CRE standards further over the remainder of the year, with mid-sized banks very broadly reporting this expectation. Meanwhile, commercial mortgage-backed securities (CMBS) issuance was very slow in February and March, amid higher spreads and volatility as well as tighter lending standards. Credit remained broadly available in the residential mortgage market for high-credit-score borrowers who met standard conforming loan criteria, but credit availability for households with lower credit scores remained tight. In the April SLOOS, the net percentages of banks reporting tighter standards for all consumer loan categories during the first quarter were elevated relative to their historical range, and respondents expected that standards would continue to tighten over the remainder of 2023. Even so, consumer loans grew at a robust pace in the first quarter, with a continued strong expansion in revolving credit balances. Overall, the credit quality of most businesses and households remained solid but deteriorated somewhat for businesses with lower credit ratings and for households with lower credit scores. The credit quality of C&I and CRE loans on banks' balance sheets remained sound as of the end of the fourth quarter of last year. However, in the April SLOOS, banks frequently cited concerns about a deterioration in the quality of their loan portfolios as a reason for expecting to tighten standards over the remainder of the year. The staff provided an update on its assessment of the stability of the financial system. The staff judged that the banking system was sound and resilient despite concerns about profitability at some banks. The staff judged that asset valuation pressures remained moderate. In particular, the staff noted that the equity risk premium and corporate bond spreads declined over the past few months but remained near historical medians. Valuations in both residential and commercial property markets remained elevated. Rising borrowing costs had contributed to a moderation of price pressures in housing markets, and year-over-year house price increases had decelerated. The staff noted that the CRE sector remained vulnerable to large price declines. This possibility seemed particularly salient for office and downtown retail properties given the shift toward telework in many industries. The staff also noted analysis that found that while losses to CRE debt holders could be moderate in aggregate, some banks and the CMBS market could experience stress should prices of these properties decline significantly. The staff assessed that vulnerabilities associated with household leverage remained at moderate levels. For nonfinancial businesses, debt relative to nominal GDP declined some but continued to be near a historically high level. The ability of nonfinancial firms to service their debt kept pace with rising debt loads and interest rates. In terms of financial-sector leverage, going into the period of recent bank stress, banks of all sizes appeared strong, with substantial loss-absorbing capacity as measured by regulatory capital ratios well above levels that prevailed before the Great Recession. However, the ratio of tangible common equity to total tangible assets at banks—excluding global systemically important banks—had fallen sharply in recent quarters, partly because of a substantial drop in the value of securities held in their portfolios. The majority of the banking system had been able to effectively manage this interest rate risk exposure. However, the failure of three banks resulting from poor interest rate risk and liquidity risk management had put stress on some additional banks. For the nonbank sector, leverage at large hedge funds remained somewhat elevated in the third quarter of 2022, and more recent data from the Senior Credit Officer Opinion Survey on Dealer Financing Terms suggested this fact had not changed. With regard to vulnerabilities associated with funding risks, the staff assessed that al­though funding strains had been notable for some banks, such strains remained low for the banking system as a whole, especially in light of official interventions by the Federal Reserve, the Federal Deposit Insurance Corporation, and the U.S. Department of Treasury to support bank depositors. Outflows of funds from bank deposits in mid-March, which were concentrated at a limited number of banks, had slowed. Staff Economic Outlook The economic forecast prepared by the staff for the May FOMC meeting continued to assume that the effects of the expected further tightening in bank credit conditions, amid already tight financial conditions, would lead to a mild recession starting later this year, followed by a moderately paced recovery. Real GDP was projected to decelerate over the next two quarters before declining modestly in both the fourth quarter of this year and the first quarter of next year. Real GDP growth over 2024 and 2025 was projected to be below the staff's estimate of potential output growth. The unemployment rate was forecast to increase this year, to peak next year, and then to start declining gradually in 2025. Resource utilization in both product and labor markets was forecast to loosen, with the level of real output moving below the staff's estimate of potential output in early 2024 and the unemployment rate rising above the staff's estimate of its natural rate at that time. The staff's core inflation forecast was revised up a little relative to the previous projection. Recent data for core PCE goods prices and the ECI measure of wage growth—the latter of which importantly influences the staff's projection of core nonhousing services inflation—came in above expectations, and the staff judged that supply–demand imbalances in both goods markets and labor markets were easing a bit more slowly than anticipated. On a four-quarter change basis, total PCE price inflation was projected to be 3.1 percent this year, with core inflation at 3.8 percent. Core goods inflation was projected to move down further this year and then remain subdued, housing services inflation was expected to have about peaked in the first quarter and to move down over the rest of the year, and core nonhousing services inflation was forecast to slow gradually as nominal wage growth eased further. Reflecting the projected effects of less tightness in resource utilization, core inflation was forecast to slow through next year but remain moderately above 2 percent. With expected declines in consumer energy prices and a substantial moderation in food price inflation, total inflation was projected to run below core inflation this year and next. In 2025, both total and core PCE price inflation were expected to be at about 2 percent. The staff continued to judge that uncertainty around the baseline projection was considerable and still viewed risks as being determined importantly by the implications for macroeconomic conditions of developments in the banking sector. If banking-sector stress were to abate more quickly or have less of an effect on macroeconomic conditions than assumed in the baseline, then the risks would be tilted to the upside for economic activity and inflation, a scenario that the staff viewed as only a little less likely than the baseline. If banking and financial conditions and their effects on macroeconomic conditions were to deteriorate more than assumed in the baseline, then the risks around the baseline would be skewed to the downside for economic activity and inflation. On balance, the staff saw the risks around the baseline inflation forecast as tilted to the upside, as an upside economic scenario with higher inflation appeared more likely than a downside scenario with lower inflation, and because inflation could continue to be more persistent than expected and inflation expectations could become unanchored after a long period of elevated inflation. Participants' Views on Current Conditions and the Economic Outlook In their discussion of current economic conditions, participants noted that economic activity had expanded at a modest pace in the first quarter. Nonetheless, job gains had been robust in recent months, and the unemployment rate had remained low. Inflation remained elevated. Participants agreed that the U.S. banking system was sound and resilient. They commented that tighter credit conditions for households and businesses were likely to weigh on economic activity, hiring, and inflation. However, participants agreed that the extent of these effects remained uncertain. Against this background, participants concurred that they remained highly attentive to inflation risks. In assessing the economic outlook, participants noted that the growth rate of real GDP in the first quarter of this year was modest despite a pickup in consumer spending, as inventory investment—a volatile category—declined substantially. Participants generally expected real GDP to grow at a pace below its longer-run trend rate in 2023, reflecting the effects of restrictive financial conditions. Participants assessed that the cumulative tightening of monetary policy over the past year had contributed significantly to more restrictive financial conditions. They also judged that banking-sector stress would likely weigh further on economic activity, but the extent to which that would be the case remained highly uncertain. With inflation well above the Committee's longer-run 2 percent objective, and core inflation showing only some signs of moderation, participants expected that a period of below-trend growth in real GDP and some softening in labor market conditions would be needed to bring aggregate supply and aggregate demand into better balance and reduce inflationary pressures over time. Participants generally noted that the actions taken by the Federal Reserve and other government agencies in response to developments in the banking sector had been effective in largely reducing stress. They noted that conditions in the banking sector had broadly improved since early March, with the initial deposit outflows experienced by some regional and smaller banks moderating substantially over subsequent weeks. Many participants commented that the recent developments in the banking sector had contributed to some tightening of lending standards beyond that which had occurred during previous quarters, especially among small and mid-sized banks. Some participants noted that small businesses tend to rely on small and mid-sized banks as primary sources of credit and therefore may disproportionally bear the effects of tighter lending conditions. Some participants mentioned that access to credit had not yet appeared to have declined significantly since the recent onset of stress in the banking sector. Participants judged that stress in the banking sector would, in coming quarters, likely induce banks to tighten lending standards by more than they would have in response to higher interest rates alone. However, participants generally noted that it was too early to assess with confidence the magnitude and persistence of these effects on economic activity. In their discussion of the household sector, participants noted that consumer spending showed strength in the first quarter, supported by gains in personal disposable income. They also remarked that the quarterly strength was driven mainly by very strong spending growth in January, while real spending fell modestly over February and March. Consistent with that slowing, participants anticipated that consumer spending would likely grow at a subdued rate over the remainder of 2023, reflecting in large part the effects of the tightening in financial conditions over the past year. Participants remarked that higher interest rates would continue to restrain interest-sensitive expenditures by households, such as those on housing and durable goods. Participants also noted that the rise in uncertainty associated with recent developments in the banking sector could weigh on consumer sentiment and spending. However, several participants observed that high-frequency measures of consumer sentiment had not yet shown significant changes following the banking-sector developments. A few participants remarked that there had been some ongoing reduction in consumers' discretionary expenditures in the face of elevated inflation and higher borrowing rates, especially among lower- and middle-income households; some of those declines were reportedly driven by shifts in purchases toward lower-cost options. Regarding the business sector, participants observed that growth in business fixed investment was subdued in the first quarter, reflecting relatively high borrowing costs, weak growth of business-sector output, and businesses' increasing concerns about the general economic outlook. Participants expected the tightening of bank lending standards to weigh further on firms' capital expenditures. Several participants noted that, based on reports from their District contacts, concerns related to banking-sector stress could add more uncertainty to an already soft economic outlook, increasing firms' caution, especially at smaller and mid-sized firms that rely heavily on bank credit to finance their operations. However, some other participants mentioned that developments in the banking sector appeared to have had only a modest effect so far on credit availability for firms. Participants noted that the labor market remained very tight, with robust payroll gains in March and an unemployment rate near historically low levels. Nevertheless, they noted some signs that the imbalance of supply and demand in the labor market was easing, with prime-age labor force participation returning to its pre-pandemic level and further reductions in the rates of job openings and quits. In addition, some participants noted that their District contacts reported less difficulty in hiring, lower turnover rates, and some layoffs. Participants anticipated that employment growth would likely slow further, reflecting a moderation in aggregate demand coming partly from tighter credit conditions. Participants remarked that al­though nominal wage growth appeared to be slowing gradually, it was still running at a pace that, given current estimates of trend productivity growth, was well above what would be consistent over the longer run with the Committee's 2 percent inflation objective. Participants generally anticipated that under appropriate monetary policy, imbalances in the labor market would gradually diminish, easing pressures on wages and prices. Participants agreed that inflation was unacceptably high. They commented that data through March indicated that declines in inflation, particularly for measures of core inflation, had been slower than they had expected. Participants observed that al­though core goods inflation had moderated since the middle of last year, it had decelerated less rapidly than expected in recent months, despite reports from several business contacts of supply chain constraints continuing to ease. Additionally, participants emphasized that core nonhousing services inflation had shown few signs of slowing in the past few months. Some participants remarked that a further easing in labor market conditions would be needed to help bring down inflation in this component. Regarding housing services inflation, participants observed that soft readings on rents for leases signed by new tenants were starting to feed into measured inflation. They expected that this process would continue and would help lead to a decline in housing services inflation over this year. In discussing the likely effects on inflation of recent banking-sector developments, several participants remarked that tighter credit conditions may not put much downward pressure on inflation in part because lower credit availability could restrain aggregate supply as well as aggregate demand. Several participants noted that longer-term measures of inflation expectations from surveys of households and businesses remained well anchored. Participants emphasized that with appropriate firming of monetary policy, well-anchored longer-term inflation expectations would support a return of inflation to the Committee's 2 percent longer-run goal. Participants noted that risks associated with the recent banking stress had led them to raise their already high assessment of uncertainty around their economic outlooks. Participants judged that risks to the outlook for economic activity were weighted to the downside, al­though a few noted the risks were two sided. In discussing sources of downside risk to economic activity, participants referenced the possibility that the cumulative tightening of monetary policy could affect economic activity more than expected, and that further strains in the banking sector could prove more substantial than anticipated. Some participants also noted concerns that the statutory limit on federal debt might not be raised in a timely manner, threatening significant disruptions to the financial system and tighter financial conditions that weaken the economy. Regarding risks to inflation, participants cited the possibility that price pressures could prove more persistent than anticipated because of, for example, stronger-than-expected consumer spending and a tight labor market, especially if the effect of bank stress on economic activity proved modest. However, a few participants cited the possibility that further tightening of credit conditions could slow household spending and reduce business investment and hiring, all of which would support the ongoing rebalancing of supply and demand in product and labor markets and reduce inflation pressures. In their discussion of financial stability, various participants commented on recent developments in the banking sector. These participants noted that the banking system was sound and resilient, that actions taken by the Federal Reserve in coordination with other government agencies had served to calm conditions in that sector, but that stresses remained. A number of participants noted that the banking sector was well capitalized overall, and that the most significant issues in the banking system appeared to be limited to a small number of banks with poor risk-management practices or substantial exposure to specific vulnerabilities. These vulnerabilities included significant unrealized losses on assets resulting from rising interest rates, heavy reliance on uninsured deposits, or strained profitability amid higher funding costs. Some participants additionally noted that, because of weak fundamentals for CRE such as high vacancy rates in the office segment, high exposure to such assets was a vulnerability for some banks. Participants also commented on the susceptibility of some nonbank financial institutions to runs or instability. These included money market funds, which had recently experienced large cash inflows; hedge funds, which tend to use substantial leverage and may hold concentrated positions in some assets with low or zero margin; thinly capitalized nonbank mortgage servicers; and digital asset entities. Many participants mentioned that it is essential that the debt limit be raised in a timely manner to avoid the risk of severely adverse dislocations in the financial system and the broader economy. A few participants noted the importance of orderly functioning of the market for U.S. Treasury securities or stressed the importance of the appropriate authorities continuing to address issues related to the resilience of the market. A number of participants emphasized that the Federal Reserve should maintain readiness to use its liquidity tools, as well as its microprudential and macroprudential regulatory and supervisory tools, to mitigate future financial stability risks. In their consideration of appropriate monetary policy actions at this meeting, participants concurred that inflation remained substantially elevated relative to the Committee's longer-run goal of 2 percent. Economic activity had expanded at a modest pace in the first quarter. The labor market continued to be tight, with robust job gains in recent months, and the unemployment rate remained low. Participants also noted that recent developments in the banking sector would likely result in tighter credit conditions for households and businesses, which would weigh on economic activity, hiring, and inflation. However, the extent of these effects remained uncertain. Against this backdrop, all participants agreed that it was appropriate to raise the target range for the federal funds rate 25 basis points to 5 percent to 5-1/4 percent. All participants agreed that it was also appropriate to continue the process of reducing the Federal Reserve's securities holdings, as described in its previously announced Plans for Reducing the Size of the Federal Reserve's Balance Sheet. In discussing the policy outlook, participants generally agreed that in light of the lagged effects of cumulative tightening in monetary policy and the potential effects on the economy of a further tightening in credit conditions, the extent to which additional increases in the target range may be appropriate after this meeting had become less certain. Participants agreed that it would be important to closely monitor incoming information and assess the implications for monetary policy. In determining the extent to which additional policy firming may be appropriate to return inflation to 2 percent over time, various participants noted specific factors that should bear on future decisions on policy actions. One such factor was the degree and timing with which cumulative policy tightening restrained economic activity and reduced inflation, with some participants commenting that they saw evidence that the past years' tightening was beginning to have its intended effect. Another factor was the degree to which tighter credit conditions for households and businesses resulting from events in the banking sector would weigh on activity and reduce inflation, which participants agreed was very uncertain. Additional factors included the progress toward returning inflation to the Committee's longer-run goal of 2 percent, and the pace at which labor market conditions softened and economic growth slowed. Participants also discussed several risk-management considerations that could bear on future policy decisions. A few assessed that there were upside risks to economic growth. However, almost all participants commented that downside risks to growth and upside risks to unemployment had increased because of the possibility that banking-sector developments could lead to further tightening of credit conditions and weigh on economic activity. Almost all participants stated that, with inflation still well above the Committee's longer-run goal and the labor market remaining tight, upside risks to the inflation outlook remained a key factor shaping the policy outlook. A few participants noted that they also saw some downside risks to inflation. Taking into account these various considerations, participants discussed their views on the extent to which further policy firming after the current meeting may be appropriate. Participants generally expressed uncertainty about how much more policy tightening may be appropriate. Many participants focused on the need to retain optionality after this meeting. Some participants commented that, based on their expectations that progress in returning inflation to 2 percent could continue to be unacceptably slow, additional policy firming would likely be warranted at future meetings. Several participants noted that if the economy evolved along the lines of their current outlooks, then further policy firming after this meeting may not be necessary. In light of the prominent risks to the Committee's objectives with respect to both maximum employment and price stability, participants generally noted the importance of closely monitoring incoming information and its implications for the economic outlook. Participants discussed the importance and various aspects of clearly explaining monetary policy actions and strategy. All participants reaffirmed their strong commitment to returning inflation to the Committee's 2 percent objective over time and remained highly attentive to inflation risks. A few participants commented that recent monetary policy actions and communications had helped keep inflation expectations well anchored, which they saw as important for the attainment of the Committee's goals. Participants emphasized the importance of communicating to the public the data-dependent approach of policymakers, and the vast majority of participants commented that the adjusted language in the postmeeting statement was helpful in that respect. Some participants stressed that it was crucial to communicate that the language in the postmeeting statement should not be interpreted as signaling either that decreases in the target range are likely this year or that further increases in the target range had been ruled out. Committee Policy Actions In their discussion of monetary policy for this meeting, members agreed that economic activity had expanded at a modest pace in the first quarter. They also concurred that job gains had been robust in recent months, and the unemployment rate had remained low. Inflation had remained elevated. Members concurred that the U.S. banking system was sound and resilient. They also agreed that tighter credit conditions for households and businesses were likely to weigh on economic activity, hiring, and inflation, but that the extent of these effects was uncertain. Members also concurred that they remained highly attentive to inflation risks. Members agreed that the Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the members agreed to raise the target range for the federal funds rate to 5 to 5-1/4 percent. Members agreed to closely monitor incoming information and assess the implications for monetary policy. In determining the extent to which additional policy firming may be appropriate to return inflation to 2 percent over time, members concurred that they will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, members agreed that they will continue reducing the Federal Reserve's holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. All members affirmed that they are strongly committed to returning inflation to their 2 percent objective. Members agreed that, in assessing the appropriate stance of monetary policy, they would continue to monitor the implications of incoming information for the economic outlook. They would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. Members also agreed that their assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments. At the conclusion of the discussion, the Committee voted to direct the Federal Reserve Bank of New York, until instructed otherwise, to execute transactions in the System Open Market Account in accordance with the following domestic policy directive, for release at 2:00 p.m.: "Effective May 4, 2023, 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 5 to 5-1/4 percent. Conduct standing overnight repurchase agreement operations with a minimum bid rate of 5.25 percent and with an aggregate operation limit of $500 billion. Conduct standing overnight reverse repurchase agreement operations at an offering rate of 5.05 percent and with a per-counterparty limit of $160 billion per day. Roll over at auction the amount of principal payments from the Federal Reserve's holdings of Treasury securities maturing in each calendar month that exceeds a cap of $60 billion per month. Redeem Treasury coupon securities up to this monthly cap and Treasury bills to the extent that coupon principal payments are less than the monthly cap. Reinvest into agency mortgage-backed securities (MBS) the amount of principal payments from the Federal Reserve's holdings of agency debt and agency MBS received in each calendar month that exceeds a cap of $35 billion per month. Allow modest deviations from stated amounts for reinvestments, if needed for operational reasons. Engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions." The vote also encompassed approval of the statement below for release at 2:00 p.m.: "Economic activity expanded at a modest pace in the first quarter. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated. The U.S. banking system is sound and resilient. Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 5 to 5-1/4 percent. The Committee will closely monitor incoming information and assess the implications for monetary policy. In determining the extent to which additional policy firming may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2 percent objective. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments." Voting for this action: Jerome H. Powell, John C. Williams, Michael S. Barr, Michelle W. Bowman, Lisa D. Cook, Austan D. Goolsbee, Patrick Harker, Philip N. Jefferson, Neel Kashkari, Lorie K. Logan, and Christopher J. Waller. 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 of the Federal Reserve System voted unanimously to raise the interest rate paid on reserve balances to 5.15 percent, effective May 4, 2023. The Board of Governors of the Federal Reserve System voted unanimously to approve a 1/4 percentage point increase in the primary credit rate to 5.25 percent, effective May 4, 2023.4 It was agreed that the next meeting of the Committee would be held on Tuesday–Wednesday, June 13–14, 2023. The meeting adjourned at 10:00 a.m. on May 3, 2023. Notation Vote By notation vote completed on April 11, 2023, the Committee unanimously approved the minutes of the Committee meeting held on March 21–22, 2023. _______________________ Joshua Gallin Secretary 1. The Federal Open Market Committee is referenced as the "FOMC" and the "Committee" in these minutes; the Board of Governors of the Federal Reserve System is referenced as the "Board" in these minutes. Return to text 2. Attended Tuesday's 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 to establish that rate 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. The vote also encompassed approval by the Board of Governors of the establishment of a 5.25 percent primary credit rate by the remaining Federal Reserve Bank, effective on the later of May 4, 2023, or the date such Reserve Bank informs the Secretary of the Board of such a request. (Secretary's note: Subsequently, the Federal Reserve Bank of New York was informed of the Board's approval of their establishment of a primary credit rate of 5.25 percent, effective May 4, 2023.) Return to text

2023-04-12

Minute

Minutes of the Federal Open Market Committee March 21–22, 2023 A joint meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve System was held in the offices of the Board of Governors on Tuesday, March 21, 2023, at 10:00 a.m. and continued on Wednesday, March 22, 2023, at 9:00 a.m.1 Attendance Jerome H. Powell, Chair John C. Williams, Vice Chair Michael S. Barr Michelle W. Bowman Lisa D. Cook Austan D. Goolsbee Patrick Harker Philip N. Jefferson Neel Kashkari Lorie K. Logan Christopher J. Waller Thomas I. Barkin, Raphael W. Bostic, Mary C. Daly, Loretta J. Mester, and Sushmita Shukla,2 Alternate Members of the Committee James Bullard and Susan M. Collins, Presidents of the Federal Reserve Banks of St. Louis and Boston, respectively Kelly J. Dubbert, Interim President of the Federal Reserve Bank of Kansas City Joshua Gallin, Secretary Matthew M. Luecke, Deputy Secretary Brian J. Bonis, Assistant Secretary Michelle A. Smith, Assistant Secretary Mark E. Van Der Weide, General Counsel Richard Ostrander, Deputy General Counsel Trevor A. Reeve, Economist Stacey Tevlin, Economist Beth Anne Wilson,3 Economist Shaghil Ahmed,4 Roc Armenter, James A. Clouse, Brian M. Doyle, Andrea Raffo, Chiara Scotti, and William Wascher, Associate Economists Roberto Perli, Manager, System Open Market Account Julie Ann Remache, Deputy Manager, System Open Market Account Jose Acosta, Senior Communications Analyst, Division of Information Technology, Board David Altig, Executive Vice President, Federal Reserve Bank of Atlanta Kartik B. Athreya, Executive Vice President, Federal Reserve Bank of Richmond Becky C. Bareford, First Vice President, Federal Reserve Bank of Richmond Penelope A. Beattie,5 Section Chief, Office of the Secretary, Board Daniel O. Beltran, Deputy Associate Director, Division of International Finance, Board Jennifer J. Burns,5 Deputy Director, Division of Supervision and Regulation, Board Mark A. Carlson, Adviser, Division of Monetary Affairs, Board Todd E. Clark, Senior Vice President, Federal Reserve Bank of Cleveland Daniel Cooper, Vice President, Federal Reserve Bank of Boston Stephanie E. Curcuru, Deputy Director, Division of International Finance, Board Wendy E. Dunn, Adviser, Division of Research and Statistics, Board Burcu Duygan-Bump, Special Adviser to the Board, Division of Board Members, Board Rochelle M. Edge, Deputy Director, Division of Monetary Affairs, Board Matthew J. Eichner,5 Director, Division of Reserve Bank Operations and Payment Systems, Board Ozge Akinci Emekli, Economic Research Advisor, Federal Reserve Bank of New York Jon Faust, Senior Special Adviser to the Chair, Division of Board Members, Board Andrew Figura, Associate Director, Division of Research and Statistics, Board Glenn Follette, Associate Director, Division of Research and Statistics, Board Michael S. Gibson, Director, Division of Supervision and Regulation, Board Christine Graham,5 Special Adviser to the Board, Division of Board Members, Board Joseph W. Gruber, Executive Vice President, Federal Reserve Bank of Kansas City Valerie S. Hinojosa, Section Chief, Division of Monetary Affairs, Board Jane E. Ihrig, Special Adviser to the Board, Division of Board Members, Board Michael T. Kiley, Deputy Director, Division of Financial Stability, Board Don H. Kim, Senior Adviser, Division of Monetary Affairs, Board Spencer Krane, Senior Vice President, Federal Reserve Bank of Chicago Andreas Lehnert, Director, Division of Financial Stability, Board Paul Lengermann, Assistant Director, Division of Research and Statistics, Board Kurt F. Lewis, Special Adviser to the Board, Division of Board Members, Board Laura Lipscomb, Special Adviser to the Board, Division of Board Members, Board David López-Salido, Senior Associate Director, Division of Monetary Affairs, Board Francesca Loria, Senior Economist, Division of Monetary Affairs, Board Byron Lutz, Deputy Associate Director, Division of Research and Statistics, Board Fernando M. Martin, Assistant Vice President, Federal Reserve Bank of St. Louis Thomas Mertens, Vice President, Federal Reserve Bank of San Francisco Ann E. Misback, Secretary, Office of the Secretary, Board Giovanni Nicolò, Senior Economist, Division of Monetary Affairs, Board Michael G. Palumbo, Senior Associate Director, Division of Research and Statistics, Board Marcel A. Priebsch, Principal Economist, Division of Monetary Affairs, Board Linda Robertson, Assistant to the Board, Division of Board Members, Board Achilles Sangster II, Senior Information Manager, Division of Monetary Affairs, Board Krista Schwarz, Principal Economist, Division of Monetary Affairs, Board Nitish Ranjan Sinha, Special Adviser to the Board, Division of Board Members, Board Yannick Timmer, Senior Economist, Division of Monetary Affairs, Board Clara Vega, Special Adviser to the Board, Division of Board Members, Board Annette Vissing-Jørgensen, Senior Adviser, Division of Monetary Affairs, Board Jeffrey D. Walker,5 Associate Director, Division of Reserve Bank Operations and Payment Systems, Board Min Wei, Senior Associate Director, Division of Monetary Affairs, Board Paul R. Wood, Special Adviser to the Board, Division of Board Members, Board Rebecca Zarutskie, Special Adviser to the Board, Division of Board Members, Board Recent Developments in the Banking Sector Before turning to other agenda items, the Chair asked the Vice Chair for Supervision to provide an update on recent developments in the banking sector. The Vice Chair for Supervision described the developments, including those at Silicon Valley Bank, Signature Bank, and Credit Suisse. He also described actions taken by the Federal Reserve and other regulatory agencies in response. He noted that the U.S. banking system is sound and resilient. He also noted that he will be leading a review of the supervision and regulation of Silicon Valley Bank, and that the Federal Reserve System will apply what is learned from the review to strengthen its supervisory and regulatory practices as appropriate. Developments in Financial Markets and Open Market Operations The manager turned first to a review of U.S. financial market developments over the intermeeting period. Early in the period, firmer-than-expected data and policy communications pushed interest rates higher and equity prices lower. Developments in the banking sector later in the period were met with sharp reductions in Treasury yields, particularly at shorter tenors. Treasury market liquidity was poor and implied volatility was high, but the market remained functional amid substantial trading activity. Higher Treasury market volatility contributed to wider spreads for household and business borrowing. Financial conditions tightened considerably over the intermeeting period as a whole. Market contacts observed that the recent developments in the banking system will likely result in a pullback in bank lending, which would not be reflected in most common financial conditions indexes. Following the banking-sector developments, equity prices for large U.S. banks underperformed the broad market; equity prices for U.S. regional banks generally underperformed by relatively more. Regarding the outlook for inflation in the United States, market-based measures of inflation compensation over shorter horizons rose over the period, al­though compensation retraced a good portion of its increase later in the period as markets reacted to the developments in the banking sector. Forward inflation compensation measures continued to indicate that longer-term inflation expectations remained well anchored. Measures of inflation expectations from the Open Market Desk's Survey of Primary Dealers and Survey of Market Participants moved higher at shorter horizons and were little changed at longer horizons. Regarding the outlook for monetary policy, market-based measures of policy expectations suggested that the federal funds rate would reach a peak in May 2023 and that the target range would then move lower. However, the medians of respondents' modal expectations of the federal funds rate from the Desk surveys did not show any declines in the target range through the end of 2023. Risk and liquidity premiums embedded in market prices may have driven a good part of the difference between survey and market measures. The median respondent expected the Summary of Economic Projections (SEP) projections for the federal funds rate at the end of 2023 and 2024 to shift 25 basis points higher. However, information gathered after the Desk surveys closed suggests that those expectations had declined some, to a level comparable with the December SEP. Survey responses suggested only modest changes in expectations for balance sheet policy. The manager turned next to a discussion of operations and money markets. Federal funds volumes fell sharply for a few days late in the period as Federal Home Loan Banks (FHLBs) sought to maintain liquidity in order to meet increased demand for advances by member banks. Money market rates remained broadly stable, and secured and unsecured money market rates, including the effective fed funds rate, traded well within the target range. Use of U.S. dollar liquidity swap lines with foreign central banks had been minimal, indicating that market participants did not face significant difficulties in obtaining dollar funding from private sources. Borrowing from the new Bank Term Funding Program had been small relative to discount window borrowing, which had increased to record levels. Use of the overnight reverse repurchase agreement (ON RRP) facility fell, especially for money market mutual funds (MMFs), as the supply of short-term securities at attractive rates increased. 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 available at the time of the March 21–22 meeting indicated that labor market conditions remained tight in January and February, with robust job gains and the unemployment rate near a historical low. Consumer price inflation—as measured by the 12-month percent change in the price index for personal consumption expenditures (PCE)—was still elevated in January. Real gross domestic product (GDP) appeared to be expanding at a modest pace in the first quarter. Al­though financial market data had shown reactions to developments in the banking sector late in the intermeeting period, there were essentially no economic data available that covered this period. Total nonfarm payroll employment increased at a faster monthly pace in January and February than in the fourth quarter of last year. The unemployment rate was little changed and stood at 3.6 percent in February. Over the past two months, the unemployment rate for African Americans was unchanged, on net, and the unemployment rate for Hispanics moved up; the unemployment rates for both groups remained above the aggregate measure. The aggregate measures of both the labor force participation rate and the employment-to-population ratio increased slightly. The private-sector job openings rate in January—as measured by the Job Openings and Labor Turnover Survey—was little changed, on balance, since November and remained high. Recent indicators of nominal wage growth had slowed but continued to be elevated. In February, the 3-month change in average hourly earnings for all employees was at an annual rate of 3.6 percent, slower than its 12-month pace of 4.6 percent. Over the four quarters of 2022, total labor compensation per hour in the business sector—as measured by the Productivity and Costs data—increased 4.5 percent, below its pace in the previous year. Consumer price inflation remained elevated early in the year. Total PCE price inflation was 5.4 percent over the 12 months ending in January, and core PCE price inflation—which excludes changes in consumer energy prices and many consumer food prices—was 4.7 percent. The trimmed mean measure of 12-month PCE price inflation constructed by the Federal Reserve Bank of Dallas was 4.6 percent in January. In February, the 12-month change in the consumer price index (CPI) was 6.0 percent, and core CPI inflation was 5.5 percent. The CPI, along with data from the producer price index, pointed to some slowing in PCE price inflation in February. The latest survey-based measures of longer-term inflation expectations from the University of Michigan Surveys of Consumers, the Survey of Professional Forecasters, and the Federal Reserve Bank of New York's Survey of Consumer Expectations remained within the range of their values reported in recent months, while near-term measures of inflation expectations from these surveys moved down. Real GDP growth seemed to be expanding at a modest pace in the first quarter. Gains in consumer spending had picked up in recent months, but growth in business fixed investment was slowing and residential investment was continuing to decline. After contracting over the second half of last year, manufacturing output expanded moderately, on average, over January and February, but near-term indicators—such as national and regional indexes for new orders—pointed to softening factory output in the coming months. The nominal U.S. international trade deficit registered a record high in 2022. The trade deficit had been narrowing since March of last year but resumed widening in December and January. Real goods imports rose in December and January, led by increases in imports of consumer goods and automotive products. Real goods exports also increased, but by less than imports. Indicators suggested that foreign economic growth rebounded in the first quarter of 2023 as China reopened rapidly from its COVID-19-related shutdowns and Europe's economy proved to be resilient to the energy price shock stemming from Russia's war against Ukraine and benefited from a mild winter that reduced energy demand. Manufacturing activity in emerging Asia showed signs of a turnaround from its pronounced slowdown since mid-2022. The recent developments in the banking sector led to some tightening of financial conditions abroad. Oil prices edged down despite China's rapid reopening and the implementation of the European Union's embargo on Russian refined oil products. Retail energy inflation continued to slow, contributing to an easing of headline consumer price inflation in many advanced foreign economies (AFEs). In contrast, core inflation has shown little sign of easing in most foreign economies amid tight labor markets. In response, many foreign central banks continued their monetary policy tightening, al­though some have either paused or indicated that a pause soon was possible, citing the importance of assessing the cumulative effects of past policy rate increases. Staff Review of the Financial Situation Over the first several weeks of the intermeeting period, incoming economic data and FOMC communications appeared to refocus market participants on upside risks to inflation and policy rates, with the market-implied policy rate path steepening, nominal Treasury yields rising, near-term inflation compensation measures increasing, and broad stock market price indexes declining. Financing conditions for businesses, households, and municipalities had tightened during this period and were moderately restrictive overall, as borrowing costs increased notably with the expected path of policy rates and Treasury yields and as some lenders appeared to tighten nonprice borrowing terms. Nonetheless, lending volumes were generally solid. Credit quality was strong overall, al­though it had worsened a bit for some borrowers. Expectations for future credit quality continued to deteriorate in some markets. Pricing in financial markets changed notably in the latter part of the intermeeting period, amid developments in the banking sector. Treasury yields and policy rate expectations moved down significantly, while broad stock price indexes rose somewhat. The market-implied policy rate path shifted down sizably, with the federal funds rate expected to peak in May before decreasing afterward. Further out, OIS (overnight index swap) quotes at the end of the intermeeting period indicated that the expected federal funds rate at year-end 2024 was 3.28 percent, about 50 basis points lower than before the closures of Silicon Valley Bank and Signature Bank but somewhat higher than at the time of the February FOMC meeting. Treasury yields declined, especially at shorter maturities, reflecting downward revisions in policy rate expectations and the effects of flight to safety. Inflation compensation declined, especially at short maturities, likely reflecting, in part, a relatively larger decline in risk premiums on nominal Treasury securities relative to Treasury Inflation-Protected Securities due to strong safe-haven demands. Late in the intermeeting period, U.S. bank stock prices declined notably. Regional banks with unusually large reliance on uninsured deposits and holdings of securities with significant unrealized mark-to-market losses experienced larger declines in stock prices. Broad equity prices rose somewhat after the closures of Silicon Valley Bank and Signature Bank, reportedly driven by investors' reassessment of the outlook for interest rates, and after the announcement that UBS had agreed to buy Credit Suisse. The VIX—the one-month option-implied volatility on the S&P 500—increased to about 26.5 percent following the closures of Silicon Valley Bank and Signature Bank, but it subsequently declined to 21 percent—around the 70th percentile of its historical distribution. Swaption-implied volatilities of short-term interest rates increased notably during this period, reflecting increased uncertainty about the interest rate outlook. Some of the pricing moves in asset markets may have been amplified by impaired liquidity conditions. Despite deteriorating liquidity conditions in Treasury, bond, and equity markets, market functioning remained orderly. Over the intermeeting period, foreign financial markets were volatile as investors' focus shifted from resilience in economic activity and stubbornly high core inflation across advanced economies earlier in the period to stresses in the global banking sector more recently. Earlier in the period, yields and market-based measures of inflation expectations in the AFEs increased notably, driven by spillovers from U.S. Treasury yields as well as upside surprises in economic and inflation data for AFEs. Later in the period, developments in the banking sector led to large declines in advanced-economy yields, and, on net, AFE yields declined slightly. Additionally, for the intermeeting period overall, the staff's dollar index rose moderately, corporate and emerging market economy sovereign credit spreads widened, and foreign equity indexes generally moved lower, with bank equities falling notably. U.S. unsecured funding markets showed some signs of pressure later in the intermeeting period. Issuance of commercial paper (CP) and negotiable certificates of deposit (NCDs) dropped a touch over the entire period, and the fraction of CP issuance with overnight maturities increased but remained within normal ranges. Spreads of term CP and NCDs widened some, and spreads for issuers with lower credit ratings rose more, but other unsecured spreads remained within normal ranges. Prime MMFs experienced outflows, while government MMFs had inflows. The effective federal funds rate was little changed after the closures of Silicon Valley Bank and Signature Bank. Amid these developments, federal funds volumes initially declined sharply as the FHLBs reduced their activity in the federal funds market in order to meet increased demand for advances by member banks; market volume subsequently rebounded partially. Activity in the repurchase agreement market was robust, and trading volume remained within recent ranges. ON RRP take-up remained within recent ranges as well. Borrowing costs for businesses, households, and municipalities rose notably in the early part of the intermeeting period, mostly in line with increases in the federal funds rate and Treasury yields. Since the closures of Silicon Valley Bank and Signature Bank, spreads on corporate bonds, municipal bonds, and leveraged loans rose, with speculative-grade corporate bond spreads registering the largest moves; spreads remained at moderate levels relative to their historical distributions. Investment-grade corporate yields and municipal yields were down moderately, whereas speculative-grade corporate yields and leveraged loan yields were up modestly. Mortgage rates were unchanged amid an increase in mortgage-backed securities (MBS) spreads. Based on data that do not cover the period following the closures of Silicon Valley Bank and Signature Bank, nonprice terms and standards appeared to tighten somewhat in a number of markets. Nevertheless, generally solid funding flows suggest that most firms and households had remained broadly able to access funding. Data on credit conditions following the developments in the banking sector were limited. After the two bank closures, issuance of municipal bond and leveraged loans was sluggish, and gross issuance of corporate bonds fell to near zero. Mortgage loans to households remained available. The credit quality of businesses and households was largely stable over the intermeeting period. However, measures of credit performance showed some signs of weakening. Leveraged loan credit quality deteriorated somewhat after the closures of Silicon Valley Bank and Signature Bank. Credit quality for residential mortgages remained unchanged. Staff Economic Outlook For some time, the forecast for the U.S. economy prepared by the staff had featured subdued real GDP growth for this year and some softening in the labor market. Given their assessment of the potential economic effects of the recent banking-sector developments, the staff's projection at the time of the March meeting included a mild recession starting later this year, with a recovery over the subsequent two years. Real GDP growth in 2024 was projected to remain below the staff's estimate of potential output growth, and then GDP growth in 2025 was expected to be above that of potential. Resource utilization in both product and labor markets was forecast to be much less tight than in the January projection. The level of real output was projected to move below the staff's estimate of potential output in early 2024, more than a year sooner than in the previous projection. Likewise, the unemployment rate was projected to rise above the staff's estimate of its natural rate early next year. On a four-quarter change basis, total PCE price inflation was forecast to be 2.8 percent this year, with core inflation at 3.5 percent. Core goods inflation was projected to move down further this year and then remain subdued; housing services inflation was expected to peak later this year and then move down, while core nonhousing services inflation was forecast to slow gradually as nominal wage growth eased further. Reflecting the effects of less projected tightness in product and labor markets, core inflation was forecast to slow sharply next year. With steep declines in consumer energy prices and a substantial moderation in food price inflation expected for this year, total inflation was projected to step down markedly this year and then to track core inflation over the following two years. In 2024 and 2025, both total and core PCE price inflation were expected to be near 2 percent. The staff judged that the uncertainty around the baseline projection was much greater than at the time of the previous forecast. In particular, the staff viewed the risks around the baseline projection as determined importantly by banking conditions and the implications for financial conditions. If the effects of the recent developments in the banking sector on macroeconomic conditions were to abate quickly, then the risks around the baseline would be tilted to the upside for both economic activity and inflation. If banking and financial conditions and their effects on macroeconomic conditions were to deteriorate more than assumed in the baseline, then the risks around the baseline would be skewed to the downside for both economic activity and inflation, particularly because historical recessions related to financial market problems tend to be more severe and persistent than average recessions. Participants' Views on Current Conditions and the Economic Outlook In conjunction with this FOMC meeting, participants submitted their projections of the most likely outcomes for real GDP growth, the unemployment rate, and inflation for each year from 2023 through 2025 and over the longer run. The projections were based on their individual assessments of appropriate monetary policy, including the path of 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. An SEP was released to the public following the conclusion of the meeting. In their discussion of current economic conditions, participants noted that recent indicators pointed to modest growth in spending and production. At the same time, though, participants noted that job gains had picked up in recent months and were running at a robust pace; the unemployment rate had remained low. Inflation remained elevated. Participants agreed that the U.S. banking system remained sound and resilient. They commented that recent developments in the banking sector were likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation. Participants agreed that the extent of these effects was uncertain. Against this background, participants continued to be highly attentive to inflation risks. In assessing the economic outlook, participants noted that since they met in February, data on inflation, employment, and economic activity generally came in stronger than expected. They also noted, however, that the developments in the banking sector that had occurred late in the intermeeting period affected their views of the economic and policy outlook and the uncertainty surrounding that outlook. Based on incoming economic data, participants' assessments of the effects of cumulative policy firming, and their initial views on the likely economic effect of the recent banking-sector developments, participants generally expected real GDP to grow this year at a pace well below its long-run trend rate. With inflation remaining unacceptably high, participants expected that a period of below-trend growth in real GDP would be needed to bring aggregate demand into better balance with aggregate supply and thereby reduce inflationary pressures. Many participants remarked that the incoming data before the onset of the banking-sector stresses had led them to see the appropriate path for the federal funds rate as somewhat higher than their assessment at the time of the December meeting. After incorporating the banking-sector developments, participants indicated that their policy rate projections were now about unchanged from December. Participants agreed that the actions taken so far by the Federal Reserve in coordination with other government agencies, as well as actions taken by foreign authorities to address banking and financial stresses outside the U.S., had helped calm conditions in the banking sector. Even with the actions, participants recognized that there was significant uncertainty as to how those conditions would evolve. Participants assessed that the developments so far would likely lead to some weakening of credit conditions, as some banks were likely to tighten lending standards amid rising funding costs and increased concerns about liquidity. Participants noted that it was too early to assess with confidence the magnitude of the effect of a credit tightening on economic activity and inflation, and that it was important to continue to closely monitor developments and update assessments of the actual and expected effects of credit tightening. Several participants noted that regional and community banks, a small number of which had come under significant stress, were important in small business and middle-market lending and were providing critical and unique financial services to many communities and industries. In their discussion of the household sector, participants noted that incoming data on real consumer expenditures showed a pickup in spending in January and February. They attributed the pickup to strong job gains, rising real disposable income, and households continuing to run down excess savings accumulated during the pandemic. They also noted that an atypically warm start to this year, along with challenges in seasonally adjusting data, likely contributed to the pickup in the reported data. A few participants observed that credit card delinquencies, particularly for lower-income households, had risen in the face of elevated inflation and higher nominal interest rates. Participants noted that recent developments in the banking sector and the associated rise in uncertainty would likely weigh on consumer sentiment and that increased caution on the part of consumers could restrain spending. A couple of participants observed that high-frequency measures of consumer sentiment had not yet shown a significant change following the recent developments in the banking sector, al­though they also acknowledged that the situation was fluid. Regarding the business sector, participants observed that growth in business fixed investment was being restrained by tighter financial conditions that reflected cumulative policy firming to date. Participants expected the likely tightening of credit conditions due to the recent developments in the banking sector to further weigh on investment spending. In addition, the banking-sector developments could damp business confidence and increase firms' caution, reducing their willingness to hire new workers. However, a few participants mentioned that their nonbank business contacts reported that the banking-sector developments so far had not resulted in significant changes in their hiring and capital spending plans or sales expectations, though their contacts also acknowledged increased uncertainties around their outlooks. Participants agreed that the labor market remained very tight. Job gains had picked up to a robust pace in January and February, and the unemployment rate remained low. Participants noted some signs of improvement in the imbalances between demand and supply in the labor market, including further declines in the quits rate as well as an increase in the overall labor force participation rate and the return of the prime-age participation rate to pre-pandemic levels. Furthermore, participants observed that wage growth appeared to be slowing gradually amid this apparent easing in labor demand and increase in labor supply. However, participants assessed that labor demand continued to substantially exceed labor supply, and several participants pointed out that wage growth was still well above the rates that would be consistent over the longer run with the 2 percent inflation objective, given current estimates of trend productivity growth. Participants expected that, under appropriate monetary policy, supply and demand conditions in the labor market will come into better balance over time, easing upward pressures on wages and prices. With inflation still well above the Committee's longer-run goal of 2 percent, participants agreed that inflation was unacceptably high. Participants commented that recent inflation data indicated slower-than-expected progress on disinflation. In particular, they noted that revisions to the price data had indicated less disinflation at the end of last year than had been previously reported and that inflation was still quite elevated. Participants noted that, on a 12-month basis, core goods price inflation declined as supply chains continued to improve, but the pace of the decline had slowed, highlighting the still uncertain nature of the disinflationary process. Participants expected that housing services inflation would likely begin to slow in coming months, reflecting continued smaller increases, or potentially declines, in rents on new leases. Regarding prices for core services excluding housing, participants agreed that there was little evidence pointing to disinflation in this component. Participants generally judged that some more easing in labor market tightness and slowing in nominal wage growth would be necessary for sustained disinflation. Additionally, participants observed that indicators of short-term inflation expectations from surveys of households and businesses had come down further, while longer-term inflation expectations remained well anchored. Participants also discussed the potential effect on inflation of the developments in the banking sector. They noted that a tightening of credit conditions was likely to weigh on aggregate demand, which in turn could help reduce inflationary pressures. However, participants observed that the size of such an effect was highly uncertain. Participants generally observed that the recent developments in the banking sector had further increased the already-high level of uncertainty associated with their outlooks for economic activity, the labor market, and inflation. Participants saw risks to economic activity as weighted to the downside. As a source of downside risk to activity, they noted the possibility that banks would reduce the supply of credit by more than expected, which could restrain economic activity significantly. Participants mentioned potential intensification of Russia's war against Ukraine as an additional source of downside risk to the economic outlook. Participants generally saw risks to inflation as weighted to the upside, though they also recognized some downside risks to inflation. As a source of upside risk to inflation, participants cited the possibility of more-persistent-than-anticipated price pressures, due to, for example, surprisingly resilient labor demand. As a source of downside risk to inflation, participants noted that if banks reduce the supply of credit by more than expected, the likely restraint on economic activity and hiring could put additional downward pressure on inflation. In their consideration of appropriate monetary policy actions at this meeting, participants concurred that inflation remained well above the Committee's longer-run goal of 2 percent and that the recent data on inflation provided few signs that inflation pressures were abating at a pace sufficient to return inflation to 2 percent over time. Participants also noted that recent developments in the banking sector would likely result in tighter credit conditions for households and businesses and weigh on economic activity, hiring, and inflation, though the extent of these effects was highly uncertain. Against this backdrop, all participants agreed that it was appropriate to raise the target range for the federal funds rate 25 basis points to 4-3/4 to 5 percent. All participants also agreed that it was appropriate to continue the process of reducing the Federal Reserve's securities holdings, as described in its previously announced Plans for Reducing the Size of the Federal Reserve's Balance Sheet. Several participants noted that, in their policy deliberations, they considered whether it would be appropriate to hold the target range steady at this meeting. They noted that doing so would allow more time to assess the financial and economic effects of recent banking-sector developments and of the cumulative tightening of monetary policy. However, these participants also observed that the actions taken by the Federal Reserve in coordination with other government agencies helped calm conditions in the banking sector and lessen the near-term risks to economic activity and inflation. Consequently, these participants judged it appropriate to increase the target range 25 basis points because of elevated inflation, the strength of the recent economic data, and their commitment to bring inflation down to the Committee's 2 percent longer-run goal. Some participants noted that given persistently high inflation and the strength of the recent economic data, they would have considered a 50 basis point increase in the target range to have been appropriate at this meeting in the absence of the recent developments in the banking sector. However, due to the potential for banking-sector developments to tighten financial conditions and to weigh on economic activity and inflation, they judged it prudent to increase the target range by a smaller increment at this meeting. These participants noted that doing so would also allow the Committee time to better assess the effects of banking-sector developments on credit conditions and the economy as the Committee moved toward a sufficiently restrictive stance of monetary policy. Participants observed that the actions taken by the Federal Reserve in coordination with other government agencies in the days preceding the meeting had served to calm conditions in the banking sector. Participants noted that the most significant issues appeared to have been limited to a small number of banks with poor risk-management practices and that the banking system remained sound and resilient. Participants emphasized that the Federal Reserve should use its liquidity and lender-of-last-resort tools, as well as its microprudential and macroprudential regulatory and supervisory tools, to address stress in the banking sector and to mitigate future financial stability risks. Participants agreed that recent banking developments would factor into the Committee's monetary policy decisions to the extent that these developments affect the outlook for employment and inflation and the risks surrounding the outlook. Participants reaffirmed their strong commitment to returning inflation to the Committee's 2 percent objective. In discussing the policy outlook, participants observed that inflation remained much too high and that the labor market remained tight; as a result, they anticipated that some additional policy firming may be appropriate to attain a sufficiently restrictive policy stance to return inflation to 2 percent over time. Many participants noted that the likely effects of recent banking-sector developments on economic activity and inflation had led them to lower their assessments of the federal funds rate target range that would be sufficiently restrictive compared with assessments based solely on the recent economic data. In determining the extent of future increases in the target range, participants judged that it would be appropriate to take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In light of the highly uncertain economic outlook, participants underscored the importance of closely monitoring incoming information and assessing the implications for future monetary policy decisions. Participants noted that it would be particularly important to review incoming information regarding changes in credit conditions and credit flows as well as broader changes in financial conditions and to assess the implications for economic activity, labor markets, and inflation. Several participants emphasized the need to retain flexibility and optionality in determining the appropriate stance of monetary policy given the highly uncertain economic outlook. Participants emphasized a number of risk-management considerations related to the conduct of monetary policy. Some participants observed that downside risks to growth and upside risks to unemployment had increased because of the risk that banking-sector developments could lead to further tightening of credit conditions and weigh on economic activity. Some participants also noted that, with inflation still well above the Committee's longer-run goal and the recent economic data remaining strong, upside risks to the inflation outlook remained a key factor shaping the policy outlook, and that maintaining a restrictive policy stance until inflation is clearly on a downward path toward 2 percent would be appropriate from a risk-management perspective. Several participants noted the importance of longer-term inflation expectations remaining anchored and remarked that the longer inflation remained elevated, the greater the risk of inflation expectations becoming unanchored. Participants generally agreed on the importance of closely monitoring incoming information and its implications for the economic outlook, and that they were prepared to adjust their views on the appropriate stance of monetary policy in response to the incoming data and emerging risks to the economic outlook. Committee Policy Actions In their discussion of monetary policy for this meeting, members agreed that recent indicators pointed to modest growth in spending and production. They also concurred that job gains had picked up in recent months and were running at a robust pace, that the unemployment rate had remained low, and that inflation remains elevated. Members concurred that the U.S. banking system is sound and resilient. They also agreed that recent developments were likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation, but that the extent of these effects was uncertain. Members also concurred that they remained highly attentive to inflation risks. Members agreed that the Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, members agreed to raise the target range for the federal funds rate to 4-3/4 to 5 percent. Members agreed that they would closely monitor incoming information and assess the implications for monetary policy. Given recent developments, members anticipated that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time. Members concurred that, in determining the extent of future increases in the target range, they would take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, members agreed that they would continue reducing the Federal Reserve's holdings of Treasury securities and agency debt and agency MBS, as described in its previously announced plans. All members affirmed that they remained strongly committed to returning inflation to its 2 percent objective. Members agreed that, in assessing the appropriate stance of monetary policy, they would continue to monitor the implications of incoming information for the economic outlook. They would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. Members agreed that their assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments. At the conclusion of the discussion, the Committee voted to direct the Federal Reserve Bank of New York, until instructed otherwise, to execute transactions in the System Open Market Account in accordance with the following domestic policy directive, for release at 2:00 p.m.: "Effective March 23, 2023, 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 4-3/4 to 5 percent. Conduct standing overnight repurchase agreement operations with a minimum bid rate of 5 percent and with an aggregate operation limit of $500 billion. Conduct standing overnight reverse repurchase agreement operations at an offering rate of 4.8 percent and with a per-counterparty limit of $160 billion per day. Roll over at auction the amount of principal payments from the Federal Reserve's holdings of Treasury securities maturing in each calendar month that exceeds a cap of $60 billion per month. Redeem Treasury coupon securities up to this monthly cap and Treasury bills to the extent that coupon principal payments are less than the monthly cap. Reinvest into agency mortgage-backed securities (MBS) the amount of principal payments from the Federal Reserve's holdings of agency debt and agency MBS received in each calendar month that exceeds a cap of $35 billion per month. Allow modest deviations from stated amounts for reinvestments, if needed for operational reasons. Engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions." The vote also encompassed approval of the statement below for release at 2:00 p.m.: "Recent indicators point to modest growth in spending and production. Job gains have picked up in recent months and are running at a robust pace; the unemployment rate has remained low. Inflation remains elevated. The U.S. banking system is sound and resilient. Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation. The extent of these effects is uncertain. The Committee remains highly attentive to inflation risks. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 4-3/4 to 5 percent. The Committee will closely monitor incoming information and assess the implications for monetary policy. The Committee anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time. In determining the extent of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2 percent objective. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments." Voting for this action: Jerome H. Powell, John C. Williams, Michael S. Barr, Michelle W. Bowman, Lisa D. Cook, Austan D. Goolsbee, Patrick Harker, Philip N. Jefferson, Neel Kashkari, Lorie K. Logan, and Christopher J. Waller. 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 of the Federal Reserve System voted unanimously to raise the interest rate paid on reserve balances to 4.9 percent, effective March 23, 2023. The Board of Governors of the Federal Reserve System voted unanimously to approve a 1/4 percentage point increase in the primary credit rate to 5 percent, effective March 23, 2023.6 It was agreed that the next meeting of the Committee would be held on Tuesday–Wednesday, May 2–3, 2023. The meeting adjourned at 10:15 a.m. on March 22, 2023. Notation Vote By notation vote completed on February 21, 2023, the Committee unanimously approved the minutes of the Committee meeting held on January 31–February 1, 2023. _______________________ Joshua Gallin Secretary 1. The Federal Open Market Committee is referenced as the "FOMC" and the "Committee" in these minutes; the Board of Governors of the Federal Reserve System is referenced as the "Board" in these minutes. Return to text 2. Elected as an Alternate by the Federal Reserve Bank of New York, effective March 2, 2023. Return to text 3. Attended through the discussion of the economic and financial situation. Return to text 4. Attended from the discussion of the economic and financial situation through the end of Wednesday's session. Return to text 5. Attended through the discussion of developments in financial markets and open market operations. Return to text 6. In taking this action, the Board approved requests to establish that rate submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Richmond, Atlanta, Kansas City, Dallas, and San Francisco. The vote also encompassed approval by the Board of Governors of the establishment of a 5 percent primary credit rate by the remaining Federal Reserve Banks, effective on the later of March 23, 2023, or the date such Reserve Banks inform the Secretary of the Board of such a request. (Secretary's note: Subsequently, the Federal Reserve Banks of Cleveland, Chicago, St. Louis, and Minneapolis were informed of the Board's approval of their establishment of a primary credit rate of 5 percent, effective March 23, 2023.) Return to text

2023-03-22

Statement

Recent indicators point to modest growth in spending and production. Job gains have picked up in recent months and are running at a robust pace; the unemployment rate has remained low. Inflation remains elevated. The U.S. banking system is sound and resilient. Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation. The extent of these effects is uncertain. The Committee remains highly attentive to inflation risks. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 4-3/4 to 5 percent. The Committee will closely monitor incoming information and assess the implications for monetary policy. The Committee anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time. In determining the extent of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2 percent objective. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments. Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Michelle W. Bowman; Lisa D. Cook; Austan D. Goolsbee; Patrick Harker; Philip N. Jefferson; Neel Kashkari; Lorie K. Logan; and Christopher J. Waller. For media inquiries, please email [email protected] or call 202-452-2955. Implementation Note issued March 22, 2023

2023-02-22

Minute

Minutes of the Federal Open Market Committee January 31–February 1, 2023 A joint meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve System was held in the offices of the Board of Governors on Tuesday, January 31, 2023, at 10:00 a.m. and continued on Wednesday, February 1, 2023, at 9:00 a.m.1 Attendance Jerome H. Powell, Chair John C. Williams, Vice Chair Michael S. Barr Michelle W. Bowman Lael Brainard Lisa D. Cook Austan D. Goolsbee Patrick Harker Philip N. Jefferson Neel Kashkari Lorie K. Logan Christopher J. Waller Thomas I. Barkin, Raphael W. Bostic, Mary C. Daly, Loretta J. Mester, and Helen E. Mucciolo, Alternate Members of the Committee James Bullard and Susan M. Collins, Presidents of the Federal Reserve Banks of St. Louis and Boston, respectively Kelly J. Dubbert, Interim President of the Federal Reserve Bank of Kansas City Joshua Gallin, Secretary Matthew M. Luecke, Deputy Secretary Brian J. Bonis, Assistant Secretary Michelle A. Smith, Assistant Secretary Mark E. Van Der Weide, General Counsel Richard Ostrander, Deputy General Counsel Trevor A. Reeve, Economist Stacey Tevlin, Economist Beth Anne Wilson, Economist Shaghil Ahmed, Roc Armenter, James A. Clouse, Brian M. Doyle, Eric M. Engen, Anna Paulson, Andrea Raffo, and William Wascher, Associate Economists Patricia Zobel, Manager pro tem, System Open Market Account Stephanie R. Aaronson, Senior Associate Director, Division of Research and Statistics, Board Jose Acosta, Senior Communications Analyst, Division of Information Technology, Board Isaiah C. Ahn, Information Management Analyst, Division of Monetary Affairs, Board Alyssa Arute,2 Manager, Division of Reserve Bank Operations and Payment Systems, Board Kartik B. Athreya, Executive Vice President, Federal Reserve Bank of Richmond Penelope A. Beattie, Section Chief, Office of the Secretary, Board Travis J. Berge, Principal Economist, Division of Research and Statistics, Board David Bowman, Senior Associate Director, Division of Monetary Affairs, Board Isabel Cairó, Principal Economist, Division of Monetary Affairs, Board Prabal Chakrabarti, Executive Vice President, Federal Reserve Bank of Boston Kathryn B. Chen, Director of Cross Portfolio Policy & Analysis, Federal Reserve Bank of New York Laura Choi, Senior Vice President, Federal Reserve Bank of San Francisco Daniel M. Covitz, Deputy Director, Division of Research and Statistics, Board Stephanie E. Curcuru, Deputy Director, Division of International Finance, Board Marnie Gillis DeBoer, Senior Associate Director, Division of Monetary Affairs, Board Navtej S. Dhillon, Special Adviser to the Board, Division of Board Members, Board Burcu Duygan-Bump, Special Adviser to the Board, Division of Board Members, Board Rochelle M. Edge, Deputy Director, Division of Monetary Affairs, Board Charles A. Fleischman, Adviser, Division of Research and Statistics, Board Glenn Follette, Associate Director, Division of Research and Statistics, Board Carlos Garriga, Senior Vice President, Federal Reserve Bank of St. Louis Michael S. Gibson, Director, Division of Supervision and Regulation, Board Christine Graham, Deputy Associate Director, Division of Supervision and Regulation, Board Joseph W. Gruber, Executive Vice President, Federal Reserve Bank of Kansas City Valerie S. Hinojosa, Section Chief, Division of Monetary Affairs, Board Jane E. Ihrig, Special Adviser to the Board, Division of Board Members, Board Michael T. Kiley, Deputy Director, Division of Financial Stability, Board Anna Kovner, Director of Financial Stability Policy Research, Federal Reserve Bank of New York David E. Lebow, Senior Associate Director, Division of Research and Statistics, Board Sylvain Leduc, Director of Research, Federal Reserve Bank of San Francisco Andreas Lehnert, Director, Division of Financial Stability, Board Karen Leone de Nie, Vice President, Reserve Bank of Atlanta Kurt F. Lewis,2 Special Adviser to the Board, Division of Board Members, Board Laura Lipscomb, Special Adviser to the Board, Division of Board Members, Board Francesca Loria, Senior Economist, Division of Monetary Affairs, Board Andrew Meldrum, Assistant Director, Division of Monetary Affairs, Board Ann E. Misback, Secretary, Office of the Secretary, Board Michelle M. Neal, Head of Markets, Federal Reserve Bank of New York Giovanni Olivei, Senior Vice President, Federal Reserve Bank of Boston Ander Perez-Orive, Principal Economist, Division of Monetary Affairs, Board Nellisha D. Ramdass, Deputy Director, Division of Monetary Affairs, Board Julie Ann Remache, Head of Cross Market & Portfolio Analysis, Federal Reserve Bank of New York Linda Robertson, Assistant to the Board, Division of Board Members, Board Zina Bushra Saijid, Senior Financial Analyst, Division of International Finance, Board Zack Saravay, Financial Institution and Policy Analyst, Division of Monetary Affairs, Board Samuel Schulhofer-Wohl, Senior Vice President, Federal Reserve Bank of Dallas Chiara Scotti, Deputy Associate Director, Division of Financial Stability, Board Nitish Ranjan Sinha, Special Adviser to the Board, Division of Board Members, Board Ellis W. Tallman, Executive Vice President, Federal Reserve Bank of Cleveland Manjola Tase, Principal Economist, Division of Monetary Affairs, Board Alene G. Tchourumoff, Senior Vice President, Federal Reserve Bank of Minneapolis Robert J. Tetlow, Senior Adviser, Division of Monetary Affairs, Board Clara Vega, Special Adviser to the Board, Division of Board Members, Board Jeffrey D. Walker,2 Associate Director, Division of Reserve Bank Operations and Payment Systems, Board Min Wei, Senior Associate Director, Division of Monetary Affairs, Board Jonathan Willis, Vice President and Senior Economist, Federal Reserve Bank of Atlanta Paul R. Wood, Special Adviser to the Board, Division of Board Members, Board Rebecca Zarutskie, Special Adviser to the Board, Division of Board Members, Board Annual Organizational Matters3 The agenda for this meeting 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, 2023, were received and that these individuals executed their oaths of office. The elected members and alternate members were as follows: John C. Williams, President of the Federal Reserve Bank of New York, with Helen E. Mucciolo, Interim First Vice President of the Federal Reserve Bank of New York, as alternate Patrick Harker, President of the Federal Reserve Bank of Philadelphia, with Thomas I. Barkin, President of the Federal Reserve Bank of Richmond, as alternate Austan D. Goolsbee, President of the Federal Reserve Bank of Chicago, with Loretta J. Mester, President of the Federal Reserve Bank of Cleveland, as alternate Lorie K. Logan, President of the Federal Reserve Bank of Dallas, with Raphael W. Bostic, President of the Federal Reserve Bank of Atlanta, as alternate Neel Kashkari, President of the Federal Reserve Bank of Minneapolis, with Mary C. Daly, 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 2024: Jerome H. Powell Chair John C. Williams Vice Chair Joshua Gallin Secretary Matthew M. Luecke Deputy Secretary Brian J. Bonis Assistant Secretary Michelle A. Smith Assistant Secretary Mark E. Van Der Weide General Counsel Richard Ostrander Deputy General Counsel Charles C. Gray Assistant General Counsel Trevor A. Reeve Economist Stacey Tevlin Economist Beth Anne Wilson Economist     Shaghil Ahmed Roc Armenter James A. Clouse Brian M. Doyle Eric M. Engen Beverly J. Hirtle Anna Paulson Andrea Raffo Chiara Scotti4 William Wascher Associate Economists By unanimous vote, the Committee selected the Federal Reserve Bank of New York to execute transactions for the System Open Market Account (SOMA). By unanimous vote, the Committee selected Patricia Zobel to serve at the pleasure of the Committee as deputy manager of the SOMA through February 20, 2023, and Roberto Perli and Julie Ann Remache to serve at the pleasure of the Committee as manager and deputy manager of the SOMA, respectively, effective February 21, 2023, on the understanding that these selections were subject to being satisfactory to the Federal Reserve Bank of New York. Secretary's note: The Federal Reserve Bank of New York subsequently sent advice that the selections indicated previously were satisfactory. As part of the annual review of the Committee's governance documents for open market operations and foreign currency transactions, the Committee unanimously approved a new governance document titled "FOMC Authorizations and Continuing Directives for Open Market Operations."3 The new document includes (1) authorizations previously in the Committee's Authorization for Foreign Currency Operations and Authorization for Domestic Open Market Operations; (2) a new "Continuing Directive for Domestic Open Market Operations," which combines direction to the Desk in the Standing Repurchase Agreement Facility and FIMA Repurchase Agreement Facility resolutions with direction to the Desk to continue to carry out other ongoing activities; (3) the Foreign Currency Directive; and (4) two other existing documents related to contingency arrangements. The new unified document improves clarity and transparency in the governance of Desk activities but does not make substantive changes to governance. The domestic policy directive released after each FOMC meeting will have modest conforming changes going forward. Ahead of the vote on policies relating to information security, external communications, and investment and trading, the Chair commented on the critical importance of maintaining the public's trust and confidence in the Federal Reserve as an institution and indicated that these policies were very important in that regard. All participants indicated support for, and agreed to abide by the requirements of, the Program for Security of FOMC Information (Program), the FOMC Policy on External Communications of Committee Participants, the FOMC Policy on External Communications of Federal Reserve System Staff, and the Investment and Trading Policy for FOMC Officials. The Committee voted unanimously to reaffirm all four policies without revision.3 As part of the Committee's annual organizational review process, all participants indicated support for the Statement on Longer-Run Goals and Monetary Policy Strategy, and the Committee voted unanimously to reaffirm it without revision.3 Developments in Financial Markets and Open Market Operations The manager pro tem turned first to a review of U.S. financial market developments. Market participants generally expected U.S. economic growth to moderate this year, al­though there was a wide dispersion in views about the extent of a potential slowdown. Market participants interpreted incoming data as pointing to moderating inflation risks. Against this backdrop, market participants judged that the FOMC would likely slow the pace of rate increases further at the current meeting, and respondents to the Desk's Survey of Primary Dealers and Survey of Market Participants widely expected the Committee to implement a 1/4 percentage point increase in the target range for the federal funds rate. Survey respondents assessed that uncertainty around the likely peak level of the policy rate narrowed relative to the comparable results from the December surveys and, on average, placed significant probability on a target federal funds rate range close to 5 percent. A significant share of survey respondents anticipated that the Committee would hold the policy rate stable for much of 2023. Moderating inflation in the United States and improving global growth prospects lifted market sentiment. While most Desk survey respondents expected subdued growth or a mild recession in 2023, market participants continued to see notable uncertainties ahead, including prospects for a deeper downturn or the potential for more persistent inflation. Regarding the international outlook, signs of a faster reopening in China and a less severe downturn in Europe eased concerns about global growth, contributing to a depreciation in the exchange value of the dollar and supporting optimism about emerging market economies. Narrowing interest rate differentials between the United States and other advanced foreign economies also contributed to dollar depreciation, as some foreign central bank communications suggested a need for further monetary policy tightening to address inflation pressures. In addition, the Bank of Japan unexpectedly widened its yield curve control band at its December meeting to address market functioning issues in the market for Japanese government bonds. Over the period, some other central banks communicated that they were at or near a point where it would be appropriate to pause policy rate increases and assess the effects of cumulative policy tightening. The manager pro tem turned next to a discussion of money markets and Federal Reserve operations. Money market rates were stable over the period, with the year-end passing smoothly. As expected, balances in the overnight reverse repurchase agreement (ON RRP) facility increased at year-end but quickly retraced. Market participants generally expected usage of the ON RRP facility to continue a downward trend in 2023, moderating the decline in reserve balances as the Federal Reserve's holdings of securities continue to run off. Should transitory pressures occur in money markets over the course of the year, the manager pro tem noted that the standing repurchase agreement (repo) facility and discount window would be available to help support effective monetary policy implementation. The manager noted that, over coming months, developments affecting the Treasury General Account (TGA) and Treasury financing could influence money market conditions. An increase in TGA balances associated with April individual tax receipts could result in a temporary decline in reserve balances. In subsequent months, uncertainties associated with the debt limit could also be important. In particular, the Treasury could increase bill issuance to rebuild TGA balances once the debt limit is lifted, reducing reserves and potentially lifting money market rates. The manager pro tem noted that in recent months, investors in the ON RRP facility had responded to small increases in money market rates by shifting balances into private investments, and that reductions in ON RRP volumes may help smooth adjustments in money markets. 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 available at the time of the January 31­â€“February 1 meeting indicated that labor market conditions remained tight in December, with the unemployment rate at a historical low. Consumer price inflation—as measured by the 12-month percent change in the price index for personal consumption expenditures (PCE)—continued to step down in November and December but was still elevated. Real gross domestic product (GDP) increased at a solid pace in the fourth quarter of last year. Total nonfarm payroll employment increased solidly in December, al­though at a slower pace than in the previous two months. The unemployment rate moved back down to 3.5 percent in December. The unemployment rate for African Americans was unchanged, and the unemployment rate for Hispanics ticked up; the unemployment rates for both groups remained above the aggregate measure. The aggregate measures of both the labor force participation rate and the employment-to-population ratio edged up. The private-sector job openings rate, as measured by the Job Openings and Labor Turnover Survey, was flat in November and remained high. Measures of nominal wage growth slowed at the end of last year but continued to be elevated. The three-month change in the employment cost index (ECI) of hourly compensation in the private sector slowed to a 4.0 percent annual rate in December, while the three-month change measure of average hourly earnings (AHE) for all employees eased to an annual rate of 4.1 percent. Over the 12 months ending in December, the ECI increased 5.1 percent, and AHE rose 4.6 percent. Consumer price inflation eased in November and December but remained elevated. Total PCE price inflation was 5.0 percent over the 12 months ending in December, 1.1 percentage points lower than the October figure. Core PCE price inflation, which excludes changes in consumer energy prices and many consumer food prices, was 4.4 percent over the 12 months ending in December, down 0.7 percentage point from its October reading. The trimmed mean measure of 12-month PCE price inflation constructed by the Federal Reserve Bank of Dallas was 4.4 percent in December, 0.3 percentage point lower than in October. The latest survey-based readings on longer-term inflation expectations from the University of Michigan Surveys of Consumers and the Federal Reserve Bank of New York's Survey of Consumer Expectations remained within the range of their values reported in recent months, while near-term measures of inflation expectations from these surveys moved down along with actual inflation. Al­though real GDP expanded at an annual rate of 2.9 percent in the fourth quarter, real private domestic final purchases (PDFP)—which includes PCE, residential investment, and business fixed investment—increased at a subdued annual rate of 0.2 percent. Real GDP growth was bolstered especially by a large gain in inventory investment and a notable contribution from net exports, as imports fell more than exports. Both inventories and net exports are volatile categories in aggregate spending. Regarding production, U.S. manufacturing output declined sizably in both November and December. Foreign economic growth slowed in the fourth quarter, weighed down by the COVID-19-related slowdown in China and repercussions of Russia's war against Ukraine. Weaker global demand and a rebalancing from goods to services also resulted in a pronounced slowdown in manufacturing, which weighed on activity in emerging Asia. In China, the pivot away from its zero-COVID policy appears to have resulted in a rapid surge in virus cases late in the year, but also in a rebound in activity as restrictions were rapidly removed. In Europe, the slowdown in economic growth was tempered by mild winter weather, which also prompted further declines in energy prices. A decline in retail energy as well as food prices contributed to an easing in headline consumer price inflation in many foreign economies. With core inflation remaining elevated amid tight labor markets, however, many central banks continued to tighten monetary policy. Staff Review of the Financial Situation Over the intermeeting period, the market-implied federal funds rate path was little changed for 2023 but moderately moved down further out. Nominal Treasury yields were little changed, while swaps-based inflation compensation measures fell notably. Stock market indexes were slightly higher, and market volatility declined but remained slightly elevated. Businesses and households continued to face elevated borrowing costs. Credit quality remained strong overall, al­though there were some signs of deterioration for consumer loans. The market-implied federal funds rate path for 2023 was little changed, on net, during the intermeeting period but fell moderately beyond mid-2024. On net, nominal Treasury yields were roughly unchanged, and swaps-market-implied inflation compensation measures fell notably. Broad stock price indexes ended the intermeeting period only slightly higher despite sizable fluctuations. Equity prices fell sharply following the December FOMC statement but recovered over the remainder of the period in response to data releases. The VIX—the one-month option-implied volatility on the S&P 500—decreased somewhat but remained slightly above the median range of its historical distribution. Spreads on investment-grade and high-yield corporate bonds narrowed somewhat, on net, over the intermeeting period, while spreads on municipal bonds narrowed substantially. Conditions in short-term funding markets remained stable over the intermeeting period, with the December increase in the target range for the federal funds rate and the associated increases in the Federal Reserve's administered rates passing through quickly to overnight money market rates. In secured markets, repo rates were roughly the same as the ON RRP offering rate but continued to occasionally print slightly higher around days with Treasury bill and coupon settlements. Daily take-up in the ON RRP facility remained elevated, reflecting continued elevated assets under management (AUM) for money market mutual funds (MMFs), ongoing uncertainty around the policy path, and limited supply of alternative investments such as Treasury bills. Net yields on MMFs rose further over the intermeeting period, mostly passing through the increase in administered rates. Bank deposit rates gradually increased but continued to lag cumulative increases in the federal funds rate. Over the intermeeting period, investor perceptions of an improved economic outlook in China and Europe contributed to increases in foreign risky asset prices and weighed on the exchange value of the dollar. Global equity indexes rose, supported in part by lower European natural gas prices and China's decision to abandon its zero-COVID policy. Sovereign yields increased notably in the euro area and Japan, reflecting more-restrictive-than-expected communications from the European Central Bank and the Bank of Japan's decision to widen its yield curve control target band, respectively. In contrast, yields in other major advanced foreign economies were little changed on net. The staff's broad dollar index declined over the intermeeting period, with larger declines against emerging market economy (EME) currencies amid significant inflows into EME-focused investment funds in January on improved investor sentiment. Narrowing yield differentials between the United States and some advanced foreign economies also contributed to the depreciation of the dollar. In domestic credit markets, businesses and households continued to face elevated borrowing costs. Yields for corporate bonds declined, while borrowing costs for leveraged loans were little changed at elevated levels. Bank interest rates for commercial and industrial (C&I) loans continued to trend upward in the fourth quarter. Yields on municipal bonds declined during the intermeeting period but remained above their historical average. Residential mortgage rates were little changed over the intermeeting period and remained well above their levels in the previous tightening cycle, notwithstanding the decline from their peak in early November. Interest rates on existing credit cards continued to increase in recent months, and interest rates on new auto loans also rose through mid-January. Credit remained broadly available for businesses and households with strong credit quality but remained tight for lower-rated borrowers. Lending standards tightened further for bank-dependent borrowers. Issuance of corporate bonds was subdued in December before picking up somewhat in January. New launches of leveraged loans were notably subdued in December and January, likely reflecting soft investor demand and higher reference rates on floating-rate loans. In the January Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS), banks reported having tightened C&I and commercial real estate (CRE) lending standards over the previous three months. Al­though C&I loans at banks continued to expand through December, they decelerated relative to earlier in the year, in line with tighter lending standards and weaker demand for C&I loans over the fourth quarter. CRE loan growth on domestic banks' balance sheets remained robust in the fourth quarter. Meanwhile, issuance of commercial mortgage-backed securities remained slow in November and December, amid high base interest rates and spreads. Some tightening in lending conditions was also evident for small businesses, with the share of small firms reporting that it was more difficult to obtain credit compared with three months earlier continuing to trend up through December. Credit was broadly available in the residential mortgage market for high-credit-score borrowers who met standard conforming loan criteria. Credit availability for households with lower credit scores was considerably tighter, though comparable to levels prevailing before the pandemic. Purchase mortgage applications and refinance applications were both little changed over the intermeeting period. Home equity line of credit (HELOC) balances at banks continued to grow through the fourth quarter, on net, potentially reflecting homeowners using HELOCs as a preferred way of extracting home equity in the presence of high current mortgage rates. In the January SLOOS, banks reported tighter standards for all consumer loans. Even so, total credit card balances increased at a solid pace in November, while auto loans grew modestly. Overall, credit quality remained strong, al­though there was some deterioration for credit card and auto loan borrowers and some predictors of future credit quality worsened a bit further. The volume of corporate bond rating downgrades outpaced upgrades in December, al­though the level of downgrades remained moderate. Leveraged loans experienced notable net rating downgrades in December, but the pace moderated in January. Default rates on corporate bonds and leveraged loans remained low. Measures of expected default probabilities for corporate bonds and leveraged loans remained elevated relative to their historical distributions. The credit quality of businesses that borrow from banks remained sound, on balance, al­though, in the January SLOOS, banks reported expecting a deterioration in the quality of business loans in their portfolio over 2023. Delinquencies on small business loans continued to edge up in November but remained low relative to historical levels. The credit quality of households also remained strong, on balance, despite some signs of deterioration. Delinquencies for Federal Housing Administration mortgages increased slightly, but overall mortgage delinquency rates were still near pre-pandemic lows. Delinquency rates for credit cards and auto loans continued to rise during the third quarter. While delinquency rates on credit cards were still relatively low, those on auto loans rose above pre-pandemic levels. In the January SLOOS, banks reported expecting a further deterioration in the quality of household loans in 2023, especially for consumer loans. The staff provided an update on its assessment of the stability of the financial system and, on balance, characterized the financial vulnerabilities of the U.S. financial system as moderate. The staff judged that asset valuation pressures remained notable. In particular, the staff noted that measures of valuations in both residential and commercial property markets remained high, and that the potential for large declines in property prices remained greater than usual. In addition, the forward price-to-earnings ratio for S&P 500 firms remained above its median value despite the decline in equity prices over the past year. The staff assessed that valuation pressures had eased for corporate bonds and leveraged loans, as spreads in both markets had increased from recent lows. The staff assessed that vulnerabilities associated with household and business leverage remained moderate, noting that al­though measures of business leverage were at or near a historically high level, the ability of firms to service their debt has kept pace with rising debt loads and interest rates. Household borrowing rose for borrowers with prime credit scores but declined for households with lower credit scores. Vulnerabilities associated with financial leverage also remained moderate. In particular, risk-based capital ratios for banks increased slightly, a staff measure of leverage at life insurance companies remained relatively flat in recent quarters, and leverage among private credit funds has remained steady for several years. While measures of hedge fund leverage have decreased since the pandemic shock, the staff noted that leverage among the largest funds was on track to return to 2019 levels. Vulnerabilities associated with funding risks were characterized as moderate. The rising rate environment has prompted inflows into prime retail MMFs, while AUM at prime institutional funds, which have proved more sensitive to turmoil in the past, have grown much less. Assets in open-end mutual funds that invest in less liquid instruments like bank loans or high-yield corporate bonds have declined notably over the past year. In response to vulnerabilities at MMFs and open-end mutual funds, the Securities and Exchange Commission has proposed rules to make these funds more resilient. Staff Economic Outlook The forecast for the U.S. economy prepared by the staff for this FOMC meeting had a somewhat higher path for the level of real GDP and a modestly lower path for the unemployment rate than in the December projection, reflecting both the recent data and a small additional boost to output from a lower projected path for the dollar. Al­though recent data indicated that real GDP growth in the fourth quarter of 2022 was stronger than expected, real PDFP growth was weaker than previously forecast, and the large, unexpected boost to GDP growth from inventory investment was not projected to persist. In part reflecting the lagged effects of previous monetary policy tightening, the staff still projected real GDP growth to slow markedly this year and the labor market to soften. The staff forecast continued to include a pickup in real GDP growth starting next year, al­though projected output growth in 2024 and 2025 remains below the staff's estimate of potential output growth. The level of real output was expected to move down to the staff's estimate of potential near the end of 2025. Likewise, the unemployment rate was projected to gradually move up to the staff's estimate of its natural rate at the end of 2025. On a four-quarter change basis, total PCE price inflation was forecast to be 2.8 percent in 2023, and core inflation was expected to be 3.2 percent, both lower than in the December projection. With the effects of supply–demand imbalances in goods markets expected to further unwind and labor and product markets projected to become less tight, the staff continued to forecast that inflation would decline further over 2024 and 2025. On a four-quarter change basis, core goods inflation was projected to move down further this year and then remain subdued, housing services inflation was expected to peak later this year and then move down, and core nonhousing services inflation was forecast to slow as nominal wage growth eased. With steep declines in consumer energy prices and a substantial moderation in food price inflation expected for this year, total inflation was projected to step down markedly this year and then to track core inflation over the following two years. In 2025, both total and core PCE price inflation were expected to be near 2 percent. The sluggish growth in real private domestic spending expected this year and the persistently tight financial conditions were seen as tilting the risks to the downside around the baseline projection for real economic activity, and the staff still viewed the possibility of a recession sometime this year as a plausible alternative to the baseline. Moreover, with core PCE price inflation having slowed in recent months, along with the cumulative upward revisions to the core inflation projection over the past year and the expected softening in economic growth, the staff now viewed the risks around the baseline forecast for inflation this year as balanced. For beyond this year, the staff continued to view the risks around the inflation projection as skewed to the upside, reflecting concerns about the potential persistence of inflation. Participants' Views on Current Conditions and the Economic Outlook In their discussion of current economic conditions, participants noted that recent indicators pointed to modest growth in spending and production. Nonetheless, job gains had been robust in recent months, and the unemployment rate remained low. Inflation had eased somewhat but remained elevated. Participants recognized that Russia's war against Ukraine was causing tremendous human and economic hardship and was contributing to elevated global uncertainty. Against this background, participants continued to be highly attentive to inflation risks. Participants agreed that cumulative policy firming to date had reduced demand in the most interest-rate-sensitive sectors of the economy, particularly housing. Participants observed that growth in economic activity in 2022 had been below its longer-run trend and expected that real GDP growth would slow further in 2023. While real GDP growth had rebounded in the second half of 2022, several participants noted that growth in PDFP had nearly stalled in the fourth quarter. With inflation remaining unacceptably high, participants expected that a period of below-trend growth in real GDP would be needed to bring aggregate demand into better balance with aggregate supply and thereby reduce inflationary pressures. Some participants judged that recent economic data signaled a somewhat higher chance of continued subdued economic growth, with inflation falling over time to the Committee's longer-run goal of 2 percent, al­though some participants noted that the probability of the economy entering a recession in 2023 remained elevated. In their discussion of the household sector, participants observed that real consumer spending had declined in November and December—in part reflecting the tightening in financial conditions over the past year—and anticipated that consumption would likely grow at a subdued rate in 2023. Participants noted that excess savings accumulated during the pandemic had continued to support consumption, al­though several participants remarked that the importance of this factor would likely wane over time as excess savings continued to be drawn down or eroded by inflation. A couple of participants observed that some consumers were shifting their spending to less expensive alternatives. A few participants noted the effects of higher interest costs in restraining consumption or inhibiting the ability of some households to repay their loans, while a couple of participants noted that inflation was eroding households' purchasing power. However, a couple of participants noted that some states could return part of their sizable budget surpluses to households through tax cuts or rebates, which would provide support to consumption. Participants agreed that activity in the housing market had continued to weaken, largely reflecting the increase in mortgage rates over the past year. Regarding the business sector, participants observed that growth in business fixed investment spending had been subdued in the fourth quarter and was being restrained by past interest rate increases. A number of participants commented that supply bottlenecks continued to ease, al­though supply chain issues remained a challenge in some sectors. Several participants remarked that the recent strong growth in inventory investment will likely slow; a couple of those participants noted that businesses appeared more confident that significant supply bottlenecks would not reemerge and might therefore choose to hold smaller inventories. Some participants commented that the easing of COVID-related lockdown restrictions in China or stronger-than-expected growth in economic activity in the euro area could provide support to final demand in the United States. Participants agreed that the labor market remained very tight and assessed that labor demand substantially exceeded the supply of available workers. Participants noted that the unemployment rate had returned to a historically low level in December, job vacancies remained high, and wage growth remained elevated. Several participants noted that recent reductions in the workforces of some large technology businesses followed much larger increases over the previous few years and judged that these reductions did not appear to reflect widespread weakness in the demand for labor. A few participants remarked that some business contacts appeared keen to retain workers even in the face of slowing demand for output because of their recent experiences of labor shortages and hiring challenges. Participants agreed that labor supply remained constrained by structural factors such as the effects from the pandemic, including those on early retirements, and the reduced availability and increased cost of childcare. Nevertheless, participants noted tentative signs that imbalances between demand and supply in the labor market were improving, with job vacancies and payroll gains declining somewhat from high levels, the average number of hours worked falling, and growth in wages and employment costs slowing. Some participants commented on the recent reduction in temporary employment, which previously had often preceded more widespread reductions in labor demand. Under appropriate monetary policy, participants expected labor market demand and supply to come into better balance over time, easing upward pressure on nominal wages and prices. A number of participants commented on the importance of recognizing that, to the extent national unemployment increases, historical evidence indicates that even larger increases in the unemployment rate for some demographic groups—particularly African Americans and Hispanics—would be likely to occur. With inflation still well above the Committee's longer-run goal of 2 percent, participants agreed that inflation was unacceptably high. A number of participants commented that the costs of elevated inflation are particularly high for lower-income households. Participants noted that inflation data received over the past three months showed a welcome reduction in the monthly pace of price increases but stressed that substantially more evidence of progress across a broader range of prices would be required to be confident that inflation was on a sustained downward path. Participants noted that core goods prices had declined notably over the previous few months as supply bottlenecks had eased but anticipated that price declines for this component would dissipate as the downward pressure on goods prices from resolving supply bottlenecks fades. Participants judged that housing services inflation would likely begin to fall later this year, reflecting continued smaller increases, or potentially declines, in rents on new leases. Participants agreed that they had observed less evidence of a slowdown in the rate of increase of prices for core services excluding housing, a category that accounts for more than half of the core PCE price index. Participants judged that as long as the labor market remained very tight, wage growth in excess of 2 percent inflation and trend productivity growth would likely continue to put upward pressure on some prices in this component. A couple of participants observed that changes in wages tend to lag changes in prices, which can complicate the assessment of inflation pressures. A couple of participants remarked that the poor performance of labor productivity growth last year was restraining aggregate supply, which was contributing to imbalances between aggregate demand and aggregate supply and therefore to upward pressure on inflation. Several participants noted the possibility that as consumers become more price sensitive, businesses might accept lower profit margins in an effort to maintain market share, which could reduce inflation temporarily. Participants observed that indicators of short-term inflation expectations from surveys of households and businesses as well as from financial markets had come down and that longer-term inflation expectations remained well anchored. A number of participants noted the importance of longer-term inflation expectations remaining anchored and remarked that the longer inflation remained elevated, the greater the risk of inflation expectations becoming unanchored. In that adverse scenario, it would be more costly to bring inflation down to achieve the Committee's statutory objectives of maximum employment and price stability. Participants observed that financial conditions remained much tighter than in early 2022. However, several participants observed that some measures of financial conditions had eased over the past few months. A few participants noted that increased confidence among market participants that inflation would fall quickly appeared to contribute to declines in market expectations of the federal funds rate path beyond the near term. Participants noted that it was important that overall financial conditions be consistent with the degree of policy restraint that the Committee is putting into place in order to bring inflation back to the 2 percent goal. Participants observed that the uncertainty associated with their outlooks for economic activity, the labor market, and inflation was high. Regarding upside risks to inflation, participants cited a variety of factors, including the possibility that price pressures could prove to be more persistent than anticipated due to, for example, the labor market staying tight for longer than anticipated. Participants also saw a number of upside risks surrounding the outlook for inflation stemming from factors abroad, such as China's relaxation of its zero-COVID policies and Russia's continuing war against Ukraine. However, a few participants remarked that the risks to their inflation outlook had become more balanced. Participants agreed that the risks to the outlook for economic activity were weighted to the downside. Participants noted that sources of such risks included the prospect of unexpected negative shocks tipping the economy into a recession in an environment of subdued growth, the effects of synchronous policy firming by major central banks, and disruptions in the financial system and broader economy associated with concerns that the statutory debt limit might not be raised in a timely manner. In their discussion of issues related to financial stability, several participants discussed vulnerabilities in the financial system associated with higher interest rates, including the elevated valuations for some categories of assets, particularly in the CRE sector; the susceptibility of some nonbank financial institutions to runs; and the effect of large, unrealized losses on some banks' securities portfolios. A few participants commented that international stresses had the potential to transmit to the U.S. financial system. A number of participants noted the importance of orderly functioning of the market for U.S. Treasury securities and stressed the importance of the appropriate authorities continuing to address issues related to the resilience of the market. Al­though several participants noted that the Federal Reserve's standing liquidity facilities could be helpful in addressing significant pressures in funding markets, should they arise, several participants also noted the challenges of addressing potential disruptions in U.S. core market functioning. A few participants remarked that recent failures of companies involved in crypto finance have had a limited effect on the broader financial system. These participants indicated that this limited effect reflected the minimal extent of the crypto market's connections to the banking system thus far, consistent with the risks associated with many of these activities. Several participants discussed the value of the Federal Reserve taking additional steps to understand the potential risks associated with climate change or to assess the materiality of such risks in the context of carrying out its responsibilities to evaluate risks in the banking system and broader financial system. A number of participants stressed that a drawn-out period of negotiations to raise the federal debt limit could pose significant risks to the financial system and the broader economy. In their consideration of appropriate monetary policy actions at this meeting, participants concurred that the Committee had made significant progress over the past year in moving toward a sufficiently restrictive stance of monetary policy. Even so, participants agreed that, while there were recent signs that the cumulative effect of the Committee's tightening of the stance of monetary policy had begun to moderate inflationary pressures, inflation remained well above the Committee's longer-run goal of 2 percent and the labor market remained very tight, contributing to continuing upward pressures on wages and prices. Against this backdrop, and in consideration of the lags with which monetary policy affects economic activity and inflation, almost all participants agreed that it was appropriate to raise the target range for the federal funds rate 25 basis points at this meeting. Many of these participants observed that a further slowing in the pace of rate increases would better allow them to assess the economy's progress toward the Committee's goals of maximum employment and price stability as they determine the extent of future policy tightening that will be required to attain a stance that is sufficiently restrictive to achieve these goals. A few participants stated that they favored raising the target range for the federal funds rate 50 basis points at this meeting or that they could have supported raising the target by that amount. The participants favoring a 50-basis point increase noted that a larger increase would more quickly bring the target range close to the levels they believed would achieve a sufficiently restrictive stance, taking into account their views of the risks to achieving price stability in a timely way. All participants agreed that it was appropriate to continue the process of reducing the Federal Reserve's securities holdings, as described in its previously announced Plans for Reducing the Size of the Federal Reserve's Balance Sheet. In discussing the policy outlook, with inflation still well above the Committee's 2 percent goal and the labor market remaining very tight, all participants continued to anticipate that ongoing increases in the target range for the federal funds rate would be appropriate to achieve the Committee's objectives. Participants affirmed their strong commitment to returning inflation to the Committee's 2 percent objective. In determining the extent of future increases in the target range, participants judged that it would be appropriate to take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. Participants observed that a restrictive policy stance would need to be maintained until the incoming data provided confidence that inflation was on a sustained downward path to 2 percent, which was likely to take some time. Participants discussed the heightened uncertainty regarding the economic outlook and a number of factors that could affect inflation and real economic activity. Participants generally noted that the Committee's future decisions regarding policy would continue to be informed by the incoming data and their implications for the outlook for economic activity and inflation. A number of participants observed that financial conditions had eased in recent months, which some noted could necessitate a tighter stance of monetary policy. Participants also discussed a number of risk-management considerations related to the conduct of monetary policy. Almost all participants observed that slowing the pace of rate increases at the current juncture would allow for appropriate risk management as the Committee assessed the extent of further tightening needed to meet the Committee's goals. Several of those participants observed that risks to the economic outlook were becoming more balanced. With inflation still well above the Committee's longer-run goal, participants generally noted that upside risks to the inflation outlook remained a key factor shaping the policy outlook, and that maintaining a restrictive policy stance until inflation is clearly on a path toward 2 percent is appropriate from a risk-management perspective. A number of participants observed that a policy stance that proved to be insufficiently restrictive could halt recent progress in moderating inflationary pressures, leading inflation to remain above the Committee's 2 percent objective for a longer period, and pose a risk of inflation expectations becoming unanchored. Participants noted that the runoff of the balance sheet had been proceeding smoothly. A few participants observed that money markets could experience some temporary pressures as reserves declined if use of the Federal Reserve's ON RRP facility continued to remain high. They noted, however, that such pressures, should they occur, would likely cause an upward re-pricing of private money-market rates that could encourage market participants to reduce their use of the facility. Committee Policy Actions In their discussion of monetary policy for this meeting, members agreed that recent indicators pointed to modest growth in spending and production. Members also concurred that job gains had been robust in recent months, and the unemployment rate had remained low. Members agreed that inflation had eased somewhat but remained elevated. Members concurred that Russia's war against Ukraine was causing tremendous human and economic hardship and was contributing to elevated global uncertainty. Members also concurred that they remained highly attentive to inflation risks. Members agreed that the Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, members agreed to raise the target range for the federal funds rate to 4-1/2 to 4-3/4 percent. Members anticipated that ongoing increases in the target range would be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time. Members concurred that, in determining the extent of future increases in the target range, they would take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, members agreed that they would continue reducing the Federal Reserve's holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee remained strongly committed to returning inflation to its 2 percent objective. Members agreed that, in assessing the appropriate stance of monetary policy, they would continue to monitor the implications of incoming information for the economic outlook. They would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. Members agreed that their assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and 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 instructed otherwise, to execute transactions in the SOMA in accordance with the following domestic policy directive, for release at 2:00 p.m.: "Effective February 2, 2023, 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 4-1/2 to 4-3/4 percent. Conduct overnight repurchase agreement operations with a minimum bid rate of 4.75 percent and with an aggregate operation limit of $500 billion; the aggregate operation limit can be temporarily increased at the discretion of the Chair. Conduct overnight reverse repurchase agreement operations at an offering rate of 4.55 percent and with a per-counterparty limit of $160 billion per day; the per-counterparty limit can be temporarily increased at the discretion of the Chair. Roll over at auction the amount of principal payments from the Federal Reserve's holdings of Treasury securities maturing in each calendar month that exceeds a cap of $60 billion per month. Redeem Treasury coupon securities up to this monthly cap and Treasury bills to the extent that coupon principal payments are less than the monthly cap. Reinvest into agency mortgage-backed securities (MBS) the amount of principal payments from the Federal Reserve's holdings of agency debt and agency MBS received in each calendar month that exceeds a cap of $35 billion per month. Allow modest deviations from stated amounts for reinvestments, if needed for operational reasons. Engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions." The vote also encompassed approval of the statement below for release at 2:00 p.m.: "Recent indicators point to modest growth in spending and production. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation has eased somewhat but remains elevated. Russia's war against Ukraine is causing tremendous human and economic hardship and is contributing to elevated global uncertainty. The Committee is highly attentive to inflation risks. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 4-1/2 to 4-3/4 percent. The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time. In determining the extent of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2 percent objective. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments." Voting for this action: Jerome H. Powell, John C. Williams, Michael S. Barr, Michelle W. Bowman, Lael Brainard, Lisa D. Cook, Austan D. Goolsbee, Patrick Harker, Philip N. Jefferson, Neel Kashkari, Lorie K. Logan, and Christopher J. Waller. 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 of the Federal Reserve System voted unanimously to raise the interest rate paid on reserve balances to 4.65 percent, effective February 2, 2023. The Board of Governors of the Federal Reserve System voted unanimously to approve a 1/4 percentage point increase in the primary credit rate to 4.75 percent, effective February 2, 2023.5 It was agreed that the next meeting of the Committee would be held on Tuesday–Wednesday, March 21–22, 2023. The meeting adjourned at 10:20 a.m. on February 1, 2023. Notation Vote By notation vote completed on January 3, 2023, the Committee unanimously approved the minutes of the Committee meeting held on December 13–14, 2022. _______________________ Joshua Gallin Secretary 1. The Federal Open Market Committee is referenced as the "FOMC" and the "Committee" in these minutes; the Board of Governors of the Federal Reserve System is referenced as the "Board" in these minutes. Return to text 2. Attended through the discussion of the economic and financial situation. Return to text 3. Committee organizational documents are available at www.federalreserve.gov/monetarypolicy/rules_authorizations.htm. Return to text 4. Chiara Scotti's selection was set to be effective upon her employment with the Federal Reserve Bank of Dallas. Return to text 5. In taking this action, the Board approved requests to establish that rate submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Richmond, Atlanta, Chicago, Kansas City, Dallas, and San Francisco. The vote also encompassed approval by the Board of Governors of the establishment of a 4.75 percent primary credit rate by the remaining Federal Reserve Banks, effective on the later of February 2, 2023, or the date such Reserve Banks inform the Secretary of the Board of such a request. (Secretary's note: Subsequently, the Federal Reserve Banks of Cleveland, St. Louis, and Minneapolis were informed of the Board's approval of their establishment of a primary credit rate of 4.75 percent, effective February 2, 2023.) Return to text

2023-02-01

Statement

Recent indicators point to modest growth in spending and production. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation has eased somewhat but remains elevated. Russia's war against Ukraine is causing tremendous human and economic hardship and is contributing to elevated global uncertainty. The Committee is highly attentive to inflation risks. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 4-1/2 to 4-3/4 percent. The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time. In determining the extent of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2 percent objective. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments. Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Michelle W. Bowman; Lael Brainard; Lisa D. Cook; Austan D. Goolsbee; Patrick Harker; Philip N. Jefferson; Neel Kashkari; Lorie K. Logan; and Christopher J. Waller. For media inquiries, please email [email protected] or call 202-452-2955. Implementation Note issued February 1, 2023

2022-12-14

Statement

Recent indicators point to modest growth in spending and production. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures. Russia's war against Ukraine is causing tremendous human and economic hardship. The war and related events are contributing to upward pressure on inflation and are weighing on global economic activity. The Committee is highly attentive to inflation risks. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 4-1/4 to 4-1/2 percent. The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time. In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in the Plans for Reducing the Size of the Federal Reserve's Balance Sheet that were issued in May. The Committee is strongly committed to returning inflation to its 2 percent objective. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments. Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Michelle W. Bowman; Lael Brainard; James Bullard; Susan M. Collins; Lisa D. Cook; Esther L. George; Philip N. Jefferson; Loretta J. Mester; and Christopher J. Waller. For media inquiries, please email [email protected] or call 202-452-2955. Implementation Note issued December 14, 2022

2023-01-04

Minute

Minutes of the Federal Open Market Committee December 13–14, 2022 A joint meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve System was held in the offices of the Board of Governors on Tuesday, December 13, 2022, at 10:00 a.m. and continued on Wednesday, December 14, 2022, at 9:00 a.m.1 Attendance Jerome H. Powell, Chair John C. Williams, Vice Chair Michael S. Barr Michelle W. Bowman Lael Brainard James Bullard Susan M. Collins Lisa D. Cook Esther L. George Philip N. Jefferson Loretta J. Mester Christopher J. Waller Charles L. Evans, Patrick Harker, Neel Kashkari, Lorie K. Logan, and Helen E. Mucciolo, Alternate Members of the Committee Thomas I. Barkin, Raphael W. Bostic, and Mary C. Daly, Presidents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco, respectively James A. Clouse, Secretary Matthew M. Luecke, Deputy Secretary Brian J. Bonis, Assistant Secretary Michelle A. Smith, Assistant Secretary Mark E. Van Der Weide, General Counsel Richard Ostrander, Deputy General Counsel Trevor A. Reeve, Economist Stacey Tevlin, Economist Beth Anne Wilson, Economist Shaghil Ahmed, Carlos Garriga, Joseph W. Gruber, and William Wascher, Associate Economists Patricia Zobel, Manager pro tem, System Open Market Account Jose Acosta, Senior Communications Analyst, Division of Information Technology, Board David Altig, Executive Vice President, Federal Reserve Bank of Atlanta Roc Armenter, Vice President, Federal Reserve Bank of Philadelphia Kartik B. Athreya, Executive Vice President, Federal Reserve Bank of Richmond Penelope A. Beattie, Section Chief, Office of the Secretary, Board Daniel O. Beltran, Deputy Associate Director, Division of International Finance, Board Ellen J. Bromagen, First Vice President, Federal Reserve Bank of Chicago Jennifer J. Burns, Deputy Director, Division of Supervision and Regulation, Board Mark A. Carlson, Adviser, Division of Monetary Affairs, Board Todd E. Clark, Senior Vice President, Federal Reserve Bank of Cleveland Stephanie E. Curcuru, Deputy Director, Division of International Finance, Board Navtej S. Dhillon, Special Adviser to the Board, Division of Board Members, Board Burcu Duygan-Bump, Special Adviser to the Board, Division of Board Members, Board Rochelle M. Edge, Deputy Director, Division of Monetary Affairs, Board Matthew J. Eichner,2 Director, Division of Reserve Bank Operations and Payment Systems, Board Eric M. Engen, Senior Associate Director, Division of Research and Statistics, Board Eric C. Engstrom, Associate Director, Division of Monetary Affairs, Board Jon Faust, Senior Special Adviser to the Chair, Division of Board Members, Board Glenn Follette, Associate Director, Division of Research and Statistics, Board Joshua Gallin, Senior Special Adviser to the Chair, Division of Board Members, Board Jonathan E. Goldberg, Principal Economist, Division of Monetary Affairs, Board Erik A. Heitfield, Deputy Associate Director, Division of Research and Statistics, Board Valerie S. Hinojosa, Section Chief, Division of Monetary Affairs, Board Jane E. Ihrig, Special Adviser to the Board, Division of Board Members, Board Benjamin K. Johannsen, Section Chief, Division of Monetary Affairs, Board Michael T. Kiley, Deputy Director, Division of Financial Stability, Board Don H. Kim, Senior Adviser, Division of Monetary Affairs, Board Elizabeth K. Kiser, Associate Director, Division of Research and Statistics, Board Sylvain Leduc, Executive Vice President, Federal Reserve Bank of San Francisco Andreas Lehnert, Director, Division of Financial Stability, Board Paul Lengermann, Assistant Director, Division of Research and Statistics, Board Eric LeSueur,2 Policy and Market Monitoring Advisor, Federal Reserve Bank of New York Kurt F. Lewis, Special Adviser to the Board, Division of Board Members, Board Laura Lipscomb, Special Adviser to the Board, Division of Board Members, Board David López-Salido, Senior Associate Director, Division of Monetary Affairs, Board Jonathan P. McCarthy, Economic Research Advisor, Federal Reserve Bank of New York Ann E. Misback, Secretary, Office of the Secretary, Board Raven Molloy, Deputy Associate Director, Division of Research and Statistics, Board Norman J. Morin, Deputy Associate Director, Division of Research and Statistics, Board Michelle M. Neal, Head of Markets, Federal Reserve Bank of New York Giovanni Nicolò, Senior Economist, Division of Monetary Affairs, Board Anna Nordstrom, Capital Markets Trading Head, Federal Reserve Bank of New York Marcelo Ochoa,3 Principal Economist, Division of Monetary Affairs, Board Giovanni Olivei, Senior Vice President, Federal Reserve Bank of Boston Anna Paulson, Executive Vice President, Federal Reserve Bank of Chicago Andrea Raffo, Senior Vice President, Federal Reserve Bank of Minneapolis Linda Robertson, Assistant to the Board, Division of Board Members, Board Achilles Sangster II, Senior Information Manager, Division of Monetary Affairs, Board Anthony Sarver, Senior Financial Institution and Policy Analyst, Division of Monetary Affairs, Board John W. Schindler,4 Senior Associate Director, Division of Financial Stability, Board Samuel Schulhofer-Wohl, Senior Vice President, Federal Reserve Bank of Dallas Seth Searls,2 Policy and Market Monitoring Associate Director, Federal Reserve Bank of New York Nitish Ranjan Sinha, Special Adviser to the Board, Division of Board Members, Board Clara Vega, Special Adviser to the Board, Division of Board Members, Board Annette Vissing-Jørgensen, Senior Adviser, Division of Monetary Affairs, Board Jeffrey D. Walker,2 Associate Director, Division of Reserve Bank Operations and Payment Systems, Board Min Wei, Senior Associate Director, Division of Monetary Affairs, Board Paul R. Wood, Special Adviser to the Board, Division of Board Members, Board Rebecca Zarutskie, Special Adviser to the Board, Division of Board Members, Board Selection of Committee Officer By unanimous vote, the Committee selected Richard Ostrander to serve as deputy general counsel, effective December 13, 2022, until the first regularly scheduled meeting of the Committee in 2023. Developments in Financial Markets and Open Market Operations The manager pro tem turned first to a discussion of developments in financial markets. Following several months of tightening, financial conditions eased over the period as investor concerns about global risks edged lower and incoming data showed nascent signs of a moderation in inflationary pressures. Central bank communications signaling a slower pace of policy rate increases appeared to contribute to improved sentiment. Measures of implied volatility across financial markets declined somewhat from the elevated levels observed in October. Consistent with the decline in volatility, model-based measures suggested that a drop in term premiums accounted for much of the decline in Treasury yields over the period. Equity markets moved higher. However, equity market contacts noted risks to growth ahead, and earnings expectations for coming quarters had been marked down. In foreign exchange markets, moderating concerns about the potential for highly elevated U.S. interest rates spurred a depreciation in the foreign exchange value of the dollar. In other market developments, the manager pro tem noted the failure of a prominent crypto-asset exchange. While the spillovers from this situation had been significant among other crypto lenders and exchanges, the collapse was not seen as posing broader market risks to the financial system. Regarding the outlook for inflation in the United States, inflation compensation implied by Treasury Inflation Protected Securities declined over the period, responding to lower-than-expected consumer price index (CPI) data and a sizable drop in oil prices. However, the Desk survey-based measures of inflation expectations were little changed from the prior survey, suggesting that falling inflation risk premiums may have contributed to the moves. Both market- and survey-based measures continued to point to expectations for a moderation of inflation over the coming year. Regarding the outlook for monetary policy, both market- and Desk survey-based measures indicated expectations for the Committee to maintain elevated policy rates through 2023. In the December survey, the median respondent's modal expectation for the path of the federal funds rate in 2023 shifted higher by 25 basis points relative to the November survey. The survey-based estimate of the expected policy path in 2024 continued to suggest a decline in the target range for the federal funds rate over 2024, little changed from the path anticipated in the November survey. In contrast, the market-implied path of the federal funds rate in 2024 shifted down by as much as 3/4 percentage point over the period, likely reflecting declining risk premiums. The manager pro tem turned next to a discussion of operations and money markets and assessed that balance sheet runoff was proceeding smoothly. Repurchase agreement (repo) rates firmed modestly relative to the overnight reverse repurchase agreement (ON RRP) facility rate over the period with balance sheet reduction reportedly contributing, in part, to an increase in the demand for financing of Treasury securities. ON RRP balances declined, on net, as money market funds shifted investments out of the ON RRP facility, reportedly in favor of higher rates available in repo markets. In recent months, banks continued to increase their use of wholesale funding. In addition, survey information suggested that banks expected to move deposit rates modestly higher relative to the target range in coming months. Over time, greater competition among banks for funding could contribute to drawdowns in the ON RRP facility. Staff indicated that they would continue to monitor money market conditions closely as balance sheet reduction proceeds. Looking ahead to year end, market participants anticipated limited pressures. The manager pro tem noted that if transitory pressures emerged in money markets, the Federal Reserve's backstop facilities are available to support effective policy implementation and smooth market functioning. 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 available at the time of the December 13–14 meeting suggested that U.S. real gross domestic product (GDP) was increasing at a modest pace in the fourth quarter of 2022 after expanding strongly in the third quarter. Labor market conditions eased somewhat over October and November but remained quite tight. Consumer price inflation—as measured by the 12-month percent change in the price index for personal consumption expenditures (PCE)—stepped down in October but continued to be elevated. Total nonfarm payroll employment posted solid gains in October and November that were slower than the average monthly pace seen over the earlier part of the year. The unemployment rate moved up 0.2 percentage point to 3.7 percent in October and remained at that rate in November. On balance, the unemployment rate for African Americans edged down over those two months, while the unemployment rate for Hispanics increased slightly; the unemployment rates for both groups remained above the national measure. Both the labor force participation rate and the employment-to-population ratio declined a little over the past two months. The private-sector job openings rate, as measured by the Job Openings and Labor Turnover Survey, moved back down in October but remained high. Nominal wage growth continued to be elevated and remained above the pace judged to be consistent with the FOMC's 2 percent inflation objective. Average hourly earnings rose 5.1 percent over the 12 months ending in November, close to the pace recorded in the employment cost index of hourly compensation in the private sector over the 12 months ending in September. Compensation per hour (CPH) in the business sector rose 4.0 percent over the four quarters ending in the third quarter, but the reported increase likely understated the true pace of increase in CPH, as the lower second-quarter employment data from the Quarterly Census of Employment and Wages had not yet been incorporated in the CPH measure. Consumer price inflation remained elevated but had eased in recent months. Total PCE price inflation was 6.0 percent over the 12 months ending in October, 0.3 percentage point below the September figure. Core PCE price inflation, which excludes changes in consumer energy prices and many consumer food prices, was 5.0 percent over the 12 months ending in October, down 0.2 percentage point from its September reading. The trimmed mean measure of 12-month PCE price inflation constructed by the Federal Reserve Bank of Dallas remained at 4.7 percent in October. In November, the 12-month change in the CPI stepped down to 7.1 percent and core CPI inflation dropped to 6.0 percent. The CPI, along with data from the producer price index, pointed to a further slowing in PCE price inflation in November. A preliminary estimate of the staff's common inflation expectations index, which combines information from many indicators of inflation expectations and inflation compensation, edged down in the fourth quarter but continued to be above pre-pandemic levels. After expanding at a moderate pace in the third quarter, real PCE growth appeared to have picked up in the fourth quarter. In contrast, residential investment looked to be contracting sharply further, and growth in business fixed investment seemed to be slowing markedly, with tepid gains in equipment and intangibles spending and continued declines in nonresidential structures investment. Manufacturing production increased only modestly in October, and the available data pointed to a decline in November. A decrease in factory output would be consistent with recent readings from national and regional manufacturing surveys, which showed declining new orders and a drawdown in order backlogs. After narrowing in the third quarter, the nominal U.S. international trade deficit widened in October. Real goods exports fell, led by declines in exports of industrial supplies and consumer goods. Real goods imports rose, driven by increases in imports of industrial supplies, which more than offset declines in imports of capital goods and consumer goods. Exports of services rose, in part as travel exports continued to recover, while imports of services were little changed. Foreign economic activity grew at a moderate pace in the third quarter, but more recent data pointed to weakening growth, weighed down by the economic fallout of Russia's war against Ukraine and a COVID-19-related slowdown in China. High inflation continued to contribute to a decline in real disposable incomes, which, together with disruptions to energy supplies, depressed economic activity, especially in Europe. In China, authorities began to ease social restrictions even as COVID cases surged, raising the prospect of significant disruptions to economic activity in the near term, but also a faster reopening. Weaker global demand and high interest rates also weighed on activity in emerging market economies. Despite tentative signs of easing in foreign headline inflation, core inflationary pressures remained elevated in many countries. In response to high inflation, many central banks further tightened monetary policy, albeit at a slower pace in some cases. Staff Review of the Financial Situation Over the intermeeting period, Treasury yields and measures of inflation compensation declined, on net, and the implied path of the federal funds rate in 2023 ended modestly lower. Stock market indexes rose, on balance, likely reflecting reduced concerns about the inflation outlook, and market volatility declined notably. Borrowing costs declined, on net, over the intermeeting period. Credit flows moderated a bit in recent months, and the credit quality of businesses and most households remained solid. The expected path of the federal funds rate implied by a straight read of financial market quotes ended the intermeeting period lower, largely reflecting data releases that pointed to a larger-than-expected moderation in inflation. Medium-to-longer-term nominal Treasury yields declined substantially over the intermeeting period, driven primarily by lower-than-expected inflation data releases, which appeared to prompt a substantial reduction in investors' concerns about the possibility that inflation would remain high for a long period. In line with those developments, inflation compensation measures based on inflation swaps declined notably, especially for shorter maturities. Broad stock price indexes increased, likely reflecting reduced concerns about the inflation outlook and the associated implications for the future path of policy. On net, the one-month option-implied volatility on the S&P 500—the VIX—decreased notably and was around the middle of its range since mid-2020. In line with reduced investor concerns about the inflation outlook, spreads of interest rates on corporate debt, mortgage-backed securities, and municipal bonds to comparable-duration Treasury yields all narrowed over the intermeeting period. Conditions in short-term funding markets remained stable over the intermeeting period, with the November increase in the target range for the federal funds rate and the associated increases in the Federal Reserve's administered rates passing through quickly to overnight money market rates. In secured markets, repo rates were below the ON RRP offering rate less frequently than in the previous intermeeting period. Daily take-up in the ON RRP facility declined modestly, consistent with the recent firming in overnight repo rates. Net yields on money market funds rose further over the intermeeting period, mostly passing through the increase in administered rates, while bank deposit rates increased only slightly in October and November. Foreign financial conditions broadly eased over the intermeeting period, largely driven by lower-than-expected U.S. inflation data. The foreign exchange value of the dollar depreciated against most foreign currencies, particularly against those of advanced foreign economies, in part reflecting a narrowing of near-term yield differentials between the United States and other advanced economies. Investors reacted positively to news of an easing of COVID restrictions in China, which drove risky asset prices significantly higher despite near-term challenges associated with the health policy shift. Emerging market fund outflows moderated and turned to inflows later in the intermeeting period. Option-implied volatility measures for exchange rates and benchmark foreign yields declined but remained elevated by historical norms amid a high degree of uncertainty around global inflation and the prospects for a reopening of the Chinese economy. In domestic credit markets, changes in borrowing costs were mixed during the intermeeting period but remained above levels observed at the end of the previous tightening cycle. Yields for corporate bonds declined, while borrowing costs for leveraged loans remained at an elevated level. Bank interest rates for commercial and industrial (C&I) loans continued to trend up in the third quarter. Municipal bond yields also decreased across rating categories. Residential mortgage rates fell, on net, after the November FOMC meeting. In contrast, interest rates in credit card offers continued to increase, reflecting the higher prime rate that was quickly passed through. Interest rates on auto loans also rose steadily through November. Credit continued to be generally available to businesses and households, but high borrowing costs appeared to weigh on financing volumes in many markets. Issuance of investment-grade corporate bonds rebounded somewhat in late October and November from earlier subdued levels, while speculative-grade issuance remained soft. New launches of leveraged loans picked up in November, particularly for higher-rated firms. Business loan originations continued to expand in October and November but at a slower pace than observed in previous months. C&I loans continued to grow in October and November but decelerated relative to the third-quarter pace, moderating the robust rate of growth observed earlier this year. Nonetheless, the volume of C&I lending remained solid overall. Commercial real estate (CRE) loans outstanding at commercial banks continued to increase in October and November, but the recent pace was somewhat lower than in previous months. In addition, banks increased CRE originations to multifamily and industrial properties relative to office properties, reflecting caution in the context of rising office vacancies. Moreover, commercial mortgage-backed securities (CMBS) issuance softened somewhat in October amid elevated financing costs and tighter underwriting standards. Credit availability to small businesses appeared to have tightened further this fall, with the share of small firms reporting that it was more difficult to obtain credit than three months earlier trending up through November. Credit was readily available in the residential mortgage market for high-credit-score borrowers who met standard conforming loan criteria. Credit availability for households with lower credit scores was considerably tighter at levels comparable with what prevailed before the pandemic. The number of home purchases and refinance mortgage rate locks edged lower at subdued levels despite recent declines in mortgage interest rates. In contrast, home equity lines of credit (HELOCs) grew notably in recent months, on net, potentially reflecting homeowners using HELOCs as a preferred way of extracting home equity in the presence of high mortgage rates. Consumer credit remained available for most consumers through September, with auto loans and credit card debt growing at a robust pace. Bank credit data also indicate that the expansion in credit card balances continued in October before slowing in early November. The credit quality of nonfinancial corporations remained solid. The volume of speculative-grade corporate bond downgrades slightly exceeded upgrades in October and November, while for investment-grade corporate bonds, the volume of upgrades turned positive, on net, in November. Leveraged loans experienced net downgrades in October, but the pace of net downgrades slowed substantially in recent weeks. Default rates on corporate bonds and leveraged loans remained at very low levels. However, measures of expected default probabilities for corporate bonds and leveraged loans had increased from their levels at the beginning of the year in recent months. Overall, the credit quality of municipalities remained robust amid strong revenues at state and local governments. The credit quality of businesses that borrow from banks remained sound on balance. Delinquencies on C&I loans stayed flat, and those on small businesses loans continued to edge up, but delinquencies remained low relative to historical levels. In addition, the credit quality of non-agency CMBS loan borrowers deteriorated slightly, with average delinquency rates ticking up in September and October, driven by the office and retail sectors. The credit quality of most households remained solid overall. Delinquencies on conventional mortgages continued to trend down through October, while those on Federal Housing Administration mortgages ticked up a bit from low levels. In contrast, delinquency rates for credit cards and auto loans continued to rise over the third quarter. While delinquency rates on credit cards remained low relative to their historical range, those on auto loans surpassed their pre-pandemic peak. Staff Economic Outlook The forecast for U.S. economic activity prepared by the staff for the December FOMC meeting was not as weak as the November projection. Recent data suggested that real GDP growth in the second half of 2022 was stronger than previously expected, but economic growth was still forecast to slow markedly in 2023 from its second-half pace. Broad financial conditions were projected to be somewhat less restrictive than previously assumed, as the effects of a higher path for equity values and a lower path for the dollar more than offset a higher medium-term trajectory for interest rates. Nevertheless, the forecast for U.S. real GDP growth through 2025 remained subdued. The staff slightly lowered its outlook for potential output, reflecting a lower expected trend in labor force participation. Moreover, the staff assumed a slower pace of decline in the natural rate of unemployment over the near term in response to recent estimates suggesting that job-matching efficiency was not improving as fast as previously anticipated. With all these changes, output was expected to move below the staff's estimate of potential near the end of 2024—a year later than in the previous forecast—and to remain below potential in 2025. Likewise, the unemployment rate was expected to move above the staff's estimate of its natural rate near the end of 2024 and remain above it in 2025. On a four-quarter change basis, total PCE price inflation was expected to be 5.5 percent in 2022, while core inflation was expected to be 4.7 percent, both lower than in the November projection. With the effects of supply–demand imbalances in goods markets expected to unwind further and labor and product markets projected to become less tight, the staff continued to forecast that inflation would decline markedly over the next two years. Core goods inflation was anticipated to slow further, housing services inflation was expected to peak in 2023 and then move down, while core non-housing services inflation was forecast to move down as wage growth eased. In 2025, both total and core PCE price inflation were expected to be near 2 percent. With inflation still elevated, the staff continued to view the risks to the inflation projection as skewed to the upside. Moreover, the sluggish growth in real private domestic spending expected over the next year, a subdued global economic outlook, and persistently tight financial conditions were seen as tilting the risks to the downside around the baseline projection for real economic activity, and the staff still viewed the possibility of a recession sometime over the next year as a plausible alternative to the baseline. Participants' Views on Current Conditions and the Economic Outlook In conjunction with this FOMC meeting, participants submitted their projections of the most likely outcomes for real GDP growth, the unemployment rate, and inflation for each year from 2022 through 2025 and over the longer run, based on their individual assessments of appropriate monetary policy, including the path of 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. A Summary of Economic Projections was released to the public following the conclusion of the meeting. In their discussion of current economic conditions, participants noted that recent indicators pointed to modest growth of spending and production. Nonetheless, job gains had been robust in recent months, and the unemployment rate had remained low. Inflation remained elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures. Participants recognized that Russia's war against Ukraine was causing tremendous human and economic hardship. The war and related events were contributing to upward pressure on inflation and were weighing on global economic activity. Against this background, participants continued to be highly attentive to inflation risks. Participants observed that the growth of economic activity had slowed significantly in 2022 from the previous year's robust pace, partly in response to the Committee's policy actions. The effects of those actions were especially notable in interest-sensitive sectors, particularly housing. Participants remarked that, although real GDP appeared to have rebounded moderately in the second half of 2022 after declining somewhat in the first half, economic activity appeared likely to expand in 2023 at a pace well below its trend growth rate. With inflation remaining unacceptably high, participants expected that a sustained period of below-trend real GDP growth would be needed to bring aggregate supply and aggregate demand into better balance and thereby reduce inflationary pressures. In their discussion of the household sector, participants noted that growth in consumer spending in September and October had been stronger than they had previously expected, likely supported by a strong labor market and households running down excess savings accumulated during the pandemic. A couple of participants remarked that excess savings likely would continue to support consumption spending for a while. A couple of other participants, however, commented that excess savings, particularly among low-income households, appeared to be lower and declining more rapidly than previously thought or that the savings, the majority of which appeared to be held by higher-income households, might continue to be largely unspent. Several participants remarked that budgets were stretched for low-to-moderate-income households and that many consumers were shifting their spending to less expensive alternatives. They also observed that many households were increasingly using credit to finance spending. Overall, participants assessed that there was considerable uncertainty around the consumer spending outlook. Participants commented that higher mortgage interest rates had notably restrained housing activity and that they expected housing activity to remain weak. A couple of participants remarked on anecdotes or concerns from builder contacts about contract cancellations by purchasers no longer able to qualify for loans at higher interest rates. With regard to the business sector, participants noted that growth in investment spending appeared modest and was being restrained by high borrowing costs and an outlook for slow growth of final demand, although views on investment prospects varied across businesses and Districts. Based on discussions with District contacts as well as a survey of firms' chief financial officers, some participants commented that while businesses were generally optimistic about their own prospects, they expressed increasing concern about the general economic outlook for 2023. Participants noted signs of continued easing in supply bottlenecks, with a couple citing District contacts' reports of declines in shipping costs and delivery times. Even so, participants remarked that the improvements in supply chains had not been uniform and supply shortages remained for some types of goods. Participants also discussed the developments in energy and agricultural sectors. Several participants commented that they saw diminished risks of severe disruption from the European Union's embargo and the Group of Seven's price cap on Russian oil exports. A couple of participants noted that high costs for inputs like diesel, feed, and fertilizer were creating challenges for the agricultural sector. Participants observed that the labor market had remained very tight, with the unemployment rate near a historically low level, robust payroll gains, a high level of job vacancies, and elevated nominal wage growth. Several participants commented that there were tentative signs of labor market imbalances improving, including declines in job openings and quits over the second half of 2022 as well as reports from District contacts that they were seeing more qualified job applicants for open positions than earlier in the year. Some participants pointed out that payroll gains had remained robust even as they slowed in recent months. Nevertheless, they noted that some other measures of employment—such as those based on the Bureau of Labor Statistics' household survey and the Quarterly Census of Employment and Wages—suggested that job growth in 2022 may have been weaker than indicated by payroll employment. Participants generally concluded that there remained a large imbalance between labor supply and labor demand, as indicated by the still-large number of job openings and elevated nominal wage growth. Participants commented that labor demand had remained strong to date despite the slowdown in economic growth, with a few remarking that some business contacts reported that they would be keen to retain workers even in the face of slowing demand for output because of their recent experiences of labor shortages and hiring challenges. With the labor force participation rate little changed since the beginning of 2022, some participants commented that labor supply appeared to be constrained by structural factors such as early retirements, reduced availability or increased cost of childcare, more costly transportation, and reduced immigration. Under an appropriately restrictive path of monetary policy, participants expected labor market supply and demand to come into better balance over time, easing upward pressures on nominal wages and prices. In the context of achieving the Committee's broad-based and inclusive maximum-employment goal, a number of participants commented that as the labor market moved into better balance, the unemployment rate for some demographic groups—particularly African Americans and Hispanics—would likely increase by more than the national average. With inflation still well above the Committee's longer-run goal of 2 percent, participants agreed that inflation was unacceptably high. Participants concurred that the inflation data received for October and November showed welcome reductions in the monthly pace of price increases, but they stressed that it would take substantially more evidence of progress to be confident that inflation was on a sustained downward path. Participants noted that core goods prices declined in the October and November CPI data, consistent with easing supply bottlenecks. Some participants also noted that, by some measures, firms' markups were still elevated and that a continued subdued expansion in aggregate demand would likely be needed to reduce remaining upward pressure on inflation. Regarding housing services inflation, many participants observed that measures of rent based on new leases were indicating a deceleration, which would be reflected in the measures of shelter inflation with some lag. Participants noted that, in the latest inflation data, the pace of increase for prices of core services excluding shelter—which represents the largest component of core PCE price inflation—was high. They also remarked that this component of inflation has tended to be closely linked to nominal wage growth and therefore would likely remain persistently elevated if the labor market remained very tight. Consequently, while there were few signs of adverse wage-price dynamics at present, they assessed that bringing down this component of inflation to mandate-consistent levels would require some softening in the growth of labor demand to bring the labor market back into better balance. Participants observed that measures from surveys of households and businesses as well as from financial markets generally indicated that longer-term inflation expectations remained well anchored, while short-term inflation expectations had come down. However, participants stressed that the Committee's ongoing monetary policy tightening to achieve a stance that will be sufficiently restrictive to return inflation to 2 percent is essential for ensuring that longer-term expectations remain well anchored. Several participants commented that the longer inflation remained well above the 2 percent goal, the greater the risk that longer-term inflation expectations could become unanchored. Such a development, if it materialized, would make it much more costly to bring inflation down to achieve the Committee's statutory objectives of maximum employment and price stability. Participants noted that since the November meeting, financial conditions had eased, with the market-implied path for the federal funds rate beyond 2023 and longer-term yields coming down noticeably. A few participants remarked that the current configuration of nominal yields, with longer-term yields lower than shorter-term yields, had historically preceded recessions and hence bore watching. However, a couple of them also noted that the current inversion of the yield curve could reflect, in part, that investors expect the nominal policy rate to decline because of a fall in inflation over time. Participants generally noted that the uncertainty associated with their economic outlooks was high and that the risks to the inflation outlook remained tilted to the upside. Participants cited the possibility that price pressures could prove to be more persistent than anticipated, due to, for example, the labor market staying tight for longer than anticipated. Participants saw a number of uncertainties surrounding the outlook for inflation stemming from factors abroad, such as China's relaxation of its zero-COVID policies, Russia's continuing war against Ukraine, and effects of synchronous policy firming by major central banks. A number of participants judged that the risks to the outlook for economic activity were weighted to the downside. They noted that sources of such risks included the potential for more persistent inflation inducing more restrictive policy responses, the prospect of unexpected negative shocks tipping the economy into a recession in an environment of subdued growth, and the possibility of households' and businesses' concerns about the outlook restraining their spending sufficiently to reduce aggregate output. In their consideration of appropriate monetary policy actions at this meeting, participants concurred that the Committee had made significant progress over the past year in moving toward a sufficiently restrictive stance of monetary policy. Even so, participants agreed that inflation remained well above the Committee's longer-run goal of 2 percent, while the labor market remained very tight, contributing to upward pressures on wages and prices. Against this backdrop, all participants agreed that it was appropriate to raise the target range for the federal funds rate 50 basis points at this meeting and to continue the process of reducing the Federal Reserve's securities holdings, as described in the Plans for Reducing the Size of the Federal Reserve's Balance Sheet that the Committee issued in May. Participants observed that a slowing in the pace of rate increases at this meeting would better allow the Committee to assess the economy's progress toward the Committee's goals of maximum employment and price stability, as monetary policy approached a stance that was sufficiently restrictive to achieve these goals. In discussing the policy outlook, participants continued to anticipate that ongoing increases in the target range for the federal funds rate would be appropriate to achieve the Committee's objectives. In determining the pace of future increases in the target range, participants judged that it would be appropriate to take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. With inflation staying persistently above the Committee's 2 percent goal and the labor market remaining very tight, all participants had raised their assessment of the appropriate path of the federal funds rate relative to their assessment at the time of the September meeting. No participants anticipated that it would be appropriate to begin reducing the federal funds rate target in 2023. Participants generally observed that a restrictive policy stance would need to be maintained until the incoming data provided confidence that inflation was on a sustained downward path to 2 percent, which was likely to take some time. In view of the persistent and unacceptably high level of inflation, several participants commented that historical experience cautioned against prematurely loosening monetary policy. In light of the heightened uncertainty regarding the outlooks for both inflation and real economic activity, most participants emphasized the need to retain flexibility and optionality when moving policy to a more restrictive stance. Participants generally noted that the Committee's future decisions regarding policy would continue to be informed by the incoming data and their implications for the outlook for economic activity and inflation, and that the Committee would continue to make decisions meeting by meeting. Participants reaffirmed their strong commitment to returning inflation to the Committee's 2 percent objective. A number of participants emphasized that it would be important to clearly communicate that a slowing in the pace of rate increases was not an indication of any weakening of the Committee's resolve to achieve its price-stability goal or a judgment that inflation was already on a persistent downward path. Participants noted that, because monetary policy worked importantly through financial markets, an unwarranted easing in financial conditions, especially if driven by a misperception by the public of the Committee's reaction function, would complicate the Committee's effort to restore price stability. Several participants commented that the medians of participants' assessments for the appropriate path of the federal funds rate in the Summary of Economic Projections, which tracked notably above market-based measures of policy rate expectations, underscored the Committee's strong commitment to returning inflation to its 2 percent goal. Participants discussed a number of risk-management considerations related to the conduct of monetary policy. Many participants highlighted that the Committee needed to continue to balance two risks. One risk was that an insufficiently restrictive monetary policy could cause inflation to remain above the Committee's target for longer than anticipated, leading to unanchored inflation expectations and eroding the purchasing power of households, especially for those already facing difficulty making ends meet. The other risk was that the lagged cumulative effect of policy tightening could end up being more restrictive than is necessary to bring down inflation to 2 percent and lead to an unnecessary reduction in economic activity, potentially placing the largest burdens on the most vulnerable groups of the population. Participants generally indicated that upside risks to the inflation outlook remained a key factor shaping the outlook for policy. A couple of participants noted that risks to the inflation outlook were becoming more balanced. Participants generally observed that maintaining a restrictive policy stance for a sustained period until inflation is clearly on a path toward 2 percent is appropriate from a risk-management perspective. Committee Policy Action In their discussion of monetary policy for this meeting, members agreed that recent indicators pointed to modest growth in spending and production. Members also concurred that job gains had been robust in recent months, and the unemployment rate had remained low. Members agreed that inflation had remained elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures. Members observed that Russia's war against Ukraine was causing tremendous human and economic hardship. They also agreed that the war and related events were contributing to upward pressure on inflation and were weighing on global economic activity. Members concurred that they remained highly attentive to inflation risks. Members agreed that the Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, members agreed to raise the target range for the federal funds rate to 4-1/4 to 4-1/2 percent. Members anticipated that ongoing increases in the target range would be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time. Members agreed that, in determining the pace of future increases in the target range, they would take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, members agreed that they would continue reducing the Federal Reserve's holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in the Plans for Reducing the Size of the Federal Reserve's Balance Sheet that were issued in May. All members affirmed that the Committee is strongly committed to returning inflation to its 2 percent objective. Members agreed that, in assessing the appropriate stance of monetary policy, they would continue to monitor the implications of incoming information for the economic outlook. They would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. Members agreed that their assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and 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 instructed otherwise, to execute transactions in the SOMA in accordance with the following domestic policy directive, for release at 2:00 p.m.: "Effective December 15, 2022, 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 4-1/4 to 4-1/2 percent. Conduct overnight repurchase agreement operations with a minimum bid rate of 4.5 percent and with an aggregate operation limit of $500 billion; the aggregate operation limit can be temporarily increased at the discretion of the Chair. Conduct overnight reverse repurchase agreement operations at an offering rate of 4.3 percent and with a per-counterparty limit of $160 billion per day; the per-counterparty limit can be temporarily increased at the discretion of the Chair. Roll over at auction the amount of principal payments from the Federal Reserve's holdings of Treasury securities maturing in each calendar month that exceeds a cap of $60 billion per month. Redeem Treasury coupon securities up to this monthly cap and Treasury bills to the extent that coupon principal payments are less than the monthly cap. Reinvest into agency mortgage-backed securities (MBS) the amount of principal payments from the Federal Reserve's holdings of agency debt and agency MBS received in each calendar month that exceeds a cap of $35 billion per month. Allow modest deviations from stated amounts for reinvestments, if needed for operational reasons. Engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions." The vote also encompassed approval of the statement below for release at 2:00 p.m.: "Recent indicators point to modest growth in spending and production. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures. Russia's war against Ukraine is causing tremendous human and economic hardship. The war and related events are contributing to upward pressure on inflation and are weighing on global economic activity. The Committee is highly attentive to inflation risks. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 4-1/4 to 4-1/2 percent. The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time. In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in the Plans for Reducing the Size of the Federal Reserve's Balance Sheet that were issued in May. The Committee is strongly committed to returning inflation to its 2 percent objective. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments." Voting for this action: Jerome H. Powell, John C. Williams, Michael S. Barr, Michelle W. Bowman, Lael Brainard, James Bullard, Susan M. Collins, Lisa D. Cook, Esther L. George, Philip N. Jefferson, Loretta J. Mester, and Christopher J. Waller. 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 of the Federal Reserve System voted unanimously to raise the interest rate paid on reserve balances to 4.4 percent, effective December 15, 2022. The Board of Governors of the Federal Reserve System voted unanimously to approve a 1/2 percentage point increase in the primary credit rate to 4.5 percent, effective December 15, 2022.5 It was agreed that the next meeting of the Committee would be held on Tuesday–Wednesday, January 31–February 1, 2023. The meeting adjourned at 10:35 a.m. on December 14, 2022. Notation Vote By notation vote completed on November 22, 2022, the Committee unanimously approved the minutes of the Committee meeting held on November 1–2, 2022. _______________________ James A. Clouse Secretary 1. The Federal Open Market Committee is referenced as the "FOMC" and the "Committee" in these minutes; the Board of Governors of the Federal Reserve System is referenced as the "Board" 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's session only. Return to text 4. Attended opening remarks for Tuesday's session only. Return to text 5. In taking this action, the Board approved requests to establish that rate submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco. Return to text

2022-11-23

Minute

Minutes of the Federal Open Market Committee November 1-2, 2022 A joint meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve System was held in the offices of the Board of Governors on Tuesday, November 1, 2022, at 10:30 a.m. and continued on Wednesday, November 2, 2022, at 9:00 a.m.1 Attendance Jerome H. Powell, Chair John C. Williams, Vice Chair Michael S. Barr Michelle W. Bowman Lael Brainard James Bullard Susan M. Collins Lisa D. Cook Esther L. George Philip N. Jefferson Loretta J. Mester Christopher J. Waller Charles L. Evans, Patrick Harker, Neel Kashkari, Lorie K. Logan, and Helen E. Mucciolo, Alternate Members of the Committee Thomas I. Barkin, Raphael W. Bostic, and Mary C. Daly, Presidents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco, respectively James A. Clouse, Secretary Matthew M. Luecke, Deputy Secretary Brian J. Bonis, Assistant Secretary Michelle A. Smith, Assistant Secretary Mark E. Van Der Weide, General Counsel Trevor A. Reeve, Economist Stacey Tevlin, Economist Beth Anne Wilson, Economist Shaghil Ahmed, Brian M. Doyle, Carlos Garriga, Joseph W. Gruber, David E. Lebow, Ellis W. Tallman, and William Wascher, Associate Economists Patricia Zobel, Manager pro tem, System Open Market Account Jose Acosta, Senior Communications Analyst, Division of Information Technology, Board Gene Amromin, Vice President, Federal Reserve Bank of Chicago Alyssa Arute,2 Manager, Division of Reserve Bank Operations and Payment Systems, Board Kartik B. Athreya, Executive Vice President, Federal Reserve Bank of Richmond Penelope A. Beattie, Section Chief, Office of the Secretary, Board James P. Bergin, Deputy General Counsel, Federal Reserve Bank of New York David Bowman, Senior Associate Director, Division of Monetary Affairs, Board Isabel Cairó, Principal Economist, Division of Monetary Affairs, Board Mark A. Carlson, Adviser, Division of Monetary Affairs, Board Michele Cavallo, Principal Economist, Division of Monetary Affairs, Board Satyajit Chatterjee, Vice President, Federal Reserve Bank of Philadelphia Daniel Cooper, Vice President, Federal Reserve Bank of Boston Stephanie E. Curcuru, Deputy Director, Division of International Finance, Board Sally Davies,3 Senior Adviser, Division of International Finance, Board Burcu Duygan-Bump, Special Adviser to the Board, Division of Board Members, Board Rochelle M. Edge, Deputy Director, Division of Monetary Affairs, Board Eric M. Engen, Senior Associate Director, Division of Research and Statistics, Board Eric C. Engstrom, Associate Director, Division of Monetary Affairs, Board Jon Faust, Senior Special Adviser to the Chair, Division of Board Members, Board Andrew Figura, Associate Director, Division of Research and Statistics, Board Glenn Follette, Associate Director, Division of Research and Statistics, Board Etienne Gagnon, Assistant Director, Division of Monetary Affairs, Board Joshua Gallin, Senior Special Adviser to the Chair, Division of Board Members, Board Michael S. Gibson, Director, Division of Supervision and Regulation, Board David Glancy, Principal Economist, Division of Monetary Affairs, Board Valerie S. Hinojosa, Section Chief, Division of Monetary Affairs, Board Matteo Iacoviello, Senior Associate Director, Division of International Finance, Board Jane E. Ihrig, Special Adviser to the Board, Division of Board Members, Board Michael T. Kiley, Deputy Director, Division of Financial Stability, Board Andreas Lehnert, Director, Division of Financial Stability, Board Kurt F. Lewis, Special Adviser to the Board, Division of Board Members, Board Laura Lipscomb, Special Adviser to the Board, Division of Board Members, Board Mark Meder, First Vice President, Federal Reserve Bank of Cleveland Ann E. Misback, Secretary, Office of the Secretary, Board Fernanda Nechio, Vice President, Federal Reserve Bank of San Francisco Edward Nelson, Senior Adviser, Division of Monetary Affairs, Board Michael G. Palumbo, Senior Associate Director, Division of Research and Statistics, Board Andrea Raffo, Senior Vice President, Federal Reserve Bank of Minneapolis Julie Ann Remache, Policy and Market Monitoring Head, Federal Reserve Bank of New York Linda Robertson, Assistant to the Board, Division of Board Members, Board Argia M. Sbordone, Research Department Head, Federal Reserve Bank of New York Samuel Schulhofer-Wohl, Senior Vice President, Federal Reserve Bank of Dallas Chiara Scotti, Special Adviser to the Board, Division of Board Members, Board Seth Searls,2 Associate Director, Federal Reserve Bank of New York Nitish Ranjan Sinha, Special Adviser to the Board, Division of Board Members, Board Paul A. Smith, Deputy Associate Director, Division of Research and Statistics, Board Gustavo A. Suarez, Assistant Director, Division of Research and Statistics, Board Paula Tkac, Senior Vice President, Federal Reserve Bank of Atlanta Jeffrey D. Walker,2 Associate Director, Division of Reserve Bank Operations and Payment Systems, Board Donielle A. Winford, Information Manager, Division of Monetary Affairs, Board Paul R. Wood, Special Adviser to the Board, Division of Board Members, Board Rebecca Zarutskie, Special Adviser to the Board, Division of Board Members, Board Committee Ethics Discussion The Chair began with a discussion of ethical standards and acknowledged the great privilege and heavy responsibility that come with being entrusted to make policy decisions. There was agreement that the Federal Reserve can be effective only when there is a foundation of public trust. Participants reaffirmed the importance of holding themselves and their staffs accountable for knowing and following the high ethical standards that are set in the Committee's policies, including those on financial transactions and disclosure and on external communications. Developments in Financial Markets and Open Market Operations The manager pro tem turned first to a discussion of financial market developments in the United States. Over the period, financial conditions had tightened amid elevated volatility across financial markets. The market-implied path of the policy rate rose, with the median federal funds rate values in the September Summary of Economic Projections and other Federal Reserve communications being viewed by market participants as indicating a commitment to sustaining a restrictive monetary policy stance. With data received over the period also indicating higher-than-expected core inflation, market participants placed high odds on a 75 basis point increase in the target range at the current meeting. Nonetheless, contacts were increasingly focused on the question of when the Committee might slow the pace of future increases in light of the substantial tightening of financial conditions that had occurred over the year. Most respondents to the Open Market Desk's surveys viewed a 50 basis point increase in the target range for the federal funds rate at the December meeting as the most likely outcome. On net, nominal Treasury yields ended the period higher, reflecting both an upward revision in the expected path of the policy rate and higher estimated term premiums. Investment-grade bond yields and mortgage interest rates moved up as well, to the highest levels in many years. The manager pro tem turned next to a discussion of volatility in global financial markets. In September, an expansionary budget announced by the U.K. government resulted in an extraordinary rise in yields on gilts (long-dated U.K. government securities) and reduced gilt market liquidity. Reflecting its financial stability objective, the Bank of England initiated a temporary gilt purchase program designed to address disorderly market conditions. These purchases and a subsequent cancellation of some announced expansionary U.K. budgetary measures resulted in a retracement of much of the earlier increase in gilt yields. Elevated volatility in international financial markets contributed to volatility in U.S. core fixed-income markets. In markets for U.S. Treasury securities, some measures of market-implied volatility approached pandemic-era levels. Spreads of yields on agency mortgage-backed securities (MBS) over yields on Treasury securities widened sharply, reflecting the sensitivity of these spreads to increased volatility. The increased volatility appeared to contribute to a decline in measures of market liquidity in core fixed-income markets, in particular around the period associated with U.K. volatility, but market functioning remained orderly. The foreign exchange value of the dollar appreciated further over the period. Market participants perceived several Asian economies as engaging in foreign exchange market interventions in response to rapid depreciations of local currencies. In the case of advanced economies, whose monetary policy tightening was well under way, market participants focused on communications perceived as signaling a potentially slower pace of policy rate increases in the period ahead. The manager pro tem turned next to developments in money markets and Federal Reserve operations. Usage of the overnight reverse repurchase agreement (ON RRP) facility remained fairly steady other than during the period surrounding quarter-end. In the period ahead, the relative pace of decline in ON RRP facility balances and reserve balances would depend importantly on shifts in money market conditions. Recent developments, including with regard to the relationship between ON RRP facility balances and money market rates, suggested that, over time, conditions could evolve in a manner that would lead to falling usage of the ON RRP facility. However, the manager pro tem noted that money market conditions could change somewhat more quickly in the lead-up to year-end because of normal factors, such as a Treasury tax payment date in December that could increase the Treasury General Account balance, and year-end position adjustments. This prospect could require money market participants to be more responsive to shifting liquidity conditions and to plan ahead for the coming period. Current market quotes suggested expectations of limited upward pressure on domestic money market rates around year-end. In offshore dollar funding markets, the premium associated with borrowing dollars was modestly higher than at similar points in previous years. Regarding Federal Reserve net income, 11 Reserve Banks reported deferred assets totaling $6.3 billion in the latest H.4.1 statistical release, reflecting the negative net income stemming from rising interest expense. Many other central banks also faced negative net income. 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 available at the time of the November 1–2 meeting suggested that U.S. real gross domestic product (GDP) had increased at a moderate pace in the third quarter after having declined over the first half of the year. Labor market conditions remained quite tight, and consumer price inflation—as measured by the 12‑month percentage change in the price index for personal consumption expenditures (PCE)—remained elevated. In September, total nonfarm payroll employment posted a solid gain that was somewhat slower than the pace seen in recent months, and the unemployment rate declined 0.2 percentage point to 3.5 percent. The unemployment rate for African Americans declined in September but was more than 2 percentage points above the national average; the unemployment rate for Hispanics declined to a level that was 0.3 percentage point above the national measure. The labor force participation rate edged down in September, and the employment-to-population ratio was unchanged. The private-sector job openings rate, as measured by the Job Openings and Labor Turnover Survey, moved lower, on net, from July to September but remained high. Nominal wage growth continued to be rapid: Average hourly earnings rose 5.0 percent over the 12 months ending in September, while the employment cost index (ECI) of hourly compensation in the private sector, which also includes benefit costs, rose 5.2 percent over this period. However, the three-month change in the ECI in September was noticeably lower than the average pace seen over the first half of the year. Consumer price inflation remained elevated. Total PCE price inflation was 6.2 percent over the 12 months ending in September, and core PCE inflation, which excludes changes in consumer energy prices and many consumer food prices, was 5.1 percent over the same period. The trimmed mean measure of 12‑month PCE price inflation constructed by the Federal Reserve Bank of Dallas was 4.7 percent in September. The staff's common inflation expectations index, which combines information from many indicators of inflation expectations and inflation compensation, was little changed in the third quarter but remained above pre-pandemic levels. Real PCE rose modestly in the third quarter. Residential investment dropped further, however, and business fixed investment growth was held back by a decline in nonresidential structures investment. Government purchases rose in the third quarter after having declined over the first half of the year. The nominal U.S. international trade deficit narrowed in the third quarter. Net exports contributed positively to real GDP growth, as real exports stepped up while real imports declined. Data pointed to weakening foreign economic activity in recent months, weighed down by the economic fallout of Russia's war against Ukraine, headwinds in China, and tighter financial conditions. In many advanced foreign economies, high inflation and disruptions to energy supply contributed to a decline in real disposable incomes and depressed consumer and business confidence. In response, fiscal authorities in Europe and Japan announced packages intended to ease the burden of high inflation on consumers and businesses. In China, data indicated weaker momentum in economic activity and a further deterioration in the property market. Weaker global demand has also resulted in a pronounced slowdown in manufacturing, which weighed on activity in export-oriented emerging market economies in Asia. Consumer price inflation rose further in October in many foreign economies, reflecting past increases in energy and food prices, but also a continued broadening of inflationary pressure within core prices. In response to high inflation, many central banks further tightened monetary policy, albeit at a slower pace in some cases. Staff Review of the Financial Situation Over the intermeeting period, U.S. Treasury yields and the market-implied federal funds rate path moved substantially higher. Broad domestic equity prices were little changed, on net, amid high market volatility, while corporate bond yields increased notably. The rise in borrowing costs appeared to have slowed the volume of financing in many credit markets. Credit quality remained sound overall, al­though there are some signs of deterioration for lower-rated borrowers. The expected path of the federal funds rate implied by a straight read of financial market quotes rose notably over the intermeeting period, largely reflecting more-restrictive-than-expected monetary policy communications and data releases that pointed to inflation moving down more slowly than previously expected. On net, nominal Treasury yields increased across the maturity spectrum. The increases in nominal yields at medium- and longer-term horizons were primarily accounted for by higher real yields, though inflation compensation measures rose as well. Broad equity price indexes fell significantly early in the intermeeting period, with inflation news and monetary policy expectations likely being the main drivers of stock price movements. However, equity prices later rebounded and ended the period essentially unchanged on net. One-month option-implied volatility on the S&P 500—the VIX—declined slightly, on net, but remained at the upper end of its range since mid-2020. Conditions in short-term funding markets remained stable over the intermeeting period, with the September increase in the target range for the federal funds rate and the associated increases in the Federal Reserve's administered rates passing through quickly to overnight money market rates. In secured markets, money market rates remained soft relative to the ON RRP offering rate, attributed to subdued Treasury bill supply, elevated demand for Treasury collateral, and investor demand for very short-term assets amid uncertainty over the pace of policy rate increases. Daily take-up in the ON RRP facility remained elevated amid this softness in repurchase agreement rates. Money market fund net yields rose along with the rise in administered rates, while retail bank deposit rates increased modestly on balance. Foreign asset prices were volatile over the intermeeting period as investors grappled with the combination of a deteriorating global growth outlook and synchronous policy tightening undertaken by major central banks in response to high inflation. Fiscal and political developments in the United Kingdom added to market volatility but left little net imprint. On balance, sovereign bond yields in most advanced foreign economies rose modestly and equity prices were mixed. The U.S. dollar appreciated against most major currencies, driven by widening yield differentials between the United States and the rest of the world and further deterioration of the foreign growth outlook. The Japanese yen weakened against the dollar, on net, even though Japanese authorities intervened to support the yen. The Chinese renminbi depreciated significantly against the dollar as continuation of the zero-COVID policy and increased investor concerns about longer-term growth prospects weighed on the currency. Investors continued to withdraw from dedicated emerging market economy and European funds amid further increases in U.S. Treasury yields and concerns over foreign economic growth. In domestic credit markets, borrowing costs continued to rise over the intermeeting period. Yields for corporate bonds and institutional leveraged loans increased. Bank interest rates for commercial and industrial (C&I) loans continued the upward trend observed since the first quarter of 2022, while a rising proportion of small businesses reported facing increased borrowing costs in September. Municipal bond yields increased across ratings categories. Residential mortgage rates rose further in the period following the September FOMC meeting, nearly reaching their highest levels since 2002. Interest rates on existing credit card accounts continued to trend upward, reflecting increases in the federal funds rate that were quickly passed through to prime rates. Credit continued to be generally available to businesses and households despite some signs of tightening lending standards in certain segments, but high borrowing costs reduced the demand for credit in many markets. Issuance of corporate bonds, al­though quite strong in early September, slowed significantly in late September and October. Gross institutional leveraged loan issuance declined in September. Equity issuance and gross issuance of municipal bonds remained weak in September and October. Business loans at banks continued to expand in September but at a slower pace than observed in past months. In the October Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS), banks reported having tightened C&I and commercial real estate (CRE) lending standards over the previous three months. Meanwhile, issuance of commercial mortgage-backed securities (CMBS) also slowed amid higher spreads. Credit appeared to remain generally available to most small businesses, though the share of small firms reporting that it was more difficult to obtain loans than three months ago continued its upward trend in September. Credit remained available in the residential mortgage market for borrowers who are able to pay high interest rates. The number of home-purchase and refinance mortgage originations were about flat in August and September but down significantly from late last year. Consumer credit remained available for most borrowers in July and August, with auto credit and credit card credit growing at a robust pace. However, banks in the October SLOOS reported being less likely to approve auto and credit card loans to subprime and near-prime borrowers compared with earlier this year. The credit quality of nonfinancial corporations showed signs of deterioration in some sectors but remained generally solid overall. The volume of corporate bond rating upgrades was roughly on par with that of downgrades in September. However, upgrades were concentrated in the investment-grade segment; in the speculative-grade segment, downgrades outpaced upgrades, and market-implied expectations of defaults over the next year increased markedly. Default rates on corporate bonds and leveraged loans rose slightly from low levels. The credit quality of C&I and CRE loans on banks' balance sheets also remained sound. Delinquency rates for CRE loans in non-agency CMBS pools ticked up in September, as did indicators of future payment stress. Delinquency rates on small business loans remained quite low, and the credit quality of municipal securities remained strong. The credit quality of most households also appeared to remain solid. Delinquencies on residential mortgage loans continued to trend down, and the share of mortgages in foreclosure in August remained close to pre-pandemic levels. Available data through the second quarter indicated that credit card and auto credit delinquency rates continued to rise; however, delinquencies for auto loans were near their pre-pandemic levels, and those for credit cards remained well below pre-pandemic levels. The staff provided an update on its assessment of the stability of the financial system. The staff noted that respondents to the Federal Reserve Bank of New York's survey of near-term risks judged that economic, financial, and geopolitical risks had risen across the globe. Amid this weaker outlook and higher interest rates, prices of risky assets generally fell, though real estate valuations remained elevated. Household borrowing was moderate, and mortgage performance remained strong. Nonfinancial businesses' leverage continued to decline, and interest coverage ratios continued to increase; however, further increases in borrowing costs could pose risks to some borrowers' ability to service their debts. In the financial sector, the results of this year's stress test demonstrated that large banks remain resilient to a substantial economic downturn, but there were indicators of elevated leverage at hedge funds and other nonbank financial institutions. Short-term funding markets continued to have structural vulnerabilities. Funding risks at domestic banks remained low, but prime money market funds, other cash-investment vehicles, open-end mutual funds, and stablecoins all continued to be susceptible to disruptive redemptions. Staff Economic Outlook The projection for U.S. economic activity prepared by the staff for the November FOMC meeting was weaker than the September forecast. Broad financial conditions were expected to be considerably more restrictive over the projection period than in September, reflecting both recent market moves and upward revisions to the staff's assumptions regarding the future course of monetary policy based on recent Federal Reserve communications. As a result, output was expected to move below the staff's estimate of potential early in 2024 and to remain below potential in 2025. Likewise, the unemployment rate was expected to be above the staff's estimate of its natural rate in 2024 and 2025. On a 12‑month change basis, total PCE price inflation was expected to be 5.3 percent in 2022 and core inflation was expected to be 4.6 percent. The staff raised their projection for core PCE price inflation in coming quarters, reflecting their assessment that the factors that had boosted inflation since the middle of last year—most notably, strong wage growth and the effect of supply constraints on prices—would persist for longer than previously thought. With the effects of supply–demand imbalances in goods markets expected to unwind and labor and product markets expected to become less tight, the staff continued to project that inflation would decline markedly over the next two years; in 2025, both total and core PCE price inflation were expected to be 2 percent. With inflation remaining stubbornly high, the staff continued to view the risks to the inflation projection as skewed to the upside. For real activity, sluggish growth in real private domestic spending, a deteriorating global outlook, and tightening financial conditions were all seen as salient downside risks to the projection for real activity; in addition, the possibility that a persistent reduction in inflation could require a greater-than-assumed amount of tightening in financial conditions was seen as another downside risk. The staff, therefore, continued to judge that the risks to the baseline projection for real activity were skewed to the downside and viewed the possibility that the economy would enter a recession sometime over the next year as almost as likely as the baseline. Participants' Views on Current Conditions and the Economic Outlook In their discussion of current economic conditions, participants noted that recent indicators pointed to modest growth of spending and production. Nonetheless, job gains had been robust in recent months, and the unemployment rate had remained low. Inflation remained elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures. Participants recognized that Russia's war against Ukraine was causing tremendous human and economic hardship. The war and related events were creating additional upward pressure on inflation and were weighing on global economic activity. Against this background, participants continued to be highly attentive to inflation risks. With regard to current economic activity and the near-term outlook, participants observed that al­though real GDP rebounded in the third quarter, recent data suggested that economic activity in the near term appeared likely to expand at a pace below its trend growth rate. Participants noted a softening in consumer and business spending growth, and some participants remarked that there had been a notable slowing in interest rate-sensitive sectors, particularly housing, in response to the tightening of financial conditions associated with the Committee's policy actions. With inflation remaining far too high and showing few signs of moderating, participants observed that a period of below-trend real GDP growth would be helpful in bringing aggregate supply and aggregate demand into better balance, reducing inflationary pressures, and setting the stage for the sustained achievement of the Committee's objectives of maximum employment and price stability. In their discussion of the household sector, participants noted that growth in consumer spending had softened recently. Several participants remarked that there had been a reduction in discretionary expenditures, especially among lower- and middle-income households, whose purchases were shifting toward lower-cost options. Participants observed that, in aggregate, household-sector balance sheets were still strong and that this factor would continue to support consumer spending. A few participants noted that some households had been running down the additional savings they had accumulated during the pandemic and that there were reports of a rise in the number of households experiencing financial strains. Participants commented that higher mortgage interest rates had notably restrained housing activity. With regard to the business sector, participants noted that growth in investment spending was modest. Several participants observed that business investment was being weighed down by tighter financial conditions, although a few participants reported that some business contacts indicated that their investment spending had been resilient. Some participants mentioned reports received from business contacts of easing supply bottlenecks, reflected in declines in shipping costs and delivery times, although the reported extent of these improvements varied across contacts. A few participants remarked that, in instances in which supply constraints had eased, their business contacts found it easier to plan production or had diminished needs to maintain precautionary inventories. A couple of participants noted that drought conditions in the Midwest were making some waterways, notably the Mississippi River System, less navigable. These conditions were creating new supply constraints and putting upward pressures on transportation costs and prices for farm products. Participants observed that, with inflation elevated globally, many central banks were tightening monetary policy simultaneously, contributing to an overall tightening of global financial conditions. Participants further noted that the overall tightening of global financial conditions, along with energy prices and other headwinds, was contributing to a slowdown in the growth rate of global real GDP. Participants remarked that the foreign economic slowdown, in combination with a strong U.S. dollar, was likely to weigh on the U.S. export sector, and several participants commented that there could be wider spillovers to the U.S. economy. Participants observed that the labor market had remained very tight, with the unemployment rate near a historically low level, the number of job vacancies very high, a low pace of layoffs, robust employment gains, and elevated nominal wage growth. Some participants remarked that employers in certain sectors, such as health care, leisure and hospitality, or construction, faced particularly acute labor shortages and that these shortages were contributing to especially strong wage pressures in those sectors. Participants commented on the labor market having remained strong to date, even alongside the slowing in economic activity. A number of participants remarked that some businesses were keen to retain workers after their recent experiences of labor shortages and hiring challenges. These participants noted that this consideration had limited layoffs even as the broader economy had softened or that this behavior could limit layoffs if aggregate economic activity were to soften further. Nevertheless, many participants noted tentative signs that the labor market might be moving slowly toward a better balance of supply and demand; these signs included a lower rate of job turnover and a moderation in nominal wage growth. Participants anticipated that imbalances in the labor market would gradually diminish and that the unemployment rate would likely rise somewhat from its current very low level, while vacancies would likely fall. Participants agreed that inflation was unacceptably high and was well above the Committee's longer-run goal of 2 percent. Some participants noted that the burden of high inflation was falling disproportionally on low-income households, for whom necessities like food, energy, and shelter make up a larger share of expenditures. Many participants observed that price pressures had increased in the services sector and that, historically, price pressures in this sector had been more persistent than those in the goods sector. Some participants noted that the recent high pace of nominal wage growth, taken together with the recent low pace of productivity growth, would, if sustained, be inconsistent with achievement of the 2 percent inflation objective. Several participants, however, commented on signs of a moderation in nominal wage growth. Participants agreed that near-term inflation pressures were high, but some noted that lower commodity prices or the expected reduced pressure on goods prices due to an easing of supply constraints should contribute to lower inflation in the medium term. Several participants remarked that rent increases on new leases had been slowing in recent months, but participants also noted that it would take some time for this development to show up in PCE inflation. Several participants summarized reports provided by business contacts about their firms' ability to pass on higher input costs to their customers. These reports suggested that some firms continued to have solid pricing power, while in other cases cost pass-through had become more difficult. Participants remarked that, overall, measures of medium- and longer-term inflation expectations obtained from surveys of households and businesses as well as from financial markets quotes appeared to have remained well anchored. A couple of participants observed that longer-term inflation expectations were stable even as measures of near-term inflation expectations responded to realized inflation in line with historical patterns. Participants noted that longer-term inflation expectations were an important influence on inflation's behavior and stressed that the Committee's ongoing monetary policy tightening would be essential for ensuring that these expectations remained well anchored. Several participants expressed the concern that the longer inflation remained well above the 2 percent goal, the greater the risk that longer-term inflation expectations could become unanchored. Such a development, if it materialized, would make it much more costly to bring inflation down and to achieve the Committee's statutory objectives of maximum employment and price stability. A couple of participants discussed the high dispersion of longer-term inflation expectations across respondents in various surveys: These participants noted that the higher dispersion may signal increased uncertainty about the inflation outlook and was a reason not to be complacent about longer-term inflation expectations remaining well anchored. Participants discussed the length of the lags in the response of the economy to monetary policy actions, taking into account historical experience and the various estimates of timing relationships provided in economic research, as well as the high degree of uncertainty involved in applying the evidence on lags to the current situation. They noted that monetary policy tightening typically produced rapid effects on financial conditions but that the full effects of changes in financial conditions on aggregate spending and the labor market, and then on inflation, likely took longer to materialize. With regard to current circumstances, many participants remarked that, even though the tightening of monetary policy had clearly influenced financial conditions and had had notable effects in some interest rate-sensitive sectors, the timing of the effects on overall economic activity, the labor market, and inflation was still quite uncertain, with the full extent of the effects yet to be realized. Several participants observed that, because of the difficulties in isolating the effects of monetary policy, changes in economic structure, or increasing transparency over time regarding monetary policy decisions, the historical record did not provide definitive evidence on the length of these lags. In addition, some participants noted that the post-pandemic dynamics of the economy may differ from those prevailing prior to the pandemic. Participants generally noted that the uncertainty associated with their economic outlooks was high and that the risks to the inflation outlook remained tilted to the upside. Participants observed that recent inflation had been higher and more persistent than anticipated. Some participants noted the risk that energy prices could rise sharply again amid geopolitical tensions. A few participants commented that the ongoing tightness in the labor market could lead to an emergence of a wage–price spiral, even though one had not yet developed. A number of participants judged that the risks regarding the outlook for economic activity were weighted to the downside, with various global headwinds being prominently cited. These global headwinds included a slowdown in economic activity occurring in China and the ongoing international economic implications of Russia's war against Ukraine. Participants observed that, because of high inflation pressures prevailing globally, monetary policy tightening was under way in many other economies—a development likely to affect foreign economic activity and carrying the potential for spillovers to the U.S. economy. In their discussion of issues related to financial stability, participants noted the importance of orderly functioning of the market for U.S. Treasury securities for the transmission of monetary policy, for meeting the financing needs of the federal government, and for the operation of the global financial system. Participants observed that, despite elevated interest rate volatility and indications of strained liquidity conditions, the functioning of the Treasury securities market had been orderly. Noting that the value of resilience of the market for Treasury securities was underlined by recent gilt market disruptions in the United Kingdom, a number of participants discussed a range of issues that could be considered by the appropriate authorities regarding market resilience, including potential interactions of capital and liquidity regulations with market activity, oversight of key market participants, clearing and settlement practices, and the role and structure of the Federal Reserve's standing facilities. A few participants noted the importance of being prepared to address disruptions in U.S. core market functioning in ways that would not affect the stance of monetary policy, especially during episodes of monetary policy tightening. Several participants noted the risks posed by nonbank financial institutions amid the rapid global tightening of monetary policy and the potential for hidden leverage in these institutions to amplify shocks. In their consideration of appropriate monetary policy actions at this meeting, participants concurred that inflation remained well above the Committee's longer-run goal of 2 percent and the recent data on inflation provided very few signs that inflation pressures were abating. The economic expansion had slowed significantly from last year's rapid pace, and recent indicators pointed to modest growth in spending and production in the current quarter. Despite the slowdown in growth, the labor market remained extremely tight, and nominal wage growth remained elevated. Against this backdrop, all participants agreed that it was appropriate to raise the target range for the federal funds rate 75 basis points at this meeting and to continue the process of reducing the Federal Reserve's securities holdings, as described in the Plans for Reducing the Size of the Federal Reserve's Balance Sheet that the Committee issued in May. Participants observed that the policy rate hike at this meeting was another step toward making the Committee's monetary policy stance sufficiently restrictive to help ease supply and demand imbalances and to return inflation to 2 percent over time. In their discussion of the effects of monetary policy actions and communications to date, participants concurred that the Committee had taken forceful steps to moderate aggregate demand in order to bring it into better alignment with aggregate supply. Financial conditions had tightened significantly in response to the Committee's policy actions, and their effects were clearly evident in the most interest rate-sensitive sectors of the economy, including residential investment and some components of business investment. Several participants commented that monetary policy actions and communications had helped keep longer-term inflation expectations well anchored—a situation that would help facilitate the return of inflation to the Committee's longer-run goal of 2 percent. Nevertheless, with realized inflation well above that goal and the labor market still very tight, participants agreed that ongoing increases in the target range for the federal funds rate would be appropriate and would help keep longer-term inflation expectations well anchored. Participants noted that, with regard to both real economic activity and inflation, it would take time for the full effects of monetary restraint to be realized and that these lags complicated an assessment of the effects of monetary policy. In discussing potential policy actions at upcoming meetings, participants reaffirmed their strong commitment to returning inflation to the Committee's 2 percent objective, and they continued to anticipate that ongoing increases in the target range for the federal funds rate would be appropriate in order to attain a sufficiently restrictive stance of policy to bring inflation down over time. Many participants commented that there was significant uncertainty about the ultimate level of the federal funds rate needed to achieve the Committee's goals and that their assessment of that level would depend, in part, on incoming data. Even so, various participants noted that, with inflation showing little sign thus far of abating, and with supply and demand imbalances in the economy persisting, their assessment of the ultimate level of the federal funds rate that would be necessary to achieve the Committee's goals was somewhat higher than they had previously expected. Participants mentioned a number of considerations that would likely influence the pace of future increases in the target range for the federal funds rate. These considerations included the cumulative tightening of monetary policy to date, the lags between monetary policy actions and the behavior of economic activity and inflation, and economic and financial developments. A number of participants observed that, as monetary policy approached a stance that was sufficiently restrictive to achieve the Committee's goals, it would become appropriate to slow the pace of increase in the target range for the federal funds rate. In addition, a substantial majority of participants judged that a slowing in the pace of increase would likely soon be appropriate. A slower pace in these circumstances would better allow the Committee to assess progress toward its goals of maximum employment and price stability. The uncertain lags and magnitudes associated with the effects of monetary policy actions on economic activity and inflation were among the reasons cited regarding why such an assessment was important. A few participants commented that slowing the pace of increase could reduce the risk of instability in the financial system. A few other participants noted that, before slowing the pace of policy rate increases, it could be advantageous to wait until the stance of policy was more clearly in restrictive territory and there were more concrete signs that inflation pressures were receding significantly. With monetary policy approaching a sufficiently restrictive stance, participants emphasized that the level to which the Committee ultimately raised the target range for the federal funds rate, and the evolution of the policy stance thereafter, had become more important considerations for achieving the Committee's goals than the pace of further increases in the target range. Participants agreed that communicating this distinction to the public was important in order to reinforce the Committee's strong commitment to returning inflation to the 2 percent objective. Participants discussed a number of risk-management considerations related to the conduct of monetary policy. In light of the continuing broad-based and unacceptably high level of inflation and upside risks to the inflation outlook, participants remarked that purposefully moving to a more restrictive policy stance was consistent with risk-management considerations. Some participants observed that there had been an increase in the risk that the cumulative policy restraint would exceed what was required to bring inflation back to 2 percent. Several participants commented that continued rapid policy tightening increased the risk of instability or dislocations in the financial system. There was wide agreement that heightened uncertainty regarding the outlooks for both inflation and real activity underscored the importance of taking into account the cumulative tightening of monetary policy, the lags with which monetary policy affected economic activity and inflation, and economic and financial developments. Committee Policy Action In their discussion of monetary policy for this meeting, members agreed that recent indicators had pointed to modest growth in spending and production. Members also concurred that job gains had been robust in recent months, and the unemployment rate had remained low. Members agreed that inflation had remained elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures. Members observed that Russia's war against Ukraine was causing tremendous human and economic hardship. They also agreed that the war and related events were creating additional upward pressure on inflation and were weighing on global economic activity. Members concurred that they remained highly attentive to inflation risks. Members agreed that the Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, members agreed to raise the target range for the federal funds rate to 3-3/4 to 4 percent. Members anticipated that ongoing increases in the target range would be appropriate in order to attain a stance of monetary policy sufficiently restrictive to return inflation to 2 percent over time. Members agreed to add language to this effect in the postmeeting statement, on the grounds that this would underscore the Committee's view that a sufficiently restrictive stance of monetary policy was needed for achieving its dual-mandate goals. Members agreed that, in determining the pace of future increases in the target range, they would take into account the cumulative tightening of monetary policy, the lags with which monetary policy affected economic activity and inflation, and economic and financial developments. Members agreed to add language to this effect in the postmeeting statement in order to convey explicitly the range of factors that they would consider in determining future monetary policy actions. In addition, members agreed that they would continue reducing the Federal Reserve's holdings of Treasury securities, agency debt, and agency MBS, as described in the Plans for Reducing the Size of the Federal Reserve's Balance Sheet that were issued in May. All members affirmed that they were strongly committed to returning inflation to its 2 percent objective. Members agreed that, in assessing the appropriate stance of monetary policy, they would continue to monitor the implications of incoming information for the economic outlook. They would be prepared to adjust the stance of monetary policy as appropriate if risks emerged that could impede the attainment of the Committee's goals. Members agreed that their assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and 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 instructed otherwise, to execute transactions in the SOMA in accordance with the following domestic policy directive, for release at 2:00 p.m.: "Effective November 3, 2022, 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 3-3/4 to 4 percent. Conduct overnight repurchase agreement operations with a minimum bid rate of 4 percent and with an aggregate operation limit of $500 billion; the aggregate operation limit can be temporarily increased at the discretion of the Chair. Conduct overnight reverse repurchase agreement operations at an offering rate of 3.8 percent and with a per-counterparty limit of $160 billion per day; the per-counterparty limit can be temporarily increased at the discretion of the Chair. Roll over at auction the amount of principal payments from the Federal Reserve's holdings of Treasury securities maturing in each calendar month that exceeds a cap of $60 billion per month. Redeem Treasury coupon securities up to this monthly cap and Treasury bills to the extent that coupon principal payments are less than the monthly cap. Reinvest into agency mortgage-backed securities (MBS) the amount of principal payments from the Federal Reserve's holdings of agency debt and agency MBS received in each calendar month that exceeds a cap of $35 billion per month. Allow modest deviations from stated amounts for reinvestments, if needed for operational reasons. Engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions." The vote also encompassed approval of the statement below for release at 2:00 p.m.: "Recent indicators point to modest growth in spending and production. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures. Russia's war against Ukraine is causing tremendous human and economic hardship. The war and related events are creating additional upward pressure on inflation and are weighing on global economic activity. The Committee is highly attentive to inflation risks. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 3-3/4 to 4 percent. The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time. In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in the Plans for Reducing the Size of the Federal Reserve's Balance Sheet that were issued in May. The Committee is strongly committed to returning inflation to its 2 percent objective. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments." Voting for this action: Jerome H. Powell, John C. Williams, Michael S. Barr, Michelle W. Bowman, Lael Brainard, James Bullard, Susan M. Collins, Lisa D. Cook, Esther L. George, Philip N. Jefferson, Loretta J. Mester, and Christopher J. Waller. 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 of the Federal Reserve System voted unanimously to raise the interest rate paid on reserve balances to 3.9 percent, effective November 3, 2022. The Board of Governors of the Federal Reserve System voted unanimously to approve a 3/4 percentage point increase in the primary credit rate to 4 percent, effective November 3, 2022.4 It was agreed that the next meeting of the Committee would be held on Tuesday–Wednesday, December 13–14, 2022. The meeting adjourned at 10:30 a.m. on November 2, 2022. Notation Vote By notation vote completed on October 11, 2022, the Committee unanimously approved the minutes of the Committee meeting held on September 20–21, 2022. _______________________ James A. Clouse Secretary 1. The Federal Open Market Committee is referenced as the "FOMC" and the "Committee" in these minutes; the Board of Governors of the Federal Reserve System is referenced as the "Board" 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. In taking this action, the Board approved requests to establish that rate submitted by the Boards of Directors of the Federal Reserve Banks of Boston, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Dallas, and San Francisco. This vote also encompassed approval by the Board of Governors of the establishment of a 4 percent primary credit rate by the remaining Federal Reserve Banks, effective on the later of November 3, 2022, or the date such Reserve Banks inform the Secretary of the Board of such a request. (Secretary's note: Subsequently, the Federal Reserve Banks of New York, Philadelphia, and Kansas City were informed of the Board's approval of their establishment of a primary credit rate of 4 percent, effective November 3, 2022.) Return to text

2022-11-02

Statement

Recent indicators point to modest growth in spending and production. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures. Russia's war against Ukraine is causing tremendous human and economic hardship. The war and related events are creating additional upward pressure on inflation and are weighing on global economic activity. The Committee is highly attentive to inflation risks. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 3-3/4 to 4 percent. The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time. In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in the Plans for Reducing the Size of the Federal Reserve's Balance Sheet that were issued in May. The Committee is strongly committed to returning inflation to its 2 percent objective. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments. Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Michelle W. Bowman; Lael Brainard; James Bullard; Susan M. Collins; Lisa D. Cook; Esther L. George; Philip N. Jefferson; Loretta J. Mester; and Christopher J. Waller. For media inquiries, please email [email protected] or call 202-452-2955. Implementation Note issued November 2, 2022

2022-09-21

Statement

Recent indicators point to modest growth in spending and production. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures. Russia's war against Ukraine is causing tremendous human and economic hardship. The war and related events are creating additional upward pressure on inflation and are weighing on global economic activity. The Committee is highly attentive to inflation risks. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 3 to 3-1/4 percent and anticipates that ongoing increases in the target range will be appropriate. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in the Plans for Reducing the Size of the Federal Reserve's Balance Sheet that were issued in May. The Committee is strongly committed to returning inflation to its 2 percent objective. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments. Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Michelle W. Bowman; Lael Brainard; James Bullard; Susan M. Collins; Lisa D. Cook; Esther L. George; Philip N. Jefferson; Loretta J. Mester; and Christopher J. Waller. Implementation Note issued September 21, 2022

2022-10-12

Minute

Minutes of the Federal Open Market Committee September 20-21, 2022 A joint meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve System was held in the offices of the Board of Governors on Tuesday, September 20, 2022, at 1:00 p.m. and continued on Wednesday, September 21, 2022, at 9:00 a.m.1 Attendance Jerome H. Powell, Chair John C. Williams, Vice Chair Michael S. Barr Michelle W. Bowman Lael Brainard James Bullard Susan M. Collins Lisa D. Cook Esther L. George Philip N. Jefferson Loretta J. Mester Christopher J. Waller Charles L. Evans, Patrick Harker, Neel Kashkari, Lorie K. Logan, and Helen E. Mucciolo, Alternate Members of the Committee Thomas I. Barkin, Raphael W. Bostic, and Mary C. Daly, Presidents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco, respectively James A. Clouse, Secretary Matthew M. Luecke, Deputy Secretary Brian J. Bonis, Assistant Secretary Michelle A. Smith, Assistant Secretary Mark E. Van Der Weide, General Counsel Trevor A. Reeve, Economist Stacey Tevlin, Economist Beth Anne Wilson, Economist Shaghil Ahmed, Joseph W. Gruber, Carlos Garriga, and William Wascher, Associate Economists Patricia Zobel,2 Manager pro tem, System Open Market Account Jose Acosta, Senior Communications Analyst, Division of Information Technology, Board David Altig, Executive Vice President, Federal Reserve Bank of Atlanta Kartik B. Athreya, Executive Vice President, Federal Reserve Bank of Richmond Penelope A. Beattie,3 Section Chief, Office of the Secretary, Board James P. Bergin, Deputy General Counsel, Federal Reserve Bank of New York Camille Bryan, Senior Project Manager, Division of Monetary Affairs, Board Michele Cavallo, Principal Economist, Division of Monetary Affairs, Board Stephanie E. Curcuru, Deputy Director, Division of International Finance, Board Marnie Gillis DeBoer, Senior Associate Director, Division of Monetary Affairs, Board Sarah Devany, First Vice President, Federal Reserve Bank of San Francisco Michael Dotsey, Executive Vice President, Federal Reserve Bank of Philadelphia Burcu Duygan-Bump, Special Adviser to the Board, Division of Board Members, Board Rochelle M. Edge, Deputy Director, Division of Monetary Affairs, Board Matthew J. Eichner,4 Director, Division of Reserve Bank Operations and Payment Systems, Board Jon Faust, Senior Special Adviser to the Chair, Division of Board Members, Board Andrew Figura, Associate Director, Division of Research and Statistics, Board Glenn Follette, Associate Director, Division of Research and Statistics, Board Joshua Gallin, Senior Special Adviser to the Chair, Division of Board Members, Board Michael S. Gibson, Director, Division of Supervision and Regulation, Board Luca Guerrieri, Deputy Associate Director, Division of Financial Stability, Board Diana Hancock, Senior Associate Director, Division of Research and Statistics, Board Valerie S. Hinojosa, Section Chief, Division of Monetary Affairs, Board Matteo Iacoviello, Senior Associate Director, Division of International Finance, Board Jane E. Ihrig, Special Adviser to the Board, Division of Board Members, Board Callum Jones, Senior Economist, Division of Monetary Affairs, Board Edward S. Knotek II, Senior Vice President, Federal Reserve Bank of Cleveland Sylvain Leduc, Executive Vice President, Federal Reserve Bank of San Francisco Andreas Lehnert, Director, Division of Financial Stability, Board Paul Lengermann, Assistant Director, Division of Research and Statistics, Board Kurt F. Lewis, Special Adviser to the Board, Division of Board Members, Board Dan Li, Assistant Director, Division of Monetary Affairs, Board Laura Lipscomb, Special Adviser to the Board, Division of Board Members, Board David López-Salido, Senior Associate Director, Division of Monetary Affairs, Board Jonathan P. McCarthy, Economic Research Advisor, Federal Reserve Bank of New York Ann E. Misback, Secretary, Office of the Secretary, Board Michelle M. Neal, Head of Markets, Federal Reserve Bank of New York Edward Nelson, Senior Adviser, Division of Monetary Affairs, Board Giovanni Olivei, Senior Vice President, Federal Reserve Bank of Boston Anna Paulson, Executive Vice President, Federal Reserve Bank of Chicago Karen M. Pence,5 Deputy Associate Director, Division of Research and Statistics, Board Andrea Raffo, Senior Vice President, Federal Reserve Bank of Minneapolis Linda Robertson, Assistant to the Board, Division of Board Members, Board Jeremy B. Rudd, Senior Adviser, Division of Research and Statistics, Board Achilles Sangster II, Senior Information Manager, Division of Monetary Affairs, Board John W. Schindler, Special Adviser to the Board, Division of Board Members, Board Samuel Schulhofer-Wohl, Senior Vice President, Federal Reserve Bank of Dallas Seth Searls,4 Associate Director, Federal Reserve Bank of New York Nitish R. Sinha, Special Adviser to the Board, Division of Board Members, Board John J. Stevens, Senior Associate Director, Division of Research and Statistics, Board Annette Vissing-Jørgensen, Senior Adviser, Division of Monetary Affairs, Board Jeffrey D. Walker,4 Associate Director, Division of Reserve Bank Operations and Payment Systems, Board Min Wei, Senior Associate Director, Division of Monetary Affairs, Board Paul R. Wood, Special Adviser to the Board, Division of Board Members, Board Nathaniel Wuerffel, Head of Domestic Markets, Federal Reserve Bank of New York Rebecca Zarutskie, Special Adviser to the Board, Division of Board Members, Board Andrei Zlate, Group Manager, Division of Monetary Affairs, Board Developments in Financial Markets and Open Market Operations The manager pro tem turned first to a discussion of financial market developments over the intermeeting period. U.S. financial conditions tightened over the period, largely reflecting an upward revision in investors' outlook for the path of the policy rate. Treasury yields climbed substantially, with most of the upward move reflected in real yields. Equity prices initially rose amid second-quarter earnings reports that were better than feared but later retraced those gains in response to the shifting policy outlook. Regarding international developments, yields in most advanced foreign economies (AFEs) also rose sharply as a number of other central banks lifted policy rates and indicated in their communications that they would likely continue to tighten monetary policy in order to address inflation pressures. The exchange value of the dollar appreciated notably, reaching multidecade highs in real terms, as market participants perceived mounting economic challenges abroad. The market-implied path of the federal funds rate shifted sharply higher after market participants interpreted Federal Reserve communications—particularly those provided at the Jackson Hole symposium—along with incoming data, as indicating a more restrictive path of policy than previously expected. Policy-sensitive rates suggested that a 75 basis point increase in the target range for the federal funds rate was widely expected to be decided on at the Committee's September meeting, with some chance of a 100 basis point move. In addition, the market-implied path suggested reasonable odds of additional 75 basis point and 50 basis point rate increases at the November and December meetings, respectively. Market participants generally anticipated a further slowing in the pace of rate increases after December, with the peak policy rate being reached in the first half of 2023. Beyond that period, the market-implied path of the federal funds rate sloped downward, likely reflecting downside risks to the policy rate path. The median respondent to the Open Market Desk surveys expected the policy rate path to remain flat through 2023 after the peak rate was reached. On average, Desk survey respondents assigned an almost 30 percent probability to a decline in real gross domestic product (GDP) over 2022, nearly double the probability assigned in the July survey. The manager pro tem turned next to a discussion of policy implementation. Balance sheet runoff had continued to proceed smoothly over the intermeeting period. With caps on redemptions of Treasury securities and agency mortgage-backed securities (MBS) doubling in September, the pace of balance sheet runoff was set to increase over coming months. The markets for Treasury securities and agency MBS continued to function in an orderly manner, though liquidity conditions in both markets remained low, reflecting elevated interest rate uncertainty. In money markets, the 75 basis point increase in the target range at the July meeting passed through fully to overnight rates. Amid strong demand for short-term investments, take-up at the overnight reverse repurchase agreement (ON RRP) facility was relatively steady at elevated levels. The staff continued to anticipate that ON RRP take-up would decline in coming quarters from its currently elevated levels as money market participants responded to shifting conditions. Issuance of short-term securities was likely to increase in coming periods, and, as more clarity emerged in the economic and policy outlook, demand for short-term assets could moderate. Both of these developments would ease downward pressure on yields on safe short-term investments. The gradual reduction in ON RRP balances could also be facilitated by rising competition among banks in seeking deposits. The manager pro tem indicated that the staff would continue to monitor money market developments closely in order to assess whether any frictions were emerging in this process. The manager pro tem concluded with an update on operational matters. As expected, Federal Reserve net income turned negative in September. The staff expected that the size of the associated deferred asset would increase over time until net income turned positive, likely in a few years. The Desk planned to begin aggregation of those agency MBS held in the System Open Market Account (SOMA) that are not eligible to be commingled into Uniform MBS and, specifically, the Freddie Mac MBS that were issued before June 2019 and have a 45-day payment delay; decisions about any additional aggregations would be made at a later date. 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 available at the time of the September 20–21 meeting suggested that U.S. real GDP was increasing at a modest pace in the third quarter after having declined over the first half of the year. Labor demand remained strong, and the labor market continued to be very tight. Recent monthly readings indicated that consumer price inflation—as measured by the 12-month percentage change in the price index for personal consumption expenditures (PCE)—remained elevated. Total nonfarm payroll employment posted robust gains in July and August at an average pace that was only slightly below what was seen over the first half of the year. The unemployment rate edged up, on net, from 3.6 percent in June to 3.7 percent in August. The unemployment rate for African Americans increased over this period, while the rate for Hispanics moved up slightly on net; both rates were noticeably higher than the national average. The labor force participation rate and employment-to-population ratio both rose, on net, from June to August. The private-sector job openings rate, as measured by the Job Openings and Labor Turnover Survey, moved slightly lower from May to July but remained at a high level. Nominal wage growth continued to be rapid and broad based: Average hourly earnings rose 5.2 percent over the 12 months ending in August, while the employment cost index of hourly compensation in the private sector, which also includes benefit costs, rose 5.5 percent over the 12 months ending in June, 2.4 percentage points faster than the year-earlier pace. Consumer price inflation remained elevated. Total PCE price inflation was 6.3 percent over the 12 months ending in July, and core PCE price inflation, which excludes changes in consumer energy prices and many consumer food prices, was 4.6 percent over the same period. The trimmed mean measure of 12‑month PCE price inflation constructed by the Federal Reserve Bank of Dallas was 4.4 percent in July. In August, the 12‑month change in the consumer price index (CPI) was 8.3 percent, while core CPI inflation was 6.3 percent over the same period. Survey-based measures of short-run inflation expectations declined in recent weeks, while measures of longer-term inflation expectations remained roughly stable or moved lower. Available spending indicators, including the August retail sales report, suggested that real PCE was on track to post a modest gain in the third quarter. However, the latest housing market data pointed to another sharp contraction in residential investment in the third quarter, and business fixed investment appeared to be rising at a tepid pace. Real goods exports stepped up in June and then rose further in July, led by increases in exports of industrial supplies. By contrast, real goods imports stepped down in June and then fell sharply in July, driven by a large decline in consumer goods imports. Exports and imports of services continued to be held back by an incomplete recovery of international travel. The nominal U.S. international trade deficit continued to narrow in June and July. Altogether, net exports contributed positively to GDP growth in the second quarter and appeared on track to make another positive contribution in the third quarter. Data pointed to weak foreign growth in recent months, weighed down by the global reverberations from Russia's war against Ukraine and a loss of momentum in the Chinese economy. In Europe, further disruptions to the supply of energy exacerbated declines in real disposable incomes and in consumer and business confidence, restraining economic activity. In China, recent indicators suggest only a partial rebound from the effects of earlier severe COVID-19-related lockdowns as well as increasing concerns about the property sector. Weaker growth in China and the broader global economy also weighed on export-oriented emerging market economies in Asia. Consumer price inflation rose further in August in many foreign economies, reflecting past increases in energy and food prices, but also a continued broadening of inflationary pressure to core prices. With inflation persistently high, many central banks continued to tighten monetary policy. Staff Review of the Financial Situation Over the intermeeting period, U.S. Treasury yields and the market-implied federal funds rate path moved higher. Broad domestic equity price indexes decreased slightly, on balance, but market volatility remained elevated. Credit remained widely available to most types of borrowers, but increases in borrowing costs appeared to damp the demand for credit in some markets in recent months. Measures of current loan performance for businesses and most households remained generally stable. However, more recently, expectations of future credit quality for businesses deteriorated slightly, and delinquency rates rose for some types of credit owed by households with low credit scores. The expected path of the federal funds rate—implied by a straight read of financial market quotes—rose in the period since the July FOMC meeting, largely reflecting more-restrictive-than-expected monetary policy communications amid stronger-than-expected economic data and ongoing concerns about high inflation. On net, nominal Treasury yields increased significantly across the maturity spectrum. The increases in nominal Treasury yields were primarily accounted for by rising real yields, while inflation compensation measures declined substantially at short horizons and remained relatively little changed at medium- and longer-term horizons. Broad equity price indexes decreased slightly, on net, as substantial early gains arising from investors' improved perceptions about the inflation outlook and better-than-feared second-quarter earnings were more than offset by later losses arising from expectations that the Committee would follow a more restrictive policy than previously expected. One‑month option-implied volatility on the S&P 500—the VIX—increased somewhat, on net, and remained elevated by historical norms, partly reflecting investor uncertainty and risks associated with higher inflation and the expected move to a restrictive policy stance. Corporate bond spreads narrowed slightly, on net, and remained roughly at the midpoints of their historical distributions. Reflecting increases in both policy rates and corporate bond spreads, yields on corporate bonds rose significantly since the start of the year. Municipal bond spreads over comparable-maturity Treasury yields widened a touch. Conditions in short-term funding markets remained stable over the intermeeting period, with the July increase in the Federal Reserve's administered interest rates passing through quickly to other money market rates. Although secured overnight rates firmed slightly later in the intermeeting period, they remained soft relative to the ON RRP offering rate—a configuration that market participants attributed to relatively low Treasury bill supply combined with strong investor demand for short-dated instruments amid uncertainty about the future path of the policy rate. Consistent with continued softness in repurchase agreement rates, daily take-up in the ON RRP facility remained elevated. Spreads on lower-rated short-term commercial paper changed little on net. Bank deposit rates continued to increase modestly in August, following a lagged response to increases in the federal funds rate, while money market mutual funds' net yields rose along with the increases in short-term rates. Sovereign yields in most AFEs rose notably over the intermeeting period as major central banks raised their policy rates and communicated a tighter stance of future policy in the face of persistent inflationary pressures. Yields on Japanese government securities, however, ended the period little changed, as the Bank of Japan reaffirmed its accommodative monetary policy stance. Measures of foreign inflation compensation were volatile amid large swings in European natural gas prices but increased moderately on net. The U.S. dollar appreciated further against most major currencies, reaching multi-decade highs against the euro, the British pound, and the Japanese yen. The dollar's strength largely reflected increasing investor concerns about the global growth outlook as well as widening interest rate differentials between the United States and Japan. Growth concerns also weighed on foreign equity prices, which declined moderately. Outflows from funds dedicated to emerging markets continued at a modest pace, and credit spreads in emerging market economies narrowed somewhat on net. In domestic credit markets, borrowing costs continued to rise over the intermeeting period. Yields on both corporate bonds and institutional leveraged loans increased. Bank interest rates for commercial and industrial (C&I) and commercial real estate (CRE) loans also increased. Among small businesses that borrow on a regular basis, the share of firms facing higher borrowing costs continued to climb through August. Municipal bond yields increased across ratings categories. Borrowing costs for residential mortgage loans increased and reached their highest levels since 2008. Interest rates on most credit card accounts continued to move higher, in line with the rise in the federal funds rate, and auto loan interest rates rose steadily through August. Credit remained generally available to businesses and households, but high borrowing costs appeared to reduce the demand for credit, resulting in lower financing volumes in some markets. Issuance of nonfinancial corporate bonds slowed further in July from the weak levels seen in the second quarter but rebounded somewhat in August and so far in September. Gross institutional leveraged loan issuance increased modestly in July from subdued levels but continued to be weak in August. Equity issuance remained depressed, while issuance of municipal bonds was sluggish over the summer and so far in September. According to the July Senior Loan Officer Opinion Survey on Bank Lending Practices, banks tightened credit standards on C&I lending for the first time in two years, but C&I loans on banks' balance sheets expanded at a strong pace in July and August, reflecting strong demand from nonfinancial businesses. CRE loans on banks' balance sheets also continued to grow robustly, but issuance of commercial mortgage-backed securities (CMBS) slowed in July from its strong pace earlier in the year. Credit availability to small businesses appeared to be tightening somewhat. The share of small firms reporting that it was more difficult to obtain loans continued its upward trend in August but remained lower than its historical average. Credit in the residential mortgage market remained available for high-credit-score borrowers. Credit availability for low-credit-score borrowers continued to ease through July but remained modestly tight—close to pre-pandemic averages. However, the volumes of both home-purchase and refinance mortgage originations plunged in July amid rising mortgage rates. Consumer credit remained available to most households in June and July, but about half of the respondents in the Federal Reserve Bank of New York's Survey of Consumer Expectations indicated that it was harder to obtain credit than it was a year earlier and that they expected it to become even harder over the next year. The credit quality of nonfinancial corporations remained generally strong, with low default rates for both corporate bonds and leveraged loans. The volume of rating upgrades in the corporate bond market outpaced that of downgrades in July and August, but, so far in September, these relative volumes reversed. The volume of rating downgrades in the leveraged loan market continued to exceed that of upgrades. Credit quality for C&I and CRE loans on banks' balance sheets also remained sound, as delinquency rates remained at low levels through June. However, banks increased loan loss provisions somewhat in the second quarter. Delinquency rates on CRE loans securitized into CMBS remained unchanged in July, delinquency rates on small business loans stayed quite low after edging up, and the credit quality of municipal securities remained strong. Household credit quality stayed broadly solid but continued to worsen for some types of credit owed by borrowers with low credit scores. Mortgage delinquencies trended down in recent months, and the share of mortgages in foreclosure remained low in July. By contrast, credit card and auto credit delinquency rates rose over the second quarter, particularly among subprime borrowers, with subprime auto loan delinquency rates rebounding notably to slightly above their historical averages. Staff Economic Outlook The projection for U.S. economic activity prepared by the staff for the September FOMC meeting was slightly weaker than the July forecast. However, the staff's estimate of potential output in recent history was revised down significantly in response to continued disappointing productivity growth and the sluggish gains in labor force participation seen so far this year; moreover, this lower trajectory for potential output was expected to persist throughout the forecast period. As a result, the staff's estimate of the output gap was revised up considerably this year, and while the staff projection still had the output gap closing in coming years, the level of output was expected to be slightly above potential at the end of 2025. Likewise, the unemployment rate was expected to rise more slowly than in the July projection and to be slightly below the staff's estimate of its natural rate at the end of 2025. On a 12-month change basis, total PCE price inflation was expected to be 5.1 percent in 2022, and core inflation was expected to be 4.3 percent. Although the staff continued to project that core inflation would step down over the next two years—reflecting the anticipated resolution of supply–demand imbalances and a labor market that was expected to become less tight—core inflation was revised up in each year of the projection. In 2025, core inflation was expected to be 2.1 percent. Total PCE price inflation was expected to decline to 2.6 percent in 2023 as core inflation slowed and energy prices declined. Total PCE inflation was expected to move down further in 2024, to 2 percent, and to remain at 2 percent in 2025. The staff continued to judge that the risks to the baseline projection for real activity were skewed to the downside. In addition to Russia's war in Ukraine, weakening activity abroad, and ongoing supply chain bottlenecks, the possibility that a persistent reduction in inflation could require a greater-than-assumed amount of tightening in financial conditions was viewed by the staff as a salient downside risk to their forecast for real activity. The staff viewed the risks to the inflation projection as skewed to the upside on the grounds that supply conditions might not improve as much as expected and energy prices might rise sharply again. The staff also pointed to the possibility that wage increases could put a greater-than-expected amount of upward pressure on price inflation and the possibility that inflation expectations could become unanchored given the large rise in inflation seen over the past year as additional upside risks to the inflation forecast. Participants' Views on Current Conditions and the Economic Outlook In conjunction with this FOMC meeting, participants submitted their projections of the most likely outcomes for real GDP growth, the unemployment rate, and inflation for each year from 2022 through 2025 and over the longer run, based on their individual assessments of appropriate monetary policy, including the path of 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. A Summary of Economic Projections was released to the public following the conclusion of the meeting. In their discussion of current economic conditions, participants noted that recent indicators had pointed to modest growth in spending and production. Job gains had been robust in recent months, and the unemployment rate had remained low. Inflation remained elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures. Participants recognized that Russia's war against Ukraine was causing tremendous human and economic hardship. Participants judged that the war and related events were creating additional upward pressure on inflation and were weighing on global economic activity. Against this background, participants remained highly attentive to inflation risks. With regard to the economic outlook, participants noted that recent data pointed to modest growth in economic activity over the second half of this year. Participants observed that recent indicators of consumer spending and business investment suggested modest increases in those spending categories but noted that activity in interest-sensitive sectors weakened appreciably. Participants revised down their projections of real GDP growth for this year from their projections in June. Several participants noted that the continued strength in the labor market, as well as the data on gross domestic income, raised the possibility that the current GDP data could understate the strength in economic activity this year. Participants generally anticipated that the U.S. economy would grow at a below-trend pace in this and the coming few years, with the labor market becoming less tight, as monetary policy assumed a restrictive stance and global headwinds persisted. Participants noted that a period of below-trend real GDP growth would help reduce inflationary pressures and set the stage for the sustained achievement of the Committee's objectives of maximum employment and price stability. In their discussion of the household sector, participants noted that consumer spending grew moderately, reflecting strength in the labor market, the elevated level of household savings accumulated during the pandemic, and a strong aggregate household-sector balance sheet. Several participants noted that spending appeared to have held up relatively well, especially among higher-income households. These participants also noted that the composition of spending by low-to-moderate-income households—who were affected to a greater degree by high food, energy, and shelter prices—was changing, with discretionary expenditures being cut and purchases shifting to lower-cost options. Participants observed that the notable slowdown in residential investment and other interest-sensitive spending had continued, reflecting the effect of the Committee's monetary policy actions and tighter financial conditions. With regard to the business sector, participants observed that growth in investment spending appeared modest. Several participants mentioned that manufacturing activity had slowed. A couple of participants noted that businesses were constrained in undertaking new capital projects, as they faced higher financing costs, persistent challenges associated with supply bottlenecks, and hiring difficulties resulting from the continued tightness of the labor market. Participants discussed how they perceived challenging supply conditions to be evolving. Many participants remarked that their business contacts were reporting signs of relief in supply bottlenecks, such as declines in shipping costs and delivery times and rising inventories, while several participants saw little improvement in the supply situation. Participants saw supply bottlenecks as likely continuing for a while longer, and a couple commented that constraints on production were increasingly taking the form of labor shortages rather than parts shortages. Participants observed that the labor market had remained very tight, as evidenced by a historically low unemployment rate, elevated job vacancies and quit rates, a low pace of layoffs, robust employment gains, and high nominal wage growth. A few participants remarked that employers facing particularly acute labor shortages were those associated with professional occupations, service industries, skilled trades, and smaller firms. Some participants noted a number of developments consistent with the labor market moving toward better balance, including a lower rate of job turnover, a moderation in employment growth, and an increase in the labor force participation rate for prime-age workers. However, several participants assessed that the scope for further improvement in labor force participation was likely limited, especially in view of the sizable contribution that retirements had made to the previous decline in the participation rate. Participants anticipated that the supply and demand imbalances in the labor market would gradually diminish and the unemployment rate would likely rise somewhat, importantly reflecting the effects of tighter monetary policy. Participants judged that a softening in the labor market would be needed to ease upward pressures on wages and prices. Participants expected that the transition toward a softer labor market would be accompanied by an increase in the unemployment rate. Several commented that they considered it likely that the transition would occur primarily through reduced job vacancies and slower job creation. A couple of participants remarked that, in light of challenges in hiring, businesses might be less willing to reduce their staffing levels in the event of a weakening in general economic activity. A few participants particularly stressed the high uncertainty associated with the expected future path of the unemployment rate and commented that the unemployment rate could rise by considerably more than in the staff forecast. Participants observed that inflation remained unacceptably high and well above the Committee's longer-run goal of 2 percent. Participants commented that recent inflation data generally had come in above expectations and that, correspondingly, inflation was declining more slowly than they had previously been anticipating. Price pressures had remained elevated and had persisted across a broad array of product categories. Energy prices had declined in recent months but remained considerably higher than in 2021, and upside risks to energy prices remained. Several participants noted the continued elevated rates of increase in core goods prices. These participants considered this development as potentially indicating that the shift of household spending from goods to services might be having a smaller effect on goods prices than they expected or that the supply bottlenecks and labor shortages were taking longer to be resolved. Participants commented that they expected inflation pressures to persist in the near term. Numerous contributing factors were cited as supporting this view, including labor market tightness and the resulting upward pressure on nominal wages, continuing supply chain disruptions, and the persistent nature of increases in services prices, particularly shelter prices. With respect to the medium term, participants judged that inflation pressures would gradually recede in coming years. Various factors were cited as likely to contribute to this outcome, including the Committee's tightening of its policy stance, a gradual easing of supply and demand imbalances in labor and product markets, and the likelihood that weaker consumer demand would result in a reduction of business profit margins from their current elevated levels. A few participants reported that business contacts in certain retail sectors—such as used cars and apparel—were planning to cut prices in order to help reduce their inventories. Several participants commented that while households across the income distribution were burdened by elevated inflation, those at the lower end of the income distribution were particularly harmed, as a larger share of their income was spent on housing and other necessities. In assessing inflation expectations, participants noted that longer-term expectations appeared to remain well anchored, as reflected in a broad range of surveys of households, businesses, and forecasters as well as measures obtained from financial markets. Participants remarked that the Committee's affirmation of its strong commitment to its price-stability objective, together with its forceful policy actions, had likely helped keep longer-run inflation expectations anchored. Some stressed that a more prolonged period of elevated inflation would increase the risk of inflation expectations becoming unanchored, making it much more costly to bring inflation down. A few participants discussed the increased dispersion of longer-term inflation expectations across respondents in various surveys, with an increase in the number of respondents reporting relatively low expectations of future inflation acknowledged as a key driver of the increased dispersion but with a couple of participants citing higher inflation expectations among some survey respondents as a cause for concern and a reason not to be complacent about longer-term inflation expectations remaining well anchored. Participants agreed that the uncertainty associated with their economic outlooks was high and that risks to their inflation outlook were weighted to the upside. Some participants noted rising labor tensions, a new round of global energy price increases, further disruptions in supply chains, and a larger-than-expected pass-through of wage increases into price increases as potential shocks that, if they materialized, could compound an already challenging inflation problem. A number of participants commented that a wage–price spiral had not yet developed but cited its possible emergence as a risk. Participants broadly judged the risks to real GDP growth to be weighted to the downside, with various global headwinds most prominently cited as contributing factors. These global headwinds included heightened risk of recession in Europe, a slowdown in economic activity occurring in China, and the ongoing global economic implications of Russia's war against Ukraine. Several participants noted that the monetary policy tightening under way in many other economies would affect global financial markets and foreign real GDP growth, with the potential for spillovers to the U.S. economy. In their consideration of the appropriate stance of monetary policy, participants concurred that the labor market was very tight and that inflation was far above the Committee's 2 percent inflation objective. Participants observed that recent indicators of production and spending had pointed to modest growth, while job gains had been robust and the unemployment rate had remained low. Against this backdrop, all participants agreed that it was appropriate to raise the target range for the federal funds rate 75 basis points at this meeting and to continue the process of reducing the Federal Reserve's securities holdings, as described in the Plans for Reducing the Size of the Federal Reserve's Balance Sheet that the Committee issued in May. Policymakers observed that the rate hike at this meeting was another step toward making the Committee's monetary policy stance sufficiently restrictive to help ease supply and demand imbalances and to bring inflation back to 2 percent. Participants reaffirmed their strong commitment to returning inflation to the Committee's 2 percent objective, with many stressing the importance of staying on this course even as the labor market slowed. In discussing potential policy actions at upcoming meetings, participants continued to anticipate that ongoing increases in the target range for the federal funds rate would be appropriate to achieve the Committee's objectives. Participants judged that the Committee needed to move to, and then maintain, a more restrictive policy stance in order to meet the Committee's legislative mandate to promote maximum employment and price stability. Many participants noted that, with inflation well above the Committee's 2 percent objective and showing little sign so far of abating, and with supply and demand imbalances in the economy continuing, they had raised their assessment of the path of the federal funds rate that would likely be needed to achieve the Committee's goals. Participants judged that the pace and extent of policy rate increases would continue to depend on the implications of incoming information for the outlook for economic activity and inflation and on risks to the outlook. Several participants noted that, particularly in the current highly uncertain global economic and financial environment, it would be important to calibrate the pace of further policy tightening with the aim of mitigating the risk of significant adverse effects on the economic outlook. Participants observed that, as the stance of monetary policy tightened further, it would become appropriate at some point to slow the pace of policy rate increases while assessing the effects of cumulative policy adjustments on economic activity and inflation. Many participants indicated that, once the policy rate had reached a sufficiently restrictive level, it likely would be appropriate to maintain that level for some time until there was compelling evidence that inflation was on course to return to the 2 percent objective. Participants noted that, in keeping with the Committee's Plans for Reducing the Size of the Federal Reserve's Balance Sheet, balance sheet runoff had moved up to its maximum planned pace in September and would continue at that pace. They further observed that a significant reduction in the Committee's holdings of securities was in progress and that this process was contributing to the move to a restrictive policy stance. A couple of participants remarked that, after the process of balance sheet reduction was well under way, it would be appropriate for the Committee to consider sales of agency MBS in order to enable suitable progress toward a longer-run SOMA portfolio composed primarily of Treasury securities. In their assessment of the effects of policy actions and communications to date, participants concurred that the Committee's actions to raise expeditiously the target range for the federal funds rate demonstrated its resolve to lower inflation to 2 percent and to keep inflation expectations anchored at levels consistent with that longer-run goal. Participants noted that the Committee's commitment to restoring price stability, together with its purposeful policy actions and communications, had contributed to a notable tightening of financial conditions over the past year that would likely help reduce inflation pressures by restraining aggregate demand. Participants observed that this tightening had led to substantial increases in real interest rates across the maturity spectrum. Most participants remarked that, al­though some interest-sensitive categories of spending—such as housing and business fixed investment—had already started to respond to the tightening of financial conditions, a sizable portion of economic activity had yet to display much response. They noted also that inflation had not yet responded appreciably to policy tightening and that a significant reduction in inflation would likely lag that of aggregate demand. Participants observed that a period of real GDP growth below its trend rate, very likely accompanied by some softening in labor market conditions, was required. They agreed that, by moving its policy purposefully toward an appropriately restrictive stance, the Committee would help ensure that elevated inflation did not become entrenched and that inflation expectations did not become unanchored. These policy moves would therefore prevent the far greater economic pain associated with entrenched high inflation, including the even tighter policy and more severe restraint on economic activity that would then be needed to restore price stability. In light of the broad-based and unacceptably high level of inflation, the intermeeting news of higher-than-expected inflation, and upside risks to the inflation outlook, participants remarked that purposefully moving to a restrictive policy stance in the near term was consistent with risk-management considerations. Many participants emphasized that the cost of taking too little action to bring down inflation likely outweighed the cost of taking too much action. Several participants underlined the need to maintain a restrictive stance for as long as necessary, with a couple of these participants stressing that historical experience demonstrated the danger of prematurely ending periods of tight monetary policy designed to bring down inflation. Several participants observed that as policy moved into restrictive territory, risks would become more two-sided, reflecting the emergence of the downside risk that the cumulative restraint in aggregate demand would exceed what was required to bring inflation back to 2 percent. A few of these participants noted that this possibility was heightened by factors beyond the Committee's actions, including the tightening of monetary policy stances abroad and the weakening global economic outlook, that were also likely to restrain domestic economic activity in the period ahead. Committee Policy Action In their discussion of monetary policy for this meeting, members agreed that recent indicators had pointed to modest growth in spending and production. Members also concurred that job gains had been robust in recent months and the unemployment rate had remained low. Members agreed that inflation remained elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures. Members observed that Russia's war against Ukraine was causing tremendous human and economic hardship. They also agreed that the war and related events were creating additional upward pressure on inflation and were weighing on global economic activity. Members remarked that they remained highly attentive to inflation risks. In their assessment of the monetary policy stance necessary for achieving the Committee's maximum-employment and price-stability goals, the Committee decided to raise the target range for the federal funds rate to 3 to 3-1/4 percent and anticipated that ongoing increases in the target range would be appropriate. In addition, members agreed that the Committee would continue reducing its holdings of Treasury securities and agency debt and agency MBS, as described in the Plans for Reducing the Size of the Federal Reserve's Balance Sheet issued in May. Members agreed that, in assessing the appropriate stance of monetary policy, they would continue to monitor the implications of incoming information for the economic outlook and that they would be prepared to adjust the stance of monetary policy as appropriate if risks emerged that could impede the attainment of the Committee's goals. They also noted that their assessments would take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments. Members affirmed that the Committee was strongly committed to returning inflation to its 2 percent objective. 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, for release at 2:00 p.m.: "Effective September 22, 2022, 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 to 3-1/4 percent. Conduct overnight repurchase agreement operations with a minimum bid rate of 3.25 percent and with an aggregate operation limit of $500 billion; the aggregate operation limit can be temporarily increased at the discretion of the Chair. Conduct overnight reverse repurchase agreement operations at an offering rate of 3.05 percent and with a per-counterparty limit of $160 billion per day; the per-counterparty limit can be temporarily increased at the discretion of the Chair. Roll over at auction the amount of principal payments from the Federal Reserve's holdings of Treasury securities maturing in each calendar month that exceeds a cap of $60 billion per month. Redeem Treasury coupon securities up to this monthly cap and Treasury bills to the extent that coupon principal payments are less than the monthly cap. Reinvest into agency mortgage-backed securities (MBS) the amount of principal payments from the Federal Reserve's holdings of agency debt and agency MBS received in each calendar month that exceeds a cap of $35 billion per month. Allow modest deviations from stated amounts for reinvestments, if needed for operational reasons. Engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions." The vote also encompassed approval of the statement below for release at 2:00 p.m.: "Recent indicators point to modest growth in spending and production. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures. Russia's war against Ukraine is causing tremendous human and economic hardship. The war and related events are creating additional upward pressure on inflation and are weighing on global economic activity. The Committee is highly attentive to inflation risks. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 3 to 3-1/4 percent and anticipates that ongoing increases in the target range will be appropriate. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in the Plans for Reducing the Size of the Federal Reserve's Balance Sheet that were issued in May. The Committee is strongly committed to returning inflation to its 2 percent objective. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments." Voting for this action: Jerome H. Powell, John C. Williams, Michael S. Barr, Michelle W. Bowman, Lael Brainard, James Bullard, Susan M. Collins, Lisa D. Cook, Esther L. George, Philip N. Jefferson, Loretta J. Mester, and Christopher J. Waller. 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 of the Federal Reserve System voted unanimously to raise the interest rate paid on reserve balances to 3.15 percent, effective September 22, 2022. The Board of Governors of the Federal Reserve System voted unanimously to approve a 3/4 percentage point increase in the primary credit rate to 3.25 percent, effective September 22, 2022.6 It was agreed that the next meeting of the Committee would be held on Tuesday–Wednesday, November 1–2, 2022. The meeting adjourned at 10:20 a.m. on September 21, 2022. Notation Vote By notation vote completed on August 16, 2022, the Committee unanimously approved the minutes of the Committee meeting held on July 26–27, 2022. _______________________ James A. Clouse Secretary 1. The Federal Open Market Committee is referenced as the "FOMC" and the "Committee" in these minutes; the Board of Governors of the Federal Reserve System is referenced as the "Board" in these minutes. Return to text 2. In the absence of the manager, the Committee's Rules of Organization provide that the deputy manager acts as manager pro tem. Return to text 3. Attended Tuesday's session only. Return to text 4. Attended through the discussion of developments in financial markets and open market operations. Return to text 5. Attended from the discussion of the economic and financial situation through the end of Wednesday's session. Return to text 6. In taking this action, the Board approved requests to establish that rate submitted by the boards of directors of the Federal Reserve Banks of Boston, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Kansas City, and Dallas. This vote also encompassed approval by the Board of Governors of the establishment of a 3.25 percent primary credit rate by the remaining Federal Reserve Banks, effective on the later of September 22, 2022, or the date such Reserve Banks inform the Secretary of the Board of such a request. (Secretary's note: Subsequently, the Federal Reserve Banks of New York, Minneapolis, and San Francisco were informed of the Board's approval of their establishment of a primary credit rate of 3.25 percent, effective September 22, 2022.) Return to text

2022-07-27

Statement

Recent indicators of spending and production have softened. Nonetheless, job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures. Russia's war against Ukraine is causing tremendous human and economic hardship. The war and related events are creating additional upward pressure on inflation and are weighing on global economic activity. The Committee is highly attentive to inflation risks. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 2-1/4 to 2-1/2 percent and anticipates that ongoing increases in the target range will be appropriate. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in the Plans for Reducing the Size of the Federal Reserve's Balance Sheet that were issued in May. The Committee is strongly committed to returning inflation to its 2 percent objective. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments. Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Michelle W. Bowman; Lael Brainard; James Bullard; Susan M. Collins; Lisa D. Cook; Esther L. George; Philip N. Jefferson; Loretta J. Mester; and Christopher J. Waller. Implementation Note issued July 27, 2022

2022-08-17

Minute

Minutes of the Federal Open Market Committee July 26-27, 2022 A joint meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve System was held in the offices of the Board of Governors on Tuesday, July 26, 2022, at 10:30 a.m. and continued on Wednesday, July 27, 2022, at 9:00 a.m.1 Attendance Jerome H. Powell, Chair John C. Williams, Vice Chair Michael S. Barr Michelle W. Bowman Lael Brainard James Bullard Susan M. Collins Lisa D. Cook Esther L. George Philip N. Jefferson Loretta J. Mester Christopher J. Waller Meredith Black, Charles L. Evans, Patrick Harker, Neel Kashkari, and Helen E. Mucciolo,2 Alternate Members of the Committee Thomas I. Barkin, Raphael W. Bostic, and Mary C. Daly, Presidents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco, respectively James A. Clouse, Secretary Brian J. Bonis, Assistant Secretary Michelle A. Smith, Assistant Secretary Mark E. Van Der Weide, General Counsel Trevor A. Reeve, Economist Stacey Tevlin, Economist Beth Anne Wilson, Economist Shaghil Ahmed, Brian M. Doyle, Joseph W. Gruber, David E. Lebow, Ellis W. Tallman, and William Wascher, Associate Economists Lorie K. Logan, Manager, System Open Market Account Patricia Zobel, Deputy Manager, System Open Market Account Ann E. Misback, Secretary, Office of the Secretary, Board Andreas Lehnert, Director, Division of Financial Stability, Board Jennifer J. Burns, Deputy Director, Division of Supervision and Regulation, Board; Sally Davies, Deputy Director, Division of International Finance, Board; Rochelle M. Edge, Deputy Director, Division of Monetary Affairs, Board Jon Faust and Joshua Gallin, Senior Special Advisers to the Chair, Division of Board Members, Board Burcu Duygan-Bump, Jane E. Ihrig, Kurt F. Lewis, Laura Lipscomb, John W. Schindler, Nitish R. Sinha, Paul R. Wood, and Rebecca Zarutskie, Special Advisers to the Board, Division of Board Members, Board Linda Robertson, Assistant to the Board, Division of Board Members, Board William F. Bassett, Senior Associate Director, Division of Financial Stability, Board Edward Nelson, Senior Adviser, Division of Monetary Affairs, Board; Jeremy B. Rudd, Senior Adviser, Division of Research and Statistics, Board Andrew Figura, Associate Director, Division of Research and Statistics, Board; Christopher J. Gust, Associate Director, Division of Monetary Affairs, Board; Jeffrey D. Walker,3 Associate Director, Division of Reserve Bank Operations and Payment Systems, Board Patrick E. McCabe and Norman J. Morin, Deputy Associate Directors, Division of Research and Statistics, Board David Arseneau, Assistant Director, Division of Financial Stability, Board; Giovanni Favara and Etienne Gagnon, Assistant Directors, Division of Monetary Affairs, Board Penelope A. Beattie,4 Section Chief, Office of the Secretary, Board; Valerie S. Hinojosa, Section Chief, Division of Monetary Affairs, Board Alyssa Arute,3 Manager, Division of Reserve Bank Operations and Payment Systems, Board Sriya L. Anbil,5 Group Manager, Division of Monetary Affairs, Board Fabian Winkler, Principal Economist, Division of Monetary Affairs, Board Peter M. Garavuso, Senior Information Manager, Division of Monetary Affairs, Board David Na and Anthony Sarver, Senior Financial Institution and Policy Analysts, Division of Monetary Affairs, Board Brett Takacs, Senior Communications Analyst, Division of Information Technology, Board Becky C. Bareford, First Vice President, Federal Reserve Bank of Richmond Kartik B. Athreya, Michael Dotsey, and Michelle M. Neal, Executive Vice Presidents, Federal Reserve Banks of Richmond, Philadelphia, and New York, respectively James P. Bergin, Spencer Krane, and Giovanni Olivei, Senior Vice Presidents, Federal Reserve Banks of New York, Chicago, and Boston, respectively William D. Dupor, Vice President, Federal Reserve Bank of St. Louis Andrew Foerster, Senior Research Advisor, Federal Reserve Bank of San Francisco James F. Dolmas, Economic Policy Advisor and Senior Economist, Federal Reserve Bank of Dallas Nina Boyarchenko, Department Head, Federal Reserve Bank of New York Jonathan Heathcote, Monetary Advisor, Federal Reserve Bank of Minneapolis Federico Mandelman, Research Economist and Advisor, Federal Reserve Bank of Atlanta Developments in Financial Markets and Open Market Operations The deputy manager turned first to a discussion of financial market developments. Financial markets over the intermeeting period reflected elevated uncertainty about the outlook. Most market participants appeared to view a moderation of inflation and slower, but still positive, economic growth ahead as the most likely scenario. However, investors appeared to be increasingly attentive to downside risks to the economy in light of the potential for shocks from abroad and the continued upside surprises to inflation. On net, financial conditions eased modestly over the period but remained substantially tighter than at the start of the year. Treasury yields fell, reflecting expectations of slower growth as well as a decline in inflation compensation. Respondents to the Open Market Desk's surveys of primary dealers and market participants marked down their growth forecasts for 2022 and 2023 and attached higher odds than in the June survey to the possibility that the U.S. economy could enter a recession in coming quarters. Market participants perceived falling commodity prices—particularly for oil—and the FOMC's commitment to bringing inflation down as pointing to lower inflation ahead. Market-based measures of near-dated inflation compensation declined and continued to suggest that inflation would ease in coming quarters. In the Desk surveys, respondents also expected inflation to decline substantially in 2023 but assigned meaningful probabilities to a wide range of potential outcomes, including scenarios involving continued elevated rates of inflation. Far-forward market-based measures of inflation compensation fell over the period. These measures continued to suggest that inflation would return over time to the Committee's 2 percent objective. In their assessment of the policy outlook, market participants expected significant policy tightening in coming meetings as the Committee continued to respond to the current elevated level of inflation. Nearly all respondents to the Desk survey anticipated a 75 basis point increase in the target range at the current meeting, and most expected a 50 basis point increase in September to follow. The market-implied path of the federal funds rate indicated a peak policy rate of around 3.4 percent, significantly lower than at the time of the June meeting. The market-implied path suggested expectations that the policy rate would fall thereafter. Most respondents to the Desk survey expected the federal funds rate to remain above the survey's longer-run policy rate of 2.4 percent through the end of 2024, but, on average, respondents placed significant probabilities on lower rate outcomes. Regarding developments abroad, central banks in advanced foreign economies (AFEs) had quickened the pace of policy tightening in order to address above-target inflation. Eight advanced-economy central banks raised their policy rates over the period. Along lines similar to U.S. developments, market-implied policy rates in most AFEs fell at longer horizons and reflected expectations that policy rates would reach peak levels by early 2023. In contrast to central banks in other advanced economies, the Bank of Japan confirmed its commitment to accommodative policy. In this environment, the exchange value of the dollar appreciated further, surpassing its March 2020 peak against advanced-economy currencies. The deputy manager next turned to a discussion of money markets and Desk operations. The 75 basis point increase in the target range at the June meeting passed through fully to the federal funds rate and other overnight rates. Although downward pressure on overnight secured rates had persisted, the pronounced softness observed in the past intermeeting period had abated to some degree. The overnight reverse repurchase agreement (ON RRP) facility continued to support policy implementation, and balances remained elevated. The deputy manager anticipated that, in the near term, the evolution of take-up at the ON RRP facility would continue to depend on changes in the supply of safe, short-term investments, and the demand for such investments by money market mutual funds (MMMFs). ON RRP balances were expected to decline over time as balance sheet runoff proceeded. The deputy manager noted that this process would involve adjustments across a number of markets and that the staff would continue to monitor developments in money markets closely. Regarding expectations for the evolution of the Federal Reserve's balance sheet, market participants expected the Committee to increase the monthly caps on System Open Market Account (SOMA) redemptions beginning in September, as announced in the Plans for Reducing the Size of the Federal Reserve's Balance Sheet issued in May. Treasury coupon principal payments would first fall below the $60 billion cap in September, with the remainder of redemptions met with maturities of Treasury bills. Paydowns of agency mortgage-backed securities (MBS) were projected to fall below the higher September cap of $35 billion beginning in September. The deputy manager ended with an update on SOMA net income. Staff projections suggested that net income would likely turn negative in coming months. That development would be reflected in a temporary deferred asset on Reserve Bank balance sheets. Any deferred asset would not affect the Committee's ability to implement monetary policy, and the deferred asset would be extinguished over time as net income turned positive again in later years. 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 available at the time of the July 26–27 meeting suggested that U.S. real gross domestic product (GDP) had declined over the first half of the year. However, the labor market continued to be very tight, and labor demand remained strong. Consumer price inflation—as measured by the 12‑month percentage change in the price index for personal consumption expenditures (PCE)—remained elevated in May, and available information suggested that inflation was still elevated in June. Total nonfarm payroll employment posted a solid gain in June at a pace that was similar to that seen in April and May. The unemployment rate was unchanged in June at 3.6 percent. The unemployment rate for African Americans moved lower in June, while the rate for Hispanics was unchanged; both rates were noticeably higher than the national average. The labor force participation rate and the employment-to-population ratio both ticked down in June. The private-sector job openings rate, as measured by the Job Openings and Labor Turnover Survey, declined further in May but remained at a high level. Nominal wage growth continued to be rapid and broad based, with average hourly earnings having risen 5.1 percent over the 12 months ending in June. Real goods exports edged down in May after growing robustly in March and April. Real goods imports continued to step down from the exceptionally strong March readings, driven by declines in imports of consumer goods and capital goods. Exports and imports of services continued to be held back by an incomplete recovery of international travel. The nominal U.S. international trade deficit narrowed for a second consecutive month in May from its record size in March. The available data suggest that net exports contributed positively to GDP growth in the second quarter. Consumer price inflation remained elevated. Total PCE price inflation was 6.3 percent over the 12 months ending in May, and core PCE price inflation, which excludes changes in consumer energy prices and many consumer food prices, was 4.7 percent over the same period. The trimmed mean measure of 12‑month PCE price inflation constructed by the Federal Reserve Bank of Dallas was 4.0 percent in May, 2.1 percentage points higher than its year-earlier rate of increase. In June, the 12‑month change in the consumer price index (CPI) was 9.1 percent, while core CPI inflation was 5.9 percent over the same period. Survey-based measures of short-run inflation expectations remained elevated; by contrast, some measures of longer-term inflation expectations moved lower in recent weeks. Available indicators suggested that real PCE rose at a modest pace in the second quarter, while business investment, residential investment, and government purchases all posted declines. Manufacturing output moved lower in May and June, and forward-looking indicators of manufacturing activity weakened broadly. Foreign economic growth slowed notably in the second quarter, as COVID-19-related lockdowns led to a sharp contraction in China and Russia's war against Ukraine took a toll on foreign activity, especially in Europe. Indicators for June showed the Chinese economy rebounding as the lockdowns were eased. The global economy, however, continued to face headwinds from disruptions to the supply of energy, elevated political uncertainties in Europe, and tighter global monetary and financial conditions. Although most commodity prices moved lower from elevated levels in recent weeks, foreign consumer price inflation continued to rise through June, mostly reflecting past increases in energy and food prices, but also a continued broadening of price pressures to core goods and services. Many foreign central banks tightened monetary policy to address high inflation. Staff Review of the Financial Situation Over the intermeeting period, nominal and real Treasury yields declined significantly, reportedly reflecting increased investor concerns about downside risks to the growth outlook as well as a decline in inflation compensation. Sovereign yields in AFEs declined notably. The market-implied federal funds rate path for the next few meetings rose but moved down noticeably at longer horizons. Broad equity price indexes were higher, on net, while credit spreads widened. Major foreign equity price indexes edged higher, on net, and the exchange value of the dollar continued to appreciate. Amid the decline in Treasury yields, longer-term borrowing costs declined for households and businesses with higher credit ratings, and while credit availability remained generally available, it appeared to tighten for most businesses and some households. Broad equity price indexes were higher over the intermeeting period, amid heightened volatility. Declines in interest rates likely supported stock prices over the period, while some positive earnings releases suggested to investors a less pessimistic corporate outlook. One-month option-implied volatility on the S&P 500 index—the VIX—decreased but remained significantly above its pre-pandemic levels. Yields on corporate bonds declined notably across the credit spectrum, but corporate bond spreads ended the period slightly wider. Spreads on municipal bonds widened slightly as yields declined by less than those of comparable-maturity Treasury securities. Conditions in short-term funding markets were stable since the previous FOMC meeting, with the June increase in the Federal Reserve's administered rates passing through promptly to overnight money markets. Secured overnight rates remained soft relative to the ON RRP offering rate, with the downward pressure on rates attributed to continuing declines in net Treasury bill issuance, elevated demand for collateral in the form of Treasury securities, and MMMFs maintaining very short portfolio maturities amid uncertainty about the near-term outlook for policy rate increases. Consistent with the downward pressure on repo rates, daily take-up in the ON RRP facility increased. Spreads on lower-rated short-term commercial paper (CP) narrowed modestly, on net. Bank core deposit rates moved up very little in response to the Federal Reserve's increase in administered rates following the June FOMC meeting, while MMMFs' net yields rose, reflecting the increases in short-term rates over recent months. Investors' concerns about global economic growth intensified amid weaker-than-expected data on economic activity and uncertainty about the supply of natural gas from Russia to Europe. Sovereign yields and medium-term inflation compensation measures in major AFEs, most notably in the euro area, moved down, with yields largely reversing the sharp increase that occurred just before the June FOMC meeting. In the euro area, peripheral sovereign spreads were little changed following the widely anticipated announcement by the European Central Bank of its Transmission Protection Instrument that could be activated to counter disorderly conditions in euro-area bond markets. Major foreign equity price indexes were volatile but generally edged higher, on net, supported by declines in sovereign yields. The dollar appreciated somewhat further against most currencies and particularly against the euro as yield differentials between the United States and the euro area widened. Most Latin American currencies depreciated against the dollar, in part reflecting the decline in global commodity prices. In domestic credit markets, longer-term borrowing costs for households and businesses with higher credit ratings declined over the intermeeting period but borrowing costs for lower rated firms were higher, on net. The credit quality of businesses, municipalities, and households remained stable. Credit remained generally available, though credit availability appeared to tighten for most businesses and for some households. Borrowing costs linked to shorter-term interest rates generally increased, largely as a result of expectations of tighter monetary policy. Bank interest rates for both commercial and industrial (C&I) and commercial real estate (CRE) loans increased in May and were close to pre-pandemic levels. Yields on institutional leveraged loans and newly issued commercial mortgage-backed securities (CMBS) increased amid financial market volatility and growing concerns about an economic slowdown. Small businesses that borrow on a regular basis faced notably higher borrowing costs in June. Interest rates on most existing credit card accounts and on auto loans continued to trend upward. In contrast to many other borrowing rates, residential mortgage rates fell since the June FOMC meeting, in line with the drop in longer-term yields, but remained near their highest levels since 2010. The credit quality of nonfinancial corporations remained strong with low volumes of defaults on corporate bonds in May and on leveraged loans in June. The volume of rating downgrades on speculative-grade credit in the corporate bond market was similar to that of upgrades in June, while for leveraged loans, the volume of downgrades exceeded the volume of upgrades in May and June. The credit quality for C&I and CRE loans on banks' books remained sound. However, respondents in the July Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS) indicated increased concerns about credit quality in the near future as reasons for their expectation of a tightening in lending standards over the second half of 2022. Delinquency rates on CRE loans in CMBS declined in June, delinquency rates on small business loans were little changed, and the credit quality of municipal securities remained strong. The credit quality of households stayed solid. Residential mortgage delinquencies and the share of mortgages in forbearance trended down. Credit card and auto credit delinquency rates rose somewhat over the first quarter but remained subdued by recent historical standards. Business loans at banks expanded at a rapid pace in May and June, despite higher interest rates and a more uncertain economic outlook. C&I loans on banks' books continued to grow robustly, with the July SLOOS citing reasons of increased demand by customers to finance inventory and accounts receivable. However, issuance of both agency and non-agency CMBS slowed significantly in June. Credit appeared to be available to most small businesses, although the share of small firms reporting that it was difficult to obtain loans increased. Credit in the residential mortgage market remained widely available for borrowers with higher credit ratings but tight for households with low credit scores. Volumes of home-purchase mortgage originations declined in May and mortgage refinance volumes continued to fall. Consumer credit remained broadly available to households in April and May but respondents in the Federal Reserve Bank of New York's Survey of Consumer Expectations indicated that it was harder to get credit in recent months. That said, auto loans outstanding continued to grow at a robust pace in April and May but credit card balances moderated somewhat in May and June. The staff provided an update on its assessment of the stability of the financial system and, on balance, characterized the vulnerabilities of the U.S. financial system as moderate, down from notable in January. Equity and corporate debt prices declined significantly since the last assessment, reflecting concerns over slower growth and lower risk appetite in corporate markets. Declining risk appetite has also led to sharp declines in the price of some digital assets. The staff noted that digital assets tended to be volatile. The staff also highlighted the financial stability considerations associated with rapid growth in stablecoins, including their vulnerability to runs and the opacity of many aspects of their operations. Residential real estate prices continued to rise, and the staff noted that although valuations have been elevated, mortgage underwriting standards have been stronger than in previous house-price cycles. CRE prices continued to rise, and valuation pressures appeared to be increasing. The staff assessed that households were in a better position than in the mid-2000s to weather a downturn in house prices, noting that mortgage debt growth has significantly lagged growth in house prices, leaving households with substantial equity cushions. Moreover, for much of the past decade, most new mortgage debt had been added by borrowers with prime credit scores. In addition, the staff assessed that business leverage was high, but businesses maintained ample cash on hand and their credit quality remained strong. Further, the ability of most firms to service their debt was at a historically high level, as measured by the interest coverage ratio. The staff assessed that leverage in the financial sector remained moderate. Recent declines in bank capital ratios were due to higher volatility, interest rate increases, and loan growth, but the recently concluded stress tests suggested that participating banks could absorb losses from a severe recession without breaching regulatory minimums, and some banks were expected to increase their capital ratios later this year. Leverage at hedge funds and life insurance companies remained relatively high. Market liquidity had deteriorated in the oil and equities markets since January, but market functioning continued to be orderly. Yields offered by MMMFs were well above those offered by banks, and the staff noted that this yield differential would attract inflows to MMMFs. Noting the structural vulnerabilities associated with MMMFs, the staff highlighted the need to monitor the size and fragility of this sector and the progress of the Security and Exchange Commission's recently proposed reforms. The staff noted that open-end bond and loan mutual funds, which are also vulnerable to large-scale investor withdrawals, had experienced outflows as interest rates rose. These outflows had proceeded in an orderly manner. Staff Economic Outlook The projection for U.S. economic activity prepared by the staff for the July FOMC meeting was noticeably weaker than the June forecast, reflecting the economy's reduced momentum and current and prospective financial conditions that were expected to provide less support to aggregate demand growth. As a result, while the projected level of real GDP remained above potential this year, the gap was expected to have closed by the second half of 2023. Similarly, the unemployment rate was projected to start rising in the second half of 2022 and to reach the staff's estimate of its natural rate at the end of next year. Total PCE price inflation was expected to be 4.8 percent in 2022, and core inflation was expected to be 4.0 percent. Core PCE price inflation was expected to step down to 2.6 percent in 2023 and to 2.0 percent in 2024; the projected deceleration in core prices was attributable to the anticipated resolution of supply–demand imbalances, a labor market that was expected to become less tight over the projection period, and a projected decline in import price inflation. Total PCE inflation was expected to decline to 2.2 percent in 2023 and to 1.9 percent in 2024, reflecting the anticipated slowing in core inflation and a projected rapid deceleration in consumer food and energy prices in coming quarters. The staff continued to judge that the risks to the baseline projection for real activity were skewed to the downside, noting that supply chain bottlenecks, Russia's war against Ukraine, weak incoming data on spending, and the tightening in financial conditions since the start of the year supported this assessment. The staff viewed the risks to the inflation projection as skewed to the upside given the persistent upward surprises seen in the inflation data, the possibility that inflation expectations would become unanchored as a result of the large increase in actual inflation over the past year, and the risk that supply conditions would not improve as much as the baseline projection assumed. Participants' Views on Current Conditions and the Economic Outlook In their discussion of current economic conditions, participants noted that recent indicators of spending and production had softened. Nonetheless, job gains had been robust in recent months, and the unemployment rate had remained low. Inflation remained elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures. Participants recognized that Russia's war against Ukraine was causing tremendous human and economic hardship. Participants judged that the war and related events were creating additional upward pressure on inflation and were weighing on global economic activity. Against this background, participants stated that they were highly attentive to inflation risks. With regard to current economic activity, participants noted that consumer expenditures, housing activity, business investment, and manufacturing production had all decelerated from the robust rates of growth seen in 2021. The labor market, however, remained strong. Participants observed that indicators of spending and production suggested that the second quarter of this year had seen a broad-based softening in economic activity. Many participants remarked that some of the slowing, particularly in the housing sector, reflected the emerging response of aggregate demand to the tightening of financial conditions associated with the ongoing firming of monetary policy. The unwinding of the large-scale support to consumer spending provided by pandemic-related fiscal policy actions, the inflation-induced reduction in real disposable income, and the move down in the demand for some products from the elevated levels seen in earlier stages of the pandemic had also all led to slower growth in households' expenditures. In addition, a deterioration in the foreign economic outlook and a strong dollar were contributing to a weakening of external demand. Participants anticipated that U.S. real GDP would expand in the second half of the year, but many expected that growth in economic activity would be at a below-trend pace, as the period ahead would likely see the response of aggregate demand to tighter financial conditions become stronger and more broad based. Participants noted that a period of below-trend GDP growth would help reduce inflationary pressures and set the stage for the sustained achievement of the Committee's objectives of maximum employment and price stability. In their discussion of the household sector, participants commented that they were seeing many signs in the data, and hearing reports from business contacts, of slower growth in consumer spending. Although the aggregate balance sheet for the household sector was strong and the unemployment rate was low, consumer sentiment had deteriorated, and households were reportedly becoming more cautious in their expenditure decisions in light of uncertainty about the economic outlook and the reduction in purchasing power induced by price rises, particularly increases in the prices of essentials such as food, housing, and transportation. Participants also observed that housing activity had weakened notably, reflecting the impact of higher mortgage interest rates and house prices on home affordability. Participants anticipated that this slowdown in housing activity would continue and also expected higher borrowing costs to lead to a slowing in other interest-sensitive household expenditures, such as purchases of durable goods. With respect to the business sector, participants noted that investment spending had likely declined in the second quarter. In addition, business survey data and information received from contacts indicated that manufacturing orders and production had fallen in some Districts. Heightened uncertainty, concerns about inflation, tighter financial conditions, and a cutback in consumer spending had led firms to downgrade economic prospects. Some participants noted that their contacts were reporting that businesses were in the process of reevaluating their capital expenditure plans, though a few participants stated that some contacts had reported a degree of short-term momentum in business activity arising from existing orders and from the implementation of expansion plans made before the tightening of financial conditions. A few participants indicated that some business contacts had assessed that demand and supply were beginning to come into better balance. Even so, contacts in many areas continued to report major supply chain disruptions and anticipated that these were likely to continue while also indicating that there were signs of improvement in supply conditions in some areas. Participants observed that the labor market remained strong, with the unemployment rate very low, job vacancies and quits close to historically high levels, and an elevated rate of nominal wage growth. Many participants also noted, however, that there were some tentative signs of a softening outlook for the labor market: These signs included increases in weekly initial unemployment insurance claims, reductions in quit rates and vacancies, slower growth in payrolls than earlier in the year, and reports of cutbacks in hiring in some sectors. In addition, although nominal wage growth remained strong according to a wide range of measures, there were some signs of a leveling off or edging down. In some Districts, contacts had suggested that labor demand–supply imbalances might be diminishing, with firms being more successful in hiring and retaining workers and under less pressure to raise wages. Some participants noted that the contribution that increases in labor supply could make to reducing labor market imbalances was likely limited, especially as the scope for labor force participation to pick up was constrained by the ongoing movement of the large baby-boom cohort into their retirement years, while others highlighted factors holding down participation that could wane in the future, such as continuing pandemic-related concerns. Participants observed that, in part because of tighter financial conditions and an associated moderation in the growth of aggregate demand, growth in employment would likely slow further in the period ahead. They noted that this development would help bring labor demand and supply into better balance, reducing upward pressures on nominal wage growth and aiding the return of inflation to 2 percent. Several participants observed that the moderation in labor market conditions might well lag the slowdown in economic activity. Participants remarked that a moderation in labor market conditions would likely involve a decline in the number of job openings as well as a moderate increase in unemployment from the current very low rate. A couple of participants indicated that firms were keen to retain workers—a factor that could limit the increase in layoffs associated with a slowing labor market. Participants noted that indicators of spending and production pointed to less underlying strength in economic activity than was suggested by indicators of labor market activity. With employment growth still strong, the weakening in spending data implied unusually large negative readings on labor productivity growth for the year so far. Participants remarked that the strength of the labor market suggested that economic activity may be stronger than implied by the current GDP data, with several participants raising the possibility that the discrepancy might ultimately be resolved by GDP being revised upward. Several participants also observed, however, that the labor market might not be as tight as some indicators suggested, and they noted that data provided by the payroll processor ADP and employment as reported in the household survey both seemed to imply a softer labor market than that suggested by the still-robust growth in payroll employment as reported in the establishment survey. Participants observed that inflation remained unacceptably high and was well above the Committee's longer-run goal of 2 percent. In light of the high CPI reading for June, participants noted that PCE inflation was likely to have increased further in that month. Participants further observed that inflationary pressures were broad based, a pattern reflected in large one-month increases in the trimmed mean CPI and core CPI measures. Participants remarked that, although recent declines in gasoline prices would likely help produce lower headline inflation rates in the short term, declines in the prices of oil and some other commodities could not be relied on as providing a basis for sustained lower inflation, as these prices could quickly rebound. Participants also noted that the high cost of living was an especially great burden on low- and middle-income households. Participants agreed that there was little evidence to date that inflation pressures were subsiding. They judged that inflation would respond to monetary policy tightening and the associated moderation in economic activity with a delay and would likely stay uncomfortably high for some time. Participants also observed that in some product categories, the rate of price increase could well pick up further in the short run, with sizable additional increases in residential rental expenses being especially likely. Participants noted that supply bottlenecks were continuing to contribute to price pressures. There were, however, some signs of gradual improvement in the supply situation—including improved availability of certain key materials, less upward pressure on input prices, and a decline in delivery times. Contacts reported that there were nevertheless substantial continuing challenges. Participants judged that it would take considerable time for supply constraints to be resolved, and a few suggested that full resolution of supply difficulties would take longer than they previously assessed. Several participants stressed that improvements in supply would be helpful but by themselves could not be relied on to resolve the supply and demand imbalances in the economy sufficiently rapidly. Participants emphasized that a slowing in aggregate demand would play an important role in reducing inflation pressures. They expected that the appropriate firming of monetary policy and an eventual easing of supply and demand imbalances would bring inflation back down to levels consistent with the Committee's longer-run objective and keep longer-term inflation expectations well anchored. Participants discussed a number of factors likely to be helpful in bringing inflation back down to 2 percent. In addition to the Committee's ongoing policy firming and anchored longer-term inflation expectations, these included competitive pressures restraining price increases, the apparent absence of a wage–price spiral, the tightening of monetary policy abroad, and the impact of the appreciation of the dollar on import prices. However, they continued to view commodity price developments as a potential source of upward pressure on inflation. Participants noted that expectations of inflation were an important influence on the behavior of actual inflation and stressed that moving to an appropriately restrictive stance of policy was essential for avoiding an unanchoring of inflation expectations. Such an unanchoring would make achieving the Committee's statutory objectives of maximum employment and price stability much more difficult. In assessing the current state of inflation expectations, participants noted that recent readings on market-based measures of inflation compensation were consistent with longer-term inflation expectations remaining anchored near 2 percent. They judged that this behavior of longer-term inflation expectations was likely partly due to the actual and expected firming of monetary policy and also likely reflected downward revisions to the growth of aggregate demand expected in coming years. In addition, several participants assessed that the Committee's ongoing monetary policy tightening was helping alleviate concerns among market participants and wage and price setters that elevated inflation would become entrenched. Several participants observed that recent readings on survey measures of inflation expectations were broadly consistent with the Committee's 2 percent longer-run inflation objective, although a few participants noted that household surveys were indicating increasing divergences in views about the likely longer-run rate of inflation. In their discussion of risks, participants emphasized that they were highly attentive to inflation risks and were closely monitoring developments regarding both inflation and inflation expectations. Uncertainty about the medium-term course of inflation remained high, and the balance of inflation risks remained skewed to the upside, with several participants highlighting the possibility of further supply shocks arising from commodity markets. Participants saw the risks to the outlook for real GDP growth as primarily being to the downside. These downside risks included the possibility that the tightening in financial conditions would have a larger negative effect on economic activity than anticipated, that there would be further pandemic-related economic disruptions, or that geopolitical and global economic developments would lead to additional adverse economic or financial disturbances. Several of the participants who commented on issues related to financial stability noted that, on balance, asset valuations had eased from elevated levels in recent months. High levels of capital and liquidity overall in the banking system, healthy household balance sheets, and the adoption of stronger mortgage underwriting standards following the Global Financial Crisis were also cited among the factors that fostered financial stability in the current environment. Several participants noted that financial market liquidity had been low in some areas but that market functioning had, nonetheless, been orderly. Several participants emphasized the importance of avoiding complacency when assessing financial vulnerabilities amid ever-changing economic and financial landscapes or the need to look at a broad range of possible outcomes, including scenarios involving elevated inflation and rising interest rates, when assessing financial vulnerabilities and stability. Some participants commented on the financial stability challenges posed by digital assets. They noted that these assets, including stablecoins, were subject to vulnerabilities—such as runs, fire sales, and excessive leverage—similar to those associated with more traditional assets. While the recent turmoil in digital asset markets had not spread to other asset classes, these participants saw digital assets' rising importance and growing interconnectedness with other segments of the financial system as underscoring the need to establish a robust supervisory and regulatory framework for this industry that would appropriately limit potential systemic risks. A few participants mentioned the need to strengthen the oversight and regulation of certain types of nonbank financial institutions. Several participants noted that capital at some of the largest banks had declined in recent quarters. These participants emphasized that it was important that the largest banks have strong capital positions and that appropriate settings of regulatory and supervisory tools can help deliver that outcome. A couple of these participants highlighted the potential role that usage of the countercyclical capital buffer could play in this context. In their consideration of the appropriate stance of monetary policy, participants concurred that the labor market was very tight and that inflation was far above the Committee's 2 percent inflation objective. Participants noted that recent indicators of spending and production had softened, while, by contrast, job gains had been robust and the unemployment rate had remained low. Against this backdrop, all participants agreed that it was appropriate to raise the target range for the federal funds rate 75 basis points at this meeting and to continue the process of reducing the Federal Reserve's securities holdings, as described in the Plans for Reducing the Size of the Federal Reserve's Balance Sheet that the Committee issued in May. Participants observed that, following this meeting's policy rate hike, the nominal federal funds rate would be within the range of their estimates of its longer-run neutral level. Even so, with inflation elevated and expected to remain so over the near term, some participants emphasized that the real federal funds rate would likely still be below shorter-run neutral levels after this meeting's policy rate hike. In discussing potential policy actions at upcoming meetings, participants continued to anticipate that ongoing increases in the target range for the federal funds rate would be appropriate to achieve the Committee's objectives. With inflation remaining well above the Committee's objective, participants judged that moving to a restrictive stance of policy was required to meet the Committee's legislative mandate to promote maximum employment and price stability. Participants concurred that the pace of policy rate increases and the extent of future policy tightening would depend on the implications of incoming information for the economic outlook and risks to the outlook. Participants judged that, as the stance of monetary policy tightened further, it likely would become appropriate at some point to slow the pace of policy rate increases while assessing the effects of cumulative policy adjustments on economic activity and inflation. Some participants indicated that, once the policy rate had reached a sufficiently restrictive level, it likely would be appropriate to maintain that level for some time to ensure that inflation was firmly on a path back to 2 percent. Participants concurred that, in expeditiously raising the policy rate, the Committee was acting with resolve to lower inflation to 2 percent and anchor inflation expectations at levels consistent with that longer-run goal. Participants noted that the Committee's credibility with regard to bringing inflation back to the 2 percent objective, together with its forceful policy actions and communications, had already contributed to a notable tightening of financial conditions that would likely help reduce inflation pressures by restraining aggregate demand. Participants pointed to some evidence suggesting that policy actions and communications about the future path of the federal funds rate were starting to affect the economy, most visibly in interest-sensitive sectors. Participants generally judged that the bulk of the effects on real activity had yet to be felt because of lags associated with the transmission of monetary policy, and that while a moderation in economic growth should support a return of inflation to 2 percent, the effects of policy firming on consumer prices were not yet apparent in the data. A number of participants posited that some of the effects of policy actions and communications were showing up more rapidly than had historically been the case, because the expeditious removal of policy accommodation and supporting communications already had led to a significant tightening of financial conditions. In light of elevated inflation and the upside risks to the outlook for inflation, participants remarked that moving to a restrictive stance of the policy rate in the near term would also be appropriate from a risk-management perspective because it would better position the Committee to raise the policy rate further, to appropriately restrictive levels, if inflation were to run higher than expected. Participants judged that a significant risk facing the Committee was that elevated inflation could become entrenched if the public began to question the Committee's resolve to adjust the stance of policy sufficiently. If this risk materialized, it would complicate the task of returning inflation to 2 percent and could raise substantially the economic costs of doing so. Many participants remarked that, in view of the constantly changing nature of the economic environment and the existence of long and variable lags in monetary policy's effect on the economy, there was also a risk that the Committee could tighten the stance of policy by more than necessary to restore price stability. These participants highlighted this risk as underscoring the importance of the Committee's data-dependent approach to judging the pace and magnitude of policy firming over coming quarters. Participants reaffirmed their strong commitment to returning inflation to the Committee's 2 percent objective. Participants agreed that a return of inflation to the 2 percent objective was necessary for sustaining a strong labor market. Participants remarked that it would likely take some time for inflation to move down to the Committee's objective. Participants added that the course of inflation would be influenced by various nonmonetary factors, including developments associated with Russia's war against Ukraine and with supply chain disruptions. Participants recognized that policy firming could slow the pace of economic growth, but they saw the return of inflation to 2 percent as critical to achieving maximum employment on a sustained basis. Committee Policy Action In their discussion of monetary policy for this meeting, members agreed that recent indicators of spending and production had softened. Members also concurred that, nonetheless, job gains had been robust in recent months and the unemployment rate had remained low. Members agreed that inflation remained elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures. In describing the sources of elevated inflation, members judged it pertinent to add a reference to higher food prices to the statement because of the notable rise in these prices and the importance of food items in households' budgets. Members concurred that Russia's war against Ukraine was causing tremendous human and economic hardship. They also agreed that the war and related events were creating additional upward pressure on inflation and were weighing on global economic activity. Members remarked that they remained highly attentive to inflation risks. Amid evidence that COVID-related lockdowns in China had generally been lifted and had affected supply chains only modestly, members generally considered it appropriate to omit from the July statement the sentence that appeared in the June statement indicating that these lockdowns were likely to exacerbate supply chain disruptions. In their assessment of the monetary policy stance necessary for achieving the Committee's maximum-employment and price-stability goals, the Committee decided to raise the target range for the federal funds rate to 2-1/4 to 2-1/2 percent and anticipated that ongoing increases in the target range would be appropriate. In addition, members agreed that the Committee would continue reducing the Federal Reserve's holdings of Treasury securities and agency debt and agency MBS, as described in the Plans for Reducing the Size of the Federal Reserve's Balance Sheet that were issued in May. Members agreed that, in assessing the appropriate stance of monetary policy, they would continue to monitor the implications of incoming information for the economic outlook and that they would be prepared to adjust the stance of monetary policy as appropriate in the event that risks emerged that could impede the attainment of the Committee's goals. They also concurred that their assessments would take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments. Members affirmed that the Committee was strongly committed to returning inflation to its 2 percent objective. 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, for release at 2:00 p.m.: "Effective July 28, 2022, 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 2-1/4 to 2-1/2 percent. Conduct overnight repurchase agreement operations with a minimum bid rate of 2.5 percent and with an aggregate operation limit of $500 billion; the aggregate operation limit can be temporarily increased at the discretion of the Chair. Conduct overnight reverse repurchase agreement operations at an offering rate of 2.3 percent and with a per-counterparty limit of $160 billion per day; the per-counterparty limit can be temporarily increased at the discretion of the Chair. Roll over at auction the amount of principal payments from the Federal Reserve's holdings of Treasury securities maturing in the calendar months of July and August that exceeds a cap of $30 billion per month. Redeem Treasury coupon securities up to this monthly cap and Treasury bills to the extent that coupon principal payments are less than the monthly cap. Starting in the calendar month of September, roll over at auction the amount of principal payments from the Federal Reserve's holdings of Treasury securities maturing in each calendar month that exceeds a cap of $60 billion per month. Redeem Treasury coupon securities up to this monthly cap and Treasury bills to the extent that coupon principal payments are less than the monthly cap. Reinvest into agency mortgage-backed securities (MBS) the amount of principal payments from the Federal Reserve's holdings of agency debt and agency MBS received in the calendar months of July and August that exceeds a cap of $17.5 billion per month. Starting in the calendar month of September, reinvest into agency MBS the amount of principal payments from the Federal Reserve's holdings of agency debt and agency MBS received in each calendar month that exceeds a cap of $35 billion per month. Allow modest deviations from stated amounts for reinvestments, if needed for operational reasons. Engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions." The vote also encompassed approval of the statement below for release at 2:00 p.m.: "Recent indicators of spending and production have softened. Nonetheless, job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures. Russia's war against Ukraine is causing tremendous human and economic hardship. The war and related events are creating additional upward pressure on inflation and are weighing on global economic activity. The Committee is highly attentive to inflation risks. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 2-1/4 to 2-1/2 percent and anticipates that ongoing increases in the target range will be appropriate. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in the Plans for Reducing the Size of the Federal Reserve's Balance Sheet that were issued in May. The Committee is strongly committed to returning inflation to its 2 percent objective. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments." Voting for this action: Jerome H. Powell, John C. Williams, Michael S. Barr, Michelle W. Bowman, Lael Brainard, James Bullard, Susan M. Collins, Lisa D. Cook, Esther L. George, Philip N. Jefferson, Loretta J. Mester, and Christopher J. Waller. 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 of the Federal Reserve System voted unanimously to raise the interest rate paid on reserve balances to 2.4 percent, effective July 28, 2022. The Board of Governors of the Federal Reserve System voted unanimously to approve a 3/4 percentage point increase in the primary credit rate to 2.5 percent, effective July 28, 2022.6 It was agreed that the next meeting of the Committee would be held on Tuesday–Wednesday, September 20–21, 2022. The meeting adjourned at 10:35 a.m. on July 27, 2022. Notation Vote By notation vote completed on July 5, 2022, the Committee unanimously approved the minutes of the Committee meeting held on June 14–15, 2022. _______________________ James A. Clouse Secretary 1. The Federal Open Market Committee is referenced as the "FOMC" and the "Committee" in these minutes; the Board of Governors of the Federal Reserve System is referenced as the "Board" in these minutes. Return to text 2. Elected as an Alternate by the Federal Reserve Bank of New York, effective July 15, 2022. Return to text 3. Attended through the discussion of developments in financial markets and open market operations. Return to text 4. Attended Tuesday's session only. Return to text 5. Attended from the discussion of the economic and financial situation through the end of Wednesday's session. Return to text 6. In taking this action, the Board approved requests to establish that rate submitted by the boards of directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, Dallas, and San Francisco. This vote also encompassed approval by the Board of Governors of the establishment of a 2.5 percent primary credit rate by the remaining Federal Reserve Banks, effective on the later of July 28, 2022, or the date such Reserve Banks inform the Secretary of the Board of such a request. (Secretary's note: Subsequently, the Federal Reserve Banks of St. Louis, Minneapolis, and Kansas City were informed of the Board's approval of their establishment of a primary credit rate of 2.5 percent, effective July 28, 2022.) Return to text

2022-06-15

Statement

Overall economic activity appears to have picked up after edging down in the first quarter. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures. The invasion of Ukraine by Russia is causing tremendous human and economic hardship. The invasion and related events are creating additional upward pressure on inflation and are weighing on global economic activity. In addition, COVID-related lockdowns in China are likely to exacerbate supply chain disruptions. The Committee is highly attentive to inflation risks. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 1‑1/2 to 1-3/4 percent and anticipates that ongoing increases in the target range will be appropriate. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in the Plans for Reducing the Size of the Federal Reserve's Balance Sheet that were issued in May. The Committee is strongly committed to returning inflation to its 2 percent objective. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments. Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; James Bullard; Lisa D. Cook; Patrick Harker; Philip N. Jefferson; Loretta J. Mester; and Christopher J. Waller. Voting against this action was Esther L. George, who preferred at this meeting to raise the target range for the federal funds rate by 0.5 percentage point to 1-1/4 percent to 1-1/2 percent. Patrick Harker voted as an alternate member at this meeting. Implementation Note issued June 15, 2022

2022-07-06

Minute

Minutes of the Federal Open Market Committee June 14–15, 2022 A joint meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve System was held in the offices of the Board of Governors on Tuesday, June 14, 2022, at 11:00 a.m. and continued on Wednesday, June 15, 2022, at 9:00 a.m.1 Attendance Jerome H. Powell, Chair John C. Williams, Vice Chair Michelle W. Bowman Lael Brainard James Bullard Lisa D. Cook Esther L. George Philip N. Jefferson Loretta J. Mester Christopher J. Waller Meredith Black, Charles L. Evans, Patrick Harker, Naureen Hassan, and Neel Kashkari, Alternate Members of the Committee Thomas I. Barkin, Raphael W. Bostic, and Mary C. Daly, Presidents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco, respectively Kenneth C. Montgomery, Interim President of the Federal Reserve Bank of Boston James A. Clouse, Secretary Matthew M. Luecke, Deputy Secretary Brian J. Bonis, Assistant Secretary Michelle A. Smith, Assistant Secretary Mark E. Van Der Weide, General Counsel Trevor A. Reeve, Economist Stacey Tevlin, Economist Beth Anne Wilson, Economist Shaghil Ahmed, Brian M. Doyle, Carlos Garriga, Joseph W. Gruber, Ellis W. Tallman, and William Wascher, Associate Economists Lorie K. Logan, Manager, System Open Market Account Patricia Zobel, Deputy Manager, System Open Market Account Ann E. Misback, Secretary, Office of the Secretary, Board Matthew J. Eichner,2 Director, Division of Reserve Bank Operations and Payment Systems, Board; Michael S. Gibson, Director, Division of Supervision and Regulation, Board; Andreas Lehnert, Director, Division of Financial Stability, Board Daniel M. Covitz, Deputy Director, Division of Research and Statistics, Board; Sally Davies, Deputy Director, Division of International Finance, Board; Rochelle M. Edge, Deputy Director, Division of Monetary Affairs, Board; Michael T. Kiley, Deputy Director, Division of Financial Stability, Board Jon Faust and Joshua Gallin, Senior Special Advisers to the Chair, Division of Board Members, Board Burcu Duygan-Bump, Jane E. Ihrig, Kurt F. Lewis, Nitish R. Sinha, and Paul R. Wood, Special Advisers to the Board, Division of Board Members, Board Linda Robertson, Assistant to the Board, Division of Board Members, Board Marnie Gillis DeBoer3 and David López-Salido, Senior Associate Directors, Division of Monetary Affairs, Board; Diana Hancock and John J. Stevens, Senior Associate Directors, Division of Research and Statistics, Board Edward Nelson and Robert J. Tetlow,4 Senior Advisers, Division of Monetary Affairs, Board Christopher J. Gust, Associate Director, Division of Monetary Affairs, Board Shane M. Sherlund, Deputy Associate Director, Division of Research and Statistics, Board Giovanni Favara and Etienne Gagnon,3 Assistant Directors, Division of Monetary Affairs, Board; Paul Lengermann and Byron Lutz, Assistant Directors, Division of Research and Statistics, Board Penelope A. Beattie,3 Section Chief, Office of the Secretary, Board; Valerie S. Hinojosa, Section Chief, Division of Monetary Affairs, Board Alyssa Arute,2 Manager, Division of Reserve Bank Operations and Payment Systems, Board Ayelen Banegas and Anna Orlik,3 Principal Economists, Division of Monetary Affairs, Board; Stephen F. Lin, Principal Economist, Division of Research and Statistics, Board Giovanni Nicolò, Arsenios Skaperdas, and Hiroatsu Tanaka, Senior Economists, Division of Monetary Affairs, Board; Cisil Sarisoy, Senior Economist, Division of International Finance, Board Achilles Sangster II, Senior Information Manager, Division of Monetary Affairs, Board David Na, Senior Financial Institution and Policy Analyst, Division of Monetary Affairs, Board Jose Acosta, Senior Communications Analyst, Division of Information Technology, Board Kathleen O. Paese, First Vice President, Federal Reserve Bank of St. Louis David Altig, Kartik B. Athreya, Michelle M. Neal, and Anna Paulson, Executive Vice Presidents, Federal Reserve Banks of Atlanta, Richmond, New York, and Chicago, respectively James P. Bergin, Marc Giannoni, Giovanni Olivei, Paolo A. Pesenti, and Robert G. Valletta, Senior Vice Presidents, Federal Reserve Banks of New York, Dallas, Boston, New York, and San Francisco, respectively Roc Armenter, Vice President, Federal Reserve Bank of Philadelphia Alisdair G. McKay, 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) turned first to a discussion of financial developments. Over the intermeeting period, there were significant swings in asset prices, and financial conditions tightened, on net, as market participants assessed incoming information about the economy. In the United States, near-term policy rate expectations shifted markedly toward the end of the period, particularly after the release of the May consumer price index (CPI) report. Ahead of the release of the report, market expectations reflected a broad consensus that there would be 50 basis point rate increases at both the June and July FOMC meetings. After the release of the higher-than-expected inflation data, policy-sensitive rates pointed instead to a considerable probability of 75 basis point moves at both the June and July meetings. The market-implied path of the federal funds rate moved higher at longer horizons as well. Market participants noted elevated uncertainty about the economic and monetary policy outlook. Across the yield curve, rates on nominal Treasury securities ended the period significantly higher, primarily reflecting the revision in the outlook for monetary policy and the associated rise in real yields. Market-based measures of inflation compensation continued to indicate expectations that inflation would decline notably in coming quarters, and measures of medium-term inflation compensation fell over the intermeeting period. Market participants reported that while liquidity conditions in the market for Treasury securities had been affected by the elevated volatility in rates and larger trades were having an increased effect on pricing, overall market functioning had held up. Responding to higher interest rates and some concerns about the growth outlook, equity prices moved substantially lower over the period. The manager turned next to a discussion of developments related to foreign central banks. Most major foreign central banks were proceeding on a path of removing policy accommodation in order to address elevated levels of inflation. Several—including those of Canada, Australia, and New Zealand—had raised their policy rates 50 basis points over the intermeeting period, and some signaled the potential need for more forceful tightening in order to address inflation risks. The European Central Bank (ECB) announced an end to its asset purchase program and signaled an intention to lift policy rates in July. Meanwhile, the stance of monetary policy in Japan was generally expected to remain highly accommodative, though recent upward pressure on Japanese government bond yields had led the Bank of Japan (BOJ) to step up its efforts to defend its yield curve control target. On balance, market participants were focused on the largely synchronous shift toward monetary policy tightening across most advanced economies. Regarding money market developments, the manager noted that the 50 basis point increase in the target range at the May FOMC meeting passed through to the effective federal funds rate and was also transmitted to other overnight rates. The federal funds rate held steady at 83 basis points throughout the period, while the Secured Overnight Financing Rate softened, on net, falling to the bottom of the federal funds target range later in the period. Contacts attributed the downward pressure on secured rates to high liquidity levels and declining Treasury bill supply, as well as elevated uncertainty about the interest rate path, which had increased demand for short-term investments. In this environment, participation in the overnight reverse repurchase agreement (ON RRP) facility increased, and a greater share of activity in overnight private repurchase agreement (repo) markets was conducted by lenders who lacked access to the facility. The manager noted that, if ON RRP usage continued to rise, it may be appropriate at some point to consider further lifting the per-counterparty limit. Over the longer term, ON RRP usage was expected to fall, with the reduction in the size of the Federal Reserve's balance sheet resulting in a gradual rise in money market rates relative to the ON RRP rate. The deputy manager turned next to a discussion of Federal Reserve operations and related topics. In accordance with the directive to the Open Market Desk, the reduction in SOMA securities holdings began in June, under the initial monthly caps on redemptions of $30 billion for Treasury securities and $17.5 billion for agency debt and agency mortgage-backed securities (MBS). Under current staff projections, the SOMA portfolio was anticipated to decline roughly $400 billion by the end of 2022. As noted in the recent SOMA annual report and reported in the Board's first-quarter financial statements for the Federal Reserve System, the SOMA portfolio had an unrealized loss, reflecting the increase in longer-term interest rates. Unrealized losses had no implications for Federal Reserve income and would eventually fall to zero as securities reached maturity. The staff projected that SOMA net income would decline and potentially turn negative, with increases in the target range lifting the interest expense on some liabilities, and that this eventuality could result in a deferred asset entry on the Federal Reserve's balance sheet. Neither unrealized losses on the Federal Reserve's existing securities portfolio nor negative net income would impair the implementation of monetary policy or the Federal Reserve's ability to achieve its dual-mandate objectives. On other operational matters, the deputy manager noted that, over the intermeeting period, the Desk onboarded three depository institutions as new counterparties for the standing repo facility (SRF), resulting in a total of nine depository institutions approved, to date, as SRF counterparties. 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 available at the time of the June 14–15 meeting suggested that U.S. real gross domestic product (GDP) was rebounding to a moderate rate of increase in the second quarter after having declined in the first quarter. The labor market remained very tight, but there were some signs that momentum was slowing. Consumer price inflation—as measured by the 12‑month percentage change in the price index for personal consumption expenditures (PCE)—remained elevated in April, and available information suggested that inflation was still elevated in May. Total nonfarm payroll employment rose solidly in April and May, though the pace of increase was slower than in the first quarter, and the unemployment rate remained unchanged at 3.6 percent. The unemployment rates for African Americans and for Hispanics were little changed, on net, though both rates remained noticeably higher than the national average. On net, the labor force participation rate edged down between March and May, while the employment-to-population ratio was unchanged. The private-sector job openings rate, as measured by the Job Openings and Labor Turnover Survey, edged lower in April but remained at a high level. Nominal wage growth remained elevated, with average hourly earnings having risen 5.2 percent over the 12 months ending in May, and the increases were widespread across industries. Consumer price inflation remained elevated. Total PCE price inflation was 6.3 percent over the 12 months ending in April, and core PCE price inflation, which excludes changes in consumer energy prices and many consumer food prices, was 4.9 percent over the same period. The trimmed mean measure of 12‑month PCE price inflation constructed by the Federal Reserve Bank of Dallas was 3.8 percent in April, nearly 2 percentage points higher than its year-earlier rate of increase. In May, the 12-month change in the CPI was 8.6 percent, while core CPI inflation was 6.0 percent over the same period. Measures of inflation expectations derived from surveys of professional forecasters and of consumers generally suggested that inflation was expected to remain high in the short run but then fall back toward levels consistent with a longer-run rate of 2 percent. Production and spending indicators were mixed but generally remained strong. Consumer spending and industrial production posted sizable gains in April. However, retail sales declined in May, data on home sales and single-family housing starts moved down in April, some indicators of manufacturing activity weakened in May, and the University of Michigan Surveys of Consumers measure of consumer sentiment decreased noticeably in the preliminary June reading. Supply disruptions appeared to have improved in some sectors (such as general merchandise retailers) but to have deteriorated in others (such as materials for home construction). On balance, the available indicators suggested that private domestic final purchases were increasing at a slower pace in the second quarter than in the first quarter. And with the available trade data for April pointing to a rebound in exports and a moderation in import growth in the second quarter, GDP growth appeared to be rebounding after having declined in the first quarter. Regarding trade, real imports of goods stepped back in April from their exceptional strength in March, driven by a decline in consumer goods imports. By contrast, real goods exports grew in both March and April after declining in the previous two months, following some normalization in categories such as soybeans and pharmaceuticals, which can exhibit large and idiosyncratic changes. Exports and imports of services continued to be held back by an incomplete recovery of international travel. The nominal U.S. international trade deficit widened to a record size in March and then reversed that widening in April. Incoming data suggested that the global reverberations from lockdown measures to deal with the spread of the COVID-19 virus in China and the Russian invasion of Ukraine slowed foreign economic growth. In China, activity indicators pointed to a sizable restraint on economic activity. The Russian invasion of Ukraine continued to have an imprint on foreign activity, with persistent stresses in global commodity markets and declining consumer and business confidence, especially in Europe. Inflation abroad moved higher, driven by further increases in consumer energy and food prices as well as some additional broadening of price pressures to core goods and services. Central banks around the world further tightened their monetary policy stances to curb high inflation. Staff Review of the Financial Situation Over the intermeeting period, U.S. Treasury yields and the market-implied federal funds rate path moved substantially higher on net. Broad domestic equity price indexes declined considerably, on balance, amid elevated market volatility. In most advanced foreign economies (AFEs), sovereign yields also increased further, and foreign equity price indexes moved lower. Despite further increases in borrowing costs, financing conditions in domestic credit markets remained generally accommodative. The credit quality of firms, municipalities, and households remained largely stable, although the outlook for credit quality had begun to deteriorate somewhat. Since the previous FOMC meeting, 2-, 5-, and 10-year nominal Treasury yields increased considerably on net. Early in the intermeeting period, Treasury yields moved lower amid rising concerns about a weakening U.S. growth outlook and Federal Reserve communications perceived as lowering the chances of large policy rate hikes at upcoming meetings. However, yields increased late in the period, with economic data releases largely being interpreted as highlighting the possibility of a more aggressive tightening of monetary policy. The expected federal funds rate path—implied by a straight read of overnight index swap quotes—also increased notably on balance. Real yields increased more than their nominal counterparts, while inflation compensation implied by Treasury Inflation-Protected Securities declined. Broad equity price indexes fell sharply over the intermeeting period on net. The stock price declines were largely associated with mixed corporate earnings news early in the period and increasing concerns about the economic outlook amid global policy tightening. One-month option-implied volatility on the S&P 500 index—the VIX—increased moderately, on balance, remaining elevated relative to its historical distribution and significantly above average pre-pandemic levels. Spreads on investment-grade and, to a greater extent, speculative-grade corporate bonds widened notably, on net, reaching levels comparable with those at the end of 2018. This widening of spreads was associated with increased concerns about the outlook for corporate credit amid monetary policy tightening. Since the previous FOMC meeting, spreads on municipal bonds narrowed substantially, on net, moving near levels observed for several years before the pandemic, as investor demand exhibited some recovery over much of the period from earlier weak levels. Conditions in short-term funding markets remained stable over the intermeeting period, with the May increase in the Federal Reserve's administered rates passing through promptly to overnight money market rates. Spreads on longer-tenor commercial paper (CP) and negotiable certificates of deposit narrowed moderately, with no signs of spillovers beyond the stablecoin market following the collapse of a large algorithmic stablecoin. Indeed, CP outstanding increased slightly over the period. Money market fund (MMF) net yields across all fund types rose notably, as increases in administered rates passed through to money market instruments. Secured overnight rates softened significantly relative to the ON RRP offering rate since the May FOMC meeting, with the downward pressure on rates attributed to continuing declines in net Treasury bill issuance, elevated demand for collateral in the form of Treasury securities, and MMFs maintaining very short portfolio maturities amid uncertainty about the pace of anticipated policy rate increases. Consistent with the downward pressure on repo rates, daily take-up in the ON RRP facility increased further. Sovereign yields in most AFEs rose over the intermeeting period amid investors' concerns about further inflationary pressures and major central banks' policy communications suggesting a firmer stance of policy. Interest rate volatility in AFEs increased, consistent with increased uncertainty about the path of policy rates. Concerns about the global growth outlook weighed on equity prices, and the broad dollar edged up. Implied equity price volatility remained at elevated levels. Japanese yields and equity prices, however, ended the period about unchanged, as the BOJ reaffirmed its accommodative monetary policy stance. Sovereign bond spreads over German bund yields for euro-area peripheral countries widened further. These moves were partially retraced following an unscheduled meeting of the ECB on June 15, at which the ECB indicated that it would take action to address potential fragmentation risk in euro-area sovereign bond markets. Outflows from emerging market-dedicated funds intensified in early May, especially from local currency bond funds, and credit spreads in emerging market economies widened moderately. In domestic credit markets, financing conditions for most businesses and households remained generally accommodative over the intermeeting period. Credit remained widely available, particularly to higher-rated firms and consumers with higher credit scores. Gross nonfinancial corporate bond issuance slowed in May, especially among speculative-grade issuers, amid elevated market volatility and high yields. Gross institutional leveraged loan issuance decelerated and initial public offering volumes remained extremely slow in May, while gross issuance of municipal bonds remained robust. Commercial and industrial (C&I) and commercial real estate (CRE) loans on banks' balance sheets expanded at a rapid pace in April and May. Issuance of both agency and non-agency commercial mortgage-backed securities (CMBS) stepped down slightly in May from its strong pace earlier in the year. Small business loan originations through April were in line with pre-pandemic levels and indicated that credit appeared to be available. Residential mortgage credit remained widely available through May for most borrowers. While refinance volumes continued trending lower in April and May amid higher mortgage rates, outstanding balances of home equity lines of credit at commercial banks posted the first significant increase in more than a decade, likely reflecting a substitution by homeowners away from cash-out refinances. In consumer credit markets, auto loans outstanding grew at a robust pace in the first quarter, consistent with a rebound in auto sales, but slowed in April and May. Credit card balances at commercial banks rose in April at the fastest pace seen in recent decades, but growth slowed in May. Borrowing costs had continued to increase in many sectors since the previous FOMC meeting. Yields on nonfinancial corporate bonds remained well above pre-pandemic levels, and new issuance spreads for institutional leveraged loans ticked up in May. Bank interest rates for both C&I and CRE loans also increased. Among small businesses that borrow on a regular basis, the share facing higher borrowing costs rose in both April and May. Borrowing costs for residential mortgage loans increased significantly over the intermeeting period, in line with the increases in MBS and Treasury yields, reaching their highest levels since 2010. In consumer credit markets, rates on auto loans and new credit card offers continued to trend upward. Despite the historically low volumes of defaults on both corporate bonds and leveraged loans in April, in the later weeks of the intermeeting period the volume of credit rating downgrades of leveraged loans exceeded the volume of upgrades. In addition, market indicators of future default expectations of businesses deteriorated to some extent, as investors appeared to mark down their assessment of the macroeconomic outlook. Credit quality of business loans on banks' books remained sound, with C&I and CRE delinquency rates continuing to be low through March. Nonetheless, banks allocated net positive loan loss provisions in the first quarter of this year. This development reversed a pattern of loan loss reserves being released throughout last year and reflected concerns about the credit quality outlook. Delinquency rates on CMBS and small business loans continued to decline, and the credit quality of municipal securities remained strong. Household credit quality remained solid, with the share of consumers with subprime credit scores still near historical lows. In addition, mortgage delinquencies and the share of mortgages in forbearance both continued to trend down in recent months. While nonprime auto loan delinquency rates edged down a touch in the first quarter, credit card delinquency rates for account holders with below-prime credit scores inched up from low levels. The sizable increases in credit card purchase volumes through March were roughly offset by high levels of credit card payments, thus increasing household borrowing only slightly. Staff Economic Outlook The projection for U.S. economic activity prepared by the staff for the June FOMC meeting implied a trajectory for real GDP that was lower than in the May projection. The staff continued to project that GDP growth would rebound in the second quarter and remain solid over the remainder of the year. However, monetary policy was assumed to be less accommodative than in the previous projection, and the recent and prospective tightening of financial conditions led the staff to reduce its GDP growth forecast for the second half of 2022 and for 2023. The level of real GDP was still expected to remain well above potential over the projection period, though the gap was projected to narrow significantly this year and to narrow a little further next year. Labor market conditions also were expected to remain very tight, albeit somewhat less so than in the previous projection. With regard to PCE price inflation, the staff revised up its projection for the second half of 2022 in response to stronger-than-expected wage growth and the staff's assessment that the boost to inflation from supply–demand imbalances in the economy, including in food and energy markets, would be more persistent than previously assumed. All told, total PCE price inflation was expected to be 5.0 percent in 2022, while core inflation was expected to be 4.1 percent. PCE price inflation was then expected to step down to 2.4 percent in 2023 and to 2.0 percent in 2024, as energy prices were forecast to decline and as supply–demand imbalances were projected to diminish because of slowing aggregate demand and an easing of supply constraints. Similarly, core inflation was projected to slow to 2.6 percent in 2023 and to 2.2 percent in 2024. The staff continued to judge that the risks to the baseline projection for real activity were skewed to the downside and that the risks to the inflation projection were skewed to the upside. The staff judged that the ongoing war in Ukraine remained a possible source of even greater upward pressure on energy and commodity prices, while the war and adverse developments associated with China's zero-COVID policy were both perceived as increasing the risk that supply chain disruptions and production constraints would be further exacerbated in the United States and abroad. Participants' Views on Current Conditions and the Economic Outlook In conjunction with this FOMC meeting, participants submitted their projections of the most likely outcomes for real GDP growth, the unemployment rate, and inflation for each year from 2022 through 2024 and over the longer run based on their individual assessments of appropriate monetary policy, including the path of 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. A Summary of Economic Projections (SEP) was released to the public following the conclusion of the meeting. In their discussion of current economic conditions, participants noted that overall economic activity appeared to have picked up after edging down in the first quarter. Job gains had been robust in recent months, and the unemployment rate had remained low. Inflation remained elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures. Participants recognized that the invasion of Ukraine by Russia was causing tremendous human and economic hardship for the Ukrainian people. Participants judged that the invasion and related events were creating additional upward pressure on inflation and were weighing on global economic activity. In addition, participants indicated that COVID-related lockdowns in China were likely to exacerbate supply chain disruptions. Against this background, participants stated that they were highly attentive to inflation risks. With regard to the economic outlook, participants noted that recent indicators suggested that real GDP growth was expanding in the current quarter, with consumption spending remaining strong. Participants generally judged that growth in business fixed investment appeared to be slowing, and activity in the housing sector appeared to be softening, in part as a result of a sharp rise in mortgage rates. Correspondingly, participants indicated that they had revised down their projections of real GDP growth for this year, consistent with ongoing supply chain disruptions and tighter financial conditions. Participants noted that the imbalance between supply and demand across a wide range of product markets was contributing to upward pressure on inflation. They saw an appropriate firming of monetary policy and associated tighter financial conditions as playing a central role in helping address this imbalance and in supporting the Federal Reserve's goals of maximum employment and price stability. An easing of supply bottlenecks, a further rise in labor force participation, and the waning effects of pandemic-related fiscal policy support were cited as additional factors that could help reduce the supply–demand imbalances in the economy and therefore lower inflation over the next few years. That said, the timing and magnitude of these effects were uncertain. Participants saw little evidence to date of a substantial improvement in supply constraints, and some of them judged that the economic effects of these constraints were likely to persist longer than they had previously anticipated. Participants stressed the need to adjust the stance of policy in response to incoming information regarding the evolution of these and other factors. In their discussion of the household sector, participants indicated that consumption spending had remained robust, in part reflecting strong balance sheets in the household sector and a tight labor market. Several participants noted that household spending patterns appeared to be shifting away from goods to services. Several participants indicated that some of their contacts reported that the pace of consumer spending, though strong, was beginning to moderate. One reason cited for this moderation was that the purchasing power of households was being reduced by higher prices for food, energy, and other essentials. Participants generally expected higher mortgage interest rates to contribute to further declines in home sales, and a couple of participants noted that housing activity in their Districts had begun to slow noticeably. Against the backdrop of rising borrowing costs and higher gasoline and food prices, a couple of participants commented that consumer sentiment had dropped notably in June, according to the preliminary reading in the Michigan survey. With respect to the business sector, participants observed that their contacts generally reported that sales remained strong, although some contacts indicated that sales had begun to slow and that they had become less optimistic about the outlook. In many industries, the ability of firms to meet demand continued to be limited by labor shortages and supply chain bottlenecks. Firms relying on international sources for their inputs were seen as encountering particularly acute supply chain disruptions. Supply constraints, labor shortages, and rising input costs were also reportedly limiting energy and agricultural producers' ability to take advantage of the higher prices of their products by investing and expanding their production capacity. Similarly, a few participants noted that, in other sectors of the economy, their contacts reported that they were postponing investment or construction projects because of rising input and financing costs. With supply challenges still widespread, contacts continued to assess that supply constraints overall were significant, and many of them judged that these constraints were likely to persist for some time. Participants noted that the demand for labor continued to outstrip available supply across many parts of the economy. They observed that various indicators pointed to a very tight labor market. These indicators included an unemployment rate near a 50-year low, job vacancies at historical highs, and elevated nominal wage growth. Additionally, most business contacts had continued to report persistent wage pressures as well as difficulties in hiring and retaining workers. However, some contacts reported that, because of previous wage hikes, hiring and retention had improved and pressure for additional wage increases appeared to be receding. Employment growth, while moderating somewhat from its pace earlier in the year, had remained robust. Several participants observed that labor force participation remained below its pre-pandemic level because of the unusually large number of retirements during the pandemic and judged that the labor force participation rate was unlikely to move up considerably in the near term. A couple of participants raised the possibility that tight labor markets would spur investment in automation by firms, boosting labor productivity. While labor markets were anticipated to remain tight in the near term, participants expected labor demand and supply to come into better balance over time, helping to ease upward pressure on wages and prices. As in the case of product markets, they anticipated that an appropriate firming of monetary policy would play a central role in helping address imbalances in the labor market. With the tightness in labor markets anticipated to diminish over time, participants generally expected the unemployment rate to increase, as the median projection of the unemployment rate in the June SEP showed a gradual rise over the next few years, reaching 4.1 percent in 2024. In light of the very high level of job vacancies, a number of participants judged that the expected moderation in labor demand relative to supply might primarily affect vacancies and have a less significant effect on the unemployment rate. Participants noted that inflation remained much too high and observed that it continued to run well above the Committee's longer-run 2 percent objective, with total PCE prices having risen 6.3 percent over the 12 months ending in April. They also observed that the 12-month change in the CPI in May came in above expectations. Participants were concerned that the May CPI release indicated that inflation pressures had yet to show signs of abating, and a number of them saw it as solidifying the view that inflation would be more persistent than they had previously anticipated. They commented on the hardship caused by elevated inflation, with low- and moderate-income households especially affected. These households had to spend more of their budgets on essentials such as food, energy, and housing and were less able to bear the rapidly rising costs of these essentials. In that context, some participants noted that their contacts had reported that low- and moderate-income consumers were shifting purchases to lower-cost goods. Participants also stressed that persistently high inflation would impede the achievement of maximum employment on a sustained basis. Participants judged that strong aggregate demand, together with supply constraints that had been larger and longer lasting than expected, continued to contribute to price pressures across a broad array of goods and services. They noted that the surge in prices of oil and other commodities associated with Russia's invasion of Ukraine was boosting gasoline and food prices and putting additional upward pressure on inflation. Participants commented on the global nature of inflation pressures, and a few of them added that many foreign central banks were also firming the stance of monetary policy. Several participants judged that a shift in spending from goods to services was likely to be associated with less upward pressure on prices in the goods sector, but also an intensification of upward pressure on prices in the services sector. Participants had revised up their PCE inflation projections for 2022 in their June SEP submissions, largely in response to higher-than-expected inflation readings and the slower anticipated resolution of supply constraints. They expected that the appropriate firming of monetary policy and an eventual easing of supply and demand imbalances would bring inflation back down to levels roughly consistent with the Committee's longer-run objectives by 2024 and keep longer-term inflation expectations well anchored. Participants observed that some measures of inflation expectations had moved up recently, including the staff index of common inflation expectations and the expectations of inflation over the next 5 to 10 years provided in the Michigan survey. With respect to market-based measures, however, a few participants noted that medium-term measures of inflation compensation fell over the intermeeting period and longer-term measures were unchanged. While measures of longer-term inflation expectations derived from surveys of households, professional forecasters, and market participants were generally judged to be broadly consistent with the Committee's longer-run 2 percent inflation objective, many participants raised the concern that longer-run inflation expectations could be beginning to drift up to levels inconsistent with the 2 percent objective. These participants noted that, if inflation expectations were to become unanchored, it would be more costly to bring inflation back down to the Committee's objective. In their discussion of risks, participants emphasized that they were highly attentive to inflation risks and were closely monitoring developments regarding both inflation and inflation expectations. Most agreed that risks to inflation were skewed to the upside and cited several such risks, including those associated with ongoing supply bottlenecks and rising energy and commodity prices. Participants judged that uncertainty about economic growth over the next couple of years was elevated. In that context, a couple of them noted that GDP and gross domestic income had been giving conflicting signals recently regarding the pace of economic growth, making it challenging to determine the economy's underlying momentum. Most participants assessed that the risks to the outlook for economic growth were skewed to the downside. Downside risks included the possibility that a further tightening in financial conditions would have a larger negative effect on economic activity than anticipated as well as the possibilities that the Russian invasion of Ukraine and the COVID-related lockdowns in China would have larger-than-expected effects on economic growth. In their consideration of the appropriate stance of monetary policy, participants concurred that the labor market was very tight, inflation was well above the Committee's 2 percent inflation objective, and the near-term inflation outlook had deteriorated since the time of the May meeting. Against this backdrop, almost all participants agreed that it was appropriate to raise the target range for the federal funds rate 75 basis points at this meeting. One participant favored a 50 basis point increase in the target range at this meeting instead of 75 basis points. All participants judged that it was appropriate to continue the process of reducing the size of the Federal Reserve's balance sheet, as described in the Plans for Reducing the Size of the Federal Reserve's Balance Sheet that the Committee issued in May. In light of elevated inflation pressures and signs of deterioration in some measures of inflation expectations, all participants reaffirmed their strong commitment to returning inflation to the Committee's 2 percent objective. Participants observed that a return of inflation to the 2 percent objective was necessary for creating conditions conducive to a sustainably strong labor market over time. In discussing potential policy actions at upcoming meetings, participants continued to anticipate that ongoing increases in the target range for the federal funds rate would be appropriate to achieve the Committee's objectives. In particular, participants judged that an increase of 50 or 75 basis points would likely be appropriate at the next meeting. Participants concurred that the economic outlook warranted moving to a restrictive stance of policy, and they recognized the possibility that an even more restrictive stance could be appropriate if elevated inflation pressures were to persist. Participants noted that, with the federal funds rate expected to be near or above estimates of its longer-run level later this year, the Committee would then be well positioned to determine the appropriate pace of further policy firming and the extent to which economic developments warranted policy adjustments. They also remarked that the pace of rate increases and the extent of future policy tightening would depend on the incoming data and the evolving outlook for the economy. Many participants noted that the Committee's credibility with regard to bringing inflation back to the 2 percent objective, together with previous communications, had been helpful in shifting market expectations of future policy and had already contributed to a notable tightening of financial conditions that would likely help reduce inflation pressures by restraining aggregate demand. Participants recognized that ongoing policy firming would be appropriate if economic conditions evolved as expected. At the current juncture, with inflation remaining well above the Committee's objective, participants remarked that moving to a restrictive stance of policy was required to meet the Committee's legislative mandate to promote maximum employment and price stability. In addition, such a stance would be appropriate from a risk management perspective because it would put the Committee in a better position to implement more restrictive policy if inflation came in higher than expected. Many participants judged that a significant risk now facing the Committee was that elevated inflation could become entrenched if the public began to question the resolve of the Committee to adjust the stance of policy as warranted. On this matter, participants stressed that appropriate firming of monetary policy, together with clear and effective communications, would be essential in restoring price stability. Participants remarked that developments associated with Russia's invasion of Ukraine, the COVID-related lockdowns in China, and other factors restraining supply conditions would affect the inflation outlook and that it would likely take some time for inflation to move down to the Committee's 2 percent objective. Participants also judged that maintaining a strong labor market during the process of bringing inflation down to 2 percent would depend on many factors affecting demand and supply. Participants recognized that policy firming could slow the pace of economic growth for a time, but they saw the return of inflation to 2 percent as critical to achieving maximum employment on a sustained basis. Committee Policy Action In their discussion of monetary policy for this meeting, members agreed that overall economic activity appeared to have picked up after edging down in the first quarter. Job gains had been robust in recent months, and the unemployment rate had remained low. Members also agreed that inflation remained elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures. Members concurred that the invasion of Ukraine by Russia was causing tremendous human and economic hardship. Members agreed that the invasion and related events were creating additional upward pressure on inflation and were weighing on global economic activity. With the effects of the invasion of Ukraine by Russia already materializing, members considered it appropriate to omit from the June statement the sentence conveying the high uncertainty associated with the implications of the invasion for the U.S. economy. Members also agreed that COVID-related lockdowns in China were likely to exacerbate supply chain disruptions. In light of these developments, members remarked that they remain highly attentive to the upside risks to inflation and would be nimble in responding to incoming data and the evolving outlook. In their assessment of the monetary policy stance necessary for achieving the Committee's maximum-employment and price-stability goals, the Committee decided to raise the target range for the federal funds rate to 1-1/2 to 1-3/4 percent and anticipated that ongoing increases in the target range would be appropriate. In addition, members agreed that the Committee would continue reducing its holdings of Treasury securities and agency debt and agency MBS, as described in the Plans for Reducing the Size of the Federal Reserve's Balance Sheet that were issued in May. One member preferred to raise the target range for the federal funds rate 50 basis points to 1-1/4 to 1-1/2 percent at this meeting. Members judged that, with high and widespread inflation pressures and some measures of longer-term inflation expectations moving up somewhat, it would be appropriate for the postmeeting statement to note that the Committee was strongly committed to returning inflation to its 2 percent objective. As the further firming in the policy stance would likely result in some slowing in economic growth and tempering in labor market conditions, members also agreed to remove the previous statement language that had indicated an expectation that appropriate policy would result in a return of inflation to 2 percent and a strong labor market. Members agreed that, in assessing the appropriate stance of monetary policy, they would continue to monitor the implications of incoming information for the economic outlook and that they would be prepared to adjust the stance of monetary policy as appropriate in the event that risks emerged that could impede the attainment of the Committee's goals. They also concurred that their assessments would take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and 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 instructed otherwise, to execute transactions in the SOMA in accordance with the following domestic policy directive, for release at 2:00 p.m.: "Effective June 16, 2022, 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. Conduct overnight repurchase agreement operations with a minimum bid rate of 1.75 percent and with an aggregate operation limit of $500 billion; the aggregate operation limit can be temporarily increased at the discretion of the Chair. Conduct overnight reverse repurchase agreement operations at an offering rate of 1.55 percent and with a per-counterparty limit of $160 billion per day; the per-counterparty limit can be temporarily increased at the discretion of the Chair. Roll over at auction the amount of principal payments from the Federal Reserve's holdings of Treasury securities maturing in the calendar months of June and July that exceeds a cap of $30 billion per month. Redeem Treasury coupon securities up to this monthly cap and Treasury bills to the extent that coupon principal payments are less than the monthly cap. Reinvest into agency mortgage-backed securities (MBS) the amount of principal payments from the Federal Reserve's holdings of agency debt and agency MBS received in the calendar months of June and July that exceeds a cap of $17.5 billion per month. Allow modest deviations from stated amounts for reinvestments, if needed for operational reasons. Engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions." The vote also encompassed approval of the statement below for release at 2:00 p.m.: "Overall economic activity appears to have picked up after edging down in the first quarter. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures. The invasion of Ukraine by Russia is causing tremendous human and economic hardship. The invasion and related events are creating additional upward pressure on inflation and are weighing on global economic activity. In addition, COVID-related lockdowns in China are likely to exacerbate supply chain disruptions. The Committee is highly attentive to inflation risks. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 1-1/2 to 1-3/4 percent and anticipates that ongoing increases in the target range will be appropriate. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in the Plans for Reducing the Size of the Federal Reserve's Balance Sheet that were issued in May. The Committee is strongly committed to returning inflation to its 2 percent objective. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments." Voting for this action: Jerome H. Powell, John C. Williams, Michelle W. Bowman, Lael Brainard, James Bullard, Lisa D. Cook, Patrick Harker, Philip N. Jefferson, Loretta J. Mester, and Christopher J. Waller. Voting against this action: Esther L. George. Patrick Harker voted as an alternate member at this meeting. President George dissented because she judged that a large increase in the target range for the federal funds rate would add to uncertainty about policy concurrent with the beginning of balance sheet runoff in ways that could unsettle households and businesses and could also adversely affect the ability of small banks to meet the credit needs of their communities. To support the Committee's decision to raise the target range for the federal funds rate, the Board of Governors of the Federal Reserve System voted unanimously to raise the interest rate paid on reserve balances to 1.65 percent, effective June 16, 2022. The Board of Governors of the Federal Reserve System voted unanimously to approve a 3/4 percentage point increase in the primary credit rate to 1.75 percent, effective June 16, 2022.5 It was agreed that the next meeting of the Committee would be held on Tuesday–Wednesday, July 26–27, 2022. The meeting adjourned at 10:45 a.m. on June 15, 2022. Notation Vote By notation vote completed on May 24, 2022, the Committee unanimously approved the minutes of the Committee meeting held on May 3–4, 2022. _______________________ James A. Clouse Secretary 1. The Federal Open Market Committee is referenced as the "FOMC" and the "Committee" in these minutes; the Board of Governors of the Federal Reserve System is referenced as the "Board" 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's session only. Return to text 4. Attended from the discussion of the economic and financial situation through the end of Wednesday's session. Return to text 5. In taking this action, the Board approved a request to establish that rate submitted by the Board of Directors of the Federal Reserve Bank of Minneapolis. This vote also encompassed approval by the Board of Governors of the establishment of a 1.75 percent primary credit rate by the remaining Federal Reserve Banks, effective on the later of June 16, 2022, or the date such Reserve Banks inform the Secretary of the Board of such a request. (Secretary's note: Subsequently, other Federal Reserve Banks were informed of the Secretary of the Board's approval of their establishment of a primary credit rate of 1.75 percent, effective June 16, 2022, for the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Richmond, Chicago, St. Louis, Kansas City, and Dallas, and effective June 17, 2022, for the Federal Reserve Banks of Atlanta and San Francisco.) Return to text

2022-05-04

Statement

Although overall economic activity edged down in the first quarter, household spending and business fixed investment remained strong. Job gains have been robust in recent months, and the unemployment rate has declined substantially. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures. The invasion of Ukraine by Russia is causing tremendous human and economic hardship. The implications for the U.S. economy are highly uncertain. The invasion and related events are creating additional upward pressure on inflation and are likely to weigh on economic activity. In addition, COVID-related lockdowns in China are likely to exacerbate supply chain disruptions. The Committee is highly attentive to inflation risks. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With appropriate firming in the stance of monetary policy, the Committee expects inflation to return to its 2 percent objective and the labor market to remain strong. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 3/4 to 1 percent and anticipates that ongoing increases in the target range will be appropriate. In addition, the Committee decided to begin reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities on June 1, as described in the Plans for Reducing the Size of the Federal Reserve's Balance Sheet that were issued in conjunction with this statement. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments. Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; James Bullard; Esther L. George; Patrick Harker; Loretta J. Mester; and Christopher J. Waller. Patrick Harker voted as an alternate member at this meeting. Implementation Note issued May 4, 2022

2022-05-25

Minute

Minutes of the Federal Open Market Committee May 3–4, 2022 A joint meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve System was held in the offices of the Board of Governors on Tuesday, May 3, 2022, at 10:00 a.m. and continued on Wednesday, May 4, 2022, at 9:00 a.m.1 Attendance Jerome H. Powell, Chair John C. Williams, Vice Chair Michelle W. Bowman Lael Brainard James Bullard Esther L. George Loretta J. Mester Christopher J. Waller Meredith Black, Charles L. Evans, Patrick Harker, Naureen Hassan, and Neel Kashkari, Alternate Members of the Committee Thomas I. Barkin, Raphael W. Bostic, and Mary C. Daly, Presidents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco, respectively Kenneth C. Montgomery, Interim President of the Federal Reserve Bank of Boston James A. Clouse, Secretary Matthew M. Luecke, Deputy Secretary Brian J. Bonis, Assistant Secretary Michelle A. Smith, Assistant Secretary Mark E. Van Der Weide, General Counsel Trevor A. Reeve, Economist Stacey Tevlin, Economist Beth Anne Wilson, Economist Carlos Garriga, Joseph W. Gruber, Beverly Hirtle, David E. Lebow, Ellis W. Tallman, and William Wascher, Associate Economists Lorie K. Logan, Manager, System Open Market Account Patricia Zobel, Deputy Manager, System Open Market Account Ann E. Misback, Secretary, Office of the Secretary, Board Matthew J. Eichner,2 Director, Division of Reserve Bank Operations and Payment Systems, Board; Michael S. Gibson, Director, Division of Supervision and Regulation, Board; Andreas Lehnert, Director, Division of Financial Stability, Board Sally Davies, Deputy Director, Division of International Finance, Board; Rochelle M. Edge, Deputy Director, Division of Monetary Affairs, Board; Michael T. Kiley, Deputy Director, Division of Financial Stability, Board Jon Faust and Joshua Gallin, Senior Special Advisers to the Chair, Division of Board Members, Board Antulio N. Bomfim, Burcu Duygan-Bump, Jane E. Ihrig, Kurt F. Lewis, and Nitish R. Sinha, Special Advisers to the Board, Division of Board Members, Board Linda Robertson, Assistant to the Board, Division of Board Members, Board William F. Bassett, Senior Associate Director, Division of Financial Stability, Board; John J. Stevens, Senior Associate Director, Division of Research and Statistics, Board; Min Wei, Senior Associate Director, Division of Monetary Affairs, Board; Paul R. Wood, Senior Associate Director, Division of International Finance, Board Edward Nelson and Annette Vissing-Jørgensen, Senior Advisers, Division of Monetary Affairs, Board Andrew Figura, Glenn Follette, and Elizabeth K. Kiser, Associate Directors, Division of Research and Statistics, Board; Andrea Raffo, Associate Director, Division of International Finance, Board; Jeffrey D. Walker,2 Associate Director, Division of Reserve Bank Operations and Payment Systems, Board Norman J. Morin, Deputy Associate Director, Division of Research and Statistics, Board; Zeynep Senyuz, Deputy Associate Director, Division of Monetary Affairs, Board Etienne Gagnon and Andrew Meldrum, Assistant Directors, Division of Monetary Affairs, Board Penelope A. Beattie,3 Section Chief, Office of the Secretary, Board; Valerie S. Hinojosa, Section Chief, Division of Monetary Affairs, Board; Logan T. Lewis,4 Section Chief, Division of International Finance, Board Randall A. Williams, Group Manager, Division of Monetary Affairs, Board Isabel Cairó, Michele Cavallo, and Manjola Tase, Principal Economists, Division of Monetary Affairs, Board Jose Acosta, Senior Communications Analyst, Division of Information Technology, Board David Altig, Kartik B. Athreya, Michael Dotsey, Michelle M. Neal, and Anna Paulson, Executive Vice Presidents, Federal Reserve Banks of Atlanta, Richmond, Philadelphia, New York, and Chicago, respectively Marc Giannoni, Giovanni Olivei, and Mark L.J. Wright, Senior Vice Presidents, Federal Reserve Banks of Dallas, Boston, and Minneapolis, respectively James P. Bergin, Nicolas Petrosky-Nadeau, and Matthew D. Raskin,2 Vice Presidents, Federal Reserve Banks of New York, San Francisco, and New York, respectively Developments in Financial Markets and Open Market Operations The manager turned first to a discussion of monetary policy expectations in the United States. Federal Reserve communications since the March FOMC meeting were perceived as signaling a more rapid removal of policy accommodation than had been expected, resulting in significant shifts in expectations regarding the path of the federal funds rate. For the current meeting, federal funds futures implied around 50 basis points of policy rate tightening, and Open Market Desk survey respondents assigned an average probability of 80 percent to that outcome. The median Desk survey respondents also projected 50-basis-point increases in the target range at the two following meetings and another 125 basis points of increases by the middle of next year, bringing the projected midpoint of the target range to a peak of 3.13 percent—substantially higher than in previous surveys. Market participants continued to note significant uncertainty regarding the economic outlook and the degree of policy tightening ahead. This uncertainty was reflected in the dispersion in survey respondents' average probability distribution for the target range at the end of 2023. Regarding the outlook for runoff of the Federal Reserve's securities holdings, market participants widely expected the Committee to announce the commencement of balance sheet runoff at the current meeting. Median survey responses suggested that most market participants anticipated maximum redemption caps of $60 billion per month for Treasury securities and $35 billion per month for agency mortgage-backed securities (MBS), with the caps phased in over roughly three months. Survey responses continued to reflect substantial dispersion in views on the level of System Open Market Account (SOMA) holdings at which balance sheet runoff would end. The manager turned next to a discussion of U.S. financial market developments. Financial conditions tightened notably over the period. Treasury yields increased across the curve, with the rise primarily reflecting higher real interest rates. Longer-term private borrowing rates also moved higher, with 30-year fixed-rate mortgage rates rising above 5 percent to the highest levels in over a decade. Equity indexes ended the period substantially lower, on net. These indexes moved up earlier in the period in connection with a perceived reduction in tail risks stemming from the war in Ukraine but then moved lower, reportedly because of increased caution regarding the economic outlook amid the expected tightening in U.S. monetary policy. The dollar appreciated, leaving the broad trade-weighted dollar up around 2 percent over the period. Viewed over a longer time horizon, financial conditions, as measured by many financial conditions indexes, had tightened by historically large amounts since the beginning of the year. Market- and survey-based measures of U.S. inflation expectations continued to project a significant deceleration in inflation in the coming years. Nonetheless, far-forward inflation compensation rose over the period, and market participants remained attentive to the risk that, in bringing inflation back to 2 percent, the Committee would need to tighten by more than currently expected. In global financial developments, many advanced-economy central banks raised policy rates over the period, and investors increasingly came to anticipate tighter monetary policy ahead in most advanced foreign economies. The Bank of Japan was an exception and was widely anticipated to maintain its accommodative policies. The yen depreciated 9 percent against the dollar over the intermeeting period to its weakest level in over two decades. Emerging market (EM) currencies remained relatively resilient. Market participants focused on the spread of COVID-19 in China and the effect of zero-COVID policies, which had resulted in increasingly widespread lockdowns. The renminbi depreciated against the dollar around 4 percent over the intermeeting period. The manager turned next to a discussion of developments in money markets. The effective federal funds rate rose 25 basis points following the increase in the target range at the March FOMC meeting and remained stable throughout the period. Secured overnight rates also rose by 25 basis points following the March meeting, though modest softness emerged in subsequent days. Market participants noted that ongoing uncertainty about the near-term path of Federal Reserve policy had increased demand for very short-dated investments. This demand, combined with declining Treasury bill supply, contributed to the downward pressure on secured rates and to rising overnight reverse repurchase agreement (ON RRP) usage. The manager expected that ON RRP usage could remain elevated in coming months but anticipated that, over the longer term, usage would decline as balance sheet reduction proceeded. The manager indicated that the Desk was prepared to implement the Committee's plan for balance sheet reduction and that, in the event that the Committee announced the plan at the end of the current meeting, the Desk would issue a statement and FAQs providing the public with details regarding the implementation of the plan. The Desk would closely monitor market conditions and update the Committee during the runoff process. The deputy SOMA manager reviewed developments concerning Desk operations. The Desk planned to increase the publication frequency of data on ON RRP usage. This additional information would provide the public with greater transparency about usage of the ON RRP facility. The Desk planned to publish the SOMA annual report soon. In addition to the detailed review of open market operations over 2021, the report would include updated illustrative projections of the size and composition of the Federal Reserve's balance sheet over coming years. With respect to other operational matters, the Desk continued to work on details of plans for agency MBS CUSIP (Committee on Uniform Security Identification Procedures) aggregation and anticipated that this process would begin in coming months. Finally, the deputy manager requested that the Committee vote to maintain the standing U.S. dollar and foreign currency liquidity swap arrangements and to renew the reciprocal currency arrangements with Canada and Mexico under the North American Framework Agreement. In their discussion, participants widely agreed that the standing swap lines are a critical tool allowing the Federal Reserve to address global dollar funding pressures that could otherwise adversely affect the U.S. economy. 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 occur 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 available at the time of the May 3–4 meeting suggested that U.S. real gross domestic product (GDP) declined in the first quarter. However, first-quarter growth in private domestic final demand was faster than in the previous quarter, while labor market conditions tightened further in March. Consumer price inflation through March—as measured by the 12‑month percentage change in the price index for personal consumption expenditures (PCE)—remained elevated. Total nonfarm payroll employment rose in March, and the unemployment rate declined to 3.6 percent. The unemployment rates for African Americans and for Hispanics moved lower, though both rates remained noticeably higher than the national average. The labor force participation rate increased in March, as did the employment-to-population ratio. The private-sector job openings rate, as measured by the Job Openings and Labor Turnover Survey, remained elevated. The employment cost index of hourly compensation in the private sector rose 4.8 percent over the 12 months ending in March; this gain was much larger than the corresponding 12‑month changes posted in each of the preceding four years and was the largest 12‑month increase since 1990. Consumer prices continued to rise rapidly. Total PCE price inflation was 6.6 percent over the 12 months ending in March, and core PCE price inflation, which excludes changes in consumer energy prices and many consumer food prices, was 5.2 percent over the same period. The trimmed mean measure of 12‑month PCE price inflation constructed by the Federal Reserve Bank of Dallas was 3.7 percent in March, 2 percentage points higher than its year-earlier rate of increase. A new version of the staff's common inflation expectations index, which combines information from many indicators of inflation expectations and inflation compensation, moved up in the first quarter and was at the upper end of the range of values seen since 2005. Both real PCE and residential investment increased in the first quarter at rates similar to those seen in the fourth quarter of 2021. Business fixed investment growth picked up sharply in the first quarter, with spending on equipment and intellectual property products posting a large increase. Inventory investment moved lower after surging in the fourth quarter of 2021, and total real government purchases declined further, led by a drop in defense purchases. The U.S. international trade deficit widened further in the first quarter of this year, and net exports made a large negative contribution to real U.S. GDP growth. Goods imports continued the fourth quarter's strong growth, driven by large increases in real imports of consumer goods, capital goods, and automotive products. By contrast, real exports of goods fell back after rising briskly late last year, with broad-based declines in most major categories. Both real exports and imports of services grew at a moderate pace in the first quarter, though both were held back by a tepid recovery in international travel amid ongoing waves of COVID-19. Data suggested that foreign economic growth remained solid in the first quarter, as most economies continued to show adaptability to new COVID-19 waves. Chinese data for March and April, however, showed declines in manufacturing and services activity and worsening supply bottlenecks after Chinese authorities locked down Shanghai and other cities to combat the spread of the Omicron variant. The ongoing Russian invasion of Ukraine also left its imprint on foreign economies, with consumer and business sentiment declining in Europe and global prices of a range of commodities continuing to rise. Foreign inflation increased significantly further, driven by surging energy and food prices as well as some broadening of price pressures to core goods and services. In response, many central banks around the world tightened their monetary policy stances. Staff Review of the Financial Situation U.S. Treasury yields and the market-implied federal funds rate path moved substantially higher over the intermeeting period as Federal Reserve communications and domestic economic data releases were perceived as suggesting that a more aggressive tightening of monetary policy was likely over coming months. Sovereign yields in advanced foreign economies (AFEs) also increased notably. Broad domestic equity price indexes declined on net, and the one-month option-implied volatility on the S&P 500 index—the VIX—remained elevated. Short-term funding markets were stable, while participation in the ON RRP facility increased further. Amid the increase in Treasury yields, borrowing costs increased in many sectors and were at or somewhat above pre-pandemic levels. Since the March FOMC meeting, 2-, 5-, and 10-year Treasury yields increased significantly on net. The increases in nominal Treasury yields were primarily accounted for by rising real yields, while inflation compensation implied by Treasury Inflation-Protected Securities was little changed. Alongside moves in shorter-term Treasury yields, the expected federal funds rate path—implied by a straight read of overnight index swap quotes—rose notably since the March FOMC meeting. Broad equity indexes decreased over the intermeeting period. Early in the period, equity prices increased, supported by the robust pace of economic activity and reduced market concerns about the implications for the global economy of Russia's invasion of Ukraine. The initial sharp gains in stock prices were followed by larger declines later in the period, as longer-term interest rates rose substantially and as some disappointing earnings reports toward the end of the intermeeting period weighed on equity prices. The VIX declined substantially early in the period but ended the period little changed on net, remaining at elevated levels. Similarly, spreads on investment- and speculative-grade corporate bonds narrowed moderately earlier in the intermeeting period and then widened, ending the period only slightly narrower, on net, and below the median of their historical distribution. Spreads on municipal bonds were up modestly and stood at about the 90th percentile of their historical distribution. Conditions in short-term funding markets remained stable over the intermeeting period, with the March increase in the Federal Reserve's administered rates passing through to overnight money market rates. Secured overnight rates softened later in the period, with downward pressure on rates attributed to continuing declines in net Treasury bill issuance, increased activity in certain segments of the repo market that tend to trade at lower rates, and money market funds continuing to shorten portfolio maturities amid uncertainty about the pace of anticipated policy rate increases. Consistent with the downward pressure on repo rates, daily take-up in the ON RRP facility remained elevated. Spreads on most types of longer-tenor commercial paper and negotiable certificates of deposit narrowed, reportedly reflecting reduced market concerns about the effects of Russia's invasion of Ukraine, although some of the spreads remained slightly wider than those seen earlier this year. Over the intermeeting period, sovereign yields in AFEs increased notably because of concerns about further inflationary pressures, some central bank communications that were perceived as less accommodative than expected, and spillovers from rises in U.S. Treasury yields. Prospects of tighter monetary policy and COVID-related lockdowns in China weighed on prices of risky assets, but investor concerns surrounding the economic effects of the war in Ukraine seemed to abate partially. On balance, major foreign equity indexes registered mixed and relatively modest changes. The U.S. dollar generally strengthened, with a more pronounced dollar appreciation against AFE currencies, as U.S. Treasury yields generally rose more than their AFE counterparts. Among EM currencies, the dollar appreciated significantly against the Chinese renminbi. Over the intermeeting period, along with the increase in Treasury yields, borrowing costs increased in many sectors and were at or somewhat above pre-pandemic levels. Credit remained widely available, and borrower credit quality continued to be strong overall. Borrowing costs for residential mortgage loans increased substantially, with the 30-year mortgage offer rates reaching levels not seen since 2010. This increase largely reflected the rise in the 10-year Treasury yield. Corporate bond yields also increased, although the effect of the increase in Treasury yields was partly offset by narrower spreads. Municipal bond yields also increased notably. Bank loan rates for commercial borrowers increased and rates on large syndicated loans were roughly in line with pre-pandemic levels. In consumer credit markets, rates on auto loans and new credit card offers continued to trend upward. Credit, which remained widely available for most types of borrowers, was broadly in line with pre-pandemic levels. Gross nonfinancial corporate bond issuance rebounded sharply in March, mostly reflecting an increase in investment-grade issuance, while gross institutional leveraged loan issuance slowed amid elevated geopolitical uncertainty. Commercial and industrial (C&I) loans and commercial real estate (CRE) loans on bank balance sheets also grew robustly in March. Respondents in the April Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS) reported a continued easing of lending terms and strengthening demand for C&I loans as well as easing standards for multifamily CRE loans. For most small businesses, credit appeared to be available, although these businesses' demand for credit reportedly remained weak. In the April SLOOS, large banks reported unchanged standards on C&I loans to small firms, while small banks tightened standards modestly to such firms. In consumer credit markets, credit card balances grew strongly in the first quarter amid easing standards and greater utilization, and auto credit outstanding continued to grow steadily through February despite vehicle production shortfalls and low vehicle inventories. Residential mortgage credit conditions remained accommodative through March, despite the increase in mortgage interest rates, particularly for stronger borrowers who met standard loan criteria. The credit quality of firms, municipalities, and households remained strong overall. The volume of credit rating upgrades for corporate bonds outpaced downgrades moderately in March, continuing a nearly yearlong pattern. The credit quality of C&I loans on banks' books continued to be strong as delinquency and default rates both remained low. Delinquency rates on bank and nonbank loans to small businesses edged down in February, while in the CRE sector, borrower financial health continued to recover. Household credit quality remained strong, and delinquency rates across both prime and nonprime borrowers continued to be subdued by historical standards. The staff provided an update on its assessment of the stability of the financial system. The staff judged that, amid a substantial upward shift in interest rates, Russia's invasion of Ukraine, and ongoing disruptions to supply chains, the financial system—outside of commodities markets—had been resilient. However, larger or prolonged disruptions in commodities markets could interfere with other markets and real activity more broadly. To date, however, such potential spillovers appeared to be limited. The staff noted that increased uncertainty and ongoing volatility had reduced risk appetite in financial markets and eased price pressures, although valuations of many assets remained elevated. CRE valuations appeared somewhat elevated except for sectors that were affected most by the pandemic. Residential house prices had risen rapidly, although the staff continued to see key differences from the previous debt-fueled housing boom: The mortgage finance reforms enacted after 2008 limited the potential for significant deterioration in underwriting standards, most new mortgage debt had been added by borrowers with prime credit scores, and homeowners' equity positions were healthy. The staff assessed that aggregate household and business leverage was moderate. Households' debt-to-GDP ratio remained relatively low, and there were few signs of increased stress among lower-income households. Business debt remained elevated relative to its pre-pandemic history, but interest coverage ratios were high. The staff assessed that vulnerabilities arising from financial leverage remained moderate on balance. Despite market volatility, the banking sector continued to be well capitalized with strong liquidity. The staff noted that leverage at key nonbank financial institutions (NBFIs) was elevated and that bank lending to NBFIs continued to increase notably. Relatedly, NBFIs' reliance on bank credit lines to meet unexpected liquidity needs could generate moderate liquidity pressures at large banks during times of financial stress. With regard to funding risk, the staff highlighted structural vulnerabilities in some types of mutual funds as a continuing focus. Staff Economic Outlook The projection for U.S. economic activity prepared by the staff for the May FOMC meeting implied a trajectory for real GDP that was broadly similar to the March projection. The staff noted that the first-quarter decline in real GDP was driven by categories of spending that had often been volatile in the past, and they viewed the continued strength in private domestic final demand, the labor market, and industrial production as providing a more accurate picture of the economy's direction in the first quarter. The staff therefore anticipated that GDP growth would rebound in the second quarter and advance at a solid pace over the remainder of the year. GDP growth was then expected to slow in 2023 and 2024 as monetary policy became less accommodative and financial conditions tightened further; by 2024, real GDP growth was expected to be in line with potential output growth. However, the level of real GDP was expected to remain well above potential over the projection period, and labor market conditions were expected to remain very tight. The staff's projection for PCE price inflation was revised up slightly in the second half of 2022 and in 2023 in response to the slow resolution of supply constraints seen over the first part of 2022, a higher projected path for import prices, and a judgment that wage increases would put more upward pressure on services prices than previously assumed. All told, total PCE price inflation was expected to be 4.3 percent in 2022. PCE price inflation was then expected to step down to 2.5 percent in 2023 and to 2.1 percent in 2024 as supply–demand imbalances in the economy were reduced by slowing aggregate demand and an anticipated easing of supply constraints. The staff continued to judge that the risks to the baseline projection for real activity were skewed to the downside and that the risks to the inflation projection were skewed to the upside. The war in Ukraine was seen as a possible source of even greater upward pressure on energy and commodity prices, while the war and adverse developments associated with rising COVID infections in China were both perceived as increasing the risk that supply chain disruptions and production constraints would be further exacerbated in the United States and abroad. Participants' Views on Current Conditions and the Economic Outlook In their discussion of current economic conditions, participants noted that, although overall economic activity had edged down in the first quarter, household spending and business fixed investment had remained strong. Job gains had been robust in recent months, and the unemployment rate had declined substantially. Inflation remained elevated, reflecting continued supply and demand imbalances, higher energy prices, and broader price pressures. Participants recognized that the invasion of Ukraine by Russia was causing tremendous human and economic hardship for the Ukrainian people. Participants judged that the implications for the U.S. economy were highly uncertain. The invasion and related events were creating additional upward pressure on inflation and were likely to weigh on economic activity. In addition, participants judged that COVID-related lockdowns in China were likely to exacerbate supply chain disruptions. Against this background, participants stated that they were highly attentive to inflation risks. Participants commented that after its rapid growth in the last quarter of 2021, real GDP had declined in the first quarter of this year, with net exports and inventory investment making large negative contributions to growth. They noted, however, that these volatile components tended to contain little signal about subsequent growth and that household spending and business fixed investment had remained strong in the first quarter. These advances and the further tightening of labor market conditions were judged consistent with significant underlying momentum in the domestic economy. In line with this judgment, participants expected that real GDP would grow solidly in the current quarter. In their discussion of the economic outlook beyond the near term, participants indicated that they expected that output would expand more moderately this year than in 2021, with growth this year likely near or above its longer-run rate, and that the imbalance between aggregate demand and aggregate supply would diminish over time. Participants saw an appropriate firming of monetary policy as playing a central role in addressing this imbalance and in supporting the Federal Reserve's goals of maximum employment and price stability. An easing of supply bottlenecks, a further rise in labor force participation, and the waning effects of pandemic-related fiscal policy support were cited as additional factors that could help reduce the supply–demand imbalances in the economy and lower inflation over the medium term. That said, the timing and magnitude of these effects were uncertain. Participants recognized the need to adjust the stance of policy depending on how these and other factors played out over time. In their discussion of the household sector, participants indicated that they expected robust growth in consumption spending. They pointed to several elements supporting this outlook, including strong household balance sheets, wide availability of jobs, and the U.S. economy's resilience in the face of new waves of the virus. The considerable increases in Treasury yields across maturities over the intermeeting period were associated with rising interest rates faced by households, particularly rates on home mortgages. A couple of participants reported that their business contacts continued to see robust housing demand and elevated home prices despite higher mortgage interest rates. With respect to the business sector, participants cited robust consumer demand, healthy household balance sheets, and inventory rebuilding as factors supportive of business activity and investment. The ability of firms to meet demand continued to be limited by labor shortages and supply chain bottlenecks. Although some participants noted that their business contacts had reported an easing of supply constraints, participants assessed that supply constraints overall were still significant and would likely take some time to be resolved. In addition, the invasion of Ukraine by Russia and COVID-related lockdowns in China were seen as likely to exacerbate supply chain disruptions. A few participants indicated that some of their business contacts were reportedly hesitant to expand capacity or had postponed construction projects. Participants commented that demand for labor continued to outstrip available supply across many parts of the economy and that their business contacts continued to report difficulties in hiring and retaining workers. They observed that various indicators pointed to a very tight labor market. Employment growth had continued at a strong pace, the unemployment rate had fallen to a near-50-year low, quits and job openings had remained extremely elevated, and nominal wages had continued to rise rapidly. A few participants noted that there were signs that the pandemic-related factors that had held back labor supply might be abating further, especially in the case of prime-age workers. In addition, a few other participants suggested that the unwelcome erosion of real incomes due to high inflation may have contributed to the increase in labor supply. Many participants indicated that they expected the labor market to remain tight and wage pressures to stay elevated for some time. Several participants raised the possibility that, in light of the exceptionally high ratio of vacancies to job searchers, a moderation in labor demand might serve to reduce vacancies and wage pressures without having significant effects on the unemployment rate. Participants observed that inflation continued to run well above the Committee's longer-run goal and that inflation pressures were evident in a broad array of goods and services. Various participants remarked on the hardship caused by elevated inflation and heightened inflation uncertainty—including by eroding American families' real incomes and wealth and by making it more difficult for businesses to make production and investment plans. They also pointed out that high inflation could impede the achievement of maximum employment on a sustained basis. Participants noted that developments associated with Russia's invasion of Ukraine, including surges in energy and commodity prices, were adding to near-term inflation pressures. In addition, COVID-related lockdowns in China were likely to disrupt global supply chains, potentially adding further upward pressure on the prices paid by U.S. businesses and consumers. Most participants indicated that their business contacts had continued to report that substantial increases in wages and input prices were being passed through into higher prices to their customers. A few participants added that some of their contacts were starting to report that higher prices were hurting sales. A number of participants observed that recent monthly data might suggest that overall price pressures may no longer be worsening. These participants also emphasized that price pressures remained elevated and that it was too early to be confident that inflation had peaked. Many participants commented that measures of short-term inflation expectations were elevated or that far-forward measures of inflation compensation were near the upper edge of their historical range. Several participants judged that measures of longer-term inflation expectations derived from surveys of households, professional forecasters, and market participants still appeared to be broadly consistent with the Committee's longer-run inflation objective, likely reflecting respondents' confidence that the Federal Reserve would take the actions necessary to return inflation to 2 percent. They noted that, together with appropriate firming of monetary policy and an eventual easing of supply constraints, well-anchored longer-term inflation expectations would support a return of inflation to levels consistent with the Committee's longer-run goal. In their discussion of risks to the outlook, participants emphasized that they were highly attentive to inflation risks and would continue to monitor closely inflation developments and inflation expectations. They agreed that risks to inflation were skewed to the upside and cited several such risks, including those associated with ongoing supply bottlenecks and rising energy and commodity prices—both of which were exacerbated by the Russian invasion of Ukraine and COVID-related lockdowns in China. Also mentioned were the risks associated with nominal wage growth continuing to run above levels consistent with 2 percent inflation over time and the extent to which households' high savings since the onset of the pandemic and healthy balance sheets would support greater-than-expected underlying momentum in consumer spending and contribute to upside inflation pressures. In addition, some participants emphasized that persistently high inflation heightened the risk that longer-term inflation expectations could become unanchored; in that case, the task of returning inflation to 2 percent would be more difficult. Uncertainty about real activity was also seen as elevated. Various participants noted downside risks to the outlook, including risks associated with the Russian invasion and COVID-related lockdowns in China and the likelihood of a prolonged rise in energy and commodity prices. Several participants who commented on issues related to financial stability noted that the tightening of monetary policy could interact with vulnerabilities related to the liquidity of markets for Treasury securities and to the private sector's intermediation capacity. A couple of participants pointed to increased risks in financial markets linked to commodities following Russia's invasion of Ukraine, which had led to higher prices and volatility across a wide range of energy, agricultural, and metal products. These participants observed that the trading and risk-management practices of some key participants in commodities markets were not fully visible to regulatory authorities and noted that central counterparties (CCPs) needed to remain capable of managing risks associated with heightened volatility or that margin requirements at CCPs could give rise to significant liquidity demands for large banks, broker-dealers, and their clients. In their consideration of the appropriate stance of monetary policy, all participants concurred that the U.S. economy was very strong, the labor market was extremely tight, and inflation was very high and well above the Committee's 2 percent inflation objective. Against this backdrop, all participants agreed that it was appropriate to raise the target range for the federal funds rate 50 basis points at this meeting. They further anticipated that ongoing increases in the target range for the federal funds rate would be warranted to achieve the Committee's objectives. Participants also agreed that it was appropriate to start reducing the size of the Federal Reserve's balance sheet on June 1, as described in the Plans for Reducing the Size of the Federal Reserve's Balance Sheet that would be issued in conjunction with the postmeeting statement. Participants judged that an appropriate firming of the stance of monetary policy, along with an eventual waning of supply–demand imbalances, would help to keep longer-term inflation expectations anchored and bring inflation down over time to levels consistent with the Committee's 2 percent longer-run goal. All participants reaffirmed their strong commitment and determination to take the measures necessary to restore price stability. To this end, participants agreed that the Committee should expeditiously move the stance of monetary policy toward a neutral posture, through both increases in the target range for the federal funds rate and reductions in the size of the Federal Reserve's balance sheet. Most participants judged that 50 basis point increases in the target range would likely be appropriate at the next couple of meetings. Many participants assessed that the Committee's previous communications had been helpful in shifting market expectations regarding the policy outlook into better alignment with the Committee's assessment and had contributed to the tightening of financial conditions. All participants supported the plans for reducing the size of the balance sheet. This reduction, starting on June 1, would work in parallel with increases in the target range for the policy rate in firming the stance of monetary policy. A number of participants remarked that, after balance sheet runoff was well under way, it would be appropriate for the Committee to consider sales of agency MBS to enable suitable progress toward a longer-run SOMA portfolio composed primarily of Treasury securities. Any program of sales of agency MBS would be announced well in advance. Regarding risks related to the balance sheet reduction, several participants noted the potential for unanticipated effects on financial market conditions. Participants agreed that the economic outlook was highly uncertain and that policy decisions should be data dependent and focused on returning inflation to the Committee's 2 percent goal while sustaining strong labor market conditions. At present, participants judged that it was important to move expeditiously to a more neutral monetary policy stance. They also noted that a restrictive stance of policy may well become appropriate depending on the evolving economic outlook and the risks to the outlook. Participants observed that developments associated with Russia's invasion of Ukraine and the COVID-related lockdowns in China posed heightened risks for both the United States and economies around the world. Several participants commented on the challenges that monetary policy faced in restoring price stability while also maintaining strong labor market conditions. In light of the high degree of uncertainty surrounding the economic outlook, participants judged that risk-management considerations would be important in deliberations over time regarding the appropriate policy stance. Many participants judged that expediting the removal of policy accommodation would leave the Committee well positioned later this year to assess the effects of policy firming and the extent to which economic developments warranted policy adjustments. Committee Policy Action In their discussion of monetary policy for this meeting, members agreed that, although overall economic activity had edged down in the first quarter, household spending and business fixed investment had remained strong. Job gains had been robust in recent months, and the unemployment rate had declined substantially. Members also agreed that inflation remained elevated, reflecting continued supply and demand imbalances, higher energy prices, and broader price pressures. Members concurred that the invasion of Ukraine by Russia was causing tremendous human and economic hardship. Members judged that the implications of the war for the U.S. economy were highly uncertain. Members agreed that the invasion and related events were creating additional upward pressure on inflation and were likely to weigh on economic activity. Members also agreed that COVID-related lockdowns in China were likely to exacerbate supply chain disruptions. In light of continuing inflation risks, members judged that it would be appropriate for the postmeeting statement to note that the Committee is highly attentive to the upside risks to inflation. In their assessment of the monetary policy stance necessary for achieving the Committee's maximum-employment and price-stability goals, members agreed that, with appropriate firming in the stance of monetary policy, they expected inflation to return to the Committee's 2 percent objective and the labor market to remain strong. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 3/4 to 1 percent and anticipated that ongoing increases in the target range would be appropriate. In addition, the Committee decided to begin reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities on June 1, as described in the Plans for Reducing the Size of the Federal Reserve's Balance Sheet that were issued in conjunction with the postmeeting statement. Members agreed that, in assessing the appropriate stance of monetary policy, they would continue to monitor the implications of incoming information for the economic outlook and that they would be prepared to adjust the stance of monetary policy as appropriate in the event that risks emerged that could impede the attainment of the Committee's goals. They also concurred that their assessments would take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments. Following the monetary policy discussion, which included a consideration of plans for reducing the size of the balance sheet, all participants indicated support for the proposed plans for reducing the size of the balance sheet. The Committee voted unanimously to adopt the Plans for Reducing the Size of the Federal Reserve's Balance Sheet, as shown below. PLANS FOR REDUCING THE SIZE OF THE FEDERAL RESERVE'S BALANCE SHEET (as adopted effective May 4, 2022) Consistent with the Principles for Reducing the Size of the Federal Reserve's Balance Sheet that were issued in January 2022, all Committee participants agreed to the following plans for significantly reducing the Federal Reserve's securities holdings. The Committee intends to reduce the Federal Reserve's securities holdings over time in a predictable manner primarily by adjusting the amounts reinvested of principal payments received from securities held in the System Open Market Account (SOMA). Beginning on June 1, principal payments from securities held in the SOMA will be reinvested to the extent that they exceed monthly caps. For Treasury securities, the cap will initially be set at $30 billion per month and after three months will increase to $60 billion per month. The decline in holdings of Treasury securities under this monthly cap will include Treasury coupon securities and, to the extent that coupon maturities are less than the monthly cap, Treasury bills. For agency debt and agency mortgage-backed securities, the cap will initially be set at $17.5 billion per month and after three months will increase to $35 billion per month. Over time, the Committee intends to maintain securities holdings in amounts needed to implement monetary policy efficiently and effectively in its ample reserves regime. To ensure a smooth transition, the Committee intends to slow and then stop the decline in the size of the balance sheet when reserve balances are somewhat above the level it judges to be consistent with ample reserves. Once balance sheet runoff has ceased, reserve balances will likely continue to decline for a time, reflecting growth in other Federal Reserve liabilities, until the Committee judges that reserve balances are at an ample level. Thereafter, the Committee will manage securities holdings as needed to maintain ample reserves over time. The Committee is prepared to adjust any of the details of its approach to reducing the size of the balance sheet in light of economic and financial developments. After adopting the Plans for Reducing the Size of the Federal Reserve's Balance Sheet, 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, for release at 2:00 p.m.: "Effective May 5, 2022, 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. Conduct overnight repurchase agreement operations with a minimum bid rate of 1.0 percent and with an aggregate operation limit of $500 billion; the aggregate operation limit can be temporarily increased at the discretion of the Chair. Conduct overnight reverse repurchase agreement operations at an offering rate of 0.8 percent and with a per-counterparty limit of $160 billion per day; the per-counterparty limit can be temporarily increased at the discretion of the Chair. Roll over at auction the amount of principal payments from the Federal Reserve's holdings of Treasury securities maturing in the calendar month of June that exceeds a monthly cap of $30 billion. Redeem Treasury coupon securities up to this monthly cap and Treasury bills to the extent that coupon principal payments are less than the monthly cap. Reinvest into agency mortgage-backed securities (MBS) the amount of principal payments from the Federal Reserve's holdings of agency debt and agency MBS received in the calendar month of June that exceeds a monthly cap of $17.5 billion. Allow modest deviations from stated amounts for reinvestments, if needed for operational reasons. Engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions." The vote also encompassed approval of the statement below for release at 2:00 p.m.: "Although overall economic activity edged down in the first quarter, household spending and business fixed investment remained strong. Job gains have been robust in recent months, and the unemployment rate has declined substantially. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures. The invasion of Ukraine by Russia is causing tremendous human and economic hardship. The implications for the U.S. economy are highly uncertain. The invasion and related events are creating additional upward pressure on inflation and are likely to weigh on economic activity. In addition, COVID-related lockdowns in China are likely to exacerbate supply chain disruptions. The Committee is highly attentive to inflation risks. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With appropriate firming in the stance of monetary policy, the Committee expects inflation to return to its 2 percent objective and the labor market to remain strong. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 3/4 to 1 percent and anticipates that ongoing increases in the target range will be appropriate. In addition, the Committee decided to begin reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities on June 1, as described in the Plans for Reducing the Size of the Federal Reserve's Balance Sheet that were issued in conjunction with this statement. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments." Voting for this action: Jerome H. Powell, John C. Williams, Michelle W. Bowman, Lael Brainard, James Bullard, Esther L. George, Patrick Harker, Loretta J. Mester, and Christopher J. Waller. Patrick Harker voted as an 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 of the Federal Reserve System voted unanimously to raise the interest rate paid on reserve balances to 0.90 percent, effective May 5, 2022. The Board of Governors of the Federal Reserve System voted unanimously to approve a 1/2 percentage point increase in the primary credit rate to 1 percent, effective May 5, 2022.5 It was agreed that the next meeting of the Committee would be held on Tuesday–Wednesday, June 14–15, 2022. The meeting adjourned at 10:15 a.m. on May 4, 2022. Notation Vote By notation vote completed on April 5, 2022, the Committee unanimously approved the minutes of the Committee meeting held on March 15–16, 2022. _______________________ James A. Clouse Secretary 1. The Federal Open Market Committee is referenced as the "FOMC" and the "Committee" in these minutes; the Board of Governors of the Federal Reserve System is referenced as the "Board" 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's session only. Return to text 4. Attended the discussion of economic developments and outlook. Return to text 5. In taking this action, the Board approved requests to establish that rate submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco. Return to text

2022-04-06

Minute

Minutes of the Federal Open Market Committee March 15-16, 2022 A joint meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve System was held in the offices of the Board of Governors on Tuesday, March 15, 2022, at 9:00 a.m. and continued on Wednesday, March 16, 2022, at 9:00 a.m.1 Attendance Jerome H. Powell, Chair John C. Williams, Vice Chair Michelle W. Bowman Lael Brainard James Bullard Esther L. George Loretta J. Mester Christopher J. Waller Meredith Black, Charles L. Evans, Patrick Harker, Naureen Hassan, and Neel Kashkari, Alternate Members of the Committee Thomas I. Barkin, Raphael W. Bostic, and Mary C. Daly, Presidents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco, respectively Kenneth C. Montgomery, Interim President of the Federal Reserve Bank of Boston James A. Clouse, Secretary Matthew M. Luecke, Deputy Secretary Brian J. Bonis, Assistant Secretary Michelle A. Smith, Assistant Secretary Mark E. Van Der Weide, General Counsel Michael Held, Deputy General Counsel Trevor A. Reeve, Economist Stacey Tevlin, Economist Beth Anne Wilson, Economist Shaghil Ahmed, Brian M. Doyle, Carlos Garriga, Joseph W. Gruber, David E. Lebow, and William Wascher, Associate Economists Lorie K. Logan, Manager, System Open Market Account Patricia Zobel, Deputy Manager, System Open Market Account Ann E. Misback, Secretary, Office of the Secretary, Board Matthew J. Eichner,2 Director, Division of Reserve Bank Operations and Payment Systems, Board; Michael S. Gibson, Director, Division of Supervision and Regulation, Board; Andreas Lehnert, Director, Division of Financial Stability, Board Daniel M. Covitz, Deputy Director, Division of Research and Statistics, Board; Sally Davies, Deputy Director, Division of International Finance, Board; Rochelle M. Edge, Deputy Director, Division of Monetary Affairs, Board; Michael T. Kiley, Deputy Director, Division of Financial Stability, Board Jon Faust and Joshua Gallin, Senior Special Advisers to the Chair, Division of Board Members, Board Antulio N. Bomfim, Jane E. Ihrig, Kurt F. Lewis, and Nitish R. Sinha, Special Advisers to the Board, Division of Board Members, Board Linda Robertson, Assistant to the Board, Division of Board Members, Board David Bowman, David López-Salido, and Min Wei, Senior Associate Directors, Division of Monetary Affairs, Board Edward Nelson, Senior Adviser, Division of Monetary Affairs, Board; Jeremy B. Rudd, Senior Adviser, Division of Research and Statistics, Board Stephanie E. Curcuru and Matteo Iacoviello,3 Associate Directors, Division of International Finance, Board; Burcu Duygan-Bump, Associate Director, Division of Research and Statistics, Board; Jeffrey D. Walker,2 Associate Director, Division of Reserve Bank Operations and Payment Systems, Board Zeynep Senyuz and Rebecca Zarutskie, Deputy Associate Directors, Division of Monetary Affairs, Board Paul Lengermann and Clara Vega, Assistant Directors, Division of Research and Statistics, Board; Dan Li, Assistant Director, Division of Monetary Affairs, Board Alyssa G. Anderson,2 Valerie S. Hinojosa, and Lubomir Petrasek,2 Section Chiefs, Division of Monetary Affairs, Board; Penelope A. Beattie,2 Section Chief, Office of the Secretary, Board; Logan T. Lewis,3 Section Chief, Division of International Finance, Board David H. Small, Project Manager, Division of Monetary Affairs, Board Mary Tian2 and Randall A. Williams, Group Managers, Division of Monetary Affairs, Board Michele Cavallo and Ander Perez-Orive, Principal Economists, Division of Monetary Affairs, Board Cynthia L. Doniger and David Glancy,4 Senior Economists, Division of Monetary Affairs, Board David Na,2 Senior Financial Institution and Policy Analyst, Division of Monetary Affairs, Board Jose Acosta, Senior Communications Analyst, Division of Information Technology, Board Kelly J. Dubbert, First Vice President, Federal Reserve Bank of Kansas City Kartik B. Athreya, Michael Dotsey, and Sylvain Leduc, Executive Vice Presidents, Federal Reserve Banks of Richmond, Philadelphia, and San Francisco, respectively Edward S. Knotek II, Anna Nordstrom,2 Giovanni Olivei, and Mark L.J. Wright, Senior Vice Presidents, Federal Reserve Banks of Cleveland, New York, Boston, and Minneapolis, respectively Kathryn B. Chen, Lisa Chung,2 Jonas Fisher, Mark J. Jensen, Matthew D. Raskin, Andrea Tambalotti, and Benedict Wensley,2 Vice Presidents, Federal Reserve Banks of New York, New York, Chicago, Atlanta, New York, New York, and New York, respectively Seth Searls,2 Assistant Vice President, Federal Reserve Bank of New York Karel Mertens, Senior Economic Policy Advisor, Federal Reserve Bank of Dallas Justin Meyer,2 Markets Officer, Federal Reserve Bank of New York Developments in Financial Markets and Open Market Operations The manager turned first to a review of global financial market developments. Following the Russian invasion of Ukraine and the subsequent imposition of an array of sanctions, the ruble depreciated roughly 40 percent against the dollar. Prices of dollar-denominated Russian bonds plunged 80 to 90 percent, and local trading of Russian equities was suspended after a precipitous decline in Russian stock price indexes. Global financial conditions tightened, reflecting declines in equity prices, increases in sovereign yields and credit spreads, and—for the United States—an appreciation of the dollar. Prices of commodities that Russia exports, particularly oil and natural gas, soared over the period. While oil prices partially retraced late in the period, options prices suggested considerable probability that oil prices could remain elevated or rise further in the months ahead. Alongside the rise in commodities prices, measures of near-term inflation compensation increased sharply across advanced economies. In Eastern European countries, currencies depreciated notably and equity prices declined, but most emerging market currencies outside of Eastern Europe depreciated only modestly or rose. Sovereign spreads for emerging market economies (EMEs) widened, but the moves outside of Eastern Europe were relatively modest. The developments in Ukraine sparked some liquidity strains across markets. Overnight interest rates were steady throughout the period, but there were some signs of pressures in term funding markets. High levels of reserves in the banking system and the backstop facilities in place—the new repurchase agreement facility for foreign and international monetary authorities (FIMA Repo Facility) and the standing repo facility (SRF), as well as the standing central bank liquidity swap lines and the discount window—likely supported market confidence regarding the availability of liquidity and helped contain funding pressures. Amid a rise in market volatility, trading liquidity declined across a number of sectors. In the Treasury market, market depth fell and the price impact of trades increased modestly in some sectors. Overall, however, volumes were typical, and markets continued to function in an orderly fashion. Notwithstanding uncertainties associated with geopolitical developments, many central banks continued to signal intentions to move ahead with reducing policy accommodation to address elevated inflation. Market-implied policy rates one year forward rose notably across many advanced foreign economies (AFEs), extending increases seen over recent months. In the United States, incoming economic data and Federal Reserve communications led investors to expect a more rapid removal of policy accommodation than they had previously expected. Market participants almost universally expected a 25 basis point increase in the target range for the federal funds rate at the current meeting. Moreover, futures prices implied that the federal funds rate would increase around 170 basis points through year-end, about 70 basis points more than had been priced in at the time of the January meeting. Similarly, the median projection of the target range for the federal funds rate in the Open Market Desk's most recent surveys of primary dealers and market participants showed an increase of 150 basis points this year. The median projected path for the target range beyond 2022 rose another 100 basis points by the first half of 2024 to a level modestly above the median projected longer-run level before returning closer to the longer-run level in 2025. Consistent with shifting expectations for the path of policy, shorter-dated Treasury yields rose notably over the intermeeting period and the spread between the 10-year Treasury yield and 2-year Treasury yield narrowed. Market participants expected an earlier and somewhat faster reduction in System Open Market Account (SOMA) holdings of securities than they did in January. In the Desk surveys, almost 90 percent of respondents projected balance sheet runoff to begin by July. Overall, survey respondents expected a significant reduction in the balance sheet over coming years, although there was a high degree of uncertainty around the magnitude of the total decline. The manager turned next to a discussion of money markets and policy implementation. Market participants expected the interest on reserve balances rate and overnight reverse repurchase agreement (ON RRP) offering rate to be increased by 25 basis points at the current meeting, in line with their expected increase in the target range, and anticipated that the changes would fully pass through to market overnight interest rates. There was uncertainty around how ON RRP usage might evolve in the near term as money market rates increased. If banks lifted their deposit rates by less than the increase in returns available on alternative investments, depositors could shift funds into these alternatives, leading to downward pressure on rates and increased ON RRP take-up. If instead deposit rates moved up in line with net yields on alternative investments, ON RRP takeup could remain relatively steady. Over the longer term, however, ON RRP balances were expected to decline as the Federal Reserve's balance sheet runoff proceeded and gradually lifted money market rates relative to the ON RRP rate. Turning to Desk operations, the manager noted that the Desk would be maintaining the size of the SOMA portfolio through reinvestments until the Committee directed otherwise. For Treasury securities, the Desk would follow the usual practice of rolling over all principal payments at auctions. In the absence of regular secondary-market purchases of Treasury securities, the Desk planned to maintain operational readiness by conducting small-value purchases and sales of Treasury securities. For agency mortgage-backed securities (MBS), the Desk planned to continue to reinvest principal payments on a monthly basis through secondary-market purchases. The manager discussed a plan to simplify administrative aspects of the SOMA holdings of agency MBS in coming months through a process of CUSIP (Committee on Uniform Securities Identification Procedures) aggregation. The Desk undertook similar programs of CUSIP aggregation following the conclusion of previous large-scale asset purchase programs; these past CUSIP aggregation programs were successful at reducing the cost and complexity of maintaining agency MBS holdings. Finally, the manager provided an update on the SRF. The Desk had onboarded four depository institutions as counterparties and noted that a number of additional banks were currently under review. The Desk planned to adjust the counterparty eligibility requirements in early April to make the SRF accessible to a broader range of banks, in line with the Committee's intention to expand eligibility over time and with efforts to ensure that Desk counterparty policies promote a fair and competitive marketplace. By unanimous vote, the Committee ratified the Desk's domestic transactions over the intermeeting period. No intervention operations occurred in foreign currencies for the System's account during the intermeeting period. Plans for Reducing the Size of the Balance Sheet Participants continued their discussion of topics related to plans for reducing the size of the Federal Reserve's balance sheet in a manner consistent with the approach described in the Principles for Reducing the Size of the Federal Reserve's Balance Sheet that the Committee released following its January meeting. The participants' discussion was preceded by a staff presentation that reviewed the Committee's 2017–19 experience with balance sheet reduction and presented a range of possible options for reducing the Federal Reserve's securities holdings over time in a predictable manner. All of the options featured a more rapid pace of balance sheet runoff than in the 2017–19 episode. The options differed primarily with respect to the size of the monthly caps for securities redemptions in the SOMA portfolio. The presentation addressed the potential implications of each option for the path of the balance sheet during and after runoff. The staff presentation also featured alternative approaches the Committee could consider with respect to SOMA holdings of Treasury bills as well as alternative ways the Committee could eventually slow and then stop balance sheet runoff as the size of the SOMA portfolio approached levels consistent with the Committee's ample-reserves framework for policy implementation. In their discussion, all participants agreed that elevated inflation and tight labor market conditions warranted commencement of balance sheet runoff at a coming meeting, with a faster pace of decline in securities holdings than over the 2017–19 period. Participants reaffirmed that the Federal Reserve's securities holdings should be reduced over time in a predictable manner primarily by adjusting the amounts reinvested of principal payments received from securities held in the SOMA. Principal payments received from securities held in the SOMA would be reinvested to the extent they exceeded monthly caps. Several participants remarked that they would be comfortable with relatively high monthly caps or no caps. Some other participants noted that monthly caps for Treasury securities should take into consideration potential risks to market functioning. Participants generally agreed that monthly caps of about $60 billion for Treasury securities and about $35 billion for agency MBS would likely be appropriate. Participants also generally agreed that the caps could be phased in over a period of three months or modestly longer if market conditions warrant. Participants discussed the approach toward implementing caps for Treasury securities and the role that the Federal Reserve's holdings of Treasury bills might play in the Committee's plan to reduce the size of the balance sheet. Most participants judged that it would be appropriate to redeem coupon securities up to the cap amount each month and to redeem Treasury bills in months when Treasury coupon principal payments were below the cap. Under this approach, redemption of Treasury bills would typically bring the total amount of Treasury redemptions up to the monthly cap. Several participants remarked that reducing the Federal Reserve's Treasury bill holdings over time would be appropriate because Treasury bills are highly valued as safe and liquid assets by the private sector, and the Treasury could increase bill issuance to the public as SOMA bill holdings decline. In addition, participants generally noted that maintaining large holdings of Treasury bills is not necessary under the Federal Reserve's ample-reserves operating framework; in the previous scarce-reserves regime, Treasury bill holdings were useful as a tool that could be used to drain reserves from the banking system when necessary to control short-term interest rates. A couple of participants commented that holding some Treasury bills could be appropriate if the Federal Reserve wished to keep its Treasury portfolio neutral with respect to the universe of outstanding Treasury securities. With respect to the Federal Reserve's agency MBS redemptions, participants generally noted that MBS principal prepayments would likely run under the proposed monthly cap in a range of plausible interest rate scenarios but that the cap could guard against outsized reductions in the Federal Reserve's agency MBS holdings in scenarios with especially high prepayments. Some participants noted that under the proposed approach to running off Treasury and agency securities primarily through adjustments to reinvestments, agency MBS holdings would still make up a sizable share of the Federal Reserve's asset holdings for many years. Participants generally agreed that after balance sheet runoff was well under way, it will be appropriate to consider sales of agency MBS to enable suitable progress toward a longer-run SOMA portfolio composed primarily of Treasury securities. A Committee decision to implement a program of agency MBS sales would be announced well in advance. Several participants noted the significant uncertainty around the future level of reserves that would be consistent with the Committee's ample-reserves operating framework. Against this backdrop, participants generally agreed that it would be appropriate to first slow and then stop the decline in the size of the balance sheet when reserve balances were above the level the Committee judged to be consistent with ample reserves, thereby allowing reserves to decline more gradually as nonreserve liabilities increased over time. Participants agreed that lessons learned from the previous balance sheet reduction episode should inform the Committee's current approach to reaching ample reserve levels and that close monitoring of money market conditions and indicators of near-ample reserves should help inform adjustments to the pace of runoff. A couple of participants noted that the establishment of the SRF, which did not exist in the previous runoff episode, could address unexpected money market pressures that might emerge if the Committee adopted an approach to balance sheet reduction in which reserves declined relatively rapidly, but several others noted that the facility was not intended as a substitute for ample reserves. Participants generally agreed that it was important for the Committee to be prepared to adjust any of the details of its approach to reducing the size of the balance sheet in light of economic and financial developments. No decision regarding the Committee's plan to reduce the Federal Reserve's balance sheet was made at this meeting, but participants agreed they had made substantial progress on the plan and that the Committee was well placed to begin the process of reducing the size of the balance sheet as early as after the conclusion of its upcoming meeting in May. Staff Review of the Economic Situation The information available at the time of the March 15–16 meeting suggested that U.S. real gross domestic product (GDP) was increasing in the first quarter at a pace that was slower than the rapid gain posted in the fourth quarter of 2021. Labor market conditions improved further in January and February, and indicators of labor compensation continued to show robust increases. Consumer price inflation through January—as measured by the 12-month percentage change in the price index for personal consumption expenditures (PCE)—remained elevated. Total nonfarm payroll employment grew strongly in January and February. The unemployment rate edged down, on net, from 3.9 percent in December to 3.8 percent in February. The unemployment rate for African Americans and for Hispanics declined over this period; however, both rates remained noticeably higher than the national average. The labor force participation rate increased in February, as did the employment-to-population ratio. The private-sector job openings rate in January, as measured by the Job Openings and Labor Turnover Survey, was little changed, on net, from its November level and remained well above its pre-pandemic level; the quits rate also remained elevated. Average hourly earnings rose 5.1 percent over the 12 months ending in February, about the same as its year-earlier pace, with widespread increases across industries. Consumer prices continued to rise rapidly. Total PCE price inflation was 6.1 percent over the 12 months ending in January, and core PCE price inflation, which excludes changes in consumer energy prices and many consumer food prices, was 5.2 percent over the same period. The trimmed mean measure of 12-month PCE inflation constructed by the Federal Reserve Bank of Dallas was 3.5 percent in January, 1.8 percentage points higher than its year-earlier rate of increase. In February, the 12-month change in the consumer price index (CPI) was 7.9 percent, while core CPI inflation was 6.4 percent over the same period. The staff's common inflation expectations index, which combines information from many indicators of inflation expectations and inflation compensation, had largely leveled off over the fall and was close to its 2014 average. Real PCE appeared to be rising at a faster pace in the first quarter of 2022 than in the fourth quarter of 2021 as social distancing unwound further. Housing demand remained strong, though activity in the residential housing sector continued to be restrained by shortages of construction materials, buildable lots, and other inputs. Available indicators suggested that growth in business fixed investment was picking up in the first quarter as growth in nonresidential structures investment turned positive. Available data suggested that motor vehicle production declined sharply in February as ongoing shortages of semiconductors and other supply chain problems continued to restrain output. Outside of the motor vehicle sector, manufacturing production appeared to have moved up over January and February; however, this increase did not appear to reflect a substantial reduction in supply bottlenecks, as many indicators of the state of bottlenecks showed little sign of improvement over this period. In particular, materials inputs such as electronic components and aluminum remained in short supply, while broad measures of industrial input prices remained elevated. Separately, transportation and distribution activity continued to be held back by port congestion and a shortage of truck drivers. Available indicators suggested that real government purchases were little changed in the first quarter after declining in the fourth quarter of 2021. Although real state and local purchases appeared to be rising, federal defense purchases appeared to be contracting further in the first quarter. The U.S. international trade deficit widened at the end of last year to a record high and surpassed that high at the beginning of this year. Imports of goods grew rapidly again in January, led by increases in consumer goods, while exports of goods fell back slightly from elevated fourth-quarter levels. Shipping congestion and other bottlenecks continued to restrain the level of trade in goods. Services exports and imports fell back in January relative to December, reflecting a reduction in travel to and from the United States. Because international travel remained depressed, services trade was still very low relative to pre-pandemic norms. Incoming data suggested that the rapid spread of the Omicron variant had tempered the foreign recovery around the turn of the year. Purchasing managers indexes were consistent with the Omicron wave having a notable effect on services activity but a rather muted effect on manufacturing activity and supplier delivery times. Moreover, with COVID-19 cases having fallen in many regions, authorities had already eased restrictions and social mobility had recovered, except in China, where lockdowns were recently reimposed. The Russian invasion of Ukraine, however, constituted another negative shock to the global economy by pushing up commodity prices further, hurting global risk sentiment, and exacerbating supply bottlenecks. Inflation abroad continued to rise, driven by recovering global demand, rising retail energy and food prices, and ongoing strains on global supply chains; the effects of the Russian invasion contributed to some of these inflationary pressures. Staff Review of the Financial Situation Financial markets were highly volatile over the intermeeting period, with strained liquidity in some markets. The Russian invasion of Ukraine led to periods of particularly elevated volatility and deteriorating investor risk sentiment. Nominal Treasury yields and the expected path of policy rose during the intermeeting period, driven by economic data releases and FOMC communications that were viewed as implying a more rapid removal of monetary policy accommodation than previously expected. Domestic equity indexes declined modestly, while those in Europe fell noticeably. Financing conditions remained accommodative, although borrowing costs increased further. Investors interpreted incoming economic data and Federal Reserve communications as implying a more rapid removal of monetary policy accommodation than they had previously expected. On net, the expected path of the federal funds rate implied by financial market quotes—unadjusted for term premiums—rose significantly, along with the yields on nominal Treasury securities, since the previous FOMC meeting. Near-term inflation compensation implied by Treasury Inflation-Protected Securities rose sharply, reflecting the higher-than-anticipated CPI releases and surging energy prices following the Russian invasion of Ukraine. Spreads of investment- and speculative-grade corporate bonds widened noticeably since the previous FOMC meeting and ended the period close to the medians of their historical distributions. Spreads of municipal bonds also widened significantly across credit categories. Broad equity indexes declined modestly, on net, amid significant fluctuations. Equity prices increased early in the period because of stronger-than-anticipated corporate earnings and economic data releases, but they retraced these gains as investor risk sentiment deteriorated following the Ukraine invasion. The one-month option-implied volatility on the S&P 500—the VIX—surged briefly immediately following the invasion but ended the intermeeting period slightly lower on net. Foreign asset prices were highly volatile over the intermeeting period in response to geopolitical developments, central bank communications, and rising inflation concerns. News related to Russia's invasion of Ukraine, in particular, contributed to decreases in major foreign equity indexes, especially in Europe, and a moderate increase in the broad dollar index. Despite downward pressure from the geopolitical events, AFE sovereign yields increased notably, on net, on higher-than-expected inflation readings and central bank communications that were perceived as less accommodative than expected. EME sovereign spreads widened, and EME-dedicated funds experienced moderate portfolio outflows, which increased after the Russian invasion. Even so, financial conditions among EMEs—including fund flows and the relative strength of local currencies outside of Europe—were resilient compared with past episodes of global turbulence, reflecting in part higher commodity prices and monetary policy tightening by EME central banks. Liquidity conditions became strained in some financial markets during the intermeeting period. Market depth—a gauge of the ability to transact in large volumes at quotes posted by market makers—deteriorated in U.S. Treasury, U.S. equity, and crude oil markets. Trading volumes generally remained within normal ranges in most markets and increased above normal levels in Treasury markets later in the period. Bid–ask spreads did not increase notably in most markets. However, investors reported that strained liquidity at times amplified the volatility of price moves and may have contributed to the particularly large swings in Treasury yields and equity prices late in the intermeeting period. Short-term funding markets were mostly stable over the intermeeting period, although spreads in some segments widened. The effective federal funds rate and the Secured Overnight Financing Rate generally held steady at 8 basis points and 5 basis points, respectively. Overnight rates on commercial paper (CP) across most sectors also held steady, although rates and spreads on longer-tenor CP and negotiable certificates of deposit increased amid the escalation of the Ukraine invasion. Spreads between three-month forward rate agreements and overnight index swaps widened as borrowers increased precautionary issuance of longer-tenor debt while money market investors preferred shorter-duration investments. ON RRP take-up was little changed, averaging about $1.6 trillion. In domestic credit markets, credit remained broadly available for most types of borrowers during the intermeeting period. Nonfinancial gross corporate bond issuance slowed noticeably in January and February, reflecting lower demand for credit due to rising borrowing costs and elevated issuance over the past two years. However, issuance rebounded to healthy levels in March for investment-grade firms, with a few high-yield firms also raising funds. Leveraged loan issuance was strong in January and February. Small business loan originations in December roughly matched pre-pandemic levels. The share of small firms that actively sought financing in the past few months and reported that it was more difficult to acquire credit compared with three months earlier remained very low. For households, both nonmortgage and mortgage credit remained accommodative. Credit card balances increased significantly in the fourth quarter, and auto credit outstanding grew at a moderate pace in December. The number of mortgage rate locks for home purchases through February was elevated relative to pre-pandemic levels. Mortgage credit for households with low credit scores continued to ease through February but remained tighter than before the pandemic. The credit quality of large nonfinancial corporations and municipalities remained strong over the intermeeting period. The volumes of credit rating upgrades for corporate and municipal bonds outpaced those of downgrades moderately in January and February. Default rates on corporate bonds, municipal bonds, and leveraged loans remained very low; most market indicators of future expected default rates for corporate bonds and leveraged loans also remained low. Credit quality in the commercial real estate sector continued to show some signs of stress. Delinquency rates for commercial mortgage-backed securities (CMBS) collateralized by hotel and retail properties continued to decline in January but remained well above pre-pandemic levels, while those for CMBS in the office sector increased somewhat in January but remained fairly low by historical standards. For households, credit quality remained fairly healthy. Delinquency rates for mortgages, which include loans in forbearance and other loans behind on payments, continued to trend down through December, while those for prime auto loan and prime credit card borrowers remained flat in December. For nonprime borrowers, delinquency rates rose in December, although they remained subdued by historical standards. Information on borrowing costs through February and early March suggested that the events surrounding Russia's invasion of Ukraine did not have a significant effect on financing conditions during the intermeeting period. Borrowing costs continued to increase in many sectors but remained low relative to their historical distributions. Spreads in the corporate bond, municipal bond, and CMBS markets generally rose to somewhat above their pre-pandemic levels, reflecting heightened geopolitical risks, uncertainty about the outlook for monetary policy, and elevated financial market volatility. Residential mortgage rates increased, mostly as a result of widening MBS spreads, which market participants attributed mainly to the tapering of the Federal Reserve's agency MBS purchases and uncertainty surrounding the market supply of agency MBS that would accompany balance sheet runoff by the Federal Reserve. Interest rates on new credit cards rose to roughly their pre-pandemic levels, while rates on auto loans also rose slightly but remained significantly below pre-pandemic levels. Staff Economic Outlook The near-term projection for U.S. economic activity prepared by the staff for the March FOMC meeting was weaker than in January, reflecting the anticipated economic effects of the conflict in Ukraine and financial conditions that were expected to be less supportive than previously assumed. For 2022 as a whole, real GDP growth was projected to step down markedly from its rapid 2021 pace before picking up slightly in 2023 as the continued resolution of supply constraints provided a small boost to growth. Real GDP growth was expected to slow further in 2024 to a pace that was in line with potential growth. However, the level of real GDP was expected to remain well above potential over the projection period, and labor market conditions were expected to remain very tight. The staff's near-term projection for PCE price inflation was revised up considerably relative to January. The upward revision reflected the staff's reaction to the persistently high and broad-based levels of domestic inflation, import price inflation, and wage growth that had been observed, as well as the staff's expectation that the upward pressure on inflation from supply and demand imbalances would last longer than previously assumed. In addition, total PCE price inflation was further revised up to reflect higher expected paths for consumer energy and food prices. All told, total PCE price inflation was projected to be 4 percent in 2022. PCE price inflation was then expected to slow to 2.3 percent in 2023 and to 2.1 percent in 2024 as food, energy, and import price inflation moved lower and as supply and demand imbalances were resolved. The staff continued to judge that the risks to the baseline projection for real activity were skewed to the downside and that the risks to the inflation projection were skewed to the upside. The COVID-19 pandemic remained a source of downside risk to activity, while the possibility of more severe and more persistent supply issues was viewed as posing an additional downside risk to activity and an upside risk to inflation. The Russian invasion of Ukraine was perceived as adding to the uncertainty around the outlook for economic activity and inflation, as the conflict carried the risk of further exacerbating supply chain disruptions and of putting additional upward pressure on inflation by boosting the prices for energy, food, and other key commodities. Finally, the possibility that continued high inflation would cause longer-term inflation expectations to become unanchored was seen as another upside risk to the inflation projection. Participants' Views on Current Conditions and the Economic Outlook In conjunction with this FOMC meeting, participants submitted their projections of the most likely outcomes for real GDP growth, the unemployment rate, and inflation for each year from 2022 through 2024 and over the longer run based on their individual assessments of appropriate monetary policy, including the path of 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. A Summary of Economic Projections was released to the public following the conclusion of the meeting. In their discussion of current economic conditions, participants noted that indicators of economic activity and employment had continued to strengthen. Job gains had been strong in recent months, and the unemployment rate had declined substantially. Inflation remained elevated, reflecting continued supply and demand imbalances, higher energy prices, and broader price pressures. With appropriate firming in the stance of monetary policy, participants expected inflation to return to the Committee's 2 percent objective over time and the labor market to remain strong. Participants recognized that the invasion of Ukraine by Russia was causing tremendous human and economic hardship for the Ukrainian people. They judged that the implications of the war for the U.S. economy were highly uncertain, but in the near term, the invasion and related events were likely to create significant additional upward pressure on inflation and could weigh on economic activity. With regard to the economic outlook, participants noted that real GDP growth had slowed from its rapid pace in the fourth quarter of 2021, largely reflecting weaker inventory investment, but consumption and business investment continued to rise solidly. The Omicron variant left only a mild and brief imprint on economic data, as households and firms appeared resilient to this wave of the virus. Relative to their December forecasts, participants had revised down their projections for real GDP growth this year, reflecting factors such as a slowdown in inventory investment from its strong pace late last year, reduced fiscal and monetary policy accommodation, and the Russian invasion of Ukraine, which had led to higher prices of energy and other commodities, increased uncertainty, and weighed on broader financial conditions and consumer sentiment. Even so, participants judged that economic fundamentals remained solid and that they expected above-trend growth to continue, sustaining a strong labor market. Participants commented that demand for labor continued to substantially exceed available supply across many parts of the economy and that their business contacts continued to report difficulties in hiring and retaining workers. Participants observed that various indicators pointed to a very tight labor market. Employment growth remained strong through the Omicron wave. A couple of participants highlighted that the annual benchmark revision to the establishment survey employment data revealed stronger employment growth in the second half of 2021 than was initially reported. The unemployment rate had fallen to a post-pandemic low, and quits and job openings were at all-time highs. Although payroll employment remained below its pre-pandemic level, the shortfall was concentrated in a few sectors and reflected a shortage of workers rather than insufficient demand for labor. Consistent with a tight labor market, nominal wages were rising at the fastest pace in many years. While wage gains thus far had been the strongest among the lowest quartile of earners and among production and supervisory workers, wage pressures had begun to spread across the income and skill distributions. Many participants commented that they expected the labor market to remain strong and wage pressures to remain elevated. A few participants noted that there were signs that the pandemic-related factors that had held back labor supply might be abating and pointed to the notable increase in the labor force participation rate among prime-age men in February. Participants remarked that recent inflation readings continued to significantly exceed the Committee's longer-run goal and noted that developments associated with Russia's invasion of Ukraine, including the related surge in energy prices, will add to near-term inflation pressures. Some participants noted that elevated inflation had continued to broaden from goods into services, especially rents, and into sectors that had not yet experienced large price increases, such as education, apparel, and health care. A few participants also noted that the number of spending categories experiencing inflation rates above 4 percent had continued to rise, or that the trimmed mean inflation measure from the Federal Reserve Bank of Dallas had risen to its highest level since the early 1980s. Many participants indicated that their business contacts continued to report substantial increases in wages and input prices that were being passed through into higher prices to their customers without any significant decrease in demand. Participants commented on a few factors that might lead the high inflation readings to persist, including strong aggregate demand, significant increases in energy and commodity prices, and supply chain disruptions that were likely to require a lengthy period to resolve. In addition, some participants noted that recent higher inflation could affect future inflation dynamics. For example, a few participants commented that persistently high inflation readings might lead businesses, when setting prices, to be more attentive to aggregate inflation or more willing to raise prices. In addition, a couple of other participants noted that some household survey data suggested that near-term consumer inflation expectations have become more sensitive to actual inflation readings since the beginning of the pandemic. A few participants commented that both survey- and market-based measures of short-term inflation expectations were at historically high levels. Several other participants noted that longer-term measures of inflation expectations from households, professional forecasters, and market participants still appeared to remain well anchored, which—together with appropriate monetary policy and an eventual easing of supply constraints—would support a return of inflation over time to levels consistent with the Committee's longer-run goal. Participants agreed that developments surrounding the Russian invasion of Ukraine, including the resulting sanctions, were adding to inflation pressures and posing upside risks to the inflation outlook. Participants noted that Russia and Ukraine were major suppliers of various commodities used in the production of energy, food, and some industrial inputs. A continued cutoff of that supply from the world market would further push up prices for those commodities and, over time, lead to price increases in downstream industries. The invasion had also exacerbated the disruptions of supply chains. Participants commented that, by leading to higher energy and food prices, weighing on consumer sentiment, and contributing to tighter financial conditions, the invasion also negatively affected the growth outlook. A few participants highlighted additional downside risks to growth associated with the war, such as the risk that a more protracted conflict than the public currently expects could lead to much tighter global financial conditions or other disruptions. A couple of participants commented that the increased uncertainty might lead businesses and consumers to reduce spending, though their business contacts currently were not seeing signs of such shifts or expecting a significant pullback in demand. Several participants judged that the upside risk to inflation associated with the war appeared more significant than the downside risk to growth, as inflation was already high, the United States had a relatively low level of financial and trade exposure to Russia, and the U.S. economy was well positioned to absorb additional adverse demand shocks. In their discussion of risks to the outlook, participants agreed that uncertainty regarding the path of inflation was elevated and that risks to inflation were weighted to the upside. Participants cited several such risks, including ongoing supply bottlenecks and rising energy and commodity prices, both of which were exacerbated by the Russian invasion; recent COVID-related lockdowns in China that had the potential to further disrupt supply chains; and the possibility that longer-run inflation expectations might become unanchored. Uncertainty about real activity was also seen as elevated. Various participants noted downside risks to the outlook, including risks associated with the Russian invasion, a broad tightening in global financial conditions, and a prolonged rise in energy prices. In their consideration of the appropriate stance of monetary policy, all participants concurred that the U.S. economy was very strong, with an extremely tight labor market, and that inflation was high and well above the Committee's 2 percent inflation objective. Against this backdrop, all participants agreed that it was appropriate to begin a process of removing policy accommodation by raising the target range for the federal funds rate at this meeting. They further judged that ongoing increases in the target range for the federal funds rate would be warranted to achieve the Committee's objectives. Participants also agreed that reducing the size of the Federal Reserve's balance sheet would play an important role in firming the stance of monetary policy and that they expected it would be appropriate to begin this process at a coming meeting, possibly as soon as in May. Participants judged that the firming of monetary policy, alongside an eventual waning of supply–demand imbalances, would help to keep longer-term inflation expectations anchored and bring inflation down over time to levels consistent with the Committee's 2 percent longer-run goal while sustaining a strong labor market. Many participants noted that—with inflation well above the Committee's objective, inflationary risks to the upside, and the federal funds rate well below participants' estimates of its longer-run level—they would have preferred a 50 basis point increase in the target range for the federal funds rate at this meeting. A number of these participants indicated, however, that, in light of greater near-term uncertainty associated with Russia's invasion of Ukraine, they judged that a 25 basis point increase would be appropriate at this meeting. Many participants noted that one or more 50 basis point increases in the target range could be appropriate at future meetings, particularly if inflation pressures remained elevated or intensified. A number of participants noted that the Committee's previous communications had already contributed to a tightening of financial conditions, as evident in the notable increase in longer-term interest rates over recent months. All participants indicated their strong commitment and determination to take the measures necessary to restore price stability. In that context, participants judged that the Committee's approach of commencing increases in the target range for the federal funds rate, and indicating that ongoing increases were likely, was fully warranted. Participants judged that it would be appropriate to move the stance of monetary policy toward a neutral posture expeditiously. They also noted that, depending on economic and financial developments, a move to a tighter policy stance could be warranted. A few participants judged that, at the current juncture, a significant risk facing the Committee was that elevated inflation and inflation expectations could become entrenched if the public began to question the Committee's resolve to adjust the stance of policy as appropriate to achieve the Committee's 2 percent longer-run objective for inflation. These participants suggested that expediting the removal of policy accommodation would reduce this risk while also leaving the Committee well positioned to adjust the stance of policy if geopolitical and other developments led to a more rapid dissipation of demand pressures than expected. Participants agreed that the economic outlook was highly uncertain and that policy decisions must take account of the state of financial markets and the economy. As always, the Committee would need to be prepared to adjust the stance of monetary policy in response to the evolving economic outlook and the risks to the outlook. In this regard, participants noted that developments associated with Russia's invasion of Ukraine posed heightened risks for both the United States and the global economy. Against this backdrop, all participants judged that risk management would be important in deciding upon the appropriate stance of monetary policy, and that policy also would need to be nimble in responding to incoming data and the evolving outlook. In particular, all participants underscored the need to remain attentive to the risks of further upward pressure on inflation and longer-run inflation expectations. Committee Policy Action In their discussion of monetary policy for this meeting, members agreed that indicators of economic activity and employment had continued to strengthen. Job gains had been strong in recent months, and the unemployment rate had declined substantially. Members also agreed that inflation remained elevated, reflecting continued supply and demand imbalances, higher energy prices, and broader price pressures. Members agreed that geopolitical developments warranted several changes to the postmeeting statement. They concurred that the invasion of Ukraine by Russia was causing tremendous human and economic hardship, and they agreed to update the statement to recognize this tragic situation. Members agreed that the implications of the war for the U.S. economy were highly uncertain, but they judged that, in the near term, the invasion and related events were likely to create additional upward pressure on inflation and weigh on economic activity. In their assessment of the monetary policy stance necessary for achieving the Committee's maximum-employment and price-stability goals, members agreed that with appropriate firming in the stance of monetary policy, they expected inflation to return to the Committee's 2 percent objective and the labor market to remain strong. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 1/4 to 1/2 percent and anticipated that ongoing increases in the target range would be appropriate. One member preferred to raise the target range for the federal funds rate by 0.5 percentage point to 1/2 to 3/4 percent at this meeting in light of elevated inflation pressures. With regard to reducing the size of the Federal Reserve's balance sheet, all members agreed that they had made substantial progress on arriving at a plan specifying the steps the Committee would take. They expected that, depending on economic and financial conditions, beginning the process of reducing the size of the balance sheet would be appropriate at a coming meeting, possibly as early as at the Committee's May meeting. Members agreed that, in assessing the appropriate stance of monetary policy, they would continue to monitor the implications of incoming information for the economic outlook and that they would be prepared to adjust the stance of monetary policy as appropriate in the event that risks emerged that could impede the attainment of the Committee's goals. They also concurred that, in assessing the appropriate stance of monetary policy, they would take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and 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 instructed otherwise, to execute transactions in the SOMA in accordance with the following domestic policy directive, for release at 2:00 p.m.: "Effective March 17, 2022, 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. Conduct overnight repurchase agreement operations with a minimum bid rate of 0.5 percent and with an aggregate operation limit of $500 billion; the aggregate operation limit can be temporarily increased at the discretion of the Chair. Conduct overnight reverse repurchase agreement operations at an offering rate of 0.3 percent and with a per-counterparty limit of $160 billion per day; the per-counterparty limit can be temporarily increased at the discretion of the Chair. Roll over at auction all principal payments from the Federal Reserve's holdings of Treasury securities and reinvest all principal payments from the Federal Reserve's holdings of agency debt and agency mortgage-backed securities (MBS) in agency MBS. Allow modest deviations from stated amounts for reinvestments, if needed for operational reasons. Engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions." The vote also encompassed approval of the statement below for release at 2:00 p.m.: "Indicators of economic activity and employment have continued to strengthen. Job gains have been strong in recent months, and the unemployment rate has declined substantially. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures. The invasion of Ukraine by Russia is causing tremendous human and economic hardship. The implications for the U.S. economy are highly uncertain, but in the near term the invasion and related events are likely to create additional upward pressure on inflation and weigh on economic activity. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With appropriate firming in the stance of monetary policy, the Committee expects inflation to return to its 2 percent objective and the labor market to remain strong. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 1/4 to 1/2 percent and anticipates that ongoing increases in the target range will be appropriate. In addition, the Committee expects to begin reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities at a coming meeting. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments." Voting for this action: Jerome H. Powell, John C. Williams, Michelle W. Bowman, Lael Brainard, Esther L. George, Patrick Harker, Loretta J. Mester, and Christopher J. Waller. Voting against this action: James Bullard. Patrick Harker voted as an alternate member at this meeting. President Bullard preferred at this meeting to raise the target range for the federal funds rate by 0.5 percentage point to 1/2 to 3/4 percent in light of elevated inflation pressures. To support the Committee's decision to raise the target range for the federal funds rate, the Board of Governors of the Federal Reserve System voted unanimously to raise the interest rate paid on reserve balances to 0.40 percent, effective March 17, 2022. The Board of Governors of the Federal Reserve System voted unanimously to approve a 1/4 percentage point increase in the primary credit rate to 0.50 percent, effective March 17, 2022.5 It was agreed that the next meeting of the Committee would be held on Tuesday–Wednesday, May 3–4, 2022.6 The meeting adjourned at 10:30 a.m. on March 16, 2022. Notation Votes By notation vote completed on February 15, 2022, the Committee unanimously approved the minutes of the Committee meeting held on January 25–26, 2022. By notation vote completed on February 17, 2022, the Committee unanimously approved the Investment Trading Policy for FOMC Officials and related revisions to the Program for Security of FOMC information. In conjunction with the notation vote, all non-voting participants also expressed support for the Policy and related revisions to the Program. _______________________ James A. Clouse Secretary 1. The Federal Open Market Committee is referenced as the "FOMC" and the "Committee" in these minutes; the Board of Governors of the Federal Reserve System is referenced as the "Board" in these minutes. Return to text 2. Attended through the discussion of plans for reducing the size of the balance sheet. Return to text 3. Attended through the staff review of the economic and financial situation. Return to text 4. Attended Tuesday's session only. Return to text 5. In taking this action, the Board approved requests to establish the rate submitted by the boards of directors of the Federal Reserve Banks of Boston, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, and San Francisco. This vote also encompassed approval by the Board of Governors of the establishment of a 0.50 percent primary credit rate by the remaining Federal Reserve Banks, effective on the later of March 17, 2022, and the date such Reserve Banks inform the Secretary of the Board of such a request. (Secretary's note: Subsequently, the Federal Reserve Banks of New York and Dallas were informed of the Secretary of the Board's approval of their establishment of a primary credit rate of 0.50 percent, effective March 17, 2022.) 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 6. An error in this date was corrected on April 6, 2022, shortly after publication. Return to text

2022-03-16

Statement

Indicators of economic activity and employment have continued to strengthen. Job gains have been strong in recent months, and the unemployment rate has declined substantially. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures. The invasion of Ukraine by Russia is causing tremendous human and economic hardship. The implications for the U.S. economy are highly uncertain, but in the near term the invasion and related events are likely to create additional upward pressure on inflation and weigh on economic activity. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With appropriate firming in the stance of monetary policy, the Committee expects inflation to return to its 2 percent objective and the labor market to remain strong. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 1/4 to 1/2 percent and anticipates that ongoing increases in the target range will be appropriate. In addition, the Committee expects to begin reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities at a coming meeting. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments. Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Esther L. George; Patrick Harker; Loretta J. Mester; and Christopher J. Waller. Voting against this action was James Bullard, who preferred at this meeting to raise the target range for the federal funds rate by 0.5 percentage point to 1/2 to 3/4 percent. Patrick Harker voted as an alternate member at this meeting. Implementation Note issued March 16, 2022

2022-01-26

Statement

Indicators of economic activity and employment have continued to strengthen. The sectors most adversely affected by the pandemic have improved in recent months but are being affected by the recent sharp rise in COVID-19 cases. Job gains have been solid in recent months, and the unemployment rate has declined substantially. Supply and demand imbalances related to the pandemic and the reopening of the economy have continued to contribute to elevated levels of inflation. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses. The path of the economy continues to depend on the course of the virus. Progress on vaccinations and an easing of supply constraints are expected to support continued gains in economic activity and employment as well as a reduction in inflation. Risks to the economic outlook remain, including from new variants of the virus. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent. With inflation well above 2 percent and a strong labor market, the Committee expects it will soon be appropriate to raise the target range for the federal funds rate. The Committee decided to continue to reduce the monthly pace of its net asset purchases, bringing them to an end in early March. Beginning in February, the Committee will increase its holdings of Treasury securities by at least $20 billion per month and of agency mortgage‑backed securities by at least $10 billion per month. The Federal Reserve's ongoing purchases and holdings of securities will continue to foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments. Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; James Bullard; Esther L. George; Patrick Harker; Loretta J. Mester; and Christopher J. Waller. Patrick Harker voted as an alternate member at this meeting. Implementation Note issued January 26, 2022

2022-02-16

Minute

Minutes of the Federal Open Market Committee January 25-26, 2022 A joint meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve System was held by videoconference on Tuesday, January 25, 2022, at 9:00 a.m. and continued on Wednesday, January 26, 2022, at 9:00 a.m.1 Attendance Jerome H. Powell, Chair John C. Williams, Vice Chair Michelle W. Bowman Lael Brainard James Bullard Esther L. George Loretta J. Mester Christopher J. Waller Meredith Black, Charles L. Evans, Patrick Harker, Naureen Hassan, and Neel Kashkari, Alternate Members of the Committee Thomas I. Barkin, Raphael W. Bostic, and Mary C. Daly, Presidents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco, respectively Kenneth C. Montgomery, Interim President of the Federal Reserve Bank of Boston James A. Clouse, Secretary Matthew M. Luecke, Deputy Secretary Brian J. Bonis, Assistant Secretary Michelle A. Smith, Assistant Secretary Mark E. Van Der Weide, General Counsel Michael Held, Deputy General Counsel Trevor A. Reeve, Economist Stacey Tevlin, Economist Beth Anne Wilson, Economist Shaghil Ahmed, Brian M. Doyle, Carlos Garriga, Joseph W. Gruber, David E. Lebow, Ellis W. Tallman, Geoffrey Tootell, and William Wascher, Associate Economists Lorie K. Logan, Manager, System Open Market Account Patricia Zobel, Deputy Manager, System Open Market Account Ann E. Misback, Secretary, Office of the Secretary, Board Matthew J. Eichner,2 Director, Division of Reserve Bank Operations and Payment Systems, Board; Michael S. Gibson, Director, Division of Supervision and Regulation, Board Daniel M. Covitz, Deputy Director, Division of Research and Statistics, Board; Sally Davies, Deputy Director, Division of International Finance, Board; Rochelle M. Edge, Deputy Director, Division of Monetary Affairs, Board; Michael T. Kiley, Deputy Director, Division of Financial Stability, Board Jon Faust and Joshua Gallin, Senior Special Advisers to the Chair, Division of Board Members, Board Antulio N. Bomfim, Jane E. Ihrig, Kurt F. Lewis, and Nitish R. Sinha, Special Advisers to the Board, Division of Board Members, Board Linda Robertson, Assistant to the Board, Division of Board Members, Board Michael G. Palumbo, Senior Associate Director, Division of Research and Statistics, Board Stephanie E. Curcuru,2 Associate Director, Division of International Finance, Board; Eric C. Engstrom and Christopher J. Gust, Associate Directors, Division of Monetary Affairs, Board; Glenn Follette, Associate Director, Division of Research and Statistics, Board Erik A. Heitfield, Deputy Associate Director, Division of Research and Statistics, Board; Laura Lipscomb and Zeynep Senyuz,2 Deputy Associate Directors, Division of Monetary Affairs, Board Etienne Gagnon2 and Andrew Meldrum, Assistant Directors, Division of Monetary Affairs, Board Mark A. Carlson, Adviser, Division of Monetary Affairs, Board Alyssa G. Anderson and Valerie S. Hinojosa, Section Chiefs, Division of Monetary Affairs, Board; Penelope A. Beattie,3 Section Chief, Office of the Secretary, Board Alyssa Arute, Manager, Division of Reserve Bank Operations and Payment Systems, Board Camille Bryan, Senior Project Manager, Division of Monetary Affairs, Board David H. Small, Project Manager, Division of Monetary Affairs, Board Damjan Pfajfar, Mary Tian, and Randall A. Williams, Group Managers, Division of Monetary Affairs, Board David B. Cashin, Principal Economist, Division of Research and Statistics, Board; Erin E. Ferris, Kyungmin Kim, and Bernd Schlusche,2 Principal Economists, Division of Monetary Affairs, Board; Colin J. Hottman, Principal Economist, Division of International Finance, Board David Na,2 Senior Financial Institution and Policy Analyst, Division of Monetary Affairs, Board Isaiah C. Ahn, Information Management Analyst, Division of Monetary Affairs, Board David Altig, Kartik B. Athreya, and Sylvain Leduc, Executive Vice Presidents, Federal Reserve Banks of Atlanta, Richmond, and San Francisco, respectively Anne Baum, John Clark,2 Spencer Krane, Paolo A. Pesenti, Julie Ann Remache,2 Keith Sill, and Mark L.J. Wright, Senior Vice Presidents, Federal Reserve Banks of New York, New York, Chicago, New York, New York, Philadelphia, and Minneapolis, respectively Deborah Leonard2 and Rania Perry,2 Vice Presidents, Federal Reserve Bank of New York James Dolmas, Economic Policy Adviser and Senior Economist, Federal Reserve Bank of Dallas Radhika Mithal,2 Markets Officer, Federal Reserve Bank of New York Annual Organizational Matters4 The agenda for this meeting reported that advices of the election of the following members and alternate members of the Federal Open Market Committee for a term beginning January 25, 2022, were received and that these individuals executed their oaths of office. The elected members and alternate members were as follows: John C. Williams, President of the Federal Reserve Bank of New York, with Naureen Hassan, First Vice President of the Federal Reserve Bank of New York, as alternate 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 Meredith Black, Interim 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 2023: Jerome H. Powell Chair John C. Williams Vice Chair James A. Clouse Secretary Matthew M. Luecke Deputy Secretary Brian J. Bonis 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 Trevor Reeve Economist Stacey Tevlin Economist Beth Anne Wilson Economist     Shaghil Ahmed Brian M. Doyle Carlos Garriga Joseph W. Gruber Beverly Hirtle David E. Lebow Ellis W. Tallman Geoffrey Tootell William Wascher Associate Economists By unanimous vote, the Committee selected the Federal Reserve Bank of New York to execute transactions for the System Open Market Account (SOMA). By unanimous vote, the Committee selected Lorie K. Logan and Patricia Zobel 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 being satisfactory to the Federal Reserve Bank of New York. Secretary's note: The Federal Reserve Bank of New York subsequently sent advice that the manager and deputy manager selections indicated previously were satisfactory. By unanimous vote, the Committee voted to reaffirm without revision the Authorization for Domestic Open Market Operations, as shown below. By unanimous vote, the Committee voted to reaffirm without revision the Authorization for Foreign Currency Operations and to amend the Foreign Currency Directive to remove references to the temporary dollar liquidity swap arrangements with foreign central banks, 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 25, 2022) 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, 1.B, 1.C and 1.D 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: i. 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 ii. Undertake repo transactions in Eligible Securities with Foreign Accounts; 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 Chair 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 Chair, whenever feasible, will consult with the Committee before making any instruction under this paragraph 5. AUTHORIZATION FOR FOREIGN CURRENCY OPERATIONS (As reaffirmed effective January 25, 2022) 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 understanding 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, temporary 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 and temporary dollar liquidity swap arrangements all drawings must be approved in advance by the Chair. The Chair 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 Chair. 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 and temporary 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 and temporary 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 Chair. The Chair 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; iii. 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 Chair: 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 Chair if the Chair believes that consultation with the Subcommittee is not feasible in the time available. The Chair shall promptly report to the Subcommittee any action approved by the Chair pursuant to this paragraph. 12. The Committee authorizes the Chair, 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 Chair, whenever feasible, will consult with the Committee before making any instruction under this paragraph. FOREIGN CURRENCY DIRECTIVE (As amended effective January 25, 2022) 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. The Committee voted unanimously to approve with minor revisions the Standing Repurchase Agreement Facility Resolution, as shown below. All but one member of the Committee voted to approve with minor revisions the Standing FIMA Repurchase Agreement Resolution. Governor Bowman abstained from the vote on the Standing FIMA Repurchase Agreement Resolution. The resolutions were modified to remove references to a specific facility rate to allow for normal adjustment in the facility rates when the Committee makes changes to the target range for the federal funds rate. STANDING REPURCHASE AGREEMENT FACILITY RESOLUTION (As amended effective January 25, 2022) The Federal Open Market Committee (the "Committee") authorizes and directs the Open Market Desk at the Federal Reserve Bank of New York (the "Selected Bank"), for the System Open Market Account ("SOMA"), to conduct operations in which it offers to purchase securities, subject to an agreement to resell ("repurchase agreement transactions"). The repurchase agreement transactions hereby authorized and directed shall (i) include only U.S. Treasury securities, agency debt securities, and agency mortgage-backed securities; (ii) be conducted as open market operations with primary dealers and depository institutions as participants; (iii) be conducted with a minimum bid rate set at a level directed by the Committee; (iv) be offered on an overnight basis (except that the Open Market Desk at the Selected Bank may extend the term for longer than an overnight term to accommodate weekend, holiday, and similar trading conventions); and (v) be subject to an aggregate operation limit of $500 billion. The aggregate operation limit can be temporarily increased at the discretion of the Chair. These operations shall be conducted by the Open Market Desk at the Selected Bank until otherwise directed by the Committee. STANDING FIMA REPURCHASE AGREEMENT RESOLUTION (As amended effective January 25, 2022) The Federal Open Market Committee (the "Committee") authorizes and directs the Open Market Desk at the Federal Reserve Bank of New York (the "Selected Bank"), for the System Open Market Account ("SOMA"), to offer to purchase U.S. Treasury securities subject to an agreement to resell ("repurchase agreement transactions") with foreign central bank and international accounts maintained at a Federal Reserve Bank (the "Foreign Accounts"). The repurchase agreement transactions hereby authorized and directed shall (i) include only U.S. Treasury securities; (ii) be conducted with Foreign Accounts approved in advance by the Foreign Currency Subcommittee (the "Subcommittee"); (iii) be conducted at an offering rate equal to the minimum bid rate for the standing repurchase agreement facility unless the Subcommittee establishes a different offering rate; (iv) be offered on an overnight basis (except that the Open Market Desk at the Selected Bank may extend the term for longer than an overnight term to accommodate weekend, holiday, and similar trading conventions); and (v) be subject to a per-counterparty limit of $60 billion per day. The Subcommittee may approve changes in the offering rate, the maturity of the transactions, eligible Foreign Accounts counterparties (either by approving or removing account access), and the counterparty limit; and the Subcommittee shall keep the Committee informed of any such changes. These transactions shall be undertaken by the Open Market Desk at the Selected Bank until otherwise directed by the Committee. The Open Market Desk at the Selected Bank will also report at least annually to the Committee on facility usage and the list of approved account holders. Regarding the tough and comprehensive ethics rules for senior officials that were announced in October, the Chair indicated that staff were working through comments received from policymakers and were aiming to circulate a new draft soon. Noting the urgency in bringing the new policy to completion, the Chair proposed that the Committee vote on a final draft as soon in the intermeeting period as possible. In the Committee's annual reconsideration of the Statement on Longer-Run Goals and Monetary Policy Strategy, all participants supported the statement as written, and the Committee voted unanimously to reaffirm without revision. In discussing the statement, the Chair noted that, consistent with previous communications, a formal framework review would commence in 2024 and conclude in 2025. That timing would allow perspectives on recent events to inform considerations of potential revisions to the framework. STATEMENT ON LONGER-RUN GOALS AND MONETARY POLICY STRATEGY (As reaffirmed effective January 25, 2022) 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. Employment, inflation, and long-term interest rates fluctuate over time in response to economic and financial disturbances. Monetary policy plays an important role in stabilizing the economy in response to these disturbances. The Committee's primary means of adjusting the stance of monetary policy is through changes in the target range for the federal funds rate. The Committee judges that the level of the federal funds rate consistent with maximum employment and price stability over the longer run has declined relative to its historical average. Therefore, the federal funds rate is likely to be constrained by its effective lower bound more frequently than in the past. Owing in part to the proximity of interest rates to the effective lower bound, the Committee judges that downward risks to employment and inflation have increased. The Committee is prepared to use its full range of tools to achieve its maximum employment and price stability goals. The maximum level of employment is a broad-based and inclusive goal that is not directly measurable and changes over time owing largely to nonmonetary factors that affect the structure and dynamics of the labor market. 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 shortfalls of employment from its maximum level, recognizing that such assessments are necessarily uncertain and subject to revision. The Committee considers a wide range of indicators in making these assessments. 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 judges that longer-term inflation expectations that are well anchored at 2 percent foster price stability and moderate long-term interest rates and enhance the Committee's ability to promote maximum employment in the face of significant economic disturbances. In order to anchor longer-term inflation expectations at this level, the Committee seeks to achieve inflation that averages 2 percent over time, and therefore judges that, following periods when inflation has been running persistently below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time. Monetary policy actions tend to influence economic activity, employment, and prices with a lag. In setting monetary policy, the Committee seeks over time to mitigate shortfalls of employment from the Committee's assessment of its maximum level and deviations of inflation from its longer-run goal. Moreover, sustainably achieving maximum employment and price stability depends on a stable financial system. 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 Committee's employment and inflation objectives are generally complementary. However, under circumstances in which the Committee judges that the objectives are not complementary, it takes into account the employment shortfalls and inflation 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 review these principles and to make adjustments as appropriate at its annual organizational meeting each January, and to undertake roughly every five years a thorough public review of its monetary policy strategy, tools, and communication practices. Financial Developments and Open Market Operations The manager turned first to a review of domestic financial market developments over the intermeeting period. Treasury yields rose across the curve, led by higher real yields. Expectations for tighter monetary policy ahead, as well as an easing of COVID-related concerns, were cited as contributing to the increase in yields. The S&P 500 index declined around 5 percent, with sharp moves toward the end of the period, reportedly prompted by concerns about the implications of a tighter path of monetary policy and rising geopolitical risks. Regarding the monetary policy outlook, with data showing continuing tightening of labor market conditions and elevated inflationary pressures, policymaker communications were perceived as pointing to an earlier and faster removal of accommodation than market participants had previously expected. Against this backdrop, respondents to the Open Market Desk's surveys of primary dealers and market participants almost uniformly projected that the Federal Reserve's net asset purchases would end by mid-March. The median survey projection for the commencement of balance sheet runoff shifted into the third quarter of this year, roughly a year and a half sooner than in the December surveys. Most survey respondents also expected the portfolio to decline at a significantly faster pace than they did in December. Expectations for the path of the federal funds rate shifted toward earlier rate increases, and interest rate futures priced in an increase in the target range for the federal funds rate at the March FOMC meeting. On average, respondents to the Desk surveys assigned a roughly 70 percent probability to an increase in the target range in March. The expected path of the federal funds rate in the Desk surveys and derived from interest rate futures also steepened over the period. The median survey projection for the most likely level of the target range at the end of 2024 was about 2 percent, similar to December. Nonetheless, survey respondents attached significant probability to outcomes in which the target range moved up more than indicated by the projected modal path. Changing views about the likely path of the Federal Reserve's balance sheet following the release of the December FOMC minutes seemed to affect longer-term yields. Far forward real yields moved higher over the period, with much of the increase following the release of the minutes for the December FOMC meeting. In addition, agency mortgage-backed securities (MBS) spreads widened notably after having been stable at low levels for the past year, reportedly driven by expectations for an earlier and faster runoff of agency MBS than had been expected. The manager turned next to a discussion of international financial market developments. Sovereign yields increased across advanced foreign economies (AFEs), reportedly driven by receding concerns about the Omicron variant, elevated inflation readings, and, relatedly, expectations that central banks would remove policy accommodation sooner than had been expected. Several central banks concluded their net asset purchases late last year, and more were expected to do so this year. On the outlook for policy rates, several central banks had either already increased their policy rates or were expected to do so later this year. The manager provided an update on issues related to monetary policy implementation. Reductions in the pace of the Committee's net asset purchases had proceeded smoothly to date and functioning in Treasury and agency MBS markets remained stable. Regarding the potential for the Committee to reduce System Open Market Account (SOMA) holdings in the future, market participants generally anticipated that SOMA redemptions could proceed smoothly at a somewhat faster pace than during the previous period of balance sheet reduction from 2017 to 2019. However, some also noted that SOMA redemptions would require significant adjustments to private-sector balance sheets, as investors absorb the net increase in Treasury and agency MBS issuance to the private sector and money markets transition to lower levels of liquidity, and that these adjustments could take some time. The manager discussed expectations for the evolution of the Federal Reserve's administered rates in connection with a potential future change in the target range for the federal funds rate. The Desk survey responses suggested expectations for administered rates to be raised by the same increment as the target range for the federal funds rate. The manager noted that the current setting of administered rates relative to the target range had been working well and anticipated that it could continue to support effective policy implementation following any increase in the target range in coming months, al­though adjustments could be warranted over time. By unanimous vote, the Committee ratified the Desk's domestic transactions over the intermeeting period. No intervention operations occurred in foreign currencies for the System's account during the intermeeting period. Principles for Reducing the Size of the Balance Sheet Participants continued their discussion of topics associated with potential adjustments in the Committee's policy tools that may be appropriate to support the achievement of sustained strong labor market conditions and a return of inflation to levels consistent with the Committee's longer-run 2 percent objective under a wide range of circumstances. At this meeting, participants discussed high-level principles that could be released to the public to describe the Committee's approach for reducing the size of the Federal Reserve's balance sheet. They agreed that the principles would address, at a high level, the sequence of adjustments in the interest rate and balance sheet tools to reduce policy accommodation, the Committee's approach to balance sheet runoff, and its intentions for the longer-run size and composition of the balance sheet. The participants' discussion was preceded by a staff presentation that reviewed key considerations raised by participants at the December FOMC meeting and examined how the proposed set of principles, which reflected those considerations, compared with the Policy Normalization Principles and Plans issued in 2014. In their discussion, participants reaffirmed that changes in the target range for the federal funds rate are the Committee's primary means for adjusting the stance of monetary policy, as noted in the Committee's Statement on Longer-Run Goals and Monetary Policy Strategy. Participants judged that the timing and pace of balance sheet reduction would be determined so as to promote the Committee's maximum-employment and price-stability goals and that it would be appropriate to begin the process of reducing the size of the balance sheet after the process of increasing the target range for the federal funds rate has begun. While participants agreed that details on the timing and pace of balance sheet runoff would be determined at upcoming meetings, participants generally noted that current economic and financial conditions would likely warrant a faster pace of balance sheet runoff than during the period of balance sheet reduction from 2017 to 2019. Participants observed that, in light of the current high level of the Federal Reserve's securities holdings, a significant reduction in the size of the balance sheet would likely be appropriate. Participants noted that the level of securities holdings consistent with implementing monetary policy efficiently and effectively in an ample reserves regime was uncertain and probably would remain so. Consequently, market conditions would have to be monitored closely to determine the appropriate longer-run level of reserves and the size of the balance sheet. Participants agreed that the Committee should reduce the Federal Reserve's securities holdings over time in a predictable manner primarily by adjusting the amounts reinvested of principal payments received from securities held in the SOMA. They also agreed that the SOMA should hold primarily Treasury securities in the longer run. Regarding these two principles, many participants commented that sales of agency MBS or reinvesting some portion of principal payments received from agency MBS into Treasury securities may be appropriate at some point in the future to enable suitable progress toward a longer-run SOMA portfolio composition consisting primarily of Treasury securities. Participants agreed that it was appropriate at this time for the Committee to publish its high-level principles for reducing the size of the Federal Reserve's balance sheet. They also agreed that it was important for the Committee to retain the flexibility to adjust any of the details of its approach in light of changing economic and financial conditions. Participants noted that the principles would serve as an important guide in future deliberations on balance sheet reduction. While no decisions regarding specific details for reducing the size of the balance sheet were made at this meeting, participants agreed to continue their discussions at upcoming meetings. Following the conclusion of the discussion, all participants supported the proposed principles for reducing the size of the balance sheet. The Committee voted unanimously to adopt the Principles for Reducing the Size of the Federal Reserve's Balance Sheet, as shown below. PRINCIPLES FOR REDUCING THE SIZE OF THE FEDERAL RESERVE'S BALANCE SHEET (As adopted effective January 25, 2022) The Federal Open Market Committee agreed that it is appropriate at this time to provide information regarding its planned approach for significantly reducing the size of the Federal Reserve's balance sheet. All participants agreed on the following elements: The Committee views changes in the target range for the federal funds rate as its primary means of adjusting the stance of monetary policy. The Committee will determine the timing and pace of reducing the size of the Federal Reserve's balance sheet so as to promote its maximum employment and price stability goals. The Committee expects that reducing the size of the Federal Reserve's balance sheet will commence after the process of increasing the target range for the federal funds rate has begun. The Committee intends to reduce the Federal Reserve's securities holdings over time in a predictable manner primarily by adjusting the amounts reinvested of principal payments received from securities held in the System Open Market Account (SOMA). Over time, the Committee intends to maintain securities holdings in amounts needed to implement monetary policy efficiently and effectively in its ample reserves regime. In the longer run, the Committee intends to hold primarily Treasury securities in the SOMA, thereby minimizing the effect of Federal Reserve holdings on the allocation of credit across sectors of the economy. The Committee is prepared to adjust any of the details of its approach to reducing the size of the balance sheet in light of economic and financial developments. Staff Review of the Economic Situation The information available at the time of the January 25–26 meeting suggested that U.S. real gross domestic product (GDP) growth had picked up in the fourth quarter after slowing in the third quarter. Labor market conditions improved further in December, and indicators of labor compensation continued to show robust increases. Consumer price inflation through November—as measured by the 12-month percentage change in the price index for personal consumption expenditures (PCE)—remained elevated. Total nonfarm payroll employment posted a moderate gain in December. The unemployment rate declined from 4.2 percent in November to 3.9 percent in December. The unemployment rate for African Americans moved higher, and the Hispanic unemployment rate declined; both rates remained well above the national average. The labor force participation rate was unchanged in December, and the employment-to-population ratio moved up. The private-sector job openings rate, as measured by the Job Openings and Labor Turnover Survey, moved down in November but remained well above pre-pandemic levels; the quits rate was also elevated. Weekly estimates of private-sector payrolls, constructed by the Board's staff using data provided by the payroll processor ADP that were available through the first half of January, pointed to a slower pace of private employment gains relative to December. Average hourly earnings rose at an annual rate of 6.2 percent over the last three months of the year; although wage increases were widespread across industries, they were particularly notable in the leisure and hospitality sector as well as the transportation and warehousing sector. Inflation readings remained high, and various indicators suggested that inflationary pressures had broadened over the second half of 2021. Total PCE price inflation was 5.7 percent over the 12 months ending in November, and core PCE price inflation, which excludes changes in consumer energy prices and many consumer food prices, was 4.7 percent over the same period. The trimmed mean measure of 12-month PCE inflation constructed by the Federal Reserve Bank of Dallas was 2.8 percent in November, 1 percentage point higher than its year-earlier rate of increase. In December, the 12-month change in the consumer price index (CPI) was 7.0 percent, while core CPI inflation was 5.5 percent over the same period. The staff's common inflation expectations index, which combines information from many indicators of inflation expectations and inflation compensation, had largely leveled off over the fall and was close to its 2014 average. Real PCE was unchanged in November, and available indicators—including the components of the nominal retail sales data used to estimate PCE—pointed to a decline in December, possibly reflecting the sharp rise in COVID-19 cases in the second half of that month as well as some holiday sales having been pulled forward to earlier months. Housing demand remained strong, and available indicators suggested that residential investment increased in the fourth quarter. However, shortages of construction materials, buildable lots, and other inputs continued to weigh on activity in this sector. Business fixed investment appeared to post only a small gain in the fourth quarter, as investment in transportation equipment was held back by supply bottlenecks and limited supplies of construction materials restrained nonresidential structures investment. Manufacturing output moved down in December after advancing strongly in October and November. Motor vehicle assemblies reversed some of their November increase; in addition, manufacturing production outside of motor vehicles ticked lower. Total real government purchases appeared to have fallen in the fourth quarter. Al­though available data suggested that real federal purchases rose, indicators of real state and local government purchases pointed to a decline in the fourth quarter despite state and local governments' extremely strong budget positions and the widespread return to in-person schooling last fall. The U.S. international trade deficit widened at the end of last year. Imports of goods rose sharply in November and December, led by increases in consumer goods, while exports of goods were little changed over the two months, on net, after surging in October. Shipping congestion and other bottlenecks continued to restrain the level of trade in goods. Meanwhile, services exports jumped in November, reflecting a sizable increase in exports of travel services after the reopening of U.S. borders to vaccinated foreign travelers early in the month. Even so, services trade was very low relative to pre-pandemic norms, largely because the level of international travel remained depressed. Incoming data suggested that foreign economic growth picked up in the fourth quarter of 2021 as economies in emerging Asia bounced back from lockdowns in the third quarter induced by the Delta variant of the COVID-19 virus. Purchasing managers indexes (PMIs) pointed to improved supplier delivery times, and foreign vehicle production rose notably, suggesting that supply bottlenecks continued to ease somewhat. However, the rapid spread of the Omicron variant led to renewed public health restrictions in several countries, particularly in China, and appeared to be weighing on activity at the start of the year. Inflation abroad continued to rise, mostly driven by further increases in retail energy prices, effects from supply bottlenecks, and, in some emerging market economies (EMEs), by rising food prices. That said, input and output price components of PMIs provided some tentative signs that easing supply constraints have started to contribute to some letup in inflationary pressures in several foreign economies. Staff Review of the Financial Situation Over the intermeeting period, easing concerns around the economic effects of the Omicron variant and FOMC communications that were viewed as less accommodative than expected contributed to increases in Treasury yields. Long-term sovereign yields in AFEs also rose notably. Broad domestic equity indexes decreased markedly, and spreads of corporate bonds widened modestly. Short-term funding markets were stable, while participation in the overnight reverse repurchase agreement (ON RRP) facility increased further. Market-based financing conditions remained accommodative, and bank lending standards eased for most loan categories. The expected path for the federal funds rate over the next few years—implied by a straight read of overnight index swap quotes—rose notably since the December FOMC meeting, apparently reflecting less-accommodative-than-expected FOMC communications and an easing of concerns around the economic effects of the Omicron variant. Those factors also contributed to notable rises in 2-, 5-, and 10-year nominal Treasury yields. Inflation compensation implied by Treasury Inflation-Protected Securities rose slightly, on net. Broad equity indexes decreased markedly, on net, particularly in the latter part of the intermeeting period, as shifts in expectations about the pace of monetary policy tightening, global inflationary pressures, and escalating tensions between Russia and Ukraine weighed on equity prices. The one-month option-implied volatility on the S&P 500—the VIX—increased considerably, on net, to above the 90th percentile of its historical distribution. Spreads of investment- and speculative-grade corporate bonds widened modestly. Spreads of municipal bonds were roughly unchanged. Short-term funding markets were stable over the intermeeting period. The effective federal funds rate and the Secured Overnight Financing Rate generally held steady at 8 basis points and 5 basis points, respectively. Participation in ON RRP operations averaged $1.6 trillion, about $150 billion higher than during the previous intermeeting period, and reached an all-time high of $1.9 trillion at year-end. Government money market funds continued to receive investment inflows and accounted for the majority of ON RRP take-up. Over the intermeeting period, movements in foreign asset prices responded to waning concerns about the Omicron variant's potential economic effects and firming views that monetary accommodation in several advanced economies will be removed at a faster pace than previously expected. Some market participants also pointed to rising geopolitical tensions related to Russia as contributing to the moves. On net, AFE sovereign yields increased notably, most major foreign equity indexes declined moderately, and the broad dollar index decreased modestly. EME sovereign spreads widened, and capital flows into EME-dedicated bond funds remained slightly negative, while flows into EME equity funds turned positive. In domestic credit markets, financing conditions for nonfinancial firms remained broadly accommodative. Gross issuance of corporate bonds and leveraged loans remained solid but slowed somewhat in December, reflecting seasonal factors. Equity funding raised through initial public offerings continued at a strong pace in November and December, while equity issuance through special purpose acquisition companies remained muted relative to earlier in 2021. Commercial and industrial (C&I) loans expanded over the fourth quarter following more than a year of declines. In the January Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS), banks reported easier standards and stronger demand for C&I loans over the fourth quarter. The credit quality of large nonfinancial corporations remained strong over the intermeeting period. The volumes of nonfinancial corporate bond and leveraged loan upgrades exceeded those of downgrades in November and December. Trailing default rates on nonfinancial bonds edged down further to historical lows, while market indicators of future expected default rates remained benign and historically low. In the municipal bond market, financing conditions remained accommodative, as municipal bond yields stayed near historical lows. Issuance of municipal debt was strong in November and December. The credit quality of municipal debt remained stable, and the volume of defaults stayed low. Financing conditions for small businesses eased a bit over the intermeeting period. In the January SLOOS, small banks reported easing C&I loan standards to small firms over the fourth quarter. Loan originations to small businesses rose in November to near pre-pandemic levels. Banks in the January SLOOS reported stronger loan demand by small firms over the fourth quarter, though loan demand remained weak overall. Commercial real estate (CRE) loan balances on banks' books expanded at a solid pace in the fourth quarter, and, in the January SLOOS, banks reported an easing of standards on such loans amid stronger demand for most CRE loan categories. Issuance of non-agency commercial mortgage-backed securities (CMBS) surged in the fourth quarter, while issuance of agency CMBS slowed. Delinquency rates on mortgages in CMBS pools continued to fall but remained elevated for hotel and retail mortgages. In the residential mortgage market, financing conditions remained accommodative, particularly for borrowers who met standard conforming loan criteria. In the January SLOOS, banks reported easing lending standards for most mortgage categories in the fourth quarter. Mortgage rates increased over the intermeeting period in line with rates on agency MBS and 10-year Treasury securities but remained low by historical standards. The fraction of mortgage borrowers missing payments continued to decline through November. Financing conditions for consumer credit remained accommodative for most borrowers, especially those with higher credit scores. Lending standards for nonprime consumers in the credit card market continued to ease from the tight levels seen earlier in the pandemic. Banks reported in the January SLOOS that demand for credit card loans strengthened over the fourth quarter, while lending standards eased for auto loans amid a weakening in demand. With sales running low because of constrained supply, auto loan growth continued to slow in October and November from the more rapid pace recorded in the first half of the year. The staff provided an update on its assessments of the stability of the financial system and, on balance, characterized the financial vulnerabilities of the U.S. financial system as notable. The staff judged that asset valuation pressures remained elevated. In particular, the forward price-to-earnings ratio for the S&P 500 index stood at the upper end of its historical distribution; high-yield corporate bond spreads and the excess loan premium for leveraged loans remained at low levels; and house prices grew strongly, with price-to-rent ratios that were at elevated levels. The staff noted that the market capitalization of crypto-assets had grown significantly over the past decade and had experienced considerable volatility, including sizable declines since late last year. The staff changed its assessment of vulnerabilities associated with nonfinancial leverage from notable to moderate, noting that measures of business leverage had declined to pre-pandemic levels. Household delinquency rates remained relatively low, while household borrowing rose but was concentrated among prime borrowers. Vulnerabilities arising from financial leverage remained moderate. Risk-based capital ratios for banks remained above their pre-pandemic levels even after the resumption of shareholder payouts. In contrast, some available measures of hedge fund leverage continued to increase, and important data gaps continued to limit a full assessment of vulnerabilities posed by many nonbank financial institutions. Vulnerabilities associated with funding risks were characterized as moderate. Prime and tax-exempt money funds continued to have structural vulnerabilities that may lead investors to withdraw funds quickly in a stress situation and were a potential source of spillovers to other short-term funding markets. In response, the Securities and Exchange Commission proposed reforms in December 2021 to make these funds more resilient. Another vulnerability in funding markets was the significant growth in stablecoin arrangements over the past few years, which may increase challenges related to run risk and pose additional risks from their potential role as a means of payment. Staff Economic Outlook The near-term projection for U.S. economic activity prepared by the staff for the January FOMC meeting was weaker than in December, reflecting the sharp rise in COVID-19 infections caused by the rapid spread of the Omicron variant and an assessment that supply constraints would resolve more slowly than previously expected. Although real GDP still appeared to have posted a sizable gain in the fourth quarter of 2021, output growth was expected to slow noticeably in the first quarter of 2022 before picking up again later in the year as COVID-19 cases declined and supply issues continued to be resolved. With most of the boost to growth from the reopening of the economy and easing of supply constraints expected to occur in 2022, real GDP growth was projected to step down in 2023 and to be roughly in line with potential growth in 2023 and 2024. However, the level of real GDP was expected to remain well above potential throughout the projection period, and labor market conditions were expected to remain very tight. The staff's near-term projection for PCE price inflation was revised up relative to December in response to the anticipated slower resolution of supply issues. In particular, the staff continued to expect that monthly inflation rates would move lower as supply constraints eased, but the projected step-down was less pronounced than in the December forecast. Even so, an improvement in supply conditions and a decline in consumer energy prices were expected to slow PCE price inflation to 2.6 percent in 2022. With supply conditions expected to normalize further but with the labor market expected to remain very tight, PCE price inflation was projected to decline to 2 percent in 2023 before edging up to 2.1 percent in 2024. The staff continued to judge that the risks to the baseline projection for economic activity were skewed to the downside and that the risks to the inflation projection were skewed to the upside. In particular, the possibility that the economic effects of the virus would turn out to be larger than assumed in the baseline projection was viewed as an important source of downside risk to activity, while the possibility of more severe and more persistent supply issues was viewed as an additional downside risk to activity and as an upside risk to inflation. Participants' Views on Current Conditions and the Economic Outlook In their discussion of current economic conditions, participants noted that indicators of economic activity and employment had continued to strengthen. The sectors most adversely affected by the pandemic had improved in recent months but continued to be affected by the recent sharp rise in COVID-19 cases. Job gains had been solid in recent months, and the unemployment rate had declined substantially. Supply and demand imbalances related to the pandemic and the reopening of the economy had continued to contribute to elevated levels of inflation. Overall financial conditions had remained accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses. Participants judged that the path of the economy continued to depend on the course of the virus. Progress on vaccinations and an easing of supply constraints were expected to support continued gains in economic activity and employment as well as a reduction in inflation. Risks to the economic outlook remained, including from new variants of the virus. With regard to the economic outlook, participants agreed that the Omicron wave of the pandemic would weigh on economic activity in the first quarter of 2022. Indeed, sectors of the economy that are particularly sensitive to pandemic-related disruptions, including travel, leisure, and restaurants, were experiencing sharp reductions in activity as a result of the Omicron wave. Participants commented that, for many afflicted individuals and families, the virus continued to cause great hardship. Participants concurred that if the Omicron wave dissipated quickly, then economic activity would likely strengthen rapidly and economic growth for 2022 as a whole would be robust. Participants cited strong household balance sheets, rising wages, and effective adaptation to the pandemic by the business sector as factors supporting the outlook for strong growth this year. However, a number of participants noted that there was a risk that additional variants could weigh on economic activity this year. Participants noted that supply chain bottlenecks and labor shortages had continued to limit businesses' ability to meet strong demand, with these challenges exacerbated by the emergence and spread of the Omicron variant. In particular, the Omicron wave had led to much more widespread worker absences due to illness, virus exposure, or caregiving needs, which had curtailed activity in many sectors including airlines, trucking, and warehousing. Some participants reported that their business contacts were hopeful that the effects of the Omicron wave would be relatively short lived. Nevertheless, several participants reported that their contacts expected the ongoing labor shortages and other supply constraints to persist well after the acute effects of the Omicron wave had waned. Participants' contacts also reported continued widespread input cost pressures, which, amid generally robust demand, they reported having largely been able to pass on to their customers. A few participants commented that agricultural businesses were experiencing higher input costs, and those higher costs were putting strain on the finances of those firms even as they experienced generally strong demand for their products. In their discussion of the household sector, many participants noted that the onset of the Omicron wave had damped consumer demand, particularly for services, with much of the recent weakness concentrated in high-contact sectors such as travel, dining, and leisure and hospitality. Almost all of those participants anticipated that household demand would recover briskly if the Omicron wave subsided quickly, with spending supported by strong household balance sheets that were bolstered by high rates of saving earlier in the pandemic and ongoing robust gains in labor income. Participants noted that the labor market had made remarkable progress in recovering from the recession associated with the pandemic and, by most measures, was now very strong. Increases in employment had been solid in recent months; the unemployment rate had declined sharply, reaching 3.9 percent in December; job openings and quits were near record high levels; and nominal wages were rising at the fastest pace in decades. Several participants commented that the gains, on balance, over recent months had been broad based, with notable improvements for lower-wage workers as well as African Americans and Hispanics. Against this backdrop of a generally strong and improving labor market, many participants observed that the effects of the Omicron variant likely would only temporarily suppress the rate of labor market gains. The labor force participation rate had edged up further over the past few months, and some participants indicated that they expected it to continue to increase as the pandemic eased. A couple of participants noted that the participation rate remained lower than trend levels that account for changing demographics. Participants noted that their District contacts were reporting that labor demand remained historically strong and that labor supply remained constrained, resulting in a broad shortage of workers across many parts of the economy. As a result, there was widespread evidence that the labor market was very tight, including near-record rates of quits and job vacancies as well as nominal wage growth that was the highest recorded in decades. Several participants reported that District business contacts were either planning to implement or had implemented larger wage increases than those of recent years to retain current employees or attract new workers. A few participants also reported contacts having been forced to reduce operating hours or close businesses temporarily because of labor shortages. Acknowledging that the maximum level of employment consistent with price stability evolves over time, participants expressed a range of views regarding their assessments of current labor market conditions relative to the Committee's goal of maximum employment. Many participants commented that they viewed labor market conditions as already at or very close to those consistent with maximum employment, citing indications of strong labor markets including the low levels of unemployment rates, elevated wage pressures, near-record levels of job openings and quits, and a broad shortage of workers across many parts of the economy. A couple of participants commented that, in their view, the economy likely had not yet reached maximum employment, noting that, even for prime-age workers, labor force participation rates were still lower than those that prevailed before the pandemic or that a reallocation of labor across sectors could lead to higher levels of employment over time. Participants remarked that recent inflation readings had continued to significantly exceed the Committee's longer-run goal and elevated inflation was persisting longer than they had anticipated, reflecting supply and demand imbalances related to the pandemic and the reopening of the economy. However, some participants commented that elevated inflation had broadened beyond sectors most directly affected by those factors, bolstered in part by strong consumer demand. In addition, various participants cited other developments that had the potential to place additional upward pressure on inflation, including real wage growth in excess of productivity growth and increases in prices for housing services. Participants acknowledged that elevated inflation was a burden on U.S. households, particularly those who were least able to pay higher prices for essential goods and services. Some participants reported that their business contacts remained concerned about persistently high inflation and that they were adjusting their business practices to cope with higher input costs—for instance, by raising output prices or utilizing contracts that were contingent on their costs. Participants generally expected inflation to moderate over the course of the year as supply and demand imbalances ease and monetary policy accommodation is removed. Some participants remarked that longer-term measures of inflation expectations appeared to remain well anchored, which would support a return of inflation over time to levels consistent with the Committee's goals. In their discussion of risks to the outlook, participants agreed that uncertainty regarding the path of inflation was elevated and that risks to inflation were weighted to the upside. Participants cited several such risks, including the zero-tolerance COVID-19 policy in China that had the potential to further disrupt supply chains, the possibility of geopolitical turmoil that could cause increases in global energy prices or exacerbate global supply shortages, a worsening of the pandemic, persistent real wage growth in excess of productivity growth that could trigger inflationary wage–price dynamics, or the possibility that longer-term inflation expectations could become unanchored. A few participants pointed to the possibility that structural factors that had contributed to low inflation in the previous decade, such as technological changes, demographics, and a low real interest rate environment, may reemerge when the effects of the pandemic abate. Uncertainty about real activity was also seen as elevated. Various participants noted downside risks to the outlook, including a possible worsening of the pandemic, the potential for escalating geopolitical tensions, or a substantial tightening in financial conditions. Participants who commented on issues related to financial stability cited a number of factors that could represent potential vulnerabilities to the financial system. A few participants noted that asset valuations were elevated across a range of markets and raised the concern that a major realignment of asset prices could contribute to a future downturn. A couple of these participants judged that prolonged accommodative financial conditions could be contributing to financial imbalances. A couple of other participants cited reasons why elevated asset valuations might prove to be less of a threat to financial stability than in past reversals of asset prices. In particular, they noted the relatively healthy balance sheet positions of households and nonfinancial firms, the well-capitalized and liquid banking sector, and the fact that the rise in housing prices was not being fueled by a large increase in mortgage debt as suggesting that the financial system might prove resilient to shocks. Some participants saw emerging risks to financial stability associated with the rapid growth in crypto-assets and decentralized finance platforms. A few participants pointed to risks associated with highly leveraged, nonbank financial institutions or the potential vulnerability of prime money market funds to a sudden withdrawal of liquidity. In their consideration of the stance of monetary policy, participants agreed that it would be appropriate for the Committee to keep the target range for the federal funds rate at 0 to 1/4 percent in support of the Committee's objectives of maximum employment and inflation at the rate of 2 percent over the longer run. They also anticipated that it would soon be appropriate to raise the target range. In discussing why beginning to remove policy accommodation could soon be warranted, participants noted that inflation continued to run well above 2 percent and generally judged the risks to the outlook for inflation as tilted to the upside. Participants also assessed that the labor market was strong, having made substantial, broad-based progress over the past year. In light of elevated inflation pressures and the strong labor market, participants continued to judge that the Committee's net asset purchases should be concluded soon. Most participants preferred to continue to reduce the Committee's net asset purchases according to the schedule announced in December, bringing them to an end in early March. A couple of participants stated that they favored ending the Committee's net asset purchases sooner to send an even stronger signal that the Committee was committed to bringing down inflation. Participants discussed the implications of the economic outlook for the likely timing and pace for removing policy accommodation. Compared with conditions in 2015 when the Committee last began a process of removing monetary policy accommodation, participants viewed that there was a much stronger outlook for growth in economic activity, substantially higher inflation, and a notably tighter labor market. Consequently, most participants suggested that a faster pace of increases in the target range for the federal funds rate than in the post-2015 period would likely be warranted, should the economy evolve generally in line with the Committee's expectation. Even so, participants emphasized that the appropriate path of policy would depend on economic and financial developments and their implications for the outlook and the risks around the outlook, and they will be updating their assessments of the appropriate setting for the policy stance at each meeting. Participants noted that the removal of policy accommodation in current circumstances depended on the timing and pace of both increases in the target range of the federal funds rate and the reduction in the size of the Federal Reserve's balance sheet. In this context, a number of participants commented that conditions would likely warrant beginning to reduce the size of the balance sheet sometime later this year. In their discussion of the outlook for monetary policy, many participants noted the influence on financial conditions of the Committee's recent communications and viewed these communications as helpful in shifting private-sector expectations regarding the policy outlook into better alignment with the Committee's assessment of appropriate policy. Participants continued to stress that maintaining flexibility to implement appropriate policy adjustments on the basis of risk-management considerations should be a guiding principle in conducting policy in the current highly uncertain environment. Most participants noted that, if inflation does not move down as they expect, it would be appropriate for the Committee to remove policy accommodation at a faster pace than they currently anticipate. Some participants commented on the risk that financial conditions might tighten unduly in response to a rapid removal of policy accommodation. A few participants remarked that this risk could be mitigated through clear and effective communication of the Committee's assessments of the economic outlook, the risks around the outlook, and the appropriate path for monetary policy. Committee Policy Action In their discussion of monetary policy for this meeting, members agreed that indicators of economic activity and employment had continued to strengthen. They noted that the sectors most adversely affected by the pandemic had improved in recent months but were being affected by the recent sharp rise in COVID-19 cases. Job gains had been solid in recent months, and the unemployment rate had declined substantially. Members remarked that supply and demand imbalances related to the pandemic and the reopening of the economy had continued to contribute to elevated levels of inflation. Overall financial conditions remained accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses. Members also acknowledged that the path of the economy continued to depend on the course of the virus. Progress on vaccinations and an easing of supply constraints were expected to support continued gains in economic activity and employment as well as a reduction in inflation, but risks to the economic outlook remained, including from new variants of the virus. In order to support the Committee's maximum-employment and price-stability objectives, members agreed to keep the target range for the federal funds rate at 0 to 1/4 percent. With inflation well above 2 percent and a strong labor market, members expected that it would soon be appropriate to raise the target range for the federal funds rate. Members agreed to continue to reduce the monthly pace of the Committee's net asset purchases, bringing them to an end in early March. Specifically, beginning in February, the Committee would increase its holdings of Treasury securities by at least $20 billion per month and of agency MBS by at least $10 billion per month. Members noted that the Federal Reserve's ongoing asset purchases and holdings of securities would continue to foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses. Members agreed that, in assessing the appropriate stance of monetary policy, they would continue to monitor the implications of incoming information for the economic outlook and that they would be prepared to adjust the stance of monetary policy as appropriate in the event that risks emerged that could impede the attainment of the Committee's goals. They also concurred that, in assessing the appropriate stance of monetary policy, they would take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments. Members agreed to remove the opening sentence from previous postmeeting statements regarding using the Federal Reserve's full range of tools to support the U.S. economy. This language was adopted during the height of the financial market turmoil in March 2020, when the Committee began its asset purchase program, and members acknowledged that it was no longer warranted in light of the strong economy as well as the Committee's announcement that net asset purchases would end in early March. Members agreed that the postmeeting statement should be updated to reflect the Committee's expectation that it would soon be appropriate to raise the target range for the federal funds rate in light of elevated inflation pressures and the strong labor market. 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, for release at 2:00 p.m.: "Effective January 27, 2022, 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 0 to 1/4 percent. Complete the increase in System Open Market Account (SOMA) holdings of Treasury securities by $40 billion and of agency mortgage-backed securities (MBS) by $20 billion, as indicated in the monthly purchase plans released in mid-January. Increase the SOMA holdings of Treasury securities by $20 billion and of agency MBS by $10 billion, during the monthly purchase period beginning in mid-February. Increase holdings of Treasury securities and agency MBS by additional amounts as needed to sustain smooth functioning of markets for these securities. Conduct overnight repurchase agreement operations with a minimum bid rate of 0.25 percent and with an aggregate operation limit of $500 billion; the aggregate operation limit can be temporarily increased at the discretion of the Chair. Conduct overnight reverse repurchase agreement operations at an offering rate of 0.05 percent and with a per-counterparty limit of $160 billion per day; the per-counterparty limit can be temporarily increased at the discretion of the Chair. Roll over at auction all principal payments from the Federal Reserve's holdings of Treasury securities and reinvest all principal payments from the Federal Reserve's holdings of agency debt and agency MBS in agency MBS. Allow modest deviations from stated amounts for purchases and reinvestments, if needed for operational reasons. Engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions." The vote also encompassed approval of the statement below for release at 2:00 p.m.: "Indicators of economic activity and employment have continued to strengthen. The sectors most adversely affected by the pandemic have improved in recent months but are being affected by the recent sharp rise in COVID-19 cases. Job gains have been solid in recent months, and the unemployment rate has declined substantially. Supply and demand imbalances related to the pandemic and the reopening of the economy have continued to contribute to elevated levels of inflation. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses. The path of the economy continues to depend on the course of the virus. Progress on vaccinations and an easing of supply constraints are expected to support continued gains in economic activity and employment as well as a reduction in inflation. Risks to the economic outlook remain, including from new variants of the virus. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent. With inflation well above 2 percent and a strong labor market, the Committee expects it will soon be appropriate to raise the target range for the federal funds rate. The Committee decided to continue to reduce the monthly pace of its net asset purchases, bringing them to an end in early March. Beginning in February, the Committee will increase its holdings of Treasury securities by at least $20 billion per month and of agency mortgage‑backed securities by at least $10 billion per month. The Federal Reserve's ongoing purchases and holdings of securities will continue to foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments." Voting for this action: Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; James Bullard; Esther L. George; Patrick Harker; Loretta J. Mester; and Christopher J. Waller. Voting against this action: None. Patrick Harker voted as an alternate member at this meeting. Consistent with the Committee's decision to leave the target range for the federal funds rate unchanged, the Board voted unanimously to maintain the interest rate paid on reserve balances at 0.15 percent, effective January 27, 2022. The Board also voted unanimously to approve the establishment of the primary credit rate at the existing level of 0.25 percent. It was agreed that the next meeting of the Committee would be held on Tuesday–Wednesday, March 15–16, 2022. The meeting adjourned at 10:10 a.m. on January 26, 2022. Notation Vote By notation vote completed on January 4, 2022, the Committee unanimously approved the minutes of the Committee meeting held on December 14–15, 2021. _______________________ James A. Clouse Secretary 1. The Federal Open Market Committee is referenced as the "FOMC" and the "Committee" in these minutes; the Board of Governors of the Federal Reserve System is referenced as the "Board" in these minutes. Return to text 2. Attended through the discussion of principles for reducing the size of the balance sheet. Return to text 3. Attended Tuesday's session only. Return to text 4. Committee organizational documents are available at www.federalreserve.gov/monetarypolicy/rules_authorizations.htm. 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

2021-12-15

Statement

The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals. With progress on vaccinations and strong policy support, indicators of economic activity and employment have continued to strengthen. The sectors most adversely affected by the pandemic have improved in recent months but continue to be affected by COVID-19. Job gains have been solid in recent months, and the unemployment rate has declined substantially. Supply and demand imbalances related to the pandemic and the reopening of the economy have continued to contribute to elevated levels of inflation. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses. The path of the economy continues to depend on the course of the virus. Progress on vaccinations and an easing of supply constraints are expected to support continued gains in economic activity and employment as well as a reduction in inflation. Risks to the economic outlook remain, including from new variants of the virus. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent. With inflation having exceeded 2 percent for some time, the Committee expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee's assessments of maximum employment. In light of inflation developments and the further improvement in the labor market, the Committee decided to reduce the monthly pace of its net asset purchases by $20 billion for Treasury securities and $10 billion for agency mortgage-backed securities. Beginning in January, the Committee will increase its holdings of Treasury securities by at least $40 billion per month and of agency mortgage‑backed securities by at least $20 billion per month. The Committee judges that similar reductions in the pace of net asset purchases will likely be appropriate each month, but it is prepared to adjust the pace of purchases if warranted by changes in the economic outlook. The Federal Reserve's ongoing purchases and holdings of securities will continue to foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments. Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Thomas I. Barkin; Raphael W. Bostic; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Mary C. Daly; Charles L. Evans; Randal K. Quarles; and Christopher J. Waller. Implementation Note issued December 15, 2021

2022-01-05

Minute

Minutes of the Federal Open Market Committee December 14-15, 2021 A joint meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve System was held by videoconference on Tuesday, December 14, 2021, at 9:00 a.m. and continued on Wednesday, December 15, 2021, at 9:00 a.m.1 Attendance Jerome H. Powell, Chair John C. Williams, Vice Chair Thomas I. Barkin Raphael W. Bostic Michelle W. Bowman Lael Brainard Richard H. Clarida Mary C. Daly Charles L. Evans Randal K. Quarles Christopher J. Waller James Bullard, Esther L. George, Naureen Hassan, Loretta J. Mester, and Kenneth C. Montgomery, Alternate Members of the Committee Patrick Harker and Neel Kashkari, Presidents of the Federal Reserve Banks of Philadelphia and Minneapolis, respectively Meredith Black, Interim President of the Federal Reserve Bank of Dallas James A. Clouse, Secretary Matthew M. Luecke, Deputy Secretary Michelle A. Smith, Assistant Secretary Mark E. Van Der Weide, General Counsel Michael Held, Deputy General Counsel Trevor A. Reeve, Economist Stacey Tevlin, Economist Beth Anne Wilson, Economist Shaghil Ahmed, David Altig, Kartik B. Athreya, Brian M. Doyle,2 Rochelle M. Edge, Sylvain Leduc, Anna Paulson, and William Wascher, Associate Economists Lorie K. Logan, Manager, System Open Market Account Patricia Zobel, Deputy Manager, System Open Market Account Ann E. Misback, Secretary, Office of the Secretary, Board Matthew J. Eichner,3 Director, Division of Reserve Bank Operations and Payment Systems, Board; Michael S. Gibson, Director, Division of Supervision and Regulation, Board; Andreas Lehnert, Director, Division of Financial Stability, Board Sally Davies, Deputy Director, Division of International Finance, Board; Michael T. Kiley, Deputy Director, Division of Financial Stability, Board Jon Faust and Joshua Gallin, Senior Special Advisers to the Chair, Division of Board Members, Board William F. Bassett, Antulio N. Bomfim, Burcu Duygan-Bump, Jane E. Ihrig, Kurt F. Lewis, Chiara Scotti, and Nitish R. Sinha, Special Advisers to the Board, Division of Board Members, Board Linda Robertson, Assistant to the Board, Division of Board Members, Board David López-Salido and Min Wei, Senior Associate Directors, Division of Monetary Affairs, Board; John J. Stevens, Senior Associate Director, Division of Research and Statistics, Board; Paul R. Wood,4 Senior Associate Director, Division of International Finance, Board Edward Nelson and Annette Vissing-Jørgensen, Senior Advisers, Division of Monetary Affairs, Board; Jeremy B. Rudd, Senior Adviser, Division of Research and Statistics, Board Eric C. Engstrom and Elizabeth K. Kiser, Associate Directors, Division of Research and Statistics, Board; Christopher J. Gust, Associate Director, Division of Monetary Affairs, Board; Jeffrey D. Walker,3 Associate Director, Division of Reserve Bank Operations and Payment Systems, Board Norman J. Morin, Deputy Associate Director, Division of Research and Statistics, Board; Zeynep Senyuz3 and Rebecca Zarutskie, Deputy Associate Directors, Division of Monetary Affairs, Board Brian J. Bonis, Etienne Gagnon,3 and Dan Li, Assistant Directors, Division of Monetary Affairs, Board; Paul Lengermann, Assistant Director, Division of Research and Statistics, Board Alyssa G. Anderson, Section Chief, Division of Monetary Affairs, Board; Penelope A. Beattie,2 Section Chief, Office of the Secretary, Board Camille Bryan, Senior Project Manager, Division of Monetary Affairs, Board David H. Small, Project Manager, Division of Monetary Affairs, Board Randall A. Williams, Group Manager, Division of Monetary Affairs, Board Jonathan E. Goldberg,3 Sebastian Infante, and Francisco Vazquez-Grande, Principal Economists, Division of Monetary Affairs, Board James Hebden3 and James M. Trevino,3 Lead Technology Analysts, Division of Monetary Affairs, Board Zina Bushra Saijid,3 Senior Financial Analyst, Division of International Finance, Board Isaiah C. Ahn, Information Management Analyst, Division of Monetary Affairs, Board Becky C. Bareford, First Vice President, Federal Reserve Bank of Richmond Joseph W. Gruber and Geoffrey Tootell, Executive Vice Presidents, Federal Reserve Banks of Kansas City and Boston, respectively David Andolfatto, Anne Baum, Todd E. Clark, Marc Giannoni, Mark L.J. Wright, and, Nathaniel Wuerffel,3 Senior Vice Presidents, Federal Reserve Banks of St. Louis, New York, Cleveland, Dallas, Minneapolis, and New York, respectively Roc Armenter, Kathryn B. Chen,3 Jonathan P. McCarthy, and Matthew D. Raskin,3 Vice Presidents, Federal Reserve Banks of Philadelphia, New York, New York, and New York, respectively Robert Lerman3 and Jamie Pfeifer,3 Assistant Vice Presidents, Federal Reserve Bank of New York Linsey Molloy3 Quantitative Policy and Analysis Manager, Federal Reserve Bank of New York Developments in Financial Markets and Open Market Operations The manager turned first to a discussion of financial market developments over the period. Financial markets responded to significant new information about the economy and monetary policy, as well as the emergence of the Omicron variant. Overall, domestic financial conditions tightened modestly but remained near historically accommodative levels. Expectations for an earlier reduction in Federal Reserve policy accommodation lifted short-term interest rates and supported the dollar. While prices of equities that are sensitive to COVID-19 risks declined significantly, the S&P 500 index was little changed. Over the period, market participants considered potential drivers of the notable decline in far-forward sovereign yields in the United States and other advanced economies. News of the Omicron variant reportedly drove safe-haven flows into sovereign bonds, pushing term premiums lower. The significant co-movement between far-forward yields and the share prices of firms most affected by social distancing was consistent with this interpretation. In addition to the effects of the pandemic on risk sentiment, some discussed the potential for COVID to become endemic, possibly resulting in modestly lower potential growth over time and a lower long-run neutral level of the federal funds rate. Regarding the outlook for U.S. monetary policy, expectations for a reduction in policy accommodation shifted forward notably. Respondents to the Open Market Desk's surveys of primary dealers and market participants broadly projected that the Committee would quicken the pace of reduction in the Federal Reserve's net purchases of Treasury securities and agency mortgage-backed securities (MBS), and the median respondent projected net asset purchases to end in March 2022. The median respondent's projected timing for the first increase in the target range for the federal funds rate also moved earlier from the first quarter of 2023 to June 2022. Although the Desk surveys and interest rate futures indicated expectations for earlier increases in the target range than at the time of the November meeting, expectations for the federal funds rate at longer horizons did not appear to have risen. In addition, the average of probability distributions for the federal funds rate reported in the Desk surveys suggested considerable uncertainty about the path of the federal funds rate, as survey respondents placed significant odds on a range of outcomes. With the likely timing of the beginning of the removal of policy accommodation considered closer, market participants began to discuss how balance sheet policy might feature in the Committee's plan for reducing accommodation when warranted, although expectations for the timing of the first decline in the balance sheet were diffuse. The manager turned next to a discussion of foreign developments. Foreign policy-sensitive rates were relatively steady over the intermeeting period, as several central banks in advanced foreign economies (AFEs) signaled somewhat cautious approaches to the removal of policy accommodation. Market participants continued to focus on risks related to economic and financial developments in China, though near-term concerns had moderated some following steps by Chinese authorities to ease policy. Turning to Desk operations and money markets, the manager noted that the Desk had reduced net purchases of Treasury securities and agency MBS in accordance with the directive issued at the November meeting. Overall, the transition to a slower pace of purchases had gone smoothly. In money markets, news that a path had emerged to a resolution of the debt ceiling impasse led yields on Treasury bills maturing in December and January to decline. Following the resolution, the Treasury was expected to increase bill issuance to restore the Treasury General Account to more normal levels. Market participants generally were not anticipating significant strains in money market conditions over year end. In discussing recently established backstop facilities, the manager noted continued progress towards expanding access to the standing repurchase agreement (repo) facility (SRF) to depository institutions; a number of institutions were currently in the process of becoming SRF counterparties. The Federal Reserve also continued to onboard new counterparties for the Foreign and International Monetary Authorities Repo Facility, and customers to the facility now represented the majority of foreign and international monetary authorities' custody holdings of Treasury securities at the Federal Reserve Bank of New York. The temporary dollar liquidity swap lines established in March 2020 were set to expire on December 31; the Committee's foreign currency directive would be updated at the January meeting to reflect the expiration of those lines. Finally, the manager provided an update on the transition away from LIBOR (London interbank offered rate). Overall, considerable progress had been made in the transition away from LIBOR to the Secured Overnight Financing Rate (SOFR) in cash and derivatives markets. However, a few key areas of work remained. 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. Discussion of Policy Normalization Considerations Participants began a discussion of a range of topics associated with the eventual normalization of the stance of monetary policy. The topics included the lessons learned from the Committee's previous experience with policy normalization, alternative approaches for removing policy accommodation, the timing and sequencing of policy normalization actions, and the appropriate size and composition of the Federal Reserve's balance sheet in the longer run. They agreed that their discussion at this meeting would be helpful background for the Committee's future decisions regarding policy normalization. No decisions regarding the Committee's approach were made at the meeting. The participants' discussion was preceded by staff presentations. The staff reviewed the previous normalization episode, including how the Committee commenced normalization by raising the target range for the federal funds rate and then reducing the Federal Reserve's asset holdings in a gradual and predictable manner, as well as the timing of these steps. The staff then discussed some of the channels through which policy rate and balance sheet actions affect financial conditions and alternative ways these tools could be deployed to reduce policy accommodation in support of the Committee's macroeconomic goals. The staff presentation included assessments of the implications for the yield curve of alternative settings of the two tools, the relative uncertainty of the effects of each tool, and the challenges associated with conducting and communicating policy with multiple tools. Finally, the staff reviewed the experience of foreign central banks with policy normalization. Participants judged that several aspects of the previous approach remained applicable in the current environment. In particular, they noted that the principles and plans underlying policy normalization were communicated in advance of any decisions or actions, which enhanced the public's understanding and thus the effectiveness of monetary policy during that period. At the same time, participants remarked that the previous experience highlighted the benefits of maintaining the flexibility to adjust the details of the approach to normalization in response to economic and financial developments. Participants generally emphasized that, as in the previous normalization episode and as expressed in the Committee's Statement on Longer-Run Goals and Monetary Policy Strategy, changes in the target range for the federal funds rate should be the Committee's primary means for adjusting the stance of monetary policy in support of its maximum-employment and price-stability objectives. This preference reflected the view that there is less uncertainty about the effects of changes in the federal funds rate on the economy than about the effects of changes in the Federal Reserve's balance sheet. Moreover, participants stated that the federal funds rate is a more familiar tool to the general public and therefore is advantageous for communication purposes. A few participants also noted that when the federal funds rate is away from the effective lower bound (ELB), the Committee could more nimbly change interest rate policy than balance sheet policy in response to economic conditions. Participants also discussed some key differences between current economic conditions and those that prevailed during the previous episode and remarked that the Committee would have to take these differences into account in removing policy accommodation. Most notably, participants remarked that the current economic outlook was much stronger, with higher inflation and a tighter labor market than at the beginning of the previous normalization episode. They also observed that the Federal Reserve's balance sheet was much larger, both in dollar terms and relative to nominal gross domestic product (GDP), than it was at the end of the third large-scale asset purchase program in late 2014. Participants noted that the current weighted average maturity of the Federal Reserve's Treasury holdings was shorter than at the beginning of the previous normalization episode. Some observed that, as a result, depending on the size of any caps put on the pace of runoff, the balance sheet could potentially shrink faster than last time if the Committee followed its previous approach in phasing out the reinvestment of maturing Treasury securities and principal payments on agency MBS. However, several participants raised concerns about vulnerabilities in the Treasury market and how those vulnerabilities could affect the appropriate pace of balance sheet normalization. A couple of participants noted that the SRF could help to mitigate such concerns. Participants also judged the Federal Reserve to be better positioned for normalization than in the past, as the ample-reserves framework and the Federal Reserve's current interest rate control tools, including interest on reserve balances and the overnight reverse repurchase agreement (ON RRP) facility, are in place and working well. Some participants judged that a significant amount of balance sheet shrinkage could be appropriate over the normalization process, especially in light of abundant liquidity in money markets and elevated usage of the ON RRP facility. Participants had an initial discussion about the appropriate conditions and timing for starting balance sheet runoff relative to raising the federal funds rate from the ELB. They also discussed how this relative timing might differ from the previous experience, in which balance sheet runoff commenced almost two years after policy rate liftoff when the normalization of the federal funds rate was judged to be well under way. Almost all participants agreed that it would likely be appropriate to initiate balance sheet runoff at some point after the first increase in the target range for the federal funds rate. However, participants judged that the appropriate timing of balance sheet runoff would likely be closer to that of policy rate liftoff than in the Committee's previous experience. They noted that current conditions included a stronger economic outlook, higher inflation, and a larger balance sheet and thus could warrant a potentially faster pace of policy rate normalization. They emphasized that the decision to initiate runoff would be data dependent. Some participants commented that removing policy accommodation by relying more on balance sheet reduction and less on increases in the policy rate could help limit yield curve flattening during policy normalization. A few of these participants raised concerns that a relatively flat yield curve could adversely affect interest margins for some financial intermediaries, which may raise financial stability risks. However, a couple of other participants referenced staff analysis and previous experience in noting that many factors can affect longer-dated yields, making it difficult to judge how a different policy mix would affect the shape of the yield curve. Many participants judged that the appropriate pace of balance sheet runoff would likely be faster than it was during the previous normalization episode. Many participants also judged that monthly caps on the runoff of securities could help ensure that the pace of runoff would be measured and predictable, particularly given the shorter weighted average maturity of the Federal Reserve's Treasury security holdings. Participants discussed considerations regarding the longer-run size of the balance sheet consistent with the efficient and effective implementation of monetary policy in an ample-reserves regime. Participants noted that the current size of the balance sheet is elevated and would likely remain so for some time after the process of normalizing the balance sheet was under way. Several participants noted that the level of reserves that would ultimately be needed to implement monetary policy effectively is uncertain, because the underlying demand for reserves by banks is time varying. In light of this uncertainty and the Committee's previous experience, a couple of participants expressed a preference to allow for a substantial buffer level of reserves to support interest rate control. Participants noted that it would be important to carefully monitor developments in money markets as the level of reserves fell to help inform the Committee's eventual assessment of the appropriate level for the balance sheet in the longer run. Some participants expressed the view that the SRF would help ensure interest rate control as the size of the balance sheet approached its longer-run level; several participants noted that the SRF could facilitate a faster runoff of the balance sheet than might otherwise be the case; several participants raised the possibility that the establishment of the SRF could reduce the demand for reserves in the longer run, suggesting that the longer-run balance sheet could be smaller than otherwise. Participants also discussed the composition of the Federal Reserve's asset holdings. Consistent with the previous normalization principles, some participants expressed a preference for the Federal Reserve's asset holdings to consist primarily of Treasury securities in the longer run. To achieve such a composition, some participants favored reinvesting principal from agency MBS into Treasury securities relatively soon or letting agency MBS run off the balance sheet faster than Treasury securities. Participants welcomed additional analysis from the staff on issues related to normalization and agreed that continuing their deliberations at upcoming meetings would be useful. Staff Review of the Economic Situation The information available at the time of the December 14–15 meeting suggested that U.S. real GDP growth was picking up in the fourth quarter after having slowed in the third quarter. Labor market conditions continued to improve in October and November, and measures of compensation had risen sharply so far this year. Consumer price inflation through October—as measured by the 12-month percentage change in the price index for personal consumption expenditures (PCE)—remained elevated. Total nonfarm payroll employment rose solidly, on average, in October and November, but the average gain was below that seen in recent quarters. The unemployment rate declined from 4.8 percent in September to 4.2 percent in November; the unemployment rates for African Americans and Hispanics also declined substantially over this period, but both rates remained well above the national average. The labor force participation rate and the employment-to-population ratio both moved up in November. Private-sector job openings, as measured by the Job Openings and Labor Turnover Survey, remained well above pre-pandemic levels; quits rates also stayed elevated despite edging down in October. The four-week moving average of initial claims for regular state unemployment insurance moved lower through early December and was at a level similar to that seen before the pandemic. Recent weekly estimates of private-sector payrolls constructed by the Board's staff using data provided by the payroll processor ADP pointed to a further increase in private employment through early December. Average hourly earnings rose 4.8 percent over the 12 months ending in November, with sizable wage gains observed across most sectors. Inflation readings remained high, and various indicators suggested that inflationary pressures had broadened in recent months. Total PCE price inflation was 5.0 percent over the 12 months ending in October, and core PCE price inflation, which excludes changes in consumer energy prices and many consumer food prices, was 4.1 percent over the same period. The trimmed mean measure of 12-month PCE inflation constructed by the Federal Reserve Bank of Dallas was 2.6 percent in October, an increase of 0.6 percentage point relative to two months earlier. In November, the 12-month change in the consumer price index (CPI) was 6.8 percent, while core CPI inflation was 4.9 percent over the same period. Survey-based measures of medium- and longer-run inflation expectations—including those from the University of Michigan Surveys of Consumers, the Federal Reserve Bank of New York's Survey of Consumer Expectations, and the Survey of Professional Forecasters—leveled off after having risen over the past year. Real PCE growth appeared to be picking up in the fourth quarter despite an upturn in COVID-19 cases, the waning effect of previous fiscal stimulus measures, lingering supply bottlenecks, and recent increases in consumer prices. In particular, real expenditures on retail goods rose solidly again in October, and outlays for services strengthened. In November, however, the components of the nominal retail sales data used to estimate PCE stepped down, possibly reflecting some holiday sales having been pulled forward to October. Light motor vehicle sales in October and November were below their third-quarter average (though they were up, on net, relative to September), as extremely low dealer inventories continued to constrain sales. Housing demand remained strong, but indicators of housing-sector activity, including housing starts and home sales, were generally little changed in October. Shortages of construction materials appeared to have hampered building completions, and there was limited availability of lots ready for construction. Growth in business fixed investment appeared to be rising at a slow pace again in the fourth quarter, as supply bottlenecks continued to weigh on business equipment spending, and the limited availability of construction materials was still holding back spending on nonresidential structures. Manufacturing output increased in October, and available indicators of production were consistent with another gain in November. Motor vehicle output moved up in October from its low level in September, as most assembly plants previously shuttered by semiconductor chip shortages had reopened. Outside of motor vehicles, manufacturing production also rose in October, partly reflecting the continued recovery from the effects of Hurricane Ida on the output of the petrochemical, refining, and plastic resins industries. Total real government purchases appeared to be rising moderately again in the fourth quarter. Federal defense spending rose, on net, in October and November relative to the third quarter. However, growth in state and local government purchases appeared to be moderating, as payrolls decreased in October and November, and nominal state and local construction expenditures in October were only a little above their third-quarter level. After reaching a record level in September, the U.S. international trade deficit narrowed in October, reflecting a large rebound in exports. The export rebound was broad based, with sizable increases in real exports of industrial supplies, capital goods, agricultural products, and consumer goods. Exports of automotive products also picked up after having been low in recent months. Real imports were little changed in October, with increases in imports of automotive products and consumer goods offset by a decline in industrial supplies. Shipping congestion and other bottlenecks continued to restrain overall trade in goods. Exports and imports of services edged up in October but remained low relative to pre-pandemic levels, largely because international travel was still depressed. Incoming data were consistent with a pickup in foreign economic growth in the current quarter, driven mainly by the reopening of Asian economies following lockdowns earlier in the year to contain a resurgence of COVID-19 cases. Strong gains in intra-Asian trade and solid readings of purchasing managers indexes also provided some early signs that production bottlenecks in the region were easing. In contrast, the introduction of new public health restrictions in Europe in response to a new wave of COVID-19 infections appeared to have restrained economic activity in some European economies. More recently, the detection and rapid spread of the Omicron variant prompted new international travel restrictions in many foreign economies. Inflation abroad continued to rise, mostly driven by further increases in retail energy and food prices. In addition, cost pressures from persistent bottlenecks in supply and transportation were reflected in record-high input and output price components of the purchasing managers indexes. Staff Review of the Financial Situation Over the intermeeting period, rising inflation and FOMC communications appeared to have put substantial upward pressure on shorter-dated Treasury yields. Even so, longer-dated Treasury yields declined, on net, in part reflecting renewed concerns among market participants about the course of the pandemic and associated safe-haven flows. Pandemic-related fears as well as concerns about inflation and tighter monetary policy apparently weighed on risky asset prices despite continued robust economic data. In domestic markets, broad equity price indexes were little changed, equity market volatility increased markedly, and spreads on corporate bonds widened moderately. In AFEs, sovereign yields declined, and major equity indexes edged down. Short-term funding markets were stable, while participation in the ON RRP facility increased further. Overall, financing conditions for businesses and households remained accommodative except for small businesses and nonprime borrowers. Market participants' views on the expected path for the federal funds rate—as implied by a straight read of overnight index swap quotes—suggested that they had pulled forward expected rate increases more into 2022 and 2023 compared with the timing they anticipated at the time of the previous FOMC meeting. The potential for a less accommodative policy stance over the next few years contributed to a notable rise in two- and five-year Treasury yields. On net, inflation compensation had declined moderately since the November FOMC meeting, as heightened concerns about the inflation outlook appeared to be outweighed by increases in the perceived prospects for tighter monetary policy and by fears about the course of the pandemic. Renewed concerns about the course of the pandemic also contributed to a decline in the 10-year Treasury yield, on net, over the intermeeting period despite stronger-than-anticipated data on economic activity and surprisingly high inflation. Broad equity indexes were little changed, on net, since the previous FOMC meeting, as strong economic data appeared to offset concerns regarding monetary policy, inflation, and the pandemic. Spreads of both investment- and speculative-grade corporate bonds widened moderately, and spreads of municipal bonds were little changed. Short-term funding markets were stable over the intermeeting period. Throughout the period, the effective federal funds rate remained at 8 basis points apart from a brief decrease on the November month-end, and the SOFR remained at 5 basis points. Participation in ON RRP operations increased slightly to an average of $1.5 trillion. Foreign asset prices fluctuated over the intermeeting period in response to central bank communications, headlines regarding COVID-related restrictions in some countries, and the spread of the Omicron variant. On net, AFE sovereign yields declined, major foreign equity indexes generally edged down, and the broad dollar index increased modestly. Emerging market economy (EME) sovereign spreads widened, and capital flows into EME-dedicated funds turned slightly negative in the second half of November, partly in response to concerns about the Omicron variant. A credit agency declared two heavily indebted Chinese property developers to be in "restricted default," hurting asset prices in China's real estate sector, but spillovers to broader financial markets were limited. In domestic credit markets, financing conditions for nonfinancial corporations remained accommodative. Gross corporate bond issuance by both investment- and speculative-grade borrowers was solid, and gross leveraged loan issuance was robust. Equity raised through traditional initial public offerings also was strong, but equity issuance through special purpose acquisition companies remained much weaker than earlier this year. In November, commercial and industrial (C&I) loans on banks' books grew for the first time since the beginning of the year. The share of Paycheck Protection Program loans in C&I loan balances at banks continued to fall in the third quarter amid ongoing forgiveness of those loans. The credit quality of large nonfinancial corporations remained solid amid strong earnings growth. S&P 500 firms' earnings reports for the third quarter again exceeded analyst expectations. In November, the volume of upgrades outpaced that of downgrades for both investment- and speculative-grade nonfinancial corporate bonds. Trailing default rates on corporate bonds and leveraged loans declined to close to historical lows in October and November, and market indicators of future default expectations remained benign. In the municipal bond market, issuance was robust in October and November, and financing conditions remained accommodative, supported by low yields. The credit quality of municipal debt continued to be stable, as the number of bond upgrades outpaced downgrades, and defaults were relatively low. Survey-based indicators suggested that credit supply conditions for small firms remained stable but tighter than before the pandemic. Small business loan originations ticked down in October, likely reflecting weak loan demand as suggested by survey-based and market indicators. Broad measures of small businesses' financial health improved slightly. Short- and long-term delinquency rates on loans to small businesses remained roughly in line with their pre-pandemic levels. Financing conditions in commercial real estate (CRE) markets remained accommodative. CRE loan balances on banks' books continued to expand at a solid pace in October and November. Issuance of commercial mortgage-backed securities (CMBS) continued to be strong, supported by spreads of agency and non-agency CMBS that were generally at or below pre-pandemic levels. Delinquency rates on mortgages in CMBS pools continued to fall but remained elevated for loans backed by hotel and retail properties. In the residential mortgage market, financing conditions stayed accommodative, particularly for borrowers who met standard conforming loan criteria. Conditions continued to ease for lower-score borrowers but remained somewhat tighter than before the pandemic. Mortgage originations for home purchases and refinances were robust through November amid historically low mortgage rates. The fraction of mortgage borrowers missing payments continued to decline through October. Financing conditions for consumer credit remained accommodative for most borrowers, especially those with higher credit scores. Conditions for nonprime consumers in the credit card market continued to ease from the tight levels seen earlier in the pandemic. Growth of credit card balances picked up in September and October, and bank credit data indicated a further increase in November. Growth of auto loans outstanding slowed through October because of tepid auto sales. Use of forbearance programs for credit card and auto loans remained at low levels in September and October. Staff Economic Outlook The projection for U.S. consumer price inflation prepared by the staff for the December FOMC meeting was higher than in the November projection. The near-term outlook was revised up, reflecting faster-than-expected increases both for a broad array of consumer prices and for wages. Supply chain bottlenecks were seen as continuing to put upward pressure on prices. As a result, the 12-month change in PCE prices was projected to move up further relative to October's pace and to end the year around 5 percent. Over the following two years, the boost to consumer prices caused by supply issues was expected to partly reverse, and energy prices were projected to decline. PCE price inflation was therefore expected to step down to 2.1 percent in 2022 and to remain there in 2023 and 2024. Projected inflation over this period was a little higher than in the previous projection, as supply bottlenecks were assumed to resolve more gradually and as the salience of this year's higher inflation readings was assumed to raise the underlying trend in inflation relative to the previous forecast. Longer-run inflation was still assumed to remain anchored at 2 percent. The staff's forecast for economic activity remained strong but was weaker, on net, than in the November projection. Although aggregate demand appeared to be rising sharply in the fourth quarter, the emerging surge in COVID-19 caseloads and hospitalizations was expected to weigh on economic activity in the winter months. In addition, supply bottlenecks were expected to resolve more gradually than previously assumed. All told, real GDP was expected to post a sizable gain over 2021 as a whole and to rise a bit less rapidly in 2022, with the pace of growth supported by the continued reopening of the economy and the resolution of supply constraints in most sectors. With the boost from these factors fading, real GDP growth was projected to step down noticeably in 2023. Given the higher forecast for inflation, the staff assumed monetary policy would be less accommodative in coming years and therefore revised down the medium-term forecast for GDP somewhat. Even so, the level of real GDP was expected to remain well above potential throughout the projection period, and labor market conditions were projected to remain very tight. The staff continued to judge that the risks to the baseline projection for economic activity were skewed to the downside and that the risks around the inflation projection were skewed to the upside. In particular, the possibility that COVID-19 cases could continue to rise steeply, especially if the Omicron variant proves to be vaccine resistant, was seen as an important source of downside risk to activity, while the possibility of more severe and persistent supply issues was viewed as an additional downside risk to activity and as an upside risk to inflation. Participants' Views on Current Economic Conditions and the Economic Outlook In conjunction with this FOMC meeting, participants submitted their projections of the most likely outcomes for real GDP growth, the unemployment rate, and inflation for each year from 2021 through 2024 and over the longer run based on their individual assessments of appropriate monetary policy, including the path of 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. A Summary of Economic Projections was released to the public following the conclusion of the meeting. In their discussion of current economic conditions, participants noted that, with progress on vaccinations and strong policy support, indicators of economic activity and employment had continued to strengthen. The sectors most adversely affected by the pandemic had improved in recent months but continued to be affected by COVID-19. Job gains had been solid in recent months, and the unemployment rate had declined substantially. Supply and demand imbalances related to the pandemic and the reopening of the economy had continued to contribute to elevated levels of inflation. Overall financial conditions remained accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses. Participants commented that the path of the economy continued to depend on the course of the virus. An easing of supply constraints was expected to support continued gains in economic activity and employment as well as a reduction in inflation. Risks to the economic outlook remained, including from new variants of the virus. Participants observed that growth of economic activity appeared to have been strong in the fourth quarter after having slowed in the third quarter, and they generally expected robust growth to continue in 2022. A few participants cited healthy household balance sheets, the need for businesses to rebuild inventory, and accommodative financial conditions as factors supporting continued robust growth. A couple of participants commented that business conditions appeared to be improving broadly, including in sectors providing in-person services, such as the retail, restaurant, and hotel sectors. Many participants noted that the emergence of the Omicron variant made the economic outlook more uncertain; several remarked that they did not yet see the new variant as fundamentally altering the path of economic recovery in the United States. In their discussion of the household sector, participants generally noted that demand for consumer goods had remained strong, likely supported by accommodative fiscal and monetary policies, increased household income as more people found jobs, increasing net worth of the household sector, and the high level of savings accumulated through the course of the pandemic. Participants noted that supply chain bottlenecks and labor shortages continued to limit businesses' ability to meet strong demand. They judged that these challenges would likely last longer and be more widespread than previously thought. Participants generally expected global supply chain bottlenecks to persist well into next year at least. While several participants pointed to signs of incremental improvement in supply chains, a few others remarked that business contacts were experiencing deteriorating supply conditions that could be exacerbated by the emergence of new variants of the virus. A couple of participants reported that some contacts were implementing permanent changes in their business models to help weather current and future disruptions, including holding larger inventories or building domestic manufacturing capacity. Many business contacts continued to experience difficulty hiring workers across all skill levels, noting the lack of qualified candidates as well. Some participants noted that businesses were offering higher wages, larger bonuses, or more flexible work arrangements to compete for workers. Participants judged that labor markets continued to strengthen, with the unemployment rate falling rapidly and payrolls growing at a solid pace. A few participants noted the recent decline in the unemployment rates of African Americans and Hispanics and the narrowing of the racial and ethnic gap in the prime-age employment-to-population ratio as suggesting a more inclusive labor market recovery. Some participants discussed the modest increase in the labor force participation rate in November. A number of participants judged that a substantial improvement in labor force participation would take longer than previously expected. A few others assessed that any further improvement in labor force participation would be quite modest. Participants cited a number of pandemic and economic factors likely depressing labor force participation, such as increased caregiving needs amid a shortage of workers in the caregiving industry, remaining concerns about the virus, and healthy balance sheets for households, including for those who retired early. A couple of participants cited factors that could support higher labor force participation over the next few years, including waning fiscal stimulus; depleted savings, particularly for lower-income households; and the historical tendency for labor force participation to lag improvement in the labor market. Participants pointed to a number of signs that the U.S. labor market was very tight, including near-record rates of quits and job vacancies, as well as a notable pickup in wage growth. In line with the recent data showing a rise in the employment cost index, many participants reported District business contacts either planning or having implemented larger wage increases to retain current employees or attract new workers. Participants generally noted that they were monitoring the incoming data for signs of inflationary pressures associated with the increasingly tight labor market. Acknowledging that the maximum level of employment consistent with price stability may evolve over time, many participants saw the U.S. economy making rapid progress toward the Committee's maximum-employment goal. Several participants viewed labor market conditions as already largely consistent with maximum employment. Participants remarked that inflation readings had been higher and were more persistent and widespread than previously anticipated. Some participants noted that trimmed mean measures of inflation had reached decade-high levels and that the percentage of product categories with substantial price increases continued to climb. While participants generally continued to anticipate that inflation would decline significantly over the course of 2022 as supply constraints eased, almost all stated that they had revised up their forecasts of inflation for 2022 notably, and many did so for 2023 as well. In discussing their revisions to the inflation outlook, participants pointed to rising housing costs and rents, more widespread wage growth driven by labor shortages, and more prolonged global supply-side frictions, which could be exacerbated by the emergence of the Omicron variant. Moreover, participants widely cited business contacts feeling confident that they would be able to pass on higher costs of labor and material to customers. Participants noted their continuing attention to the public's concern about the sizable increase in the cost of living that had taken place this year and the associated burden on U.S. households, particularly those who had limited scope to pay higher prices for essential goods and services. In their comments on inflation expectations, some participants discussed the risk that recent elevated levels of inflation could increase the public's longer-term expectations for inflation to a level above that consistent with the Committee's longer-run inflation objective. They noted that the realization of such a development could make it harder for the Committee to achieve 2 percent inflation over the longer run. A couple of participants pointed to reports of higher inflation expectations of businesses and of increased use of cost-of-living adjustments in wage negotiations as early developments that could potentially affect the anchoring of inflation expectations. A few participants, however, noted that long-term inflation expectations remained well anchored, citing stable readings of market-based inflation compensation measures or the generally low level of longer-term bond yields. Participants observed that uncertainty about the economic outlook remained high. Most agreed that risks to inflation were weighted to the upside. Several participants pointed to the possibility that structural factors that kept inflation low in the previous decade, such as technological changes, demographics, and the proximity of the ELB in an environment of low equilibrium interest rates, may reemerge when the effects of the pandemic abate. A couple of others noted the risk that persistent real wage growth in excess of productivity growth could trigger inflationary wage–price dynamics. Participants generally continued to stress uncertainties associated with the labor market—in particular, the evolution of labor force participation—and with the length of time required to resolve the supply chain situation. Many participants noted that the pandemic, particularly new variants of the virus, continued to pose downside risks to economic activity and upside risks to inflation. In their consideration of the stance of monetary policy, participants reaffirmed the Federal Reserve's commitment to using its full range of tools to support the U.S. economy during this challenging time, thereby promoting the Committee's statutory goals of maximum employment and price stability. Participants discussed the progress the economy had made toward the criteria the Committee had specified in its forward guidance for the federal funds rate. Participants agreed that the Committee's criteria of inflation rising to 2 percent and moderately exceeding 2 percent for some time had been more than met. All participants remarked that inflation had continued to run notably above 2 percent, reflecting supply and demand imbalances related to the pandemic and the reopening of the economy. With respect to the maximum-employment criterion, participants noted that the labor market had been making rapid progress as measured by a variety of indicators, including solid job gains reported in recent months, a substantial further decline in a range of unemployment rates to levels well below those prevailing a year ago, and a labor force participation rate that had recently edged up. Many participants judged that, if the current pace of improvement continued, labor markets would fast approach maximum employment. Several participants remarked that they viewed labor market conditions as already largely consistent with maximum employment. In support of the Committee's goals of maximum employment and inflation at the rate of 2 percent over the longer run, participants judged that it would be appropriate for the Committee to keep the target range for the federal funds rate at 0 to 1/4 percent until labor market conditions had reached levels consistent with the Committee's assessments of maximum employment, a condition most participants judged could be met relatively soon if the recent pace of labor market improvements continued. A few participants remarked that maximum employment consistent with price stability evolves over time and that further improvements in labor markets were likely over subsequent years as the economy continued to expand. Some participants also remarked that there could be circumstances in which it would be appropriate for the Committee to raise the target range for the federal funds rate before maximum employment had been fully achieved—for example, if the Committee judged that its employment and price-stability goals were not complementary in light of economic developments and that inflation pressures and inflation expectations were moving materially and persistently higher in a way that could impede the attainment of the Committee's longer-run goals. In light of elevated inflation pressures and the strengthening labor market, participants judged that the increase in policy accommodation provided by the ongoing pace of net asset purchases was no longer necessary. They remarked that a quicker conclusion of net asset purchases would better position the Committee to set policy to address the full range of plausible economic outcomes. Participants judged that it would be appropriate to double the pace of the ongoing reduction in net asset purchases. Such a change would result in reducing the monthly pace of net purchases of Treasury securities by $20 billion and of agency MBS by $10 billion starting in January. Participants also expected that economic conditions would evolve in a manner such that similar reductions in the pace of net asset purchases would be appropriate each subsequent month, resulting in an end to net asset purchases in mid-March, a few months sooner than participants had anticipated at the November FOMC meeting. In addition, participants remarked that the Committee should continue to be prepared to adjust the pace of purchases if warranted by changes in the economic outlook. Participants continued to stress that maintaining flexibility to implement appropriate policy adjustments on the basis of risk-management considerations should be a guiding principle in conducting policy in the current highly uncertain environment. Participants generally noted that, given their individual outlooks for the economy, the labor market, and inflation, it may become warranted to increase the federal funds rate sooner or at a faster pace than participants had earlier anticipated. Some participants also noted that it could be appropriate to begin to reduce the size of the Federal Reserve's balance sheet relatively soon after beginning to raise the federal funds rate. Some participants judged that a less accommodative future stance of policy would likely be warranted and that the Committee should convey a strong commitment to address elevated inflation pressures. These participants noted, however, that a measured approach to tightening policy would help enable the Committee to assess incoming data and be in position to react to the full range of plausible economic outcomes. Committee Policy Action In their discussion of monetary policy for this meeting, members agreed that with progress on vaccinations and strong policy support, indicators of economic activity and employment had continued to strengthen. They noted that the sectors most adversely affected by the pandemic had improved in recent months but continued to be affected by COVID-19. Job gains had been solid in recent months, and the unemployment rate had declined substantially. They remarked that supply and demand imbalances related to the pandemic and the reopening of the economy had continued to contribute to elevated levels of inflation. Overall financial conditions remained accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses. Members also acknowledged that the path of the economy continued to depend on the course of the virus. Progress on vaccinations and an easing of supply constraints were expected to support continued gains in economic activity and employment as well as a reduction in inflation, but risks to the economic outlook remained, including from new variants of the virus. As elevated inflation had persisted for longer than they had previously anticipated, members agreed that it was appropriate to remove the reference to "transitory" factors affecting inflation in the postmeeting statement and instead note that supply and demand imbalances have continued to contribute to elevated inflation. Members also agreed that, with the emergence of the Omicron variant, it was appropriate to note the risk of new variants of the virus in their assessment of risks to the economic outlook. Members agreed that the Federal Reserve was committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals. All members reaffirmed their commitment to seek to achieve maximum employment and inflation at the rate of 2 percent over the longer run. Members agreed that the postmeeting statement should be updated to reflect the Committee's assessment of the progress the economy had made toward the criteria specified in its forward guidance for the target range for the federal funds rate. They agreed that the inflation criteria in the guidance had been met and that the postmeeting statement should note that with inflation having exceeded 2 percent for some time, the Committee expected that it would be appropriate to maintain the current target range of 0 to 1/4 percent until labor market conditions had reached levels consistent with the Committee's assessments of maximum employment. In light of inflation developments and the further improvement in the labor market, members decided to reduce the monthly pace of the Federal Reserve's net asset purchases by $20 billion for Treasury securities and $10 billion for agency MBS. Specifically, beginning in January, the Committee would increase its holdings of Treasury securities by at least $40 billion per month and of agency MBS by at least $20 billion per month. Members also agreed that similar reductions in the pace of net asset purchases would likely be appropriate in subsequent months, implying that increases in the Federal Reserve's securities holdings would cease by mid-March under the Committee's outlook, a few months sooner than had been anticipated at the previous meeting. Members noted that the Committee was prepared to adjust the pace of purchases if warranted by changes in the economic outlook and that it was important to maintain the flexibility to adjust the stance of policy as appropriate in response to changes in the Committee's outlook for the labor market and inflation. Members also noted that the Federal Reserve's ongoing asset purchases and holdings of securities would continue to foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit. Members agreed that, in assessing the appropriate stance of monetary policy, they would continue to monitor the implications of incoming information for the economic outlook and that they would be prepared to adjust the stance of monetary policy as appropriate in the event that risks emerged that could impede the attainment of the Committee's goals. They also concurred that, in assessing the appropriate stance of monetary policy, they would take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and 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 instructed otherwise, to execute transactions in the System Open Market Account in accordance with the following domestic policy directive, for release at 2:00 p.m.: "Effective December 16, 2021, 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 0 to 1/4 percent. Complete the increase in System Open Market Account (SOMA) holdings of Treasury securities by $60 billion and of agency mortgage-backed securities (MBS) by $30 billion, as indicated in the monthly purchase plans released in mid-December. Increase the SOMA holdings of Treasury securities by $40 billion and of agency MBS by $20 billion, during the monthly purchase period beginning in mid-January. Increase holdings of Treasury securities and agency MBS by additional amounts as needed to sustain smooth functioning of markets for these securities. Conduct overnight repurchase agreement operations with a minimum bid rate of 0.25 percent and with an aggregate operation limit of $500 billion; the aggregate operation limit can be temporarily increased at the discretion of the Chair. Conduct overnight reverse repurchase agreement operations at an offering rate of 0.05 percent and with a per-counterparty limit of $160 billion per day; the per-counterparty limit can be temporarily increased at the discretion of the Chair. Roll over at auction all principal payments from the Federal Reserve's holdings of Treasury securities and reinvest all principal payments from the Federal Reserve's holdings of agency debt and agency MBS in agency MBS. Allow modest deviations from stated amounts for purchases and reinvestments, if needed for operational reasons. Engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions." The vote also encompassed approval of the statement below for release at 2:00 p.m.: "The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals. With progress on vaccinations and strong policy support, indicators of economic activity and employment have continued to strengthen. The sectors most adversely affected by the pandemic have improved in recent months but continue to be affected by COVID-19. Job gains have been solid in recent months, and the unemployment rate has declined substantially. Supply and demand imbalances related to the pandemic and the reopening of the economy have continued to contribute to elevated levels of inflation. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses. The path of the economy continues to depend on the course of the virus. Progress on vaccinations and an easing of supply constraints are expected to support continued gains in economic activity and employment as well as a reduction in inflation. Risks to the economic outlook remain, including from new variants of the virus. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent. With inflation having exceeded 2 percent for some time, the Committee expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee's assessments of maximum employment. In light of inflation developments and the further improvement in the labor market, the Committee decided to reduce the monthly pace of its net asset purchases by $20 billion for Treasury securities and $10 billion for agency mortgage-backed securities. Beginning in January, the Committee will increase its holdings of Treasury securities by at least $40 billion per month and of agency mortgage‑backed securities by at least $20 billion per month. The Committee judges that similar reductions in the pace of net asset purchases will likely be appropriate each month, but it is prepared to adjust the pace of purchases if warranted by changes in the economic outlook. The Federal Reserve's ongoing purchases and holdings of securities will continue to foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments." Voting for this action: Jerome H. Powell, John C. Williams, Thomas I. Barkin, Raphael W. Bostic, Michelle W. Bowman, Lael Brainard, Richard H. Clarida, Mary C. Daly, Charles L. Evans, Randal K. Quarles, and Christopher J. Waller. Voting against this action: None. Consistent with the Committee's decision to leave the target range for the federal funds rate unchanged, the Board voted unanimously to maintain the interest rate paid on reserve balances at 0.15 percent, effective December 16, 2021. The Board also voted unanimously to approve establishment of the primary credit rate at the existing level of 0.25 percent, effective December 16, 2021. At the end of the meeting, the Chair noted that the Board's staff had made substantial progress in developing formal polices to implement the tough and comprehensive ethics rules for senior officials that were announced in October. It was agreed that the next meeting of the Committee would be held on Tuesday–Wednesday, January 25–26, 2022. The meeting adjourned at 11:00 a.m. on December 15, 2021. Notation Vote By notation vote completed on November 23, 2021, the Committee unanimously approved the minutes of the Committee meeting held on November 2–3, 2021. _______________________ James A. Clouse Secretary 1. The Federal Open Market Committee is referenced as the "FOMC" and the "Committee" in these minutes; the Board of Governors of the Federal Reserve System is referenced as the "Board" in these minutes. Return to text 2. Attended Tuesday's session only. Return to text 3. Attended through the discussion of policy normalization considerations. Return to text 4. Attended through the discussion of policy normalization considerations and all of Wednesday's session. Return to text

2021-11-24

Minute

Minutes of the Federal Open Market Committee November 2-3, 2021 A joint meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve System was held in the offices of the Board of Governors on Tuesday, November 2, 2021, at 1:00 p.m. and continued on Wednesday, November 3, 2021, at 9:00 a.m.1 Attendance Jerome H. Powell, Chair John C. Williams, Vice Chair Thomas I. Barkin Raphael W. Bostic Michelle W. Bowman Lael Brainard Richard H. Clarida Mary C. Daly Charles L. Evans Randal K. Quarles Christopher J. Waller James Bullard, Esther L. George, Naureen Hassan, Loretta J. Mester, and Kenneth C. Montgomery, Alternate Members of the Committee Patrick Harker and Neel Kashkari, Presidents of the Federal Reserve Banks of Philadelphia, and Minneapolis, respectively Meredith Black, Interim President of the Federal Reserve Bank of Dallas James A. Clouse, Secretary Matthew M. Luecke, Deputy Secretary Michelle A. Smith, Assistant Secretary Mark E. Van Der Weide, General Counsel Michael Held, Deputy General Counsel Trevor A. Reeve, Economist Stacey Tevlin, Economist Beth Anne Wilson, Economist Shaghil Ahmed, Brian M. Doyle, Rochelle M. Edge, Anna Paulson, and William Wascher, Associate Economists Lorie K. Logan, Manager, System Open Market Account Patricia Zobel, Deputy Manager, System Open Market Account Ann E. Misback, Secretary, Office of the Secretary, Board Matthew J. Eichner,2 Director, Division of Reserve Bank Operations and Payment Systems, Board; Michael S. Gibson, Director, Division of Supervision and Regulation, Board; Andreas Lehnert, Director, Division of Financial Stability, Board Daniel M. Covitz, Deputy Director, Division of Research and Statistics, Board; Sally Davies, Deputy Director, Division of International Finance, Board Jon Faust and Joshua Gallin, Senior Special Advisers to the Chair, Division of Board Members, Board William F. Bassett, Antulio N. Bomfim, Burcu Duygan-Bump, Jane E. Ihrig, Kurt F. Lewis, Chiara Scotti, and Nitish R. Sinha, Special Advisers to the Board, Division of Board Members, Board Linda Robertson, Assistant to the Board, Division of Board Members, Board David López-Salido, Senior Associate Director, Division of Monetary Affairs, Board Edward Nelson and Annette Vissing-Jørgensen, Senior Advisers, Division of Monetary Affairs, Board; Jeremy B. Rudd, Senior Adviser, Division of Research and Statistics, Board Glenn Follette, Associate Director, Division of Research and Statistics, Board; Christopher J. Gust, Associate Director, Division of Monetary Affairs, Board; Jeffrey D. Walker,2 Associate Director, Division of Reserve Bank Operations and Payment Systems, Board Skander Van den Heuvel, Deputy Associate Director, Division of Financial Stability, Board Gianni Amisano, Byron Lutz, and Raven Molloy, Assistant Directors, Division of Research and Statistics, Board; Brian J. Bonis, Giovanni Favara, and Dan Li, Assistant Directors, Division of Monetary Affairs, Board Penelope A. Beattie,3 Section Chief, Office of the Secretary, Board David H. Small, Project Manager, Division of Monetary Affairs, Board Randall A. Williams, Group Manager, Division of Monetary Affairs, Board Michele Cavallo, Principal Economist, Division of Monetary Affairs, Board Callum Jones and Arsenios Skaperdas, Senior Economists, Division of Monetary Affairs, Board Jose Acosta, Senior Communications Analyst, Division of Information Technology, Board Isaiah C. Ahn, Senior Staff Assistant, Division of Monetary Affairs, Board Ron Feldman, First Vice President, Federal Reserve Bank of Minneapolis Joseph W. Gruber and Geoffrey Tootell, Executive Vice Presidents, Federal Reserve Banks of Kansas City and Boston, respectively Anne Baum, Carlos Garriga, Paolo A. Pesenti, and Mark L.J. Wright, Senior Vice Presidents, Federal Reserve Banks of New York, St. Louis, New York, and Minneapolis, respectively Satyajit Chatterjee and Alexander L. Wolman, Vice Presidents, Federal Reserve Banks of Philadelphia and Richmond, respectively Edward S. Prescott, Senior Economic and Policy Advisor, Federal Reserve Bank of Cleveland Karel Mertens, Senior Economic Policy Advisor, Federal Reserve Bank of Dallas Mark Spiegel, Senior Policy Advisor, Federal Reserve Bank of San Francisco Brent Meyer, Policy Advisor and Economist, Federal Reserve Bank of Atlanta Discussion of Financial Markets and Open Market Operations The manager turned first to a discussion of global financial markets. Sovereign yields rose sharply across many advanced economies with much of the increase concentrated in measures of inflation compensation. In the United States, the five-year measure of inflation compensation based on Treasury Inflation Protected Securities (TIPS) rose by around 45 basis points. Far forward measures of inflation compensation also rose, but by modest amounts. In the Open Market Desk's surveys of primary dealers and market participants, the median forecast for headline PCE inflation in 2021 was revised up notably. Median forecasts beyond 2021 move up by less, al­though the average of the probabilities reported by survey respondents placed on higher inflation outcomes at these horizons increased modestly. Policy sensitive rates increased across most advanced economies. The central banks of Norway and New Zealand raised their policy rates early in the period, and policy communications from the Bank of England and the Bank of Canada pointed to the potential for earlier policy firming than had been expected, contributing to the upward movement of global rates. The Reserve Bank of Australia ended its yield target for the April 2024 government bond. That central bank signaled that conditions for raising the policy rate could be met in 2023 but were unlikely to be achieved in the earlier timeframe implied by market pricing. Some European Central Bank communications also suggested that market rates were likely not consistent with the outlook for policy. In the United States, the market-implied path of the federal funds rate rose, implying an earlier date for raising the target range for the federal funds rate and a faster pace of rate hikes than was the case in September. Option-implied volatility on short-dated interest rates increased, reportedly reflecting greater uncertainty over the path of the federal funds rate. Desk survey responses also indicated expectations for an earlier increase in the target range, al­though the median respondent's modal expectation shifted by less than market pricing. The median survey respondent's modal expectation for the federal funds rate at the end of 2025 was little changed suggesting that investors had not revised their expectations for the cumulative extent of policy firming over the next four years. Expectations for a reduction in the pace of net asset purchases coalesced further, and most survey respondents expected the tapering of asset purchases to start with the November purchase schedule with monthly reductions of $10 billion and $5 billion in Treasury securities and agency mortgage-backed securities (MBS), respectively. Over the intermeeting period, U.S. equity indexes rose and the one-month option-implied volatility on the S&P 500—the VIX—fell to post-pandemic lows. Continued strong earnings underpinned the rise in equity prices, with firms posting profits near historical highs. Despite signs of robust risk appetite, market participants continued to note prominent risks to the outlook, including ongoing challenges in the Chinese property sector. Turning to Desk operations, the manager noted that, should the Committee decide to announce a reduction in the pace of net asset purchases at this meeting, the Desk would issue a monthly purchase schedule on November 12 reflecting this change. The mid-December purchase schedule, to be released just before the next FOMC meeting, would reflect additional reductions of the same size. Treasury securities and agency MBS would continue to be purchased across sectors and coupons consistent with current practice. If similar reductions in the net purchase pace were implemented in subsequent months, the System Open Market Account (SOMA) portfolio would peak around next June at about $8.5 trillion. In terms of composition, Treasury securities and agency MBS would constitute roughly 70 percent and 30 percent of the SOMA portfolio, respectively—roughly in line with the shares of Treasury securities and agency MBS in the total stock of these securities outstanding—and the SOMA portfolio would be more heavily weighted toward Treasury securities than after the conclusion of the third large-scale asset purchase program (LSAP 3) following the global financial crisis. The maturity composition of SOMA Treasury coupon holdings would also be fairly close to that of the outstanding universe of Treasury securities, and the weighted average maturity would be shorter than after LSAP 3. Turning to money market developments, the manager noted that the transition away from LIBOR (London Interbank Offered Rate) had gained momentum with a pick-up in the interdealer trading volume of Secured Overnight Financing Rate (SOFR) derivatives; that said, much remained to be done to complete the LIBOR transition. Market participants were attentive to some temporary downward pressure on the SOFR over the period. This softness appeared to be the result of technical factors and was observed primarily in centrally cleared repurchase agreement markets. The Federal Reserve's administered rates—the interest on reserve balances rate and the overnight reverse repurchase agreement (ON RRP) rate—continued to support effective interest rate control and, outside of month- and quarter-end, the federal funds rate remained stable over the period. Regarding the debt ceiling, the short-term resolution reached in October increased the debt limit by $480 billion. Market participants' estimates of the new date when the Treasury would exhaust its extraordinary measures and cash balance were wide-ranging but some estimates suggested the date might be as early as mid-December. Most market participants anticipated that a resolution to the debt ceiling would again be reached without a delayed payment on maturing Treasury securities al­though uncertainty about the debt ceiling resolution remained a source of concern in financial markets. 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 available at the time of the November 2–3 meeting suggested that U.S. real GDP growth had slowed markedly in the third quarter after the first half's rapid pace. Labor market conditions continued to improve in September, though employment growth was slower than in recent months. Consumer price inflation in September—as measured by the 12-month percentage change in the PCE price index—was elevated. Growth in total nonfarm payroll employment slowed further in September, held down by a decline in state and local government employment. As of September, total payroll employment had retraced three-fourths of the losses seen at the onset of the pandemic. The unemployment rate declined from 5.2 percent in August to 4.8 percent in September; the unemployment rates for African Americans and Hispanics also declined over this period, but both rates remained well above the national average. The labor force participation rate edged lower in September, and the employment-to-population ratio moved up. Private-sector job openings, as measured by the Job Openings and Labor Turnover Survey, stepped down in August but remained well above pre-pandemic levels. Initial claims for regular state unemployment insurance moved lower through late October and were approaching the levels seen before the pandemic. Recent weekly estimates of private-sector payrolls constructed by the Board's staff using data provided by the payroll processor ADP were especially volatile but, on balance, appeared consistent with a pickup in the pace of private employment gains relative to September. The employment cost index of hourly compensation in the private sector rose 4.1 percent over the 12 months ending in September; this gain was noticeably larger than the index's year-earlier 12-month change and was the fastest 12-month change since 2001. Total PCE price inflation was 4.4 percent over the 12 months ending in September, and core PCE price inflation, which excludes changes in consumer energy prices and many consumer food prices, was 3.6 percent over the same period. The trimmed mean measure of 12-month PCE inflation constructed by the Federal Reserve Bank of Dallas was 2.3 percent in September. In the third quarter of 2021, the staff's common inflation expectations index, which combines information from many indicators of inflation expectations and inflation compensation, was little changed relative to the second quarter and remained at its highest level since 2014. Real PCE posted a modest increase in the third quarter after having risen sharply over the first half of the year. The third-quarter slowdown appeared to reflect a combination of factors, including the waning effect of previous fiscal stimulus measures, the surge in COVID-19 cases over the summer, and a plunge in motor vehicle purchases as extremely low dealer inventories constrained sales. Residential investment dropped further in the third quarter; al­though demand for housing was strong, shortages of construction supplies as well as tight land and labor markets restrained residential construction activity. Growth in business fixed investment slowed sharply in the third quarter, as supply bottlenecks—particularly for motor vehicles—weighed on business equipment spending and a limited availability of construction materials held back spending on nonresidential structures. Manufacturing output declined in September. Motor vehicle output stepped down further as semiconductor shortages continued to restrain production; in addition, Hurricane Ida resulted in prolonged plant outages in the petrochemical, refining, and plastic resins industries. Total real government purchases posted a small increase in the third quarter after having declined in the second quarter. Al­though real state and local purchases increased, the gain was largely offset by declines in both federal defense and nondefense purchases. The U.S. international trade deficit widened in August, reflecting a moderate pace of import growth against a subdued pace of export growth. Real import growth was driven by increases in consumer goods and industrial supplies. Real export growth was held back by declines in capital goods, agricultural products, and automotive products. Bottlenecks in the global semiconductor industry continued to weigh on exports and imports of automotive products, and shipping congestion continued to restrain trade overall. Advance estimates for September suggested that goods imports rose while goods exports fell, pointing to a further widening of the trade deficit. The Bureau of Economic Analysis estimated that a drop in net exports subtracted substantially from real GDP growth in the third quarter. Foreign GDP growth slowed modestly in the third quarter, as supply chain disruptions and the resurgence of COVID-19 weighed on production, particularly in China and other emerging market economies (EMEs). In several EMEs, public health restrictions were reinstated, resulting in factory closures. Moreover, Chinese manufacturing output was curtailed by the rationing of electricity amid a coal shortage resulting in part from policies to lower carbon emissions. In contrast to EMEs, advanced foreign economies (AFEs) generally continued to recover at a solid pace in the third quarter, as the boost from the further reopening of high-contact services activity was only partially offset by the drag from bottlenecks, the spread of the virus, and, in some places, labor shortages. Twelve-month rates of inflation abroad continued to rise, reflecting further increases in energy prices, persistent pressures from supply bottlenecks, and past exchange rate depreciation in some EMEs. Staff Review of the Financial Situation Over the intermeeting period, an increase in perceived inflation risks and an associated upward revision in the market-implied path of the federal funds rate contributed to increases in Treasury yields. Long-term sovereign yields in AFEs also increased notably. Despite these pressures, broad domestic equity indexes increased, on net, supported by strong earnings reports. Spreads of corporate bonds were little changed overall. Short-term funding markets were stable, while participation in the ON RRP facility increased further, to its highest level since the facility was put in place. Market-based financing conditions were accommodative, and bank lending standards eased for most loan categories. Market participants' views on the expected path for the federal funds rate over the next few years—implied by a straight read of overnight index swap quotes—rose substantially since the September FOMC meeting, apparently in response to perceived risks of higher inflation. Those risks also contributed to increases in Treasury yields, with 2-, 5-, and 10-year yields rising notably on net. Broad equity indexes increased, on net, over the intermeeting period. Perceptions of increased risks related to inflation were more than offset by a short-term resolution of the debt ceiling, a decrease in perceived risks related to the effect of the pandemic on the pace of the economic recovery, and stronger-than-expected third-quarter earnings. The VIX declined notably to near pre-pandemic levels. Spreads on corporate bonds were little changed, on net, over the intermeeting period and remained at low levels. Spreads of municipal bonds narrowed slightly. Short-term funding markets were stable over the intermeeting period. The effective federal funds rate remained at 8 basis points throughout the period except on month-ends, while the SOFR averaged 5 basis points. Consistent with relatively low Treasury bill supply and abundant liquidity, participation in ON RRP operations increased from an average of $1.1 trillion over the previous intermeeting period to $1.4 trillion, reaching a new high of $1.6 trillion on the September quarter-end. In major foreign markets, sovereign yields rose notably over the intermeeting period, as did inflation compensation and market-implied measures of expected policy rates, amid sharp further increases in energy prices, concerns about higher inflation, and communications by some foreign central banks that were seen as signaling a faster removal of monetary policy accommodation. Market concerns about risks of a downturn in the Chinese real estate sector remained elevated, and inflows into funds investing in China slowed, but the effects on broader financial markets were limited. On balance, major foreign equity indexes increased moderately, and the broad dollar appreciated a touch. In domestic credit markets, financing conditions faced by nonfinancial firms in capital markets remained highly accommodative over the intermeeting period. Gross corporate bond issuance stayed strong in September and October. Gross leveraged loan issuance decreased slightly in September after its strong growth in August. Equity raised through traditional initial public offerings remained robust in September and October, while equity issuance through special purpose acquisition companies remained at the subdued levels seen in recent months. Commercial and industrial (C&I) loans declined notably in the third quarter amid ongoing forgiveness of Paycheck Protection Program loans. In the October Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS), banks reported easing standards and terms, on net, for C&I loans over the third quarter. Banks also reported that demand for C&I loans was about unchanged over the third quarter after strengthening for the previous two quarters; on balance, loan demand was still weaker than before the pandemic. The credit quality of large nonfinancial corporations remained strong. The volume of credit rating upgrades for speculative-grade nonfinancial corporate bonds outpaced downgrades in September and October. Trailing default rates on corporate bonds and leveraged loans decreased from already low levels, while market indicators of future expected default rates remained benign. In the municipal bond market, financing conditions remained accommodative despite a modest increase in yields. Issuance of municipal debt was strong in September and October, and indicators of the credit quality of municipal debt remained healthy. Survey-based indicators suggested that small business owners became less pessimistic about their financial prospects, with the exception of owners in the educational services sector, for whom expectations deteriorated slightly. While loan originations to small businesses fell a bit, the results from the October SLOOS suggested that the decline appeared to reflect weak demand, particularly for small and very small firms. Commercial real estate loan balances on banks' books strengthened, and, in the October SLOOS, banks reported an easing of standards on such loans over the third quarter. Issuance of commercial mortgage-backed securities (CMBS) remained robust, supported by spreads of agency CMBS generally at or below pre-pandemic levels. Delinquency rates on mortgages in CMBS pools continued to fall but remained elevated for CMBS backed by hotel and retail properties. In the residential mortgage market, financing conditions remained accommodative, particularly for borrowers who met standard conforming loan criteria. In the October SLOOS, banks reported easing lending standards for almost all major mortgage categories. Mortgage rates increased modestly over the intermeeting period but did not rise as much as the 10-year Treasury yield. Indicators of mortgage originations for home purchases and refinancing remained fairly robust. The share of mortgages in forbearance continued to decline through October, and the rate of new transitions into delinquency stayed low by historical standards. Financing conditions for consumer credit remained accommodative for most borrowers, especially those with stronger credit scores. Lending standards for nonprime consumers in the credit card market continued to ease but remained slightly tighter than pre-pandemic levels. In the October SLOOS, banks reported easier standards for credit cards and auto loans over the third quarter. While demand for credit cards strengthened, auto loan growth slowed in response to low dealer inventories and a weakening of auto sales. The staff provided an update on indicators related to the stability of the financial system. The staff noted that asset valuations remained generally high relative to historical norms. In particular, bond and leveraged loan spreads remained narrow, while equity prices continued to increase, supported by strong earnings expectations, still-low Treasury yields, and high risk appetite. House prices rose rapidly, outpacing rents, but the staff did not see signs of loose mortgage underwriting standards or excessive mortgage credit growth that could potentially amplify a shock arising from falling house prices. For households, the level of consumer debt was largely unchanged on an inflation-adjusted basis, while delinquencies returned to pre-pandemic levels or below. For nonfinancial businesses, measures of leverage in the corporate sector fell over the second quarter and largely returned to pre-pandemic levels; in addition, the level of corporate debt became more sustainable as earnings increased and rates remained low. In the financial sector, the staff noted that banks were strongly capitalized, with high levels of stable funding and high-quality liquid assets. The mean level of gross hedge fund leverage was noteworthy and its distribution was skewed, with particularly high leverage among funds in the top decile. Vulnerabilities associated with funding risks remained at money funds and other mutual funds. In addition, funding risks were an emerging concern at entities issuing stablecoins, because they appeared to have structural maturity and liquidity transformation vulnerabilities similar to those for money funds but with considerably less transparency and an underdeveloped regulatory framework. The staff noted that the President's Working Group on Financial Markets was engaged in interagency work to address these risks. Staff Economic Outlook The projection for U.S. economic activity prepared by the staff for the November FOMC meeting was slightly weaker than the September projection. Incoming data suggested that the resolution of supply constraints was starting later and would be more gradual than previously assumed; even so, real GDP was expected to post a sizable gain over 2021 as a whole. In 2022, real GDP growth was expected to remain close to its 2021 pace, supported by the continued reopening of the economy and the resolution of supply constraints in most sectors. With the boost from these factors fading, real GDP growth was projected to step down noticeably in 2023 and to be close to potential output growth in 2023 and 2024. However, the level of real GDP was expected to remain well above potential throughout the projection period, and the unemployment rate was expected to decline to historically low levels. The staff's near-term outlook for inflation was revised up, as consumer food and energy prices had risen faster than expected and production bottlenecks and recent wage gains were seen as putting somewhat greater upward pressure on prices than had been anticipated. As a result, the 12-month change in PCE prices was projected to move up further relative to September's pace and to end the year well above 2 percent. Over the following two years, the boost to consumer prices caused by supply issues was expected to partly reverse, and resource utilization was projected to tighten further. PCE price inflation was therefore expected to step down to 2 percent in 2022 and to 1.9 percent in 2023 before edging back up to 2 percent in 2024. The staff continued to judge that the risks to the baseline projection for economic activity were skewed to the downside and that the risks around the inflation projection were skewed to the upside. In particular, the possibility of another sizable wave of COVID-19 cases in the winter was seen as an important source of downside risk to activity, while the possibility of more severe and persistent supply issues was viewed as an additional downside risk to activity and as an upside risk to inflation. Participants' Views on Current Economic Conditions and the Economic Outlook In their discussion of current conditions, participants noted that, with progress on vaccinations and strong policy support, indicators of economic activity and employment had continued to strengthen. The sectors most adversely affected by the pandemic had improved in recent months, but the summer's rise in COVID-19 cases had slowed their recovery. Inflation was elevated, largely reflecting factors that were expected to be transitory. Supply and demand imbalances related to the pandemic and the reopening of the economy had contributed to sizable price increases in some sectors. Overall financial conditions remained accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses. Participants noted that the path of the economy continued to depend on the course of the virus. Progress on vaccinations and an easing of supply constraints were expected to support continued gains in economic activity and employment as well as a reduction in inflation, but risks to the economic outlook remained. Participants observed that growth in economic activity had slowed in the third quarter to a rate significantly below the robust pace seen in the first half of the year. The spread of the Delta variant had contributed to the slowdown in growth in the third quarter by damping household and business spending, holding down labor supply, and intensifying supply chain disruptions. Participants noted that the underlying conditions supporting growth in demand remained strong and that, as the number of COVID-19 cases remained well below the summer's levels, growth in economic activity would likely show a pickup in the fourth quarter. They further foresaw robust growth in 2022, supported by progress on vaccinations and an easing of supply constraints. In their discussion of the household sector, participants remarked that demand for most consumer goods had remained strong. They noted that businesses had generally recorded robust sales despite labor shortages and other supply disruptions that had prevented them from fully meeting higher demand for their products. Participants interpreted available data as suggesting that the spread of the Delta variant had slowed the shift of consumer demand toward purchases of services and away from spending on goods, stretching out the full reopening of the economy and intensifying supply and demand imbalances. Participants observed that households had strong balance sheets and that consumer spending would also be supported by accommodative financial conditions. A number of participants noted that there was likely to be a drag on household spending as previous fiscal support faded, or that fiscal policy might provide some support to aggregate demand if the Congress authorized major new federal appropriations. Participants remarked that supply chain challenges and limited labor availability continued to be major constraints on manufacturing activity and the business sector more broadly. Bottleneck pressures faced by businesses were accompanied by global supply chain disruptions associated with major backlogs in shipments and transportation as well as surging demand for a variety of goods, shortages of labor and other inputs, increases in costs of production, and depleted inventory levels in key sectors. Many business contacts had experienced a worsening of supply chain problems, and participants reported that firms had responded to these challenges by taking a variety of actions, including raising prices, turning away customers, restructuring supply chains, and using alternative, but higher-cost, shipping options. Participants judged that supply constraints would likely continue for longer than they had previously expected. Participants noted that data received over the intermeeting period indicated that labor market conditions had continued to improve. Al­though the September increase in payrolls had been moderate compared with recent months, the unemployment rate had declined further and previous months' job growth had been revised up. Participants observed that September's rise in payrolls had been held down by a shortage of workers, in part reflecting the ongoing effect of the virus on labor supply decisions. With COVID-19 cases expected to remain below the summer's levels, participants anticipated better payroll numbers in the months ahead. Participants indicated that District contacts continued to report difficulties in finding and retaining workers and that, in addition to offering higher wages, businesses were turning to increased use of automation. While recognizing that labor market conditions varied significantly across the country, some participants cited a number of signs that the U.S. labor market was very tight: These included data on quits, job availability, and stronger rates of nominal wage growth reflected in the recent rise in the employment cost index, as well as the readings provided by the Federal Reserve Bank of Kansas City's Labor Market Conditions Indicators. A number of participants observed that the labor force participation rate remained well below the level reached before the pandemic. Several participants judged that labor force participation would be structurally lower than in the past, and a few of these participants cited the high level of retirements recorded since the start of the pandemic. Several other participants suggested that labor supply was currently being depressed by pandemic-related factors such as disruptions related to caregiving arrangements and noted that the importance of such factors would likely diminish as economic and public health conditions improved further. Participants generally saw the current elevated level of inflation as largely reflecting factors that were likely to be transitory but judged that inflation pressures could take longer to subside than they had previously assessed. They remarked that the Delta wave had intensified the impediments to supply chains and had helped sustain the high level of goods demand, adding to the upward pressure on prices. Participants also observed that increases in energy prices, stronger rates of nominal wage growth, and higher housing rental costs had been forces adding to inflation. Some participants highlighted the fact that price increases had become more widespread. Although participants expected significant inflation pressures to last for longer than they previously expected, they generally continued to anticipate that the inflation rate would diminish significantly during 2022 as supply and demand imbalances abated. Nonetheless, they indicated that their uncertainty regarding this assessment had increased. Many participants pointed to considerations that might suggest that elevated inflation could prove more persistent. These participants noted that average inflation already exceeded 2 percent when measured on a multiyear basis and cited a number of factors—such as businesses' enhanced scope to pass on higher costs to their customers, the possibility that nominal wage growth had become more sensitive to labor market pressures, or accommodative financial conditions—that might result in inflation continuing at elevated levels. Some other participants, however, remarked that al­though inflationary pressures were lasting longer than anticipated, those pressures continued to reflect the same pandemic-related imbalances and would likely abate when supply constraints eased. These participants also noted that the most sizable price increases may have already occurred, that there was as yet little evidence of a change in inflation dynamics—such as the development of a wage–price spiral—that would tend to prolong elevated levels of inflation, and that forces already in motion would likely bring inflation down toward 2 percent over the medium term. Participants were attentive to the sizable increase in the cost of living that had taken place this year and the associated burden on U.S. households, particularly those who had limited scope to pay higher prices for essential goods and services. In their comments on inflation expectations, a number of participants discussed the risk that, in light of recent elevated levels of inflation, the public's longer-term expectations of inflation might increase to a level above that consistent with the Committee's longer-run inflation objective; such a development could make it harder for the Committee to achieve 2 percent inflation over the longer run. A couple of participants pointed to increases in survey- and market-based indicators of expected inflation—including the notable rise in the five-year TIPS-based measure of inflation compensation—as possible signs that inflation expectations were becoming less well anchored. Several other participants, however, remarked that measures of near- and medium-term inflation expectations typically had been sensitive to movements in realized inflation and that they had not exhibited greater sensitivity recently. They additionally pointed out that indicators of longer-term inflation expectations—including the five-year, five-year-forward measure of inflation compensation—continued to display less sensitivity to realized inflation and remained well anchored at levels consistent with the Committee's longer-run 2 percent goal. Participants observed that uncertainty about the economic outlook remained high. They particularly stressed uncertainties associated with the labor market, including the evolution of labor force participation, and with the length of time required to resolve the supply chain situation. Participants cited upside risks to inflation, including those associated with strong demand for goods and a tight labor market. Upside risks to economic activity included a potential near-term boost to aggregate demand that could arise from the drawing down of the substantial savings accumulated by households since the beginning of the pandemic. A few participants mentioned an upsurge in COVID-19 cases during the coming winter or an emergence of new virus strains as possibilities that, if they were realized, would damp economic activity and intensify price pressures. A number of participants commented on issues related to financial stability. A couple of participants noted factors supporting the strength and resilience of the U.S. financial system, including the solid capital and liquidity conditions of banks and the fact that underwriting standards for residential mortgages had not eased substantially in an environment of rising house prices. A few participants emphasized the importance of maintaining strong bank capital positions, particularly at the largest banks. A few participants also cited a number of factors representing potential vulnerabilities to the financial system: These included elevated asset valuations prevailing widely across asset classes, the growing exposure of banks to nonbank financial firms, and the risk of a sudden reduction in the liquidity of collateral used at central counterparty clearing and settlement systems. In the area of cybersecurity, a few participants stressed the importance of greater preparedness against a cyberattack that could disrupt the nation's payments process and financial system. Several participants commented on the financial stability risks—including those relating to maturity and liquidity transformation—associated with stablecoins and on the need for regulators to address these risks. A few participants noted the importance of developing systematic monitoring of the climate-related risks facing the financial system. In their consideration of the stance of monetary policy, participants agreed that the economy had made substantial further progress toward the Committee's goals since December 2020, when the Committee adopted its guidance regarding asset purchases. The unemployment rate had declined to 4.8 percent in September—about 2 percentage points lower than the level last December—and job openings and other indicators also were pointing to widespread strength in labor demand, consistent with a broad improvement in labor market conditions. Consequently, participants assessed that the criterion of substantial further progress had been met with regard to the Committee's maximum employment goal. In addition, participants generally judged that the Committee's criterion of substantial further progress had clearly been more than met with respect to inflation. Against this backdrop, all participants judged that, consistent with the Committee's previous policy communications, it would be appropriate to announce at this meeting a reduction in the pace of net asset purchases. Participants generally supported the plan to implement reductions in the pace of net purchases of Treasury securities and agency MBS by $10 billion and $5 billion per month, respectively, over the upcoming intermeeting period and judged that similar reductions in the pace would likely be appropriate in each subsequent month. Some participants preferred a somewhat faster pace of reductions that would result in an earlier conclusion to net purchases. Participants noted that beginning to scale back the pace of net asset purchases was not intended to convey any direct signal regarding adjustments to the target range for the federal funds rate. They highlighted the more stringent criteria for raising the target range, compared with the criteria that applied to beginning to reduce the pace of asset purchases. Participants stressed that maintaining flexibility to implement appropriate policy adjustments on the basis of risk-management considerations should be a guiding principle in conducting policy in the current highly uncertain environment. Some participants suggested that reducing the pace of net asset purchases by more than $15 billion each month could be warranted so that the Committee would be in a better position to make adjustments to the target range for the federal funds rate, particularly in light of inflation pressures. Various participants noted that the Committee should be prepared to adjust the pace of asset purchases and raise the target range for the federal funds rate sooner than participants currently anticipated if inflation continued to run higher than levels consistent with the Committee's objectives. At the same time, because of the continuing considerable uncertainty about developments in supply chains, production logistics, and the course of the virus, a number of participants stressed that a patient attitude toward incoming data remained appropriate to allow for careful evaluation of evolving supply chain developments and their implications for the labor market and inflation. That said, participants noted that the Committee would not hesitate to take appropriate actions to address inflation pressures that posed risks to its longer-run price stability and employment objectives. Committee Policy Action In their discussion of monetary policy for this meeting, members agreed that with progress on vaccinations and strong policy support, indicators of economic activity and employment had continued to strengthen. They noted that the sectors most adversely affected by the pandemic had improved in recent months but that the summer's rise in COVID-19 cases had slowed their recovery. Inflation was elevated, largely reflecting factors that were expected to be transitory. They remarked that supply and demand imbalances related to the pandemic and the reopening of the economy had contributed to sizable price increases in some sectors. Overall financial conditions remained accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses. Members also acknowledged that the path of the economy continued to depend on the course of the virus. Progress on vaccinations and an easing of supply constraints were expected to support continued gains in economic activity and employment as well as a reduction in inflation, but risks to the economic outlook remained. Members agreed that the postmeeting statement should acknowledge that the sectors of the economy most adversely affected by the pandemic had improved in recent months, but that the summer's rise in COVID-19 cases had slowed their recovery. They also concurred that it would be appropriate to convey less certainty about the path of inflation by noting that the factors driving elevated inflation "are expected to be transitory." In order to provide additional information about these factors, members further decided that the postmeeting statement would say that "supply and demand imbalances related to the pandemic and the reopening of the economy have contributed to sizable price increases in some sectors." Members also agreed to include a sentence stating that "progress on vaccinations and an easing of supply constraints are expected to support continued gains in economic activity and employment as well as a reduction in inflation." Members agreed that the Federal Reserve was committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals. All members reaffirmed that, in accordance with the Committee's goals to achieve maximum employment and inflation at the rate of 2 percent over the longer run, and with inflation having run persistently below this longer-run goal, they would aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent. Members expected to maintain an accommodative stance of monetary policy until those outcomes were achieved. In their discussion of monetary policy in the period ahead, members agreed that, in light of the substantial further progress the economy had made toward the Committee's goals since last December, the Committee should begin to slow the pace of its asset purchases at this meeting. Consistent with this approach, the Committee decided to start reducing the monthly pace of its net asset purchases by $10 billion for Treasury securities and $5 billion for agency MBS. Consequently, the Committee agreed that, beginning with the purchase schedule published in mid-November, it would increase its holdings of Treasury securities by at least $70 billion per month rather than $80 billion per month and would increase its holdings of agency MBS by at least $35 billion per month, rather than $40 billion per month. Because the Open Market Desk would be releasing two monthly purchase schedules between the November and December FOMC meetings, the Committee further decided to add to the postmeeting statement an indication that, beginning in December, the Committee would increase its holdings of Treasury securities by at least $60 billion per month and of agency MBS by at least $30 billion per month. Members decided the postmeeting statement should state that the Committee judged that similar reductions in the pace of net asset purchases would likely be appropriate in subsequent months, implying that increases in securities holdings would cease by the middle of next year under the Committee's outlook. Members also noted that the Committee was prepared to adjust the pace of purchases if warranted by changes in the economic outlook and agreed that the postmeeting statement should say so. Members agreed that the addition of this language would acknowledge the importance of maintaining flexibility to adjust the stance of policy as appropriate in response to changes in the Committee's outlook for the labor market and inflation. Members agreed that the statement should continue to note that the Committee's ongoing asset purchases helped foster smooth market functioning and accommodative financial conditions. Additionally, members decided to introduce into the postmeeting statement a reference to the Federal Reserve's "holdings of securities" in the sentence describing the economic effects of asset purchases. This addition would make clear that, even after net increases in the SOMA portfolio ceased, the Federal Reserve's elevated securities holdings would continue to support accommodative financial conditions. Members agreed that, in assessing the appropriate stance of monetary policy, they would continue to monitor the implications of incoming information for the economic outlook and that they would be prepared to adjust the stance of monetary policy as appropriate in the event that risks emerged that could impede the attainment of the Committee's goals. They also concurred that, in assessing the appropriate stance of monetary policy, they would take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and 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 instructed otherwise, to execute transactions in the SOMA in accordance with the following domestic policy directive, for release at 2:00 p.m.: "Effective November 4, 2021, 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 0 to 1/4 percent. Complete the increase in System Open Market Account (SOMA) holdings of Treasury securities by $80 billion and of agency mortgage-backed securities (MBS) by $40 billion, as indicated in the monthly purchase plans released in mid-October. Increase the SOMA holdings of Treasury securities by $70 billion and of agency MBS by $35 billion, during the monthly purchase period beginning in mid-November. Increase the SOMA holdings of Treasury securities by $60 billion and of agency MBS by $30 billion, during the monthly purchase period beginning in mid-December. Increase holdings of Treasury securities and agency MBS by additional amounts as needed to sustain smooth functioning of markets for these securities. Conduct overnight repurchase agreement operations with a minimum bid rate of 0.25 percent and with an aggregate operation limit of $500 billion; the aggregate operation limit can be temporarily increased at the discretion of the Chair. Conduct overnight reverse repurchase agreement operations at an offering rate of 0.05 percent and with a per-counterparty limit of $160 billion per day; the per-counterparty limit can be temporarily increased at the discretion of the Chair. Roll over at auction all principal payments from the Federal Reserve's holdings of Treasury securities and reinvest all principal payments from the Federal Reserve's holdings of agency debt and agency MBS in agency MBS. Allow modest deviations from stated amounts for purchases and reinvestments, if needed for operational reasons. Engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions." The vote also encompassed approval of the statement below for release at 2:00 p.m.: "The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals. With progress on vaccinations and strong policy support, indicators of economic activity and employment have continued to strengthen. The sectors most adversely affected by the pandemic have improved in recent months, but the summer's rise in COVID-19 cases has slowed their recovery. Inflation is elevated, largely reflecting factors that are expected to be transitory. Supply and demand imbalances related to the pandemic and the reopening of the economy have contributed to sizable price increases in some sectors. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses. The path of the economy continues to depend on the course of the virus. Progress on vaccinations and an easing of supply constraints are expected to support continued gains in economic activity and employment as well as a reduction in inflation. Risks to the economic outlook remain. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation having run persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved. The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee's assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. In light of the substantial further progress the economy has made toward the Committee's goals since last December, the Committee decided to begin reducing the monthly pace of its net asset purchases by $10 billion for Treasury securities and $5 billion for agency mortgage-backed securities. Beginning later this month, the Committee will increase its holdings of Treasury securities by at least $70 billion per month and of agency mortgage-backed securities by at least $35 billion per month. Beginning in December, the Committee will increase its holdings of Treasury securities by at least $60 billion per month and of agency mortgage-backed securities by at least $30 billion per month. The Committee judges that similar reductions in the pace of net asset purchases will likely be appropriate each month, but it is prepared to adjust the pace of purchases if warranted by changes in the economic outlook. The Federal Reserve's ongoing purchases and holdings of securities will continue to foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments." Voting for this action: Jerome H. Powell, John C. Williams, Thomas I. Barkin, Raphael W. Bostic, Michelle W. Bowman, Lael Brainard, Richard H. Clarida, Mary C. Daly, Charles L. Evans, Randal K. Quarles, and Christopher J. Waller. Voting against this action: None. Consistent with the Committee's decision to leave the target range for the federal funds rate unchanged, the Board voted unanimously to maintain the interest rate paid on reserve balances at 0.15 percent, effective November 4, 2021. The Board also voted unanimously to approve establishment of the primary credit rate at the existing level of 0.25 percent, effective November 4, 2021. Following these actions, the Chair commented on the critical importance of maintaining the public's trust and confidence in the Federal Reserve as an institution. In this regard, the Chair noted the recent announcement of changes in the rules regarding financial investments and transactions for Federal Reserve officials and indicated that efforts were under way to implement these new rules expeditiously. It was agreed that the next meeting of the Committee would be held on Tuesday–Wednesday, December 14–15, 2021. The meeting adjourned at 10:35 a.m. on November 3, 2021. Notation Vote By notation vote completed on October 12, 2021, the Committee unanimously approved the minutes of the Committee meeting held on September 21–22, 2021. _______________________ James A. Clouse Secretary 1. The Federal Open Market Committee is referenced as the "FOMC" and the "Committee" in these minutes; the Board of Governors of the Federal Reserve System is referenced as the "Board" 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's session only. Return to text

2021-11-03

Statement

The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals. With progress on vaccinations and strong policy support, indicators of economic activity and employment have continued to strengthen. The sectors most adversely affected by the pandemic have improved in recent months, but the summer's rise in COVID-19 cases has slowed their recovery. Inflation is elevated, largely reflecting factors that are expected to be transitory. Supply and demand imbalances related to the pandemic and the reopening of the economy have contributed to sizable price increases in some sectors. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses. The path of the economy continues to depend on the course of the virus. Progress on vaccinations and an easing of supply constraints are expected to support continued gains in economic activity and employment as well as a reduction in inflation. Risks to the economic outlook remain. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation having run persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer‑term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved. The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee's assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. In light of the substantial further progress the economy has made toward the Committee's goals since last December, the Committee decided to begin reducing the monthly pace of its net asset purchases by $10 billion for Treasury securities and $5 billion for agency mortgage-backed securities. Beginning later this month, the Committee will increase its holdings of Treasury securities by at least $70 billion per month and of agency mortgage‑backed securities by at least $35 billion per month. Beginning in December, the Committee will increase its holdings of Treasury securities by at least $60 billion per month and of agency mortgage-backed securities by at least $30 billion per month. The Committee judges that similar reductions in the pace of net asset purchases will likely be appropriate each month, but it is prepared to adjust the pace of purchases if warranted by changes in the economic outlook. The Federal Reserve's ongoing purchases and holdings of securities will continue to foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments. Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Thomas I. Barkin; Raphael W. Bostic; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Mary C. Daly; Charles L. Evans; Randal K. Quarles; and Christopher J. Waller. Implementation Note issued November 3, 2021

2021-09-22

Statement

The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals. With progress on vaccinations and strong policy support, indicators of economic activity and employment have continued to strengthen. The sectors most adversely affected by the pandemic have improved in recent months, but the rise in COVID-19 cases has slowed their recovery. Inflation is elevated, largely reflecting transitory factors. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses. The path of the economy continues to depend on the course of the virus. Progress on vaccinations will likely continue to reduce the effects of the public health crisis on the economy, but risks to the economic outlook remain. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation having run persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer‑term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved. The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee's assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. Last December, the Committee indicated that it would continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage‑backed securities by at least $40 billion per month until substantial further progress has been made toward its maximum employment and price stability goals. Since then, the economy has made progress toward these goals. If progress continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted. These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments. Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Thomas I. Barkin; Raphael W. Bostic; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Mary C. Daly; Charles L. Evans; Randal K. Quarles; and Christopher J. Waller. Implementation Note issued September 22, 2021

2021-10-13

Minute

Minutes of the Federal Open Market Committee September 21–22, 2021 A joint meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve System was held by videoconference on Tuesday, September 21, 2021, at 1:00 p.m. and continued on Wednesday, September 22, 2021, at 9:00 a.m.1 PRESENT: Jerome H. Powell, Chair John C. Williams, Vice Chair Thomas I. Barkin Raphael W. Bostic Michelle W. Bowman Lael Brainard Richard H. Clarida Mary C. Daly Charles L. Evans Randal K. Quarles Christopher J. Waller James Bullard, Esther L. George, Naureen Hassan, Loretta J. Mester, and Eric Rosengren, Alternate Members of the 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 Michelle A. Smith, Assistant Secretary Mark E. Van Der Weide, General Counsel Michael Held, Deputy General Counsel Trevor A. Reeve, Economist Stacey Tevlin, Economist Beth Anne Wilson, Economist David Altig, Brian M. Doyle, Rochelle M. Edge, Sylvain Leduc, Anna Paulson, and William Wascher, Associate Economists Lorie K. Logan, Manager, System Open Market Account Patricia Zobel, Deputy Manager, System Open Market Account Ann E. Misback, Secretary, Office of the Secretary, Board Matthew J. Eichner,2 Director, Division of Reserve Bank Operations and Payment Systems, Board; Michael S. Gibson, Director, Division of Supervision and Regulation, Board; Andreas Lehnert, Director, Division of Financial Stability, Board Sally Davies, Deputy Director, Division of International Finance, Board Jon Faust and Joshua Gallin, Senior Special Advisers to the Chair, Division of Board Members, Board William F. Bassett, Antulio N. Bomfim, Burcu Duygan-Bump, Jane E. Ihrig, Kurt F. Lewis, Chiara Scotti, and Nitish R. Sinha, Special Advisers to the Board, Division of Board Members, Board Linda Robertson, Assistant to the Board, Division of Board Members, Board Marnie Gillis DeBoer, Senior Associate Director, Division of Monetary Affairs, Board; Susan V. Foley,2 Senior Associate Director, Division of Reserve Bank Operations and Payment Systems, Board; Diana Hancock and David E. Lebow, Senior Associate Directors, Division of Research and Statistics, Board Don H. Kim, Edward Nelson, and Annette Vissing-Jørgensen, Senior Advisers, Division of Monetary Affairs, Board; Jeremy B. Rudd, Senior Adviser, Division of Research and Statistics, Board Andrew Figura and Elizabeth K. Kiser, Associate Directors, Division of Research and Statistics, Board; Paul R. Wood, Associate Director, Division of International Finance, Board Eric C. Engstrom, Deputy Associate Director, Division of Monetary Affairs, Board; Patrick E. McCabe, Deputy Associate Director, Division of Research and Statistics, Board; Skander Van den Heuvel, Deputy Associate Director, Division of Financial Stability, Board; Jeffrey D. Walker2 Deputy Associate Director, Division of Reserve Bank Operations and Payment Systems, Board Brian J. Bonis and Etienne Gagnon, Assistant Directors, Division of Monetary Affairs, Board Penelope A. Beattie,3 Section Chief, Office of the Secretary, Board; Deepa D. Datta,4 Section Chief, Division of International Finance, Board Michele Cavallo, Camelia Minoiu, and Anna Orlik, Principal Economists, Division of Monetary Affairs, Board Randall A. Williams, Lead Information Manager, Division of Monetary Affairs, Board David Na, Senior Financial Institution Policy Analyst, Division of Monetary Affairs, Board Meredith Black, First Vice President, Federal Reserve Bank of Dallas Michael Dotsey and Joseph W. Gruber, Executive Vice Presidents, Federal Reserve Banks of Philadelphia and Kansas City, respectively Anne Baum, Carlos Garriga, Edward S. Knotek II, Giovanni Olivei, and Mark L.J. Wright, Senior Vice Presidents, Federal Reserve Banks of New York, St. Louis, Cleveland, Boston, and Minneapolis, respectively Matthew D. Raskin,2 Vice President, Federal Reserve Bank of New York Andreas L. Hornstein, Senior Advisor, Federal Reserve Bank of Richmond Alex Richter, Economic Policy Advisor and Senior Economist, Federal Reserve Bank of Dallas Keshav Dogra, Senior Economist, Federal Reserve Bank of New York Developments in Financial Markets and Open Market Operations The manager turned first to a discussion of financial market developments over the period. Domestic financial conditions were little changed, on net, and remained highly accommodative. The spread of the Delta variant of the COVID-19 virus weighed on the near-term growth outlook and median respondents to the Open Market Desk's Survey of Primary Dealers marked down projections for gross domestic product (GDP) growth and revised up projections for inflation this year. Nonetheless, expectations for the trajectory of growth beyond 2021 were little changed. Implied forward inflation compensation two to four years ahead based on Treasury Inflation-Protected Securities (TIPS) increased modestly over the intermeeting period. Regarding the outlook for monetary policy, market participants noted policymaker communications suggesting that tapering of asset purchases could begin this year and end by mid-2022. Around half of respondents to the Desk's surveys of primary dealers and market participants viewed December as the most likely timing of the first reduction in the net pace of purchases, al­though respondents also attached significant probability to the first reduction coming in November. Median expectations for the pace of net purchases were consistent with a gradual tapering of net purchases being completed in July of next year, about one to two months earlier than in the previous surveys. Expectations for the target federal funds rate based on survey responses and interest rate futures moved up slightly since the previous meeting. Several central banks announced reductions in the pace of their asset purchase programs or eventual plans for their balance sheets once asset purchases had been completed. These announcements were broadly in line with market participants' expectations and elicited only a modest reaction in financial markets. In Latin America and emerging Europe, some central banks recently tightened policy to address rising inflation pressures. Investors remained focused on other vulnerabilities in emerging markets, and concerns had grown recently about the possible implications of developments in China. The manager turned next to a discussion of money markets and Federal Reserve operations. Domestic funding conditions were stable over the period. The federal funds rate edged lower amid ongoing increases in reserves, but it remained well within the target range; the Secured Overnight Financing Rate (SOFR) was steady at 5 basis points. Participation in the overnight reverse repurchase agreement (ON RRP) facility increased to an average of just over $1 trillion over the period, driven primarily by increased usage by government money market funds. Market participants were attentive over the period to negotiations on the debt limit. Yields on Treasury bills maturing in mid-October to mid-November had become modestly elevated as investors reduced exposures to securities that could be at risk for delayed payments. Market participants noted information in the public domain about measures the Federal Reserve and the Treasury could take around a debt limit event. They pointed, in particular, to the October 2013 FOMC meeting minutes, which highlighted that the Federal Reserve would use normal procedures in its operations, both as the debt limit nears and in the event of a delayed payment. Market participants also focused on a 2013 report by the Treasury Market Practices Group (TMPG), which outlined a process that could be used to delay principal payments on Treasury securities by rolling forward the operational maturity date in order to maintain the ability to transfer such securities over Fedwire®. The TMPG report noted that such a procedure would help support ongoing functioning of markets for securities with delayed payments. This would maintain their eligibility in open market operations under normal procedures. Nevertheless, market participants emphasized that, even with these procedures, a delayed payment would create severe and broad-based market disruption. In light of increased usage of the ON RRP facility and the potential for continued downward pressure on short-term interest rates over the near term, the manager next discussed a staff proposal to increase the per-counterparty limit for the ON RRP facility to $160 billion. Staff analysis suggested that the proposed increase was likely to be sufficient to support effective policy implementation for most foreseeable circumstances. The manager provided a brief update on the new repurchase agreement (repo) facilities that the Committee had announced following its meeting in July. The Desk had been working to onboard depository institutions as additional counterparties for the standing repo facility. In addition, a number of foreign central banks had expressed intent to establish access to the Foreign and International Monetary Authority Repo 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 available at the time of the September 21–22 meeting suggested that U.S. real GDP was increasing in the third quarter at a slower pace than in the second quarter of the year. The pace of improvement in labor market conditions had remained very rapid in July but slowed sharply in August. Consumer price inflation in June and July—as measured by the 12‑month percentage change in the personal consumption expenditures (PCE) price index was elevated. Total nonfarm payroll employment increased sharply in July but rose much less rapidly in August, with job gains in the leisure and hospitality sector slowing to zero. In addition, state and local government employment was reported to have fallen in August, though abnormal seasonal swings had likely distorted recent readings for this sector. As of August, total payroll employment had retraced three-fourths of the losses seen at the onset of the pandemic. The unemployment rate had declined from 5.9 percent in June to 5.2 percent in August; although the unemployment rates for African Americans and Hispanics had also declined, on net, over this period, both rates remained well above the national average. The labor force participation rate edged up, on net, and the employment-to-population (EPOP) ratio rose further in July and August. Private-sector job openings, as measured by the Job Openings and Labor Turnover Survey, increased further in July and continued to suggest that labor demand was extraordinarily high. Initial claims for regular state unemployment insurance remained near the pandemic-period low that had been reached in early September but were still somewhat elevated relative to pre-pandemic levels. Weekly estimates of private-sector payrolls constructed by the Board's staff using data provided by the payroll processor ADP that were available through early September pointed to a modest pickup in the pace of private employment gains relative to August. Average hourly earnings for all employees rose strongly in July and August, with gains that were widespread across industries. Recent monthly increases in average hourly earnings appeared to reflect a combination of continued strong labor demand and increased difficulties in hiring. A staff measure of the 12-month change in the median wage derived from the ADP data had also pointed to strong wage growth, with a pace in August that was well above the growth rates seen before the pandemic. By contrast, the Wage Growth Tracker measure constructed by the Federal Reserve Bank of Atlanta had not shown a similar pickup. The employment cost index of hourly compensation in the private sector, which also includes benefit costs, rose at an annual rate of 3.6 percent over the 6 months ending in June, 1 percentage point faster than the 12‑month change posted in December 2020. Inflation, as measured by either the PCE price index or the consumer price index (CPI), had been boosted by a surge in demand as the economy reopened further, along with the effects of production bottlenecks and supply constraints. Total PCE price inflation was 4.2 percent over the 12 months ending in July, and core PCE price inflation, which excludes changes in consumer energy prices and many consumer food prices, was 3.6 percent over the 12 months ending in July. In contrast, the trimmed mean measure of 12‑month PCE inflation constructed by the Federal Reserve Bank of Dallas was 2.0 percent in July. In August, the 12-month change in the CPI was 5.3 percent, while the core CPI rose 4.0 percent over the same period. In the third quarter of 2021, the staff's common inflation expectations index, which combines information from many indicators of inflation expectations and inflation compensation, was little changed relative to the second quarter and was near its average over the decade before the pandemic. Although real PCE declined in July, the components of retail sales used to estimate PCE rose strongly in August, returning to levels seen in the spring. However, concerns about the course of the pandemic appeared to be weighing on consumer services spending, as available indicators pointed to a slowing in demand for services sensitive to social distancing. In addition, measures of consumer confidence had moved lower in August. Demand for housing appeared to have remained very strong, but incoming data suggested that materials shortages and a lack of developed lots for construction were restraining residential building activity. Available indicators suggested that growth in business fixed investment was slowing somewhat in the third quarter as supply bottlenecks—particularly for motor vehicles—weighed on business equipment spending. Manufacturing output rose strongly in July and ticked up further in August. In August, activity in the oil and gas sector and production of petrochemicals had been held down by shutdowns related to Hurricane Ida. Supply chain issues faced by a number of other industries also continued to be a drag on overall factory output. Total real government purchases appeared to be increasing in the third quarter after having moved lower in the second quarter. Available data suggested that federal nondefense purchases were declining sharply in the third quarter but that robust gains in real state and local purchases were offsetting this decline. The U.S. international trade deficit remained high in July. After rising in June, real goods imports fell back in July, held down by a sizable decline in consumer goods imports, but the levels of consumer and total goods imports remained well above pre-COVID-19 levels. Real goods exports edged up in July and were close to pre-pandemic levels. Bottlenecks in the global semiconductor industry continued to weigh on exports and imports of automotive products, and shipping congestion continued to restrain trade overall. Exports and imports of services rose again in July, but they remained low relative to pre-pandemic levels, largely because international travel was still depressed. In the advanced foreign economies (AFEs), where high vaccination rates had increased resilience to COVID-19 outbreaks, incoming data were consistent with economic growth in the third quarter at a slightly faster pace than in the second quarter. With the economic reopening under way, purchasing managers indexes for both manufacturing and services remained strong in Europe and Canada. Conversely, in emerging market economies (EMEs)—especially in Southeast Asia, where vaccination rates were lower—a global resurgence in COVID-19 infections due to the Delta variant led to renewals of public health restrictions. These restrictions weakened retail sales and contributed to labor shortages and transportation congestion, disrupting global supply chains. Inflation abroad was elevated, reflecting reversals of price declines early in the pandemic, past increases in energy and commodity prices, upward pressures from supply bottlenecks, and past exchange rate depreciations in some EMEs. Staff Review of the Financial Situation Financial market prices were little changed over the intermeeting period. Concerns over the period about the effects of COVID-19 developments on economic performance and, late in the period, about a heavily indebted Chinese property developer appeared to have only marginal net effects on financial asset prices. The incoming domestic economic data were generally viewed as mixed. Yields on Treasury securities of intermediate maturities increased modestly, the market-implied path of the federal funds rate steepened, domestic equity prices were unchanged, and speculative-grade corporate bond spreads narrowed modestly. Short-term funding markets were stable. Market-based financing conditions were robust, and credit availability improved for riskier borrowers. Yields on intermediate-maturity Treasury securities increased modestly, on net, amid mixed news on economic activity and the pandemic, and slightly less-accommodative-than-expected July FOMC communications. Measures of inflation compensation declined modestly, on net. The market-implied level of the effective federal funds rate for the ends of 2023 and 2024 rose 12 and 17 basis points, respectively. Broad stock market prices were about unchanged, on net, over the intermeeting period. Early in the period, concerns over the Delta variant were a headwind for stock prices. Prices recovered following the FDA's first full approval of a COVID-19 vaccine and signs that the Delta variant surge was starting to abate. Over the intermeeting period, spreads of yields on speculative-grade corporate bonds over those on comparable-maturity Treasury securities narrowed slightly, on net. Investment-grade corporate bond spreads were little changed, on net, and spreads of municipal bond indexes increased slightly but remained well below pre-pandemic levels. On September 20, stock market prices fell notably and speculative-grade yield spreads widened amid rising concerns about the creditworthiness of a Chinese property developer, but these moves were mostly reversed during the following day, particularly in the stock market. Short-term funding markets were stable over the intermeeting period. The effective federal funds rate declined slightly, from 10 basis points at the beginning of the period to 8 basis points at the end, while the SOFR remained at 5 basis points throughout the period. Assets under management (AUM) of government money market mutual funds increased modestly to near all-time highs. Treasury bill supply continued to decline with the reinstatement of the debt ceiling. Higher AUM together with declining Treasury bill supply led government money market mutual funds to increase their participation at the Federal Reserve's ON RRP facility. Participation in ON RRP operations increased from an average of $808 billion over the previous intermeeting period to $1.08 trillion. Foreign asset prices fluctuated moderately over the intermeeting period as market participants continued to assess the effect of the Delta variant on global growth and inflation. Concerns about a potential default by a heavily indebted Chinese property developer and risks of a downturn in the Chinese real estate sector intensified later in the period, but effects on broader financial markets were limited. On balance, major foreign equity indexes were mixed, the broad dollar appreciated a touch, and sovereign yields in most major AFEs increased moderately. In the euro area and the United Kingdom, higher-than-expected inflation data contributed to the rise in yields and inflation compensation measures. In domestic credit markets, large nonfinancial firms had ample access to market-based financing as market participants appeared confident in the domestic corporate credit outlook. After accounting for the seasonal summer lull in activity, gross corporate bond issuance remained solid in July and August. Leveraged loan issuance was also strong in July and August. Equity funding raised through traditional initial public offerings remained robust over the summer, while equity issuance through special purpose acquisition companies remained at the subdued levels seen in recent months. Commercial and industrial (C&I) loans declined notably through August, amid ongoing forgiveness of Paycheck Protection Program (PPP) loans. Excluding PPP loans, C&I loan balances were estimated to have been largely unchanged between June and July. The credit quality of large nonfinancial corporations remained strong with a positive outlook. The volume of credit rating upgrades for nonfinancial bonds outpaced downgrades noticeably in July and August. Trailing default rates on corporate bonds and leveraged loans remained low, as did market indicators of future default expectations. In the municipal bond market, financing conditions remained accommodative. Issuance of municipal debt was strong in July and August and indicators of credit quality of municipal debt remained healthy, though municipal bond impairments—that is, credit events that are less severe than payment defaults—remained elevated in August. These impairments were concentrated in the retirement and assisted living sector and represent a very small fraction of the municipal market. Survey-based indicators suggest small business owners, especially from COVID-sensitive sectors that include lodging and food services, arts, entertainment and recreation, and educational services, became more pessimistic about their financial prospects, largely because of a worsening of near-term expectations for sales and general business conditions. Small business loan originations were above pre-pandemic levels in June and July, but increased concerns about the Delta variant depressed loan demand in August. Financing conditions in commercial real estate (CRE) improved over the intermeeting period amid increasing CRE property prices. CRE loan growth at banks strengthened and issuance of commercial mortgage-backed securities (CMBS) remained robust over the summer. Spreads of agency CMBS were generally at or below pre-pandemic levels. Strong investor appetite for CMBS was supported by falling delinquency rates on mortgages, al­though delinquency rates remained elevated for CMBS backed by hotel and retail properties. Financing remained limited for the hard-hit hotel sector. In the residential mortgage market, financing conditions remained accommodative particularly for borrowers who met standard conforming loan criteria. Mortgage rates increased slightly over the intermeeting period but remained very low by historical standards. Credit availability continued to improve, especially for jumbo loans and lower-score Federal Housing Administration borrowers. Indicators of mortgage originations for home-purchases and refinancing were solid through August. The share of mortgages in forbearance declined further in July and August. Financing conditions for consumer credit remained accommodative for most borrowers, especially those with stronger credit scores. Consumer credit and the credit card market expanded at a strong pace in June before stepping down somewhat in July. Conditions for nonprime consumers in the credit card market eased from tight levels. Auto loan growth slowed in June and July from its brisk pace in May. Conditions in the asset-backed securities market were robust over the intermeeting period. Staff Economic Outlook The projection for U.S. economic activity prepared by the staff for the September FOMC meeting was broadly similar to the July projection. In the second half of 2021, supply constraints were expected to resolve more slowly than previously assumed; in addition, the recent rise in COVID‑19 cases was viewed as likely to exert a larger amount of restraint on consumer spending, hiring, and labor supply than previously anticipated. Even so, real GDP was expected to post a sizable gain over the second half of 2021 and over the year as a whole, resulting in a correspondingly large decline in the unemployment rate. In 2022, GDP was expected to rise more slowly than in 2021 but at a still-solid pace, supported by the continued reopening of the economy and an easing of supply constraints. With the boost from these factors fading, real GDP growth was projected to step down noticeably in 2023 and to be roughly equal to potential output growth in 2023 and 2024. However, the level of real GDP was expected to remain well above potential throughout the projection period, resulting in a decline in the unemployment rate to historically low levels. The staff's near-term outlook for inflation was revised up further in response to incoming data, but the staff continued to expect that this year's rise in inflation would prove to be transitory. The 12-month change in total and core PCE prices was well above 2 percent in July, and available data suggested that PCE price inflation had remained high in August. The staff interpreted recent inflation data as indicating that supply constraints were putting a larger amount of upward pressure on prices than previously anticipated; relative to the July projection, these supply constraints were also expected to take longer to resolve. As a result, the 12‑month change in PCE prices was projected to hold roughly steady over the remainder of 2021 and to end the year well above 2 percent. Over the following year, the boost to consumer prices caused by supply issues was expected to partly reverse and import prices were expected to decelerate sharply. PCE price inflation was therefore expected to step down to a little below 2 percent in 2022; thereafter, additional increases in resource utilization were expected to cause it to gradually edge higher and to reach 2 percent in 2024. The staff continued to judge that the risks to the baseline projection for economic activity were skewed to the downside. In particular, the future course of the pandemic was seen as an important source of downside risk. The staff also continued to judge that the risks around the inflation projection were tilted to the upside, with the possibility of more severe and persistent supply issues viewed as especially salient. In addition, the staff pointed to a risk that longer-run inflation expectations would move appreciably higher and lead to persistently elevated inflation. Participants' Views on Current Economic Conditions and the Economic Outlook In conjunction with this FOMC meeting, participants submitted their projections of the most likely outcomes for real GDP growth, the unemployment rate, and inflation for each year from 2021 through 2024 and over the longer run based on their individual assessments of appropriate monetary policy, including the path of 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. A Summary of Economic Projections was released to the public following the conclusion of the meeting. In their discussion of current conditions, participants noted that, with progress on vaccinations and strong policy support, indicators of economic activity and employment had continued to strengthen. The sectors most adversely affected by the pandemic had improved in recent months, but the rise in COVID-19 cases had slowed their recovery. Inflation was elevated, largely reflecting transitory factors. Overall financial conditions remained accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses. Participants noted that the path of the economy continued to depend on the course of the virus. Progress on vaccinations would likely continue to reduce the effects of the public health crisis on the economy, but risks to the economic outlook remained. Participants observed that economic activity had continued to expand in recent months, though at a less rapid pace than in the first half of the year. They marked down their projections of real GDP growth for the year, pointing to a reassessment of the severity and likely duration of supply constraints or of the effects of the spread of the Delta variant on the economy. Still, participants foresaw rapid growth this year, and several highlighted that the economy had shown resilience in the face of the recent wave of infections. In their discussion of the household sector, participants noted that consumer spending had decelerated in recent months after expanding at a very rapid pace in the first half of the year. The spread of the Delta variant was weighing on spending for some consumer services, and low inventories and high prices due to supply constraints were restraining spending on many goods, most notably motor vehicles. Nonetheless, participants expected the accumulated stock of savings, the release of pent-up demand, and progress on vaccinations to continue to support household spending in coming months. Participants noted that residential construction had been restrained by shortages of materials and other inputs and that home sales had been held back by limited supplies of available homes. With respect to the business sector, participants observed that firms in a number of industries were facing challenges keeping up with strong demand due to widespread supply chain bottlenecks as well as labor shortages. Some participants commented that the recent global wave of COVID-19 infections and associated business shutdowns were exacerbating or prolonging these problems. The supply chain bottlenecks were creating challenges for a number of manufacturers; the problems were seen as especially acute for the motor vehicle industry, where the shortages of semiconductor chips had sharply curtailed production. Retail industries were also facing various bottlenecks, including those stemming from port congestion and delays in ground transportation. Participants noted that their District contacts generally did not expect these bottlenecks to be fully resolved until sometime next year or even later. A couple of participants noted that inventories-to-sales ratios were at or near record-low levels in many industries, and the need to rebuild them would boost business investment going forward. Participants also discussed the developments in oil, gasoline, and agricultural sectors. A couple of participants pointed out that Hurricane Ida significantly affected the oil and gas industries, curtailing U.S. offshore production at a time of low inventories. A couple of other participants noted that elevated crop prices were continuing to boost income in the agricultural sector. Participants noted that labor market conditions had continued to improve in recent months. The unemployment rate declined further to 5.2 percent in August, and a few participants noted a further pickup in recent months in the level of activity indicator in the Federal Reserve Bank of Kansas City's Labor Market Conditions Indicators. After a rapid pace of almost 1 million per month in June and July, job gains slowed to 235,000 in August as the resurgence of COVID-19 cases weighed on employment in high-contact service sectors, particularly in the leisure and hospitality sector. Meanwhile, the labor force participation rate was little changed, remaining at a lower level than its pre-pandemic values. Some participants noted that the increase in labor force participation that they had expected had not yet materialized in the wake of the reopening of schools and the expiration of the extended unemployment benefits, and that this likely reflected in part concerns about the resurgence of the virus, childcare challenges, and the uncertainties generated by ongoing disruptions to in-person schooling. Participants expected the labor market to continue to improve in coming months. Several participants indicated that a rise in the labor force participation rate might lag the improvements in other indicators such as the unemployment rate—a pattern consistent with past business cycle recoveries. Participants expressed a range of views regarding the extent to which they expected the labor force participation rate and the EPOP ratio would move back to their pre-pandemic levels. Various participants suggested that a complete return to pre-pandemic conditions was unlikely, as the pandemic had prompted reductions in the workforce that were likely to persist, including a large number of retirements and other departures from the labor force. A number of others, however, assessed that once the COVID-related concerns that were currently weighing on labor force participation passed, the participation rate and the EPOP ratio could return to, or even exceed, the pre-pandemic levels. Some participants remarked that the labor market recovery continued to be uneven across demographic and income groups and across sectors, with the recovery being particularly slow for women with young children and people with lower incomes. Participants noted that their District contacts had broadly reported having difficulty hiring workers. The labor shortages were causing firms to reduce hours and scale back production while also leading employers to provide incentives to attract and retain workers, including wage increases and signing and retention bonuses. The rate of nominal wage growth had been robust in recent data; for example, average hourly earnings were up 4.9 percent at an annualized rate over the past six months. In their discussion of inflation, participants observed that the inflation rate was elevated, and they expected that it would likely remain so in coming months before moderating. Participants marked up their inflation projections, as they assessed that supply constraints in product and labor markets were larger and likely to be longer lasting than previously anticipated. Some participants expressed concerns that elevated rates of inflation could feed through into longer-term inflation expectations of households and businesses or saw recent inflation data as suggestive of broader inflation pressures. Several other participants pointed out that the largest contributors to the recent elevated measures of inflation were a handful of COVID-related, pandemic-sensitive categories in which specific, identifiable bottlenecks were at play. This observation suggested that the upward pressure on prices would abate as the COVID-related demand and supply imbalances subsided. These participants noted that prices in some of those categories showed signs of stabilizing or even turned down of late. Many participants pointed out that the owners' equivalent rent component of price indexes should be monitored carefully, as rising home prices could lead to upward pressure on rents. A few participants noted that there was not yet evidence that robust wage growth was exerting upward pressure on prices to a significant degree, but also that the possibility merited close monitoring. In their comments on inflation expectations, several participants observed that measures of longer-term inflation expectations, including TIPS- and survey-based measures, had remained in ranges that were viewed as broadly consistent with the Committee's longer-run inflation goal, or that the distribution across households of longer-term expected inflation had remained stable over the past two years. Many participants noted the substantial rise in one- and three-year measures of inflation expectations in the Federal Reserve Bank of New York's Survey of Consumer Expectations or in the one-year measure in the University of Michigan Surveys of Consumers. A few participants remarked that these survey measures tended to be sensitive to movements in actual inflation, or that the recent rise was consistent with previous historical relationships between such measures and actual inflation. In discussing the uncertainty and risks associated with the economic outlook, participants noted that uncertainty remained high. A number of participants judged that the uncertain course of the virus, supply chain disruptions, and labor shortages complicated the task of interpreting incoming economic data and assessing progress toward the Committee's goals. Participants generally saw the risks to the outlook for economic activity as broadly balanced. Uncertainty around the course of the virus, the resolution of supply constraints, and fiscal measures were cited as presenting both upside and downside risks. In addition, some participants mentioned the risks associated with high asset valuations in the United States and abroad, and a number of participants commented on the importance of resolving the issues involving the federal government budget and debt ceiling in a timely manner. Most participants saw inflation risks as weighted to the upside because of concerns that supply disruptions and labor shortages might last longer and might have larger or more persistent effects on prices and wages than they currently assumed. A few participants commented that there were also some downside risks for inflation, as the factors that had held inflation down over the previous long expansion were likely still in place. In their consideration of the stance of monetary policy, participants reaffirmed the Federal Reserve's commitment to using its full range of tools to support the U.S. economy during this challenging time, thereby promoting the Committee's statutory goals of maximum employment and price stability. Participants judged that the current stance of monetary policy remained appropriate to promote maximum employment as well as to achieve inflation that averages 2 percent over time and longer-term inflation expectations that are well anchored at 2 percent. Participants also reiterated that the existing outcome-based guidance implied that the paths of the federal funds rate and the balance sheet would depend on actual progress toward reaching the Committee's maximum-employment and inflation goals. Participants resumed their discussions on the progress made toward the Committee's goals since December 2020, when the Committee adopted its guidance regarding asset purchases and indicated that purchases would continue at their current pace until substantial further progress had been made toward the Committee's goals of maximum employment and price stability. These purchases had been a critical part of the Federal Reserve's efforts to foster smooth financial market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses as well as the economic recovery. Most participants remarked that the standard of "substantial further progress" had been met with regard to the Committee's price-stability goal or that it was likely to be met soon. With regard to the Committee's maximum-employment goal, participants considered the cumulative degree of improvement in the labor market since December 2020. In doing so, participants cited the progress recorded in a number of individual series, including, among others, the employment-to-population ratio, the unemployment rate, claims for unemployment insurance, job openings, nominal wage growth, and increases in payrolls, as well as in summary measures of the labor situation. Some participants observed that progress on labor force participation was lagging. Many participants noted that although the economic recovery had slowed recently and the August increase in payrolls had fallen short of expectations, the labor market had continued to show improvement since the Committee's previous meeting. A number of participants assessed that the standard of substantial further progress toward the goal of maximum employment had not yet been attained but that, if the economy proceeded roughly as they anticipated, it may soon be reached. On the basis of the cumulative performance of the labor market since December 2020, a number of other participants indicated that they believed that the test of "substantial further progress" toward maximum employment had been met. Some of these participants also suggested that labor supply constraints were the main impediments to further improvement in labor market conditions rather than lack of demand. They noted that adding monetary policy accommodation at this time would not address such constraints or that the costs of continuing asset purchases might be beginning to exceed their benefits. All participants agreed that it would be appropriate for the current meeting's postmeeting statement to relay the Committee's judgment that, if progress continued broadly as expected, a moderation in the pace of asset purchases may soon be warranted. Participants also expressed their views on how slowing in the pace of purchases might proceed. In particular, participants commented on an illustrative path, developed by the staff and reflecting participants' discussions at the Committee's July meeting, that gave the speed and composition associated with a tapering of asset purchases. The illustrative tapering path was designed to be simple to communicate and entailed a gradual reduction in the pace of net asset purchases that, if begun later this year, would lead the Federal Reserve to end purchases around the middle of next year. The path featured monthly reductions in the pace of asset purchases, by $10 billion in the case of Treasury securities and $5 billion in the case of agency mortgage-backed securities (MBS). Participants generally commented that the illustrative path provided a straightforward and appropriate template that policymakers might follow, and a couple of participants observed that giving advance notice to the general public of a plan along these lines may reduce the risk of an adverse market reaction to a moderation in asset purchases. Participants noted that, in keeping with the outcome-based standard for initiating a tapering of asset purchases, the Committee could adjust the pace of the moderation of its purchases if economic developments were to differ substantially from what they expected. Several participants indicated that they preferred to proceed with a more rapid moderation of purchases than described in the illustrative examples. No decision to proceed with a moderation of asset purchases was made at the meeting, but participants generally assessed that, provided that the economic recovery remained broadly on track, a gradual tapering process that concluded around the middle of next year would likely be appropriate. Participants noted that if a decision to begin tapering purchases occurred at the next meeting, the process of tapering could commence with the monthly purchase calendars beginning in either mid-November or mid-December. Many participants remarked upon risk-management considerations and the way in which these figured into their thinking on asset purchases and the appropriate policy stance. A number of downside risks to the economic outlook were cited, including a potential tightening of financial conditions, the possibility that another rise in COVID-19 cases would slow the economic recovery by more than expected, and the prospect that fiscal policy could become a source of economic headwinds as the effects of previous support measures receded. Upside risks to the economic outlook included the possibility that there would be additional expansionary fiscal actions or that consumer spending would rise by more than expected as households reduced the large volume of savings that they had accumulated during the pandemic. With regard to inflation, upside risks cited included the possibility that elevated levels of inflation would continue for longer than expected, especially if labor and other supply shortages proved more persistent than currently anticipated, or that longer-term inflation expectations might move above levels consistent with the Committee's longer-term inflation objective of 2 percent. Downside risks to inflation included the possibility of a decline in inflation expectations that might occur if the public misconstrued the Federal Reserve's reaction function as less accommodative than it actually was. Several participants expressed concern that the high degree of accommodation being provided by monetary policy, including through continued asset purchases, could increase risks to financial stability. Participants reaffirmed that the Committee's "substantial further progress" standard regarding its asset purchases was distinct from the criteria given in its forward guidance on the federal funds rate and that a policy shift toward a moderation of asset purchases provided no direct signal about its interest rate policy. Rather, the Committee had articulated a different, and more stringent, test concerning the conditions that would need to be met before it started raising the target range for the federal funds rate. Various participants stressed that economic conditions were likely to justify keeping the rate at or near its lower bound over the next couple of years. In addition to noting that the economy was still well below maximum employment, several of these participants suggested that there would likely be sustained downward pressure on inflation in the years ahead. These participants stated that, in such circumstances, a major challenge facing policymakers—especially in the presence of the effective lower bound on the federal funds rate—was to maintain a policy stance sufficiently accommodative to keep average inflation at 2 percent and thereby bolster the credibility of the Committee's new policy framework, facilitating the achievement of both maximum employment and price stability. In contrast, a number of participants raised the possibility of beginning to increase the target range by the end of next year because they expected that the labor market and inflation outcomes specified in the Committee's guidance on the federal funds rate might be achieved by that time; some of these participants saw inflation as likely to remain elevated in 2022 with risks to the upside. Committee Policy Action In their discussion of monetary policy for this meeting, members agreed that with progress on vaccinations and strong policy support, indicators of economic activity and employment had continued to strengthen. They noted that the sectors most adversely affected by the pandemic had improved in recent months but that the rise in COVID-19 cases had slowed their recovery. Inflation was elevated, largely reflecting transitory factors. Overall financial conditions remained accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses. Members also acknowledged that the path of the economy continued to depend on the course of the virus. Progress on vaccinations would likely continue to reduce the effects of the public health crisis on the economy, but risks to the economic outlook remained. Members agreed that the Federal Reserve was committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals. All members reaffirmed that, in accordance with the Committee's goals to achieve maximum employment and inflation at the rate of 2 percent over the longer run, and with inflation having run persistently below this longer-run goal, they would aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent. Members expected to maintain an accommodative stance of monetary policy until those outcomes were achieved. All members agreed to keep the target range for the federal funds rate at 0 to 1/4 percent, and they expected that it would be appropriate to maintain this target range until labor market conditions had reached levels consistent with the Committee's assessments of maximum employment and inflation had risen to 2 percent and is on track to moderately exceed 2 percent for some time. Last December, the Committee indicated that it would continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency MBS by at least $40 billion per month until substantial further progress has been made toward its maximum employment and price stability goals. The members commented that, since then, the economy had made progress toward these goals and that, if progress continued broadly as expected, a moderation in the pace of asset purchases may soon be warranted. They judged that these asset purchases would help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses. Members agreed that, in assessing the appropriate stance of monetary policy, they would continue to monitor the implications of incoming information for the economic outlook and that they would be prepared to adjust the stance of monetary policy as appropriate in the event that risks emerged that could impede the attainment of the Committee's goals. Members also concurred that, in assessing the appropriate stance of monetary policy, they would take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments. Members agreed that the postmeeting statement should acknowledge the slowing of the economic recovery, as indicated in data received since the July meeting, as well as ongoing elevated inflation readings. In light of these developments, they agreed that the Committee should indicate that the sectors of the economy most adversely affected by the pandemic had improved in recent months but that the rise in COVID-19 cases had slowed their recovery, and they also concurred that it would be appropriate to characterize inflation as being "elevated" in place of stating that inflation had "risen." Members further decided to add to the postmeeting statement an indication that if progress toward the maximum-employment and price-stability goals continued broadly as expected, the Committee judged that a moderation in the pace of asset purchases may soon be warranted. Members agreed that the addition of this language was an appropriate means of acknowledging that, in the near future, the Committee would likely assess that the standard for reducing the pace of net asset purchases had been met. With regard to the directive to the Desk, members agreed that the directive should incorporate the proposed increase in the per-counterparty limit for the ON RRP facility to $160 billion. 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, for release at 2:00 p.m.: "Effective September 23, 2021, 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 0 to 1/4 percent. Increase the System Open Market Account holdings of Treasury securities by $80 billion per month and of agency mortgage-backed securities (MBS) by $40 billion per month. Increase holdings of Treasury securities and agency MBS by additional amounts and purchase agency commercial mortgage-backed securities (CMBS) as needed to sustain smooth functioning of markets for these securities. Conduct overnight repurchase agreement operations with a minimum bid rate of 0.25 percent and with an aggregate operation limit of $500 billion; the aggregate operation limit can be temporarily increased at the discretion of the Chair. Conduct overnight reverse repurchase agreement operations at an offering rate of 0.05 percent and with a per-counterparty limit of $160 billion per day; the per- counterparty limit can be temporarily increased at the discretion of the Chair. Roll over at auction all principal payments from the Federal Reserve's holdings of Treasury securities and reinvest all principal payments from the Federal Reserve's holdings of agency debt and agency MBS in agency MBS. Allow modest deviations from stated amounts for purchases and reinvestments, if needed for operational reasons. Engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions." The vote also encompassed approval of the statement below for release at 2:00 p.m.: "The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals. With progress on vaccinations and strong policy support, indicators of economic activity and employment have continued to strengthen. The sectors most adversely affected by the pandemic have improved in recent months, but the rise in COVID-19 cases has slowed their recovery. Inflation is elevated, largely reflecting transitory factors. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses. The path of the economy continues to depend on the course of the virus. Progress on vaccinations will likely continue to reduce the effects of the public health crisis on the economy, but risks to the economic outlook remain. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation having run persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer‑term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved. The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee's assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. Last December, the Committee indicated that it would continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage‑backed securities by at least $40 billion per month until substantial further progress has been made toward its maximum employment and price stability goals. Since then, the economy has made progress toward these goals. If progress continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted. These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments." Voting for this action: Jerome H. Powell, John C. Williams, Thomas I. Barkin, Raphael W. Bostic, Michelle W. Bowman, Lael Brainard, Richard H. Clarida, Mary C. Daly, Charles L. Evans, Randal K. Quarles, and Christopher J. Waller. Voting against this action: None. Consistent with the Committee's decision to leave the target range for the federal funds rate unchanged, the Board voted unanimously to maintain the interest rate paid on reserve balances at 0.15 percent, effective September 23, 2021. The Board also voted unanimously to approve establishment of the primary credit rate at the existing level of 0.25 percent, effective September 23, 2021. Following the FOMC policy vote, the Chair emphasized that maintaining the public trust is absolutely essential for the work of the Federal Reserve. In light of recent questions regarding the financial transactions of senior officials, the Chair indicated that the staff would conduct a thorough review of the Federal Reserve's current rules and regulations regarding the financial holdings and practices of Federal Reserve officials. This deliberate and thoughtful review will focus on strengthening Federal Reserve rules and standards in ways that will help guard against even the appearance of conflicts of interest or any other improprieties. It was agreed that the next meeting of the Committee would be held on Tuesday–Wednesday, November 2–3, 2021. The meeting adjourned at 10:45 a.m. on September 22, 2021. Notation Vote By notation vote completed on August 17, 2021, the Committee unanimously approved the minutes of the Committee meeting held on July 27–28, 2021. _______________________ James A. Clouse Secretary 1. The Federal Open Market Committee is referenced as the "FOMC" and the "Committee" in these minutes; the Board of Governors of the Federal Reserve System is referenced as the "Board" in these minutes. Return to text 2. Attended through the discussion of developments in financial markets and open market operations. (This footnote was corrected on November 26, 2021, to replace an erroneous reference to a "discussion of asset purchases.") Return to text 3. Attended Tuesday's session only. Return to text 4. Attended the discussion of economic developments and the outlook. Return to text

2021-07-28

Statement

The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals. With progress on vaccinations and strong policy support, indicators of economic activity and employment have continued to strengthen. The sectors most adversely affected by the pandemic have shown improvement but have not fully recovered. Inflation has risen, largely reflecting transitory factors. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses. The path of the economy continues to depend on the course of the virus. Progress on vaccinations will likely continue to reduce the effects of the public health crisis on the economy, but risks to the economic outlook remain. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation having run persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer‑term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved. The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee's assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. Last December, the Committee indicated that it would continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage‑backed securities by at least $40 billion per month until substantial further progress has been made toward its maximum employment and price stability goals. Since then, the economy has made progress toward these goals, and the Committee will continue to assess progress in coming meetings. These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments. Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Thomas I. Barkin; Raphael W. Bostic; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Mary C. Daly; Charles L. Evans; Randal K. Quarles; and Christopher J. Waller. Implementation Note issued July 28, 2021

2021-08-18

Minute

Minutes of the Federal Open Market Committee July 27-28, 2021 A joint meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve System was held by videoconference on Tuesday, July 27, 2021, at 9:00 a.m. and continued on Wednesday, July 28, 2021, at 9:00 a.m.1 PRESENT: Jerome H. Powell, Chair John C. Williams, Vice Chair Thomas I. Barkin Raphael W. Bostic Michelle W. Bowman Lael Brainard Richard H. Clarida Mary C. Daly Charles L. Evans Randal K. Quarles Christopher J. Waller James Bullard, Esther L. George, Naureen Hassan, Loretta J. Mester, and Eric Rosengren, Alternate Members of the 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 Michelle A. Smith, Assistant Secretary Mark E. Van Der Weide, General Counsel Michael Held, Deputy General Counsel Trevor A. Reeve, Economist Stacey Tevlin, Economist Beth Anne Wilson, Economist Shaghil Ahmed, Kartik B. Athreya, Brian M. Doyle, Rochelle M. Edge, Beverly Hirtle, and William Wascher, Associate Economists Lorie K. Logan, Manager, System Open Market Account Patricia Zobel, Deputy Manager, System Open Market Account Ann E. Misback, Secretary, Office of the Secretary, Board Matthew J. Eichner,2 Director, Division of Reserve Bank Operations and Payment Systems, Board; Michael S. Gibson, Director, Division of Supervision and Regulation, Board; Andreas Lehnert, Director, Division of Financial Stability, Board Jon Faust3 and Joshua Gallin, Senior Special Advisers to the Chair, Division of Board Members, Board William F. Bassett, Antulio N. Bomfim, Burcu Duygan-Bump, Jane E. Ihrig, Kurt F. Lewis, Chiara Scotti, and Nitish R. Sinha, Special Advisers to the Board, Division of Board Members, Board Elizabeth Klee, Senior Associate Director, Division of Financial Stability, Board; David E. Lebow, Michael G. Palumbo, and John J. Stevens, Senior Associate Directors, Division of Research and Statistics, Board; Min Wei, Senior Associate Director, Division of Monetary Affairs, Board Brett Berger,2 Senior Adviser, Division of International Finance, Board; Ellen E. Meade and Edward Nelson, Senior Advisers, Division of Monetary Affairs, Board Christopher J. Gust, Associate Director, Division of Monetary Affairs, Board; Paul R. Wood, Associate Director, Division of International Finance, Board Stephanie E. Curcuru2 and Andrea Raffo, Deputy Associate Directors, Division of International Finance, Board; Laura Lipscomb2 and Zeynep Senyuz, Deputy Associate Directors, Division of Monetary Affairs, Board; Norman J. Morin and Karen M. Pence, Deputy Associate Directors, Division of Research and Statistics, Board; Jeffrey D. Walker,2 Deputy Associate Director, Division of Reserve Bank Operations and Payment Systems, Board Jennifer Gallagher, Special Assistant to the Board, Division of Board Members, Board Brian J. Bonis and Etienne Gagnon,2 Assistant Directors, Division of Monetary Affairs, Board Alyssa G. Anderson2 and Andrew Meldrum,2 Section Chiefs, Division of Monetary Affairs, Board; Penelope A. Beattie,4 Section Chief, Office of the Secretary, Board Mark A. Carlson, Senior Economic Project Manager, Division of Monetary Affairs, Board David H. Small, Project Manager, Division of Monetary Affairs, Board Erin E. Ferris2 and Andrei Zlate, Principal Economists, Division of Monetary Affairs, Board Randall A. Williams, Lead Information Manager, Division of Monetary Affairs, Board Isabel Cairó, Senior Economist, Division of Monetary Affairs, Board James M. Trevino,2 Senior Economic Modeler, Division of Monetary Affairs, Board Isaiah C. Ahn, Senior Staff Assistant, Division of Monetary Affairs, Board Kathleen O. Paese, First Vice President, Federal Reserve Bank of St. Louis Michael Dotsey, Joseph W. Gruber, and Ellis W. Tallman, Executive Vice Presidents, Federal Reserve Banks of Philadelphia, Kansas City, and Cleveland, respectively Anne Baum, Spencer Krane, David C. Wheelock, Mark L.J. Wright, and Nathaniel Wuerffel,2 Senior Vice Presidents, Federal Reserve Banks of New York, Chicago, St. Louis, Minneapolis, and New York, respectively Dina Marchioni,2 Thomas Mertens, Jon Willis, and Mark A. Wynne, Vice Presidents, Federal Reserve Banks of New York, San Francisco, Atlanta, and Dallas, respectively Jeffrey Moore2 and Brett Rose,2 Assistant Vice Presidents, Federal Reserve Bank of New York Daniel Cooper, Senior Economist and Policy Advisor, Federal Reserve Bank of Boston Ellen Correia-Golay2 and Brian Greene,2 Markets Officers, Federal Reserve Bank of New York Developments in Financial Markets and Open Market Operations The manager turned first to a discussion of developments in financial markets. Although there were notable moves in some asset prices over the intermeeting period, overall financial conditions ended the period little changed at historically accommodative levels. Market participants seemed to interpret communications associated with the June FOMC meeting as signaling a less accommodative path of monetary policy than had been anticipated. Implied rates on interest rate futures initially rose following the meeting but subsequently retraced, and expectations regarding the path of the target federal funds rate over the next few years ended the period only modestly changed. Longer-term yields fell notably over the period, with the declines concentrated in far-forward rates. A significant portion of these movements seemed to reflect changes in term premiums. Market participants pointed to a number of factors as driving the movement in longer-term yields, most prominently including Federal Reserve policy communications, investor positioning, and changes in expectations regarding the course of the pandemic. With respect to the path of net asset purchases, respondents to the Open Market Desk's surveys of primary dealers and market participants expected communications on asset purchases to evolve gradually, with signals anticipated over coming months regarding both the Committee's assessment of conditions constituting "substantial further progress" and details on tapering plans. Almost 60 percent of respondents anticipated the first reduction in the pace of net asset purchases to come in January, though, on average, respondents placed somewhat more weight than in the June surveys on the possibility of tapering beginning somewhat earlier. With respect to the pace of tapering, respondents continued to anticipate that the Committee would take a gradual approach. While market participants discussed the possibility of an earlier or faster-than-proportional reduction in the pace of net purchases of agency mortgage-backed securities (MBS), most survey respondents appeared to expect the timing and pace of tapering of net purchases of agency MBS and Treasury securities to be similar. The manager turned next to a discussion of developments in operations and money markets over the period. Following the June meeting, overnight rates rose in line with the technical adjustment in administered rates and were relatively stable for the remainder of the period. Overnight reverse repurchase agreement (ON RRP) take-up jumped by over $200 billion after the technical adjustment took effect, as government-sponsored enterprises moved balances held in unremunerated Federal Reserve deposit accounts into the higher-yielding ON RRP investments. Government money market funds also increased their participation in the facility amid a continued decline in Treasury bills outstanding and downward pressure on overnight rates. Overall, market participants reported that the technical adjustment went smoothly and that, with overnight rates having moved further away from zero, concerns about the functioning of short-term funding markets had diminished. Looking ahead, market participants were beginning to focus on the potential effects of changes in the Treasury General Account at the Federal Reserve and Treasury bill issuance over coming months in connection with the debt ceiling. The manager noted that, if a number of counterparties reached the per-counterparty limit on their ON RRP investments and downward pressure on overnight rates emerged, it may become appropriate to lift the limit. Establishment of Standing Repurchase Agreement Facilities Finally, the manager summarized the proposed terms for the standing repurchase agreement (repo) facility (SRF) and the Foreign and International Monetary Authorities (FIMA) Repo Facility. In questions and comments following the manager's briefing, participants expressed broad support for the establishment of the SRF and FIMA Repo Facility. The vast majority of participants supported the proposed terms, al­though a few participants raised questions, including whether the proposed aggregate cap of $500 billion was necessary, whether the collateral eligible in SRF operations should be limited to Treasury securities only, and how the setting of the minimum bid rate in SRF operations would be expected to evolve over time relative to the primary credit rate and the interest on reserve balances rate. In general, participants viewed the SRF and FIMA Repo Facility as important new tools, serving in backstop roles, that would support effective policy implementation and smooth market functioning. Participants anticipated that the Committee would learn more about how these facilities operate over time and noted that it could adjust some parameters of the facilities on the basis of that experience. The Committee voted unanimously to approve the establishment of the SRF. All but one member of the Committee voted to approve the FIMA Repo Facility. Governor Bowman abstained from voting on the FIMA Repo Facility and noted that she would have preferred that the liquidity arrangements accessible to foreign official institutions be maintained only during periods of extraordinary financial market stress rather than through a standing facility. Standing Repurchase Agreement Facility Resolution The Federal Open Market Committee (the "Committee") authorizes and directs the Open Market Desk at the Federal Reserve Bank of New York (the "Selected Bank"), for the System Open Market Account ("SOMA"), to conduct operations in which it offers to purchase securities, subject to an agreement to resell ("repurchase agreement transactions"). The repurchase agreement transactions hereby authorized and directed shall (i) include only U.S. Treasury securities, agency debt securities, and agency mortgage-backed securities; (ii) be conducted as open market operations with primary dealers and depository institutions as participants; (iii) be conducted with a minimum bid rate of 0.25 percent; (iv) be offered on an overnight basis (except that the Open Market Desk at the Selected Bank may extend the term for longer than an overnight term to accommodate weekend, holiday, and similar trading conventions); and (v) be subject to an aggregate operation limit of $500 billion. The aggregate operation limit can be temporarily increased at the discretion of the Chair. These operations shall be conducted by the Open Market Desk at the Selected Bank until otherwise directed by the Committee. Standing FIMA Repurchase Agreement Resolution The Federal Open Market Committee (the "Committee") authorizes and directs the Open Market Desk at the Federal Reserve Bank of New York (the "Selected Bank"), for the System Open Market Account ("SOMA"), to offer to purchase U.S. Treasury securities subject to an agreement to resell ("repurchase agreement transactions") with foreign central bank and international accounts maintained at a Federal Reserve Bank (the "Foreign Accounts"). The repurchase agreement transactions hereby authorized and directed shall (i) include only U.S. Treasury securities; (ii) be conducted with Foreign Accounts approved in advance by the Foreign Currency Subcommittee (the "Subcommittee"); (iii) be conducted at an offering rate of 0.25 percent; (iv) be offered on an overnight basis (except that the Open Market Desk at the Selected Bank may extend the term for longer than an overnight term to accommodate weekend, holiday, and similar trading conventions); and (v) be subject to a per-counterparty limit of $60 billion per day. The Subcommittee may approve changes in the offering rate, the maturity of the transactions, eligible Foreign Accounts counterparties (either by approving or removing account access), and the counterparty limit; and the Subcommittee shall keep the Committee informed of any such changes. These transactions shall be undertaken by the Open Market Desk at the Selected Bank until otherwise directed by the Committee. The Open Market Desk at the Selected Bank will also report at least annually to the Committee on facility usage and the list of approved account holders. 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. Discussion of Asset Purchases Participants discussed aspects of the Federal Reserve's asset purchases, including progress made toward the Committee's maximum-employment and price-stability goals since the adoption of the asset purchase guidance in December 2020. They also considered the question of how asset purchases might be adjusted once economic conditions met the standards of that guidance. Participants agreed that their discussion at this meeting would be helpful background for the Committee's future decisions about modifying asset purchases. No decisions regarding future adjustments to asset purchases were made at this meeting. The participants' discussion was preceded by staff presentations that reviewed the principal channels through which asset purchases exert effects on financial conditions and the economy, with a focus on the implications of these channels for the Committee's deliberations regarding future adjustments to the Federal Reserve's asset purchases. The presentations noted that, in the staff's standard empirical modeling framework, the effect of asset purchases on financial and economic conditions occurred primarily via their influence on the expected path of private-sector holdings of longer-term assets. In that framework, larger Federal Reserve holdings of these assets reduced private-sector holdings, exerting downward pressure on term premiums and, consequently, keeping longer-term interest rates and overall financial conditions more accommodative than they otherwise would be. The staff noted that, because plausible alternative approaches to the tapering of asset purchases would likely not lead to significant differences in the expected path of the Federal Reserve's balance sheet, these approaches would have similar financial and economic effects in the staff's standard framework. The presentations highlighted, however, that alternative tapering approaches could have significant financial and economic effects not fully captured in the staff's standard empirical framework. In particular, changes in asset purchases could be interpreted by the public as signaling a shift in the Committee's view of the economic outlook or in its overall policy strategy, with implications for the expected path of the federal funds rate. Changes in the flow of asset purchases could also influence yields, but this influence would likely be modest outside of periods of stressed financial market conditions. In their discussion of considerations related to asset purchases, various participants noted that these purchases were an important part of the monetary policy toolkit and a critical aspect of the Federal Reserve's response to the economic effects of the pandemic, supporting smooth financial market functioning and accommodative financial conditions, which aided the flow of credit to households and businesses and supported the recovery. Participants discussed a broad range of labor market and inflation indicators. All participants assessed that the economy had made progress toward the Committee's maximum-employment and price-stability goals since the adoption of the guidance on asset purchases in December. Most participants judged that the Committee's standard of "substantial further progress" toward the maximum-employment goal had not yet been met. At the same time, most participants remarked that this standard had been achieved with respect to the price-stability goal. A few participants noted, however, that the transitory nature of this year's rise in inflation, as well as the recent declines in longer-term yields and in market-based measures of inflation compensation, cast doubt on the degree of progress that had been made toward the price-stability goal since December. Looking ahead, most participants noted that, provided that the economy were to evolve broadly as they anticipated, they judged that it could be appropriate to start reducing the pace of asset purchases this year because they saw the Committee's "substantial further progress" criterion as satisfied with respect to the price-stability goal and as close to being satisfied with respect to the maximum-employment goal. Various participants commented that economic and financial conditions would likely warrant a reduction in coming months. Several others indicated, however, that a reduction in the pace of asset purchases was more likely to become appropriate early next year because they saw prevailing conditions in the labor market as not being close to meeting the Committee's "substantial further progress" standard or because of uncertainty about the degree of progress toward the price-stability goal. Participants agreed that the Committee would provide advance notice before making changes to its balance sheet policy. Participants expressed a range of views on the appropriate pace of tapering asset purchases once economic conditions satisfied the criterion laid out in the Committee's guidance. Many participants saw potential benefits in a pace of tapering that would end net asset purchases before the conditions currently specified in the Committee's forward guidance on the federal funds rate were likely to be met. At the same time, participants indicated that the standards for raising the target range for the federal funds rate were distinct from those associated with tapering asset purchases and remarked that the timing of those actions would depend on the course of the economy. Several participants noted that an earlier start to tapering could be accompanied by more gradual reductions in the purchase pace and that such a combination could mitigate the risk of an excessive tightening in financial conditions in response to a tapering announcement. Participants exchanged views on what the composition of asset purchases should be during the tapering process. Most participants remarked that they saw benefits in reducing the pace of net purchases of Treasury securities and agency MBS proportionally in order to end both sets of purchases at the same time. These participants observed that such an approach would be consistent with the Committee's understanding that purchases of Treasury securities and agency MBS had similar effects on broader financial conditions and played similar roles in the transmission of monetary policy, or that these purchases were not intended as credit allocation. Some of these participants remarked, however, that they welcomed further discussion of the appropriate composition of asset purchases during the tapering process. Several participants commented on the benefits that they saw in reducing agency MBS purchases more quickly than Treasury securities purchases, noting that the housing sector was exceptionally strong and did not need either actual or perceived support from the Federal Reserve in the form of agency MBS purchases or that such purchases could be interpreted as a type of credit allocation. Participants commented on other factors that were relevant for their consideration of future adjustments to the pace of asset purchases. Many participants noted that, when a reduction in the pace of asset purchases became appropriate, it would be important that the Committee clearly reaffirm the absence of any mechanical link between the timing of tapering and that of an eventual increase in the target range for the federal funds rate. A few participants suggested that the Committee would need to be mindful of the risk that a tapering announcement that was perceived to be premature could bring into question the Committee's commitment to its new monetary policy framework. With respect to the effects of the pandemic, several participants indicated that they would adjust their views on the appropriate path of asset purchases if the economic effects of new strains of the virus turned out to be notably worse than currently anticipated and significantly hindered progress toward the Committee's goals. Staff Review of the Economic Situation The information available at the time of the July 27–28 meeting suggested that U.S. real gross domestic product (GDP) had increased in the second quarter at a faster pace than in the first quarter of the year. Indicators of labor market conditions were mixed in June, though labor demand remained strong. Consumer price inflation through May—as measured by the 12-month percentage change in the personal consumption expenditures (PCE) price index—had picked up notably, largely reflecting transitory factors. Total nonfarm payroll employment rose sharply in June, with job gains widespread across industries and especially strong job growth in the leisure and hospitality sector. As of June, total payroll employment had retraced more than two-thirds of the losses seen at the onset of the pandemic. The unemployment rate edged higher and stood at 5.9 percent in June, and the unemployment rates for African Americans and Hispanics remained well above the national average. The labor force participation rate and employment-to-population ratio were unchanged in June. May private-sector job openings, as measured by the Job Openings and Labor Turnover Survey, remained at the highest recorded level since the survey's inception in 2000. Initial claims for regular state unemployment insurance were little changed, on net, since mid-June. Weekly estimates of private-sector payrolls constructed by Federal Reserve Board staff using data provided by the payroll processor ADP that were available through the first part of July suggested that the pace of private employment gains had remained strong. Average hourly earnings for all employees rose further in June. Recent monthly increases in average hourly earnings appeared to reflect a combination of strong labor demand and increased difficulties in hiring that had more than offset the downward pressure on average earnings from disproportionately large employment gains in lower-wage industries. Information from compensation measures that were judged to be less affected by shifts in the composition of the workforce was mixed: A staff measure of the 12-month change in the median wage derived from the ADP data had stepped up noticeably in June relative to earlier in the year; by contrast, the Wage Growth Tracker measure constructed by the Federal Reserve Bank of Atlanta had not shown a similar pickup. Recent 12-month change measures of inflation, using either PCE prices or the consumer price index (CPI), had been boosted by base effects as the extremely low inflation readings from the spring of 2020 rolled out of the calculation. In addition, a surge in demand as the economy reopened further, combined with production bottlenecks and supply constraints, had pushed up recent monthly price increases. Total PCE price inflation was 3.9 percent over the 12 months ending in May, and core PCE price inflation, which excludes changes in consumer energy prices and many consumer food prices, was 3.4 percent over the 12 months ending in May. In contrast, the trimmed mean measure of 12-month PCE inflation constructed by the Federal Reserve Bank of Dallas was 1.9 percent in May. In June, the 12-month change in the CPI was 5.4 percent, while the core CPI rose 4.5 percent over the same period. In the second quarter of 2021, the staff's common inflation expectations index, which combines information from many indicators of inflation expectations and inflation compensation, had more than reversed the moderate decline recorded in the middle of last year and had returned to the level that prevailed in 2014, when actual inflation was relatively modest. Real PCE appeared to have risen in the second quarter at a pace similar to that seen in the first quarter, supported by previous rounds of federal stimulus payments and reductions in social distancing. Even so, consumer spending appeared to have been held back some as producers struggled to meet demand. Similarly, despite very strong demand for housing, incoming data suggested that residential investment spending had declined in the second quarter as materials shortages and limited stocks of homes for sale temporarily restrained activity in that sector. Available indicators suggested that growth in business fixed investment had slowed sharply in the second quarter, reflecting disruptions to motor vehicle production and aircraft deliveries and a faster rate of decline in nonresidential structures investment. Growth in manufacturing output had picked up modestly in the second quarter. Although production in the chemicals industry had rebounded from the weather-related disruptions earlier in the year, the supply chain issues faced by a number of other industries, particularly the motor vehicle industry, continued to weigh on overall factory output. Total real government purchases appeared to have moved lower in the second quarter after having risen in the first quarter. Available data suggested that federal nondefense purchases had dropped following a first-quarter surge in pandemic-related expenditures and that defense purchases were little changed. However, indicators of real state and local purchases pointed to a modest second-quarter increase in this component of government spending. The nominal U.S. international trade deficit remained high in May. Real goods imports in May retraced only a bit of their April decline, but they were still at the second-highest level on record. Real goods exports edged down in May and remained below pre-COVID-19 levels. Bottlenecks in the global semiconductor industry continued to weigh on exports and imports of automotive products, and shipping congestion likely continued to restrain trade overall. Although international travel recovered further in May, exports and imports of services remained depressed relative to pre-pandemic levels. Incoming data suggested that, after a weak start to the year, foreign economic activity accelerated in the second quarter. The improvements were concentrated in the advanced foreign economies and China, supported by vaccine rollouts, the unwinding of public health restrictions, economic adaptation to the virus, and the reopening of the services sector. The situation was quite different in some emerging market economies (EMEs) whose low vaccination rates left them vulnerable to new waves of infections. Although new COVID-19 cases fell dramatically in India after the surge in May and June, the situation deteriorated markedly in several Southeast Asian countries, whose cases and deaths rose to all-time highs. In addition, the increased prevalence of new virus variants, particularly the Delta variant, underscored the continued uncertainty about the foreign outlook. Inflation rose further in most foreign economies, reflecting a reversal of price declines seen in the spring of 2020, higher energy and commodity prices, and supply bottlenecks. Staff Review of the Financial Situation Over the intermeeting period, fluctuations in financial markets appeared to be driven by less-accommodative-than-expected June FOMC communications, a reduction in investor perceptions of the risk of persistently high inflation, increased concerns about the rapid spread of the Delta variant, and stronger-than-anticipated inflation data. Longer-dated Treasury yields fell, largely reflecting declines in real yields, while longer-horizon forward measures of inflation compensation also declined. Domestic equity prices rose moderately, and corporate bond spreads remained near the low end of their historical ranges. Short-term funding markets were stable, while participation in the ON RRP facility increased further, to its highest level since the facility was put in place. Market-based financing conditions were accommodative, and bank lending standards eased for most loan categories. The Treasury yield curve flattened, on net, with the 2‑year yield about unchanged, the 5-year yield declining a bit, and the 10- and 30-year yields each decreasing about 30 basis points. The decline in longer-term Treasury yields was associated with a drop in real yields implied by Treasury Inflation-Protected Securities (TIPS), with the 10-year real yield down about 25 basis points. Meanwhile, shorter-horizon measures of inflation compensation ended the period modestly higher, but longer-term forward measures fell notably. On net, the market-implied path of the policy rate was little changed for horizons up to late 2023, while it shifted lower beyond those horizons. Broad stock market prices rose moderately over the intermeeting period, supported in part by some strong second-quarter earnings reports that bolstered investor risk sentiment. However, some prices declined for stocks that historically have moved more closely with economic conditions—such as stocks for smaller companies and for firms in cyclical industries—as did stock prices for firms in sectors such as airlines and hotels that were negatively affected by the pandemic. Bank stock prices also fell. One-month option-implied volatility on the S&P 500—the VIX—spiked to reach a two-month high. For the intermeeting period as a whole, however, the VIX was little changed, on net, and remained somewhat above its average pre-pandemic levels. Spreads of yields on corporate bonds over those on comparable-maturity Treasury securities were little changed, and spreads of benchmark municipal bond indexes increased moderately, although both remained below their pre-pandemic levels. Short-term funding markets were stable over the intermeeting period. Following the actions at the June FOMC meeting to increase both the interest rate on excess reserves and the ON RRP rate by 5 basis points, the effective federal funds rate rose 4 basis points, reaching 10 basis points, while the Secured Overnight Financing Rate rose 4 basis points, reaching 5 basis points. These funding rates remained at these levels for most of the period. Participation in the Federal Reserve's ON RRP operations continued to increase to its highest level since the facility was put in place, from an average of $340 billion in the previous intermeeting period to an average of around $800 billion over the current intermeeting period, and reached almost $1 trillion on the June quarter-end. The increase in participation was driven in part by larger investments from money market funds, as ongoing reductions in net Treasury bill issuance contributed to downward pressure on yields of other investment options available to these funds. Concerns about the worldwide spread of the Delta variant weighed somewhat on risk sentiment in global financial markets over the intermeeting period. The dollar broadly appreciated, longer-term yields in major advanced foreign economies decreased notably, and most major foreign equity indexes declined moderately. Equity markets in China and Hong Kong underperformed notably amid increased regulatory uncertainty in China. In addition, EME sovereign credit spreads widened slightly, but capital flows into dedicated EME funds remained modestly positive. Several foreign central banks scaled back their asset purchase programs. The Bank of Canada and the Reserve Bank of Australia reduced the pace of their asset purchases, and the Reserve Bank of New Zealand unexpectedly announced that it would halt its asset purchases in July. In emerging markets, the central banks of Brazil and Mexico raised rates in order to reduce inflationary pressures. In contrast, the People's Bank of China cut the broad reserve requirement ratio for banks to support economic growth. The European Central Bank completed its strategy review, adopting a 2 percent symmetric inflation target, and revised forward guidance on its policy rate. Financing conditions faced by nonfinancial firms in capital markets continued to be broadly accommodative over the intermeeting period, as corporate bond spreads remained near the low end of their historical distributions. Gross issuance of corporate bonds slowed from its brisk pace in May but remained solid, and gross issuance of leveraged loans was also robust. Equity raised through traditional initial public offerings rebounded noticeably, while equity raised through seasoned equity offerings continued to be moderate in June. Meanwhile, equity issuance through special purpose acquisition companies remained subdued. Commercial and industrial (C&I) loans outstanding at banks continued to decline in June, with forgiveness of Paycheck Protection Program loans more than offsetting the volumes of new loan originations. In the July Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS), banks reported easing standards and nearly all terms, on net, for C&I loans over the second quarter. The July SLOOS also indicated that the level of standards on C&I loans returned to the easier end of the range that had prevailed since 2005. Banks surveyed in the July SLOOS reported that demand for C&I loans had improved over the second quarter; however, market commentary suggested that demand was still generally weak. The credit quality of large nonfinancial corporations remained stable over the intermeeting period. The volume of credit rating upgrades for nonfinancial corporate bonds and leveraged loans moderately outpaced downgrades in June. Corporate bond and leveraged loan defaults also remained low. Financing conditions in the municipal bond market remained accommodative over the intermeeting period, with municipal bond yields edging down to record lows. Issuance of municipal bonds was solid in the case of higher-rated bonds, while it was still below pre-pandemic levels for speculative-grade and unrated securities. The credit quality of municipal debt appeared stable, al­though pandemic-related risks to state and local government finances remained. Financing conditions facing small businesses remained relatively tight, and their loan demand was generally weak. Although the July SLOOS banks reported, on net, easier lending standards for C&I loans to small firms over the second quarter, industry commentary suggested that the lending standards of community banks and of other lenders not included in the SLOOS remained relatively tight. Furthermore, the results of a separate survey suggested that the share of firms that did not want to borrow remained near its all-time high. Meanwhile, loan performance for small businesses continued to improve, with delinquency rates continuing to decline in May. For commercial real estate (CRE) financed through capital markets, financing conditions remained accommodative. Spreads of agency and non-agency commercial mortgage-backed securities (CMBS) were generally at or below pre-pandemic levels. Issuance of agency CMBS remained robust and issuance of non-agency CMBS strengthened notably in June. Delinquency rates on mortgages in CMBS pools were little changed but continued to be elevated on hotel and retail mortgages. Meanwhile, bank-based financing conditions for CRE remained relatively tight. CRE loan growth at banks remained weak in the second quarter in comparison with pre-pandemic levels. In the July SLOOS, banks reported that, despite some easing over the second quarter, the levels of CRE lending standards were still tight relative to the midpoint of the range of standards that had prevailed since 2005. Financing conditions in the residential real estate market remained accommodative. This was particularly true for stronger borrowers who met standard conforming loan criteria. In addition, according to the July SLOOS, bank lending standards for jumbo loans eased over the second quarter to near their pre-pandemic levels. However, although broad financing conditions for lower-score Federal Housing Administration borrowers also continued to ease, their credit standards remained tighter than before the pandemic. Mortgage rates ticked down over the intermeeting period, in line with rates on MBS and 10‑year Treasury securities. Furthermore, the spread of mortgage rates to MBS yields was close to pre-pandemic levels after having widened significantly at the start of the pandemic. Mortgage originations for home purchases and refinancing were fairly robust through June. Financing conditions for consumer credit remained accommodative. Consumer credit jumped in May and remained strong in June, reflecting a rebound in credit card balances and continued robust growth in auto loans. Banks in the July SLOOS reported stronger demand and easier standards for both credit cards and auto loans over the second quarter. The staff provided an update on its assessments of the stability of the financial system and, on balance, characterized the financial vulnerabilities of the U.S. financial system as notable. The staff judged that asset valuation pressures were elevated. In particular, the forward price-to-earnings ratio for the S&P 500 index stood at the upper end of its historical distribution; high-yield corporate bond spreads tightened further and were near the low end of their historical range; and house prices continued to increase rapidly, leaving valuation measures stretched. That said, the staff did not see signs of loose mortgage underwriting standards or excessive credit growth that could potentially amplify a shock arising from falling house prices. The staff assessed vulnerabilities associated with nonfinancial leverage as lower than in January but still notable. For households, the mortgage debt-to-income ratio was moderate, and mortgage borrowing was concentrated among prime borrowers, though some uncertainty remained regarding the outlook for mortgages in non-payment status. While measures of corporate-sector leverage fell since January, particularly at the most levered firms, the debt of firms that had relatively low earnings-to-interest payment ratios remained high. The staff judged that vulnerabilities arising from financial leverage were moderate. The aggregate common equity tier 1 capital ratio of the largest banks significantly exceeded regulatory requirements. However, some available measures of hedge fund leverage were elevated, and significant data gaps continued to obscure risks at hedge funds and other nonbank financial institutions. Vulnerabilities associated with funding risks were characterized as moderate. Domestic banks held significant quantities of high-quality liquid assets and had only limited reliance on short-term wholesale funding. Nonetheless, significant structural vulnerabilities remained at entities such as prime money funds, and new financial arrangements such as stablecoins appeared to have the same structural maturity and liquidity transformation vulnerabilities but with less transparency and an underdeveloped regulatory framework. Staff Economic Outlook The projection for U.S. economic activity prepared by the staff for the July FOMC meeting was little changed, on balance, from the June forecast. In the second half of 2021, an easing of the surge in demand seen over the first part of the year was expected to be largely offset by a reduction in the effects of supply constraints on production, thereby allowing real GDP growth to continue at a rapid pace. For the year as a whole, therefore, real GDP was projected to post a substantial increase, with a correspondingly large decline in the unemployment rate. With the boost to spending growth from continued reductions in social distancing assumed to fade after 2021 and with a further unwinding of the effects of fiscal stimulus, GDP growth was expected to step down in 2022 and 2023. However, with monetary policy assumed to remain highly accommodative, the staff continued to anticipate that real GDP growth would outpace growth in potential output over most of this period, leading to a decline in the unemployment rate to historically low levels. The staff's near-term outlook for inflation was revised up further in response to incoming data, but the staff continued to expect that this year's rise in inflation would prove to be transitory. The 12-month change in total and core PCE prices was well above 2 percent in May, and available data suggested that PCE price inflation would remain high in June. The staff continued to judge that the surge in demand that had resulted as the economy reopened further had combined with production bottlenecks and supply constraints to boost recent monthly inflation rates. The staff expected the 12‑month change in PCE prices to move down gradually over the second part of 2021, reflecting an anticipated moderation in monthly inflation rates and the waning of base effects; even so, PCE price inflation was projected to be running well above 2 percent at the end of the year. Over the following year, the boost to consumer prices caused by supply issues was expected to partly reverse, and import prices were expected to decelerate sharply; as a result, PCE price inflation was expected to step down to a little below 2 percent in 2022 before additional increases in resource utilization raised it to 2 percent in 2023. The staff continued to judge that the risks to the baseline projection for economic activity were skewed to the downside and that the uncertainty around the forecast was elevated. In particular, the probability that the course of the pandemic would turn out to be more adverse than the staff's baseline assumption was viewed to be higher than the probability that a more favorable outcome would occur. However, the staff judged that the risks around the inflation projection were now tilted to the upside, as recent data pointed to a greater risk that the upward pressure on inflation that had resulted from supply-related issues would unwind more slowly than the staff's baseline projection assumed. Participants' Views on Current Economic Conditions and the Economic Outlook In their discussion of current conditions, participants noted that, with progress on vaccinations and strong policy support, indicators of economic activity and employment had continued to strengthen. The sectors most adversely affected by the pandemic had shown improvement but had not fully recovered. Inflation had risen, largely reflecting transitory factors. Overall financial conditions remained accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses. Participants noted that the path of the economy would continue to depend on the course of the virus. Progress on vaccinations would likely continue to reduce the effects of the public health crisis on the economy, but risks to the economic outlook remained. Participants observed that economic activity continued to expand at a rapid pace through the middle of the year even though capacity constraints were restraining the increase in output in some sectors. Economic growth was expected to remain strong over the second half of the year, supported by the further reopening of the economy, accommodative financial conditions, and easing of supply constraints. Nevertheless, participants generally saw supply disruptions and labor shortages as likely to persist over the second half of the year. In their discussion of the household sector, participants remarked that consumer spending had continued to increase at a very rapid pace, supported by the ongoing reopening of the economy along with the accommodation provided by fiscal policy and monetary policy. In addition, the accumulated stock of savings and further progress on vaccination were cited as important factors lifting household spending. Some participants noted that they expected consumer spending to continue to be bolstered by these factors. Participants generally expected housing demand to remain strong but noted that construction had been restrained by shortages of materials and other inputs and that home sales had been held back by limited supplies of available homes. With respect to the business sector, participants observed that activity in the service industries most adversely affected by the pandemic, such as in the leisure and hospitality sector, was rebounding as the economy reopened further but had not fully recovered. Participants noted that growth in manufacturing activity continued to be solid but was restrained by production bottlenecks and supply constraints, particularly in the motor vehicle sector. Citing reports received from contacts in a broad range of industries, participants indicated that shortages of materials and labor as well as supply chain challenges remained widespread and continued to limit the ability of firms to keep up with strong demand. Even though their outlook for demand had improved further, many business contacts had expressed uncertainty and pessimism over prospects regarding the easing of supply constraints over the near term. Participants commented on the continued improvement in labor market conditions in recent months driven by strong demand for workers. The monthly pace of job gains had picked up, with employment expanding 850,000 in June and with notable increases in the leisure and hospitality sector. Nevertheless, the household survey showed that the unemployment rate remained elevated at 5.9 percent in June, and the labor force participation rate and employment-to-population ratio were little changed in recent months. Participants indicated that the economy had not yet achieved the Committee's broad-based and inclusive maximum-employment goal. Several participants remarked that the labor market recovery continued to be uneven across demographic and income groups and across sectors. Participants generally noted that supply-side factors related to the pandemic—such as caregiving needs, ongoing fears of the virus, increased retirements, and expanded unemployment insurance payments—continued to weigh on labor force participation and employment growth. A majority of participants anticipated that most of these factors would ease in the coming months. They also noted, however, that the spread of the Delta variant may temporarily delay the full reopening of the economy and restrain hiring and labor supply. Participants observed that recent wage increases had been moderate on average. However, District contacts had continued to report having trouble hiring workers and had indicated that this difficulty was putting upward pressure on wages in some sectors or leading employers to provide additional incentives to attract and retain workers. Several participants noted that their District contacts expected that difficulties finding workers would likely extend into the fall. In their discussion of inflation, participants observed that the inflation rate had increased notably and expected that it would likely remain elevated in coming months before moderating. Participants remarked that inflation had increased generally more than expected this year and attributed this increase to supply constraints in product and labor markets and a surge in consumer demand as the economy reopened. They noted that many of their District contacts had reported that higher input costs were also putting upward pressure on prices. Many participants pointed out that the largest contributors to recent increases in measures of inflation were a handful of sectors most affected by temporary supply bottlenecks or sectors in which price levels were rebounding from depressed levels as the economy continued to reopen. Looking ahead, while participants generally expected inflation pressures to ease as the effect of these transitory factors dissipated, several participants remarked that larger-than-anticipated supply chain disruptions and increases in input costs could sustain upward pressure on prices into 2022. In their comments on inflation expectations, some participants noted that measures of longer-term inflation expectations had remained in ranges that were viewed as broadly consistent with the Committee's longer-run inflation goal. Several participants indicated that the recent increases in survey-based measures signaled a risk that longer-term inflation expectations might be moving up above levels consistent with the Committee's goals. Other participants pointed to the substantial decline in TIPS-based longer-term inflation compensation since June as suggesting that investors perceived reduced risks that inflation could run persistently above the Committee's 2 percent goal. A couple of participants noted that recent readings on forward inflation compensation could be read as suggesting investor concern that inflation over the longer term could run persistently below the Committee's 2 percent inflation goal. In discussing the uncertainty and risks associated with the economic outlook, many participants remarked that uncertainty was quite high, with slowing in progress on vaccinations and developments surrounding the Delta variant posing downside risks to the economic outlook. A number of participants judged that the effects of supply chain disruptions and labor shortages would likely complicate the task of interpreting the incoming data and assessing the speed at which these supply-side factors would dissipate. Some participants noted that there were upside risks to inflation associated with concerns that supply disruptions and labor shortages might linger for longer than currently anticipated and might have larger or more persistent effects on prices and wages than they currently assumed. Participants who commented on financial stability emphasized the risks associated with elevated valuations across many asset classes. A few participants highlighted scenarios in which a prolonged period of low interest rates and broadly elevated asset valuations could generate imbalances, which could increase financial stability risks. Some participants commented on the housing market and noted that ongoing rapid house price increases reflected both demand and supply factors. Several participants noted that the lack of evidence of deteriorating mortgage underwriting standards could mitigate risks associated with high housing valuations; a couple of other participants, however, expressed concern that a home price reversal could pose risks to financial stability. Some participants cited various potential risks to financial stability including the risks associated with expanded use of cryptocurrencies or the risks associated with collateral liquidity at central counterparties during episodes of market stress. In connection with the former set of risks, a few of these participants highlighted the fragility and the general lack of transparency associated with stablecoins, the importance of monitoring them closely, and the need to develop an appropriate regulatory framework to address any risks to financial stability associated with such products. In their consideration of the stance of monetary policy, participants reaffirmed the Federal Reserve's commitment to using its full range of tools to support the U.S. economy during this challenging time, thereby promoting the Committee's statutory goals of maximum employment and price stability. Participants judged that the current stance of monetary policy remained appropriate to promote maximum employment as well as to achieve inflation that averages 2 percent over time and longer-term inflation expectations that are well anchored at 2 percent. Participants also reiterated that the existing outcome-based guidance implied that the paths of the federal funds rate and the balance sheet would depend on actual progress toward reaching the Committee's maximum-employment and inflation goals. Participants discussed the progress toward the Committee's goals since December 2020, when the Committee adopted its guidance for asset purchases. They generally judged that the Committee's standard of "substantial further progress" toward the maximum-employment and inflation goals had not yet been met, particularly with respect to labor market conditions, and that risks to the economic outlook remained. Most participants anticipated that the economy would continue to make progress toward those goals and, provided that the economy evolved broadly as they anticipated, they judged that the standard set out in the Committee's guidance regarding asset purchases could be reached this year. With regard to the labor market, participants noted that the demand for workers had been strong in recent months, while the level of employment had been constrained by labor supply shortages and hiring difficulties. Several participants emphasized that employment remained well below its pre-pandemic level and that a robust labor market, supported by a continuation of accommodative monetary policy, would allow further progress toward the Committee's broad and inclusive maximum-employment goal and a return over time to labor market conditions as strong as those prevailing before the pandemic. A few other participants judged that monetary policy had limited ability to address the labor supply shortages and hiring difficulties currently constraining the level of employment. Several participants also commented that the pandemic might have caused longer-lasting changes in the labor market and that the pre-pandemic labor market conditions may not be the right benchmark against which the Committee should assess the progress toward its maximum-employment objective. With regard to inflation, participants commented that recent inflation readings had been boosted by the effects of supply bottlenecks and labor shortages and were likely to be transitory. A few participants noted that, while the specific results depended on the period used in the calculation, some measures of average inflation were already moving above, or would soon move above, the Committee's 2 percent goal, supported by strong demand, a tight labor market, and firming inflation expectations. Some other participants emphasized that recent high inflation readings had largely been driven by price increases in a handful of categories. These participants pointed out that there was no evidence of broad-based price pressures or of inappropriately high longer-term inflation expectations. Several participants also commented that price increases concentrated in a small number of categories were unlikely to change underlying inflation dynamics sufficiently to overcome the possibility of a persistent downward bias in inflation, as might be associated with the effective lower bound on the policy rate. Many participants remarked upon risk-management considerations when contemplating how and when to make changes to the Committee's pace of asset purchases. Some participants suggested that it would be prudent for the Committee to prepare for starting to reduce its pace of asset purchases relatively soon, in light of the risk that the recent high inflation readings could prove to be more persistent than they had anticipated and because an earlier start to reducing asset purchases would most likely enable additions to securities holdings to be concluded before the Committee judged it appropriate to raise the federal funds rate. A few participants expressed concerns that maintaining highly accommodative financial conditions might contribute to a further buildup in risk to the financial system that could impede the attainment of the Committee's dual-mandate goals. In contrast, a few other participants suggested that preparations for reducing the pace of asset purchases should encompass the possibility that the reductions might not occur for some time and highlighted the risks that rising COVID-19 cases associated with the spread of the Delta variant could cause delays in returning to work and school and so damp the economic recovery. Several participants also remained concerned about the medium-term outlook for inflation and the possibility of the reemergence of significant downward pressure on inflation, especially in light of the recent decline in longer-term inflation compensation. In addition, several participants emphasized that there was considerable uncertainty about the likely resolution of the labor market shortages and supply bottlenecks and about the influence of pandemic-related developments on longer-run labor market and inflation dynamics. Those participants stressed that the Committee should be patient in assessing progress toward its goals and in announcing changes to its plans on asset purchases. Some participants emphasized that a decision to reduce the Committee's pace of asset purchases once the "substantial further progress" benchmark had been achieved would be fully consistent with the Committee's new monetary policy framework and would help foster the achievement of the Committee's longer-run objectives over time. A couple of participants also noted that a tapering of asset purchases did not amount to a tightening of the stance of monetary policy and instead only implied that additional monetary accommodation would be provided at a slower rate. Several participants emphasized that an announcement of a reduction in the Committee's pace of asset purchases should not be interpreted as the beginning of a predetermined course for raising the federal funds rate from its current level. Those participants stressed that the Committee's assessment regarding the appropriate timing of an increase in the target range for the federal funds rate was separate from its current deliberations on asset purchases and would be subject to the higher standard, as laid out in the Committee's outcome-based guidance on the federal funds rate. Nonetheless, a couple of participants cautioned that it could be challenging for the public to disentangle deliberations about the two tools and that any decisions the Committee made on its asset purchases would likely influence the public's understanding of the Committee's other policy intentions, including with regard to future decisions concerning the target range for the federal funds rate. Committee Policy Action In their discussion of monetary policy for this meeting, members agreed that with progress on vaccinations and strong policy support, indicators of economic activity and employment had continued to strengthen. They noted that the sectors most adversely affected by the pandemic had shown improvement but had not fully recovered. Inflation had risen, largely reflecting transitory factors. Overall financial conditions remained accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses. Members also acknowledged that the path of the economy continued to depend on the course of the virus. Progress on vaccinations would likely continue to reduce the effects of the public health crisis on the economy, but risks to the economic outlook remained. Members agreed that the Federal Reserve was committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum-employment and price-stability goals. All members reaffirmed that, in accordance with the Committee's goals to achieve maximum employment and inflation at the rate of 2 percent over the longer run and with inflation having run persistently below this longer-run goal, they would aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent. Members expected to maintain an accommodative stance of monetary policy until those outcomes were achieved. All members agreed to keep the target range for the federal funds rate at 0 to 1/4 percent, and they expected that it would be appropriate to maintain this target range until labor market conditions had reached levels consistent with the Committee's assessments of maximum employment and inflation had risen to 2 percent and was on track to moderately exceed 2 percent for some time. Last December, the Committee indicated that it would continue to increase its holdings of Treasury securities by at least $80 billion per month and agency mortgage-backed securities by at least $40 billion per month until substantial further progress had been made toward its maximum-employment and price-stability goals. The members commented that, since then, the economy had made progress toward these goals, and they agreed to continue to assess progress in coming meetings. They judged that these asset purchases would help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses. Members agreed that, in assessing the appropriate stance of monetary policy, they would continue to monitor the implications of incoming information for the economic outlook and that they would be prepared to adjust the stance of monetary policy as appropriate in the event that risks emerged that could impede the attainment of the Committee's goals. Members also concurred that, in assessing the appropriate stance of monetary policy, they would take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments. Members agreed that the postmeeting statement should acknowledge the economy's continued recovery as well as its progress toward the Committee's maximum-employment and price-stability goals set forth in the Committee's asset purchase guidance in December. In light of these developments, members decided to remove the characterization of sectors most adversely affected by the pandemic as being in a "weak" condition and to replace it with the judgment that those sectors "have not fully recovered." They also agreed to remove the word "significantly" when characterizing the dependence of the path of the economy on the course of the virus. In addition, members agreed to insert the assessment that "the economy has made progress" toward the Committee's longer-run goals since the guidance on asset purchases was first issued in December and to indicate that the assessment of progress would continue in coming meetings. Members agreed that the addition of this language was appropriate to acknowledge the Committee's ongoing deliberations in assessing the economy's progress toward the Committee's goals and the implications for the pace of asset purchases. 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, for release at 2:00 p.m.: "Effective July 29, 2021, 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 0 to 1/4 percent. Increase the System Open Market Account holdings of Treasury securities by $80 billion per month and of agency mortgage-backed securities (MBS) by $40 billion per month. Increase holdings of Treasury securities and agency MBS by additional amounts and purchase agency commercial mortgage-backed securities (CMBS) as needed to sustain smooth functioning of markets for these securities. Conduct overnight repurchase agreement operations with a minimum bid rate of 0.25 percent and with an aggregate operation limit of $500 billion; the aggregate operation limit can be temporarily increased at the discretion of the Chair. Conduct overnight reverse repurchase agreement operations at an offering rate of 0.05 percent and with a per-counterparty limit of $80 billion per day; the per-counterparty limit can be temporarily increased at the discretion of the Chair. Roll over at auction all principal payments from the Federal Reserve's holdings of Treasury securities and reinvest all principal payments from the Federal Reserve's holdings of agency debt and agency MBS in agency MBS. Allow modest deviations from stated amounts for purchases and reinvestments, if needed for operational reasons. Engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions." The vote also encompassed approval of the statement below for release at 2:00 p.m.: "The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals. With progress on vaccinations and strong policy support, indicators of economic activity and employment have continued to strengthen. The sectors most adversely affected by the pandemic have shown improvement but have not fully recovered. Inflation has risen, largely reflecting transitory factors. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses. The path of the economy continues to depend on the course of the virus. Progress on vaccinations will likely continue to reduce the effects of the public health crisis on the economy, but risks to the economic outlook remain. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation having run persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer‑term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved. The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee's assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. Last December, the Committee indicated that it would continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage‑backed securities by at least $40 billion per month until substantial further progress has been made toward its maximum employment and price stability goals. Since then, the economy has made progress toward these goals, and the Committee will continue to assess progress in coming meetings. These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments." Voting for this action: Jerome H. Powell, John C. Williams, Thomas I. Barkin, Raphael W. Bostic, Michelle W. Bowman, Lael Brainard, Richard H. Clarida, Mary C. Daly, Charles L. Evans, Randal K. Quarles, and Christopher J. Waller. Voting against this action: None. Consistent with the Committee's decision to leave the target range for the federal funds rate unchanged, the Board voted unanimously to establish the interest rate paid on reserve balances at 0.15 percent, effective July 29, 2021.5 The Board also voted unanimously to approve establishment of the primary credit rate at the existing level of 0.25 percent, effective July 29, 2021. It was agreed that the next meeting of the Committee would be held on Tuesday–Wednesday, September 21–22, 2021. The meeting adjourned at 10:35 a.m. on July 28, 2021. Notation Vote By notation vote completed on July 6, 2021, the Committee unanimously approved the minutes of the Committee meeting held on June 15–16, 2021. _______________________ James A. Clouse Secretary 1. In these minutes, the Federal Open Market Committee is referenced as the "FOMC" and the "Committee"; the Board of Governors of the Federal Reserve System is referenced as the "Board." Return to text 2. Attended through the discussion of asset purchases. Return to text 3. Attended Wednesday's session only. Return to text 4. Attended through the discussion of economic developments and the outlook. Return to text 5. As announced on June 2, 2021, the Board approved a final rule, effective July 29, amending Regulation D to eliminate references to an interest on required reserves (IORR) rate and to an interest on excess reserves (IOER) rate and replace them with a single interest on reserve balances (IORB) rate. Therefore, the Board voted on one rate, the IORB rate, at this meeting and will continue to do so going forward. The Federal Register notice, "Regulation D: Reserve Requirements of Depository Institutions," is available at www.federalregister.gov/documents/2021/06/04/2021-11758/regulation-d-reserve-requirements-of-depository-institutions Return to text

2021-07-07

Minute

Minutes of the Federal Open Market Committee A joint meeting of the Federal Open Market Committee and the Board of Governors was held by videoconference on Tuesday, June 15, 2021, at 9:00 a.m. and continued on Wednesday, June 16, 2021, at 9:00 a.m.1 PRESENT: Jerome H. Powell, Chair John C. Williams, Vice Chair Thomas I. Barkin Raphael W. Bostic Michelle W. Bowman Lael Brainard Richard H. Clarida Mary C. Daly Charles L. Evans Randal K. Quarles Christopher J. Waller James Bullard, Esther L. George, Naureen Hassan, Loretta J. Mester, 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 Michelle A. Smith, Assistant Secretary Mark E. Van Der Weide, General Counsel Michael Held, Deputy General Counsel Trevor A. Reeve, Economist Stacey Tevlin, Economist Beth Anne Wilson, Economist Shaghil Ahmed, Kartik B. Athreya, Rochelle M. Edge, Eric M. Engen, and William Wascher, Associate Economists Lorie K. Logan, Manager, System Open Market Account Patricia Zobel, Deputy Manager, System Open Market Account Ann E. Misback, 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 Daniel M. Covitz, Deputy Director, Division of Research and Statistics, Board of Governors; Sally Davies, Deputy Director, Division of International Finance, Board of Governors Jon Faust, Senior Special Adviser to the Chair, Division of Board Members, Board of Governors Joshua Gallin, Special Adviser to the Chair, Division of Board Members, Board of Governors William F. Bassett, Antulio N. Bomfim, Wendy E. Dunn, Burcu Duygan-Bump, Jane E. Ihrig, Kurt F. Lewis, Chiara Scotti, and Nitish R. Sinha, Special Advisers to the Board, Division of Board Members, Board of Governors Carol C. Bertaut, Senior Associate Director, Division of International Finance, Board of Governors; Marnie Gillis DeBoer and David López-Salido, Senior Associate Directors, Division of Monetary Affairs, Board of Governors; Elizabeth Klee, Senior Associate Director, Division of Financial Stability, Board of Governors; David E. Lebow, Senior Associate Director, Division of Research and Statistics, Board of Governors Brett Berger,2 Senior Adviser, Division of International Finance, Board of Governors; 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 Andrew Figura, Associate Director, Division of Research and Statistics, Board of Governors; Christopher J. Gust, Associate Director, Division of Monetary Affairs, Board of Governors Stephanie E. Curcuru2 and Andrea Raffo, Deputy Associate Directors, Division of International Finance, Board of Governors; Laura Lipscomb,2 Deputy Associate Director, Division of Monetary Affairs, Board of Governors; Steve Spurry,2 Deputy Associate Director, Division of Supervision and Regulation, Board of Governors; Jeffrey D. Walker,2 Deputy Associate Director, Division of Reserve Bank Operations and Payment Systems, Board of Governors Jennifer Gallagher, Special Assistant to the Board, Division of Board Members, Board of Governors Brian J. Bonis, Etienne Gagnon, and Dan Li, Assistant Directors, Division of Monetary Affairs, Board of Governors Charles Fleischman, Adviser, Division of Research and Statistics, Board of Governors Penelope A. Beattie,3 Section Chief, Office of the Secretary, Board of Governors Alyssa Arute,2 Manager, Division of Reserve Bank Operations and Payment Systems, Board of Governors Sriya Anbil,2 Group Manager, Division of Monetary Affairs, Board of Governors Mark A. Carlson,2 Senior Economic Project Manager, Division of Monetary Affairs, Board of Governors David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors David M. Byrne, Principal Economist, Division of Research and Statistics, Board of Governors; Michele Cavallo, Bernd Schlusche, Mary Tian, and Francisco Vazquez-Grande, Principal Economists, Division of Monetary Affairs, Board of Governors; Alberto Queralto, Principal Economist, Division of International Finance, Board of Governors Randall A. Williams, Lead Information Manager, Division of Monetary Affairs, Board of Governors Courtney Demartini,2 Lead Financial Institution Policy Analyst, Division of Monetary Affairs, Board of Governors Anthony M. Diercks, Senior Economist, Division of Monetary Affairs, Board of Governors Joseph W. Gruber and Ellis W. Tallman, Executive Vice Presidents, Federal Reserve Banks of Kansas City and Cleveland, respectively Anne Baum, Carlos Garriga, Susan McLaughlin,2 Anna Nordstrom,2 Giovanni Olivei, Paolo A. Pesenti, Julie Ann Remache,2 Robert G. Valletta, and Mark L.J. Wright, Senior Vice Presidents, Federal Reserve Banks of New York, St. Louis, New York, New York, Boston, New York, New York, San Francisco, and Minneapolis, respectively Roc Armenter, Jennifer S. Crystal,2 Jonas Fisher, and Matthew Nemeth,2 Vice Presidents, Federal Reserve Banks of Philadelphia, New York, Chicago, and New York, respectively Jason A. Miu,2 Assistant Vice President, Federal Reserve Bank of New York Karel Mertens, Senior Economic Policy Advisor, Federal Reserve Bank of Dallas Kristopher Gerardi, Financial Economist and Senior Advisor, Federal Reserve Bank of Atlanta Haitham Jendoubi,2 Policy and Markets Analysis Manager, Federal Reserve Bank of New York Discussion of Repurchase Agreement Arrangements Participants resumed their discussion from the April 2021 FOMC meeting of considerations related to the establishment of a domestic standing repurchase agreement (repo) facility (SRF) and a standing Foreign International Monetary Authorities (FIMA) repo facility. Building on discussion at previous meetings, the staff presented considerations for how these facilities might be designed. The design considerations were guided by participants' general desire to have these facilities play a backstop role in fostering effective implementation of monetary policy and supporting smooth functioning of markets. In April, participants highlighted the importance of designing these facilities in a way that would leave ample room for private market activity while minimizing the potential for stigma, promote equitable access to an appropriately broad set of counterparties, and be governed by the FOMC. With these principles and goals in mind, the staff presented potential terms for each facility. The staff presentation on the potential design of a domestic SRF included establishing the minimum bid rate at 25 basis points—the top of the target range for the federal funds rate. The staff briefing suggested counterparties for the facility would include primary dealers and would be extended over time to include banks that expressed interest in participation. The staff presentation noted that such a facility could be limited to only U.S. Treasury securities or could accept all securities currently accepted in open market operations (OMOs), which include Treasury securities, agency securities, and agency mortgage-backed securities (MBS). The briefing noted that, on the one hand, restricting eligible collateral for a domestic SRF to U.S. Treasury securities could mitigate concerns that an SRF could encourage counterparties to take on greater liquidity risk. On the other hand, accepting agency securities and agency MBS in an SRF would be consistent with the structure of current repo operations and could help address a greater range of potential repo market pressures from spilling over into the federal funds market. The proposed design for a standing FIMA repo facility was similar in structure to the existing temporary FIMA repo facility. Under the draft terms, the range of eligible counterparties for the FIMA repo facility would continue to include foreign official institutions, largely comprising central banks, subject to individual approval. The eligible collateral would continue to be limited to U.S. Treasury securities. The draft terms envisioned that the rate for the FIMA repo facility would be set equal to the top of the target range for the federal funds rate, a rate equal to the minimum bid rate in the draft terms for the domestic SRF. In their discussion of considerations related to the design of a domestic SRF, a substantial majority restated their view, conveyed at the April 2021 meeting, that the potential benefits of such a facility outweighed the potential costs. Participants broadly supported the terms presented by the staff for such a facility. Several participants noted the importance of setting the minimum bid rate high enough so that the facility was positioned as a backstop, while some pointed out the importance of not setting the rate so high that usage of the facility could be stigmatized or that the facility would not sufficiently contain pressures that could spill over into the federal funds market. Several participants noted that setting an SRF rate at the top of the target range for the federal funds rate would be consistent with addressing pressures that could spill over to the federal funds market. Others remarked that setting the SRF rate at the same level as the primary credit rate for borrowing at the discount window would promote equitable access to Federal Reserve liquidity across banks and counterparties for OMOs. Several participants commented that it may also be appropriate to adjust the SRF rate over time based on accumulated experience and economic or financial developments. Several participants suggested that, in order to ensure an SRF continues to be effective, it may be appropriate to study the costs and benefits of additional adjustments over time, such as moving to a cleared settlement structure. Most participants noted the benefits of allowing banks to be counterparties to a domestic SRF, including more directly addressing liquidity pressures for participants in the federal funds market and promoting equitable access to liquidity across domestic counterparties. Many participants judged that it would be appropriate to accept the same set of securities that is currently accepted for OMOs. Some participants indicated that accepting these securities in the domestic SRF's operations should increase the effectiveness of the facility in limiting upward pressures in repo markets that could spill over into the federal funds market. Some other participants noted that limiting acceptable securities for SRF operations to U.S. Treasury securities could have benefits, including consistency with the regulatory distinction between U.S. Treasury securities and other types of securities, potentially limiting the Federal Reserve's footprint in financial markets, and maintaining consistency with the structure of the proposed FIMA repo facility and the overnight reverse repo (ON RRP) facility. Several participants cautioned that establishing a backstop SRF would not diminish the importance of providing a sufficiently ample supply of reserves on an ongoing basis or the need to improve the structural resiliency of the U.S. Treasury market. A couple of participants reiterated their concerns about converting current ongoing daily repo operations to a standing facility and suggested ways to calibrate the terms of the facility to mitigate these concerns, including setting a relatively high minimum bid rate or limiting securities eligible for SRF operations to only U.S. Treasury securities. In their discussion of considerations related to the design of a standing FIMA repo facility, a substantial majority supported the broad structure discussed in the staff presentation. Many participants generally saw benefits in keeping the rate at the same level as that in the potential domestic SRF in light of the similar nature of the transactions and high quality of the collateral. A number of participants remarked that the rate at the FIMA repo facility could be set at a higher level than at the domestic SRF or could be set at a level comparable to that in the Federal Reserve's dollar liquidity swap lines. A couple of participants commented on the potential reputational risks of establishing a standing FIMA repo facility, including those associated with providing liquidity on a standing basis to a wider set of central banks and finance ministries than through existing swap lines. These participants reiterated the importance of maintaining well-defined criteria for participation in the facility and suggested that the FOMC should receive regular reports on the operations and counterparties approved for a standing FIMA repo facility. Participants agreed that they would continue their discussion of design parameters for both a domestic SRF and a standing FIMA repo facility. The Chair asked the staff to work on a specific proposal that reflected the views expressed by participants at this meeting. Developments in Financial Markets and Open Market Operations The manager turned first to a discussion of financial market developments over the intermeeting period. On net, U.S. financial conditions eased further, led by a decline in Treasury yields. Lower term premiums appeared to be a significant component of the declines, as reflected by lower implied volatility on longer-term interest rates. Equities rose slightly, the broad dollar weakened, and credit spreads were little changed at historically tight levels. Over the period, market participants focused on data showing lower employment growth and higher inflation readings than had been expected. The median 2021 core personal consumption expenditures (PCE) inflation forecast from the Open Market Desk's Survey of Primary Dealers jumped nearly 1 percentage point from the previous survey. However, median forecasts for 2022 and 2023 each rose less than 0.1 percent, suggesting expectations for inflationary pressures to subside. Inflation compensation as measured by five-year breakeven rates on Treasury Inflation-Protected Securities peaked in mid-May at the highest level in more than a decade, but the increase was driven almost entirely by higher inflation compensation at short horizons. Indeed, one-year-forward inflation compensation at horizons beyond a year was relatively stable. Measures of expectations for Federal Reserve policy were little changed over the period. The median respondent to the Desk's surveys of primary dealers and market participants continued to expect the pace of Federal Reserve asset purchases to begin to decline in the first quarter of 2022, although most respondents also saw a reasonable chance that this decline could occur one quarter earlier or later. The median respondent expected purchases to end in the fourth quarter of 2022. The Desk's survey measures of the expected path of the target federal funds rate were also fairly steady, and the median respondent continued to expect the first target rate increase to occur in the third quarter of 2023. Nearly all Desk survey respondents anticipated that the Summary of Economic Projections would show the median Committee participant projecting either no increase in the target range or one 1/4 percentage point increase by the end of 2023. The manager noted that downward pressure on money market rates continued over the period. Banks continued to limit growth in their balance sheets by allowing wholesale liabilities to mature and encouraging customers to shift some nonoperational deposits to money market funds. Moreover, the supply of Treasury bills, a primary investment for government money market mutual funds, fell further. Against this backdrop, the Secured Overnight Financing Rate (SOFR) printed at 1 basis point each day in the intermeeting period, while the effective federal funds rate (EFFR) decreased 1 basis point, to 6 basis points. Amid heightened demand and reduced supply for short-term investments, the ON RRP continued to maintain a floor on overnight rates. Growth in the ON RRP and other nonreserve liabilities helped expand the base of Federal Reserve liabilities supporting asset purchases, damping the increase in reserves and easing pressure on bank balance sheets. Over the next intermeeting period, the manager anticipated that further increases in reserves and reductions in bill supply could put additional downward pressure on overnight rates. A modest technical adjustment to administered rates could be warranted to maintain the EFFR well within the target range and support smooth functioning of short-term funding markets. Such an adjustment would be expected to raise the federal funds rate and to lift other overnight rates modestly. Most respondents to the Desk's surveys expected an administered rate adjustment this summer. The manager noted that balances at the ON RRP facility would likely continue to grow over coming months. The staff would continue to monitor developments, and the manager noted that, at some point, it could become appropriate to consider raising the counterparty limits for the ON RRP. The manager provided an update on progress toward winding down a number of emergency facilities established under section 13(3) of the Federal Reserve Act. While market participants took note of the Federal Reserve Board's announcement on winding down the Secondary Market Corporate Credit Facility (SMCCF) holdings, it elicited little price response. The commencement of exchange-traded funds sales proceeded smoothly. All of the SMCCF assets are expected to be sold by the end of this year. Finally, the manager noted a proposal to request the Chair's approval for an extension to the temporary U.S. dollar liquidity swap arrangements to December 31, 2021. The extension would benefit the U.S. economy by helping forestall potential pressures in offshore dollar funding markets that could spill over to U.S. financial conditions while much of the global economy remains on an uncertain recovery path from the pandemic. Should the Committee decide to make the FIMA repo facility standing, an extension would also provide sufficient time for those temporary swap line central banks that are not currently enrolled in the FIMA repo facility to do so and to become fully operational. Secretary's note: The Chair subsequently provided approval to the Desk, following the procedures in the Authorization for Foreign Currency Operations, to extend the expiration of the temporary U.S. dollar liquidity swap lines through December 31, 2021. 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 available at the time of the June 15–16 meeting suggested that U.S. real gross domestic product (GDP) was expanding in the second quarter at a pace that was faster than in the first quarter of the year. Moreover, labor market conditions had improved further in April and May. Consumer price inflation through April—as measured by the 12-month percentage change in the PCE price index—had picked up notably, largely reflecting transitory factors. Total nonfarm payroll employment increased solidly over April and May, though at a slower monthly pace than over February and March. As of May, total payroll employment had retraced two‑thirds of the job losses seen at the onset of the pandemic, although employment in the leisure and hospitality sector and in the education sector (including both public and private education) had bounced back by less. Over April and May, the unemployment rate edged down and stood at 5.8 percent in May. The unemployment rates for African Americans, Asians, and Hispanics also moved down, although the rates for African Americans and Hispanics remained well above the national average. Both the labor force participation rate and the employment-to-population ratio moved up slightly, and both measures had recovered only partially from their lows during the pandemic. Initial claims for regular state unemployment insurance benefits had moved down further since mid‑April and were at the lowest level since the beginning of the pandemic, though they remained high relative to their pre-pandemic level. Weekly estimates of private-sector payrolls constructed by Federal Reserve Board staff using data provided by the payroll processor ADP, which were available through May, suggested that the pace of private employment gains had stepped up late in that month. The pace of increases in several measures of labor compensation had moved up in recent months. Average hourly earnings for all employees jumped at a sizable monthly rate in April and May, even though the large job gains in the leisure and hospitality sector—where wages tend to be lower than in other sectors—likely held down the increases in average hourly earnings in these months. A staff measure of the 12‑month change in the median wage derived from the ADP data had stepped up significantly in April relative to March. The employment cost index of total hourly compensation in the private sector increased at an annual rate of 4 percent in the three months ending in March, a notably faster pace than over the previous three months. Recent 12-month change measures of inflation, using either PCE prices or the consumer price index (CPI), were boosted significantly by the base effects of the drop in prices from the spring of 2020 rolling out of the calculation. In addition, a surge in demand as the economy reopened further, combined with production bottlenecks and supply constraints, contributed to the large recent monthly price increases. Total PCE price inflation was 3.6 percent over the 12 months ending in April. Core PCE price inflation, which excludes changes in consumer energy prices and many consumer food prices, was 3.1 percent over the 12 months ending in April. In contrast, the trimmed mean measure of 12-month PCE inflation constructed by the Federal Reserve Bank of Dallas was 1.8 percent in April. In May, the 12-month change in the CPI was 5 percent, while core CPI inflation was 3.8 percent over the same period. In the second quarter, the staff's common inflation expectations index, which combines information from many indicators of inflation expectations and inflation compensation, had returned to the level that prevailed in 2014, a time when inflation was modest. Real PCE increased substantially in March and then was little changed from that high level in April. The components of the nominal retail sales data that are used to estimate PCE edged down in May, but the sales data for the previous two months were revised up markedly, pointing to stronger real PCE growth than had been initially estimated. Combined with reduced social distancing and more widespread vaccinations, key factors that influence consumer spending—including increasing job gains, the upward trend in real disposable income, high levels of household net worth, and low interest rates—pointed to strong real PCE growth over the rest of the year. Housing demand continued to be robust, with construction of single-family homes and home sales remaining well above their pre-pandemic levels and house prices rising appreciably further. The incoming data for this sector indicated that residential investment spending was being temporarily held back in the second quarter by materials shortages and limited stocks of homes for sale. Available indicators suggested that equipment and intangibles investment—particularly in high-tech categories—was increasing solidly in the second quarter. Rising orders for nondefense capital goods excluding aircraft were running well above the increases in shipments of those goods through April, which pointed to additional gains in business equipment spending in coming months. Moreover, business investment in the drilling and mining sector appeared to be increasing further, as crude oil and natural gas rigs in operation—an indicator of drilling investment—continued to rise through early June, with oil prices moving higher. However, nominal nonresidential construction spending declined further in April, and investment in nonresidential structures outside of the drilling and mining sector looked to remain weak in the current quarter, likely reflecting continued hesitation by businesses to commit to building projects with lengthy times to completion and uncertain future returns. Manufacturing output expanded solidly, on balance, over April and May. Output in the motor vehicle and parts sector rose, on net, although semiconductor shortages were still weighing on vehicle production. Factory output outside of the motor vehicle sector increased solidly, and production in the mining sector, which includes crude oil and natural gas extraction, also increased over April and May. Total real government purchases looked to be about flat, on balance, in the second quarter. Data through May indicated that real federal defense spending was rising only slightly, and nondefense spending was expected to drop following a first-quarter surge in pandemic-related expenditures. State and local government purchases looked to be increasing significantly, as the payrolls of these governments expanded solidly over April and May. Nominal state and local construction spending, however, edged down in April. With the strong economic recovery leading to an improved outlook for state and local tax revenues, and the additional federal support for these governments included in the American Rescue Plan, state and local purchases appeared likely to increase notably over the rest of the year. The nominal U.S. international trade deficit widened to a record size in March and then reversed that widening in April. Real goods exports in March surpassed their January 2020 levels for the first time and then continued to grow in April, with particular strength in exports of capital goods. Real goods imports surged to record-high levels in March and then stepped back modestly in April. Bottlenecks in the global semiconductor industry, which had weighed on exports and imports of automotive products this year, continued to do so through April. Exports and imports of services remained depressed relative to pre-pandemic levels, as international travel increased only slightly from February. Recent data pointed to a pickup in foreign economic activity in the second quarter. Demand improved as social-distancing restrictions were lifted in the United Kingdom and the euro area following the rollout of vaccines. With the economic reopening under way, purchasing managers indexes (PMIs) in both the manufacturing and services sectors were strong in Europe in April and May. In the emerging market economies (EMEs), manufacturing PMIs and exports were generally robust. However, many EMEs continued to struggle to contain the virus amid a slow pace of vaccinations, particularly in South America and parts of Asia. Consumer price inflation continued to rise in many foreign economies, primarily driven by rebounding energy prices and the fading effects of steep price declines seen early last year. Price increases were concentrated in relatively few items, suggesting that underlying inflationary pressures remained subdued amid considerable economic slack. Staff Review of the Financial Situation Overall financial conditions eased during the intermeeting period as market participants appeared to remain confident that the economic recovery was broadly on track, that inflation over the medium term would stay contained, and that monetary policy would remain accommodative. Domestic equity prices edged up, and corporate bond spreads narrowed a little. Yields on nominal Treasury securities declined modestly since the previous FOMC meeting. Measures of inflation compensation at shorter horizons moved down somewhat, on net, while measures of longer-term inflation compensation were little changed. A straight read of overnight index swap (OIS) quotes suggested that the expected path for the federal funds rate moved lower over the intermeeting period and that the expected policy rate would remain below 25 basis points until the first quarter of 2023. Short-term funding markets functioned smoothly amid record participation in the ON RRP facility. Financing conditions for businesses and households remained accommodative, particularly for large firms and households with high credit ratings. The Treasury yield curve flattened a bit, on net, with 2-year yields about unchanged while 5-, 10-, and 30-year yields declined somewhat. Inflation compensation declined a bit at shorter horizons but held steady at longer horizons. Market expectations for the federal funds rate path over the medium term, as implied by OIS quotes unadjusted for term premiums, declined moderately. Broad stock price indexes increased slightly over the intermeeting period, with stocks in cyclically sensitive sectors generally outperforming. One-month option-implied volatility on the S&P 500—the VIX—reached its lowest level since February 2020 and remained a bit below the middle of its historical distribution. Spreads of yields on corporate bonds over those on comparable-maturity Treasury securities narrowed a little for all credit ratings. Meanwhile, yields on municipal bonds reached historical lows, with spreads roughly unchanged for high-credit-rated bonds and moderately narrower for lower-credit-rated bonds. Short-term funding markets continued to function smoothly over the intermeeting period. Short‑term and overnight rates remained near historical lows, with overnight rates dipping slightly. The EFFR was nearly constant throughout the period at 6 basis points, while the SOFR remained at 1 basis point. With rates low and net Treasury bill supply contracting, government money market funds, which at the same time were attracting notable inflows, had limited investment options at nonnegative rates. As a result, ON RRP take-up by these funds surged, pushing total ON RRP participation to record levels in late May and June. International financial market participants were focused on news about inflation and monetary policy communications. In Europe, stronger-than-expected readings for both inflation and economic activity, as well as increased optimism about vaccinations, contributed to a rise in market-based measures of inflation expectations. On net, European longer-term government bond yields were little changed even as U.S. yields declined, and the broad dollar index decreased modestly. In emerging markets, credit spreads narrowed a bit, and capital flows into EME funds continued at a moderate pace. Equity indexes increased somewhat in both emerging and advanced foreign economies. Financing conditions for nonfinancial firms through capital markets remained highly accommodative, as reflected in historically low corporate bond and leveraged loan yields as well as high price-to-earnings ratios in the equity markets. Gross issuance of corporate bonds and leveraged loans was solid. Equity raised through traditional initial public offerings was robust in April but softened to more moderate levels in May and through mid-June, while the pace of seasoned equity offerings was modest over the intermeeting period. Meanwhile, equity issuance through special purpose acquisition companies slowed markedly. Commercial and industrial (C&I) loans outstanding at banks fell through mid-May, with forgiveness of Paycheck Protection Program (PPP) loans continuing to drive balances down and more than offsetting volumes of new loan originations. Tepid demand for loans appears to have been a factor in the decline in loans outstanding. For instance, despite healthy growth in C&I commitments at large banks over the first quarter, there was no corresponding change in the utilization rates of credit lines. The credit quality of large nonfinancial corporations remained largely stable over the intermeeting period. The volume of credit rating upgrades for nonfinancial bonds and leveraged loans outpaced downgrades somewhat in the April-to-early-June period. There were no reported corporate defaults in April, and defaults were low in May. Delinquency rates on bank C&I loans also remained low in the first quarter. Market indicators of future default expectations were little changed and remained low relative to their historical range. In the municipal bond market, financing conditions remained accommodative over the intermeeting period. Issuance of municipal bonds was solid in recent months, and indicators of the credit quality of municipal debt showed some signs of improvement, with the volume of bond upgrades outpacing the volume of bond downgrades. Financing conditions for small businesses were little changed, with supply of small business loans remaining tight and demand still subdued outside of the PPP. While small business loan originations rose in April, surpassing pre-pandemic levels, loans made under the PPP likely accounted for a significant portion of that growth. Loan performance and other indicators of the financial health of small businesses improved in recent months. However, in certain sectors, such as accommodation and food services, small businesses remained stressed. For commercial real estate (CRE) financed through capital markets, financing conditions remained mostly accommodative over the intermeeting period. Issuance of commercial mortgage-backed securities (CMBS) was solid in recent months except in the retail and hotel sectors. Spreads of agency CMBS narrowed to below pre-pandemic levels. Meanwhile, spreads on non-agency triple-A CMBS were little changed at accommodative levels, while non-agency triple-B spreads remained elevated. CRE loan growth at banks continued to be weak through mid-May, likely reflecting weak demand as well as tight underwriting standards. In the residential mortgage market, financing conditions were little changed over the intermeeting period and remained accommodative for stronger borrowers who met standard conforming loan criteria. Credit continued to appear tight for borrowers with lower credit scores. Mortgage rates for most borrowers were little changed, on net, and remained near historical lows. Home-purchase and refinance mortgage activity continued at a strong pace through early June. The share of mortgages in forbearance declined in May. Financing conditions for consumer credit remained generally accommodative. Consumer loans grew at a robust pace in April, driven by rapid growth in auto loan balances. Credit card balances on banks' books rose in May, reversing an April decline. For subprime borrowers, conditions in the credit card market appeared to have eased somewhat further from the tight conditions seen after the onset of the pandemic. Conditions in the asset-backed securities market continued to be supportive of lending during the intermeeting period. Staff Economic Outlook The U.S. economic projection prepared by the staff for the June FOMC meeting was stronger than the April forecast. Real GDP growth was projected to increase substantially this year, with a correspondingly rapid decline in the unemployment rate. Further reductions in social distancing and favorable financial conditions were expected to support output growth, even though the effects of fiscal stimulus on economic growth were starting to unwind. With the boost to growth from continued reductions in social distancing assumed to fade after 2021 and the further unwinding of fiscal stimulus, GDP growth was expected to step down in 2022 and 2023. Nevertheless, with monetary policy assumed to remain highly accommodative, the staff continued to anticipate that real GDP growth would outpace that of potential over most of this period, leading to a decline in the unemployment rate to historically low levels. The staff's near-term outlook for inflation was revised up markedly, but the staff continued to expect the rise in inflation this year to be transitory. The 12‑month change in total and core PCE prices had moved well above 2 percent in April, and incoming CPI data suggested that PCE price inflation would remain high in May. The recent 12-month measures of inflation were being boosted significantly by the base effects of the drop in prices from the spring of 2020 rolling out of the calculation. In addition, the surge in demand as the economy reopened further, combined with production bottlenecks and supply constraints, contributed to the large recent monthly price increases. The staff expected the 12-month change in PCE prices to gradually move down in coming months, reflecting, importantly, the fading of base effects along with smaller expected monthly price increases, but PCE price inflation was forecast to still be well above 2 percent at the end of this year. Over the next year, the transitory price increases caused by bottlenecks and supply constraints were expected to largely reverse, and the growth in demand was forecast to ease. As a result, inflation was projected to slow to slightly below 2 percent in 2022 before moving back up to a bit above 2 percent in 2023, supported by high levels of resource utilization. The staff continued to see the uncertainty surrounding the economic outlook as elevated, although increasingly widespread vaccinations, along with ongoing policy support, were viewed as helping to diminish some of these uncertainties. Nevertheless, the staff judged that the risks around their strong baseline projection for economic activity were still tilted somewhat to the downside, as adverse alternative courses of the pandemic—including the possibility of the spread of more-contagious, more-vaccine-resistant COVID-19 variants—seemed more likely than outcomes that would be more favorable than in the baseline forecast. The staff continued to view the risks around the inflation projection as roughly balanced. On the upside, bottlenecks, supply disruptions, and historically high rates of resource utilization were seen as potential sources of greater-than-expected inflationary pressures, particularly if there were a significant rise in inflation expectations that altered inflation dynamics. On the downside, if the effects of supply constraints proved to be transitory, as expected, then the inflation record from the past 25 years suggested the possibility that low underlying trend inflation and a flat Phillips curve could cause inflation to revert to relatively low levels despite a strengthening economy. Participants' Views on Current Economic Conditions and the Economic Outlook In conjunction with this FOMC meeting, participants submitted their projections of the most likely outcomes for real GDP growth, the unemployment rate, and inflation for each year from 2021 through 2023 and over the longer run, based on their individual assessments of appropriate monetary policy, including the path of 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. A Summary of Economic Projections was released to the public following the conclusion of the meeting. In their discussion of current conditions, participants noted that progress on vaccinations had reduced the spread of COVID-19 in the United States. Amid this progress and strong policy support, indicators of economic activity and employment had strengthened. The sectors most adversely affected by the pandemic remained weak but had shown improvement. Inflation had risen, largely reflecting transitory factors. Overall financial conditions remained accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses. Participants generally noted that the path of the economy would depend significantly on the course of the virus. Progress on vaccinations would likely continue to reduce the effects of the public health crisis on the economy, but risks to the economic outlook remained. Participants observed that economic activity was expanding at a historically rapid pace, led by robust gains in consumer spending. A vast majority of participants revised up their projections for real GDP growth this year compared with the projections they had submitted in March, citing stronger consumer demand and improvements in vaccination rates as the primary reasons for these upgrades. That said, participants generally saw supply disruptions and labor shortages as constraining the expansion of economic activity this year. Participants' projections of real GDP growth in 2022 and 2023 were generally little changed. In their discussion of the household sector, participants remarked that indicators of consumer spending had continued to surge and expected that further gains in spending would contribute significantly to the economic recovery. Many participants commented that accommodative financial conditions, the release of pent-up demand, progress on widespread vaccination, the ongoing reduction of social-distancing measures, and fiscal stimulus were important factors supporting spending. Some participants also noted that consumer spending would likely continue to be bolstered by the ongoing effects from these factors as well as by households' elevated level of accumulated savings and generally healthy balance sheets. A majority of participants observed that housing market activity remained strong. With respect to the business sector, most participants noted that activity in the service industries most adversely affected by the pandemic, such as in the leisure and hospitality sector, was rebounding as the economy reopened. A number of participants noted that business equipment investment was rising at a strong pace, but growth in manufacturing activity was being restrained by production bottlenecks and supply constraints. In addition, participants reported hearing from contacts in a broad range of industries that shortages of materials and labor as well as supply chain challenges were limiting the ability of firms to keep up with demand. Some business contacts indicated that they were responding to input shortages and bottlenecks by canceling shifts, raising compensation to attract and retain workers, raising prices, or focusing on cutting costs and increasing productivity, particularly through automation. Participants commented on the continued improvement in labor market conditions in recent months. Job gains in April and May averaged more than 400,000, and the unemployment rate edged down, on net, to 5.8 percent over the period. Many participants pointed to the elevated number of job openings and high rates of job switching as further evidence of the improvement in labor market conditions. Many participants remarked, however, that the economy was still far from achieving the Committee's broad-based and inclusive maximum-employment goal, and some participants indicated that recent job gains, while strong, were weaker than they had expected. A number of participants noted that the labor market recovery continued to be uneven across demographic and income groups and across sectors. Participants noted that their District contacts had reported having trouble hiring workers to meet demand, likely reflecting factors such as early retirements, concerns about the virus, childcare responsibilities, and expanded unemployment insurance benefits. Some participants remarked that these factors were making people either less able or less inclined to work in the current environment. Citing recent wage data and reports from business contacts, many participants judged that labor shortages were putting upward pressure on wages or leading employers to provide additional financial incentives to attract and retain workers, particularly in lower-wage occupations. Participants expected labor market conditions to continue to improve, with labor shortages expected to ease throughout the summer and into the fall as progress on vaccinations continues, social distancing unwinds further, more schools reopen, and expanded unemployment insurance benefits expire. In their discussions on inflation, participants stated that they had expected inflation to move above 2 percent in the near term, in part as the drop in prices from early in the pandemic fell out of the calculation and past increases in oil prices passed through to consumer energy prices. However, participants remarked that the actual rise in inflation was larger than anticipated, with the 12-month change in the PCE price index reaching 3.6 percent in April. Participants attributed the upside surprise to more widespread supply constraints in product and labor markets than they had anticipated and to a larger-than-expected surge in consumer demand as the economy reopened. They noted that many of their District contacts had reported that higher input costs were putting upward pressure on prices. Most participants observed that the largest contributors to the rise in measured inflation were sectors affected by supply bottlenecks or sectors where price levels were rebounding from levels depressed by the pandemic. Looking ahead, participants generally expected inflation to ease as the effect of these transitory factors dissipated, but several participants remarked that they anticipated that supply chain limitations and input shortages would put upward pressure on prices into next year. Several participants noted that, during the early months of the reopening, uncertainty remained too high to accurately assess how long inflation pressures will be sustained. Some participants commented that recent readings of inflation measures that exclude volatile components, such as trimmed mean measures, had been relatively stable at or just below 2 percent. In their comments on longer-term inflation expectations, a number of participants noted that, despite increases earlier this year, measures of longer-term inflation expectations had remained in ranges that were broadly consistent with the Committee's longer-run inflation goal. Others noted that it was this year's increases that had brought these measures to levels that were broadly consistent with the Committee's longer-run inflation goal. Participants noted that overall financial conditions remained highly accommodative, in part reflecting the stance of monetary policy, which continued to deliver appropriate support to the economy. Several participants highlighted, however, that low interest rates were contributing to elevated house prices and that valuation pressures in housing markets might pose financial stability risks. In discussing the uncertainty and risks associated with the economic outlook, participants commented that the process of reopening the economy was unprecedented and likely to be uneven across sectors. Some participants judged that supply chain disruptions and labor shortages complicated the task of assessing progress toward the Committee's goals and that the speed at which these factors would dissipate was uncertain. Accordingly, participants judged that uncertainty around their economic projections was elevated. Although they generally saw the risks to the outlook for economic activity as broadly balanced, a substantial majority of participants judged that the risks to their inflation projections were tilted to the upside because of concerns that supply disruptions and labor shortages might linger for longer and might have larger or more persistent effects on prices and wages than they currently assumed. Several participants expressed concern that longer-term inflation expectations might rise to inappropriate levels if elevated inflation readings persisted. Several other participants cautioned that downside risks to inflation remained because temporary price pressures might unwind faster than currently anticipated and because the forces that held down inflation and inflation expectations during the previous economic expansion had not gone away or might reinforce the effect of the unwinding of temporary price pressures. In their consideration of the stance of monetary policy, participants reaffirmed the Federal Reserve's commitment to using its full range of tools to support the U.S. economy during this challenging time, thereby promoting the Committee's statutory goals of maximum employment and price stability. Participants generally agreed that the economic recovery was incomplete and that risks to the economic outlook remained. Although inflation had risen more than anticipated, the increase was seen as largely reflecting temporary factors, and participants expected inflation to decline toward the Committee's 2 percent longer-run objective. Participants judged that the current stance of monetary policy and policy guidance remained appropriate to promote maximum employment as well as to achieve inflation that averages 2 percent over time and longer-term inflation expectations that are well anchored at 2 percent. Participants also reiterated that the existing outcome-based guidance implied that the paths of the federal funds rate and the balance sheet would depend on actual progress toward reaching the Committee's maximum-employment and inflation goals. In light of the incoming data and the implications for their economic outlooks, a few participants mentioned that they expected the economic conditions set out in the Committee's forward guidance for the federal funds rate to be met somewhat earlier than they had projected in March. Several participants emphasized, however, that uncertainty around the economic outlook was elevated and that it was too early to draw firm conclusions about the paths of the labor market and inflation. In their view, this heightened uncertainty regarding the evolution of the economy also implied significant uncertainty about the appropriate path of the federal funds rate. Some participants noted that communications about the appropriate path of policy would be a focus of market participants in the current environment and commented that it would be important to emphasize that the Committee's reaction function or commitment to its monetary policy framework had not changed. Participants discussed the Federal Reserve's asset purchases and progress toward the Committee's goals since last December when the Committee adopted its guidance for asset purchases. The Committee's standard of "substantial further progress" was generally seen as not having yet been met, though participants expected progress to continue. Various participants mentioned that they expected the conditions for beginning to reduce the pace of asset purchases to be met somewhat earlier than they had anticipated at previous meetings in light of incoming data. Some participants saw the incoming data as providing a less clear signal about the underlying economic momentum and judged that the Committee would have information in coming months to make a better assessment of the path of the labor market and inflation. As a result, several of these participants emphasized that the Committee should be patient in assessing progress toward its goals and in announcing changes to its plans for asset purchases. Participants generally judged that, as a matter of prudent planning, it was important to be well positioned to reduce the pace of asset purchases, if appropriate, in response to unexpected economic developments, including faster-than-anticipated progress toward the Committee's goals or the emergence of risks that could impede the attainment of the Committee's goals. Various participants offered their views on the Committee's agency MBS purchases. Several participants saw benefits to reducing the pace of these purchases more quickly or earlier than Treasury purchases in light of valuation pressures in housing markets. Several other participants, however, commented that reducing the pace of Treasury and MBS purchases commensurately was preferable because this approach would be well aligned with the Committee's previous communications or because purchases of Treasury securities and MBS both provide accommodation through their influence on broader financial conditions. In coming meetings, participants agreed to continue assessing the economy's progress toward the Committee's goals and to begin to discuss their plans for adjusting the path and composition of asset purchases. In addition, participants reiterated their intention to provide notice well in advance of an announcement to reduce the pace of purchases. With regard to the implementation of monetary policy, participants had observed downward pressure on money market rates over the intermeeting period and viewed the possibility of further downward pressure on these rates in the near term as likely. Consequently, they noted that an adjustment to the Federal Reserve's administered rates would help keep the federal funds rate well within the target range and support smooth market functioning of short-term funding markets. Participants agreed that this technical adjustment had no bearing on the appropriate path for the federal funds rate or the stance of monetary policy. Committee Policy Action In their discussion of monetary policy for this meeting, members agreed that progress on vaccinations had reduced the spread of COVID-19 in the United States. They noted that amid progress and strong policy support, indicators of economic activity and employment had strengthened. Although the sectors most adversely affected by the pandemic remained weak, they had shown improvement. Inflation had risen, largely reflecting transitory factors. Overall financial conditions remained accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses. Members also agreed that the path of the economy would depend significantly on the course of the virus. Progress on vaccinations would likely continue to reduce the effects of the public health crisis on the economy, but risks to the economic outlook remained. Members agreed that the Federal Reserve was committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum-employment and price-stability goals. All members reaffirmed that, in accordance with the Committee's goals to achieve maximum employment and inflation at the rate of 2 percent over the longer run and with inflation having run persistently below this longer-run goal, they would aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent. Members expected to maintain an accommodative stance of monetary policy until those outcomes were achieved. All members agreed to keep the target range for the federal funds rate at 0 to 1/4 percent, and they expected that it would be appropriate to maintain this target range until labor market conditions had reached levels consistent with the Committee's assessments of maximum employment and inflation had risen to 2 percent and was on track to moderately exceed 2 percent for some time. In addition, members agreed that it would be appropriate for the Federal Reserve to continue to increase its holdings of Treasury securities by at least $80 billion per month and agency MBS by at least $40 billion per month until substantial further progress had been made toward the Committee's maximum-employment and price-stability goals. They judged that these asset purchases would help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses. Members agreed that, in assessing the appropriate stance of monetary policy, they would continue to monitor the implications of incoming information for the economic outlook and that they would be prepared to adjust the stance of monetary policy as appropriate in the event that risks emerged that could impede the attainment of the Committee's goals. Members also concurred that, in assessing the appropriate stance of monetary policy, they would take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments. Members judged that the economic outlook had continued to improve and that the most negative effects of the pandemic on the economy most likely had occurred. As a result, they agreed to remove references in the FOMC statement that noted that the virus was "causing tremendous human and economic hardship" and that "the ongoing public health crisis continues to weigh on the economy." Instead, they agreed to say that progress on vaccinations had reduced the spread of COVID-19 and would likely continue to reduce the negative economic effects of the public health crisis. 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, for release at 2:00 p.m.: "Effective June 17, 2021, 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 0 to 1/4 percent. Increase the System Open Market Account holdings of Treasury securities by $80 billion per month and of agency mortgage-backed securities (MBS) by $40 billion per month. Increase holdings of Treasury securities and agency MBS by additional amounts and purchase agency commercial mortgage-backed securities (CMBS) as needed to sustain smooth functioning of markets for these securities. Conduct repurchase agreement operations to support effective policy implementation and the smooth functioning of short-term U.S. dollar funding markets. Conduct overnight reverse repurchase agreement operations at an offering rate of 0.05 percent and with a per-counterparty limit of $80 billion per day; the per-counterparty limit can be temporarily increased at the discretion of the Chair. Roll over at auction all principal payments from the Federal Reserve's holdings of Treasury securities and reinvest all principal payments from the Federal Reserve's holdings of agency debt and agency MBS in agency MBS. Allow modest deviations from stated amounts for purchases and reinvestments, if needed for operational reasons. Engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions." The vote also encompassed approval of the statement below for release at 2:00 p.m.: "The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals. Progress on vaccinations has reduced the spread of COVID-19 in the United States. Amid this progress and strong policy support, indicators of economic activity and employment have strengthened. The sectors most adversely affected by the pandemic remain weak but have shown improvement. Inflation has risen, largely reflecting transitory factors. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses. The path of the economy will depend significantly on the course of the virus. Progress on vaccinations will likely continue to reduce the effects of the public health crisis on the economy, but risks to the economic outlook remain. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation having run persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer‑term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved. The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee's assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. In addition, the Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage‑backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee's maximum employment and price stability goals. These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments." Voting for this action: Jerome H. Powell, John C. Williams, Thomas I. Barkin, Raphael W. Bostic, Michelle W. Bowman, Lael Brainard, Richard H. Clarida, Mary C. Daly, Charles L. Evans, Randal K. Quarles, and Christopher J. Waller. 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 raise the interest rates on required and excess reserve balances to 0.15 percent. Setting the interest rate paid on required and excess reserve balances 15 basis points above the bottom of the target range for the federal funds rate is intended to foster trading in the federal funds market at rates well within the Federal Open Market Committee's target range and to support the smooth functioning of short-term funding markets. The Board of Governors also voted unanimously to approve establishment of the primary credit rate at the existing level of 0.25 percent, effective June 17, 2021. It was agreed that the next meeting of the Committee would be held on Tuesday–Wednesday, July 27–28, 2021. The meeting adjourned at 10:40 a.m. on June 16, 2021. Notation Vote By notation vote completed on May 18, 2021, the Committee unanimously approved the minutes of the Committee meeting held on April 27–28, 2021. _______________________ 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 economic developments and the outlook. Return to text

2021-06-16

Statement

The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals. Progress on vaccinations has reduced the spread of COVID-19 in the United States. Amid this progress and strong policy support, indicators of economic activity and employment have strengthened. The sectors most adversely affected by the pandemic remain weak but have shown improvement. Inflation has risen, largely reflecting transitory factors. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses. The path of the economy will depend significantly on the course of the virus. Progress on vaccinations will likely continue to reduce the effects of the public health crisis on the economy, but risks to the economic outlook remain. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation having run persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer‑term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved. The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee's assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. In addition, the Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage‑backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee's maximum employment and price stability goals. These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments. Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Thomas I. Barkin; Raphael W. Bostic; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Mary C. Daly; Charles L. Evans; Randal K. Quarles; and Christopher J. Waller. Implementation Note issued June 16, 2021

2021-04-28

Statement

The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals. The COVID-19 pandemic is causing tremendous human and economic hardship across the United States and around the world. Amid progress on vaccinations and strong policy support, indicators of economic activity and employment have strengthened. The sectors most adversely affected by the pandemic remain weak but have shown improvement. Inflation has risen, largely reflecting transitory factors. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses. The path of the economy will depend significantly on the course of the virus, including progress on vaccinations. The ongoing public health crisis continues to weigh on the economy, and risks to the economic outlook remain. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer‑term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved. The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee's assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. In addition, the Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage‑backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee's maximum employment and price stability goals. These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments. Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Thomas I. Barkin; Raphael W. Bostic; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Mary C. Daly; Charles L. Evans; Randal K. Quarles; and Christopher J. Waller. Implementation Note issued April 28, 2021

2021-05-19

Minute

Minutes of the Federal Open Market Committee April 27–28, 2021 A joint meeting of the Federal Open Market Committee and the Board of Governors was held by videoconference on Tuesday, April 27, 2021, at 9:30 a.m. and continued on Wednesday, April 28, 2021, at 9:00 a.m.1 PRESENT: Jerome H. Powell, Chair John C. Williams, Vice Chair Thomas I. Barkin Raphael W. Bostic Michelle W. Bowman Lael Brainard Richard H. Clarida Mary C. Daly Charles L. Evans Randal K. Quarles Christopher J. Waller James Bullard, Esther L. George, Naureen Hassan, Loretta J. Mester, 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 Michelle A. Smith, Assistant Secretary Mark E. Van Der Weide, General Counsel Michael Held, Deputy General Counsel Trevor A. Reeve, Economist Stacey Tevlin, Economist Beth Anne Wilson, Economist David Altig, Kartik B. Athreya, Brian M. Doyle, Rochelle M. Edge, Eric M. Engen, Anna Paulson, and William Wascher, Associate Economists Lorie K. Logan, Manager, System Open Market Account Patricia Zobel, 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 Sally Davies, Deputy Director, Division of International Finance, Board of Governors Jon Faust, Senior Special Adviser to the Chair, Division of Board Members, Board of Governors Joshua Gallin, Special Adviser to the Chair, Division of Board Members, Board of Governors William F. Bassett, Antulio N. Bomfim, Wendy E. Dunn, Burcu Duygan-Bump, Jane E. Ihrig, Kurt F. Lewis, and Chiara Scotti, Special Advisers to the Board, Division of Board Members, Board of Governors Carol C. Bertaut, Senior Associate Director, Division of International Finance, Board of Governors; David Bowman, Senior Associate Director, Division of Monetary Affairs, Board of Governors; Diana Hancock, Senior Associate Director, Division of Research and Statistics, Board of Governors; Elizabeth Klee, Senior Associate Director, Division of Financial Stability, Board of Governors Brett Berger,2 Senior Adviser, Division of International Finance, Board of Governors; Ellen E. Meade, Senior Adviser, Division of Monetary Affairs, Board of Governors; Jeremy B. Rudd, Senior Adviser, Division of Research and Statistics, Board of Governors Marnie Gillis DeBoer and Min Wei, Associate Directors, Division of Monetary Affairs, Board of Governors; Glenn Follette, Associate Director, Division of Research and Statistics, Board of Governors Ricardo Correa2 and Stephanie E. Curcuru,2 Deputy Associate Director, Division of International Finance, Board of Governors; Eric C. Engstrom, Deputy Associate Director, Division of Monetary Affairs, Board of Governors; Jeffrey D. Walker,2 Deputy Associate Director, Division of Reserve Bank Operations and Payment Systems, Board of Governors Jennifer Gallagher, Special Assistant to the Board, Division of Board Members, Board of Governors Brian J. Bonis, Michiel De Pooter,2 Giovanni Favara, Laura Lipscomb,2 and Zeynep Senyuz, Assistant Directors, Division of Monetary Affairs, Board of Governors; Byron Lutz and Matthias Paustian, Assistant Directors, Division of Research and Statistics, Board of Governors Penelope A. Beattie,2 Section Chief, Office of the Secretary, Board of Governors Mark A. Carlson,2 Senior Economic Project Manager, Division of Monetary Affairs, Board of Governors David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors Michele Cavallo, Jonathan E. Goldberg, Edward Herbst, and Krista Schwarz, Principal Economists, Division of Monetary Affairs, Board of Governors Randall A. Williams, Lead Information Manager, Division of Monetary Affairs, Board of Governors Courtney Demartini,2 Lead Financial Institution Policy Analyst, Division of Monetary Affairs, Board of Governors Anthony Sarver,2 Senior Financial Institution Policy Analyst, Division of Monetary Affairs, Board of Governors Kenneth C. Montgomery, First Vice President, Federal Reserve Bank of Boston Michael Dotsey, Joseph W. Gruber, and Ellis W. Tallman, Executive Vice Presidents, Federal Reserve Banks of Philadelphia, Kansas City, and Cleveland, respectively Anne Baum, Carlos Garriga, Samuel Schulhofer-Wohl,2 Mark L.J. Wright, and Nathaniel Wuerffel,2 Senior Vice Presidents, Federal Reserve Banks of New York, St. Louis, Chicago, Minneapolis, and New York, respectively Matthew Nemeth,2 Pia Orrenius, Nicolas Petrosky-Nadeau, and Matthew D. Raskin,2 Vice Presidents, Federal Reserve Bank of New York, Dallas, San Francisco, and New York, respectively Robert Lerman2 and William E. Riordan,2 Assistant Vice Presidents, Federal Reserve Banks of New York and New York, respectively Mark Choi2 and Ellen Correia-Golay,2 Markets Officers, Federal Reserve Banks of New York and New York, respectively Fatih Karahan and Jenny Tang, Senior Economists, Federal Reserve Banks of New York and Boston, respectively Developments in Financial Markets and Open Market Operations The System Open Market Account (SOMA) manager first discussed developments in financial markets over the intermeeting period. Financial conditions eased modestly as market participants continued to focus on progress toward economic reopening as well as supportive monetary and fiscal policy. Equity prices rose, with the S&P 500 index reaching a record high, while Treasury yields, the dollar, and credit spreads declined modestly. The equity gains were broad based across sectors, though shares of small caps, as captured by the Russell 2000 index, declined. News regarding losses associated with a highly levered family investment office affected the equity prices of some large financial firms, but the broader financial market effects appeared limited. After rising sharply in recent months, longer-term Treasury yields declined modestly over the intermeeting period, even as market expectations for U.S. growth continued to be revised higher. Contacts reported that the earlier increases in yields drew in a range of investors, including foreign institutions, pension funds, and insurance companies. Against this backdrop, term premiums as measured by term structure models and based on estimates using the Open Market Desk's surveys of primary dealers and market participants moved slightly lower. Nonetheless, market participants were attentive to the potential for rising yields going forward, and, in recent months, Desk survey respondents had increased the probability they attach to higher yields at the end of 2021. Regarding expectations for the policy outlook, the market- and survey-implied paths of the federal funds rate were both relatively little changed over the intermeeting period, and the modal survey path in later years continued to imply that the target range would gradually increase to a level just over 2 percent in 2026. Expectations for the path of asset purchases were also stable, and market participants remained focused on the Committee's communications about progress toward its goals. According to the median survey responses, the Federal Reserve's net purchases of Treasury and agency securities were expected to end three quarters after the first reduction in the pace of asset purchases, and the first increase in the target range for the federal funds rate was expected to occur three quarters after that. Recent financial market developments across advanced economies reflected differing expectations for economic growth and monetary policy. Some countries that were expected to recoup COVID-19-related output losses earlier than others had seen larger yield increases and more appreciation in their currencies in recent months. Over the intermeeting period, the Bank of Canada announced a reduction in the pace of its asset purchases and brought forward its forecast of when conditions would be met for an increase in its policy rate. The manager turned next to money markets and the Federal Reserve's balance sheet. Reserve balances increased further this intermeeting period to a record level of $3.9 trillion. The effective federal funds rate was steady at 7 basis points. However, amid ongoing strong demand for safe short-term investments and reduced Treasury bill supply, the Secured Overnight Financing Rate (SOFR) stood at 1 basis point throughout the period. The overnight reverse repurchase agreement (ON RRP) facility continued to effectively support policy implementation, and take-up peaked at more than $100 billion. A modest amount of trading in overnight repurchase agreement (repo) markets occurred at negative rates, although this development appeared to largely reflect technical factors. The SOMA manager noted that downward pressure on overnight rates in coming months could result in conditions that warrant consideration of a modest adjustment to administered rates and could ultimately lead to a greater share of Federal Reserve balance sheet expansion being channeled into ON RRP and other Federal Reserve liabilities. Although few survey respondents expected an adjustment to administered rates at the current meeting, more than half expected an adjustment by the end of the June FOMC meeting. The manager concluded with an update on three operational issues. Following the review of the ON RRP facility discussed at the previous meeting, the Desk planned to relax counterparty eligibility criteria for money funds and government-sponsored enterprises in order to allow smaller counterparties of these types to participate. The Desk also planned to make modest adjustments to the allocation of Treasury outright purchases across maturity ranges to ensure that purchases remain roughly proportional to the outstanding amounts of Treasury securities. These minor technical adjustments would have no implications for the effects of the Federal Reserve's asset purchases on overall financial conditions. Finally, the manager requested that the Committee vote to maintain the standing U.S. dollar and foreign currency liquidity swap arrangements and to renew the reciprocal currency arrangements with Canada and Mexico under the North American Framework Agreement. 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 occur 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. Discussion of Repurchase Agreement Arrangements The staff briefed participants on the Federal Reserve's experience with the daily repo operations with primary dealers that have been in place since September 2019 and the temporary Foreign and International Monetary Authorities (FIMA) Repo Facility established in March last year. The briefing also reviewed considerations that could be relevant for policymakers' judgments regarding whether these arrangements should become permanent standing facilities. The staff noted that repo operations have been a useful tool in controlling the federal funds rate by adding reserves to ensure that they remain ample and by limiting pressures in repo markets that could spill over into unsecured markets. In March 2020, repo operations worked in concert with other measures to manage shocks to financial markets by stabilizing Treasury market conditions. Since June 2020, when the rate on overnight repo operations was raised relative to the rate of interest on excess reserves, repo operations have served as a backstop and there has been no substantive usage. Regarding considerations concerning a permanent standing repo facility, the briefing noted that standing repo operations could be viewed as useful in forestalling funding strains that could spill over into other overnight markets and limit dealers' intermediation activity in financial markets. However, a standing repo facility could be seen as a form of liquidity support for nonbank financial institutions, and one that could create incentives for firms with access to the facility to take on more liquidity risk against eligible securities than would otherwise be the case. In discussing considerations for the establishment of a standing FIMA repo facility, the staff noted that such a facility could limit the propensity for foreign official institutions to execute large sales of U.S. Treasury securities in a stress environment that, in turn, could exacerbate strains in broader U.S. domestic financial markets. The briefing also noted some potential drawbacks of such a facility, including less transparency regarding its operations relative to other Federal Reserve facilities. In their discussion of considerations related to the establishment of a standing repo facility as part of the Committee's overall approach to policy implementations in an ample reserves regime, a substantial majority of participants saw the potential benefits of an appropriately calibrated facility as outweighing the potential costs. Nearly all participants commented that a standing repo facility, by acting as a backstop, could help address pressures in the markets for U.S. Treasury securities and Treasury repo that could spill over to other funding markets and impair the implementation and transmission of monetary policy. In this regard, a number of participants noted the potential for pressures in short-term funding markets to arise from time to time, even with monetary policy operating in an ample-reserves regime. Many participants noted that a standing facility could provide a timely and automatic response to incipient market pressures; they remarked that such pressures can be difficult to anticipate and, as a result, might not be as promptly addressed with discretionary operations. A few participants noted that a standing repo facility could provide counterparties with additional flexibility in managing the composition of their holdings of high-quality liquid assets, potentially reducing the demand for reserves. A few participants cautioned that establishing a standing repo facility should not be viewed as a way of implementing monetary policy without an ample supply of reserves. A couple of participants remarked that most of the benefits of a standing repo facility could be realized by the Federal Reserve maintaining readiness to conduct repo operations on short notice as needed, noting that such an arrangement could avoid some of the costs of a standing facility. A few participants mentioned that a standing repo facility could be perceived as a means of supporting the financing of the U.S. Treasury or as a permanent Federal Reserve liquidity backstop for nondepository institutions; a couple of others called out the risk that such a facility could crowd out private market sources of liquidity provision. Participants noted that it would be important to carefully consider key design elements of a potential standing repo facility, including the pricing structure, counterparties, and range of collateral accepted. A number of participants commented that the counterparties at such a facility should include depository institutions. Several participants noted the facility's design should be targeted specifically to enhance control of the federal funds rate rather than to limit volatility in the repo market. In their discussion of considerations related to the establishment of a permanent FIMA repo facility, a vast majority of participants saw the potential benefits as outweighing the costs. Participants highlighted a number of benefits of a standing FIMA repo facility, with many noting that it could support smoother functioning in U.S. Treasury securities markets and U.S. financial markets more broadly by providing foreign official holders of U.S. Treasury securities with an alternative to outright sales of these securities in times of market stress. A few participants noted that, had a FIMA repo facility been in place in March 2020, it likely would have significantly damped pressures in these markets caused by the abrupt need for dollar funding abroad. Several participants suggested that a standing FIMA repo facility could be viewed as complementing the existing dollar swap lines by extending access to dollar funding for a broader range of central banks and foreign official institutions. Participants also commented on some potential risks of a standing FIMA repo facility, including less transparency in connection with FIMA repo operations relative to other Federal Reserve facilities. Staff Review of the Economic Situation The COVID-19 pandemic and the measures undertaken to contain its spread continued to affect economic activity in the United States and abroad. The information available at the time of the April 27–28 meeting suggested that U.S. real gross domestic product (GDP) had increased in the first quarter of 2021 at a pace that was faster than in the fourth quarter of last year but had not yet returned to its pre-pandemic level. Labor market conditions improved markedly in March, though employment remained well below its level at the start of 2020. Consumer price inflation through February—as measured by the 12-month percentage change in the price index for personal consumption expenditures (PCE)—continued to run well below 2 percent. Total nonfarm payroll employment surged in March, with a notable gain in the leisure and hospitality sector. As of March, payroll employment had retraced almost two-thirds of the losses seen at the onset of the pandemic. The unemployment rate declined to 6 percent in March, as the number of workers on temporary layoff continued to fall and the number on permanent layoff ticked down. Although the unemployment rates for African Americans and Hispanics fell, both rates remained well above the national average; in addition, the Asian unemployment rate moved up and was equal to the national average in March. The labor force participation rate and employment-to-population ratio increased in March, though both measures remained below their pre-pandemic levels. Initial claims for unemployment insurance had moved down, on net, since mid-March and were at the lowest level since the beginning of the pandemic, though they remained exceptionally high by pre-pandemic standards. Weekly estimates of private-sector payrolls constructed by Federal Reserve Board staff using data provided by the payroll processor ADP, which were available through the first half of April, suggested that the rate of increase in private employment had slowed somewhat relative to its earlier robust pace. Average hourly earnings for all employees rose 4.2 percent over the 12 months ending in March. The 12‑month change in average hourly earnings continued to be influenced by the effect of the pandemic on the composition of the workforce; in particular, the concentration of job losses among lower-wage workers since early last year had resulted in large increases in this measure that were not indicative of tight labor market conditions. By contrast, a staff measure of the 12‑month change in the median wage derived from the ADP data was 3.1 percent in March and continued to run below its pre-pandemic pace; this measure had likely been less affected by shifts in the composition of the workforce. Total PCE price inflation was 1.6 percent over the 12 months ending in February and continued to be held down by low rates of resource utilization. Core PCE price inflation, which excludes changes in consumer energy prices and many consumer food prices, was 1.4 percent over the 12 months ending in February, while the trimmed mean measure of 12-month PCE inflation constructed by the Federal Reserve Bank of Dallas was 1.6 percent in February. In March, the 12-month change in the consumer price index (CPI) was 2.6 percent, boosted by increases in consumer energy prices, while core CPI inflation was 1.6 percent over the same period. In the first quarter of 2021, the staff's common inflation expectations index, which combines information from many indicators of inflation expectations and inflation compensation, had returned to the level that prevailed in 2018. Real PCE declined in February; however, available indicators—including the components of the nominal retail sales data used to estimate PCE—pointed to a large increase in March and for the first quarter as a whole, with federal stimulus payments having likely supported the March increase. Housing starts bounced back in March following a weather-induced decline in February. Although existing home sales fell in February and March, the declines appeared to reflect continued limited availability of homes for sale rather than weakening demand; in addition, February's drop in new home sales was retraced in March. Available indicators suggested that equipment and intangibles investment had increased in the first quarter of 2021, though at a slower pace than that seen in the fourth quarter of 2020. Likewise, drilling investment appeared to have moved up, boosted in part by higher energy prices. However, investment in nonresidential structures outside of the drilling and mining sector looked as though it had declined further in the first quarter, likely reflecting ongoing uncertainty about the longer-term effects of the pandemic on businesses. Manufacturing output rebounded strongly in March following weather-related disruptions to production in February. The March rise in factory output occurred despite lingering supply constraints; for example, weather-damaged facilities in Texas used to produce petrochemical and plastic materials had not yet been fully repaired, and semiconductor shortages were still weighing on motor vehicle production. Total real government purchases appeared to have moved up in the first quarter after having declined over the second half of 2020. Available data suggested that a jump in federal nondefense purchases had offset a decline in defense purchases; in addition, indicators of real state and local purchases pointed to a small first-quarter increase. Data for February showed a wider nominal U.S. international trade deficit than in January. Both imports and exports fell from their January levels, the first nominal decline in each since last May. Goods imports were held back in February by weakness in imports for automotive products and consumer goods but remained higher than their pre-pandemic level. Nominal goods exports in February were weak in most categories and were still below their pre-pandemic level. Imports and exports of services remained depressed, weighed down by the continued suspension of most international travel. Incoming data were consistent with a sharp slowdown in foreign economic growth in the first quarter, following a tightening of social-distancing restrictions to contain new waves of COVID-19 infections. Nevertheless, the slowdown appeared less severe than observed declines in mobility would have suggested, underscoring that foreign economies continued to adapt to public health restrictions. The most recent indicators showed that economic activity in many advanced foreign economies (AFEs) resumed expanding toward the end of the first quarter amid a partial easing of restrictions. However, a new surge in infections in several countries in Latin America and South Asia, notably India, underscored the fragility of the global recovery. Foreign headline inflation rose considerably, boosted by temporary factors, such as the fading effects of steep price declines seen early last year and the pass-through of price increases for oil and other commodities. However, underlying inflationary pressures appeared to have remained muted. Staff Review of the Financial Situation Investor sentiment improved over the intermeeting period, reflecting a pickup in the pace of vaccinations, prospects for infrastructure spending, and stronger-than-expected labor market and retail sales data. Domestic equity prices increased notably amid declining equity market volatility, and corporate bond spreads narrowed. The nominal Treasury yield curve was little changed, as were measures of inflation compensation. A straight read of overnight index swap quotes suggested that the expected path for the federal funds rate was little changed over the intermeeting period and that the expected policy rate would remain below 25 basis points until the first quarter of 2023. Market-based financing conditions remained accommodative, and bank lending conditions eased markedly. Despite recent improvements, lending standards for commercial and industrial (C&I) and consumer loans remained tighter than pre-pandemic levels. Broad stock price indexes increased over the intermeeting period, with outperformance by technology stocks and stocks sensitive to consumer discretionary spending. One-month option-implied volatility on the S&P 500—the VIX—declined, approaching the median level observed in the decade before the pandemic. Spreads of yields on investment- and speculative-grade corporate bonds over comparable-maturity Treasury yields narrowed moderately. Spreads on municipal bonds were little changed, with yields on such bonds remaining close to their lowest levels in more than 20 years. Domestic short-term funding markets remained stable. Funding rates stayed very low against the backdrop of continued paydowns in Treasury bills and substantial increases in reserve balances stemming from Federal Reserve asset purchases as well as the drawdown in balances maintained in the Treasury General Account associated with stimulus payments and other fiscal outlays. Assets under management increased somewhat for government money market funds (MMFs) but declined slightly for prime MMFs. The weighted average maturity of government and prime MMFs remained elevated. The effective federal funds rate and the SOFR were little changed, averaging 7 basis points and 1 basis point, respectively, over the intermeeting period. There continued to be no participation in the Fed's repo operations. Participation in the Fed's reverse repo facility increased from minimal levels to an average of $47 billion and reached $134 billion on the quarter-end date. Factors that had stressed foreign financial markets earlier this year—rising U.S. interest rates, resurging COVID-19 cases, and renewed lockdowns in a number of countries—appeared less concerning to global investors over the intermeeting period. Most AFE equity indexes rose modestly, and most AFE sovereign bond yields were little changed. In emerging market economies (EMEs), market optimism was tempered in part by rising COVID-19 cases. The broad EME equity price index was little changed, while credit spreads widened somewhat in the most vulnerable EMEs. After robust inflows earlier this year, flows into EME-dedicated funds continued at a moderate pace. The broad dollar index fell modestly. Financing conditions for nonfinancial businesses in capital markets remained highly accommodative over the intermeeting period, as reflected in low corporate bond yields and high price-to-earnings ratios in equity markets. Gross corporate bond issuance and gross leveraged loan issuance were robust in February and March. Equity raised through traditional initial public offerings (IPOs) and seasoned equity offerings, as well as through special purpose acquisition companies, continued to be substantial in March. C&I loans outstanding at banks expanded in February and March after contracting for more than half a year. In the April Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS), banks reported easing standards, on net, for C&I loans across firms of all sizes over the first quarter. Banks also reported that demand for C&I loans weakened at large and middle-market firms and was basically unchanged at small firms. The credit quality of nonfinancial corporations showed further signs of improvement for lower-rated firms. Following a modest uptick in February, the volume of nonfinancial corporate bond downgrades spiked in March, but the spike reflected the downgrades of a few large and highly rated investment-grade firms. In contrast, for speculative-grade issuers, the volume of upgrades modestly exceeded that of downgrades in February and March. Nonfinancial corporate bond defaults remained at low levels in February and March. Market indicators of future default expectations were little changed and stayed low. Financing conditions in the municipal bond market remained accommodative over the intermeeting period. Issuance of municipal bonds was strong in March, and indicators of the credit quality of municipal debt were little changed in February and March. Financing conditions for small businesses appeared to have improved, with demand for loans remaining subdued. Likely in part because of the Paycheck Protection Program, small business loan originations rose notably in February, the most recent month for which data were available, and were close to pre-pandemic levels. However, even amid improving financing conditions, many small businesses remained under financial stress. For commercial real estate (CRE) financed through capital markets, financing conditions remained accommodative over the intermeeting period. Although overall delinquency rates in agency commercial mortgage-backed securities (CMBS) declined in the past few months, delinquency rates on hotel and retail mortgages in CMBS pools remained high. CRE loans held by banks were little changed in March. In the April SLOOS, changes in lending standards over the first quarter were mixed across CRE loan categories. Financing conditions in the residential mortgage market were little changed over the intermeeting period and remained accommodative for stronger borrowers who met standard conforming loan criteria. Credit remained tight for borrowers with lower credit scores. Mortgage rates for most borrowers were little changed on net. In the April SLOOS, banks reported easing standards on most types of mortgages. The share of mortgages in forbearance declined slightly in March. Financing conditions in consumer credit markets generally remained accommodative for borrowers with strong credit scores but tight for those with subprime scores. Consumer loans grew at a robust pace in February, reflecting the continued expansion of auto loans and a partial rebound in credit card account balances. Banks in the April SLOOS reported easing auto lending standards in the first quarter but generally reported that standards remained tight compared with the end of 2019, especially for nonprime borrowers. Banks also reported that standards on credit cards eased over the first quarter of 2021 but were generally still tighter than before the pandemic. Interest rates offered to nonprime borrowers continued to rise through February, with the fraction of these offers with zero introductory rates continuing to decline. The staff provided an update on its assessments of the stability of the financial system. The staff noted that corporate bond spreads had declined notably since late last year and were at the lower ends of their historical distributions. In addition, measures of the equity risk premium declined further, and nonprice measures, such as high IPO volume, also indicated elevated investor appetite for risk in the equity market. Valuation pressures for CRE remained high, although information related to CRE continued to be noisier than usual due to pandemic-induced declines in transactions. House price growth increased further, with house prices outpacing rents. In contrast, vulnerabilities from both household and business debt had diminished, reflecting continued government support, a slower pace of business borrowing, and improving business earnings, although many households and businesses continued to struggle. Regarding financial leverage, the staff noted that bank capital ratios remained above pre-pandemic levels in the fourth quarter, but risks remained. Leverage among hedge funds was elevated and increased in the third quarter of last year for the most highly leveraged funds. Leverage in hedge funds' prime brokerage accounts rose notably through the fourth quarter of last year, reflecting elevated hedge fund leverage related to their stock market activities. The staff highlighted recent episodes underlining the opacity of risk exposures among some leveraged entities. With regard to funding risks, the staff noted that MMFs and open-end mutual funds faced significant structural vulnerabilities associated with liquidity transformation. Assets under management at MMFs declined during the second half of 2020, while open-end mutual fund holdings of corporate bonds rose during the second half of last year. Staff Economic Outlook The U.S. economic projection prepared by the staff for the April FOMC meeting was slightly stronger than the March forecast. Real GDP growth was projected to post a substantial increase this year, with a correspondingly rapid decline in the unemployment rate, as further reductions in social distancing and favorable financial conditions were expected to support output growth. With the boost to growth from continued reductions in social distancing assumed to fade after 2021, GDP growth was expected to step down in 2022 and 2023. However, with monetary policy assumed to remain highly accommodative, the staff continued to anticipate that real GDP growth would outpace that of potential over much of this period, leading to a decline in the unemployment rate to historically low levels. The staff's outlook for inflation was broadly unchanged. The 12‑month changes in total and core PCE prices were expected to move above 2 percent in coming months as the unusually low readings from the spring of 2020 dropped out of the calculation window and as a recent jump in consumer energy prices pushed up the total measure. Core inflation was expected to ease some later in the year but to remain above 2 percent at the end of 2021, boosted by large increases in import prices, a recovery in prices that had been especially affected by the pandemic, and the temporary effects of supply bottlenecks. Inflation was then projected to dip slightly below 2 percent in 2022 as the influence of these transitory factors diminished, before returning to 2 percent by the end of 2023, supported by sustained tight levels of resource utilization in labor and product markets. The staff continued to judge that the risks to the baseline projection for economic activity were skewed to the downside and that the uncertainty around the forecast was elevated. In particular, despite the demonstrated resilience of the economy to surges in the pandemic over the past year, the possibility that COVID-19 variants that were more contagious or more resistant to existing vaccines would spread posed a salient downside risk. The staff continued to view the risks around the inflation projection as balanced. On the upside, bottlenecks, supply disruptions, and historically high rates of resource utilization were seen as potential sources of greater-than-expected inflationary pressures. Alternatively, the possibility that inflation would be held down by low underlying trend inflation and a weaker-than-expected response to resource utilization was seen as an important downside risk. Participants' Views on Current Conditions and the Economic Outlook In their discussion of current conditions, participants noted that the COVID-19 pandemic was causing tremendous human and economic hardship across the United States and around the world. Amid progress on vaccinations and strong policy support, indicators of economic activity and employment had strengthened. The sectors most adversely affected by the pandemic remained weak but had shown improvement. Inflation had risen, largely reflecting transitory factors. Overall financial conditions remained accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses. Participants noted that the path of the economy would depend significantly on the course of the virus, including progress on vaccinations. The ongoing public health crisis continued to weigh on the economy, and risks to the economic outlook remained. Participants observed that economic activity had picked up sharply this year, with robust gains in consumer spending, housing-sector activity, business equipment investment, and manufacturing production. They noted that the acceleration in economic activity reflected positive developments associated with the rapid pace of vaccinations as well as continued support from fiscal and monetary policies. Nevertheless, participants generally noted that the economy remained far from the Committee's maximum-employment and price-stability goals. In their discussion of the household sector, participants remarked that indicators of consumer spending surged in March and expected that further gains in spending would contribute significantly to the economic recovery. Many participants commented that fiscal stimulus, accommodative financial conditions, the release of pent-up demand, progress on widespread vaccination, and the ongoing reduction of social-distancing measures were important factors supporting spending. Many participants also noted that consumer spending would continue to be bolstered by these factors as well as by the elevated level of accumulated household savings. Several participants observed that housing market activity continued to be strong, supported in part by low interest rates. With respect to the business sector, participants noted that business equipment investment continued to rise at a robust pace and manufacturing activity was expanding at a strong clip. That said, many participants discussed reports of shortages of materials and labor as well as supply chain bottlenecks as likely restraints to the pace of recovery in manufacturing and other business sectors. Many participants also noted that their District contacts had reported a pickup in activity in the leisure, travel, and hospitality sectors. Those contacts had grown increasingly optimistic about overall business conditions, given ongoing progress on vaccinations, easing of restrictions on in-person activities, and substantial fiscal support. A couple of participants reported improved conditions in the agricultural sector, with farmers' income supported by higher crop prices and federal aid payments. Participants commented on the continued improvement in labor market conditions in recent months. Job gains in the March employment report were strong, and the unemployment rate fell to 6.0 percent. Even so, participants judged that the economy was far from achieving the Committee's broad-based and inclusive maximum-employment goal. Payroll employment was 8.4 million jobs below its pre-pandemic level. Some participants noted that the labor market recovery continued to be uneven across demographic and income groups and across sectors. Many participants also remarked that business contacts in their Districts reported having trouble hiring workers, likely reflecting factors such as early retirements, health concerns, childcare responsibilities, and expanded unemployment insurance benefits. Many participants noted as well that these factors were depressing the labor force participation rate, relative to its pre-pandemic level. Some of these factors were seen as likely to remain significant while pandemic-related risks persisted. Based on reports from business contacts, some participants noted that the step-up in demand for labor had started to put some upward pressure on wages. Moreover, over the medium term, participants expected labor market conditions to continue to improve, supported by accommodative fiscal and monetary policies as well as continued progress on vaccinations, unwinding of social distancing, and the associated recovery in economic activity. A couple of participants remarked that businesses in industries severely affected by the pandemic were downsizing or that some businesses were focused on cutting costs or increasing productivity, particularly through automation. In their comments about inflation, participants anticipated that inflation as measured by the 12-month change of the PCE price index would move above 2 percent in the near term as very low readings from early in the pandemic fall out of the calculation. In addition, increases in oil prices were expected to pass through to consumer energy prices. Participants also noted that the expected surge in demand as the economy reopens further, along with some transitory supply chain bottlenecks, would contribute to PCE price inflation temporarily running somewhat above 2 percent. After the transitory effects of these factors fade, participants generally expected measured inflation to ease. Looking further ahead, participants expected inflation to be at levels consistent with achieving the Committee's objectives over time. A number of participants remarked that supply chain bottlenecks and input shortages may not be resolved quickly and, if so, these factors could put upward pressure on prices beyond this year. They noted that in some industries, supply chain disruptions appeared to be more persistent than originally anticipated and reportedly had led to higher input costs. Despite the expected short-run fluctuations in measured inflation, many participants commented that various measures of longer-term inflation expectations remained well anchored at levels broadly consistent with achieving the Committee's longer-run goals. Participants judged that uncertainty was elevated and that the outlook was highly dependent on the course of the virus. Amid considerable progress on vaccinations, the unwinding of social distancing, and strong policy support, participants assessed that risks to the outlook were no longer as elevated as in previous months. Nevertheless, some participants remarked that the pandemic continued to pose downside risks to the economic outlook and noted the potential for an uneven recovery in light of new virus strains and potential hesitancy regarding vaccination. As upside risks, some participants mentioned that the release of pent-up demand, accumulated excess household savings, and rapid progress on vaccinations, amid continued fiscal and monetary support, could boost economic activity and bring individuals back into the labor force more quickly than currently expected. Some participants mentioned upside risks around the inflation outlook that could arise if temporary factors influencing inflation turned out to be more persistent than expected. Participants who commented on financial stability agreed that the financial sector had shown resilience during the pandemic, in large part reflecting strong policy support. Some remarked that the capital positions and loan loss reserves at large banks remained high, and earnings were strong. A few participants noted that vulnerabilities from both business and household debt were at a moderate level. Nevertheless, a couple of participants highlighted that forbearance programs instituted in response to the pandemic could be masking vulnerabilities among households and businesses. Regarding asset valuations, several participants noted that risk appetite in capital markets was elevated, as equity valuations had risen further, IPO activity remained high, and risk spreads on corporate bonds were at the bottom of their historical distribution. A couple of participants remarked that, should investor risk appetite fall, an associated drop in asset prices coupled with high business and financial leverage could have adverse implications for the real economy. A number of participants commented on valuation pressures being somewhat elevated in the housing market. Some participants mentioned the potential risks to the financial system stemming from the activities of hedge funds and other leveraged investors, commenting on the limited visibility into the activities of these entities or on the prudential risk-management practices of dealers' prime-brokerage businesses. Some participants highlighted potential vulnerabilities in other parts of the financial system, including run-prone investment funds in short-term funding and credit markets. Various participants commented on the prolonged period of low interest rates and highly accommodative financial market conditions and the possibility for these conditions to lead to reach-for-yield behavior that could raise financial stability risks. In their consideration of the stance of monetary policy, participants reaffirmed the Federal Reserve's commitment to using its full range of tools to support the U.S. economy during this challenging time, thereby promoting the Committee's statutory goals of maximum employment and price stability. Participants agreed that the economy was still far from the Committee's longer-run goals. Moreover, the path ahead continued to depend on the course of the virus, and risks to the economic outlook remained. Consequently, participants judged that the current stance of policy and policy guidance remained appropriate to foster further economic recovery as well as to achieve inflation that averages 2 percent over time and longer-term inflation expectations that continue to be well anchored at 2 percent. Participants judged that the Committee's current guidance for the federal funds rate and asset purchases was serving the economy well. Participants also noted that the existing outcome-based guidance implied that the path of the federal funds rate and the balance sheet would depend on actual progress toward reaching the Committee's maximum-employment and inflation goals. In particular, some participants emphasized that an important feature of the outcome-based guidance was that policy would be set based on observed progress toward the Committee's goals, not on uncertain economic forecasts. However, a couple of participants commented on the risks of inflation pressures building up to unwelcome levels before they become sufficiently evident to induce a policy reaction. In their discussion of the Federal Reserve's asset purchases, various participants noted that it would likely be some time until the economy had made substantial further progress toward the Committee's maximum-employment and price-stability goals relative to the conditions prevailing in December 2020 when the Committee first provided its guidance for asset purchases. Consistent with the Committee's outcome-based guidance, purchases would continue at least at the current pace until that time. Many participants highlighted the importance of the Committee clearly communicating its assessment of progress toward its longer-run goals well in advance of the time when it could be judged substantial enough to warrant a change in the pace of asset purchases. The timing of such communications would depend on the evolution of the economy and the pace of progress toward the Committee's goals. A number of participants suggested that if the economy continued to make rapid progress toward the Committee's goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases. Committee Policy Action In their discussion of monetary policy for this meeting, members agreed that the COVID-19 pandemic was causing tremendous human and economic hardship across the United States and around the world. They noted that amid progress on vaccinations and strong policy support, indicators of economic activity and employment had strengthened. Al­though the sectors most adversely affected by the pandemic remained weak, they had shown improvement. Inflation had risen, largely reflecting transitory factors. Overall financial conditions remained accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses. Members also remarked that the path of the economy would depend significantly on the course of the virus, including progress on vaccinations. In addition, members agreed that the ongoing public health crisis continued to weigh on the economy and risks to the economic outlook remained. Members agreed that the Federal Reserve was committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum-employment and price-stability goals. All members reaffirmed that, in accordance with the Committee's goals to achieve maximum employment and inflation at the rate of 2 percent over the longer run and with inflation running persistently below this longer-run goal, they would aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent. Members expected to maintain an accommodative stance of monetary policy until those outcomes were achieved. All members agreed to keep the target range for the federal funds rate at 0 to 1/4 percent, and they expected that it would be appropriate to maintain this target range until labor market conditions had reached levels consistent with the Committee's assessments of maximum employment and inflation had risen to 2 percent and was on track to moderately exceed 2 percent for some time. In addition, members agreed that it would be appropriate for the Federal Reserve to continue to increase its holdings of Treasury securities by at least $80 billion per month and agency mortgage-backed securities by at least $40 billion per month until substantial further progress had been made toward the Committee's maximum-employment and price-stability goals. They judged that these asset purchases would help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses. Members agreed that, in assessing the appropriate stance of monetary policy, they would continue to monitor the implications of incoming information for the economic outlook and that they would be prepared to adjust the stance of monetary policy as appropriate in the event that risks emerged that could impede the attainment of the Committee's goals. Members also concurred that, in assessing the appropriate stance of monetary policy, they would take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments. Members agreed that the postmeeting statement should acknowledge that indicators of economic activity and employment had strengthened but that, despite showing improvement, the sectors of the economy most affected by the pandemic remained weak. Members also judged that, while risks to the outlook remained, continued progress on vaccinations and accommodative monetary and fiscal policies most likely would underpin further gains in economic activity and employment and would limit risks to the outlook. As a result, they agreed to remove the characterization of risks as "considerable" in the FOMC statement. With regard to the characterization of inflation, members agreed that the statement should note that inflation had risen but that the increase largely reflected transitory factors. They noted that inflation as measured by the 12-month change of the PCE price index was expected to move above 2 percent as the very low readings from early in the pandemic fell out of the calculation and as past increases in oil prices passed through to consumer energy prices. The expected rebound in spending as the economy continued to reopen was also likely to boost inflation temporarily, particularly if supply bottlenecks limited how quickly production could respond to demand in the near term. However, members also viewed these increases in prices as likely to have only transitory effects on inflation. 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, for release at 2:00 p.m.: "Effective April 29, 2021, 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 0 to 1/4 percent. Increase the System Open Market Account holdings of Treasury securities by $80 billion per month and of agency mortgage-backed securities (MBS) by $40 billion per month. Increase holdings of Treasury securities and agency MBS by additional amounts and purchase agency commercial mortgage-backed securities (CMBS) as needed to sustain smooth functioning of markets for these securities. Conduct repurchase agreement operations to support effective policy implementation and the smooth functioning of short-term U.S. dollar funding markets. Conduct overnight reverse repurchase agreement operations at an offering rate of 0.00 percent and with a per-counterparty limit of $80 billion per day; the per-counterparty limit can be temporarily increased at the discretion of the Chair. Roll over at auction all principal payments from the Federal Reserve's holdings of Treasury securities and reinvest all principal payments from the Federal Reserve's holdings of agency debt and agency MBS in agency MBS. Allow modest deviations from stated amounts for purchases and reinvestments, if needed for operational reasons. Engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions." The vote also encompassed approval of the statement below for release at 2:00 p.m.: "The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals. The COVID-19 pandemic is causing tremendous human and economic hardship across the United States and around the world. Amid progress on vaccinations and strong policy support, indicators of economic activity and employment have strengthened. The sectors most adversely affected by the pandemic remain weak but have shown improvement. Inflation has risen, largely reflecting transitory factors. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses. The path of the economy will depend significantly on the course of the virus, including progress on vaccinations. The ongoing public health crisis continues to weigh on the economy, and risks to the economic outlook remain. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer‑term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved. The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee's assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. In addition, the Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage‑backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee's maximum employment and price stability goals. These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments." Voting for this action: Jerome H. Powell, John C. Williams, Thomas I. Barkin, Raphael W. Bostic, Michelle W. Bowman, Lael Brainard, Richard H. Clarida, Mary C. Daly, Charles L. Evans, Randal K. Quarles, and Christopher J. Waller. 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 at 0.10 percent. The Board of Governors also voted unanimously to approve establishment of the primary credit rate at the existing level of 0.25 percent, effective April 29, 2021. It was agreed that the next meeting of the Committee would be held on Tuesday–Wednesday, June 15–16, 2021. The meeting adjourned at 10:20 a.m. on April 28, 2021. Notation Vote By notation vote completed on April 6, 2021, the Committee unanimously approved the minutes of the Committee meeting held on March 16–17, 2021. _______________________ 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 repurchase agreement arrangements. Return to text

2021-03-17

Statement

The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals. The COVID-19 pandemic is causing tremendous human and economic hardship across the United States and around the world. Following a moderation in the pace of the recovery, indicators of economic activity and employment have turned up recently, although the sectors most adversely affected by the pandemic remain weak. Inflation continues to run below 2 percent. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses. The path of the economy will depend significantly on the course of the virus, including progress on vaccinations. The ongoing public health crisis continues to weigh on economic activity, employment, and inflation, and poses considerable risks to the economic outlook. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer‑term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved. The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee's assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. In addition, the Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage‑backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee's maximum employment and price stability goals. These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments. Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Thomas I. Barkin; Raphael W. Bostic; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Mary C. Daly; Charles L. Evans; Randal K. Quarles; and Christopher J. Waller. Implementation Note issued March 17, 2021

2021-04-07

Minute

Minutes of the Federal Open Market Committee March 16-17, 2021 A joint meeting of the Federal Open Market Committee and the Board of Governors was held by videoconference on Tuesday, March 16, 2021, at 11:00 a.m. and continued on Wednesday, March 17, 2021, at 9:00 a.m.1 PRESENT: Jerome H. Powell, Chair John C. Williams, Vice Chair Thomas I. Barkin Raphael W. Bostic Michelle W. Bowman Lael Brainard Richard H. Clarida Mary C. Daly Charles L. Evans Randal K. Quarles Christopher J. Waller James Bullard, Esther L. George, Loretta J. Mester, 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 Michelle A. Smith, Assistant Secretary Mark E. Van Der Weide, General Counsel Michael Held, Deputy General Counsel Trevor A. Reeve, Economist Stacey Tevlin, Economist Beth Anne Wilson, Economist Shaghil Ahmed, Kartik B. Athreya, Brian M. Doyle, Rochelle M. Edge, Eric M. Engen, Sylvain Leduc, Anna Paulson, and William Wascher, Associate Economists Lorie K. Logan, Manager, System Open Market Account Patricia Zobel, 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 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 Jon Faust, Senior Special Adviser to the Chair, Division of Board Members, Board of Governors Joshua Gallin, Special Adviser to the Chair, Division of Board Members, Board of Governors William F. Bassett, Antulio N. Bomfim, Wendy E. Dunn, Burcu Duygan-Bump, Jane E. Ihrig, Kurt F. Lewis, and Chiara Scotti, Special Advisers to the Board, Division of Board Members, Board of Governors Elizabeth Klee, Senior Associate Director, Division of Financial Stability, Board of Governors; David E. Lebow and Michael G. Palumbo, Senior Associate Directors, Division of Research and Statistics, Board of Governors Don H. Kim and Ellen E. Meade, Senior Advisers, Division of Monetary Affairs, Board of Governors Glenn Follette, Associate Director, Division of Research and Statistics, Board of Governors; David López-Salido, Associate Director, Division of Monetary Affairs, Board of Governors Stephanie E. Curcuru, Deputy Associate Director, Division of International Finance, Board of Governors; Christopher J. Gust, Deputy Associate Director, Division of Monetary Affairs, Board of Governors; Norman J. Morin and Paul A. Smith, Deputy Associate Directors, 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 Jennifer Gallagher, Special Assistant to the Board, Division of Board Members, Board of Governors Brian J. Bonis, Michiel De Pooter, and Zeynep Senyuz,2 Assistant Directors, Division of Monetary Affairs, Board of Governors Alyssa G. Anderson,2 Section Chief, Division of Monetary Affairs, Board of Governors; Penelope A. Beattie,2 Section Chief, Office of the Secretary, Board of Governors Mark A. Carlson, Senior Economic Project Manager, Division of Monetary Affairs, Board of Governors David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors Michele Cavallo, Sebastian Infante, and Ander Perez-Orive, Principal Economists, Division of Monetary Affairs, Board of Governors Randall A. Williams, Lead Information Manager, Division of Monetary Affairs, Board of Governors Anthony Sarver,2 Senior Financial Institution Policy Analyst, Division of Monetary Affairs, Board of Governors Ellen J. Bromagen, First Vice President, Federal Reserve Bank of Chicago Michael Dotsey, Executive Vice President, Federal Reserve Bank of Philadelphia Anne Baum, Edward S. Knotek II, Giovanni Olivei, Paula Tkac, and Mark L.J. Wright, Senior Vice Presidents, Federal Reserve Banks of New York, Cleveland, Boston, Atlanta, and Minneapolis, respectively Kathryn B. Chen2 and Jonathan P. McCarthy, Vice Presidents, Federal Reserve Bank of New York Brett Rose,2 Assistant Vice President, Federal Reserve Bank of New York Anthony Murphy, Senior Economic Policy Advisor, Federal Reserve Bank of Dallas Brent Bundick, Research and Policy Advisor, Federal Reserve Bank of Kansas City Michael Koslow,2 Markets Officer, Federal Reserve Bank of New York Fernando M. Martin, Research Officer, Federal Reserve Bank of St. Louis William G. O'Boyle,2 Policy and Markets Manager, Federal Reserve Bank of New York Michael Junho Lee,2 Economist, Federal Reserve Bank of New York Action to Adopt Changes to the Committee's Rules Regarding Availability of Information By unanimous vote, the Committee approved a final rule that revises its Rules Regarding Availability of Information, which are the Committee's Freedom of Information Act (FOIA) rules. The revised FOIA rules, which include a range of minor and technical updates, will become effective 30 days after the forthcoming publication of the final rule in the Federal Register. Developments in Financial Markets and Open Market Operations The manager turned first to a discussion of financial market developments. In the United States, the trend toward higher longer-term yields observed in recent months accelerated over the intermeeting period, and far-forward real rates based on Treasury Inflation-Protected Securities (TIPS) rose considerably. Market participants highlighted an improving economic outlook, bolstered by passage of the American Rescue Plan (ARP) and progress on vaccinations, as underlying the increase in yields. Model- and survey-based estimates suggested that a significant portion of the increase in yields was associated with an increase in term premiums. Higher term premiums could reflect the outlook for more expansive fiscal policy and an associated upward revision in the expected path for Treasury debt outstanding. Increased uncertainty over the outlook for longer-term interest rates as well as technical factors may also have contributed to the rise in term premiums. The Treasury market functioned well over most of the period, al­though measures of market liquidity deteriorated somewhat toward the end of February. Conditions gradually improved, al­though some measures of market liquidity had not fully returned to earlier levels. Rates implied by interest rate futures maturing over the next several years rose notably over the intermeeting period, reportedly reflecting a reassessment by market participants of the expected path of the target range for the federal funds rate. Since the January meeting, the date of the first increase in the target range for the federal funds rate implied by a straight read of market pricing moved notably earlier to the first quarter of 2023, and the implied target rate at the end of 2023 rose around 50 basis points. However, responses to the Open Market Desk surveys suggested more modest changes to policy rate expectations. The probability-weighted mean survey expectation for the target rate at the end of 2023 rose only around 5 basis points. Expectations for economic conditions at the time of the first increase in the target range, as measured by the Desk surveys, appeared to remain broadly consistent with the Committee's policy framework and forward guidance. Expectations from the Desk surveys for the path of asset purchases were little changed. Contacts noted that these expectations have been held steady by policymaker communications emphasizing both the need to see realized progress toward the Committee's goals and the intent to communicate well in advance of the time when progress could be judged substantial enough to warrant a change in the pace of purchases. Alongside the rise in U.S. yields, broad U.S. equity price indexes increased moderately, with the largest gains in cyclically sensitive sectors. The rise in U.S. yields was also accompanied by increases in sovereign yields in other advanced economies. Some central banks responded to these yield increases with adjustments to operations; others suggested that the rising yields reflected improvements in the outlook. The deputy manager discussed the evolution of the Federal Reserve's balance sheet and related developments in money markets. Reserve balances rose more than $400 billion, on net, over the intermeeting period to $3.7 trillion, while Treasury bills outstanding decreased more than $200 billion. Against this backdrop, the effective federal funds rate softened modestly, while repurchase agreement (repo) rates declined to a greater extent. Moreover, market participants projected that reserves would grow at a historically rapid pace in coming months, reflecting continued expansion of the Federal Reserve's balance sheet along with a projected drawdown in the balances maintained in the Treasury General Account. Market contacts suggested that continued rapid expansion of reserves could put further downward pressure on money market rates. The deputy manager noted that the earliest and most pronounced pressure was likely to be observed in overnight secured financing markets, and there could be increasing usage of the overnight reverse repurchase agreement (ON RRP) facility. In light of the potential for expanded use of the ON RRP facility, the staff had conducted a review to ensure that the terms of the facility and its counterparty base were well positioned to continue to support effective policy implementation. By offering a broad range of money market lenders an outside investment option, the ON RRP facility enhances lenders' bargaining power in negotiating rates on short-term private investments and thus helps establish a floor on overnight money market rates. The facility can also alleviate downward pressure on overnight rates associated with reserve growth by broadening the range of liabilities that support the Federal Reserve's balance sheet expansion. The review recommended raising the ON RRP per-counterparty limit from $30 billion to $80 billion. The $30 billion limit had been established a number of years ago, and the amount of credit intermediated through money markets had grown substantially since then. The increase in the limit to $80 billion would restore the capacity of the facility relative to the aggregate size of money fund counterparties to roughly the level in place when the facility was established. The staff would also monitor money market conditions on an ongoing basis to assess whether any additional adjustments were needed to the ON RRP facility terms. In addition to changes to the ON RRP parameters, the deputy manager also noted that the Federal Reserve could consider adjusting its administered rates if undue downward pressure on overnight rates emerged. Responses to the Desk surveys indicated that many market participants anticipated adjustments to the interest on excess reserves rate and the ON RRP rate at or before the June meeting. Finally, in light of more normal conditions in agency commercial mortgage-backed securities (CMBS) markets, the Desk planned to conduct agency CMBS operations as needed to sustain smooth market functioning but would cease regularly scheduled CMBS operations. In their discussion following the Desk briefings, participants noted that the ON RRP facility had been very effective in establishing a firm floor for the federal funds rate and supporting monetary policy implementation. Participants commented that the facility would continue to be an important part of the monetary policy implementation framework going forward, particularly in coming months with reserve levels projected to rise rapidly. Participants broadly supported the proposed increase in the counterparty limit, and a few participants also noted that they would support removing the limit altogether. A few participants suggested that some type of dynamic or differential limit could be considered in the future to enable the ON RRP facility to adapt more readily to market developments. A few participants noted that the concerns at the time the facility was established about possible adverse effects of the ON RRP facility on financial stability and the structure of money markets had not materialized. Indeed, over the spring of 2020, the facility played an important role in helping stabilize money market conditions. In light of the potential for greater use of the ON RRP facility going forward in connection with the expansion of the Federal Reserve's balance sheet and associated downward pressure on overnight rates, a couple of participants noted that it might be useful to review lessons learned regarding the ON RRP facility since its inception. Following the discussion, the Chair noted the potential for downward pressure on money market rates and suggested that, should undue downward pressure on overnight rates emerge, it might be appropriate to implement adjustments to administered rates at upcoming meetings or even between meetings to support effective policy implementation and ensure that the federal funds rate remains well within the target range. By unanimous vote, the Committee ratified the Desk's domestic transactions over the intermeeting period. No intervention operations occurred in foreign currencies for the System's account during the intermeeting period. Staff Review of the Economic Situation The COVID‑19 pandemic and the measures undertaken to contain its spread continued to affect economic activity in the United States and abroad. The information available at the time of the March 16–17 meeting suggested that U.S. real gross domestic product (GDP) was expanding in the first quarter of 2021 at a pace that was faster than in the fourth quarter of last year, al­though the level of real GDP had likely not yet returned to the level seen before the onset of the pandemic. Labor market conditions improved in January and February, but employment was still well below its level at the start of 2020. Consumer price inflation through January—as measured by the 12‑month percentage change in the price index for personal consumption expenditures (PCE)—remained well below 2 percent. Total nonfarm payroll employment increased solidly over January and February after softening at the end of last year. As of February, payroll employment had retraced somewhat more than half of the losses seen since the onset of the pandemic. The unemployment rate fell to 6.2 percent in February. The unemployment rates for Hispanics and Asians declined, on balance, over January and February, while the unemployment rate for African Americans was unchanged on net; the rates for both African Americans and Hispanics remained well above the national average. Even though the labor force participation rate edged down, the employment-to-population ratio moved up somewhat over January and February; both measures remained below their pre-pandemic levels. Initial claims for unemployment insurance in early March were at their lowest level since November of last year. Weekly estimates of private-sector payrolls constructed by Federal Reserve Board staff using data provided by the payroll processor ADP indicated that the four-week average increase in private employment at the end of February was about the same as it had been in the middle of the month, when the Bureau of Labor Statistics collects payroll employment data. Average hourly earnings for all employees rose 5.3 percent over the 12 months ending in February, and labor compensation per hour in the business sector increased 6.6 percent over the four quarters of 2020. The gains in both these measures, however, continued to be dominated by changes in the composition of the workforce. In particular, the concentration of job losses among lower-wage workers since early last year had resulted in outsized increases in average hourly earnings and compensation per hour that were not indicative of tight labor market conditions. By contrast, the employment cost index of total hourly compensation in the private sector rose 2.6 percent over the 12 months of last year, and a staff estimate of the 12‑month change in the median wage derived from the ADP data was 3.2 percent in January. These measures are likely to have been less affected by changes in workforce composition, and they were rising more slowly than their pre-pandemic pace. Total PCE price inflation was 1.5 percent over the 12 months ending in January and continued to be held down by slack in resource utilization. Core PCE price inflation, which excludes changes in consumer energy prices and many consumer food prices, also was 1.5 percent over the 12 months ending in January, while the trimmed mean measure of 12‑month PCE inflation constructed by the Federal Reserve Bank of Dallas was 1.7 percent in January. In February, the 12‑month change in the consumer price index (CPI) was 1.7 percent, while core CPI inflation was 1.3 percent over the same period. The latest readings on survey-based measures of longer-run inflation expectations were little changed on balance. In early March, the University of Michigan Surveys of Consumers preliminary measure for the next 5 to 10 years was the same as in the previous two months, while in February, the 3‑year‑ahead measure of inflation expectations produced by the Federal Reserve Bank of New York was essentially unchanged from its January level. The Survey of Professional Forecasters measure of PCE price inflation over the next 10 years edged up in the first quarter, returning to its pre-pandemic level. A staff index of common inflation expectations, which summarizes the co‑movement of a wide variety of inflation expectations measures, was at about the same level in the fourth quarter of last year as in the third quarter. Consumer spending appeared to be increasing in the first quarter at a pace considerably faster, on balance, than in the fourth quarter of last year. Real PCE expanded strongly in January after declining over the preceding two months, with spending likely boosted by federal stimulus payments sent out in early January. The components of the nominal retail sales data used by the Bureau of Economic Analysis to estimate PCE pointed to a step-down in spending in February, but revised data for the previous month suggested an even stronger gain in January. Spending in March was expected to be boosted by additional federal stimulus payments from the ARP, which started to be distributed around the middle of the month. In addition, the personal saving rate jumped to an even higher level in January, and ongoing gains in labor earnings along with further fiscal support pointed to additional increases in accumulated household savings. Moreover, the preliminary reading of consumer sentiment from the Michigan survey moved up notably in early March to its highest level over the past year, reportedly reflecting the growing number of vaccinations and the enactment of the ARP, al­though consumer sentiment remained below its levels from just before the onset of the pandemic. Construction of single-family homes and home sales remained well above their pre-pandemic levels. However, the incoming data for this sector were mixed. Starts of single-family homes moved down notably over January and February, in part likely reflecting severe winter weather in February. Starts of multifamily units also fell in February but by less than the strong increase seen in January. Construction permits for single-family homes moved down, on net, over January and February, pointing to some slowing in construction in coming months. Sales of both new and existing homes increased further in January, and home prices continued to rise briskly. Business investment in equipment and intangibles was continuing to increase in the first quarter after rising appreciably in the fourth quarter of last year. Nominal shipments of nondefense capital goods excluding aircraft expanded strongly in January, and rising orders for these goods pointed to further gains in business equipment spending in coming months. Business investment in the drilling and mining sector appeared to be increasing further after turning up sharply in the fourth quarter, as crude oil and natural gas rigs in operation—an indicator of drilling investment—continued to rise through early March with oil prices moving higher. Nominal nonresidential construction spending rose somewhat in January, but investment in nonresidential structures outside of the drilling and mining sector looked to remain weak in the current quarter after declining further in the fourth quarter, reflecting continued hesitation by businesses to commit to building projects with lengthy times to completion and uncertain future returns. Industrial production continued to rise solidly in January but then fell markedly in February, largely reflecting declines in manufacturing and mining sector output caused by severe winter weather in the south central region of the country in the middle of that month. Along with the severe weather, a cutback in the production of motor vehicles and parts also reflected a global shortage of semiconductors. New orders indexes in national and regional manufacturing surveys pointed toward solid increases in factory output in the coming months, al­though reports of shortages in materials and labor, as well as bottlenecks in transportation, signaled some potential restraints on the pace of the manufacturing recovery. Total real government purchases appeared to be rising in the first quarter after edging down in the fourth quarter. Al­though data through February indicated that defense spending was moving down, a likely bounceback in nondefense spending was expected to lift total federal purchases. State and local government purchases looked to be increasing, as the payrolls of these governments expanded, on net, over January and February, and nominal state and local construction spending increased solidly in January. Moreover, additional federal support for state and local governments included in the ARP, along with an improved outlook for state and local tax revenues, pointed to further notable increases in state and local purchases. Data for December and January showed a narrower nominal U.S. international trade deficit than in November. Both imports and exports continued to rebound from their collapse in the first half of last year. Goods imports in January were much higher than a year earlier, with continued gains in most categories. Nominal goods exports in January nearly recovered to their level from a year earlier, with particular strength in exports of capital goods and industrial supplies. Services imports and exports remained depressed, weighed down by the continued suspension of most international travel. Recent data pointed to a slowdown in economic activity across foreign economies around the turn of the year, as tight social-distancing restrictions were imposed to rein in a new wave of COVID-19 infections in various parts of the world, most notably in Europe and Latin America. Even so, economies appeared to be better adapted to operating under restrictions than during previous waves of infections. Manufacturing activity continued to generally outperform activity in the services sector, and manufactured exports from China and some other Asian economies remained strong, especially to the United States. Inflation rebounded in many foreign economies, reflecting rising energy prices and other temporary factors. However, underlying inflationary pressures remained subdued. Staff Review of the Financial Situation Investors appeared to have become more optimistic about the economic outlook over the intermeeting period against the backdrop of progress on COVID-19 vaccinations, signs of stronger domestic spending, and additional fiscal stimulus. The nominal Treasury yield curve steepened markedly, largely because of increases in longer-term real yields, al­though measures of inflation compensation also increased further. Despite the spikes in equity market volatility early in the intermeeting period, spurred by heavy trading concentrated in a few specific stocks and subsequent concerns over the rapid rise in longer-term interest rates, broad equity price indexes rose on net. Consistent with the stronger outlook, spreads on high-yield corporate bonds narrowed. Financing conditions for businesses with access to capital markets and households with high credit scores remained broadly accommodative, but conditions stayed tight for other borrowers. The Treasury yield curve steepened over the intermeeting period, with 5- and 10-year yields rising markedly. Measures of inflation compensation increased moderately, on net, continuing the trend observed over recent months. However, in contrast to recent months, most of the recent increase in longer-term Treasury yields was accounted for by higher TIPS-implied real yields. Market participants attributed the increases in longer-term yields in part to increased investor optimism about the economic outlook and expectations of higher Treasury debt issuance. On February 25, yields rose especially sharply. Market depth became thin, and bid-ask spreads widened, but Treasury market liquidity gradually recovered over the following days. Swaption-implied volatilities of longer-term interest rates rose notably. The expected path for the federal funds rate over the next few years, as implied by a straight read of overnight index swap quotes, rose substantially since the previous FOMC meeting and moved above 25 basis points in the first quarter of 2023, about three quarters sooner than expected at the time of the January meeting. Broad stock price indexes increased, on net, over the intermeeting period, consistent with increased investor optimism about the economic outlook and the enactment of the ARP. Stocks in cyclically sensitive industries such as energy, banking, and small caps recorded sizable gains, while other sectors experienced mixed performance. One-month option-implied volatility on the S&P 500—the VIX—fluctuated over a wide range during the intermeeting period but moved lower on balance. Spreads of corporate bond yields over comparable-maturity Treasury yields were roughly unchanged on investment-grade corporate bonds but narrowed for speculative-grade bonds. Conditions in short-term funding markets remained stable over the intermeeting period. Spreads on commercial paper and negotiable certificates of deposit across different tenors were little changed and remained near historically low levels. Assets under management (AUM) of government money market funds (MMFs) rose over the intermeeting period, whereas AUM of prime MMFs declined somewhat. The effective federal funds rate and the Secured Overnight Financing Rate averaged 7 basis points and 3 basis points, respectively, over the intermeeting period, decreasing somewhat relative to the previous intermeeting period average amid a net decrease in Treasury bill issuance and rising reserves. There continued to be no participation in the Federal Reserve's repo operations, but participation in the Federal Reserve's ON RRP increased a little. Amid stable market conditions, there was no take-up in the Money Market Mutual Fund Liquidity Facility or the Commercial Paper Funding Facility. Improved U.S. economic growth prospects and optimism about the eventual lifting of social-distancing and related restrictions globally were major drivers of asset prices abroad, spurring sizable increases in sovereign yields in advanced foreign economies. In response to rising yields, the Reserve Bank of Australia increased its bond purchases, and the European Central Bank indicated it would increase the pace of its bond purchases going forward. The broad dollar index rose modestly, with more notable appreciation against currencies of emerging market economies (EMEs). EME sovereign spreads edged up, and flows into EME bond funds fell back later in the period amid the rise in yields in advanced economies. However, flows into dedicated EME equity funds remained strong. Overall, foreign equity indexes increased slightly in most major markets. Financing conditions for nonfinancial businesses in capital markets remained broadly accommodative over the intermeeting period, supported by low interest rates and high equity valuations. Gross and net corporate bond issuances were solid in January and February. Gross issuance of leveraged loans was strong in January, driven mainly by refinancing activity, as primary-market spreads compressed notably since the end of last year in response to strong investor demand for such loans. Equity raised through traditional initial public offerings and seasoned equity offerings continued to be strong in January and February, and initial equity offerings by special purpose acquisition companies remained exceptionally high. Commercial and industrial loans outstanding on banks' balance sheets continued to decline through February as loan paydowns persisted and demand for new bank credit reportedly remained subdued. Corporate earnings continued to recover while the credit quality of nonfinancial corporations improved further. Corporate bond defaults declined in December and January and reached levels substantially below their 2019 average. In addition, the volume of nonfinancial corporate credit rating upgrades modestly outpaced downgrades over the first two months of 2021. Market indicators of future default expectations moved lower. Financing conditions for small businesses remained tight. Demand for loans remained depressed—and loan originations fell in December last year to about the same level seen in August—after the spike in lending associated with the first round of the Paycheck Protection Program. Long-term delinquencies remained elevated relative to recent years but were at levels significantly below those experienced during the Global Financial Crisis. Municipal market financing conditions stayed accommodative over the intermeeting period. For commercial real estate (CRE) financed through capital markets, financing conditions remained accommodative over the intermeeting period. Agency CMBS spreads narrowed further with strong issuance in December and January. Spreads on non-agency CMBS also tightened, although triple-B spreads stayed at elevated levels compared with pre-pandemic levels. Issuance of non-agency CMBS remained weak relative to pre-pandemic levels. CRE loan growth at banks was weak, on net, through February, consistent with tight bank lending standards. Financing conditions in the residential mortgage market tightened somewhat over the intermeeting period but remained accommodative for stronger borrowers. Mortgage rates for most borrowers increased but stayed near historically low levels, supporting elevated refinance and purchase activity through January. Credit was broadly available to higher-score borrowers meeting standard conforming loan criteria but tightened further for borrowers with lower credit scores. The share of mortgages in forbearance was unchanged. Financing conditions in consumer credit markets remained generally accommodative for borrowers with strong credit scores but were still tight for those with nonprime scores. Auto loan balances continued to grow in January, while credit card balances declined. Interest rates on new credit card offers to borrowers with prime credit scores continued to trend down, on net, through December. In contrast, offer rates to nonprime borrowers rose further. Conditions in the asset-backed securities market were stable during the intermeeting period. Staff Economic Outlook The U.S. economic projection prepared by the staff for the March FOMC meeting was considerably stronger than the January forecast. Real GDP growth appeared to be picking up at the beginning of this year by more than the staff had expected, likely reflecting both a faster-than-anticipated easing in social distancing and a more rapid response by households to the fiscal support package enacted in late December. Moreover, the size of the ARP enacted in March was considerably larger than what the staff had assumed in the January projection. All told, real GDP growth was projected to be substantial this year and the unemployment rate was forecast to decline markedly, as the staff's projection also continued to anticipate that widespread vaccination would allow for further easing in social distancing this year. Real GDP growth was expected to step down in 2022 and 2023 but still outpace that of potential over this period, leading to a decline in the unemployment rate to historically low levels, as monetary policy was assumed to remain highly accommodative. Incoming data on inflation were a little above what the staff had expected. The 12‑month changes in total and core PCE prices were expected to transitorily move above 2 percent in coming months, as the low inflation readings from the spring of last year dropped out of the calculation window. In addition, inflation was forecast to be temporarily boosted this year by the expected emergence of some production bottlenecks and supply constraints. Following the transitory increase this year, inflation was projected to run a bit below 2 percent next year and then to reach 2 percent by 2023, reflecting tight resource utilization in product and labor markets. The staff continued to see the uncertainty surrounding the outlook as elevated. Moreover, the uncertain course of the pandemic, particularly the emergence of more-contagious strains of the coronavirus in the United States and elsewhere, was still viewed as tilting the risks to the economic outlook to the downside. However, given the resilience of the economy in the face of the earlier surge in new COVID-19 cases, hospitalizations, and deaths and the magnitude of fiscal support enacted, the downside risks to the economic outlook were seen as smaller than for the previous projection. The staff viewed the risks of upside inflationary pressures as having increased since the previous forecast and now saw the risks to the inflation projection as balanced. Participants' Views on Current Conditions and the Economic Outlook In conjunction with this FOMC meeting, participants submitted their projections of the most likely outcomes for real GDP growth, the unemployment rate, and inflation for each year from 2021 through 2023 and over the longer run, based on their individual assessments of appropriate monetary policy, including the path of 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. A Summary of Economic Projections was released to the public following the conclusion of the meeting. In their discussion of current conditions, participants noted that the COVID-19 pandemic was causing tremendous human and economic hardship across the United States and around the world. Following a moderation in the pace of the recovery, indicators of economic activity and employment had turned up recently, al­though the sectors most adversely affected by the pandemic remained weak. Inflation continued to run below 2 percent. Overall financial conditions remained accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses. Participants noted that the path of the economy would depend significantly on the course of the virus, including progress on vaccinations, and that the ongoing public health crisis would continue to weigh on economic activity, employment, and inflation and posed considerable risks to the economic outlook. Participants observed that the pace of the economic recovery had picked up recently and that the economy continued to show resilience in the face of the pandemic. They noted encouraging developments regarding the pandemic, including significant declines in the number of new cases, hospitalizations, and deaths over the intermeeting period as well as a pickup in the pace of vaccinations. In light of these developments as well as the extent of the recent fiscal policy support, participants significantly revised up their projections for real GDP growth this year compared with the projections they submitted last December. They noted, however, that economic activity and employment were currently well below levels consistent with maximum employment. Participants observed that the economic downturn had not fallen equally on all Americans and that lower-income and Black and Hispanic households had been disproportionately affected by the pandemic. A number of participants stressed that recently enacted fiscal support would help address some of the hardships faced by these groups and that monetary policy would also help by promoting the economy's return to the Committee's goals of broad-based and inclusive maximum employment and price stability. Participants observed that household spending had risen notably so far this year and anticipated that further gains in consumer spending would contribute significantly to the economic recovery. While household spending on services that typically require close personal contact remained weak, participants expected spending on these services would improve as vaccinations became more widespread, social-distancing measures were relaxed, and the public became less wary of close personal interactions. Participants anticipated consumer spending would be bolstered by the recently enacted fiscal stimulus packages as well as by accommodative monetary policy. Many participants also pointed to the elevated level of household savings and judged that the release of pent-up demand could boost consumption growth further as social distancing waned. Participants also observed that residential construction continued to be solid and home sales remained robust in part because of low interest rates. Low inventory was viewed as an important factor supporting strong gains in housing prices. With respect to the business sector, participants observed that business equipment investment had continued to increase and that readings on new orders and shipments of capital goods remained strong. While some District contacts continued to report that firms in industries such as CRE or leisure, travel, and hospitality were struggling from pandemic-related social distancing, other District contacts reported that activity in these industries had started to improve. Participants noted that surveys of business activity had picked up recently and that many District contacts were growing increasingly optimistic about business prospects given ongoing progress on vaccinations. Participants also discussed reports of shortages in materials, key intermediate inputs, and labor as well as bottlenecks in shipping. A few participants noted that higher crop prices were continuing to boost income in the agricultural sector. Several participants judged that the support provided by the ARP could improve the financial positions of small firms that had been adversely affected by the pandemic. Participants observed that labor market conditions had improved recently, as payroll employment registered strong gains in February and the unemployment rate fell to 6.2 percent. Even so, payroll employment was about 9.5 million jobs below its pre-pandemic level, and labor market conditions for those in the most disadvantaged communities were viewed as lagging behind those of other households. Moreover, participants noted that employment in the leisure and hospitality sector was still down substantially from its pre-pandemic level despite a sharp rebound in February. Participants generally expected strong job gains to continue over coming months and into the medium term, supported by accommodative fiscal and monetary policies as well as by continued progress on vaccinations, further reopening of sectors most affected by the pandemic, and the associated recovery in economic activity. However, participants noted that the economy was far from achieving the Committee's broad-based and inclusive goal of maximum employment. Some participants commented that labor force participation continued to be held down by workers' health concerns and additional childcare responsibilities associated with virtual schooling and that the pace of recovery in the labor market would depend importantly on how rapidly those affected by these issues could rejoin the labor force. Several participants noted that the speed of the labor market recovery also depended on factors such as the movement of workers across industries and occupations in a restructuring economy or the effects of technological change on the demand for labor. Several participants suggested that the ARP could hasten the recovery, which could help limit longer-term damage in labor markets caused by the pandemic. Participants observed that headline PCE inflation continued to run below 2 percent. In the near term, the 12-month change in PCE prices was expected to move above 2 percent as the low inflation readings from the spring of last year drop out of the calculation. Most participants also pointed to supply constraints that could contribute to price increases for some goods in coming months as the economy continued to reopen. After the transitory effects of these factors fade, however, participants generally anticipated that annual inflation readings would edge down next year. Subsequently, participants expected that inflation would likely move along a trajectory consistent with achieving the Committee's objectives over time, supported by strong aggregate demand, which participants expected would be driven in part by accommodative monetary and fiscal policies. Participants discussed market- and survey-based measures of longer-term inflation expectations and their implications for the inflation outlook. Market-based measures of inflation compensation at the 5- and 10-year horizons had continued to move up over the intermeeting period, while survey-based measures of inflation expectations were little changed on balance. A number of participants indicated that the increases in market-based measures of inflation compensation from the very low levels of last spring were consistent with the view that inflation was likely to move along a path over time consistent with the Committee's goals. Participants noted that overall financial conditions remained highly accommodative, in part reflecting the stance of monetary policy. Participants commented on the notable rise in longer-term Treasury yields that occurred over the intermeeting period and generally viewed it as reflecting the improved economic outlook, some firming in inflation expectations, and expectations for increased Treasury debt issuance. Disorderly conditions in Treasury markets or a persistent rise in yields that could jeopardize progress toward the Committee's goals were seen as cause for concern. While overall financial conditions were still seen as accommodative, a number of participants remarked that financing conditions remained challenging for many small businesses. A couple of participants expressed concern that highly accommodative financial conditions could lead to excessive risk-taking and the buildup of financial imbalances. While generally acknowledging that the medium-term outlook for real GDP growth and employment had improved, participants continued to see the uncertainty surrounding that outlook as elevated. Participants agreed that the path of the economy would depend significantly on the course of the virus, including progress on vaccinations. Most participants indicated that the pandemic continued to pose considerable risks to the economic outlook, including risks associated with new more-contagious virus strains, obstacles in getting sufficient numbers of the public vaccinated, or social-distancing fatigue. A few participants pointed to risks associated with stress in the CRE sector or to risks associated with the unwinding of mortgage forbearance and eviction moratoriums provided to households. With regard to upside risks, some participants pointed to the possibility that fiscal policy could have a more expansionary effect than anticipated, that households could display a greater-than-expected willingness to spend out of accumulated savings, or that widespread vaccinations and easing of social distancing could result in a more rapid boost to spending and employment than anticipated. Most participants noted that they viewed the risks to the outlook for inflation as broadly balanced. Several remarked that supply disruptions and strong demand could push up price inflation more than anticipated. Several participants commented that the factors that had contributed to low inflation during the previous expansion could again exert more downward pressure on inflation than expected. In their consideration of the stance of monetary policy, participants reaffirmed the Federal Reserve's commitment to using its full range of tools to support the U.S. economy during this challenging time, thereby promoting the Committee's statutory goals of maximum employment and price stability. Participants noted that indicators of economic activity and employment had turned up recently after a period of moderation, although the sectors most adversely affected by the pandemic remained weak. Despite these positive indicators and an improved public health situation, participants agreed that the economy remained far from the Committee's longer-run goals and that the path ahead remained highly uncertain, with the pandemic continuing to pose considerable risks to the outlook. Consequently, participants judged that the current stance of policy and policy guidance remained appropriate to foster further economic recovery as well as to achieve inflation that averages 2 percent over time and longer-term inflation expectations that remain well anchored at 2 percent. Participants judged that the Committee's current guidance for the federal funds rate and asset purchases was serving the economy well. They noted that a benefit of the outcome-based guidance was that it did not need to be recalibrated often in response to incoming data or the evolving outlook. Participants also noted the importance of communicating to the public that the existing guidance, together with the new monetary policy framework as delineated in the revised Statement on Longer-Run Goals and Monetary Policy Strategy, meant that the path of the federal funds rate and the balance sheet depend on actual progress toward reaching the Committee's maximum-employment and inflation goals. In particular, various participants noted that changes in the path of policy should be based primarily on observed outcomes rather than forecasts. Participants agreed that overall financial conditions were accommodative. They noted that the Federal Reserve's asset purchases since last March had materially eased financial conditions and were providing substantial support to the economy. Participants noted that it would likely be some time until substantial further progress toward the Committee's maximum-employment and price-stability goals would be realized and that, consistent with the Committee's outcome-based guidance, asset purchases would continue at least at the current pace until then. A number of participants highlighted the importance of the Committee clearly communicating its assessment of progress toward its longer-run goals well in advance of the time when it could be judged substantial enough to warrant a change in the pace of asset purchases. The timing of such communications would depend on the evolution of the economy and the pace of progress toward the Committee's goals. Committee Policy Action In their discussion of monetary policy for this meeting, members agreed that the COVID-19 pandemic was causing tremendous human and economic hardship across the United States and around the world. They noted that following a moderation in the pace of the recovery, indicators of economic activity and employment had turned up recently, although the sectors most adversely affected by the pandemic remained weak. Inflation continued to run below 2 percent. Overall financial conditions remained accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses. Members also remarked that the path of the economy would depend significantly on the course of the virus, including progress on vaccinations. In addition, members agreed that the ongoing public health crisis continued to weigh on economic activity, employment, and inflation and was posing considerable risks to the economic outlook. Members agreed that the Federal Reserve was committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum-employment and price-stability goals. All members reaffirmed that, in accordance with the Committee's goals to achieve maximum employment and inflation at the rate of 2 percent over the longer run and with inflation running persistently below this longer-run goal, they would aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent. Members expected to maintain an accommodative stance of monetary policy until those outcomes were achieved. All members agreed to maintain the target range for the federal funds rate at 0 to 1/4 percent, and they expected that it would be appropriate to maintain this target range until labor market conditions had reached levels consistent with the Committee's assessments of maximum employment and inflation had risen to 2 percent and was on track to moderately exceed 2 percent for some time. In addition, members agreed that it would be appropriate for the Federal Reserve to continue to increase its holdings of Treasury securities by at least $80 billion per month and agency mortgage-backed securities by at least $40 billion per month until substantial further progress had been made toward the Committee's maximum-employment and price-stability goals. They judged that these asset purchases would help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses. Members agreed that, in assessing the appropriate stance of monetary policy, they would continue to monitor the implications of incoming information for the economic outlook and that they would be prepared to adjust the stance of monetary policy as appropriate in the event that risks emerged that could impede the attainment of the Committee's goals. Members also agreed that, in assessing the appropriate stance of monetary policy, they would take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments. With regard to the postmeeting statement, in light of the notably positive tone of recent data, members judged that it was appropriate to incorporate that development in the description of the economic situation with the language that "indicators of economic activity and employment have turned up recently." Members also determined that, with oil prices having essentially retraced their pandemic-related declines, it was appropriate to remove the reference to oil prices as a factor holding down consumer price inflation and to simply state that "inflation continues to run below 2 percent." Regarding the directive to the Desk, members agreed that the directive should incorporate the proposed increase in the per-counterparty limit for the ON RRP facility to $80 billion. 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 System Open Market Account in accordance with the following domestic policy directive, for release at 2:00 p.m.: "Effective March 18, 2021, 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 0 to 1/4 percent. Increase the System Open Market Account holdings of Treasury securities by $80 billion per month and of agency mortgage-backed securities (MBS) by $40 billion per month. Increase holdings of Treasury securities and agency MBS by additional amounts and purchase agency commercial mortgage-backed securities (CMBS) as needed to sustain smooth functioning of markets for these securities. Conduct repurchase agreement operations to support effective policy implementation and the smooth functioning of short-term U.S. dollar funding markets. Conduct overnight reverse repurchase agreement operations at an offering rate of 0.00 percent and with a per-counterparty limit of $80 billion per day; the per-counterparty limit can be temporarily increased at the discretion of the Chair. Roll over at auction all principal payments from the Federal Reserve's holdings of Treasury securities and reinvest all principal payments from the Federal Reserve's holdings of agency debt and agency MBS in agency MBS. Allow modest deviations from stated amounts for purchases and reinvestments, if needed for operational reasons. Engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions." The vote also encompassed approval of the statement below for release at 2:00 p.m.: "The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals. The COVID-19 pandemic is causing tremendous human and economic hardship across the United States and around the world. Following a moderation in the pace of the recovery, indicators of economic activity and employment have turned up recently, although the sectors most adversely affected by the pandemic remain weak. Inflation continues to run below 2 percent. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses. The path of the economy will depend significantly on the course of the virus, including progress on vaccinations. The ongoing public health crisis continues to weigh on economic activity, employment, and inflation, and poses considerable risks to the economic outlook. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer‑term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved. The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee's assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. In addition, the Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage‑backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee's maximum employment and price stability goals. These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments." Voting for this action: Jerome H. Powell, John C. Williams, Thomas I. Barkin, Raphael W. Bostic, Michelle W. Bowman, Lael Brainard, Richard H. Clarida, Mary C. Daly, Charles L. Evans, Randal K. Quarles, and Christopher J. Waller. 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 at 0.10 percent. The Board of Governors also voted unanimously to approve establishment of the primary credit rate at the existing level of 0.25 percent, effective March 18, 2021. It was agreed that the next meeting of the Committee would be held on Tuesday–Wednesday, April 27–28, 2021. The meeting adjourned at 10:20 a.m. on March 17, 2021. Notation Vote By notation vote completed on February 16, 2021, the Committee unanimously approved the minutes of the Committee meeting held on January 26–27, 2021. _______________________ 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

2021-02-17

Minute

Minutes of the Federal Open Market Committee January 26-27, 2021 A joint meeting of the Federal Open Market Committee and the Board of Governors was held by videoconference on Tuesday, January 26, 2021, at 1:00 p.m. and continued on Wednesday, January 27, 2021, at 9:00 a.m.1 PRESENT: Jerome H. Powell, Chair John C. Williams, Vice Chair Thomas I. Barkin Raphael W. Bostic Michelle W. Bowman Lael Brainard Richard H. Clarida Mary C. Daly Charles L. Evans Randal K. Quarles Christopher J. Waller James Bullard, Esther L. George, Loretta J. Mester, Helen E. Mucciolo, 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 Michelle A. Smith, Assistant Secretary Mark E. Van Der Weide, General Counsel Michael Held, Deputy General Counsel Trevor A. Reeve, Economist Stacey Tevlin, Economist Beth Anne Wilson, Economist Shaghil Ahmed, David Altig, Kartik B. Athreya, Brian M. Doyle, Rochelle M. Edge, Eric M. Engen, Beverly Hirtle, and William Wascher, Associate Economists Lorie K. Logan, Manager, System Open Market Account Patricia Zobel, 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; Sally Davies, Deputy Director, Division of International Finance, Board of Governors; Michael T. Kiley, Deputy Director, Division of Financial Stability, Board of Governors Jon Faust, Senior Special Adviser to the Chair, Division of Board Members, Board of Governors Joshua Gallin, Special Adviser to the Chair, Division of Board Members, Board of Governors William F. Bassett, Antulio N. Bomfim, Wendy E. Dunn, Burcu Duygan-Bump, Jane E. Ihrig, Kurt F. Lewis, and Chiara Scotti, Special Advisers to the Board, Division of Board Members, Board of Governors John J. Stevens, Senior Associate Director, Division of Research and Statistics, Board of Governors; Gretchen C. Weinbach, Senior Associate Director, Division of Monetary Affairs, Board of Governors Ellen E. Meade and Robert J. Tetlow, Senior Advisers, Division of Monetary Affairs, Board of Governors; Steven A. Sharpe, Senior Adviser, Division of Research and Statistics, Board of Governors Marnie Gillis DeBoer and Min Wei, Associate Directors, Division of Monetary Affairs, Board of Governors; Andrew Figura, Associate Director, Division of Research and Statistics, Board of Governors Eric C. Engstrom, Deputy Associate Director, Division of Monetary Affairs, Board of Governors; Jeffrey D. Walker,2 Deputy Associate Director, Division of Reserve Bank Operations and Payment Systems, Board of Governors Jennifer Gallagher, Special Assistant to the Board, Division of Board Members, Board of Governors Brian J. Bonis, Assistant Director, Division of Monetary Affairs, Board of Governors Penelope A. Beattie, Section Chief, Office of the Secretary, Board of Governors Mark A. Carlson, Senior Economic Project Manager, Division of Monetary Affairs, Board of Governors David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors Michele Cavallo, Olesya Grishchenko, Horacio Sapriza, and Fabian Winkler, Principal Economists, Division of Monetary Affairs, Board of Governors; Pablo Cuba-Borda, Principal Economist, Division of International Finance, Board of Governors; Andrew Paciorek, Principal Economist, Division of Research and Statistics, Board of Governors Randall A. Williams, Lead Information Manager, Division of Monetary Affairs, Board of Governors Joseph W. Gruber, Daleep Singh, and Ellis W. Tallman, Executive Vice Presidents, Federal Reserve Banks of Kansas City, New York, and Cleveland, respectively David Andolfatto, Spencer Krane, Keith Sill, and Mark L.J. Wright, Senior Vice Presidents, Federal Reserve Banks of St. Louis, Chicago, Philadelphia, and Minneapolis, respectively Joe Peek, Vice President, Federal Reserve Bank of Boston James Dolmas, Economic Policy Advisor and Senior Research Economist, Federal Reserve Bank of Dallas Andrew Foerster, Research Advisor, Federal Reserve Bank of San Francisco Annual Organizational Matters3 The agenda for this meeting 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, 2021, were received and that these individuals executed their oaths of office. The elected members and alternate members were as follows: John C. Williams, President of the Federal Reserve Bank of New York, with Helen E. Mucciolo, 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 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 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 Mary C. Daly, 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 2022: Jerome H. Powell Chair John C. Williams Vice Chair James A. Clouse Secretary Matthew M. Luecke Deputy Secretary Michelle A. Smith Assistant Secretary Mark E. Van Der Weide General Counsel Michael Held Deputy General Counsel Richard M. Ashton Assistant General Counsel Trevor Reeve Economist Stacey Tevlin Economist Beth Anne Wilson Economist     Shaghil Ahmed David Altig Kartik B. Athreya Brian M. Doyle Rochelle M. Edge Eric M. Engen Beverly Hirtle Sylvain Leduc Anna Paulson William Wascher Associate Economists By unanimous vote, the Committee selected the Federal Reserve Bank of New York to execute transactions for the System Open Market Account (SOMA). By unanimous vote, the Committee selected Lorie K. Logan and Patricia Zobel 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 being satisfactory to the Federal Reserve Bank of New York. Secretary's note: The Federal Reserve Bank of New York subsequently sent advice that the manager and deputy manager selections indicated previously were satisfactory. By unanimous vote, the Committee voted to reaffirm without revision 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 26, 2021) 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, 1.B, 1.C and 1.D 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: i. 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 ii. Undertake repo transactions in Eligible Securities with Foreign Accounts; 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 Chair 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 Chair, whenever feasible, will consult with the Committee before making any instruction under this paragraph 5. AUTHORIZATION FOR FOREIGN CURRENCY OPERATIONS (As reaffirmed effective January 26, 2021) 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, temporary 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 and temporary dollar liquidity swap arrangements all drawings must be approved in advance by the Chair. The Chair 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 Chair. 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 and temporary 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 and temporary 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 Chair. The Chair 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; iii. 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 Chair: 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 Chair if the Chair believes that consultation with the Subcommittee is not feasible in the time available. The Chair shall promptly report to the Subcommittee any action approved by the Chair pursuant to this paragraph. 12. The Committee authorizes the Chair, 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 Chair, whenever feasible, will consult with the Committee before making any instruction under this paragraph. FOREIGN CURRENCY DIRECTIVE (As reaffirmed effective January 26, 2021) 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. Temporary dollar liquidity swap arrangements with the following foreign central banks: Reserve Bank of Australia National Bank of Denmark Reserve Bank of New Zealand Bank of Norway Bank of Sweden Central Bank of Brazil Bank of Mexico Bank of Korea Monetary Authority of Singapore D. 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 reaffirmed its Program for Security of FOMC Information with minor technical changes. In the Committee's annual reconsideration of the Statement on Longer-Run Goals and Monetary Policy Strategy, all participants supported the statement as written, and the Committee voted unanimously to reaffirm without revision. STATEMENT ON LONGER-RUN GOALS AND MONETARY POLICY STRATEGY (As reaffirmed effective January 26, 2021) 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. Employment, inflation, and long-term interest rates fluctuate over time in response to economic and financial disturbances. Monetary policy plays an important role in stabilizing the economy in response to these disturbances. The Committee's primary means of adjusting the stance of monetary policy is through changes in the target range for the federal funds rate. The Committee judges that the level of the federal funds rate consistent with maximum employment and price stability over the longer run has declined relative to its historical average. Therefore, the federal funds rate is likely to be constrained by its effective lower bound more frequently than in the past. Owing in part to the proximity of interest rates to the effective lower bound, the Committee judges that downward risks to employment and inflation have increased. The Committee is prepared to use its full range of tools to achieve its maximum employment and price stability goals. The maximum level of employment is a broad-based and inclusive goal that is not directly measurable and changes over time owing largely to nonmonetary factors that affect the structure and dynamics of the labor market. 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 shortfalls of employment from its maximum level, recognizing that such assessments are necessarily uncertain and subject to revision. The Committee considers a wide range of indicators in making these assessments. 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 judges that longer-term inflation expectations that are well anchored at 2 percent foster price stability and moderate long-term interest rates and enhance the Committee's ability to promote maximum employment in the face of significant economic disturbances. In order to anchor longer-term inflation expectations at this level, the Committee seeks to achieve inflation that averages 2 percent over time, and therefore judges that, following periods when inflation has been running persistently below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time. Monetary policy actions tend to influence economic activity, employment, and prices with a lag. In setting monetary policy, the Committee seeks over time to mitigate shortfalls of employment from the Committee's assessment of its maximum level and deviations of inflation from its longer-run goal. Moreover, sustainably achieving maximum employment and price stability depends on a stable financial system. 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 Committee's employment and inflation objectives are generally complementary. However, under circumstances in which the Committee judges that the objectives are not complementary, it takes into account the employment shortfalls and inflation 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 review these principles and to make adjustments as appropriate at its annual organizational meeting each January, and to undertake roughly every 5 years a thorough public review of its monetary policy strategy, tools, and communication practices. Developments in Financial Markets and Open Market Operations The manager turned first to a discussion of financial market developments. The evolving outlooks for the path of the virus and for fiscal policy were the main drivers of financial markets over the intermeeting period. Progress on vaccinations had been slower than expected, and the near-term trajectory of the pandemic worsened, weighing on economic activity. However, even with the appearance of new strains of the virus, market confidence in the ultimate efficacy of the vaccination efforts seemed to remain high. The emergence of a narrow Democratic majority in the Senate bolstered investor expectations for additional fiscal stimulus, prompting upward revisions to forecasts for economic growth this year. In the Open Market Desk Survey of Primary Dealers, the median 2021 gross domestic product (GDP) growth forecast rose about 1 percentage point. Against this backdrop, longer-term Treasury yields rose notably over the period. Longer-dated real yields were lifted by expectations for improved growth and increased Treasury issuance, but remained deeply negative. Measures of inflation compensation increased over the period, with the five-year, five-year-forward measure rising to a level of around 2 percent. Overall financial conditions eased further, on net, as the recent rally in risk assets continued. Gains in U.S. equities again centered on cyclical sectors and smaller-capitalization firms most sensitive to growth. Credit spreads narrowed further, especially for riskier borrowers. Expectations for the path of the target federal funds rate over the next several years, as implied by interest rate futures and by the Desk Survey of Primary Dealers and Survey of Market Participants, were relatively little changed from December. The stability in near-term policy rate expectations amid an improving growth outlook appeared consistent with the Committee's new framework and forward interest rate guidance. Al­though the median Desk survey respondent continued to expect 12‑month personal consumption expenditure (PCE) inflation of 2.3 percent when the FOMC first lifts the target range, the median expectation for the unemployment rate prevailing at that time was modestly lower than in December. The Desk survey results indicated that a majority of market participants anticipated that the pace of net asset purchases would remain stable for the remainder of the year and slow around the first quarter of 2022. The manager next discussed conditions in funding markets. Over the year-end, overnight secured and unsecured rates were little changed at rates just below the interest on excess reserves (IOER) rate even as financial firms managed their balance sheets for the reporting date. Going forward, reserves were projected to rise rapidly through the summer, reflecting ongoing Federal Reserve asset purchases as well as expected declines in balances held in the Treasury General Account. Market pricing suggested that the effective federal funds rate was expected to decline modestly through the second quarter. Even if more notable downward pressure on money market rates emerged, the manager anticipated that the Federal Reserve's tools, including the IOER rate and overnight reverse repurchase agreement facility, would continue to provide effective control over the federal funds rate and other overnight money market rates. Finally, the manager discussed Desk operations. A range of indicators suggested that both fixed-income and funding markets continued to function smoothly over the period. The manager noted that, in the coming period, the Desk anticipated implementing two adjustments to continue to normalize operations. First, given the sustained stability in term repurchase markets, the Desk proposed discontinuing the weekly one-month term repurchase operations, beginning in mid-February. In addition, the Desk planned to reduce the frequency of agency commercial mortgage-backed securities (CMBS) operations in light of the sustained improvement in market conditions for these securities. By unanimous vote, the Committee ratified the Desk's domestic transactions over the intermeeting period. No intervention operations occurred in foreign currencies for the System's account during the intermeeting period. Staff Review of the Economic Situation The COVID‑19 pandemic and the measures undertaken to contain its spread continued to affect economic activity in the United States and abroad. The information available at the time of the January 26–27 meeting suggested that U.S. real GDP had continued to advance in the fourth quarter of 2020, albeit at a pace that was markedly slower than the rapid rate seen in the third quarter, while the level of real GDP had not yet returned to the level seen before the onset of the pandemic. Labor market conditions deteriorated, on balance, in December, and employment continued to be well below its level at the start of 2020. Consumer price inflation through November—as measured by the 12‑month percentage change in the PCE price index—remained considerably lower than the rates seen in early 2020. Total nonfarm payroll employment fell in December, with especially sharp declines in the leisure and hospitality sector. As of December, payroll employment had retraced a little more than half of the losses seen at the onset of the pandemic. The unemployment rate held steady at 6.7 percent in December. The unemployment rate for African Americans declined and the Hispanic unemployment rate rose; both rates remained well above the national average. However, the Asian unemployment rate moved below the national average in December. Both the labor force participation rate and employment-to-population ratio were unchanged in December. Initial claims for unemployment insurance in mid-January were higher than their early December level. Weekly estimates of private-sector payrolls constructed by Federal Reserve Board staff using data provided by the payroll processor ADP indicated that the four-week average change in private employment in mid-January was slightly lower than it had been in early December; however, the most recent week-to-week changes in this measure of payrolls had been highly volatile. Average hourly earnings for all employees rose 5.1 percent over the 12 months ending in December, a gain that was noticeably higher than the measure's year‑earlier 12‑month change. The 12‑month change in average hourly earnings continued to be dominated by changes in the composition of the workforce, with the concentration of job losses among lower-wage workers over the pandemic period resulting in outsized increases in this measure of earnings that were not indicative of tight labor market conditions. By contrast, a staff measure of the 12‑month change in the median wage derived from the ADP data—a measure likely to have been less affected by changes in workforce composition—was 3-1/2 percent in December and remained well below its pre‑pandemic pace. Total PCE price inflation was 1.1 percent over the 12 months ending in November and continued to be held down by relatively weak aggregate demand and the declines in consumer energy prices seen over the first part of 2020. Core PCE price inflation, which excludes changes in consumer energy prices and many consumer food prices, was 1.4 percent over the 12 months ending in November, while the trimmed mean measure of 12‑month PCE inflation constructed by the Federal Reserve Bank of Dallas was 1.7 percent in November. In December, the 12‑month change in the consumer price index (CPI) was 1.4 percent, while core CPI inflation was 1.6 percent over the same period. The latest readings on survey-based measures of longer-run inflation expectations ticked higher. In the first part of January, the University of Michigan Surveys of Consumers measure for the next 5 to 10 years moved back up to its late‑summer level, while in December, the 3‑year‑ahead measure of inflation expectations produced by the Federal Reserve Bank of New York moved back up to its August level. Real PCE fell in November, and available indicators—including the components of the nominal retail sales data used to estimate PCE—pointed to a further decline in December. Housing starts and construction permits moved up in November and December and finished the year well above their pre‑pandemic levels. Al­though home sales turned down in November, the decline appeared to reflect limited availability of homes for sale rather than weakening demand. Available indicators pointed to a strong increase in investment in equipment and intangibles in the fourth quarter of 2020, as this component of capital spending recovered from its sharp decline over the first half of the year. Likewise, drilling investment appeared to have turned up sharply, albeit from a low level, as oil prices moved higher. By contrast, investment in nonresidential structures outside of the drilling and mining sector appeared to have declined further in the fourth quarter and had likely been restrained by firms' continued hesitation to commit to projects with lengthy times to completion and uncertain future returns. Industrial production advanced further in the fourth quarter, led by a solid gain in manufacturing output, but had not yet overtaken its pre‑pandemic level. The low level of export demand since the onset of the pandemic had likely continued to restrain the recovery in the manufacturing sector; in addition, production of motor vehicles and parts was a small drag on manufacturing output in the fourth quarter as automotive producers appeared to have had difficulty getting assemblies fully under way for the new model year. Total real government purchases appeared to have fallen further in the fourth quarter, though at a slower pace than in the third quarter. Available data suggested that real federal purchases had posted a modest gain, as an increase in defense purchases offset a reduction in nondefense purchases; however, indicators of real state and local purchases, including state and local government employment, pointed to a fourth-quarter decline similar in size to what had been seen in the third quarter. The nominal U.S. international trade deficit widened further in November. Both imports and exports continued to rebound from their collapse in the first half of the year. Goods imports rose in November to a level well above that of the previous January, with gains in most major categories. Al­though exports also grew in November, they had not yet recovered to their January 2020 level. Services trade continued a gradual rise but remained depressed, driven by the continued suspension of most international travel. Taken together, these data suggested that net exports made a significant negative contribution to real GDP growth in the fourth quarter. Recent data pointed to a sharp slowing in foreign economic growth in the fourth quarter, after a strong rebound in the third quarter. Amid a further intensification of the pandemic, many foreign governments tightened social-distancing restrictions. In a few countries, the emergence of new and more contagious virus strains was accompanied by a surge in COVID-19 cases and deaths. The increased virus spread and restrictions appeared to take a toll on foreign economic activity, particularly in Europe. The global slowdown was most notable for services, with further declines in purchasing managers indexes for this sector through January in many advanced foreign economies. By contrast, manufacturing output in both advanced and emerging foreign economies continued to expand at a solid pace, supported by resilient demand for durable goods, high-tech goods, and medical supplies. Amid the generally weak economic situation, inflationary pressures remained subdued in most foreign economies. Staff Review of the Financial Situation Investor sentiment improved and risk asset prices moved higher over the intermeeting period on greater prospects for additional fiscal stimulus. Domestic and foreign equity prices increased notably, and spreads on corporate and municipal bonds narrowed. The nominal Treasury yield curve steepened, partly reflecting an increase in inflation compensation. Market-based financing conditions remained accommodative, while bank lending conditions continued to be tight. However, a smaller net share of banks tightened lending standards than in previous quarters. A straight read of overnight index swap (OIS) quotes suggested that the expected path of the federal funds rate beyond mid-2023 rose moderately over the intermeeting period, with the increases reportedly associated largely with greater investor optimism regarding the expected speed of the economic recovery. OIS quotes suggested that the expected policy rate would remain below 25 basis points until the third quarter of 2023, little changed from the time of the December meeting. The yield on 2-year nominal Treasury securities was little changed over the intermeeting period, while the 10-year yield rose notably. Most of the steepening of the Treasury yield curve occurred following the outcome of the Georgia runoff elections, which reportedly bolstered market participants' expectations for additional fiscal stimulus. The FOMC's updated guidance around asset purchases was seen as broadly in line with expectations and did not elicit noticeable financial market reaction. Measures of inflation compensation based on Treasury Inflation-Protected Securities increased moderately, on net, continuing the upward trend observed over recent months, with the increase over the intermeeting period reportedly reflecting greater prospects for additional fiscal stimulus and an associated improvement in the longer-run economic outlook. Broad stock price indexes increased, on net, over the intermeeting period, boosted by gains in the share prices of banks and companies in more cyclically sensitive sectors, reportedly reflecting, in part, increased expectations of fiscal stimulus. One-month option-implied volatility on the S&P 500—the VIX—was little changed, on net, remaining modestly elevated relative to its range over the past several years. Consistent with the optimism driving stock prices, spreads on corporate bond yields over comparable-maturity Treasury yields narrowed somewhat. Spreads on municipal bond yields narrowed notably in January, reportedly reflecting increased expectations of additional fiscal stimulus and aid to state and local governments. Conditions in short-term funding markets remained stable over the intermeeting period, including over the year-end. Spreads for commercial paper and negotiable certificates of deposit across tenors were largely unchanged at historically low levels. Commercial paper outstanding declined somewhat in late December but quickly rebounded in early January to the levels observed before year-end. Amid stable market conditions, there was no take-up at the Commercial Paper Funding Facility or the Money Market Mutual Fund Liquidity Facility over the intermeeting period. Assets under management (AUM) of government money market funds (MMFs) remained stable over the intermeeting period. AUM of prime MMFs continued to decline, reaching the lowest level since late 2018, likely reflecting the compressed net yield advantage for prime funds relative to yields for government funds. The net yields of both prime and government MMFs remained near historically low levels. The effective federal funds rate and the Secured Overnight Financing Rate were little changed, averaging 9 basis points and 8 basis points, respectively, over the intermeeting period. There continued to be no participation in the Fed's repurchase agreement (repo) operations, and participation in the Fed's reverse repo facility was minimal. In foreign financial markets, the prospect of additional U.S. fiscal stimulus and the passage of key risk events such as the Brexit trade agreement largely outweighed investor concerns around new virus strains and the sluggish global vaccine rollout. On balance, foreign equity prices increased moderately, with notable outperformance in some Asian indexes, and capital inflows into mutual funds dedicated to emerging markets continued at a robust pace. Longer-term sovereign yields in most advanced foreign economies rose slightly on improved investor sentiment even while several major central banks reaffirmed their commitment to continue or possibly expand accommodative policies. The broad dollar index was little changed, on net, over the intermeeting period, while the Chinese renminbi appreciated notably against the dollar as data showed a robust economic recovery in China. Dollar funding conditions were generally stable around year-end. Financing conditions in capital markets remained broadly accommodative, supported by low interest rates and high equity valuations. Gross corporate bond issuance was fairly strong in November and December, and seasoned and initial public offerings in the equity markets were robust. Gross institutional leveraged loan issuance was also strong in December, as issuance volumes excluding refinancing topped their averages for previous months of 2020 and were above those observed during the same period of 2019. Commercial and industrial (C&I) loan balances at banks continued to decline in December, albeit at a slower pace than in the fall. C&I loans declined in the fourth quarter because of weak origination activity, loan forgiveness at the Paycheck Protection Program, and continued repayments of bank debt. In the January Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS), banks, on net, reported weaker demand and tightened lending standards for C&I loans, with notable differences in reported changes across bank sizes. Large banks reported having eased standards to large and middle-market firms, while, on net, banks of all sizes reported having tightened standards to small firms. However, a smaller net percentage of banks tightened lending standards to firms of all sizes than in previous quarters. The credit quality of nonfinancial corporations remained stable in recent months after deteriorating substantially for several months following the onset of the pandemic. The volume of nonfinancial corporate bond downgrades continued to slightly outpace upgrades in November and December, and the monthly volume of nonfinancial corporate bond defaults remained relatively low. Market indicators of future default expectations moved slightly lower, essentially returning to their pre-pandemic levels. Financing conditions for small businesses remained tight, but small business loan originations in November, the most recent month for which data were available, were at roughly the level seen a year earlier, likely supported by the refinancing of existing loans. Meanwhile, liquidity needs of small businesses remained high as businesses continued to operate at reduced capacity. Small business delinquency and default rates were little changed but remained elevated relative to the levels of recent years. Financing conditions in the municipal bond market remained generally accommodative over the intermeeting period, and the credit quality of municipal debt remained roughly stable. For commercial real estate (CRE) financed through capital markets, financing conditions remained generally accommodative, easing further over the intermeeting period. Spreads on agency CMBS ticked down, on net, and issuance remained elevated through December, al­though below its recent historical high in October. Risk spreads on triple-B non-agency CMBS declined, and spreads on triple-A non-agency CMBS stayed close to their historical lows. Issuance of non-agency CMBS remained somewhat below its pre-pandemic level. CRE bank loan growth remained weak in the fourth quarter amid depressed property transaction volumes. On net, in the January SLOOS, banks reported a further tightening of lending standards and further weakening in demand for CRE loans. Financing conditions in the residential mortgage market were little changed over the intermeeting period. Mortgage rates ticked up slightly but stayed near historically low levels, supporting strong loan origination activity. Credit remained broadly available to higher-score borrowers seeking conforming mortgages but tightened further, from already tight levels, for borrowers with lower credit scores and those seeking nonconforming mortgages. The January SLOOS suggested that for most types of residential mortgages, banks' lending standards remained unchanged, while loan demand was either little changed or somewhat stronger. Mortgage forbearance rates plateaued in December and early January after having gradually declined over the previous six months, and the rate of new delinquencies stayed at low, pre-pandemic levels. Financing conditions in consumer credit markets generally remained accommodative for borrowers with strong credit scores but tight for those with subprime scores. Banks in the January SLOOS reported easing standards for all consumer loan types and experiencing weaker demand for auto loans and little-changed demand for other consumer loans. Conditions in the asset-backed securities market appeared supportive of lending. Credit card balances edged down further for both prime and nonprime borrowers, likely reflecting weak consumer spending. However, the volume of new cards and available credit continued to rise for both prime and nonprime borrowers. Interest rates on new credit card offers for nonprime borrowers stayed elevated, and financing conditions remained tight for those borrowers. Auto loan balances continued to increase solidly for prime and near-prime borrowers but declined further for subprime borrowers. Auto loan interest rates were about flat over the past few months and remained significantly below their pre-pandemic levels. Delinquency rates for nonprime auto and credit card borrowers ticked up, albeit from very low levels. The staff provided an update on its assessments of the stability of the financial system and, on balance, characterized the financial vulnerabilities of the U.S. financial system as notable. The staff assessed asset valuation pressures as elevated. In particular, corporate bond spreads had declined to pre-pandemic levels, which were at the lower ends of their historical distributions. In addition, measures of the equity risk premium declined further, returning to pre-pandemic levels. Prices for industrial and multifamily properties continued to grow through 2020 at about the same pace as in the past several years, while prices of office buildings and retail establishments started to fall. The staff assessed vulnerabilities associated with household and business borrowing as notable, reflecting increased leverage and decreased incomes and revenues in 2020. Small businesses were hit particularly hard. The staff judged that vulnerabilities stemming from financial leverage were moderate, noting that capital ratios at the largest bank holding companies rose over the course of last year; leverage among hedge funds was elevated but it did decline last spring for the most highly leveraged funds. The staff characterized vulnerabilities stemming from funding risks as moderate. Banks continued to maintain significant levels of high-quality liquid assets and stable sources of funding. In contrast, money market funds and open-ended mutual funds were characterized by significant vulnerabilities associated with liquidity transformation. Staff Economic Outlook The U.S. economic projection prepared by the staff for the January FOMC meeting implied a considerably stronger outlook for activity in 2021 relative to the December forecast. Although incoming data had been weaker than expected, the staff's January projection incorporated the effects of the stimulus in the recently enacted Consolidated Appropriations Act, 2021 (CAA), together with an assumption that an additional sizable tranche of fiscal support would be put into place in coming months. Taken together, these stimulus measures were expected to partly offset the substantial drag on aggregate demand that would result from the unwinding of the fiscal stimulus enacted in the spring of 2020. The staff's projection continued to anticipate that widespread vaccination would allow for an easing in social distancing in 2021. With the boost to growth from the reduction in social distancing assumed to be largely completed by the end of 2021, GDP growth was expected to step down over the remainder of the medium term. Even so, the staff continued to project that real GDP growth would outpace that of potential over this period, leading to a considerable further decline in the unemployment rate. The 12‑month changes in total and core PCE prices in coming months were projected to briefly move above 2 percent in the second quarter of 2021 as the unusually low observations from the spring of 2020 drop out of the 12-month calculation. Following these swings, inflation was expected to finish the year at just below 2 percent. Thereafter, inflation was projected to gradually edge up to 2 percent by the end of the medium term as labor and product markets tightened. With monetary policy assumed to remain accommodative, inflation was projected to moderately overshoot 2 percent for some time in the years beyond 2023. The staff viewed the possibility that a larger-than-anticipated fiscal package would be enacted in coming months as a modest upside risk to the baseline economic outlook. However, the further rise in COVID‑19 cases in the United States, coupled with developments such as the emergence of more-contagious strains of the virus in the United States and elsewhere, led the staff to continue to judge that the risks to the baseline projection were skewed to the downside and that the uncertainty around the forecast was elevated. Participants' Views on Current Conditions and the Economic Outlook Participants noted that the COVID-19 pandemic was causing tremendous human and economic hardship across the United States and around the world. The pace of the recovery in economic activity and employment had moderated in recent months, with weakness concentrated in the sectors of the economy most adversely affected by the resurgence of the virus and by greater social distancing. Weaker demand and earlier declines in oil prices were holding down consumer price inflation. Overall financial conditions remained accommodative, in part reflecting the Federal Reserve's actions to support the economy and the flow of credit to U.S. households and businesses. Participants agreed that the path of the economy would depend significantly on the course of the virus, including progress on vaccinations, and that the ongoing public health crisis would continue to weigh on economic activity, employment, and inflation and posed considerable risks to the economic outlook. Participants observed that the resurgence in COVID-19 infections and associated social-distancing measures were restraining activity in some sectors, particularly in industries such as travel and leisure and hospitality. Most participants expected that the stimulus provided by the passage of the CAA in December, the likelihood of additional fiscal support, and anticipated continued progress in vaccinations would lead to a sizable boost in economic activity. Even so, participants noted that economic activity and employment were currently well below levels consistent with achieving maximum employment. Participants commented on improved prospects for household spending over the course of the year, in part reflecting fiscal support. They saw progress on vaccinations as essential for supporting further gains in aggregate consumer spending and for the economic recovery more generally. In commenting on recent data for household spending, most participants discussed the composition of expenditures, with strong spending on many goods, especially durables, and weakness in spending on some services, especially in travel and in leisure and hospitality. The relative strength in consumer spending on goods was supported by fiscal programs such as federal stimulus payments and expanded unemployment benefits as well as by accommodative monetary policy. The weakness in services spending was largely attributed to the pandemic and associated social-distancing measures, which limited spending on services that depend heavily on in-person contact. Increased government transfers to households, combined with reduced outlays on some services, had contributed to a historically large increase in aggregate household savings last year. Participants also observed that residential investment and home sales remained robust; low interest rates were viewed as an important factor supporting the strength in housing activity. Most participants noted that the economic downturn had not fallen equally on all Americans and that those least able to shoulder the burden—in particular, lower-income and Black and Hispanic households—had been the hardest hit by the pandemic. Many participants stressed that sustained support from fiscal policy would help address the hardships faced by these groups and that monetary policy could also help by promoting the economy's return to maximum employment and price stability. In their remarks on the business sector, participants commented that business equipment investment had continued to show strength while nonresidential construction remained weak. Participants also discussed the recent strong performance of the manufacturing sector. Many discussed supply chain issues in manufacturing, including those associated with acquiring material inputs and pandemic-related worker shortages and absenteeism. Business contacts reported that firms in goods-producing industries, particularly larger firms and those in the durable goods or housing sectors, were adapting to the pandemic; in contrast, smaller firms and those in industries most adversely affected by the pandemic were finding it more difficult to adapt. Many participants stated that their business contacts were optimistic that continued progress on vaccinations, together with further fiscal support, would result in more improvement in overall business conditions. Several participants noted the increase in agricultural crop prices over 2020 and the associated improvement in farm revenues. As with overall economic activity, the pace of improvement in the labor market had slowed in recent months. Payroll employment fell in December, as continued job gains in many industries were outweighed by significant layoffs in industries where the resurgence of the virus had weighed heavily on activity. While labor market conditions had improved significantly, on balance, since the spring, some participants noted that if the sizable number of workers who reported having left the labor force since the beginning of the pandemic were to be counted as unemployed, the unemployment rate would be substantially higher. Participants judged that the current low level of labor force participation likely reflected a number of factors, including health concerns and additional childcare responsibilities. Over the medium term, participants expected strong growth in employment, driven by continued progress on vaccinations and an associated rebound of economic activity and of consumer and business confidence, as well as accommodative fiscal and monetary policy. However, participants observed that the economy was far from achieving the Committee's broad-based and inclusive goal of maximum employment and that even with a brisk pace of improvement in the labor market, achieving this goal would take some time. In their comments about inflation, participants noted that headline PCE price inflation in December, measured on a 12-month basis, was poised to come in well below the Committee's 2 percent longer-term objective. In the relatively near term, a number of participants suggested that there could be increases in the prices of some goods whose production has been subject to supply chain constraints, or soon could be; others anticipated that a possibly abrupt return to normal levels of activity could result in one-time increases in certain prices. Many participants stressed the importance of distinguishing between such one-time changes in relative prices and changes in the underlying trend for inflation, noting that changes in relative prices could temporarily raise measured inflation but would be unlikely to have a lasting effect. Some participants further observed that 12-month PCE inflation was likely to move somewhat above 2 percent for a brief period in the spring as the unusually low monthly observations from last spring roll out of the 12-month calculation. Outside of such near-term fluctuations, participants generally anticipated that inflation would move up along a trajectory consistent with achieving the Committee's objectives over time, supported by stronger economic activity, widespread vaccinations and the associated reduction in social distancing, and accommodative fiscal and monetary policy. Some participants pointed to the continued increase in market-based measures of inflation compensation from the very low levels recorded in the spring as consistent with the view that inflation was likely to move up gradually over time; others noted that survey-based measures were little changed, on net, over the year as a whole. Participants noted that overall financial conditions remained highly accommodative, in part reflecting investors' optimism about the economic outlook along with the accommodative stance of monetary policy and recent and expected future fiscal policy measures. However, a few participants remarked that credit conditions were relatively tight for borrowers with low credit scores and for some small and medium-sized businesses that rely on bank lending rather than capital markets to meet their financing needs. While generally acknowledging that the medium-term outlook for real GDP growth and employment had improved, participants continued to see the uncertainty surrounding that outlook as elevated. Participants agreed that the path of the economy depended significantly on the course of the virus and progress on vaccinations. Many participants remarked that the pandemic continued to pose considerable risks to the economic outlook, including risks associated with new virus strains, potential public resistance to vaccination, and potential difficulties in the production and distribution of vaccines. With regard to upside risks, some participants pointed to the possibility that fiscal policy could turn out to be more expansionary than anticipated, that households could display greater willingness to spend out of accumulated savings than expected, or that widespread vaccinations and easing of social distancing could result in a more rapid boost to spending and employment than anticipated. Participants generally viewed the risks to the outlook for inflation as having become more balanced than was the case over most of 2020, although most still viewed the risks as weighted to the downside. As an upside risk to inflation, several participants noted the potential for pandemic-related supply constraints to affect price inflation somewhat more than anticipated or for price increases among industries most adversely affected by the pandemic to be more pronounced than projected. A number of participants commented on issues related to financial stability. Several participants noted areas of strength. For example, the banking system had shown considerable resilience since the onset of the pandemic. Banks' capital positions had generally remained solid, and earnings were strong. In addition, results from the most recent stress tests indicated that the largest banks could withstand very stressed economic conditions. That said, a few participants stated that it would be important to stay vigilant to ensure that the banking system remained strong and resilient. In addition, several participants noted that the pandemic had highlighted structural vulnerabilities in other parts of the financial system. These included run-prone investment funds in short-term funding and credit markets as well as fragilities in Treasury market functioning; stresses stemming from these vulnerabilities had required substantial intervention by the Federal Reserve in the turbulent market conditions at the onset of the pandemic. A couple of participants commented that it would be important for the appropriate regulatory bodies to address these financial stability vulnerabilities. Regarding asset valuations, some participants commented that equity valuations had risen further, that initial public offering activity was elevated, or that valuations might have been affected by retail investors trading through electronic platforms. In addition, risk spreads on corporate bonds and loans were generally low, even with corporate indebtedness having risen to high levels. A few participants noted that some CRE in sectors that had been most directly affected by the pandemic—such as those involving retail establishments and hotels—faced the prospect of falling prices and increased stress. In their consideration of monetary policy at this meeting, participants reaffirmed the Federal Reserve's commitment to using its full range of tools to support the U.S. economy during this challenging time, thereby promoting the Committee's statutory goals of maximum employment and price stability. Participants agreed that the path of the economy would depend significantly on the course of the virus, including progress on vaccinations, and that the ongoing public health crisis had continued to weigh on economic activity, employment, and inflation. Participants noted that as the pandemic had worsened across the country in recent months, the pace of the recovery had moderated, with weakness concentrated in the sectors most adversely affected by the pandemic. In contrast, participants remarked that the prospect of an effective vaccine program, the recently enacted fiscal support, and the potential for additional fiscal actions had led them to judge that the medium-term outlook had improved. That said, participants agreed that the economy remained far from the Committee's longer-run goals and that the path ahead remained highly uncertain, with the pandemic continuing to pose considerable risks to the outlook. In their discussion of the outlook for monetary policy, participants judged that maintaining a highly accommodative stance of policy was essential to foster further economic recovery and to achieve an average inflation rate of 2 percent over time. Participants noted that economic conditions were currently far from the Committee's longer-run goals and that the stance for policy would need to remain accommodative until those goals were achieved. Consequently, all participants supported maintaining the Committee's current settings and outcome-based guidance for the federal funds rate and the pace of asset purchases. Participants noted that the Committee's current guidance was well suited to the current environment because it describes how policy would respond based on the path of the economy. For example, if progress toward the Committee's goals proved slower than anticipated, the outcome-based guidance would convey the Committee's intention to respond by increasing monetary policy accommodation through maintaining the current level of the target range of the federal funds rate for longer and raising the expected path of the Federal Reserve's balance sheet. In addition, participants noted that the Committee's current outcome-based guidance for both the federal funds rate and balance sheet appeared to be well understood by the public. In that context, participants emphasized that it was important to abstract from temporary factors affecting inflation—such as low past levels of prices dropping out of measures of annual price changes or relative price increases in some sectors brought about by supply constraints or disruptions—in judging whether inflation was on track to moderately exceed 2 percent for some time. Participants noted that the increase in the Federal Reserve's balance sheet since last March had materially eased financial conditions and was providing substantial support to the economy. The Committee's guidance for asset purchases indicated that asset purchases would continue at least at the current pace until substantial further progress toward its employment and inflation goals had been achieved. With the economy still far from those goals, participants judged that it was likely to take some time for substantial further progress to be achieved. Various participants noted the importance of the Committee clearly communicating its assessment of progress toward its longer-run goals well in advance of the time when it could be judged substantial enough to warrant a change in the pace of purchases. Committee Policy Action In their discussion of monetary policy for this meeting, members agreed that the COVID-19 pandemic was causing tremendous human and economic hardship across the United States and around the world. They noted that the pace of recovery in economic activity and employment had moderated in recent months, with weakness concentrated in sectors most adversely affected by the pandemic. Weaker demand and earlier declines in oil prices had been holding down consumer price inflation. Overall financial conditions remained accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses. Members also stated that the path of the economy would depend significantly on the course of the virus, including progress on vaccinations. In addition, members agreed that the ongoing public health crisis had continued to weigh on economic activity, employment, and inflation and was posing considerable risks to the economic outlook. Members agreed that the pandemic continued to pose considerable risks to the outlook. Nonetheless, in light of the expected progress on vaccinations and the change in the outlook for fiscal policy, the medium-term prospects for the economy had improved enough that members decided that the reference in previous post-meeting statements to risks to the economic outlook over the medium term was no longer warranted. Members agreed that the Federal Reserve was committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum-employment and price-stability goals. All members reaffirmed that, in accordance with the Committee's goals to achieve maximum employment and inflation at the rate of 2 percent over the longer run and with inflation running persistently below this longer-run goal, they would aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent. Members expected to maintain an accommodative stance of monetary policy until those outcomes were achieved. All members agreed to maintain the target range for the federal funds rate at 0 to 1/4 percent, and they expected that it would be appropriate to maintain this target range until labor market conditions had reached levels consistent with the Committee's assessments of maximum employment and inflation had risen to 2 percent and was on track to moderately exceed 2 percent for some time. In addition, members agreed that it would be appropriate for the Federal Reserve to continue to increase its holdings of Treasury securities by at least $80 billion per month and agency mortgage-backed securities by at least $40 billion per month until substantial further progress had been made toward the Committee's maximum-employment and price-stability goals. They judged that these asset purchases would help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses. Members agreed that, in assessing the appropriate stance of monetary policy, they would continue to monitor the implications of incoming information for the economic outlook and that they would be prepared to adjust the stance of monetary policy as appropriate in the event that risks emerged that could impede the attainment of the Committee's goals. Members also agreed that, in assessing the appropriate stance of monetary policy, they would take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and 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 instructed otherwise, to execute transactions in the SOMA in accordance with the following domestic policy directive, for release at 2:00 p.m.: "Effective January 28, 2021, 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 0 to 1/4 percent. Increase the System Open Market Account holdings of Treasury securities by $80 billion per month and of agency mortgage-backed securities (MBS) by $40 billion per month. Increase holdings of Treasury securities and agency MBS by additional amounts and purchase agency commercial mortgage-backed securities (CMBS) as needed to sustain smooth functioning of markets for these securities. Conduct repurchase agreement operations to support effective policy implementation and the smooth functioning of short-term U.S. dollar funding markets. Conduct overnight reverse repurchase agreement operations at an offering rate of 0.00 percent and with a per-counterparty limit of $30 billion per day; the per-counterparty limit can be temporarily increased at the discretion of the Chair. Roll over at auction all principal payments from the Federal Reserve's holdings of Treasury securities and reinvest all principal payments from the Federal Reserve's holdings of agency debt and agency MBS in agency MBS. Allow modest deviations from stated amounts for purchases and reinvestments, if needed for operational reasons. Engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions." The vote also encompassed approval of the statement below for release at 2:00 p.m.: "The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals. The COVID-19 pandemic is causing tremendous human and economic hardship across the United States and around the world. The pace of the recovery in economic activity and employment has moderated in recent months, with weakness concentrated in the sectors most adversely affected by the pandemic. Weaker demand and earlier declines in oil prices have been holding down consumer price inflation. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses. The path of the economy will depend significantly on the course of the virus, including progress on vaccinations. The ongoing public health crisis continues to weigh on economic activity, employment, and inflation, and poses considerable risks to the economic outlook. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved. The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee's assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. In addition, the Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage-backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee's maximum employment and price stability goals. These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments." Voting for this action: Jerome H. Powell, John C. Williams, Thomas I. Barkin, Raphael W. Bostic, Michelle W. Bowman, Lael Brainard, Richard H. Clarida, Mary C. Daly, Charles L. Evans, Randal K. Quarles, and Christopher J. Waller. 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 at 0.10 percent. The Board of Governors also voted unanimously to approve establishment of the primary credit rate at the existing level of 0.25 percent, effective January 28, 2021. It was agreed that the next meeting of the Committee would be held on Tuesday–Wednesday, March 16–17, 2021. The meeting adjourned at 10:25 a.m. on January 27, 2021. Notation Vote By notation vote completed on January 5, 2021, the Committee unanimously approved the minutes of the Committee meeting held on December 15–16, 2020. _______________________ 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. Committee organizational documents are available at www.federalreserve.gov/monetarypolicy/rules_authorizations.htm. 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

2021-01-27

Statement

The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals. The COVID-19 pandemic is causing tremendous human and economic hardship across the United States and around the world. The pace of the recovery in economic activity and employment has moderated in recent months, with weakness concentrated in the sectors most adversely affected by the pandemic. Weaker demand and earlier declines in oil prices have been holding down consumer price inflation. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses. The path of the economy will depend significantly on the course of the virus, including progress on vaccinations. The ongoing public health crisis continues to weigh on economic activity, employment, and inflation, and poses considerable risks to the economic outlook. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer‑term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved. The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee's assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. In addition, the Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage‑backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee's maximum employment and price stability goals. These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments. Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Thomas I. Barkin; Raphael W. Bostic; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Mary C. Daly; Charles L. Evans; Randal K. Quarles; and Christopher J. Waller. Implementation Note issued January 27, 2021

2020-12-16

Statement

The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals. The COVID-19 pandemic is causing tremendous human and economic hardship across the United States and around the world. Economic activity and employment have continued to recover but remain well below their levels at the beginning of the year. Weaker demand and earlier declines in oil prices have been holding down consumer price inflation. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses. The path of the economy will depend significantly on the course of the virus. The ongoing public health crisis will continue to weigh on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved. The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee's assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. In addition, the Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage-backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee's maximum employment and price stability goals. These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments. Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Patrick Harker; Robert S. Kaplan; Neel Kashkari; Loretta J. Mester; and Randal K. Quarles. Implementation Note issued December 16, 2020

2021-01-06

Minute

Minutes of the Federal Open Market Committee December 15-16, 2020 A joint meeting of the Federal Open Market Committee and the Board of Governors was held by videoconference on Tuesday, December 15, 2020, at 1:00 p.m. and continued on Wednesday, December 16, 2020, at 9:00 a.m.1 PRESENT: Jerome H. Powell, Chair John C. Williams, Vice Chair Michelle W. Bowman Lael Brainard Richard H. Clarida Patrick Harker Robert S. Kaplan Neel Kashkari Loretta J. Mester Randal K. Quarles Thomas I. Barkin, Raphael W. Bostic, Mary C. Daly, Charles L. Evans, and Helen E. Mucciolo,2 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 Michelle A. Smith, Assistant Secretary Mark E. Van Der Weide, General Counsel Michael Held, Deputy General Counsel Trevor A. Reeve, Economist Stacey Tevlin, Economist Beth Anne Wilson, Economist Shaghil Ahmed, Michael Dotsey, Rochelle M. Edge, Marc Giannoni, William Wascher, and Mark L.J. Wright, Associate Economists Lorie K. Logan, Manager, System Open Market Account Ann E. Misback,3 Secretary, Office of the Secretary, Board of Governors Matthew J. Eichner,4 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 Sally Davies and Brian M. Doyle, Deputy Directors, Division of International Finance, Board of Governors; Michael T. Kiley, Deputy Director, Division of Financial Stability, Board of Governors Jon Faust, Senior Special Adviser to the Chair, Division of Board Members, Board of Governors Joshua Gallin, Special Adviser to the Chair, Division of Board Members, Board of Governors William F. Bassett, Antulio N. Bomfim, Wendy E. Dunn, Burcu Duygan-Bump, Kurt F. Lewis, Ellen E. Meade, and Chiara Scotti, Special Advisers to the Board, Division of Board Members, Board of Governors Linda Robertson, Assistant to the Board, Division of Board Members, Board of Governors Eric M. Engen and John J. Stevens, Senior Associate Directors, Division of Research and Statistics, Board of Governors Jane E. Ihrig, Don H. Kim, and Edward Nelson, Senior Advisers, Division of Monetary Affairs, Board of Governors; Brett Berger,4 Senior Adviser, Division of International Finance, Board of Governors Elizabeth K. Kiser, Associate Director, Division of Research and Statistics, Board of Governors Eric C. Engstrom, Deputy Associate Director, Division of Monetary Affairs, Board of Governors; Norman J. Morin, Karen M. Pence, and John M. Roberts, Deputy Associate Directors, Division of Research and Statistics, Board of Governors; Jeffrey D. Walker,4 Deputy Associate Director, Division of Reserve Bank Operations and Payment Systems, Board of Governors Brian J. Bonis and Dan Li, Assistant Directors, Division of Monetary Affairs, Board of Governors Penelope A. Beattie,3 Section Chief, Office of the Secretary, Board of Governors; Lubomir Petrasek, Section Chief, Division of Monetary Affairs, Board of Governors David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors Heather A. Wiggins,4 Group Manager, Division of Monetary Affairs, Board of Governors Michele Cavallo and Erin E. Ferris, Principal Economists, Division of Monetary Affairs, Board of Governors Kyungmin Kim4 and Arsenios Skaperdas,4 Senior Economists, Division of Monetary Affairs, Board of Governors Courtney Demartini,4 Lead Financial Institution and Policy Analyst, Division of Monetary Affairs, Board of Governors Randall A. Williams, Lead Information Manager, Division of Monetary Affairs, Board of Governors Becky C. Bareford, First Vice President, Federal Reserve Bank of Richmond Kartik B. Athreya, Joseph W. Gruber, Sylvain Leduc, Anna Paulson, Daleep Singh, and Christopher J. Waller, Executive Vice Presidents, Federal Reserve Banks of Richmond, Kansas City, San Francisco, Chicago, New York, and St. Louis, respectively Todd E. Clark, Senior Vice President, Federal Reserve Bank of Cleveland Jonathan P. McCarthy, Matthew Nemeth,4 Giovanni Olivei, Rania Perry,4 Matthew D. Raskin,4 Jonathan L. Willis, and Patricia Zobel, Vice Presidents, Federal Reserve Banks of New York, New York, Boston, New York, New York, Atlanta, and New York, respectively Robert Lerman,4 Assistant Vice President, Federal Reserve Bank of New York Lisa Stowe,4 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) turned first to a discussion of financial market developments. Market sentiment improved over the period, as reduced uncertainty related to the U.S. election and positive vaccine news outweighed the anticipated effect of the ongoing surge in the pandemic. U.S. equity price indexes reached all-time highs, with the largest gains registered in sectors that have underperformed during the pandemic. Corporate credit spreads tightened, most notably among lower-rated firms and in sectors most affected by social distancing measures resulting from the pandemic. Longer-term Treasury yields rose modestly, driven by increases in inflation compensation. The positive vaccine news also supported risk sentiment abroad, leading many global equity price indexes to advance and the U.S. dollar to depreciate further. Market participants had highlighted that uncertainty nevertheless remained high and had pointed to several prominent risks to the economic outlook. These risks included the possibility that the vaccine rollout might not proceed as smoothly as anticipated, the potential for adverse developments in negotiations concerning the United Kingdom's withdrawal from the European Union, and the potential for deterioration in already strained sectors, such as those involving small businesses and certain segments of commercial real estate (CRE). With regard to market expectations concerning the policy outlook, responses to the Open Market Desk surveys of dealers and market participants suggested that views on the most likely timing of the next increase in the target range for the federal funds rate coalesced further around the first half of 2024. Survey responses continued to indicate median expectations of headline personal consumption expenditures (PCE) inflation above 2 percent and an unemployment rate of around 4 percent at the time of the first increase in the target range for the federal funds rate. A majority of Desk survey respondents indicated that they expected the Committee to revise its guidance on asset purchases at the current meeting, with many noting that they anticipated the announcement of some form of qualitative, outcome-based guidance tied to inflation, the unemployment rate, or both. Median Desk survey responses continued to suggest expectations that purchases would begin to slow in the first half of 2022 and cease altogether in 2023. The size of the Federal Reserve's balance sheet increased to around $7.3 trillion over the intermeeting period, driven by growth in securities holdings. The Desk conducted purchases to increase holdings of Treasury securities and agency mortgage-backed securities (MBS) at the minimum pace directed by the FOMC, as markets for these securities continued to function smoothly. News that CARES Act (Coronavirus Aid, Relief, and Economic Security Act) funding would not be available to support new activity in section 13(3) facilities after the end of the year had only a modest effect on financial markets. New activity remained limited across most Federal Reserve funding operations and section 13(3) facilities, although the Municipal Liquidity Facility and the Main Street Lending Program saw growing usage over the period, with more take-up expected before their scheduled year-end termination. The manager discussed a proposal to extend the temporary U.S. dollar liquidity swap arrangements as well as the temporary FIMA (Foreign and International Monetary Authorities) Repo Facility through September 2021. The path to a complete economic recovery remained uncertain across the globe, particularly for many emerging market countries, underscoring the need for backstops that could address potential market stresses and prevent spillovers from reemerging. Keeping these arrangements in place would contribute to sustaining improvements in global dollar funding markets and to the continued smooth functioning of the U.S. Treasury securities market. Under the proposal, provided that the Committee had no objections, the Chair would approve the extension of the temporary liquidity swap lines following the meeting. The extensions of the swap and FIMA repurchase agreement (repo) arrangements would be announced following this meeting. Market participants generally anticipated calm money market conditions through year-end, and the premiums paid for dollar funding crossing year-end generally were below those observed in recent years. Money market futures also indicated expectations of short-term rates moving down modestly in coming months, in light of anticipated further increases in aggregate reserve balances and a moderation in Treasury bill supply. The manager anticipated that administered rates and the overnight reverse repo program would be effective tools for maintaining control of overnight money market rates. By unanimous vote, the Committee voted to approve a resolution that extended through September 30, 2021, the expiration of a temporary repo facility for foreign and international monetary authorities (FIMA Repo Facility).5 Secretary's note: The Chair subsequently provided approval to the Desk, following the procedures in the Authorization for Foreign Currency Operations, to extend the expiration of the temporary U.S. dollar liquidity swap lines through September 30, 2021. 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 COVID-19 pandemic and the measures undertaken to contain its spread continued to affect economic activity in the United States and abroad. The information available at the time of the December 15–16 meeting suggested that U.S. real gross domestic product (GDP) was continuing to recover in the fourth quarter, but at a more moderate pace than its rapid third-quarter rate, and that the level of real GDP remained well below its level at the start of 2020. Labor market conditions improved further over October and November, although employment continued to be well below its level at the beginning of the year. Consumer price inflation through October—as measured by the 12‑month percentage change in the PCE price index—remained notably below the rates seen in early 2020. Total nonfarm payroll employment continued to increase solidly over October and November, though the rate of monthly job gains was more moderate than the substantial third‑quarter pace. Through November, payroll employment had regained somewhat more than half of the losses seen at the onset of the pandemic. The unemployment rate moved down further and stood at 6.7 percent in November. The unemployment rates for African Americans and Hispanics each declined but remained well above the national average. Both the labor force participation rate and the employment-to-population ratio in November were above their levels of two months earlier. The four-week moving average of initial claims for unemployment insurance was only slightly lower in early December than it had been in late October. Weekly estimates of private-sector payrolls constructed by Federal Reserve Board staff using data provided by the payroll processor ADP suggested that the four-week average of private employment gains in early December was lower than it was in mid-November. Both the 12‑month change in average hourly earnings for all employees through November and the four‑quarter change in total labor compensation per hour in the business sector through the third quarter continued to be dominated by changes in the composition of the workforce. The substantial employment losses over the past year were most significant among lower-wage workers—a situation that had led to outsized increases in these average measures of earnings and compensation that were not indicative of tight labor market conditions. Total PCE price inflation was 1.2 percent over the 12 months ending in October, and it continued to be held down by relatively weak aggregate demand and the declines in consumer energy prices seen earlier in 2020. Core PCE price inflation, which excludes changes in consumer energy prices and many consumer food prices, was 1.4 percent over the same period, while the trimmed mean measure of 12‑month PCE price inflation constructed by the Federal Reserve Bank of Dallas was 1.7 percent in October. In November, the 12-month change in the consumer price index (CPI) was 1.2 percent, while core CPI inflation was 1.6 percent over the same period. The latest readings on survey-based measures of longer-run inflation expectations edged up, though each remained within the range in which it has fluctuated in recent years; in November and early December, the University of Michigan Surveys of Consumers measure for the next 5 to 10 years was slightly above its level in October, while the 3‑year‑ahead measure produced by the Federal Reserve Bank of New York rose a bit in November. Real PCE rose strongly in October, though at a more moderate pace than in the third quarter. Real disposable personal income declined in October, reflecting a large reduction in government transfer payments, even though wage and salary income continued to climb. As a result, the personal saving rate moved lower, though it continued to be notably above its 2019 average. In November, the components of the nominal retail sales data used to estimate PCE, along with the rate of light motor vehicle sales, stepped down, possibly reflecting the effects on consumer spending of renewed social-distancing measures and concerns about the resurgent pandemic. Consumer sentiment, as measured by both the Michigan survey and the Conference Board, moved somewhat lower, on net, since October, although both indexes were still above their April troughs. Housing-sector activity advanced further, on balance, in October, supported in part by low interest rates. Starts and construction permits for single-family homes continued to rise, while starts of multi-family units moved sideways. Sales of existing homes increased solidly, though new home sales were roughly flat. Business fixed investment appeared to be expanding further, on net, in the fourth quarter following an outsized third-quarter increase. Nominal shipments of nondefense capital goods excluding aircraft rose strongly in October, and new orders for these capital goods continued to advance. By contrast, nominal spending on nonresidential structures outside of the drilling and mining sector declined further in October. The number of crude oil and natural gas rigs in operation—an indicator of business spending on structures in the drilling and mining sector—continued to move up somewhat through early December, although the number of rigs in operation was still subdued, reflecting the effect of low oil prices on drilling investment. Industrial production rose strongly over October and November, led by gains in manufacturing output, but production was still below its February pre-pandemic level. The pickup in the production of motor vehicles and related parts was particularly strong in November. Output in the mining sector—which includes crude oil and natural gas drilling and extraction—increased, on net, over October and November. Total real government purchases appeared to be declining moderately, on balance, in the fourth quarter. Federal defense spending continued to rise in October and November, although federal employment declined with the layoff of temporary census workers. State and local government payrolls decreased in October and November, and nominal state and local construction expenditures in October were somewhat below their third-quarter level. The nominal U.S. international trade deficit widened in October. Both imports and exports continued to rebound from their collapse in the first half of the year. Goods imports in October rose above their January level after several months of strong growth. Goods exports, however, had only recovered three-fourths of their decline since January despite brisk growth in agricultural exports. Services trade remained depressed, driven by the continued suspension of most international travel. After a strong rebound in the third quarter, foreign economic growth appeared to slow sharply in recent months. The resurgence of coronavirus infections in Europe and Canada prompted governments to reintroduce social-distancing restrictions, leading to a fall in measures of mobility and services activity. Even so, with restrictions less severe and more targeted than in the spring, the hit to economic activity looked to be more limited. Economic growth appeared to hold up better in several emerging Asian economies. In these economies, effective virus control was supporting domestic demand, while strong external demand boosted exports. Inflationary pressures remained subdued in most foreign economies amid substantial economic slack. Staff Review of the Financial Situation Financial market sentiment improved over the intermeeting period, boosted by news of forthcoming COVID-19 vaccines and reduced uncertainty following the U.S. election that outweighed concerns regarding the continued rise in COVID-19 cases and the potential effects of ensuing restrictions. Corporate bond spreads narrowed, and major global equity price indexes rose on net. The prospect of additional fiscal stimulus likely contributed to a steeper U.S. Treasury yield curve, increased inflation compensation, and broad dollar depreciation. Financing conditions for businesses able to access capital markets and households possessing high credit scores remained accommodative and eased a bit further in some sectors, but conditions for borrowers dependent on bank financing remained tight. Yields on 2-year nominal Treasury securities were little changed since the November FOMC meeting, while 10- and 30-year yields rose moderately. Market participants attributed the increases in longer-term yields primarily to greater optimism about the economic outlook, due to the forthcoming availability of effective vaccines and renewed fiscal stimulus negotiations. Near-dated option-implied volatility on the 10-year Treasury futures contract declined to historic lows. The rise in longer-term Treasury yields was concentrated in inflation compensation. The 5-year and 5-to-10-year measures of inflation compensation based on Treasury Inflation Protected Securities rose above their pre-pandemic levels. The expected path of the federal funds rate, based on a straight read of overnight index swap rates, remained close to the effective lower bound through mid-2023. Survey-based measures indicated that market expectations regarding the federal funds rate target range did not show a tightening until 2024. Broad stock price indexes increased over the intermeeting period, led by steep stock price gains in cyclical sectors and buoyed by the prospect of successful vaccines and lower post‑election uncertainty. One-month S&P 500 option-implied volatility—the VIX—declined, reversing a pre-election increase. Consistent with the optimism driving stock prices, spreads of corporate bond yields over comparable-maturity Treasury yields narrowed markedly across the credit spectrum, most notably for debt securities of the lowest credit quality firms. Conditions in short-term funding markets remained stable over the intermeeting period. Spreads on commercial paper (CP) and negotiable certificates of deposit across different tenors were little changed, on net, and remained around pre-pandemic levels despite continued outflows from prime money market funds (MMFs) and the coming year-end. CP issuance was robust over the intermeeting period across the different tenors. With the yields of prime MMFs approaching those of government MMFs, assets under management (AUM) of prime MMFs declined moderately, while AUM of government MMFs were little changed. Net yields of prime and government MMFs both remained near historically low levels. The intermeeting averages of the effective federal funds rate and the Secured Overnight Financing Rate remained unchanged from the previous intermeeting period averages, at 9 basis points and 8 basis points, respectively. Term and forward repo market quotes indicated muted year-end funding pressure amid ample liquidity conditions. The Federal Reserve maintained its pace of purchases of Treasury securities and agency MBS, and Federal Reserve repos outstanding remained at zero over the intermeeting period. Investor sentiment abroad improved over the intermeeting period, as favorable news on COVID-19 vaccines and the resolution of uncertainty regarding the U.S. election apparently outweighed concerns about another surge in COVID-19 cases and the resulting adoption of tighter social-distancing restrictions in many countries. On balance, prices of global risky assets increased notably, implied volatility dropped sharply, and the dollar depreciated against most currencies. Most advanced foreign economy sovereign yields were little changed, on net, as policymakers in several countries announced additional actions aimed at maintaining accommodative financial conditions. Financing conditions in capital markets continued to be broadly accommodative, supported by low interest rates and high equity valuations. With historically low corporate bond yields, gross issuance of both investment- and speculative-grade bonds remained solid in October. Much of the recent issuance was intended to refinance existing debt. Gross institutional leveraged loan issuance increased substantially in October for both new loans and refinancing. Seasoned equity offerings in October and November were similar to the typical volumes observed in previous years, though equity raised through initial public offerings moderated somewhat from the robust rate of issuance in September. Commercial and industrial (C&I) loans outstanding on banks' balance sheets contracted in October and November, reflecting the continued paydown of loan balances and the start of Paycheck Protection Program loan forgiveness activity. The credit quality of nonfinancial corporations continued to show signs of stabilization. Although the volume of nonfinancial corporate bond downgrades outpaced upgrades somewhat in October and November, nonfinancial corporate bond defaults continued to decline. The rate of leveraged loan defaults was largely unchanged in October, albeit at somewhat elevated levels. Market indicators of future default expectations for corporate bonds fell slightly but remained above their pre-pandemic levels. In the municipal bond market, financing conditions remained accommodative. Issuance of state and local government debt moderated in November after all-time high issuance in October, and market-based measures of state credit quality were little changed on net. Financing conditions for small businesses remained tight, although some indicators suggested that they might have improved a bit. Data provided by the Federal Reserve Small Business Lending Survey showed that standards for small businesses tightened, on net, over the third quarter, consistent with the most recent Senior Loan Officer Opinion Survey on Bank Lending Practices. Small business loan originations ticked up in October to a level near that seen in the same period last year. Short‑term delinquencies and defaults remained relatively elevated but significantly lower than the levels observed following the financial crisis. In light of the uncertain outlook, small business owners' assessments of the risk of permanent closures remained elevated in most sectors, according to the Census Small Business Pulse Survey. In the CRE market, financing conditions remained accommodative, on net, over the intermeeting period. Agency commercial mortgage-backed security (CMBS) spreads remained narrow amid strong issuance in October, while non-agency CMBS spreads ticked down. Triple-B-rated non-agency CMBS spreads came down substantially from their highs in the spring, although they remained elevated relative to pre-pandemic levels. Non-agency issuance picked up in October, nearing pre-pandemic levels. CRE bank loan growth in October and November remained weak, consistent with tightened bank lending standards. In the residential mortgage market, financing conditions remained highly accommodative for borrowers accessing government-backed loans. Mortgage rates remained near historic lows, supporting robust loan originations. Credit continued to flow to higher-score borrowers who met standard conforming loan criteria while remaining tight for lower-score borrowers and for nonstandard mortgage products. The credit quality of mortgages was little changed, as the fraction of mortgages in forbearance held fairly steady, and the rate of transition into mortgage delinquency remained at pre-pandemic levels. Financing conditions in consumer credit markets remained generally accommodative for borrowers with relatively strong credit. Credit card balances and average credit limits on existing accounts contracted, on net, for all types of borrowers. However, auto loan balances continued to increase for higher-quality borrowers, and loan rates remained well below pre-pandemic levels. Conditions in the asset-backed securities market remained stable over the intermeeting period. Staff Economic Outlook In the U.S. economic projection prepared by the staff for the December FOMC meeting, real GDP growth was revised up and the unemployment rate revised down for the fourth quarter relative to the November meeting forecast. These revisions reflected incoming data that were, on balance, better than expected, although the recent resurgence of the pandemic and increased social-distancing restrictions in many states and localities were expected to weigh on economic activity in the coming months. As a result, the staff expected that real GDP growth would temporarily weaken in the first quarter of 2021, and the slowing seen in some of the most recent high-frequency indicators of spending and employment appeared consistent with that forecast. The inflation forecast for the rest of 2020 was revised down slightly in response to incoming data, and inflation was projected to finish the year at a relatively subdued level, reflecting substantial margins of labor- and product-market slack in the economy and the large declines in consumer energy prices seen earlier in 2020. Primarily in response to the recent favorable news on the development of COVID-19 vaccines, the staff revised up its projection of real GDP growth for 2021 as a whole, as social-distancing measures were expected to ease more quickly than previously assumed. With monetary policy assumed to remain highly accommodative, the staff continued to project that real GDP growth over the medium term would be well above the rate of potential output growth, leading to a considerable further decline in the unemployment rate. The resulting take‑up of labor- and product-market slack was expected to lead to gradually increasing inflation, and, for some time in the years beyond 2023, inflation was projected to overshoot 2 percent by a moderate amount, as monetary policy remained accommodative. The staff observed that the uncertainty related to the future course of the pandemic, the measures to control it, and the associated economic effects remained elevated. In addition, the staff continued to judge the risks to the economic outlook as being tilted to the downside. The recent sharp resurgence in the pandemic suggested that the near-term risks had risen, while the recent favorable developments regarding vaccines pointed to some reduction in the downside risks over the medium term. Participants' Views on Current Conditions and the Economic Outlook In conjunction with this FOMC meeting, participants submitted their projections of the most likely outcomes for real GDP growth, the unemployment rate, and inflation for each year from 2020 through 2023 and over the longer run, based on their individual assessments of appropriate monetary policy, including the path of 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. A Summary of Economic Projections (SEP) was released to the public following the conclusion of the meeting. Participants noted that the COVID-19 pandemic was causing tremendous human and economic hardship across the United States and around the world. Economic activity and employment had continued to recover but remained well below their levels at the beginning of the year. Weaker demand and earlier declines in oil prices had been holding down consumer price inflation. Overall financial conditions remained accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses. Participants agreed that the path of the economy would depend on the course of the virus and that the ongoing public health crisis would continue to weigh on economic activity, employment, and inflation in the near term and posed considerable risks to the economic outlook over the medium term. Participants observed that the economy continued to show resilience in the face of the pandemic, though it was still far from having attained conditions consistent with the Committee's dual mandate. They noted that the economic recovery thus far had been stronger than anticipated—suggesting greater momentum in economic activity than had been previously thought—but viewed the more recent indicators as signaling that the pace of recovery had slowed. With the pandemic worsening across the country, the expansion was expected to slow even further in coming months. Nevertheless, the positive vaccine news received over the intermeeting period was viewed as favorable for the medium-term economic outlook. Participants noted that household spending on goods, especially durables, had been strong. Participants commented that the rebound in consumer spending was due, in part, to fiscal programs such as federal stimulus payments and expanded unemployment benefits. These measures had provided essential support to many households. The support to incomes provided by fiscal programs, combined with reduced spending by households on some services, had contributed to a historically large increase in aggregate household savings. Participants also observed that residential investment and home sales remained robust. Accommodative monetary policy was viewed as having provided support to interest rate sensitive expenditure categories, including residential investment and consumer durables spending. Participants regarded the positive news on vaccine development as further strengthening the medium-term outlook for household spending. However, participants saw increased challenges for the economy in the coming months, as the ongoing surge of COVID-19 cases and the related mandatory and voluntary measures prompted greater social distancing and damped spending, especially on services requiring in-person contact. Several participants pointed out that readings on high-frequency economic indicators, such as individual mobility indexes and online restaurant reservation data, might already be registering the effects of the recent rise in virus cases. Various participants noted that low-income households were particularly hard hit by the effects of the resurgent virus, and that—with the looming expiration of the expanded unemployment benefits, eviction moratoria, and loan forbearance programs—their situations could deteriorate significantly if additional relief and support did not materialize. With respect to the business sector, participants observed that business equipment investment had picked up further, with strong readings registered on new orders and shipments. A couple of participants remarked that the very low levels of inventories would likely be a factor supporting increases in production as demand continued to recover. Participants noted that the economic recovery had been uneven across firms and industries. Though many business contacts, particularly those in the durable goods or housing sectors, reported progress in adapting to the pandemic and improved business practices, others—especially those closely linked to the leisure, travel, and hospitality industries—were still struggling, and their problems were intensifying because of the resurgence of the virus. Furthermore, while larger firms were generally seen as recovering reasonably well, conditions remained worrisome for small businesses. A number of participants noted that many small businesses were in especially vulnerable positions and that further fiscal policy support would help such businesses weather the ongoing surge in the pandemic, especially over the coming months. Looking further ahead, participants observed that continuing positive developments on the vaccine front could further support business investment by helping reduce stresses in pandemic-sensitive industries and by boosting confidence. Participants remarked that labor market conditions generally had continued to improve, but they were still a long way from those consistent with the Committee's maximum employment goal. Although the pace of employment gains had moderated in recent months, the overall recovery in employment thus far had been faster than anticipated, with a little more than half of the 22 million jobs lost over March and April having been regained. The unemployment rate had declined further, although several participants underlined the fact that the labor force participation rate remained below its pre-pandemic level—likely reflecting, in part, health concerns and additional childcare responsibilities associated with online schooling. Participants assessed that the ongoing surge in COVID-19 infections would be particularly challenging for the labor market in coming months, but they indicated that they expected employment to continue to recover over the medium term. Participants stressed that the burdens of the economic downturn had fallen unequally on different groups; in particular, high rates of job losses had been especially prevalent among lower-wage workers and among African Americans and Hispanics. Some participants expressed the concern that the longer the pandemic continued, the more lasting damage to the labor market there could be. They noted that the number of unemployed workers who had been permanently laid off had increased notably in recent months and that those workers historically often required a longer time to find a new job than those temporarily laid off. In light of these considerations, several participants assessed that improvements in the labor market were lagging that of economic activity, and they indicated that they had not revised their projections of labor market variables to the same extent as their revision of the outlook for economic activity. In their comments about inflation, participants noted that increases in consumer prices had been soft of late, as prices of products in those categories most affected by social distancing—such as hotel accommodations and air travel—continued to be depressed and increases in rents remained low. These patterns were expected to continue in the near term as pandemic concerns intensified over the winter. However, participants generally saw these downward pressures on inflation starting to abate next year, with widespread distribution of vaccines reducing social-distancing concerns and spurring economic activity. A couple of participants suggested that, as a result of ongoing technology-enabled disruption to business models and practices or lasting pandemic-induced restraint on firms' pricing power, downward pressure on inflation could persist. Several participants noted a pickup in market-based measures of inflation compensation. Participants expected that, with continued monetary policy support, inflation would rise over time. In their SEP submissions, seven participants—five more than in the September SEP—expected overall inflation to be above the Committee's 2 percent longer-run objective in 2023. Participants noted that overall financial conditions were accommodative, in part reflecting policy measures to support the economy and the flow of credit to households and businesses. However, participants underlined important differences in credit availability across borrowers. Financing conditions eased further for large corporations that were able to access capital markets, as equity prices rose and corporate credit spreads continued to narrow, but smaller firms and some households reliant on bank lending continued to face tight lending standards. Participants noted that the financing conditions for small businesses were especially strained, with a few participants pointing out that a sizable fraction of small businesses had permanently closed or were in the process of transitioning to closure. A couple of participants observed that aggregate banking data had not indicated a significant increase in loan delinquencies for C&I loans thus far, though this development could be partly due to the CARES Act provisions that provided relief to many troubled borrowers or to the fact that many small businesses had gone out of business without declaring bankruptcy or defaulting on loans. Some participants noted the important role played by the various section 13(3) facilities implemented in 2020 in serving as temporary backstops to key credit markets and in helping to restore and maintain the flow of credit to households, businesses, and communities. These participants also mentioned the announcement that CARES Act funding to support new activity in many of these facilities would not be available after December 31, and a number noted that they saw downside risks associated with this development. Participants continued to see the uncertainty surrounding the economic outlook as elevated, with the path of the economy highly dependent on the course of the virus. The positive vaccine news was seen as reducing downside risks over the medium term, and a number of participants saw risks to economic activity as more balanced than earlier. Still, participants saw significant uncertainties regarding how quickly the deployment of vaccines would proceed as well as how different members of the public would respond to the availability of vaccines. Participants cited several downside risks that could threaten the economic recovery. These risks included the possibility of significant additional fiscal policy support not materializing in a timely manner, the potential for further adverse pandemic developments—which could lead to more-stringent restrictions, more-severe business failures, and more permanent job losses—and the chance that trade negotiations between the United Kingdom and the European Union would not be concluded successfully before the December 31 deadline. As upside risks, participants mentioned the prospect that the release of pent-up demand, spurred by wider-scale vaccinations and easing of social distancing, could boost spending and bring individuals back to the labor force more quickly than currently expected as well as the possibility that fiscal policy developments could see measures that were larger than expected in amount or economic impact. Regarding inflation, participants generally viewed the risks as having become more balanced than they were earlier in the year, though most still viewed the risks as being weighted to the downside. As an upside risk to inflation, a few participants noted the potential for a stronger-than-expected recovery, coupled with the possible emergence of pandemic-related supply constraints, to boost inflation. In their consideration of monetary policy at this meeting, participants reaffirmed the Federal Reserve's commitment to using its full range of tools to support the U.S. economy during this challenging time, thereby promoting the Committee's statutory goals of maximum employment and price stability. Participants agreed that the path of the economy would depend significantly on the course of the virus and that the ongoing public health crisis would continue to weigh on economic activity, employment, and inflation in the near term. Participants noted that, with the pandemic worsening across the country, the expansion would likely slow in coming months. In contrast, for the medium term, participants commented that positive vaccine news had improved the economic outlook. That said, participants agreed that the path ahead remained highly uncertain and that the economy remained far from the Committee's longer-run goals. In light of this assessment, all participants judged that maintaining an accommodative stance of monetary policy was essential to foster economic recovery and to achieve an average inflation rate of 2 percent over time. All participants supported enhancing the Committee's guidance on asset purchases at this meeting and, in particular, adopting qualitative, outcome-based guidance indicating that increases in asset holdings would continue, with purchases of Treasury securities of at least $80 billion per month and of agency MBS of at least $40 billion per month, until substantial further progress has been made toward reaching the Committee's maximum employment and price stability goals. In their discussions of this change, participants noted that the new guidance regarding balance sheet policy brought the statement's references to purchases into better alignment with the Committee's outcome-based guidance on the federal funds rate, offered more clarity about the role played by the asset purchase program in providing accommodation to meet the Committee's economic goals, and underscored the responsiveness of balance sheet policy to unanticipated economic developments. A few participants stressed that all of the Committee's policy tools were now well positioned to respond to the evolution of the economy. For example, if progress toward the Committee's goals proved slower than anticipated, the new guidance relayed the Committee's intention to respond by increasing monetary policy accommodation through maintaining the current level of the target range of the federal funds rate for longer and raising the expected path of the Federal Reserve's balance sheet. A couple of participants remarked that, against this background, it was important to convey to the public that the federal funds rate remained the Committee's primary policy tool. A number of participants discussed considerations related to determining the eventual attainment of "substantial further progress" toward reaching the Committee's maximum employment and price stability goals. Participants commented that this judgment would be broad, qualitative, and not based on specific numerical criteria or thresholds. Various participants noted the importance of the Committee clearly communicating its assessment of actual and expected progress toward its longer-run goals well in advance of the time when it could be judged substantial enough to warrant a change in the pace of purchases. Regarding the decisions on the pace and composition of the Committee's asset purchases, all participants judged that it would be appropriate to continue those purchases at least at the current pace, and nearly all favored maintaining the current composition of purchases, although a couple of participants indicated that they were open to weighting purchases of Treasury securities toward longer maturities. Participants generally judged that the asset purchase program as structured was providing very significant policy accommodation. Some participants noted that the Committee could consider future adjustments to its asset purchases—such as increasing the pace of securities purchases or weighting purchases of Treasury securities toward those that had longer remaining maturities—if such adjustments were deemed appropriate to support the attainment of the Committee's objectives. A few participants underlined the importance of continuing to evaluate the balance of costs and risks associated with asset purchases against the benefits arising from purchases. Participants shared their views on the appropriate evolution of asset purchases once substantial further progress had been made toward the Committee's maximum employment and price stability goals. A number of participants noted that, once such progress had been attained, a gradual tapering of purchases could begin and the process thereafter could generally follow a sequence similar to the one implemented during the large-scale purchase program in 2013 and 2014. Committee Policy Action In their discussion of monetary policy for this meeting, members agreed that the COVID-19 pandemic was causing tremendous human and economic hardship across the United States and around the world. They noted that economic activity and employment had continued to recover but remained well below their levels at the beginning of the year and that weaker demand and earlier declines in oil prices had been holding down consumer price inflation. Overall financial conditions remained accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses. Members agreed that the Federal Reserve was committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals. Members also stated that the path of the economy would depend significantly on the course of the virus. In addition, members agreed that the ongoing public health crisis would continue to weigh on economic activity, employment, and inflation in the near term and was posing considerable risks to the economic outlook over the medium term. All members reaffirmed that, in accordance with the Committee's goals to achieve maximum employment and inflation at the rate of 2 percent over the longer run and with inflation running persistently below this longer-run goal, they would aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent. Members expected to maintain an accommodative stance of monetary policy until those outcomes were achieved. All members agreed to maintain the target range for the federal funds rate at 0 to 1/4 percent, and they expected that it would be appropriate to maintain this target range until labor market conditions had reached levels consistent with the Committee's assessments of maximum employment and inflation had risen to 2 percent and was on track to moderately exceed 2 percent for some time. In addition, members agreed that it would be appropriate for the Federal Reserve to continue to increase its holdings of Treasury securities by at least $80 billion per month and agency MBS by at least $40 billion per month until substantial further progress had been made toward the Committee's maximum employment and price stability goals. They judged that these asset purchases would help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses. Members agreed that, in assessing the appropriate stance of monetary policy, they would continue to monitor the implications of incoming information for the economic outlook and that they would be prepared to adjust the stance of monetary policy as appropriate in the event that risks emerged that could impede the attainment of the Committee's goals. Members also agreed that, in assessing the appropriate stance of monetary policy, they would take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and 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 instructed otherwise, to execute transactions in the SOMA in accordance with the following domestic policy directive, for release at 2:00 p.m.: "Effective December 17, 2020, 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 0 to 1/4 percent. Increase the System Open Market Account holdings of Treasury securities by $80 billion per month and of agency mortgage-backed securities (MBS) by $40 billion per month. Increase holdings of Treasury securities and agency MBS by additional amounts and purchase agency commercial mortgage-backed securities (CMBS) as needed to sustain smooth functioning of markets for these securities. Conduct term and overnight repurchase agreement operations to support effective policy implementation and the smooth functioning of short-term U.S. dollar funding markets. Conduct overnight reverse repurchase agreement operations at an offering rate of 0.00 percent and with a per-counterparty limit of $30 billion per day; the per-counterparty limit can be temporarily increased at the discretion of the Chair. Roll over at auction all principal payments from the Federal Reserve's holdings of Treasury securities and reinvest all principal payments from the Federal Reserve's holdings of agency debt and agency MBS in agency MBS. Allow modest deviations from stated amounts for purchases and reinvestments, if needed for operational reasons. Engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions." The vote also encompassed approval of a statement for release.6 The following statement was released at 2:00 p.m.: "The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals. The COVID-19 pandemic is causing tremendous human and economic hardship across the United States and around the world. Economic activity and employment have continued to recover but remain well below their levels at the beginning of the year. Weaker demand and earlier declines in oil prices have been holding down consumer price inflation. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses. The path of the economy will depend significantly on the course of the virus. The ongoing public health crisis will continue to weigh on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved. The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee's assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. In addition, the Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage-backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee's maximum employment and price stability goals. These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments." Voting for this action: Jerome H. Powell, John C. Williams, Michelle W. Bowman, Lael Brainard, Richard H. Clarida, Patrick Harker, Robert S. Kaplan, Neel Kashkari, 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 at 0.10 percent. The Board of Governors also voted unanimously to approve establishment of the primary credit rate at the existing level of 0.25 percent, effective December 17, 2020. It was agreed that the next meeting of the Committee would be held on Tuesday–Wednesday, January 26–27, 2021. The meeting adjourned at 10:05 a.m. on December 16, 2020. Notation Vote By notation vote completed on November 24, 2020, the Committee unanimously approved the minutes of the Committee meeting held on November 4–5, 2020. _______________________ 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. Elected as an Alternate by the Federal Reserve Bank of New York, effective November 11, 2020. Return to text 3. Attended Tuesday's session only. Return to text 4. Attended through the discussion of developments in financial markets and open market operations. Return to text 5. The approved FIMA Desk Resolution, which updates the July 2020 resolution with a new expiration date, is available along with other Committee organizational documents at https://www.federalreserve.gov/monetarypolicy/rules_authorizations.htm. Return to text 6. The statement approved at the meeting included a drafting error. By notation vote shortly after the meeting concluded, the Committee unanimously approved a corrected version of the statement for release at 2:00 p.m. Return to text

2020-11-25

Minute

Minutes of the Federal Open Market Committee November 4-5, 2020 A joint meeting of the Federal Open Market Committee and the Board of Governors was held by videoconference on Wednesday, November 4, 2020, at 9:00 a.m. and continued on Thursday, November 5, 2020, at 9:00 a.m.1 PRESENT: Jerome H. Powell, Chair John C. Williams, Vice Chair Michelle W. Bowman Lael Brainard Richard H. Clarida Patrick Harker Robert S. Kaplan Loretta J. Mester Randal K. Quarles Thomas I. Barkin, Raphael W. Bostic, Mary C. Daly, Charles L. Evans, and Michael Strine, 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 Ron Feldman, First Vice President, Federal Reserve Bank of Minneapolis James A. Clouse, Secretary Matthew M. Luecke, Deputy Secretary Michelle A. Smith, Assistant Secretary Mark E. Van Der Weide, General Counsel Michael Held, Deputy General Counsel Trevor A. Reeve, Economist Stacey Tevlin, Economist Beth Anne Wilson, Economist Shaghil Ahmed, Rochelle M. Edge, David E. Lebow, Ellis W. Tallman, William Wascher, and Mark L.J. Wright, Associate Economists Lorie K. Logan, 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 Sally Davies and Brian M. Doyle, Deputy Directors, Division of International Finance, Board of Governors; Michael T. Kiley, Deputy Director, Division of Financial Stability, Board of Governors Jon Faust, Senior Special Adviser to the Chair, Division of Board Members, Board of Governors Joshua Gallin, Special Adviser to the Chair, Division of Board Members, Board of Governors William F. Bassett, Antulio N. Bomfim, Wendy E. Dunn, Kurt F. Lewis, Ellen E. Meade, and Chiara Scotti, Special Advisers to the Board, Division of Board Members, Board of Governors Linda Robertson, Assistant to the Board, Division of Board Members, Board of Governors Michael G. Palumbo, Senior Associate Director, Division of Research and Statistics, Board of Governors Marnie Gillis DeBoer, David López-Salido, and Min Wei, Associate Directors, Division of Monetary Affairs, Board of Governors; Glenn Follette, Associate Director, Division of Research and Statistics, Board of Governors; Paul Wood, Associate Director, Division of International Finance, Board of Governors Andrew Figura, Deputy Associate Director, Division of Research and Statistics, Board of Governors; Christopher J. Gust, Deputy Associate Director, Division of Monetary Affairs, Board of Governors; Jeffrey D. Walker,2 Deputy Associate Director, Division of Reserve Bank Operations and Payment Systems, Board of Governors Brian J. Bonis, Michiel De Pooter, Zeynep Senyuz,2 and Rebecca Zarutskie,2 Assistant Directors, Division of Monetary Affairs, Board of Governors; Paul Lengermann, Assistant Director, Division of Research and Statistics, Board of Governors Matthias Paustian, Assistant Director and Chief, Division of Research and Statistics, Board of Governors Alyssa G. Anderson,2 Benjamin K. Johannsen,2 and Matthew Malloy,2 Section Chiefs, Division of Monetary Affairs, Board of Governors; Penelope A. Beattie,2 Section Chief, Office of the Secretary, Board of Governors David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors Michele Cavallo, Dobrislav Dobrev, Anna Orlik, and Judit Temesvary,2 Principal Economists, Division of Monetary Affairs, Board of Governors Arsenios Skaperdas,2 Senior Economist, Division of Monetary Affairs, Board of Governors Randall A. Williams, Lead Information Manager, Division of Monetary Affairs, Board of Governors Gregory L. Stefani, First Vice President, Federal Reserve Bank of Cleveland Kartik B. Athreya, Joseph W. Gruber, Glenn D. Rudebusch, Daleep Singh, and Christopher J. Waller, Executive Vice Presidents, Federal Reserve Banks of Richmond, Kansas City, San Francisco, New York, and St. Louis, respectively Spencer Krane, Antoine Martin,2 Paolo A. Pesenti, and Nathaniel Wuerffel,2 Senior Vice Presidents, Federal Reserve Banks of Chicago, New York, New York, and New York, respectively Satyajit Chatterjee, Mark J. Jensen, Dina Marchioni,2 Matthew D. Raskin,2 and Patricia Zobel, Vice Presidents, Federal Reserve Banks of Philadelphia, Atlanta, New York, New York, and New York, respectively Daniel Cooper, Senior Economist and Policy Advisor, Federal Reserve Bank of Boston Alex Richter, Senior Economist and Advisor, Federal Reserve Bank of Dallas Ryan Bush,2 Markets Manager, Federal Reserve Bank of New York Developments in Financial Markets and Open Market Operations The System Open Market Account (SOMA) manager first discussed developments in financial markets. Financial conditions were little changed, on net, over the intermeeting period and remained accommodative. Market participants suggested that evolving expectations for U.S. fiscal policy as well as stronger-than-expected economic data and corporate earnings reports helped support equity prices. Later in the intermeeting period, however, rising COVID-19 cases in Europe and the United States weighed on the outlook, and equity prices reversed some of their earlier gains. Implied volatility in the equity market moved higher during the intermeeting period, reflecting uncertainties associated with the U.S. election and the future path of fiscal policy as well as concerns about the trajectory of COVID-19 cases. Market participants' expectations for the path of the federal funds rate were little changed over the intermeeting period. In the Open Market Desk's Survey of Primary Dealers and Survey of Market Participants, respondents' views on when the Committee will most likely start raising the target range for the federal funds rate were centered around 2024. Expectations for the economic conditions that will prevail when the FOMC first lifts the target range were little changed since the September surveys. Respondents to the Desk's surveys generally expected the Federal Reserve's purchases of Treasury securities and agency mortgage-backed securities (MBS) to continue at the current pace through the end of 2021 and then to slow in subsequent years, although there was a wide range of views about purchase amounts for 2022 and 2023. Market participants appeared increasingly focused on how the Committee's communications on asset purchases might evolve. They expected those communications to place a greater emphasis on fostering accommodative financial conditions, and many noted the possibility that at some point the Committee might convey additional guidance about the future path of asset purchases. Some market participants expected the Committee to eventually lengthen the weighted average maturity of the Federal Reserve's purchases of Treasury securities. The manager turned next to a discussion of financial market functioning, open market operations, and conditions in short-term funding markets. Markets for Treasury securities and agency MBS continued to function smoothly, with bid-ask spreads and a range of other market functioning indicators remaining near pre-pandemic levels. Weekly operations continued for agency commercial mortgage-backed securities (CMBS), with the Desk purchasing only modest amounts. Short-term dollar funding markets also continued to function smoothly over the period, and forward measures of funding rates were consistent with expectations for calm conditions over year-end. The Federal Reserve's balance sheet increased modestly over the intermeeting period to $7.2 trillion, as growth in securities holdings was partially offset by a decline in U.S. dollar liquidity swaps outstanding. Outstanding balances for credit and liquidity facilities were little changed. The manager noted that market participants continued to view these facilities as important backstops that would support market functioning and the flow of credit should stresses reemerge. 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. Discussion on Asset Purchases Participants discussed the FOMC's asset purchases, including the role they are playing in supporting the Committee's maximum-employment and price-stability goals. In their discussions, participants focused on the objectives of these purchases; considerations for assessing the appropriate pace and composition of asset purchases over time; communications regarding the future path of asset purchases; and the potential effects of higher levels of reserves, associated with the ongoing expansion in Federal Reserve asset holdings, on banks' balance sheets and money market rates. Participants agreed that this discussion would be helpful for future assessments of the appropriate structure of the Committee's asset purchases. While participants judged that immediate adjustments to the pace and composition of asset purchases were not necessary, they recognized that circumstances could shift to warrant such adjustments. Accordingly, participants saw the ongoing careful consideration of potential next steps for enhancing the Committee's guidance for its asset purchases as appropriate. The participants' discussion was preceded by staff presentations. The staff reviewed some key considerations relevant for conducting asset purchases in the current environment. The staff judged that the Committee's forward guidance on the federal funds rate, the expansion of the Federal Reserve's securities holdings since March, and expectations for a further expansion all had contributed to a very low level of longer-term yields despite substantial Treasury debt issuance. The staff noted that financial market participants generally expected the Committee to continue its net asset purchases at the current pace through next year and at a reduced pace in subsequent years. The staff discussed various changes the Committee could make to the structure of its purchases, including to their pace and composition as well as to the guidance the Committee has been providing to the public about its future asset purchases. The staff discussed the structure of asset purchase programs of several foreign central banks and how they have evolved during the pandemic. Finally, the staff evaluated how higher levels of reserves associated with the ongoing expansion in the Federal Reserve's asset holdings might influence banks' balance sheets and money market rates and discussed the various tools that the Federal Reserve has for managing money market rates in an environment with very high levels of reserves. In their discussion regarding the role of the Committee's asset purchases, participants noted that these purchases have supported and sustained smooth market functioning and helped foster accommodative financial conditions. With market functioning seen as having largely recovered, many participants indicated that the role of asset purchases had shifted more toward fostering accommodative financial conditions for households and businesses to support the Committee's employment and inflation goals. Still, participants generally judged that asset purchases would continue to support smooth market functioning, and many judged that asset purchases helped provide insurance against risks that might reemerge in financial markets in an environment of high uncertainty. A few participants indicated that asset purchases could also help guard against undesirable upward pressure on longer-term rates that could arise, for example, from higher-than-expected Treasury debt issuance. Several participants noted the possibility that there may be limits to the amount of additional accommodation that could be provided through increases in the Federal Reserve's asset holdings in light of the low level of longer-term yields, and they expressed concerns that a significant expansion in asset holdings could have unintended consequences. Participants commented on considerations related to the appropriate pace and composition of asset purchases. Participants generally saw the current pace and composition as effective in fostering accommodative financial conditions. Participants noted that the Committee could provide more accommodation, if appropriate, by increasing the pace of purchases or by shifting its Treasury purchases to those with a longer maturity without increasing the size of its purchases. Alternatively, the Committee could provide more accommodation, if appropriate, by conducting purchases of the same pace and composition over a longer horizon. Pointing to the recently announced change in the Bank of Canada's asset purchase program, several participants judged that the Committee could maintain its current degree of accommodation by lengthening the maturity of the Committee's Treasury purchases while reducing the pace of purchases somewhat. In their view, such a change in the Committee's purchase structure would have to be carefully communicated to the public to avoid the misperception that the reduced pace of purchases represented a decline in the degree of accommodation. A few participants expressed concern that maintaining the current pace of agency MBS purchases could contribute to potential valuation pressures in housing markets. The September FOMC statement indicated that asset purchases will continue "over coming months," and participants viewed this guidance for asset purchases as having served the Committee well so far. Most participants judged that the Committee should update this guidance at some point and implement qualitative outcome-based guidance that links the horizon over which the Committee anticipates it would be conducting asset purchases to economic conditions. These participants indicated that updating the Committee's guidance for asset purchases in this manner would help keep the market's expectation for future asset purchases aligned with the Committee's intentions. Some of these participants also saw such updated guidance as reinforcing the Committee's commitment to fostering outcomes consistent with maximum employment and inflation that averages 2 percent over time. A few participants were hesitant to make changes in the near term to the guidance for asset purchases and pointed to considerable uncertainty about the economic outlook and the appropriate use of balance sheet policies given that uncertainty. Participants noted that it would be important for the Committee's guidance for future asset purchases to be consistent with the Committee's forward guidance for the federal funds rate so that the use of these tools would be well coordinated in terms of achieving the Committee's objectives. Most participants judged that the guidance for asset purchases should imply that increases in the Committee's securities holdings would taper and cease sometime before the Committee would begin to raise the target range for the federal funds rate. A number of participants highlighted the view that after net purchases cease there would likely be a period of time in which maturing assets would be reinvested to roughly maintain the size of the Federal Reserve's securities holdings. Participants commented on how a higher level of reserves associated with the expansion in the Federal Reserve's asset holdings might affect the banking sector and money markets. A few participants raised concerns about the possibility that much higher levels of reserves might create pressure on banks' balance sheets, including on regulatory ratios, or could potentially put undue downward pressure on money market rates. Most participants judged that the Federal Reserve had effective tools to address these circumstances. Some participants noted that, if needed, the Federal Reserve could consider various steps to manage the levels of short-term interest rates and the quantity of reserves, such as adjusting administered rates, expanding the overnight reverse repurchase agreement program, or implementing a maturity extension program. Staff Review of the Economic Situation The coronavirus pandemic and the measures undertaken to contain its spread continued to affect economic activity in the United States and abroad. The information available at the time of the November 4–5 meeting suggested that U.S. real gross domestic product (GDP) had rebounded at a rapid rate in the third quarter but remained well below its level at the start of the year. Labor market conditions improved further in September, although the pace of gains eased and employment continued to be well below its level at the beginning of the year. Consumer price inflation—as measured by the 12‑­month percentage change in the price index for personal consumption expenditures (PCE) through September—had returned to its year-earlier pace but remained noticeably below the rates that were posted in January and February. Total nonfarm payroll employment expanded strongly in September, but the gain was markedly below the even larger increases seen in previous months. Through September, payroll employment had retraced only about half of the decline seen at the onset of the pandemic. The unemployment rate moved down further to 7.9 percent in September. The unemployment rates for African Americans and Asians both decreased, but the unemployment rate for Hispanics was little changed, and each group's rate remained well above the national average. In addition, the overall labor force participation rate declined, and the employment-to-population ratio rose only slightly. Initial claims for unemployment insurance continued to move lower, on net, through late October, and weekly estimates of private-sector payrolls constructed by the Board's staff using data provided by the payroll processor ADP suggested that employment gains from mid‑September to mid‑October remained solid. The employment cost index (ECI) for total hourly labor compensation in the private sector, which likely had been less influenced than other hourly compensation measures by the concentration of recent job losses among lower-wage workers, rose 2.4 percent over the 12 months ending in September. This gain was a little smaller than the index's year‑earlier 12‑month change; in addition, the 3‑month changes in the ECI in June and September were noticeably below the average pace seen over the period from 2017 through 2019. Total PCE price inflation was 1.4 percent over the 12 months ending in September and continued to be held down by relatively weak aggregate demand and the declines in consumer energy prices seen earlier in the year. Core PCE price inflation, which excludes changes in consumer energy prices and many consumer food prices, was 1.5 percent over the same period, while the trimmed mean measure of 12‑month PCE price inflation constructed by the Federal Reserve Bank of Dallas was 1.9 percent in September. On a monthly basis, inflation was a little lower in September, largely reflecting slower goods price inflation. The latest readings on survey-based measures of longer-run inflation expectations moved lower, though each remained within the range in which it has fluctuated in recent years; in October, the University of Michigan Surveys of Consumers measure for the next 5 to 10 years fell back to the level that prevailed in early 2020, while in September the 3‑year‑ahead measure from the Federal Reserve Bank of New York retraced its August increase. Real PCE rose strongly in the third quarter, though the increase was not sufficient to return consumer spending to its pre-pandemic level. Real disposable personal income declined, reflecting a large reduction in government transfer payments. As a result, the personal saving rate moved sharply lower, though it was still elevated relative to its 2019 average. The consumer sentiment measures from the Michigan survey and the Conference Board had moved higher, on net, since August; although both indexes stood above their April troughs, they remained well below their levels at the start of the year. Housing-sector activity advanced in the third quarter, with real residential investment and home sales both moving above their first‑quarter levels. Activity in this sector was likely being supported by low interest rates, the sector's ability to adjust business practices in response to social distancing, and pent-up demand following the widespread shutdowns earlier in the year. Business fixed investment expanded strongly, led by an outsized increase in third-quarter equipment spending. By contrast, spending on nonresidential structures continued to move lower and was likely restrained by firms' hesitation to commit to projects with lengthy times to completion and uncertain future returns as well as by the effect of lower oil prices on drilling investment. Growth in both total industrial production and manufacturing output turned negative in September after having slowed markedly in August. Part of the softness in manufacturing production appeared to be attributable to pandemic-related delays in the motor vehicle industry's model-year changeover, though subdued foreign demand and weaker demand from domestic energy producers were also likely acting to restrain factory output. As of September, manufacturing output had recovered roughly two-thirds of the drop seen earlier in the year. Total real government purchases declined in the third quarter. Federal nondefense purchases fell especially sharply, largely reflecting a step‑down in lender processing fees associated with the Paycheck Protection Program (PPP). In addition, real purchases by state and local governments declined further. The nominal U.S. international trade deficit narrowed in September after widening in August. Both exports and imports continued to rebound from their collapse in the first half of the year. Goods imports fully recovered to their January level, with broad-based increases in August and September. In contrast, goods exports by September recovered only two-thirds of their decline since January despite brisk growth in exports of agricultural products and industrial supplies. Services trade remained depressed, driven by the continued suspension of most international travel. Altogether, net exports made a substantial negative contribution to real GDP growth in the third quarter. Economic activity abroad rebounded sharply in the third quarter following a rollback of pandemic-related restrictions. GDP levels, however, generally remained well below their pre-pandemic peaks, with China being a notable exception. Domestic demand supported the recovery, and in Asia there was also a strong rebound of exports, especially of electronics and, more recently, autos. Third-quarter growth was particularly rapid in those economies that experienced some of the deepest contractions in the second quarter, including France, Italy, and Spain among the advanced foreign economies (AFEs) and Mexico among the emerging market economies. After falling through the end of the summer in many countries, inflation rates started to rise over the past two months but remained well below rates from early in the year. The rapid increase over recent weeks of new COVID‑19 cases in several AFEs, especially in Europe, prompted governments to reintroduce restrictions to rein in this renewed wave of infections. In late October, the governments of several European countries—including England, France, and Germany—announced new nationwide restrictions (including the closures of bars and restaurants) and, in some cases, restrictions to the mobility of individuals within and across regions. Still, relative to the spring, restrictions were noticeably less severe; factories, most businesses, and schools generally remained open. Staff Review of the Financial Situation Financial market sentiment was little changed over the intermeeting period against the backdrop of evolving U.S. election and fiscal outlooks, as well as rising COVID-19 cases in the United States and Europe. On net, the Treasury yield curve steepened modestly, corporate bond spreads narrowed somewhat, and broad equity price indexes increased. Inflation compensation increased a little further, remaining close to pre-pandemic levels. Financing conditions for businesses with access to capital markets and households with high credit scores remained generally accommodative, although conditions remained tight or tightened somewhat for other borrowers. Yields on two-year nominal Treasury securities were little changed over the intermeeting period, while longer-term yields increased modestly, on net, reportedly reflecting market participants' reassessments of the election outcome and the outlook for fiscal policy. FOMC communications and macroeconomic data releases did not elicit material yield reactions. Measures of inflation compensation based on Treasury Inflation-Protected Securities (TIPS) edged up, on net, remaining close to their pre-pandemic levels. This development reflected in part the recovery of TIPS market liquidity conditions from their stressed levels in the spring. However, both the 5-year and 5-to-10-year measures of inflation compensation remained near the lower ends of their historical ranges. The expected path for the federal funds rate over the next few years, as implied by a straight read of overnight index swap quotes, was little changed, on net, since the September FOMC meeting and remained close to the effective lower bound (ELB) until the end of 2023. Survey-based expectations favored the first increase in the federal funds rate to occur in 2024. Broad stock price indexes increased, on balance, over the intermeeting period amid volatility associated with market participants' reactions to news on the U.S. election, the pandemic's trajectory, and the fiscal policy outlook. One-month option-implied volatility on the S&P 500—the VIX—increased some, on net, after briefly rising sharply late in the intermeeting period. Spreads on corporate bond yields over comparable-maturity Treasury yields narrowed across the credit spectrum and stood somewhat below their historical median levels at the end of the intermeeting period. Conditions in short-term funding markets remained stable over the intermeeting period. Spreads on commercial paper (CP) and negotiable certificates of deposit across different tenors were little changed and remained at pre-pandemic levels. The outstanding level of nonfinancial CP continued to move down over the intermeeting period, reportedly driven by issuers' relatively low appetite for CP funding in light of the availability of longer-term financing on attractive terms. September quarter-end effects were muted, and there was no credit outstanding through the Commercial Paper Funding Facility by the end of the intermeeting period. Conditions in money market funds (MMFs) were also generally calm over the intermeeting period, and net yields of MMFs remained stable near historical lows. The effective federal funds rate stood at 9 basis points, unchanged from the average over the previous intermeeting period. The Secured Overnight Financing Rate averaged 8 basis points, edging down from the previous intermeeting period amid a modest net decrease in Treasury bill issuance. The amount of Federal Reserve repurchase agreements outstanding remained at zero over the intermeeting period, as dealers were able to obtain more attractive rates in the private market. The Federal Reserve increased holdings of Treasury securities and agency MBS at the same pace as over the previous intermeeting period. Investor sentiment abroad turned negative over the intermeeting period amid rising COVID-19 case counts, newly adopted restrictions aimed at containing the spread of the virus, and indicators pointing to a slowing recovery in several foreign economies, particularly in the euro area. Uncertainty about additional U.S. fiscal stimulus and the outcome of the U.S. presidential election also caused some asset price volatility abroad. On net, most foreign equity indexes declined, option-implied volatility in the euro area increased a bit, and most AFE long-term sovereign yields fell. Overall, the broad dollar index was little changed over the intermeeting period. The dollar appreciated modestly against most AFE currencies except the Japanese yen and the British pound. Several Asian currencies, including the Chinese renminbi, the South Korean won, and the Taiwanese dollar, appreciated against the U.S. dollar amid improving growth prospects and low COVID-19 case counts. Most Latin American currencies (especially the Brazilian real) and the Turkish lira depreciated against the U.S. dollar on concerns about fiscal and political prospects in Latin America and Turkey. Financing conditions in capital markets continued to be broadly accommodative over the intermeeting period, supported by low interest rates and high equity valuations. With historically low corporate bond yields, gross issuance of both investment- and speculative-grade corporate bonds remained solid in September, moderating from robust readings in August but staying close to the averages seen in recent years. Most of this issuance was reportedly intended to refinance existing debt. Gross institutional leveraged loan issuance continued to pick up in September but remained below its average pace in 2019. Collateralized loan obligation issuance was strong in September, likely supporting robust investor demand for newly issued leveraged loans in the coming months. The credit quality of nonfinancial corporations continued to show signs of stabilization. The volume of downgrades to corporate bonds and leveraged loans fell to pre-pandemic levels through September. Corporate bond and leveraged loan defaults were low in August and September relative to their elevated readings in July. Market indicators of expected corporate bond and leveraged loan defaults remained somewhat elevated at above pre-pandemic levels, especially for lower-rated leveraged loan issuers. Commercial and industrial (C&I) loans on banks' balance sheets continued to decline through September, reflecting a mix of weak origination activity and the repayment of credit-line draws from earlier in the year. In the October Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS), banks reported that standards for C&I loans continued to tighten during the third quarter, although fewer banks reported tightening than in previous quarters. In addition, demand for C&I loans reportedly weakened in the third quarter. Financing conditions for small businesses remained tight as a result of the pandemic. Small business loan originations dropped off sharply in August after a temporary boost from PPP distributions over the summer. At the same time, small businesses' liquidity needs were high and appeared likely to increase further, with the most recent Census Bureau Small Business Pulse Survey pointing to a majority of small businesses having no more than two months of cash on hand and many small businesses anticipating some need for additional financial assistance in the next six months. However, the uncertainty surrounding earning prospects was reportedly making many business owners less willing to take on debt at prevailing terms. Small business loan performance generally deteriorated further over the intermeeting period. For commercial real estate (CRE) financed through capital markets, financing conditions remained accommodative over the intermeeting period. Spreads on agency CMBS were narrow, and issuance was very strong in September. Spreads on triple-A non-agency CMBS, which were already within their pre-pandemic range in August, moved down further in September and early October, while non-agency issuance remained relatively subdued in September. In contrast, CRE loan growth at banks decelerated in the third quarter, while standards for CRE loans tightened further, according to the October SLOOS. Financing conditions in the residential mortgage market were little changed over the intermeeting period. Mortgage rates remained near historical lows, supporting high volumes of both home-purchase and refinancing originations. Credit continued to flow to higher-score borrowers meeting standard conforming loan criteria, while it remained tight for borrowers with lower credit scores and for nonstandard mortgage products. Residential real estate loans on banks' balance sheets declined, and the October SLOOS suggested that lending standards tightened for all mortgage types. Mortgage forbearance rates continued their downward trend, and the rate of new delinquencies remained low. In consumer credit markets, conditions remained accommodative for borrowers with relatively strong credit scores but continued to be tight for borrowers with subprime credit scores. Banks in the October SLOOS indicated that standards tightened and demand was little changed, on balance, across consumer loan types following a sharp contraction in demand in the second quarter. Credit card balances continued to decline through the third quarter, with gains in balances for account holders with prime credit scores offset by declines in those for nonprime accounts. Interest rates on existing accounts were little changed and remained below pre-crisis levels, while interest rates on new accounts to nonprime borrowers remained elevated. Auto loan balances increased solidly for prime and near-prime borrowers but declined for subprime borrowers. Auto loan interest rates increased but stayed below pre-pandemic levels. Conditions in the asset-backed securities market remained stable over the intermeeting period. The staff provided an update on its assessment of the stability of the financial system. The staff judged that, accounting for low interest rates, asset valuations appeared moderate, with measures of compensation for risk generally in the middle of their historical ranges. However, uncertainty regarding the pandemic and economic outlook has been high, and the risk of sizable declines in asset prices, should adverse shocks materialize, has remained significant. CRE prices had started to decline in some sectors, while market conditions, including rising vacancies and declining rents, pointed to a risk of further drops, especially in severely affected sectors. The staff assessed vulnerabilities associated with household and business borrowing as notable. Household finances had weakened with the economic downturn, and some households could find debt levels burdensome going forward. Business debt levels were high before the pandemic, and the ability of some businesses to service these obligations will depend on the course of the economic recovery. The staff assessed vulnerabilities arising from financial leverage as moderate. While the banking sector has been resilient to recent developments, banks' profitability, as well as that of a range of financial institutions, could be affected by future losses, the weakening of the economic outlook relative to pre-pandemic conditions, and low interest rates. With regard to funding risks, the staff highlighted that structural vulnerabilities in markets for short-term funding and corporate bonds remained present. Emergency facilities were viewed as critical in restoring market functioning and continued to serve as important backstops. The staff also summarized near-term risks to financial stability identified in outreach to the public in recent months, including concerns associated with the outlook for the pandemic and business defaults. Staff Economic Outlook In the U.S. economic projection prepared by the staff for the November FOMC meeting, the rate of real GDP growth and the pace of declines in the unemployment rate over the second half of this year were similar to those in the September forecast despite material revisions to several assumptions influencing the outlook along with incoming data that were, on balance, better than expected. In particular, in the absence of clear progress toward an agreement on further fiscal stimulus, the staff removed the assumption that an additional tranche of fiscal policy support would be enacted. Although this lack of additional fiscal support was expected to cause significant hardships for a number of households, the staff now assessed that the savings cushion accumulated by other households would be enough to allow total consumption to be largely maintained through year-end. Hence, as in the September projection, the staff continued to expect a rapid but partial rebound in activity over the second half of the year following the unprecedented contraction in the spring. The inflation forecast for the rest of the year was revised up slightly in response to incoming readings on inflation that were, on balance, higher than expected. Nevertheless, inflation was still projected to finish the year at a relatively subdued level, reflecting substantial margins of slack in labor and product markets and the large declines in consumer energy prices seen earlier in the year. In the staff's medium-term projection, the assumption that significant additional fiscal support would not be enacted pointed to a lower trajectory for aggregate demand going forward. However, recent data on tax receipts also suggested that the fiscal positions of states and localities had deteriorated less than expected, which led the staff to boost the projected path of state and local government purchases. Hence, with monetary policy assumed to remain highly accommodative and social‑distancing measures expected to ease further, the staff continued to project that real GDP over the medium term would outpace potential, leading to a considerable further decline in the unemployment rate. The resulting take­â€‘up of economic slack was in turn expected to cause inflation to increase gradually, and the inflation rate was projected to moderately overshoot 2 percent for some time in the years beyond 2023 as monetary policy remained accommodative. The staff continued to observe that the uncertainty related to the future course of the pandemic and its consequences for the economy was high. The staff also continued to view the risks to the economic outlook as tilted to the downside, with the latest data suggesting an increased probability of a resurgence in the disease. Participants' Views on Current Conditions and the Economic Outlook Participants noted that the COVID-19 pandemic was causing tremendous human and economic hardship across the United States and around the world. Economic activity and employment had continued to recover but remained well below their levels at the beginning of the year. Weaker demand and earlier declines in oil prices had been holding down consumer price inflation. Overall financial conditions remained accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses. Participants agreed that the path of the economy would depend on the course of the virus and that the ongoing public health crisis would continue to weigh on economic activity, employment, and inflation in the near term and posed considerable risks to the economy's medium-term outlook. Participants observed that the economy had registered a rapid though incomplete rebound, with third-quarter real GDP rising at an annual rate of 33 percent, reflecting gains across consumer spending, housing-sector activity, and business equipment investment. In recent months, however, the pace of improvement had moderated, with slower growth expected for the fourth quarter. Participants noted that economic activity thus far had recovered faster than had been expected earlier in the year. Household spending on goods, especially durable goods, had been strong and had moved above its pre-pandemic level. Participants commented that the rebound in consumer spending was due in part to federal stimulus payments and expanded unemployment benefits, which provided essential support to many households. Participants viewed accommodative monetary policy as also contributing to gains in durable goods and residential investment as well as the surge in home sales. In contrast, participants noted that consumer outlays for services were increasing more slowly than for durable goods, particularly for items such as air travel, hotel accommodations, and restaurant meals, which had been significantly disrupted by voluntary and mandated social-distancing measures. Participants generally expected the strength in household spending to continue, especially for durable goods and residential investment. A few participants noted that households' balance sheets generally appeared healthy and an unwinding of the large pool of household savings accumulated during the pandemic could provide greater-than-anticipated momentum to consumer spending over coming months. However, several participants expressed concern that, in the absence of additional fiscal support, lower- and moderate-income households might need to reduce their spending sharply when their savings were exhausted. A couple of these participants noted reports from their banking contacts that households appeared to be rapidly exhausting funds they received from fiscal relief programs. Participants noted that business equipment investment had also picked up. A few participants expected the momentum in investment to extend into next year as the economic recovery continued, while a couple of other participants noted that many businesses in their Districts were deferring longer-term commitments because of heighted uncertainty about the economic outlook. The recovery was viewed as unevenly distributed across industries. While many business contacts, particularly those in the durable goods or housing industries, reported progress in adapting to the pandemic or improved business conditions, others—especially those with ties to small businesses and the hospitality, aviation, and nonresidential construction industries—were still seeing very difficult circumstances. Contacts reported improved conditions in the agricultural sector, boosted by strong demand from China as well as domestic ethanol production, higher crop prices, and federal aid payments. Looking ahead, some business contacts expressed concerns that many households and businesses were currently in a weaker position to weather additional economic shocks than they had been at the beginning of the pandemic. Participants observed that labor market conditions had continued to improve in recent months, with roughly half of the 22 million jobs lost over March and April having been regained. The unemployment rate had declined further, and the employment gains since the spring were generally seen as larger than anticipated. Business contacts in a couple of Districts—particularly those in the manufacturing, health-care, and technology sectors—reported having trouble hiring workers for reasons likely related to virus cases or workers' need to provide childcare. Several participants noted that the decline in the unemployment rate in recent months had been accompanied by a fall in the labor force participation rate, particularly among those with a high school education or lower and among women. Although the number of workers on temporary layoff had fallen sharply, the number of permanent job losers had continued to rise. Most participants commented that the pace of labor market improvement was likely to moderate going forward. A couple of them noted that many businesses in industries severely affected by the pandemic were downsizing or that some businesses were focused on cutting costs or increasing productivity, including through automation. Many participants observed that high rates of job losses had been especially prevalent among lower-wage workers, particularly in the services sector, and among women, African Americans, and Hispanics. A few participants noted that these trends, if slow to reverse, could exacerbate racial, gender, and other social-economic disparities. In addition, a slow job market recovery would cause particular hardship for those with less educational attainment, less access to childcare or broadband, or greater need for retraining. In their comments about inflation, participants noted that some consumer prices had increased more quickly than expected in recent months but that broader price trends were still quite soft. The upturn in consumer price inflation was primarily attributed to price increases in sectors where the pandemic had induced stronger demand, such as consumer durables. In contrast, services price inflation remained softer than pre-pandemic rates, as prices for the categories most affected by social distancing, such as accommodations and airfares, continued to be very depressed and housing services inflation moderated. Several participants commented on the unusually large relative price movements caused by the pandemic and the considerable uncertainty as to how long these price changes would persist. Participants noted that financial conditions were generally accommodative and that actions by the Federal Reserve, including the establishment of emergency lending facilities with the approval of and, in some cases, provision of equity investments by the Treasury, were supporting the flow of credit to households, businesses, and communities. While these actions were viewed as contributing to accommodative financial conditions, participants noted important differences in credit availability across borrowers. In particular, financing conditions eased further for residential mortgage borrowers and for large corporations that were able to access capital markets, but surveys of credit availability indicated that bank lending conditions tightened further. A few participants noted that the financing conditions for small businesses were especially worrisome, as the PPP had ended and the prospect for additional fiscal support remained uncertain. They pointed to the most recent Census Bureau Small Business Pulse Survey, in which more than half of the respondents reported having no more than two months of cash on hand. Participants continued to see the uncertainty surrounding the economic outlook as quite elevated, with the path of the economy highly dependent on the course of the virus; on how individuals, businesses, and public officials responded to it; and on the effectiveness of public health measures to address it. Participants cited several downside risks that could threaten the recovery. While another broad economic shutdown was seen as unlikely, participants remained concerned about the possibility of a further resurgence of the virus that could undermine the recovery. The majority of participants also saw the risk that current and expected fiscal support for households, businesses, and state and local governments might not be sufficient to sustain activity levels in those sectors, while a few participants noted that additional fiscal stimulus that was larger than anticipated could be an upside risk. Some participants commented that the recent surge in virus cases in Europe and the reimposition of restrictions there could lead to a slowdown in economic activity in the euro area and have negative spillover effects on the U.S. recovery. Some participants raised concerns regarding the longer-run effects of the pandemic, including sectoral restructurings that could slow employment growth or an acceleration of technological disruptions that could be limiting the pricing power of some firms. A number of participants commented on various potential risks to financial stability. A few participants noted that the banking system showed considerable resilience through the end of the third quarter, and a few observed that this resilience partly reflected stronger-than-expected balance sheets of their customers, with delinquency rates declining or showing only moderate increases. Moreover, capital positions and loan loss reserves for large banks were higher than before the pandemic. Several participants emphasized the need to ensure that banks continue to maintain strong capital levels, as lower levels of capital are typically associated with tighter credit availability from banks. Several participants commented on the vulnerabilities witnessed during the March selloff in the Treasury market. The substantial maturity and liquidity transformations undertaken by some nonbank financial institutions—such as prime MMFs and corporate bond and bank loan mutual funds—were also discussed. A couple of participants expressed concerns that a prolonged period of low interest rates and highly accommodative financial market conditions could lead to excessive risk-taking, which in turn could result in elevated firm bankruptcies and significant employment losses in the next economic downturn. A few participants noted that climate change poses important challenges to financial stability and welcomed analysis of climate change as both a source of shocks and an underlying vulnerability. A couple of participants commented that the actions taken by the Federal Reserve to support the economy and achieve its mandated goals also supported financial stability. Relatedly, several participants emphasized the important roles various section 13(3) facilities played in restoring financial market confidence and supporting financial stability; they noted that these facilities were still serving as an important backstop in financial markets. A few participants noted that it was important to extend them beyond year-end. In their consideration of monetary policy at this meeting, participants reaffirmed the Federal Reserve's commitment to using its full range of tools in order to support the U.S. economy during this challenging time, thereby promoting the Committee's statutory goals of maximum employment and price stability. Participants agreed that the path of the economy would depend significantly on the course of the virus and that the ongoing public health crisis would continue to weigh on economic activity, employment, and inflation in the near term and posed considerable risks to the economic outlook over the medium term. In light of this assessment, all participants judged that maintaining an accommodative stance of monetary policy was essential to foster economic recovery and to achieve the Committee's long-run 2 percent inflation objective. Participants remarked that the Committee's action in September to provide more explicit outcome-based forward guidance for the federal funds rate had been an important step to affirm the Committee's strong commitment to the goals and strategy articulated in its revised Statement on Longer-Run Goals and Monetary Policy Strategy. Several participants noted that they were encouraged by evidence that suggested that market participants' expectations of the economic conditions that would likely prevail at the time of liftoff seemed broadly consistent with the Committee's forward guidance and revised consensus statement. Participants agreed that monetary policy was providing substantial accommodation, and most concurred that, with the federal funds rate at the ELB, much of that accommodation was due to the Committee's forward guidance and increases in securities holdings. They judged that the current stance of monetary policy remained appropriate, as both employment and inflation remained well short of the Committee's goals and the uncertainty about the course of the virus and the outlook for the economy continued to be very elevated. Participants viewed the resurgence of COVID-19 cases in the United States and abroad as a downside risk to the recovery; a few participants noted that diminished odds for further significant fiscal support also increased downside risks and added to uncertainty about the economic outlook. Regarding asset purchases, participants judged that it would be appropriate over coming months for the Federal Reserve to increase its holdings of Treasury securities and agency MBS at least at the current pace. These actions would continue to help sustain smooth market functioning and help foster accommodative financial conditions, thereby supporting the flow of credit to households and businesses. Many participants judged that the Committee might want to enhance its guidance for asset purchases fairly soon. Most participants favored moving to qualitative outcome-based guidance for asset purchases that links the horizon over which the Committee anticipates it would be conducting asset purchases to economic conditions. A few participants were hesitant to make changes in the near term to the guidance for asset purchases and pointed to considerable uncertainty about the economic outlook and the appropriate use of balance sheet policies given that uncertainty. Discussion on Recommended Changes to the Summary of Economic Projections Participants considered two recommendations from the subcommittee on communications for changes to the Summary of Economic Projections (SEP) that would enhance the information provided to the public. These recommendations included accelerating the release of the full set of SEP exhibits from three weeks after the corresponding FOMC meeting, when the minutes of that meeting are released, to the day of the policy decision and adding new charts that display a time series of diffusion indexes for participants' judgments of uncertainty and risks. With these recommendations, the written summary of the projections that has been included as an addendum to the minutes of the corresponding FOMC meeting would be discontinued. Most of the participants who commented noted that releasing all SEP materials at the time of the postmeeting statement would provide greater context for the policy decision, highlight the risk-management factors relevant for the decision, or further emphasize the degree of uncertainty around participants' modal projections. Some who commented noted that the SEP serves a valuable role in illustrating how participants' policy assessments respond to changes in the economic outlook. Most participants who commented suggested that it would be useful to continue thinking about options for refining the SEP. Participants unanimously supported the recommended changes and agreed that they should be implemented beginning in December. Committee Policy Action In their discussion of monetary policy for this meeting, members agreed that the COVID-19 pandemic was causing tremendous human and economic hardship across the United States and around the world. They noted that economic activity and employment had continued to recover but remained well below their levels at the beginning of the year, and that weaker demand and earlier declines in oil prices had been holding down consumer price inflation. Overall financial conditions remained accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses. Members agreed that the Federal Reserve was committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum-employment and price-stability goals. Members also stated that the path of the economy would depend significantly on the course of the virus. In addition, members agreed that the ongoing public health crisis would continue to weigh on economic activity, employment, and inflation in the near term and was posing considerable risks to the economic outlook over the medium term. All members reaffirmed that, in accordance with the Committee's goals to achieve maximum employment and inflation at the rate of 2 percent over the longer run and with inflation running persistently below this longer-run goal, they would aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent. Members expected to maintain an accommodative stance of monetary policy until those outcomes were achieved. All members agreed to maintain the target range for the federal funds rate at 0 to 1/4 percent, and they expected that it would be appropriate to maintain this target range until labor market conditions had reached levels consistent with the Committee's assessments of maximum employment and inflation had risen to 2 percent and was on track to moderately exceed 2 percent for some time. In addition, members agreed that over coming months it would be appropriate for the Federal Reserve to increase its holdings of Treasury securities and agency MBS at least at the current pace to sustain smooth market functioning and help foster accommodative financial conditions, thereby supporting the flow of credit to households and businesses. Members agreed that, in assessing the appropriate stance of monetary policy, they would continue to monitor the implications of incoming information for the economic outlook and that they would be prepared to adjust the stance of monetary policy as appropriate in the event that risks emerged that could impede the attainment of the Committee's goals. Members also agreed that, in assessing the appropriate stance of monetary policy, they would take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and 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 instructed otherwise, to execute transactions in the SOMA in accordance with the following domestic policy directive, for release at 2:00 p.m.: "Effective November 6, 2020, 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 0 to 1/4 percent. Increase the System Open Market Account holdings of Treasury securities and agency mortgage-backed securities (MBS) at the current pace. Increase holdings of Treasury securities and agency MBS by additional amounts and purchase agency commercial mortgage-backed securities (CMBS) as needed to sustain smooth functioning of markets for these securities. Conduct term and overnight repurchase agreement operations to support effective policy implementation and the smooth functioning of short-term U.S. dollar funding markets. Conduct overnight reverse repurchase agreement operations at an offering rate of 0.00 percent and with a per-counterparty limit of $30 billion per day; the per-counterparty limit can be temporarily increased at the discretion of the Chair. Roll over at auction all principal payments from the Federal Reserve's holdings of Treasury securities and reinvest all principal payments from the Federal Reserve's holdings of agency debt and agency MBS in agency MBS. Allow modest deviations from stated amounts for purchases and reinvestments, if needed for operational reasons. Engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions." The vote also encompassed approval of the statement below for release at 2:00 p.m.: "The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals. The COVID-19 pandemic is causing tremendous human and economic hardship across the United States and around the world. Economic activity and employment have continued to recover but remain well below their levels at the beginning of the year. Weaker demand and earlier declines in oil prices have been holding down consumer price inflation. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses. The path of the economy will depend significantly on the course of the virus. The ongoing public health crisis will continue to weigh on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved. The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee's assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. In addition, over coming months the Federal Reserve will increase its holdings of Treasury securities and agency mortgage-backed securities at least at the current pace to sustain smooth market functioning and help foster accommodative financial conditions, thereby supporting the flow of credit to households and businesses. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments." Voting for this action: Jerome H. Powell, John C. Williams, Michelle W. Bowman, Lael Brainard, Richard H. Clarida, Mary C. Daly, Patrick Harker, Robert S. Kaplan, Loretta J. Mester, and Randal K. Quarles. Voting against this action: None. Ms. Daly 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 at 0.10 percent. The Board of Governors also voted unanimously to approve establishment of the primary credit rate at the existing level of 0.25 percent, effective November 6, 2020. It was agreed that the next meeting of the Committee would be held on Tuesday–Wednesday, December 15–16, 2020. The meeting adjourned at 10:05 a.m. on November 5, 2020. Notation Votes By notation vote completed on September 30, 2020, the Committee unanimously approved the selection of Trevor Reeve to serve as economist and Rochelle Edge to serve as associate economist, effective October 1, 2020. By notation vote completed on October 6, 2020, the Committee unanimously approved the minutes of the Committee meeting held on September 15–16, 2020. _______________________ 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 on asset purchases. Return to text

2020-11-05

Statement

The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals. The COVID-19 pandemic is causing tremendous human and economic hardship across the United States and around the world. Economic activity and employment have continued to recover but remain well below their levels at the beginning of the year. Weaker demand and earlier declines in oil prices have been holding down consumer price inflation. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses. The path of the economy will depend significantly on the course of the virus. The ongoing public health crisis will continue to weigh on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved. The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee's assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. In addition, over coming months the Federal Reserve will increase its holdings of Treasury securities and agency mortgage-backed securities at least at the current pace to sustain smooth market functioning and help foster accommodative financial conditions, thereby supporting the flow of credit to households and businesses. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments. Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Mary C. Daly; Patrick Harker; Robert S. Kaplan; Loretta J. Mester; and Randal K. Quarles. Ms. Daly voted as an alternate member at this meeting. Implementation Note issued November 5, 2020

2020-09-16

Statement

The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals. The COVID-19 pandemic is causing tremendous human and economic hardship across the United States and around the world. Economic activity and employment have picked up in recent months but remain well below their levels at the beginning of the year. Weaker demand and significantly lower oil prices are holding down consumer price inflation. Overall financial conditions have improved in recent months, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses. The path of the economy will depend significantly on the course of the virus. The ongoing public health crisis will continue to weigh on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved. The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee's assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. In addition, over coming months the Federal Reserve will increase its holdings of Treasury securities and agency mortgage-backed securities at least at the current pace to sustain smooth market functioning and help foster accommodative financial conditions, thereby supporting the flow of credit to households and businesses. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments. Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Patrick Harker; Loretta J. Mester; and Randal K. Quarles. Voting against the action were Robert S. Kaplan, who expects that it will be appropriate to maintain the current target range until the Committee is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals as articulated in its new policy strategy statement, but prefers that the Committee retain greater policy rate flexibility beyond that point; and Neel Kashkari, who prefers that the Committee indicate that it expects to maintain the current target range until core inflation has reached 2 percent on a sustained basis. Implementation Note issued September 16, 2020

2020-10-07

Minute

Minutes of the Federal Open Market Committee September 15–16, 2020 A joint meeting of the Federal Open Market Committee and the Board of Governors was held by videoconference on Tuesday, September 15, 2020, at 11:00 a.m. and continued on Wednesday, September 16, 2020, at 9:00 a.m.1 PRESENT: Jerome H. Powell, Chair John C. Williams, Vice Chair Michelle W. Bowman Lael Brainard Richard H. Clarida Patrick Harker Robert S. Kaplan Neel Kashkari Loretta J. Mester Randal K. Quarles Thomas I. Barkin, Raphael W. Bostic, Mary C. Daly, Charles L. Evans, and Michael Strine, 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 Michelle A. Smith, Assistant Secretary Mark E. Van Der Weide, General Counsel Michael Held, Deputy General Counsel Stacey Tevlin, Economist Beth Anne Wilson, Economist Shaghil Ahmed, Michael Dotsey, Marc Giannoni, Trevor A. Reeve, Ellis W. Tallman, William Wascher, and Mark L.J. Wright, Associate Economists Lorie K. Logan, 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 Sally Davies and Brian M. Doyle, Deputy Directors, Division of International Finance, 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 Chair, Division of Board Members, Board of Governors Joshua Gallin, Special Adviser to the Chair, Division of Board Members, Board of Governors William F. Bassett, Antulio N. Bomfim, Wendy E. Dunn, Ellen E. Meade, Chiara Scotti, and Ivan Vidangos, Special Advisers to the Board, Division of Board Members, Board of Governors Linda Robertson, Assistant to the Board, Division of Board Members, Board of Governors David Bowman, Senior Associate Director, Division of Monetary Affairs, Board of Governors; Eric M. Engen, Diana Hancock, and John J. Stevens, Senior Associate Directors, Division of Research and Statistics, Board of Governors Jeremy B. Rudd, Senior Adviser, Division of Research and Statistics, Board of Governors Glenn Follette, Associate Director, Division of Research and Statistics, Board of Governors; David López-Salido, Associate Director, Division of Monetary Affairs, Board of Governors Christopher J. Gust, Deputy Associate Director, Division of Monetary Affairs, Board of Governors; John M. Roberts, Deputy 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 Brian J. Bonis and Laura Lipscomb, Assistant Directors, Division of Monetary Affairs, Board of Governors Penelope A. Beattie,3 Section Chief, Office of the Secretary, Board of Governors; Dana L. Burnett and Felicia Ionescu, Section Chiefs, Division of Monetary Affairs, Board of Governors Mark A. Carlson, Senior Economic Project Manager, Division of Monetary Affairs, Board of Governors David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors Michele Cavallo, Jonathan E. Goldberg, and Kurt F. Lewis, Principal Economists, Division of Monetary Affairs, Board of Governors Randall A. Williams, Senior Information Manager, Division of Monetary Affairs, Board of Governors Meredith Black, First Vice President, Federal Reserve Bank of Dallas David Altig, Kartik B. Athreya, Joseph W. Gruber, Sylvain Leduc, Anna Paulson, Daleep Singh, and Christopher J. Waller, Executive Vice Presidents, Federal Reserve Banks of Atlanta, Richmond, Kansas City, San Francisco, Chicago, New York, and St. Louis, respectively Argia M. Sbordone and Patricia Zobel, Vice Presidents, Federal Reserve Bank of New York Jenny Tang, Senior Economic Policy Advisor, Federal Reserve Bank of Boston Opening Remarks The Chair, Vice Chair Williams, and Governor Clarida opened the meeting with remarks in memory of Thomas Laubach. Chair Powell: "Thomas was unquestionably one of the great economic minds of his generation, and his research has been central to some of our biggest discussions and policy actions over the past several years. He had a rare and underappreciated gift for translating arcane and academic theory into real world practice. That ability made a real difference in the conduct and communication of monetary policy. From his work on r*, to the balance sheet, to leading the steering committee for our monetary policy review, Thomas Laubach's intellectual fingerprints are all over the Committee's decisions that will define this era of the Federal Reserve. Thomas was also an exceptional colleague, leader, and friend. No one here will be surprised to know that as condolences pour in, the admiration for his kindness and equanimity match, if not exceed, the esteem for his intellect. Thomas was a model of leadership who fiercely believed that every member of his team is critical to our collective success, and he made certain they knew it. Even as he battled his own health problems, working through treatment to help fight the economic fallout of a global pandemic, his concern lay with others. Amid a deluge of emergency work to fight a historic downturn and the upending of daily life, Thomas urged people to take care of themselves and their families first. It is a testament to the mutual respect and amity that it was Thomas's team who proposed the Tealbook dedication in his memory. As friends, colleagues, and collaborators, we all grieve his loss. His absence leaves a space that cannot truly be filled. We will miss Thomas Laubach's intellect and his insight. More importantly, we will miss Thomas Laubach." Vice Chair Williams: "Thomas and I started working together 20 years ago. He had just arrived at the Board from the Kansas City Fed, and I had returned from my stint at the Council of Economic Advisers. And it was truly serendipitous. We immediately recognized the shared interest in figuring out how to estimate this thing called the natural rate of interest. And more importantly, Thomas was an expert in Kalman filtering. So we were off to the races on that project. Ironically, given subsequent events, the question of the time was whether the productivity boom had driven r* higher. In fact, if you go back to our December 2000 memo, our first memo to the Board on r*, our original estimates had r* at 4-1/4 percent, and that's real, not nominal. So that's a 6-1/4 percent nominal r*. Those were the days. Jumping ahead 15 years, following his appointment as Director of Monetary Affairs, Thomas would frequently, and very earnestly, ask me how he could be most effective in his role as an adviser to the FOMC. And I'd remind him that the Committee has at times been compared to a herd of cats. But he was always looking for ways to raise his game, and hopefully ours, and help the Committee grapple with issues and decisions before us. Sometimes that effort led to briefings with a labyrinth of charts and figures, where Thomas heroically tried to make sense of our Summary of Economic Projections (SEP) projections and the implicit policy rule that must be embedded in them if you only looked hard enough. Or it goes without saying how everything makes more sense once you factor in r*. His role as trusted adviser was never more on display or important than during the framework review as Chair Powell just commented. Thomas focused on making sure the Committee was prepared with the very best information and analysis. He consistently moved us towards the goal line, even as he engaged in a complex range of issues and dealt with the effects of the pandemic. And he scrupulously played the role of honest broker throughout. Indeed, he perfected the formula for herding cats. It's one part keen intellect, a dollop of understated humor, and a big helping of patience and perseverance." Governor Clarida: "Thomas Laubach was a remarkable human being who just happened to be a world class economist. His passing last week represents of course an incalculable loss for his family, but is also a devastating blow felt by each and every one of us in the Federal Reserve System, and indeed, in major central banks around the world that he frequently visited. Before I arrived at the Board, I knew Thomas primarily through his research. His book on inflation targeting with Ben Bernanke, Rick Mishkin, and Adam Posen is a classic reference on the subject, as is his work with President Williams on r*. I would say Thomas had a talent for picking co-authors. Thomas and I first met when he was a Ph.D. student working on the book and we were both visiting the New York Fed. I remember well our first meeting 25 years ago, and I was struck then by Thomas's enthusiasm that he brought to economics as a graduate student. Thomas of course never lost that spark and joy for the practice of monetary policy, and we are all fortunate that he did not. I—and I'm sure Chair Powell, and before him, Chair Yellen—trusted him implicitly. And speaking for myself, I always sought his insight and advice privately in my office and counsel on all of the big policy decisions I've had to consider in my two years as Vice Chair. Thomas made everyone that he worked with better and inspired to put forth their best energy and effort to achieve larger goals. That was most certainly the case in the framework review, and I'll second what Vice Chair Williams and Chair Powell said. Thomas brought peerless leadership, energy, and a commitment to the entire framework review. We simply would not have achieved the evolution of our framework and strategy without Thomas and the insight, inspiration, and good judgment he brought to the project and the ambitious process that he designed and worked with us to implement. I understand that in Thomas's last days, he was able to watch the Chair's speech at Jackson Hole rolling out the new framework, and that he was so proud to have been part of what the Wall Street Journal called a landmark change in U.S. monetary policy. I'm sure I speak for all of us when I conclude by saying that it is we who are proud to have had the privilege of working with Thomas Laubach during his 20 years at the Fed. He is and will be deeply missed, but his spirit and inspiration to us all will endure." Developments in Financial Markets and Open Market Operations The System Open Market Account (SOMA) manager first discussed developments in financial markets. On net, financial conditions eased over the intermeeting period. Equity prices rose and the broad dollar continued to depreciate from its crisis-driven peak in March. Yields on Treasury inflation-protected securities fell, while longer-dated nominal Treasury yields increased modestly. Market participants attributed these developments to a stronger economic outlook, better news on the COVID-19 trajectory, better-than-feared corporate earnings reports, and accommodative policy. Against this backdrop, most respondents to the Open Market Desk's Survey of Primary Dealers and Survey of Market Participants perceived downside risks to U.S. gross domestic product (GDP) growth this year as having declined notably since the July survey, and their forecasts for overall growth for 2020 were revised up significantly. While the economic outlook had brightened, market participants continued to see significant risks ahead. Some noted concerns about elevated asset valuations in certain sectors. Many also cited geopolitical events as heightening uncertainty. In addition, most forecasters were assuming that an additional pandemic-related fiscal package would be approved this year, and noted that, absent a new package, growth could decelerate at a faster-than-expected pace in the fourth quarter. In light of these and other risks, as well as the ongoing pandemic, market participants continued to suggest that the supportive policy environment and the backstops to market functioning remained important stabilizers. The release of the revised Statement on Longer-Run Goals and Monetary Policy Strategy (consensus statement) elicited relatively modest immediate reaction across markets. However, market participants generally viewed the completion of the review as an important milestone; many indicated that growing expectations for the Committee to adopt a flexible average-inflation-targeting regime had influenced asset prices over recent months. In particular, these expectations were viewed as contributing to the recent rise in far-forward measures of inflation compensation, though market participants noted that these measures were still somewhat low by historical standards. Market participants continued to anticipate that the Committee would update its forward guidance for the federal funds rate. Most respondents to the Desk's surveys continued to indicate that they expected the FOMC to adopt outcome-based forward guidance linked to inflation; some noted that employment measures could be part of the forward guidance as well. Survey respondents' expectations for the economic conditions that would prevail when the FOMC first lifted the target range had shifted notably since the previous survey, with many respondents projecting somewhat higher inflation and lower unemployment than in July. Expectations for asset purchases this year remained tightly centered around the current pace; however, many survey respondents revised up the amount of asset purchases expected in 2021 and 2022. The manager turned next to a discussion of funding market conditions and open market operations over the period. Conditions in short-term dollar funding markets remained stable over the period. Overnight secured and unsecured rates continued to trade in narrow ranges near the interest on excess reserves rate. Forward measures of funding rates implied that conditions were expected to remain stable in coming months. Markets for Treasury securities and agency mortgage-backed securities (MBS) continued to function smoothly, with bid-ask spreads and a range of other indicators remaining near pre-pandemic levels. Indicators of functioning in the market for agency commercial mortgage-backed securities (CMBS) also remained stable. In light of the improved conditions, the staff proposed that the Desk no longer be required to increase agency CMBS holdings or reinvest principal payments for agency CMBS. For the time being, the Desk would continue to conduct regular agency CMBS operations to maintain backstop capacity. 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 COVID-19 pandemic and the measures undertaken to contain its spread continued to affect economic activity in the United States and abroad. The information available at the time of the September 15–16 meeting suggested that U.S. real GDP was rebounding at a rapid rate in the third quarter. Labor market conditions continued to improve markedly in July and August, but employment was still below its level at the beginning of the year. Consumer price inflation—as measured by the 12‑month percentage change in the price index for personal consumption expenditures (PCE) through July—remained well below the rates that prevailed early in the year. Total nonfarm payroll employment expanded strongly in July and August, al­though payrolls had retraced only about half of the jobs lost at the onset of the pandemic. The unemployment rate moved down further to 8.4 percent in August. The unemployment rates for African Americans, Asians, and Hispanics declined over the past two months but remained well above the national average. The labor force participation rate rose, on net, and the employment-to-population ratio increased further in July and August. Initial claims for unemployment insurance benefits continued to move down, on net, through early September, but the pace of declines had slowed. In addition, weekly estimates of private-sector payrolls constructed by the Board's staff using data provided by the payroll processor ADP suggested that employment gains likely were still solid from mid-August to early September. Total PCE price inflation was 1.0 percent over the 12 months ending in July, reflecting both weak aggregate demand and a considerable drop in consumer energy prices early this year. Core PCE price inflation, which excludes changes in consumer food and energy prices, was 1.3 percent over the same 12-month period. By comparison, the trimmed mean measure of 12‑month PCE price inflation constructed by the Federal Reserve Bank of Dallas was 1.8 percent in July. The consumer price index (CPI) increased 1.3 percent over the 12 months ending in August, while core CPI inflation was 1.7 percent over the same period. On a monthly basis, recent inflation readings were bolstered by increases in durable goods prices, largely reflecting the strong demand for consumer goods as household purchases shifted away from many consumer services. The latest readings on survey-based measures of longer-run inflation expectations moved up a bit but remained within their ranges in recent years. The University of Michigan Surveys of Consumers measure for the next 5 to 10 years edged up in July and August, and the three-year-ahead measure from the Federal Reserve Bank of New York's Survey of Consumer Expectations also crept up over the past two months. Real PCE expanded strongly in July and continued to be bolstered by supportive fiscal and monetary policy actions. In August, the components of retail sales used to estimate PCE, along with sales of light motor vehicles, increased further. However, recent high-frequency indicators of spending on some consumer services—such as restaurant dining, hotel accommodations, and air travel—were still subdued. Real disposable personal income was roughly flat in July, primarily reflecting further gains in wage and salary income that were largely offset by the waning of government transfer payments from their peak in the spring. Nevertheless, the personal saving rate remained quite elevated. The consumer sentiment measure from the Michigan survey edged up in August, while the Conference Board survey measure moved down; both measures continued to be below their levels at the beginning of the year. Housing-sector activity continued to expand, likely supported by the effects of low interest rates. Starts and building permit issuance for single-family homes, along with starts of multifamily units, increased further in July. Sales of both new and existing homes also rose substantially further. These measures of construction and sales were generally at or near their pre-pandemic levels. Indicators of business fixed investment suggested that this sector was beginning to recover on balance. Nominal new orders and shipments of nondefense capital goods excluding aircraft increased in July, the third consecutive monthly increase in these indicators of business equipment spending. Many measures of business sentiment also improved somewhat in July and August. In addition, the number of crude oil and natural gas rigs in operation through early September—an indicator of business spending on structures in the drilling and mining sector—had flattened out recently following its declines since the spring. In contrast, nominal business spending on nonresidential structures outside of the drilling and mining sector declined over June and July. Industrial production expanded further in July and August, al­though at a less rapid pace than over the preceding two months. The increase in factory output was broad based, but the gains for most manufacturing industries had slowed gradually since June. Production in the mining sector—which includes crude oil and natural gas drilling and extraction—increased in July but fell in August, as Tropical Storm Marco and Hurricane Laura caused sharp but temporary decreases in extraction and drilling. Total real government purchases appeared to be increasing modestly, on balance, in the third quarter. Federal defense spending continued to rise through August, and federal employment was boosted markedly by temporary census-related hiring. State and local government payrolls expanded in July and August, al­though nominal state and local construction expenditures decreased in June and July. After declining sharply earlier this year, exports and imports of goods and services increased strongly in June and July. On net, over these two months, the nominal U.S. international trade deficit widened, as imports rose more than exports. Exports and imports of goods rose in June and July in most major product categories, while exports and imports of services rose modestly following previous historic declines. Foreign economic activity plunged in the second quarter as a result of the COVID-19 pandemic and the associated restrictive measures to contain it. With some of these measures having been rolled back in recent months, economic indicators pointed to a large, but partial, rebound in most foreign economies in the third quarter. Recent indicators of household and business spending were strong in several economies (including Canada, the euro area, and Brazil), reflecting in part a boost from substantial government support programs. In China, economic indicators showed a continued moderate expansion after a sharp rebound in the second quarter, though gains in consumption continued to lag those in production and exports. Similarly, in Mexico, a strong rebound in manufacturing production contrasted with weak services activity. Despite the widespread rebound in foreign activity indicators, a resurgence in COVID-19 cases in parts of Europe and Asia added uncertainty to the outlook for those economies. Recent readings of headline and core inflation abroad remained quite low, particularly in the advanced foreign economies (AFEs), amid subdued demand pressures and lower energy prices from earlier this year. Staff Review of the Financial Situation Financial market sentiment improved over the intermeeting period, boosted by declines in the number of new COVID-19 cases in the United States and stronger-than-anticipated corporate earnings reports and domestic economic data releases. Broad stock price indexes rose, on net, despite notable declines late in the intermeeting period. Inflation compensation increased further, reaching pre-pandemic levels. Changes in other asset prices were generally more modest but were consistent with improved sentiment: The Treasury yield curve steepened a little, spreads on speculative-grade corporate bonds narrowed moderately, and the exchange value of the dollar depreciated modestly. Meanwhile, financing conditions for businesses with access to capital markets and households with high credit scores remained broadly accommodative, al­though conditions remained tight for other borrowers. Yields on 2-year nominal Treasury securities were little changed since the July FOMC meeting, while 10- and 30-year yields rose moderately. Market commentary attributed the increases in longer-term yields to improved investor sentiment. This improved sentiment partly reflected the decline in new COVID-19 cases in the United States and stronger-than-expected economic data, al­-though market reactions to economic data releases were limited. The near-dated implied volatility on 10-year Treasury securities was little changed over the intermeeting period and remained near the bottom of its historical range. Measures of inflation compensation based on TIPS maturing over the next few years continued to increase, likely reflecting the general improvement in investor sentiment accompanying the improvement in the economic outlook, some further improvements in TIPS market liquidity, and the higher-than-expected July CPI data release. The 5-year and 5-to-10-year measures of inflation compensation were close to their pre-pandemic levels but were still in the lower end of their historical ranges. The expected path for the federal funds rate over the next few years, as implied by a straight read of overnight index swap quotes, was little changed, on net, since the July FOMC meeting and remained close to the effective lower bound (ELB) through the first half of 2024. Communications about monetary policy over the intermeeting period generally had little effect on Treasury yields or the expected path of the federal funds rate. However, market participants suggested that building expectations that the Committee would move to a form of flexible average inflation targeting under the revised consensus statement had been a factor boosting TIPS inflation compensation over recent months. Broad stock price indexes rose, on net, during the intermeeting period, consistent with generally better-than-expected news on both the economy and second-quarter corporate earnings. One-month option-implied volatility on the S&P 500—the VIX—was roughly unchanged, on net, al­though measures of longer-term downside risks in equity markets, such as the option-implied cost of insuring against a 10 percent decline in the S&P 500 index in three months, increased somewhat. Spreads of investment- and speculative-grade corporate bond yields over comparable-maturity Treasury yields narrowed somewhat and remained near their historical medians. Conditions in short-term funding markets were stable over the intermeeting period. Spreads on commercial paper (CP) and negotiable certificates of deposit across different tenors changed little, on net, and remained around levels observed before the pandemic. Total gross CP issuance also remained within pre-pandemic normal ranges, al­though outstanding volumes of nonfinancial CP declined moderately since the July FOMC meeting. Assets under management of prime and government money market funds (MMFs) declined modestly on net. Partly reversing changes observed between April and July, institutional government MMFs, on net, decreased their holdings of Treasury securities and increased their holdings of repurchase agreements (repos) in August. The reversal was driven in part by a tighter spread between Treasury bill yields and repo rates. Amid normalizing market conditions, there was little activity in the Money Market Mutual Fund Liquidity Facility or the Commercial Paper Funding Facility. The effective federal funds rate and the Secured Overnight Financing Rate averaged 9 basis points over the intermeeting period. The amount of Federal Reserve repo outstanding remained at zero over the intermeeting period due to more attractive rates in the private market. Meanwhile, the Federal Reserve increased holdings of Treasury securities and agency MBS at the same pace as during the previous intermeeting period. Foreign asset price movements were generally muted, with market participants likely weighing concerns over rising infection rates in some countries against the prospect of a COVID-19 vaccine. In emerging market economies (EMEs), Asian equity markets significantly outperformed Latin American counterparts, with Chinese equities showing particular strength. In most AFEs, equity indexes rose modestly and long-term sovereign yields edged higher. In line with the modest improvement in risk sentiment, the staff's broad dollar index declined moderately, on net, with the dollar depreciating more against EME currencies. The Chinese renminbi was boosted by better-than-expected Chinese economic data and was the most notable contributor to the decline in the staff's trade-weighted dollar index, along with the Mexican peso. Among AFE currencies, the euro appreciated further and reached its highest level against the dollar since 2018. The pound was little changed, as some of its earlier appreciation against the dollar unwound amid a resurgence of Brexit-related uncertainty. Financing conditions in capital markets remained accommodative over the intermeeting period. Amid historically low corporate bond yields, gross issuance of both investment- and speculative-grade corporate bonds was strong in July and August. Much of this recent issuance was intended to refinance existing debt. Gross institutional leveraged loan issuance picked up slightly in July but remained below the levels observed during the same period last year. Amid notable equity market gains in August, gross equity issuance was robust, as seasoned offerings strengthened to about double their typical pace. Commercial and industrial loans outstanding declined in July and August, but at a slower pace than in June, with declines in large part reflecting continued credit-line repayment. The credit quality of nonfinancial corporations showed tentative signs of stabilization over the intermeeting period. The dollar volume of nonfinancial corporate bond downgrades continued to exceed upgrades, albeit only modestly, representing a sizable reduction in net downgrades since the spring. The pace of nonfinancial corporate bond defaults in July was also notably lower than in April and May but was still elevated relative to pre-pandemic levels. Default volumes fell further in August, reaching a level below the 2019 monthly average. Market indicators of future default expectations also improved somewhat. Financing conditions for small businesses remained tight, al­though some indicators pointed to a slight improvement. Thirty-day delinquency rates fell modestly between May and July but remained comparable with early 2008 levels. The credit needs of small businesses remained high, with significant shares of respondents to the Census Bureau's Small Business Pulse Survey reporting scarce cash availability and anticipating a need for financial assistance in the next six months. Municipal market financing conditions remained accommodative since the July FOMC meeting. However, the credit quality of municipal debt deteriorated somewhat, driven by a relatively large volume of credit rating downgrades of revenue bonds. Financing conditions for commercial real estate (CRE) intermediated through capital markets recovered further over the intermeeting period. Spreads on triple-B non-agency CMBS remained wide, though they continued to narrow through August, while triple-A spreads remained close to pre-pandemic levels. Issuance of non-agency CMBS was steady but subdued relative to pre-pandemic levels. Spreads on agency CMBS were tight and issuance was very strong, setting a new single-month record in July. In contrast, CRE loan growth at banks was weak in July and August, likely partly driven by the recovery of CMBS markets. Delinquency rates on mortgages backing CMBS fell a bit in July but remained high in the hotel and retail sectors. Financing conditions in the residential mortgage market were little changed over the intermeeting period. While mortgage rates hovered near historical lows, the spread between primary mortgage rates and MBS yields remained quite wide. Credit continued to flow to higher-score borrowers who met standard conforming loan criteria, while it remained tight for borrowers with lower credit scores and for nonstandard mortgage products. Nonetheless, low mortgage rates were supporting both home-purchase originations and refinancing. The credit quality of mortgages improved slightly, with the rate of transition into delinquency remaining near pre-pandemic levels and forbearance continuing to slowly decline. Financing conditions in consumer credit markets remained accommodative for borrowers with relatively strong credit scores but continued to be tight for subprime borrowers. Auto loan balances increased solidly overall but declined for borrowers with low credit scores. Credit card balances contracted at a slower rate in June and July than in the spring. However, offered interest rates rose and credit limits edged down for credit cards to nonprime borrowers. Conditions in the asset-backed securities (ABS) market were stable during the intermeeting period. ABS spreads edged down, and auto and student loan issuance was robust. Consumer credit performance remained stable, and the share of auto and credit card balances in forbearance declined. Staff Economic Outlook In the U.S. economic projection prepared by the staff for the September FOMC meeting, the rate of real GDP growth and the pace of declines in the unemployment rate were faster over the second half of this year than in the July forecast, primarily reflecting recent better-than-expected data. In addition, the inflation forecast for the rest of the year was revised up slightly, as some recent consumer goods prices were stronger than expected. Nevertheless, inflation was still projected to be subdued this year, reflecting substantial slack in resource utilization and the sizable declines in consumer energy prices earlier this year. Fiscal policy measures, along with the support from monetary policy and the Federal Reserve's liquidity and lending facilities, were expected to continue supporting the second-half recovery, al­though the recovery was forecast to be far from complete by year-end. The staff's forecast assumed the enactment of some additional fiscal policy support this year; without that additional policy action, the pace of the economic recovery would likely be slower. In the staff's medium-term projection, the baseline assumptions included that the current restrictions on social interactions and business operations, along with voluntary social distancing by individuals and firms, would ease gradually through next year. In addition, the staff projection assumed that monetary policy would be even more accommodative than in the previous forecast in order to more fully reflect the revised consensus statement. Altogether, the rate of real GDP growth was projected to exceed potential output growth, the unemployment rate was expected to decline considerably further, and inflation was forecast to pick back up in 2021 through 2023. With the more-accommodative monetary policy assumed in the current forecast, which reflected the recent consensus statement, inflation was projected to moderately overshoot 2 percent for some time in the years beyond 2023. The staff continued to observe that the uncertainty related to the course of the COVID‑19 pandemic and its associated economic effects was extremely elevated and that the risks to the outlook were still tilted to the downside. Given the apparent resilience of the U.S. economy to the acceleration in the spread of the pandemic during the summer, the staff judged that a significantly more pessimistic economic outcome, which the staff had previously viewed as no less plausible than the baseline forecast and had featured a renewed downturn in economic activity, was now less likely than the baseline forecast. Participants' Views on Current Conditions and the Economic Outlook In conjunction with this FOMC meeting, participants submitted their projections of the most likely outcomes for real GDP growth, the unemployment rate, and inflation for each year from 2020 through 2023 and over the longer run, based on their individual assessments of appropriate monetary policy—including the 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 SEP, which is an addendum to these minutes. Participants noted that the COVID-19 pandemic was causing tremendous human and economic hardship across the United States and around the world. Economic activity and employment had picked up in recent months but remained well below their levels at the beginning of the year. Weaker demand and significantly lower oil prices were holding down consumer price inflation. Overall financial conditions had improved in recent months, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses. Participants agreed that the path of the economy would depend on the course of the virus and that the ongoing public health crisis would continue to weigh on economic activity, employment, and inflation in the near term and posed considerable risks to the economy's medium-term outlook. Participants observed that the incoming data indicated that economic activity was recovering faster than expected from its depressed second-quarter level, when much of the economy was shut down to stem the spread of the virus. In particular, with the reopening of many businesses and fewer people withdrawing from social interactions, consumer spending was rebounding sharply and appeared to have recovered about three-fourths of its earlier decline. Prior fiscal policy actions were seen as having supported the ability and willingness of households to spend, al­though most participants expressed concern about the expiration of the enhanced unemployment insurance benefits from the CARES Act (Coronavirus Aid, Relief, and Economic Security Act) and judged that additional fiscal relief would help sustain the recovery in household spending. Indeed, many participants noted that their economic outlook assumed additional fiscal support and that if future fiscal support was significantly smaller or arrived significantly later than they expected, the pace of the recovery could be slower than anticipated. Participants also viewed accommodative monetary policy as contributing to gains in residential investment as well as consumer purchases of motor vehicles and other durable goods. While participants pointed to strength in consumers' purchases of goods, especially those sold online, they noted that outlays for services had been slower to recover, particularly for items such as air travel, hotel accommodations, and restaurant meals, which had been significantly disrupted by social-distancing measures. Participants generally expected spending on these services to remain subdued for some time and thus to be a restraining factor on the pace of the recovery. A few participants raised the possibility that the unwinding of the large pool of household savings accumulated during the pandemic could provide greater-than-anticipated momentum to consumption going forward. However, a couple of other participants judged that if this savings reflected reduced spending on in-person services by high-income consumers, it was unlikely to provide much momentum to future consumption. Participants noted that business investment, which had plummeted in the second quarter, appeared to have begun to turn around. They pointed to data showing gains in capital goods orders and shipments as well as improved business sentiment. A number of participants judged that low interest rates were supporting business investment. However, the recovery was viewed as unevenly distributed across industries. While many business contacts reported progress on adapting to the pandemic, others noted that industries that relied more on person-to-person interactions continued to struggle. Business contacts with ties to the motor vehicle or housing industries indicated increased activity, while those closer to the aviation, hospitality, and nonresidential construction industries were not seeing much of a recovery. Contacts continued to report ongoing stresses in the energy sector, as well as challenges in the agricultural sector even though some crop prices had risen recently as sales to China increased. Al­though business contacts indicated that overall business activity had been stronger than they expected, it remained well below pre-pandemic levels. Business contacts pointed to several factors that could restrain further recovery, including high levels of uncertainty that were reportedly still holding back hiring and capital spending. Some contacts reported difficulties in managing disruptions in supply chains as well as elevated levels of employee absenteeism because of the pandemic. Additionally, District contacts indicated that fiscal policy had helped support small businesses, while federal aid payments had helped support farm incomes. Participants observed that labor market conditions continued to improve in recent months and that the economy through August had regained roughly half of the 22 million jobs that were lost in March and April. The gains in employment over July and August were generally seen as larger than anticipated. Participants judged, however, that the labor market was a long way from being fully recovered. They generally agreed that prospects for a further substantial improvement in the labor market would depend on a broad and sustained reopening of businesses, which in turn would depend importantly on how safe individuals felt to reengage in a wide range of activities. Some participants noted that the majority of gains in employment so far reflected workers on temporary layoffs returning to work. These participants judged it as less likely for future job gains to continue at their recent pace, because a greater share of the remaining layoffs might become permanent. Workers facing permanent layoffs were seen as more likely to need to find new jobs in different industries, and this process could take time, especially to the extent that these workers needed to be retrained. Participants observed that lower-paid workers had been disproportionally affected by the economic effects of the pandemic. Many of these workers were employed in the service sector or other industries most adversely affected by social-distancing measures. With a disproportionate share of service-sector jobs held by African Americans, Hispanics, and women, these groups were seen as being especially hard hit by the economic hardships caused by the pandemic. Participants viewed fiscal support from the CARES Act as having been very important in bolstering the financial situations of millions of families, and a number of participants judged that the absence of further fiscal support would exacerbate economic hardships in minority and lower-income communities. In addition, several participants observed that the effects of the pandemic were disrupting the supply of labor because of the need to care for children, many of whom were attending school virtually from home. In their comments about inflation, participants noted that consumer prices had increased more quickly than expected in recent months and that market-based measures of inflation compensation had increased moderately over the intermeeting period, al­though they remained low. The upturn in consumer prices was primarily attributed to price increases in sectors such as consumer durables in which demand had risen after experiencing a large decline earlier this spring. Nevertheless, inflation remained subdued, and participants still generally judged that the overall effect of the pandemic on prices was disinflationary. While the outlook for inflation was viewed as highly uncertain, a number of participants projected that inflation would run below the Committee's 2 percent longer-run objective for a significant period before moving moderately above 2 percent for some time—consistent with the Committee's revised consensus statement. Participants noted that financial conditions were generally accommodative and that actions by the Federal Reserve, including the establishment of emergency lending facilities in conjunction with the Treasury, were supporting the flow of credit to households, businesses, and communities. While these actions as well as prompt and forceful monetary policy measures in response to the pandemic were viewed as contributing to accommodative financial conditions, participants noted important differences in credit quality and credit availability across borrowers. While the pace of corporate downgrades was seen as having decreased significantly in recent months, the delinquency rates on business loans had risen noticeably. Bank contacts reported ample capacity to lend to creditworthy borrowers; however, surveys of credit availability indicated that bank lending was tight. Furthermore, several participants noted the stress that small- and medium-sized banks could face from defaults on loans to small businesses and CRE properties if people continued to withdraw from travel and shopping activities. Additionally, a couple of participants indicated that highly accommodative financial market conditions could lead to excessive risk-taking and to a buildup of financial imbalances. Participants continued to see the uncertainty surrounding the economic outlook as very elevated, with the path of the economy highly dependent on the course of the virus; on how individuals, businesses, and public officials responded to it; and on the effectiveness of public health measures to address it. Participants cited several downside risks that could threaten the recovery. While the risk of another broad economic shutdown was seen as having receded, participants remained concerned about the possibility of additional virus outbreaks that could undermine the recovery. Such scenarios could result in increases in bankruptcies and defaults, put stress on the financial system, and lead to disruptions in the flow of credit to households and businesses. Most participants raised the concern that fiscal support so far for households, businesses, and state and local governments might not provide sufficient relief to these sectors. A couple of participants saw an upside risk that further fiscal stimulus could be larger than anticipated, though it might come later than had been expected. Several participants raised concerns regarding the longer-run effects of the pandemic, including how it could lead to a restructuring in some sectors of the economy that could slow employment growth or could accelerate technological disruption that was likely limiting the pricing power of firms. In their consideration of monetary policy at this meeting, participants reaffirmed that they were committed to using the Federal Reserve's full range of tools in order to support the U.S. economy during this challenging time, thereby promoting the Committee's statutory goals of maximum employment and price stability. They also noted that the path of the economy would depend significantly on the course of the virus and that the ongoing public health crisis would continue to weigh on economic activity, employment, and inflation in the near term and posed considerable risks to the economic outlook over the medium term. All participants agreed that the completion of the framework review and the publication of the revised consensus statement provided a strong foundation for monetary policy decisions and communications going forward. Accordingly, participants agreed that it would be appropriate to incorporate some key elements of the revised consensus statement into the FOMC statement to be released following this meeting. In particular, participants reiterated their commitment to achieve maximum employment and an inflation rate of 2 percent over the longer run. With inflation running persistently below its longer-run goal, participants judged that it would be appropriate to aim to achieve inflation moderately above 2 percent for some time so that inflation would average 2 percent over time and longer-term inflation expectations would remain well anchored at 2 percent. Against this backdrop, participants discussed a range of issues associated with providing greater clarity about the likely path of the federal funds rate in the years ahead. Most participants supported providing more explicit outcome-based forward guidance for the federal funds rate that included establishing criteria for lifting the federal funds rate above the ELB in terms of the paths for employment or inflation or both. Among the participants who favored providing more explicit forward guidance at this meeting, all but a couple supported a formulation in which the forward guidance included language indicating that it would likely be appropriate to maintain the current target range until labor market conditions were judged to be consistent with the Committee's assessments of maximum employment and inflation had risen to 2 percent and was on track to moderately exceed 2 percent for some time. These participants noted that communicating that the target range for the federal funds rate would remain at the ELB until these criteria were achieved would provide appropriately clear and strong policy guidance. Doing so at this meeting was viewed as an especially important way of affirming the Committee's commitment to achieving the economic outcomes articulated in the consensus statement. Participants generally noted that outcome-based forward guidance for the federal funds rate of this type was not an unconditional commitment to a particular path. Indeed, outcome-based guidance of this type would allow the public to infer changes in the Committee's assessment of how long the target range for the federal funds rate would remain at its current setting. Information pointing to a weaker outlook for the economy and inflation would tend to lead to public expectations for a longer period at the current setting of the target range while information suggesting a stronger outlook for the economy and inflation would tend to lead to expectations for a shorter period at the current setting. In addition, circumstances could arise in which the Committee judged that it would be appropriate to change its guidance, particularly if risks emerged that could impede the attainment of its economic objectives. A couple of participants preferred even stronger, and less qualified, outcome-based forward guidance that they judged would more clearly convey the Committee's commitment to its objectives and to the strategic approach that was articulated in the revised consensus statement. In particular, these participants preferred forward guidance in which the target range for the federal funds rate remained at the ELB until inflation had moved above 2 percent for some time. Especially in light of the lengthy period in which inflation has run below the Committee's longer-run 2 percent objective, these participants judged that it was critical to demonstrate the Committee's commitment to achieve outcomes in which inflation averages 2 percent over time. Several participants noted that while they agreed it was appropriate to incorporate key elements of the consensus statement into the postmeeting statement, they preferred to retain forward guidance similar to that provided in recent FOMC statements. These participants judged that it would likely be appropriate to maintain an accommodative stance of policy for some time in order to foster outcomes consistent with the Committee's revised consensus statement. However, with longer-term interest rates already very low, there did not appear to be a need for enhanced forward guidance at this juncture or much scope for forward guidance to put additional downward pressure on yields. Moreover, these participants were concerned that forward guidance that involved the target range for the federal funds rate remaining at the ELB until employment and inflation criteria were achieved could limit the Committee's flexibility for years. Furthermore, by influencing expectations for the path of short-term interest rates, such guidance could contribute to a buildup of financial imbalances that would make it more difficult for the Committee to achieve its objectives in the future. Regarding asset purchases, participants judged that it would be appropriate over coming months for the Federal Reserve to increase its holdings of Treasury securities and agency MBS at least at the current pace. These actions would continue to help sustain smooth market functioning and would continue to help foster accommodative financial conditions, thereby supporting the flow of credit to households and businesses. Some participants also noted that in future meetings it would be appropriate to further assess and communicate how the Committee's asset purchase program could best support the achievement of the Committee's maximum-employment and price-stability goals. Participants widely echoed the remarks at the opening of the meeting in memory of Thomas Laubach. Participants universally recognized his great leadership and intellectual contributions to the work of the Committee as well as his warm and generous spirit. Committee Policy Action In their discussion of monetary policy for this meeting, members agreed that the COVID-19 pandemic was causing tremendous human and economic hardship across the United States and around the world. They noted that economic activity and employment had picked up in recent months but remained well below their levels at the beginning of the year, and that weaker demand and significantly lower oil prices were holding down consumer price inflation. Overall, financial conditions had improved in recent months, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses. Members agreed that the Federal Reserve was committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum-employment and price-stability goals. Members also stated that the path of the economy would depend significantly on the course of the virus. In addition, members agreed that the ongoing public health crisis would continue to weigh on economic activity, employment, and inflation in the near term and was posing considerable risks to the economic outlook over the medium term. All members agreed to incorporate into the postmeeting statement key elements of the Committee's revised Statement on Longer-Run Goals and Monetary Policy Strategy. Members judged that this action would underscore the Committee's strong commitment to the goals and strategy articulated in the new consensus statement in pursuit of the Committee's statutory objectives. Accordingly, members agreed that the FOMC statement should note that the Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run and that, with inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent. Members generally expected that it would be appropriate to maintain an accommodative stance of monetary policy until these outcomes were achieved. All members agreed to maintain the target range for the federal funds rate at 0 to 1/4 percent. Almost all members viewed this meeting as the appropriate time to modify forward guidance to provide greater clarity regarding the likely future path of the federal funds rate. To this end, almost all members agreed on a specification for outcome-based forward guidance that indicated that the Committee expects that it will be appropriate to maintain the current setting of the target range for the federal funds rate until labor market conditions had reached levels consistent with the Committee's assessments of maximum employment and inflation had risen to 2 percent and was on track to run moderately in excess of 2 percent for some time. Two members dissented from the policy decision. One of these dissenting members preferred that the Committee retain greater policy rate flexibility by retaining the language in the forward guidance provided in the July postmeeting statement; that language noted that it would be appropriate to maintain the current target range until the Committee was confident that the economy had weathered recent events and was on track to achieve its maximum employment and price stability goals. The other dissenting member preferred a stronger formulation for the forward guidance—one in which the Committee would indicate that it expected to maintain the current target range until core inflation had reached 2 percent on a sustained basis. In their discussion of monetary policy for the period ahead, members generally agreed that the Committee's policy guidance expressed its assessment about the path for the federal funds rate most likely to be consistent with achievement of the Committee's goals, but that it was not an unconditional commitment. They stated that the appropriate rate path would depend on the evolution of the economic outlook. Accordingly, they agreed that the Committee would be prepared to adjust the stance of policy as appropriate in the event that risks emerged that could impede the attainment of the Committee's goals. Members also agreed that, in assessing the appropriate stance of monetary policy, they would take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments. Members noted that the Committee's asset purchases had helped foster significant improvements in market functioning over recent months. In addition, purchases of securities were contributing to accommodative financial conditions in a way that supported economic recovery. Consistent with these observations, members agreed that it would be appropriate to acknowledge in the postmeeting statement the role of asset purchases in supporting accommodative financial conditions. The Committee's statement thus indicated that over coming months it would be appropriate for the Federal Reserve to increase its holdings of Treasury securities and agency MBS at least at the current pace to sustain smooth market functioning and to help foster accommodative financial conditions, thereby supporting the flow of credit to households and businesses. Members considered the staff proposal to eliminate the requirement in the directive to increase the holdings of agency CMBS in the SOMA portfolio. In light of the substantial improvement in market functioning in the agency CMBS market, the Committee judged that it would be appropriate for the Desk to purchase agency CMBS only as needed to sustain smooth market functioning, rather than seek to steadily increase agency CMBS holdings, and to cease reinvestments of agency CMBS principal payments. Members also concluded that, in light of ongoing low take-up at Desk repo operations, it was not necessary to include a sentence on these operations in the FOMC statement. However, the directive adopted by the Committee continued to direct the Desk to conduct overnight and term repo operations to support effective policy implementation and smooth functioning of short-term U.S. dollar funding markets. 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, for release at 2:00 p.m.: "Effective September 17, 2020, 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 0 to 1/4 percent. Increase the System Open Market Account holdings of Treasury securities and agency mortgage-backed securities (MBS) at the current pace. Increase holdings of Treasury securities and agency MBS by additional amounts and purchase agency commercial mortgage-backed securities (CMBS) as needed to sustain smooth functioning of markets for these securities. Conduct term and overnight repurchase agreement operations to support effective policy implementation and the smooth functioning of short-term U.S. dollar funding markets. Conduct overnight reverse repurchase agreement operations at an offering rate of 0.00 percent and with a per-counterparty limit of $30 billion per day; the per-counterparty limit can be temporarily increased at the discretion of the Chair. Roll over at auction all principal payments from the Federal Reserve's holdings of Treasury securities and reinvest all principal payments from the Federal Reserve's holdings of agency debt and agency MBS in agency MBS. Allow modest deviations from stated amounts for purchases and reinvestments, if needed for operational reasons. Engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions." The vote also encompassed approval of the statement below for release at 2:00 p.m.: "The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals. The COVID-19 pandemic is causing tremendous human and economic hardship across the United States and around the world. Economic activity and employment have picked up in recent months but remain well below their levels at the beginning of the year. Weaker demand and significantly lower oil prices are holding down consumer price inflation. Overall financial conditions have improved in recent months, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses. The path of the economy will depend significantly on the course of the virus. The ongoing public health crisis will continue to weigh on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved. The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee's assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. In addition, over coming months the Federal Reserve will increase its holdings of Treasury securities and agency mortgage-backed securities at least at the current pace to sustain smooth market functioning and help foster accommodative financial conditions, thereby supporting the flow of credit to households and businesses. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments." Voting for this action: Jerome H. Powell, John C. Williams, Michelle W. Bowman, Lael Brainard, Richard H. Clarida, Patrick Harker, Loretta J. Mester, and Randal K. Quarles. Voting against this action: Robert S. Kaplan and Neel Kashkari. President Kaplan dissented because he expects that it will be appropriate to maintain the current target range until the Committee is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals as articulated in its new policy strategy statement, but prefers that the Committee retain greater policy rate flexibility beyond that point. President Kashkari dissented because he prefers that the Committee indicate that it expects to maintain the current target range until core inflation has reached 2 percent on a sustained basis. 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 at 0.10 percent. The Board of Governors also voted unanimously to approve establishment of the primary credit rate at the existing level of 0.25 percent, effective September 17, 2020. It was agreed that the next meeting of the Committee would be held on Wednesday–Thursday, November 4–5, 2020. The meeting adjourned at 11:00 a.m. on September 16, 2020. Notation Votes By notation vote completed on August 18, 2020, the Committee unanimously approved the minutes of the Committee meeting held on July 28–29, 2020. By notation vote completed on August 27, 2020, the Committee unanimously approved updates to its Statement on Longer-Run Goals and Monetary Policy Strategy. In conjunction with the notation vote, all non-voting participants also expressed support for the updated statement. _______________________ 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's session only. Return to text

2020-07-29

Statement

The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals. The coronavirus outbreak is causing tremendous human and economic hardship across the United States and around the world. Following sharp declines, economic activity and employment have picked up somewhat in recent months but remain well below their levels at the beginning of the year. Weaker demand and significantly lower oil prices are holding down consumer price inflation. Overall financial conditions have improved in recent months, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses. The path of the economy will depend significantly on the course of the virus. The ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term. In light of these developments, the Committee decided to maintain the target range for the federal funds rate at 0 to 1/4 percent. The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals. The Committee will continue to monitor the implications of incoming information for the economic outlook, including information related to public health, as well as global developments and muted inflation pressures, and will use its tools and act as appropriate to support the economy. In determining the timing and size of future adjustments to the stance of monetary policy, 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. To support the flow of credit to households and businesses, over coming months the Federal Reserve will increase its holdings of Treasury securities and agency residential and commercial mortgage-backed securities at least at the current pace to sustain smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions. In addition, the Open Market Desk will continue to offer large-scale overnight and term repurchase agreement operations. The Committee will closely monitor developments and is prepared to adjust its plans as appropriate. Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Patrick Harker; Robert S. Kaplan; Neel Kashkari; Loretta J. Mester; and Randal K. Quarles. Implementation Note issued July 29, 2020

2020-08-19

Minute

Minutes of the Federal Open Market Committee July 28-29, 2020 A joint meeting of the Federal Open Market Committee and the Board of Governors was held by videoconference on Tuesday, July 28, 2020, at 10:00 a.m. and continued on Wednesday, July 29, 2020, at 9:00 a.m.1 PRESENT: Jerome H. Powell, Chair John C. Williams, Vice Chair Michelle W. Bowman Lael Brainard Richard H. Clarida Patrick Harker Robert S. Kaplan Neel Kashkari Loretta J. Mester Randal K. Quarles Thomas I. Barkin, Raphael W. Bostic, Mary C. Daly, Charles L. Evans, and Michael Strine, 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 Michelle A. Smith, Assistant Secretary Mark E. Van Der Weide, General Counsel Michael Held, Deputy General Counsel Stacey Tevlin, Economist Beth Anne Wilson, Economist Shaghil Ahmed,2 Michael Dotsey, Beverly Hirtle, Trevor A. Reeve, Ellis W. Tallman, William Wascher, and Mark L.J. Wright, Associate Economists Lorie K. Logan, Manager, System Open Market Account Ann E. Misback, Secretary, Office of the Secretary, Board of Governors Eric Belsky,3 Director, Division of Consumer and Community Affairs, Board of Governors; Matthew J. Eichner,4 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; Brian M. Doyle, Deputy Director, Division of International Finance, Board of Governors; Rochelle M. Edge, Deputy Director, Division of Monetary Affairs, Board of Governors Jon Faust, Senior Special Adviser to the Chair, Division of Board Members, Board of Governors Joshua Gallin, Special Adviser to the Chair, Division of Board Members, Board of Governors William F. Bassett, Antulio N. Bomfim, Wendy E. Dunn, Ellen E. Meade, Chiara Scotti, and Ivan Vidangos, Special Advisers to the Board, Division of Board Members, Board of Governors Linda Robertson, Assistant to the Board, Division of Board Members, Board of Governors Eric M. Engen 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 Edward Nelson and Robert J. Tetlow, Senior Advisers, Division of Monetary Affairs, Board of Governors David López-Salido,3 Associate Director, Division of Monetary Affairs, Board of Governors; Paul R. Wood, Associate Director, Division of International Finance, Board of Governors Eric C. Engstrom and Christopher J. Gust,3 Deputy Associate Directors, Division of Monetary Affairs, Board of Governors; Luca Guerrieri, Deputy Associate Director, Division of Financial Stability, Board of Governors; Norman J. Morin, Deputy Associate Director, Division of Research and Statistics, Board of Governors; Jeffrey D. Walker,4 Deputy Associate Director, Division of Reserve Bank Operations and Payment Systems, Board of Governors Brian J. Bonis and Etienne Gagnon,3 Assistant Directors, Division of Monetary Affairs, Board of Governors; Viktors Stebunovs,5 Assistant Director, Division of International Finance, Board of Governors Brett Berger,6 Adviser, Division of International Finance, Board of Governors Penelope A. Beattie,7 Section Chief, 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 Michele Cavallo and Kurt F. Lewis, Principal Economists, Division of Monetary Affairs, Board of Governors Marcelo Ochoa, 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, Joseph W. Gruber, Daleep Singh, and Christopher J. Waller, Executive Vice Presidents, Federal Reserve Banks of Atlanta, Richmond, Kansas City, New York, and St. Louis, respectively Michael Schetzel,6 Senior Vice President, Federal Reserve Bank of New York Eugene Amromin, Kathryn B. Chen,6 Matthew Nemeth,6 Joe Peek, and Patricia Zobel, Vice Presidents, Federal Reserve Banks of Chicago, New York, New York, Boston, and New York, respectively Robert Lerman,6 Assistant Vice President, Federal Reserve Bank of New York Karel Mertens, Senior Economic Policy Advisor, Federal Reserve Bank of Dallas Mark Spiegel, Senior Policy Advisor, Federal Reserve Bank of San Francisco Review of Monetary Policy Strategy, Tools, and Communication Practices Participants continued their discussion related to the ongoing review of the Federal Reserve's monetary policy strategy, tools, and communication practices. At this meeting, they discussed potential changes to the Committee's Statement on Longer-Run Goals and Monetary Policy Strategy. Participants agreed that, in light of fundamental changes in the economy over the past decade—including generally lower levels of interest rates and persistent disinflationary pressures in the United States and abroad—and given what has been learned during the monetary policy framework review, refining the statement could be helpful in increasing the transparency and accountability of monetary policy. Such refinements could also facilitate well-informed decisionmaking by households and businesses, and, as a result, better position the Committee to meet its maximum-employment and price-stability objectives. Participants noted that the Statement on Longer-Run Goals and Monetary Policy Strategy serves as the foundation for the Committee's policy actions and that it would be important to finalize all changes to the statement in the near future. Developments in Financial Markets and Open Market Operations The System Open Market Account (SOMA) manager turned first to a review of U.S. financial market developments. Over the intermeeting period, overall financial conditions eased slightly. Broad equity price indexes were roughly flat even as concerns about the resurgence in the coronavirus (COVID-19) in the United States grew. At the same time, Treasury yields and other sovereign yields declined, and the U.S. dollar weakened. Overall, volatility remained subdued relative to recent periods. While the S&P 500 index was little changed, the effect of renewed outbreaks was evident in the differentiated performance across S&P industry sectors. Virus-sensitive sectors and firms with weaker fundamentals underperformed over the period, as they had over the broader pandemic episode. Airline and hotel share prices declined sharply, and share prices of banks—which faced earnings pressures from large loan loss provisions and compressed net interest margins—continued to underperform. As the SOMA manager highlighted, the S&P 500 index has been supported by its significant share of technology firms, many of which have been relatively resilient to virus containment measures. In contrast, smaller firms not well represented in the S&P 500 may be experiencing greater effects on their businesses due to the virus—a possibility consistent with the underperformance of the broader Russell 2000 index over the intermeeting period. The market-implied path of the federal funds rate shifted down modestly over the intermeeting period. The corresponding path implied by responses to the Open Market Desk's Survey of Primary Dealers and Survey of Market Participants also fell, as the probabilities placed on rate hikes next year and in 2022 declined. Market pricing suggested that the federal funds rate was expected to first rise above the current target range in 2024. That timing was broadly consistent with survey respondents' expectations regarding the timing of the first increase in the target range, although the range of survey responses was wide. The SOMA manager noted that survey responses suggested that the dispersion in views about the timing of a rate increase might be related to differing views about the economic conditions that would prevail when the FOMC first lifted the target range, as survey respondents' views about those conditions were also dispersed. The SOMA manager reported that market functioning across a number of market segments remained stable at significantly improved levels. In Treasury and agency mortgage-backed securities (MBS) markets, many market functioning indicators had returned to levels prevailing before the pandemic, and, as a result, purchases were conducted at the minimum pace directed by the Committee. Importantly, with conditions in MBS markets continuing to stabilize, primary mortgage rates fell to historically low levels over the intermeeting period. Conditions in short-term dollar funding markets were also stable, with overnight rates close to the interest on excess reserves (IOER) rate. In broader dollar funding markets, term unsecured rates and foreign exchange swap spreads were also steady. Federal Reserve repurchase agreements (repos) outstanding fell from $185 billion to zero over the intermeeting period. With the timing of the overnight operations now having shifted to the afternoon when most trading activity in the repo market is complete and with minimum bid rates above the IOER rate, repo operations had been effectively positioned in a backstop role for the time being. As term U.S. dollar liquidity swaps matured, the amounts outstanding fell to around $120 billion, less than a third of the peak reached in late May. In light of improved conditions across these markets, the Federal Reserve's balance sheet declined over the intermeeting period from $7.2 trillion to $7.0 trillion. The decline was driven by the reductions in repo and U.S. dollar liquidity swaps outstanding. These reductions more than offset ongoing purchases of Treasury securities and agency MBS. The manager discussed a proposal to extend the temporary U.S. dollar liquidity swap arrangements as well as the temporary FIMA (Foreign and International Monetary Authorities) Repo Facility through March of next year. Keeping these arrangements in place would help sustain recent improvements in global dollar funding markets and support smooth functioning of the U.S. Treasury market. Under the proposal, provided that the Committee had no objections, the Chair would approve the extension of the temporary liquidity swap lines following the meeting. The extensions of the swap and FIMA repo arrangements would be announced following this meeting. By unanimous vote, the Committee voted to approve a resolution that extended through March 31, 2021, the expiration of a temporary repo facility for foreign and international monetary authorities (FIMA Repo Facility).8 Secretary's note: The Chair subsequently provided approval to the Desk, following the procedures in the Authorization for Foreign Currency Operations, to extend the expiration of the temporary U.S. dollar liquidity swap lines through March 31, 2021. 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 coronavirus outbreak and the measures undertaken to contain its spread continued to have substantial effects on economic activity in the United States and abroad. The information available at the time of the July 28–29 meeting suggested that U.S. economic activity had picked up in May and June following sharp declines in March and April. Measured on a quarterly basis, however, it appeared that real gross domestic product (GDP) had decreased at a historically rapid rate in the second quarter. Labor market conditions improved considerably in June, but the improvements over May and June were modest relative to the substantial deterioration seen in March and April. Consumer price inflation—as measured by the 12‑month percentage change in the price index for personal consumption expenditures (PCE) through May—remained well below the rates that prevailed early in the year. Total nonfarm payroll employment expanded robustly in June, as it did in May, but the gains in those two months offset only about one-third of the jobs lost in March and April. The unemployment rate moved down further to 11.1 percent, but it continued to be far above its level at the beginning of the year. The unemployment rates for African Americans, Asians, and Hispanics declined, on balance, over the past two months but remained well above the national average. Both the labor force participation rate and the employment-to-population ratio increased further in June. Initial claims for unemployment insurance benefits continued to decrease, on net, through the middle of July, but the pace of declines had slowed in recent weeks. In addition, weekly estimates of private-sector payrolls constructed by the Board's staff using data provided by the payroll processor ADP, along with some other high-frequency measures—such as employment at small businesses and job postings—suggested that employment gains had slowed since mid-June but likely were still strong. Total PCE price inflation was 0.5 percent over the 12 months ending in May, reflecting both weak aggregate demand and a considerable drop in consumer energy prices. Core PCE price inflation, which excludes changes in consumer food and energy prices, was 1.0 percent over the same 12-month period. In contrast, the trimmed mean measure of 12‑month PCE price inflation constructed by the Federal Reserve Bank of Dallas was 2.0 percent in May. The consumer price index (CPI) increased 0.6 percent over the 12 months ending in June, while core CPI inflation was 1.2 percent over the same period. On a monthly basis, the available data indicated that consumer prices—as measured by the PCE price index in May and the CPI in June—had turned up after having fallen in March and April; this rebound was evident in many price categories that were most affected by social-distancing measures. Recent readings on survey-based measures of longer-run inflation expectations were little changed on balance. The University of Michigan Surveys of Consumers measure for the next 5 to 10 years was unchanged, on net, from May to early July; the three-year-ahead measure from the Federal Reserve Bank of New York's Survey of Consumer Expectations edged down in June but remained within its recent range. Real PCE rebounded robustly in May, with particularly strong growth in spending for consumer goods but more moderate gains in expenditures for consumer services. In June, the components of retail sales used by the Bureau of Economic Analysis to estimate PCE, along with light motor vehicle sales, increased further. Overall, however, real consumer spending remained well below the levels that prevailed at the beginning of the year. Moreover, recent high-frequency indicators of spending on many consumer services—such as restaurant dining, hotel accommodations, and air travel—remained very subdued. Real disposable personal income fell back in May, primarily reflecting the waning of the substantial boost that federal stimulus payments had provided in April. However, wage and salary income increased strongly in May, though to a level still below its February value, and unemployment insurance benefits continued to be substantial, leaving the personal saving rate quite elevated. The consumer sentiment measures from both the Michigan survey and the Conference Board survey improved notably in June but fell back somewhat in July. Housing-sector activity bounced back strongly in recent months, likely boosted in part by the effects of low interest rates. Starts and building permit issuance for single-family homes, along with starts of multifamily units, increased significantly over May and June; however, these construction measures were still below their pre-pandemic levels. Sales of existing homes rose substantially over those two months, and new home sales also moved up on net. Indicators of business fixed investment suggested that investment had generally not begun to recover but that the pace of declines had moderated, on balance, in recent months. Nominal new orders and shipments of nondefense capital goods excluding aircraft increased in May and June, but they remained below their levels at the beginning of the year, while some measures of business sentiment improved. Nominal business spending on nonresidential structures outside of the drilling and mining sector declined further in May, and the number of crude oil and natural gas rigs in operation—an indicator of business spending on structures in the drilling and mining sector—continued to decrease through late July. Industrial production expanded briskly in May and June, as many factories reopened or ramped up production. The surge in manufacturing production was led by appreciable gains in the output of motor vehicles and related parts following extended automaker shutdowns from mid-March through April. In contrast, output in the mining sector—which includes crude oil extraction—decreased further, reflecting the effects of still-low crude oil prices. Total real government purchases appeared to have increased moderately, on balance, in the second quarter. Federal defense spending continued to rise through June, and nondefense purchases were likely boosted in the second quarter by fiscal policy measures taken in response to the coronavirus. In contrast, state and local purchases looked to have declined markedly, as the payrolls of these governments shrank further in June, and nominal state and local construction expenditures decreased, on net, over April and May. The nominal U.S. international trade deficit widened in May relative to April, as exports decreased more than imports. The fall in exports was broad based across goods categories, while lower imports of automotive products more than offset higher imports of consumer goods and industrial supplies. Following April's historic plunge, exports and imports of services fell a bit further in May, driven by the continued suspension of most international travel. Preliminary data for June showed some recovery in nominal goods exports and imports. Altogether, the available data suggested that net exports were a significant drag on the rate of change in real GDP in the second quarter. Incoming data suggested that foreign economic activity plunged in the second quarter as a result of the coronavirus pandemic and the measures undertaken to contain it. There were also signs that many foreign economies started to recover over the past few months as restrictions were gradually eased. In China, where economic activity had collapsed in the first quarter and restrictions were rolled back earlier than elsewhere, the preliminary GDP release showed that the economy bounced back strongly in the second quarter. In the euro area and other advanced foreign economies, recent data on industrial production and, to a lesser extent, consumer spending showed a partial recovery in May and June. However, continued uncertainty about the course of the virus was underscored by the fact that some emerging market economies were struggling to control the pandemic, while some other countries that previously contained the virus were experiencing flare-ups of new infections. Inflation rates continued to fall in most foreign economies through June because of low energy prices and weak demand, and measures of inflation expectations remained subdued. Staff Review of the Financial Situation Amid sizable fluctuations, changes in asset prices over the intermeeting period were mixed on net. Financial market sentiment was boosted by better-than-expected economic data for the United States, China, and Europe. However, the boost to sentiment appeared to have been offset by concerns about the domestic spread of the coronavirus and its uncertain effects on the future course of the economy. On balance, broad equity price indexes were roughly unchanged, Treasury yields declined and the yield curve flattened, corporate and municipal bond spreads narrowed, and the dollar weakened somewhat. Liquidity conditions continued to normalize but had not returned to their pre-pandemic levels in several markets. Over the intermeeting period, yields on nominal Treasury securities fell and the yield curve flattened on net. Yields declined somewhat at the start of the intermeeting period following the more-accommodative-than-expected June FOMC communications. The further decline in yields that occurred over subsequent weeks likely reflected concerns about the surge in confirmed coronavirus cases across many parts of the United States. Measures of inflation compensation based on Treasury Inflation Protected Securities maturing over the next few years continued to rebound from their sharp drop in mid-March. The rebound was reportedly driven primarily by investors' interpretation of recent economic data, which suggested that the risk of deflation had abated somewhat, as well as by some improvement in market liquidity. Despite the uptick, both the 5-year and 10-year measures of inflation compensation remained below their pre-pandemic levels. The expected path of the federal funds rate based on a straight read of overnight index swap quotes declined modestly and stayed close to the effective lower bound at least through the first half of 2024. Market‑implied forward rates referring to 2021 and 2022 remained slightly negative; however, market commentary suggested that investors generally did not expect the FOMC to lower the federal funds target range below zero. Broad stock price indexes fluctuated substantially, largely in reaction to news about the pandemic and economic activity, and ended the intermeeting period roughly unchanged. Technology stocks continued to outperform the broader market, whereas equity prices in the bank and energy sectors fell notably over the period. One-month option-implied volatility on the S&P 500 index—the VIX—rose markedly earlier in the period but subsequently declined and ended the period lower. Equity market volatility remained elevated relative to its normal range over the past several years. Spreads of investment- and speculative-grade corporate bond yields over comparable-maturity Treasury yields narrowed somewhat and had retraced most of their pandemic-related surge. Conditions in short-term funding markets were generally stable over the intermeeting period. Spreads for negotiable certificates of deposit and most types of commercial paper were little changed, on net, and spreads and issuance volumes for both types of instruments reached pre‑pandemic levels. In light of the stable market conditions, there was little activity in the emergency liquidity facilities. Since the June FOMC meeting, assets under management for prime money market funds (MMFs) were little changed, whereas government MMFs experienced moderate outflows. Amid heavy issuance of securities by the Treasury, government MMFs continued to increase their holdings of Treasury securities while reducing their holdings of repos. The effective federal funds rate (EFFR) and Secured Overnight Financing Rate (SOFR) increased, on average, 4 basis points and 5 basis points, respectively, from the previous intermeeting period. The EFFR fluctuated between 8 and 10 basis points, and the SOFR fluctuated between 7 and 13 basis points, throughout the intermeeting period. The decline in total outstanding Federal Reserve repo operations from $185 billion to zero largely reflected an increase in minimum bid rates at the Federal Reserve's overnight and term repo operations. Over the intermeeting period, the Federal Reserve maintained the purchases of Treasury securities and agency MBS at the pace prevailing at the end of the previous intermeeting period. Risk sentiment abroad fluctuated over the intermeeting period as market participants weighed increasing coronavirus cases in a number of countries against improving economic data releases and ongoing fiscal and monetary policy support. Foreign equity prices generally declined on net. A resurgence of geopolitical tensions between the United States and China weighed on investor sentiment late in the period and prompted a partial retracement of earlier gains for the Shanghai Composite Index. Long-term sovereign yields in most advanced foreign economies (AFEs) ended the period moderately lower. The yield spreads of long-term Italian bonds over their German counterparts narrowed further, reaching the lowest level since March following agreement on the European Union (EU) Recovery Fund. The staff's broad dollar index declined slightly, on net, with moderate depreciation against AFE currencies. The EU Recovery Fund agreement supported the euro, which appreciated about 3 percent against the dollar over the intermeeting period. In contrast, the Brazilian real depreciated about 5 percent against the dollar, amid continued policy rate cuts by the Central Bank of Brazil, escalating coronavirus cases, and political turmoil in Brazil. Capital market financing conditions for nonfinancial firms eased somewhat further over the intermeeting period, with yields on corporate bonds remaining near historical lows. Investment-grade corporate bond issuance was solid in June, and speculative-grade issuance remained robust. Gross institutional leveraged loan issuance picked up in June from its subdued levels in previous months. Gross equity issuance hit a record level in June, as the volume of seasoned equity offerings reached a new record, while initial public offerings rebounded from their very low levels of the previous three months. In the July Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS), banks reported a notable tightening of lending standards on commercial and industrial (C&I) loans to firms of all sizes in the second quarter. Standards were reported to be at the tighter end of their range since 2005, a marked change from a year ago. C&I loans on banks' balance sheets contracted significantly in June, reflecting paydowns of the record draws on credit lines seen in previous months, as well as low originations. Credit quality of nonfinancial corporations deteriorated further over the intermeeting period, with a sizable volume of speculative-grade debt downgraded in June. Defaults in May reached their highest single-month volume since 2009, and June defaults were high as well. Market indicators of future default expectations also deteriorated somewhat. Municipal market financing conditions remained accommodative, although the credit quality of municipal debt continued to show signs of weakness. Financing conditions for small businesses remained tight. Banks reported in the July SLOOS that the level of standards for small businesses was at the tighter end of the range since 2005. At the same time, the credit needs of small businesses remained high, as the prospect arose of many businesses having to shut down operations again in response to rising coronavirus cases. Small business loan performance deteriorated significantly; short-term delinquencies were comparable with levels seen in early 2008. Amid tighter lending standards and high credit demand, advances via the Paycheck Protection Program Lending Facility continued to grow over the intermeeting period. In early July, the Main Street Lending Program became fully operational. Financing conditions for commercial real estate (CRE), particularly those in capital markets, recovered further over the intermeeting period. Spreads on non-agency commercial mortgage-backed securities (CMBS) continued to decline in June, while issuance of non-agency CMBS continued to show signs of moderate recovery in May and June. Spreads on agency CMBS remained at pre-pandemic levels, and agency CMBS issuance was strong. In contrast, bank lending standards for CRE loans tightened further, according to the July SLOOS, and CRE loan growth at banks slowed. The credit quality of existing CRE loans continued to deteriorate as further signs of repayment difficulties emerged, most notably in the lodging and retail sectors. Financing conditions in the residential mortgage market were generally unchanged over the intermeeting period. The spread between the primary mortgage rate and MBS yields remained wide, reflecting capacity constraints at loan originators, increased origination costs, and decreases in the value of servicing rights. Credit continued to flow to borrowers with higher credit scores seeking mortgages that met standard conforming loan criteria, and low mortgage interest rates supported elevated refinancing activity. Financing conditions remained tight, however, for borrowers with relatively low credit scores and for those seeking nonconforming mortgages. The July SLOOS and other surveys of mortgage market conditions suggested that both bank and nonbank lenders tightened standards in the second quarter. The credit quality of mortgages did not appear to deteriorate further over the period. Financing conditions for consumer credit tightened a bit further during the intermeeting period. In the credit card market, lending standards at commercial banks tightened further according to the July SLOOS. In contrast, conditions in the auto loan market appeared to be little changed, on balance, with those for subprime borrowers remaining tight. Conditions in the consumer asset-backed securities (ABS) markets were stable during the intermeeting period. Yield spreads for certain highly rated credit card and auto loan ABS stabilized at pre-pandemic levels, while student and auto loan ABS issuance recovered to a pre-pandemic pace. Consumer credit quality remained stable, partly due to forbearance programs. The staff provided an update on its assessment of the stability of the financial system, and, on balance, characterized the financial vulnerabilities of the U.S. financial system as notable, while noting an unusually high level of uncertainty associated with this assessment. The staff judged that asset valuation pressures were notable. In particular, high-yield and investment-grade corporate bond spreads were within historical norms, and commercial real estate prices were continuing to increase despite rising vacancy rates. The staff assessed vulnerabilities due to nonfinancial leverage to have risen from moderate to notable, reflecting declines in household incomes and business profits; such declines implied less resilient borrowers. The expected sharp decline in second-quarter real GDP would likely result in a rise in the ratio of household debt to nominal GDP. The ratio of business debt to nominal GDP rose in the first quarter from levels that were already historically high—amid declining profits and deteriorating credit quality—although low interest rates had helped ease firms' debt servicing burdens. The staff assessed vulnerabilities arising from financial leverage to have increased from low to moderate, citing uncertainty about losses connected to business loans for banks and a higher weight on vulnerabilities connected to leverage at nonbank financial institutions. Vulnerabilities associated with maturity and liquidity transformation were characterized as moderate, and the staff noted that Federal Reserve facilities reduced these vulnerabilities at nonbanks. Staff Economic Outlook In the U.S. economic projection prepared by the staff for the July FOMC meeting, the estimated level of real GDP in the second quarter was marked up compared with the June meeting forecast, reflecting the better-than-expected data through June. Nevertheless, economic activity still appeared to have declined at a historically rapid rate in the second quarter. The projected rate of recovery in real GDP, and the pace of declines in the unemployment rate, over the second half of this year were expected to be somewhat less robust than in the previous forecast. Although the staff assumed that additional fiscal stimulus measures would be enacted beyond those anticipated in the June forecast, the positive effect on the economic outlook was outweighed somewhat by the staff's assessment of the likely effects of several other factors. Those factors included the increasing spread of the coronavirus in the United States since mid-June; the reactions of many states and localities in slowing or scaling back the reopening of their economies, especially for businesses, such as restaurants and bars, providing services that entail personal interactions; and some high-frequency indicators that pointed to a deceleration in economic activity. Substantial fiscal policy measures—both enacted and anticipated—along with appreciable support from monetary policy and the Federal Reserve's liquidity and lending facilities were expected to continue bolstering the economic recovery, although a complete recovery was not expected by year-end. Inflation was projected to remain subdued this year, reflecting the substantial amount of slack in resource utilization and the sizable declines in consumer energy prices earlier this year. The staff's baseline assumptions were that the current restrictions on social interactions and business operations, along with voluntary social distancing by individuals, would ease gradually through next year. As a result, the rate of real GDP growth was projected to exceed potential output growth, the unemployment rate was expected to decline considerably, and inflation was forecast to pick back up over 2021 and 2022. The staff continued to observe that the uncertainty related to the economic effects of the pandemic was extremely elevated and that the unusual nature of the pandemic-related shock made assessments about how the economy might evolve in the future more challenging than usual. In light of the significant uncertainty and downside risks associated with the course of the pandemic and how long it would take the economy to recover, the staff still judged that a more pessimistic projection was no less plausible than the baseline forecast. In this alternative scenario, an acceleration of the coronavirus outbreak, with another round of strict limitations on social interactions and business operations, was assumed to begin later this year, leading to a decrease in real GDP, a jump in the unemployment rate, and renewed downward pressure on inflation next year. Compared with the baseline, the disruption to economic activity was more severe and protracted in this scenario, with real GDP and inflation lower and the unemployment rate higher by the end of the medium-term projection. Participants' Views on Current Conditions and the Economic Outlook Participants noted that the coronavirus pandemic was causing tremendous human and economic hardship across the United States and around the world. Following sharp declines, economic activity and employment had picked up somewhat in recent months but remained well below levels at the beginning of the year. Weaker demand and significantly lower oil prices were holding down consumer price inflation. Overall financial conditions had improved in recent months, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses. Participants agreed that the path of the economy would depend on the course of the virus, which was seen as highly uncertain. Participants noted that the rebound in consumer spending from its trough in April had been particularly strong. Resumption in economic activity, as well as payments to households under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, had supported household income and consumer expenditures. Participants observed that with this rebound, household spending likely had recovered about half of its previous decline. Consumers' purchases of goods—including motor vehicles, other durables, and especially goods sold online—had bounced back much more than their purchases of services, such as air travel, hotel accommodations, and restaurant meals, which were disrupted significantly by social distancing and other effects of the virus. With regard to the behavior of household spending in recent weeks, participants pointed to information from District contacts and high-frequency indicators (such as credit and debit card transactions and mobility indicators based on cellphone location tracking) as suggesting that increases in some consumer expenditures had likely slowed in reaction to the further spread of the virus. Participants noted that households' spending on discretionary services—such as leisure, travel, and hospitality—would likely be subdued for some time and thus would be a factor restraining the pace of recovery. In contrast to the sizable rebound in consumer spending, participants saw less improvement in the business sector in recent months, and they noted that their District business contacts continued to report extraordinarily high levels of uncertainty and risks. Several participants relayed examples of some operational difficulties their business contacts were reportedly facing in the current environment. These difficulties included managing disruptions in supply chains, challenges associated with closure and reopening, and elevated employee absenteeism in some cases. Furthermore, some participants noted that small businesses were under significant strain. Also, further near-term fiscal support was uncertain. Participants noted that, in light of conditions in the business sector, business investment spending continued to be subdued. Participants generally agreed that actions of consumers and businesses in taking steps to slow the spread of the virus, along with developments in public health, would be critical in ensuring a durable reopening of businesses. In addition, monetary policy and particularly fiscal policy would also play important roles in supporting business activity. Several participants also commented on ongoing challenges facing the energy or farm sector despite recent improvements. In the energy sector, these challenges included still-low oil demand, excess inventories, and low oil prices, while in the farm sector they included low prices of some farm commodities, pandemic-related disruptions in some food processing plants, and a significant decline in demand for ethanol. Regarding the labor market, many participants commented that the pace of employment gains, which was quite strong in May and June, had likely slowed. The increasing number of virus cases in many parts of the country had led to delays in some business reopenings and to some reclosures as well. The pace of declines in initial unemployment insurance claims had slowed in recent weeks, and claims remained at an elevated level. In addition, participants emphasized that the labor market was a long way from a full recovery even after the positive May and June employment reports; these reports indicated that, through June, only about one-third of the roughly 22 million loss in jobs that occurred over March and April had been offset by subsequent gains. Participants generally agreed that prospects for further substantial improvement in the labor market would depend on a broad and sustained reopening of businesses. In turn, such a reopening would depend in large part on the efficacy of health measures taken to limit the spread of the virus. Participants also discussed the nature of the current situation in the labor market. They noted that the downturn in employment was concentrated among lower-wage and service-sector workers, many of whom were employed in industries most adversely affected by social-distancing measures. And with lower-wage and service-sector jobs disproportionately held by African Americans, Hispanics, and women, these portions of the population were bearing a disproportionate share of the economic hardship caused by the pandemic. Participants noted that the fiscal support initiated in the spring through the CARES Act had been very important in granting some financial relief to millions of families. A number of participants observed that, with some provisions of the CARES Act set to expire shortly against the backdrop of a still-weak labor market, additional fiscal aid would likely be important for supporting vulnerable families, and thus the economy more broadly, in the period ahead. In their comments about inflation, participants generally judged that the negative effect of the pandemic on aggregate demand was more than offsetting upward pressures on some prices stemming from supply constraints or from higher demand for certain products, so that the overall effect of the pandemic on prices was seen as disinflationary. Recent low monthly readings of PCE prices suggested that the 12-month change measure of PCE price inflation would likely continue to run well below the Committee's 2 percent objective for some time. Against this backdrop, a few participants noted a risk that longer-term inflation expectations might move below levels consistent with the Committee's symmetric 2 percent objective. Participants also noted that a highly accommodative stance of monetary policy would likely be needed for some time to support aggregate demand and achieve 2 percent inflation over the longer run. Participants observed that many measures of financial market functioning were indicating that improvements achieved since the extreme turbulence in March had been sustained. Actions by the Federal Reserve, including emergency lending facilities established with approval of (and, in many cases, financial support from) the Treasury, had helped ease the strains in some financial markets seen earlier in the year and were supporting the flow of credit to households, businesses, and communities. Participants observed that the volume of borrowing in recent months at many of the Federal Reserve's liquidity facilities had stayed low, reflecting improved availability of funding from market sources. And participants agreed that the Federal Reserve's ongoing provision of backstop credit in various forms continued to be important to sustain the market improvements already achieved. Participants observed that uncertainty surrounding the economic outlook remained very elevated, with the path of the economy highly dependent on the course of the virus and the public sector's response to it. Several risks to the outlook were noted, including the possibility that additional waves of virus outbreaks could result in extended economic disruptions and a protracted period of reduced economic activity. In such scenarios, banks and other lenders could tighten conditions in credit markets appreciably and restrain the availability of credit to households and businesses. Other risks cited included the possibility that fiscal support for households, businesses, and state and local governments might not provide sufficient relief of financial strains in these sectors and that some foreign economies could come under greater pressure than anticipated as a result of the spread of the pandemic abroad. Several participants noted potential longer-run effects of the pandemic associated with possible restructuring in some sectors of the economy that could slow the growth of the economy's productive capacity for some time. A number of participants commented on various potential risks to financial stability. Banks and other financial institutions could come under significant stress, particularly if one of the more adverse scenarios regarding the spread of the virus and its effects on economic activity was realized. Nonfinancial corporations had carried high levels of indebtedness into the pandemic, increasing their risk of insolvency. There were also concerns that the anticipated increase in Treasury debt over the next few years could have implications for market functioning. There was general agreement that these institutions, activities, and markets should be monitored closely, and a few participants noted that improved data would be helpful for doing so. Several participants observed that the Federal Reserve had recently taken steps to help ensure that banks remain resilient through the pandemic, including by conducting additional sensitivity analysis in conjunction with the most recent bank stress tests and imposing temporary restrictions on shareholder payouts to preserve banks' capital. A couple of participants noted that they believed that restrictions on shareholder payouts should be extended, while another judged that such a step would be premature. In their consideration of monetary policy at this meeting, participants reaffirmed their commitment to using the Federal Reserve's full range of tools to support the U.S. economy during this challenging time, thereby promoting its maximum employment and price stability goals. They noted that the path of the economy would depend significantly on the course of the virus and that the ongoing public health crisis would weigh heavily on economic activity, employment, and inflation in the near term and posed considerable risks to the economic outlook over the medium term. In light of this assessment, all participants considered it appropriate to maintain the target range for the federal funds rate at 0 to 1/4 percent. Furthermore, participants continued to judge that it would be appropriate to maintain this target range until they were confident that the economy had weathered recent events and was on track to achieve the Committee's maximum employment and price stability goals. Participants also judged that, in order to continue to support the flow of credit to households and businesses, it would be appropriate over coming months for the Federal Reserve to increase its holdings of Treasury securities and agency residential mortgage-backed securities (RMBS) and CMBS at least at the current pace. These actions would be helpful in sustaining smooth market functioning, thereby fostering the effective transmission of monetary policy to broader financial conditions. In addition, participants noted that it was appropriate that the Desk would continue to offer large-scale overnight and term repo operations. Participants observed that it would be important to continue to monitor developments closely and that the Committee would be prepared to adjust its plans as appropriate. Participants discussed the current stance of monetary policy and the circumstances under which they might increase monetary policy accommodation or clarify their intentions regarding policy. Participants generally judged that the Committee's policy actions over the past several months had provided substantial accommodation; several of them observed that the Committee's asset purchases, which were designed to support financial market functioning and the smooth flow of credit, were likely also providing a degree of policy accommodation. Noting the increase in uncertainty about the economic outlook over the intermeeting period, several participants suggested that additional accommodation could be required to promote economic recovery and return inflation to the Committee's 2 percent objective. Some participants observed that, due to the nature of the shock that the U.S. economy was experiencing, strong fiscal policy support would be necessary to encourage expeditious improvements in labor market conditions. With regard to the outlook for monetary policy beyond this meeting, a number of participants noted that providing greater clarity regarding the likely path of the target range for the federal funds rate would be appropriate at some point. Concerning the possible form that revised policy communications might take, these participants commented on outcome-based forward guidance—under which the Committee would undertake to maintain the current target range for the federal funds rate at least until one or more specified economic outcomes was achieved—and also touched on calendar-based forward guidance—under which the current target range would be maintained at least until a particular calendar date. In the context of outcome-based forward guidance, various participants mentioned using thresholds calibrated to inflation outcomes, unemployment rate outcomes, or combinations of the two, as well as combinations with calendar-based guidance. In addition, many participants commented that it might become appropriate to frame communications regarding the Committee's ongoing asset purchases more in terms of their role in fostering accommodative financial conditions and supporting economic recovery. More broadly, in discussing the policy outlook, a number of participants observed that completing a revised Statement on Longer-Run Goals and Monetary Policy Strategy would be very helpful in providing an overarching framework that would help guide the Committee's future policy actions and communications. A majority of participants commented on yield caps and targets—approaches that cap or target interest rates along the yield curve—as a monetary policy tool. Of those participants who discussed this option, most judged that yield caps and targets would likely provide only modest benefits in the current environment, as the Committee's forward guidance regarding the path of the federal funds rate already appeared highly credible and longer-term interest rates were already low. Many of these participants also pointed to potential costs associated with yield caps and targets. Among these costs, participants noted the possibility of an excessively rapid expansion of the balance sheet and difficulties in the design and communication of the conditions under which such a policy would be terminated, especially in conjunction with forward guidance regarding the policy rate. In light of these concerns, many participants judged that yield caps and targets were not warranted in the current environment but should remain an option that the Committee could reassess in the future if circumstances changed markedly. A couple of participants remarked on the value of yield caps and targets as a means of reinforcing forward guidance on asset purchases, thereby providing insurance against adverse movements in market expectations regarding the path of monetary policy, and as a tool that could help limit the amount of asset purchases that the Committee would need to make in pursuing its dual-mandate goals. Committee Policy Action In their discussion of monetary policy for this meeting, members agreed that the coronavirus outbreak was causing tremendous human and economic hardship across the United States and around the world. Following sharp declines, economic activity and employment had picked up somewhat in recent months but remained well below their levels at the beginning of the year. Consumer price inflation was being held down by weaker demand and significantly lower oil prices. Overall financial conditions had improved, in part reflecting policy measures to support the economy and the flow of credit to U.S. households, businesses, and communities. Members agreed that the Federal Reserve was committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals. Members stated that the path of the economy would depend significantly on the course of the virus. In addition, members agreed that the ongoing public health crisis would weigh heavily on economic activity, employment, and inflation in the near term and was posing considerable risks to the economic outlook over the medium term. In light of these developments, members decided to maintain the target range for the federal funds rate at 0 to 1/4 percent. Members stated that they expected to maintain this target range until they were confident that the economy had weathered recent events and was on track to achieve the Committee's maximum employment and price stability goals. Members agreed that they would continue to monitor the implications of incoming information for the economic outlook—including information related to public health—as well as global developments and muted inflation pressures, and that they would use the Committee's tools and act as appropriate to support the economy. In determining the timing and size of future adjustments to the stance of monetary policy, members noted that they would assess realized and expected economic conditions relative to the Committee's maximum-employment objective and its symmetric 2 percent inflation objective. 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. To support the flow of credit to households and businesses, members agreed that over coming months it would be appropriate for the Federal Reserve to increase its holdings of Treasury securities and agency RMBS and CMBS at least at the current pace to sustain smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions. In addition, members agreed that the Desk would continue to offer large-scale overnight and term repo operations. Members noted that they would closely monitor developments and be prepared to adjust their plans as appropriate. 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, for release at 2:00 p.m.: "Effective July 30, 2020, 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 0 to 1/4 percent. Increase the System Open Market Account holdings of Treasury securities, agency mortgage-backed securities (MBS), and agency commercial mortgage-backed securities (CMBS) at least at the current pace to sustain smooth functioning of markets for these securities, thereby fostering effective transmission of monetary policy to broader financial conditions. Conduct term and overnight repurchase agreement operations to support effective policy implementation and the smooth functioning of short-term U.S. dollar funding markets. Conduct overnight reverse repurchase agreement operations at an offering rate of 0.00 percent and with a per-counterparty limit of $30 billion per day; the per-counterparty limit can be temporarily increased at the discretion of the Chair. Roll over at auction all principal payments from the Federal Reserve's holdings of Treasury securities and reinvest all principal payments from the Federal Reserve's holdings of agency debt and agency MBS in agency MBS and all principal payments from holdings of agency CMBS in agency CMBS. Allow modest deviations from stated amounts for purchases and reinvestments, if needed for operational reasons. Engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions." The vote also encompassed approval of the statement below for release at 2:00 p.m.: "The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals. The coronavirus outbreak is causing tremendous human and economic hardship across the United States and around the world. Following sharp declines, economic activity and employment have picked up somewhat in recent months but remain well below their levels at the beginning of the year. Weaker demand and significantly lower oil prices are holding down consumer price inflation. Overall financial conditions have improved in recent months, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses. The path of the economy will depend significantly on the course of the virus. The ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term. In light of these developments, the Committee decided to maintain the target range for the federal funds rate at 0 to 1/4 percent. The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals. The Committee will continue to monitor the implications of incoming information for the economic outlook, including information related to public health, as well as global developments and muted inflation pressures, and will use its tools and act as appropriate to support the economy. In determining the timing and size of future adjustments to the stance of monetary policy, 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. To support the flow of credit to households and businesses, over coming months the Federal Reserve will increase its holdings of Treasury securities and agency residential and commercial mortgage-backed securities at least at the current pace to sustain smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions. In addition, the Open Market Desk will continue to offer large-scale overnight and term repurchase agreement operations. The Committee will closely monitor developments and is prepared to adjust its plans as appropriate." Voting for this action: Jerome H. Powell, John C. Williams, Michelle W. Bowman, Lael Brainard, Richard H. Clarida, Patrick Harker, Robert S. Kaplan, Neel Kashkari, 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 at 0.10 percent. The Board of Governors also voted unanimously to approve establishment of the primary credit rate at the existing level of 0.25 percent, effective July 30, 2020. It was agreed that the next meeting of the Committee would be held on Tuesday–Wednesday, September 15–‍16, 2020. The meeting adjourned at 10:55 a.m. on July 29, 2020. Notation Vote By notation vote completed on June 30, 2020, the Committee unanimously approved the minutes of the Committee meeting held on June 9-10, 2020. _______________________ 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 economic developments and the outlook, and all of Wednesday's session. Return to text 3. Attended through the discussion of the review of monetary policy strategy, tools, and communication practices. Return to text 4. Attended through the discussion of developments in financial markets and open market operations. Return to text 5. Attended the discussion of economic developments and the outlook. Return to text 6. Attended the discussion of developments in financial markets and open market operations. Return to text 7. Attended Tuesday's session only. Return to text 8. The approved FIMA Desk Resolution, which updates the March 2020 resolution with a new expiration date, is available with other Committee organizational documents at https://www.federalreserve.gov/monetarypolicy/rules_authorizations.htm. Return to text

2020-07-01

Minute

Minutes of the Federal Open Market Committee June 9-10, 2020 A joint meeting of the Federal Open Market Committee and the Board of Governors was held by videoconference on Tuesday, June 9, 2020, at 10:00 a.m. and continued on Wednesday, June 10, 2020, at 9:00 a.m.1 PRESENT: Jerome H. Powell, Chair John C. Williams, Vice Chair Michelle W. Bowman Lael Brainard Richard H. Clarida Patrick Harker Robert S. Kaplan Neel Kashkari Loretta J. Mester Randal K. Quarles Thomas I. Barkin, Raphael W. Bostic, Mary C. Daly, Charles L. Evans, and Michael Strine, 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 Michelle A. Smith, Assistant Secretary Mark E. Van Der Weide, General Counsel Michael Held, Deputy General Counsel Thomas Laubach, Economist Stacey Tevlin, Economist Beth Anne Wilson, Economist Shaghil Ahmed, Marc Giannoni, Trevor A. Reeve, William Wascher, and Mark L.J. Wright, Associate Economists Lorie K. Logan, 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; Michael T. Kiley, Deputy Director, Division of Financial Stability, Board of Governors Jon Faust, Senior Special Adviser to the Chair, Office of Board Members, Board of Governors Joshua Gallin, Special Adviser to the Chair, Office of Board Members, Board of Governors William F. Bassett, Antulio N. Bomfim, Wendy E. Dunn, Ellen E. Meade, Chiara Scotti, and Ivan Vidangos, 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 Brian M. Doyle,3 Senior Associate Director, Division of International Finance, Board of Governors; Eric M. Engen, Senior Associate Director, Division of Research and Statistics, Board of Governors Edward Nelson4 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 Sally Davies, Associate Director, Division of International Finance, Board of Governors; David López-Salido, Associate Director, Division of Monetary Affairs, Board of Governors Burcu Duygan-Bump, Andrew Figura, Shane M. Sherlund, and Paul A. Smith, Deputy Associate Directors, 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; Paul R. Wood,4 Deputy Associate Director, Division of International Finance, Board of Governors Brian J. Bonis, Etienne Gagnon, and Zeynep Senyuz, Assistant Directors, Division of Monetary Affairs, Board of Governors Matthias Paustian,4 Assistant Director and Chief, Division of Research and Statistics, Board of Governors Penelope A. Beattie,5 Section Chief, Office of the Secretary, Board of Governors; Dana L. Burnett, Section Chief, Division of Monetary Affairs, Board of Governors; Dario Caldara,6 Section Chief, Division of International Finance, Board of Governors Mark A. Carlson, Senior Economic Project Manager, Division of Monetary Affairs, Board of Governors; Canlin Li,4 Senior Economic Project Manager, Division of International Finance, 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 Michele Cavallo, Bernd Schlusche,4 and Mary Tian, Principal Economists, Division of Monetary Affairs, Board of Governors; Maria Otoo, Principal Economist, Division of Research and Statistics, Board of Governors Sriya Anbil,4 Erin E. Ferris, and Fabian Winkler, Senior Economists, Division of Monetary Affairs, Board of Governors; David S. Miller,4 Senior Economist, Division of Research and Statistics, Board of Governors; Gaston Navarro, Senior Economist, Division of International Finance, Board of Governors Randall A. Williams, Senior Information Manager, Division of Monetary Affairs, Board of Governors James Hebden4 and James M. Trevino,4 Senior Technology Analysts, Division of Monetary Affairs, Board of Governors Andre Anderson, First Vice President, Federal Reserve Bank of Atlanta David Altig, Joseph W. Gruber, Anna Paulson, Daleep Singh, and Christopher J. Waller, Executive Vice Presidents, Federal Reserve Banks of Atlanta, Kansas City, Chicago, New York, and St. Louis, respectively Edward S. Knotek II, Paolo A. Pesenti, Julie Ann Remache,2 Samuel Schulhofer-Wohl,2 Robert G. Valletta, and Nathaniel Wuerffel,2 Senior Vice Presidents, Federal Reserve Banks of Cleveland, New York, New York, Chicago, San Francisco, and New York, respectively Roc Armenter, Matthew D. Raskin,2 and Patricia Zobel, Vice Presidents, Federal Reserve Banks of Philadelphia, New York, and New York, respectively Robert Lerman,2 Assistant Vice President, Federal Reserve Bank of New York Daniel Cooper and John A. Weinberg, Senior Economists and Policy Advisors, Federal Reserve Banks of Boston and Richmond, respectively The Chair opened the meeting with an acknowledgment of the extraordinary and deeply troubling events of the last two weeks. Injustice, prejudice, and the callous disregard for life had led to social unrest and a sense of despair. The Chair noted that it was incumbent upon the leaders of the Federal Reserve System to continue to communicate with force and clarity about the Federal Reserve's core values, and to reaffirm its unflinching commitment to those values in pursuing the Federal Reserve's mandated goals. In that spirit, the Chair noted that he intended to offer the following remarks at the end of the postmeeting press conference. All participants supported the statement affirming the Federal Reserve's core values and its commitment to do everything it can to foster racial equality as well as diversity and inclusion both within the Federal Reserve System and in society more broadly. I want to acknowledge the tragic events that have again put a spotlight on the pain of racial injustice in this country. The Federal Reserve serves the entire nation. We operate in, and are part of, many of the communities across the country where Americans are grappling with and expressing themselves on issues of racial equality. I speak for my colleagues throughout the Federal Reserve System when I say that there is no place at the Federal Reserve for racism, and there should be no place for it in our society. Everyone deserves the opportunity to participate fully in our society and in our economy. These foundational principles guide us in all we do, from monetary policy to our focus on diversity and inclusion in our workplace, and to our work regulating and supervising banks to ensure fair access to credit around the country. We will take this opportunity to renew our steadfast commitment to these principles, making sure that we are playing our part. We understand that the work of the Federal Reserve touches communities, families, and businesses across the country. Everything we do is in service to our public mission. We are committed to using our full range of tools to support the economy and to help assure that the recovery from this difficult period will be as robust as possible. Discussion of Forward Guidance, Asset Purchases, and Yield Curve Caps or Targets Participants discussed tools for conducting monetary policy when the federal funds rate is at its effective lower bound (ELB). The discussion addressed two topics: (1) the roles of forward guidance and large-scale asset purchase programs in supporting the attainment of the Committee's maximum-employment and price-stability goals and (2) in light of the foreign and historical experience with approaches that cap or target interest rates along the yield curve, whether such approaches could be used to support forward guidance and complement asset purchase programs. The staff briefing on the first topic focused on outcome-based forward guidance for the federal funds rate—which ties changes in the target range for the federal funds rate to the achievement of specified macroeconomic outcomes, such as reaching a given level of the unemployment rate or inflation—and asset purchase programs of the kind used during and following the previous recession. The staff presented results from model simulations that suggested that forward guidance and large-scale asset purchases can help support the labor market recovery and the return of inflation to the Committee's symmetric 2 percent inflation goal. The simulations suggested that the Committee would have to maintain highly accommodative financial conditions for many years to quicken meaningfully the recovery from the current severe downturn. The briefing addressed factors that might alter the potency of forward guidance and asset purchase programs, along with a number of considerations for the design of these actions. The staff cautioned that businesses and households might not be as forward looking as assumed in the model simulations, which could reduce the effectiveness of policies that are predicated on influencing expectations about the path of policy several years into the future. Alternatively, prompt and forceful policy actions by the Committee might help focus the public's expectations around better outcomes or reduce perceived risks of worst-case scenarios, which could generate more immediate macroeconomic benefits than those featured in the staff analysis. The second staff briefing reviewed the yield caps or targets (YCT) policies that the Federal Reserve followed during and after World War II and that the Bank of Japan and the Reserve Bank of Australia are currently employing. These three experiences illustrated different types of YCT policies: During World War II, the Federal Reserve capped yields across the curve to keep Treasury borrowing costs low and stable; since 2016, the Bank of Japan has targeted the 10-year yield to continue to provide accommodation while limiting the potential for an excessive flattening of the yield curve; and, since March 2020, the Reserve Bank of Australia has targeted the three-year yield, a target that is intended to reinforce the bank's forward guidance for its policy rate and to influence funding rates across much of the Australian economy. The staff noted that these three experiences suggested that credible YCT policies can control government bond yields, pass through to private rates, and, in the absence of exit considerations, may not require large central bank purchases of government debt. But the staff also highlighted the potential for YCT policies to require the central bank to purchase very sizable amounts of government debt under certain circumstances—a potential that was realized in the U.S. experience in the 1940s—and the possibility that, under YCT policies, monetary policy goals might come in conflict with public debt management goals, which could pose risks to the independence of the central bank. In their discussion of forward guidance and large-scale asset purchases, participants agreed that the Committee has had extensive experience with these tools, that they were effective in the wake of the previous recession, that they have become key parts of the monetary policy toolkit, and that, as a result, they have important roles to play in supporting the attainment of the Committee's maximum-employment and price-stability goals. Various participants noted that the economy is likely to need support from highly accommodative monetary policy for some time and that it will be important in coming months for the Committee to provide greater clarity regarding the likely path of the federal funds rate and asset purchases. Participants generally indicated support for outcome-based forward guidance. A number of participants spoke favorably of forward guidance tied to inflation outcomes that could possibly entail a modest temporary overshooting of the Committee's longer-run inflation goal but where inflation fluctuations would be centered on 2 percent over time. They saw this form of forward guidance as helping reinforce the credibility of the Committee's symmetric 2 percent inflation objective and potentially preventing a premature withdrawal of monetary policy accommodation. A couple of participants signaled a preference for forward guidance tied to the unemployment rate, noting that it would be more credible to focus on labor market outcomes that have been achieved in the recent past or that—given how high the unemployment rate currently is—such guidance would clearly signal a high degree of accommodation for an extended period. A few others suggested that calendar-based guidance—which specifies a date beyond which accommodation could start to be reduced—might be at least as effective as outcome-based guidance. They noted that calendar-based guidance had been very effective when the Committee used it in 2011 and 2012 or that it would be very challenging to provide credible outcome-based guidance in light of the substantial uncertainty surrounding the current economic outlook. Regardless of the specific form of forward guidance, a couple of participants expressed the concern that policies that effectively committed the Committee to maintaining very low interest rates for a long time could ultimately pose significant risks to financial stability. Participants agreed that asset purchase programs can promote accommodative financial conditions by putting downward pressure on term premiums and longer-term yields. Several participants remarked that declines in the neutral rate of interest and in term premiums over the past decade and prevailing low levels of longer-term yields would likely act as constraints on the effectiveness of asset purchases in the current environment and noted that these constraints were not as acute when the Committee implemented such programs in the wake of the Global Financial Crisis. These participants noted, however, that large-scale asset purchases could still be beneficial under current circumstances by offsetting potential upward pressures on longer-term yields or by helping reinforce the Committee's commitment to maintaining highly accommodative financial conditions. A few participants questioned the desirability of large-scale asset purchases following the current purchases to support market functioning, noting that they likely would lead to a further considerable expansion of the Federal Reserve's balance sheet or have potentially adverse implications for financial stability. In their discussion of the foreign and historical experience with YCT policies and the potential role for such policies in the United States, nearly all participants indicated that they had many questions regarding the costs and benefits of such an approach. Among the three episodes discussed in the staff presentation, participants generally saw the Australian experience as most relevant for current circumstances in the United States. Nonetheless, many participants remarked that, as long as the Committee's forward guidance remained credible on its own, it was not clear that there would be a need for the Committee to reinforce its forward guidance with the adoption of a YCT policy. In addition, participants raised a number of concerns related to the implementation of YCT policies, including how to maintain control of the size and composition of the Federal Reserve's balance sheet, particularly as the time to exit from such policies nears; how to combine YCT policies—which at least in the Australian case incorporate aspects of date-based forward guidance—with the types of outcome-based forward guidance that many participants favored; how to mitigate the risks that YCT policies pose to central bank independence; and how to assess the effects of these policies on financial market functioning and the size and composition of private-sector balance sheets. A number of participants commented on additional challenges associated with YCT policies focused on the longer portion of the yield curve, including how these policies might interact with large-scale asset purchase programs and the extent of additional accommodation they would provide in the current environment of very low interest rates. Some of these participants also noted that longer-term yields are importantly influenced by factors such as longer-run inflation expectations and the longer-run neutral real interest rate and that changes in these factors or difficulties in estimating them could result in the central bank inadvertently setting yield caps or targets at inappropriate levels. A couple of participants remarked that an appropriately designed YCT policy that focused on the short-to-medium part of the yield curve could serve as a powerful commitment device for the Committee. These participants noted that, even if market participants currently expect the federal funds rate to remain at its ELB through the medium term, the introduction of an effective YCT policy could help prevent those expectations from changing prematurely—as happened during the previous recovery—or that the size of a large-scale asset purchase program, which also poses risks to central bank independence, could be reduced by an effective YCT policy. All participants agreed that it would be useful for the staff to conduct further analysis of the design and implementation of YCT policies as well as of their likely economic and financial effects. A number of participants emphasized that, when assessing the potential roles that different monetary policy tools might play to support the attainment of the Committee's goals, it was important to think about how various policy tools could be used in coordination as part of the Committee's overall strategy to achieve its dual-mandate objectives. In addition, various participants noted that clear communications with the public are central to the efficacy of all policy tools and that, therefore, the Committee should complete its monetary policy framework review in the near term, including revising the Statement on Longer-Run Goals and Monetary Policy Strategy. Such a revised statement would communicate to the public how the Committee views its policy goals and provide additional context to the Committee's policy actions. Developments in Financial Markets and Open Market Operations The System Open Market Account (SOMA) manager first discussed developments in financial markets over the intermeeting period. Risk asset prices were buoyed by optimism about the potential for increased economic activity associated with reopenings as parts of the United States and other countries relaxed lockdown restrictions. That optimism was reinforced by high-frequency data suggesting a pickup in economic activity. Market participants also pointed to the suite of U.S. and global policy measures taken since mid-March as laying a foundation for the improvement in risk sentiment. Against this backdrop, staff analysis suggested that equity prices had been supported by expectations for a strong rebound in earnings next year, low risk-free rates and positive risk sentiment. Despite this improvement in risk sentiment, market participants expected weak overall growth in 2020, and elevated uncertainties in the outlook remained. The manager noted that prospects for adverse developments regarding the coronavirus (COVID-19) and the potential for financial strains to amplify recessionary dynamics, and geopolitical developments, including renewed U.S.–China tensions, presented near term risks to financial markets. Market participants were also attentive to the recent steepening in the Treasury yield curve and noted a range of uncertainties in the outlook for longer-term rates. Regarding expectations for monetary policy, respondents to the Open Market Trading Desk's surveys suggested that most market participants did not anticipate policy changes at the June meeting. The target range for the federal funds rate was expected to remain at the ELB for at least the next couple of years, although many survey respondents attached some probability to the target range increasing in 2022. Although the rates implied by federal funds futures contracts settling next year had fallen to slightly negative levels in May, survey respondents attached very little probability to the possibility of negative policy rates. The manager turned to a discussion of Federal Reserve operations. Credit facilities, some of which became operational over the period, generally experienced modest activity in light of broad improvements in credit market conditions. New usage across many funding operations and facilities had declined over the intermeeting period as conditions in funding markets improved. The manager noted that a significant proportion of amounts outstanding under U.S. dollar liquidity swaps and repurchase agreements (repo) reflected term transactions initiated during the period of funding market strains. In light of the improvement in funding market conditions, the manager noted that it might be appropriate to make a modest adjustment to the minimum bid rates on repo operations in the forthcoming calendar, which would effectively position these operations in a backstop role. These adjustments were not expected to have any significant effects in short-term funding markets. Finally, the manager discussed the near-term plans for purchases of Treasury securities and agency mortgage-backed securities (MBS). Overall, functioning in the markets for these securities had improved substantially. In light of these improvements, the Desk had gradually reduced the pace of purchases over the intermeeting period, to their current levels of $4 billion per day in Treasury securities and $4.5 billion per day in agency MBS. These purchase amounts were significantly lower than the peak pace in mid-March and roughly corresponded to monthly increases in SOMA holdings of approximately $80 billion in Treasury securities and $40 billion in agency MBS. Continuing to increase holdings at this pace would likely help sustain the improvements in market functioning, and seemed to be roughly in line with market expectations for Treasury purchases, and toward the lower end of expectations for agency MBS purchases, net of reinvestments. In addition, principal payments from agency debt and agency MBS held in the SOMA portfolio could continue to be reinvested in agency MBS. Weekly operations in agency commercial mortgage-backed securities (CMBS) would also be conducted. The Desk was prepared to increase the size or adjust the composition of Treasury, agency MBS and agency CMBS purchases as needed to sustain smooth market functioning in the markets for these securities. 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 coronavirus outbreak and the measures undertaken to contain its spread were severely disrupting economic activity in the United States and abroad. The available information for the June 9–10 meeting suggested that U.S. real gross domestic product (GDP) would likely post a historically large decline in the second quarter. Labor market conditions improved in May, but these improvements were modest relative to the substantial deterioration seen over the previous two months. Consumer price inflation, as measured by the 12‑month percentage change in the price index for personal consumption expenditures (PCE), slowed notably through April, reflecting the effects of both weak aggregate demand and low energy prices. Total nonfarm payroll employment expanded strongly in May, though by much less than the historic job losses recorded in April. The unemployment rate moved down to 13.3 percent in May after soaring to 14.7 percent in April. As was highlighted by the Bureau of Labor Statistics, these figures likely understated the extent of unemployment; accounting for the unusually large number of workers who reported themselves as employed but absent from their jobs would have raised the unemployment rate by 5 percentage points in April and 3 percentage points in May. Both the labor force participation rate and the employment-to-population ratio increased in May. Initial claims for unemployment insurance benefits had declined through the last week of May from their peak in late March, but they still were at a historically elevated level. Average hourly earnings for all employees declined in May after rising sharply in April, but these fluctuations largely reflected the substantial changes in the level and composition of employment, which disproportionately affected lower-wage workers. The employment cost index for total labor compensation in the private sector increased 2.8 percent over the 12 months ending in March—a period mostly predating the onset of the pandemic—and was the same as its year-earlier pace. Total PCE price inflation was only 0.5 percent over the 12 months ending in April, reflecting both weak aggregate demand in recent months and a considerable drop in consumer energy prices. Prices fell in March and April in many categories that were affected the most by social-distancing measures, such as the prices for air travel and hotel accommodations. Core PCE price inflation, which excludes changes in consumer food and energy prices, was 1.0 percent over the 12 months ending in April. In contrast, the trimmed mean measure of 12-month PCE price inflation constructed by the Federal Reserve Bank of Dallas was 1.9 percent in April. The consumer price index (CPI) inched up 0.1 percent over the 12 months ending in May, while core CPI inflation was 1.2 percent over the same period. Recent readings on survey-based measures of longer-run inflation expectations were little changed on balance. The University of Michigan Surveys of Consumers measure for the next 5 to 10 years edged up in May, while the 3-year-ahead measure from the Federal Reserve Bank of New York's Survey of Consumer Expectations was unchanged. The 10-year measure for PCE price inflation from the Survey of Professional Forecasters ticked down in the second quarter. All of these measures of longer-run inflation expectations continued to be near their recent ranges. Real PCE slumped in April, with declines widespread across most spending categories. In May, however, light motor vehicle sales and some other high-frequency indicators of consumer spending turned up, but the levels of these indicators were mostly still below their levels early in the year. Real disposable personal income increased significantly in April, as a marked decline in wage and salary income was more than offset by a substantial boost from government transfer payments due to recent fiscal policy support; as a result, the personal saving rate soared. The consumer sentiment measures from both the Michigan survey and the Conference Board survey crept up in May but remained below their levels early in the year. Real residential investment appeared to be weakening significantly in the second quarter. Starts and building permit issuance for single-family homes, along with starts of multifamily units, dropped sharply in April. Sales of existing homes contracted markedly in April, al­though new home sales edged up. Real business fixed investment continued to tumble in the second quarter. Nominal new orders and shipments of nondefense capital goods excluding aircraft decreased considerably in April. Nominal business spending for nonresidential structures outside of the drilling and mining sector also fell in April. In addition, the effects of low crude oil prices were evident in further declines in the number of crude oil and natural gas rigs in operation through early June, an indicator of business spending on structures in the drilling and mining sector. Total industrial production plunged in April, as many factories slowed or suspended operation in response to the coronavirus pandemic. The decline in manufacturing production was widespread across all major industries and was led by a collapse in the output of motor vehicles and related parts. Output in the mining sector—which includes crude oil extraction—also decreased, reflecting the effects of low crude oil prices. Total real government purchases appeared to be rising moderately in the second quarter. Federal defense spending continued to increase in April, and nondefense purchases were likely to be boosted in the second quarter by recent fiscal policy measures related to the coronavirus. In contrast, state and local purchases looked to be declining, as the payrolls of these governments shrank in April and May, and nominal state and local construction expenditures decreased in April. The nominal U.S. international trade deficit widened in both March and April, as exports of goods and services plunged more than imports. The fall in goods exports was broad based, with particularly sharp declines in automotive products, industrial supplies, and capital goods. Goods imports also contracted significantly in most categories through April, and a near halt of international travel drove a steep decline in exports and imports of services. Foreign economic activity contracted in the first quarter, even though most countries abroad introduced strict social-distancing measures to contain the spread of the coronavirus only toward the end of the quarter. In China, where restrictions were largely lifted by the end of the first quarter, data pointed to a relatively quick rebound in economic activity in the second quarter. Outside of China, indicators suggested that foreign economic activity plummeted further in the second quarter, notwithstanding some signs of improvement in May as restrictions started to ease. Inflation rates fell sharply across most foreign economies in April and May. The low level of oil prices relative to a year ago contributed to 12-month inflation rates close to or below zero in many advanced foreign economies (AFEs). Staff Review of the Financial Situation Over the intermeeting period, risk sentiment improved, on net, as optimism over reopening the economy, potential coronavirus treatments, the unexpectedly positive May employment situation report, and other indicators that suggest that economic activity may be rebounding more than offset concerns arising from otherwise dire economic data releases, warnings from health experts that openings may have been premature, and renewed tensions between the United States and China. Equity prices rose, and corporate bond spreads narrowed notably. The Treasury yield curve steepened, and the market-implied expected path of the federal funds rate declined somewhat. Liquidity conditions continued to improve in general, but some stress was still evident in several markets. Financing conditions were still somewhat strained for lower-rated borrowers and small businesses even as announcements and implementation of Federal Reserve facilities during the intermeeting period were supportive of credit flows. The credit quality of businesses and municipal debt weakened. The expected path of the federal funds rate for the next few years, based on a straight read of overnight index swap quotes, declined a bit and remained close to the ELB through late 2023. Market-implied forward rates referring to 2021 and 2022 turned slightly negative for a few days beginning on May 7, though market commentary suggested that this development did not reflect investors expecting the FOMC to lower the federal funds rate target range below zero. This view was supported by Federal Reserve communications that negative interest rates did not appear to be an attractive policy tool. The Treasury yield curve steepened over the intermeeting period, with 2-year yields little changed while 10- and 30-year yields rose. Longer-term yields were likely boosted by expectations of heavy upcoming Treasury security issuance as well as some unwinding of safe-haven demands in connection with improved investor sentiment. The Treasury's first 20-year bond offering since 1986 was met with solid demand. Changes in inflation compensation based on Treasury Inflation-Protected Securities yields were mixed; 5-year inflation compensation rose amid the recent partial rebound in crude oil prices, while the 5-to-10-year measure edged down. At the end of the intermeeting period, both measures stood roughly halfway between their mid-March lows and typical levels seen in recent years. Broad stock price indexes moved higher. One-month implied volatility on the S&P 500 index declined somewhat but still stood at the 85th percentile of its distribution since 1990. Spreads on investment- and speculative-grade corporate bonds over comparable-maturity Treasury yields narrowed considerably but remained at levels similar to those in other periods of notable economic or bond market stress, though well below financial crisis levels. Over the intermeeting period, financial market functioning appeared to improve in general, al­though progress was uneven. Liquidity measures improved in the Treasury market, but off-the-run Treasury securities of all tenors and longer-maturity on-the-run securities remained less liquid than before the onset of the pandemic. Agency MBS market functioning had largely recovered, except for some less liquid parts of the market. Corporate bond market liquidity improved considerably but remained somewhat strained, particularly for speculative-grade bonds. Liquidity in the municipal bond markets was still below pre-pandemic levels. Conditions in unsecured short-term funding markets continued to improve over the intermeeting period, and spreads on most types of commercial paper and negotiable certificates of deposit narrowed to levels that approached pre-pandemic ranges. Amid better market conditions, take-up in the emergency liquidity facilities declined substantially. Heavy demand for Treasury bills from money market funds held down rates despite an unprecedented pace of issuance. The effective federal funds rate was 5 basis points almost every day over the intermeeting period, and the Secured Overnight Financing Rate averaged 4 basis points. Total outstanding Federal Reserve repos averaged about $170 billion. Amid improving market functioning, Federal Reserve purchases of Treasury securities and agency MBS were reduced from around $10 billion and $8 billion per day, respectively, to $4 billion and $4.5 billion per day, respectively, over the intermeeting period. Risk sentiment in foreign financial markets improved over the intermeeting period. Further monetary policy and fiscal policy support in foreign countries, the easing of coronavirus-related restrictions, and a stronger-than-expected U.S. May employment report outweighed concerns about otherwise weak global economic data and the resurgence of U.S.–China tensions. Liquidity in global dollar funding markets continued to improve, helped in part by the Federal Reserve's liquidity programs, and prices of foreign risky assets increased. In the AFEs, option-implied volatility measures declined and long-term sovereign bond yields rose moderately, while fiscal stimulus in Japan and Europe boosted prices in their respective equity markets. Euro-area peripheral bond spreads narrowed after the European Commission proposed that the European Union be given the authority to borrow €750 billion to assist the recovery and the European Central Bank (ECB) increased the size of its Pandemic Emergency Purchase Programme. In emerging markets, the rise in oil prices since late April and overall improvements in investor sentiment boosted asset prices, even as the coronavirus outbreak worsened in some countries. Outflows from emerging market funds slowed and then turned into small inflows later in the period. The improving risk sentiment also supported several foreign currencies, and the staff's broad dollar index fell. The euro appreciated notably over the period, lifted in part by the European fiscal and monetary policy communications. The recent rebound in oil prices contributed to a strong appreciation of the Canadian dollar, the Brazilian real, and the Mexican peso. Financing conditions for nonfinancial firms eased somewhat over the intermeeting period, though they remained moderately strained for lower-rated borrowers. Investment-grade corporate bond issuance soared to record levels in April and remained robust in May, as issuers took advantage of more favorable market conditions following Federal Reserve announcements of two facilities to support corporate credit markets. Regarding these facilities, the Secondary Market Corporate Credit Facility began in mid-May to purchase exchange-traded funds whose investment objective is to provide broad exposure to the market for U.S. corporate bonds. Speculative-grade corporate bond issuance picked up considerably toward the end of April from very low levels, though it slowed somewhat in May. Commercial and industrial loans on banks' books surged again in April, largely driven by lending through the Paycheck Protection Program (PPP), especially at smaller banks. Credit-line drawdowns continued in April and May, though drawdowns by large firms slowed considerably from record levels in March. The credit quality of nonfinancial corporations continued to deteriorate sharply during the intermeeting period. The volume of nonfinancial corporate bond and leveraged loan downgrades remained very high in April and May. Defaults in corporate bonds and leveraged loans increased as well; market analysts projected defaults to increase considerably over the remainder of 2020 and into 2021. Financing conditions for small businesses tightened amid widespread continued pandemic-related closures and reduced operations of small businesses. Lenders indicated that they had tightened loan standards on small business loans or discontinued lending to such borrowers altogether (other than PPP loans). Financing conditions for state and local governments improved moderately following several Federal Reserve announcements to support the municipal debt market, but conditions remained somewhat strained for lower-rated states and municipalities. In the first week of June, the State of Illinois became the first to use the Municipal Liquidity Facility. Commercial real estate (CRE) lending conditions recovered somewhat during the intermeeting period. Spreads on triple-A-rated and triple-B-rated non-agency CMBS declined in May but remained elevated relative to before the pandemic, and issuance showed signs of recovery in late April and early May. Federal Reserve purchases of agency CMBS reportedly helped return spreads on these securities to their pre-pandemic levels, and issuance in that market continued to be strong. However, early signs of credit repayment difficulties emerged in some CRE sectors. The volume of mortgage rate locks for home-purchase loans picked up in mid-May following a material drop in April. Financing conditions remained tight for borrowers with relatively low credit scores and for those seeking nonconforming mortgages. In addition, options for home equity extraction continued to be restricted, as credit for both home equity lines of credit and cash-out refinances was limited. Servicers were able to handle the liquidity strains imposed by forbearance. The sharp decline in economic activity had also curtailed the demand for consumer credit. On balance, consumer credit financing conditions did not appear to be a major drag on household spending. Issuance of consumer asset-backed securities resumed in mid-April and in early May but remained significantly below pre-pandemic levels. Staff Economic Outlook The projection for the U.S. economy prepared by the staff for the June FOMC meeting was downgraded, on balance, as compared with the April meeting forecast in response to information on the spread of the coronavirus and changes in the measures undertaken to contain it both at home and abroad, along with incoming economic data. U.S. real GDP was forecast to show a historically large decline in the second quarter of this year, and the unemployment rate was expected to be sharply higher than in the first quarter. The substantial fiscal policy measures and appreciable support from monetary policy, along with the Federal Reserve's liquidity and lending facilities, were expected to help mitigate the deterioration in current economic conditions and to help boost the recovery. The staff continued to judge that the future performance of the economy would depend importantly on the evolution of the coronavirus outbreak and the measures undertaken to contain it. Under the staff's baseline assumptions that the current restrictions on social interactions and business operations would continue to ease gradually this year, real GDP was forecast to rise appreciably and the unemployment rate to decline considerably in the second half of the year, al­though a complete recovery was not expected by year-end. Inflation was projected to weaken this year, reflecting both the deterioration in resource utilization and sizable expected declines in consumer energy prices. Under the baseline assumptions, economic conditions were projected to continue to improve, and inflation to pick back up, over the next two years. The staff still observed that the uncertainty related to the economic effects of the coronavirus pandemic was extremely elevated and that the historical behavior of the U.S. economy in response to past economic shocks provided limited guidance for making judgments about how the economy might evolve in the future. In light of the significant uncertainty and downside risks associated with the pandemic, including how much the economy would weaken and how long it would take to recover, the staff judged that a more pessimistic projection was no less plausible than the baseline forecast. In this scenario, a second wave of the coronavirus outbreak, with another round of strict limitations on social interactions and business operations, was assumed to begin later this year, leading to a decrease in real GDP, a jump in the unemployment rate, and renewed downward pressure on inflation next year. Compared with the baseline, the disruption to economic activity was more severe and protracted in this scenario, with real GDP and inflation lower and the unemployment rate higher by the end of the medium-term projection. Participants' Views on Current Conditions and the Economic Outlook In conjunction with this FOMC meeting, participants submitted their projections of the most likely outcomes for real GDP growth, the unemployment rate, and inflation for each year from 2020 through 2022 and over the longer run, based on their individual assessments of appropriate monetary policy—including the 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, which is an addendum to these minutes. Participants noted that the coronavirus outbreak was causing tremendous human and economic hardship across the United States and around the world. The virus and the measures taken to protect public health induced sharp declines in economic activity and a surge in job losses. Weaker demand and significantly lower oil prices were holding down consumer price inflation. Financial conditions had improved, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses. Participants agreed that lowering the federal funds rate to its ELB had established more accommodative financial conditions and that the Federal Reserve's ongoing purchases of sizable quantities of Treasury securities and agency MBS had helped restore smooth market functioning to support the economy and the flow of credit to U.S. households and businesses. The fiscal response to economic developments had been large and timely and was providing much needed support for economic activity. Credit flows and economic activity were also being supported by the lending facilities established under the authority of section 13(3) of the Federal Reserve Act with the approval of the Secretary of the Treasury. Participants judged that the effects of the coronavirus outbreak and the ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term and would pose considerable risks to the economic outlook over the medium term. Participants agreed that the data for the second quarter would likely show the largest decline in economic activity in post–World War II history. Based in part on information from their Districts, participants observed that the burdens of the present crisis were not falling equally on all Americans and noted that the rise in joblessness was especially severe for lower-wage workers, women, African Americans, and Hispanics. Participants agreed that recently enacted fiscal policy programs had been delivering valuable direct financial aid to households, businesses, and communities, as well as providing relief to disadvantaged groups. Regarding household spending, participants pointed to information from District contacts, to surveys of consumer behavior, and to high-frequency indicators—such as credit card transactions, automated teller machine visits, and cellphone data tracking—as suggesting that consumer expenditures may be stabilizing or rebounding modestly. Limited available sources of standard economic data, such as retail purchases and motor vehicle sales, also seemed in line with this impression. With supportive monetary policy and payments to households under the CARES Act (Coronavirus Aid, Relief, and Economic Security Act), including enhanced unemployment insurance payments, participants expected personal consumption expenditures to grow strongly in the second half of the year, albeit from very low levels. However, the recovery in consumer spending was not expected to be particularly rapid beyond this year, with voluntary social distancing, precautionary saving, and lower levels of employment and income restraining the pace of expansion over the medium term. Participants noted that levels of uncertainty and risks perceived by businesses remained high and that these factors continued to contribute to restraints on capital expenditures, despite easing in financing conditions stemming in part from recent policy measures. Some business contacts pointed to halting improvements in consumer demand, a dearth in public infrastructure projects due to strained state and local government budget conditions, or the decline in energy prices as factors likely to depress business spending. Some participants also noted reports of firms stating that they have had some challenges in rehiring employees, in part related to temporary enhanced unemployment insurance benefits. Participants generally agreed that practices and developments in public health to address the pandemic would be critical for ensuring a strong and lasting reopening of businesses and reducing the likelihood of an outsized wave of closures, but monetary policy and, especially, fiscal policy would play important roles. Nevertheless, participants concluded that voluntary social distancing and structural shifts stemming from the pandemic would likely mean that some proportion of businesses would close permanently. Noting ongoing changes in the composition of production and the processes by which production takes place, participants suggested that some business adaptations were likely to endure long after the coronavirus subsides, resulting in notable dislocation and sectoral reallocation of firms and workers across industries. Participants noted that conditions in the energy sector remained difficult amid still-low oil prices. Several participants anticipated continued low drilling activity, at least until excess inventories were reduced later this year, and expressed concern that a wave of bankruptcies in the energy sector could be forthcoming. In addition, the agricultural sector continued to be under stress due to low prices for some farm commodities, reduced ethanol production, and pandemic-related limitations on production for some food processing plants. With regard to the labor market, participants remarked on the surprisingly positive news from the labor market report for May but emphasized that nearly 20 million jobs had been lost, on net, since February. Participants noted that because of misclassification errors in the Current Population Survey, the official unemployment rate for May likely understated the extent of unemployment; others observed that government reliance on unemployment insurance as a vehicle for income support under the CARES Act complicates the interpretation of the data. Participants also noted that unemployment insurance claims continued to run at a historically elevated level, but the proportion of laid-off workers who expected to be recalled was unusually large. Taken together, the data suggested that April could turn out to be the trough of the recession, but participants agreed that it was too early to draw any firm conclusions. Prospects for further substantial improvement in the labor market were seen as depending on a sustained reopening of the economy, which in turn depended in large part on the efficacy of health measures taken to limit the effects of the coronavirus. On this issue, participants judged there to be a great deal of uncertainty and expressed concerns about the possibility that an early reopening would contribute to a significant increase of infections. Participants also regarded highly accommodative monetary policy and sustained support from fiscal policy as likely to be needed to facilitate a durable recovery in labor market conditions. Overall, participants expected that a full recovery in employment would take some time. With regard to inflation, participants reiterated their view that the negative effect from the pandemic on aggregate demand was likely to more than offset any upward pressure from supply constraints so that the overall effect of the outbreak on prices was seen as disinflationary. Consistent with that interpretation, participants observed the recent negative readings on the monthly CPI and noted that they anticipated that the 12-month PCE inflation measure would likely run well below the Committee's 2 percent objective for some time. Observing that inflation had been running somewhat below the Committee's 2 percent longer-run objective before the coronavirus outbreak, some participants noted a risk that long-term inflation expectations might deteriorate. Participants noted that a highly accommodative stance of monetary policy would likely be needed for some time to achieve the 2 percent inflation objective over the longer run. Participants commented that there remained an extraordinary amount of uncertainty and considerable risks to the economic outlook. Participants shared views on possible outcomes for the reopening of the economy, the prospects for effective voluntary social distancing, and the efficacy of public health initiatives for their implications for economic activity and employment. A number of participants judged that there was a substantial likelihood of additional waves of outbreaks, which, in some scenarios, could result in further economic disruptions and possibly a protracted period of reduced economic activity. Other possibilities included economic activity that might recover more quickly if sizable, widespread outbreaks could be avoided even as households and businesses relax or modify social-distancing behaviors. Among the other sources of risk noted by participants were that fiscal support for households, businesses, and state and local governments might prove to be insufficient and that foreign economies could come under greater pressure than anticipated as a result of the spread of the pandemic abroad. Participants stressed that measures taken in the areas of health-care policy and fiscal policy, together with actions by households and businesses, would shape the prospects for a prompt and timely return of the U.S. economy to more normal conditions. In addition, participants agreed that recent actions taken by the Federal Reserve had helped reduce risks to the economic outlook. As part of their discussions of longer-run risks, participants noted that in some adverse scenarios, more business closures would occur, and workers would experience longer spells of unemployment that could lead to a loss of skills that could impair their employment prospects. In addition, to the extent that transmission-mitigation procedures adopted by firms reduced their productivity, or if the reallocation of industry output resulted in a lasting reduction in business investment, the longer-run level of potential output could be reduced. Regarding developments in financial markets, participants agreed that ongoing actions by the Federal Reserve, including those undertaken in collaboration with the Treasury, had helped ease strains in some financial markets and supported the flow of credit to households, businesses, and communities. Measures of market functioning in the markets for Treasury securities and agency MBS had improved substantially since March. Strains in short-term funding markets had receded as well, and the volume of borrowing at many of the Federal Reserve's liquidity facilities had moved lower as borrowers returned to market sources of funding. Risk spreads across a range of fixed-income markets had narrowed as the intense flight to safety witnessed in financial markets in the spring ebbed further. In their consideration of monetary policy at this meeting, participants reaffirmed that the Federal Reserve was committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum-employment and price-stability goals. In light of their assessment that the ongoing public health crisis would weigh heavily on economic activity, employment, and inflation in the near term and posed considerable risks to the economic outlook over the medium term, all participants judged that it would be appropriate to maintain the target range for the federal funds rate at 0 to 1/4 percent. Keeping the target range at the ELB would continue to provide support to the economy and promote the Committee's maximum-employment and price-stability goals. Participants also judged that it would be appropriate to maintain the target range for the federal funds rate at its present level until policymakers were confident that the economy had weathered recent events and was on track to achieve the Committee's maximum-employment and price-stability goals. Participants also agreed that, to support the flow of credit to households and businesses, over coming months it would be appropriate for the Federal Reserve to increase its holdings of Treasury securities and agency MBS and agency CMBS at least at the current pace to sustain smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions. In addition, the Desk would continue to offer large-scale overnight and term repo operations. Participants noted that it would be important to continue to monitor developments closely and that the Committee would be prepared to adjust its plans as appropriate. Participants also commented that the lending facilities established by the Federal Reserve under the authority of section 13(3) of the Federal Reserve Act were supporting financial market functioning and the flow of credit to households, businesses of all sizes, and state and local governments. Several participants commented further that it would be important for the Federal Reserve to remain ready to adjust these emergency lending facilities as appropriate based on its monitoring of financial market functioning and credit conditions. Participants agreed that the current stance of monetary policy remained appropriate, but many noted that the Committee could, at upcoming meetings, further clarify its intentions with respect to its future monetary policy decisions as the economic outlook becomes clearer. In particular, most participants commented that the Committee should communicate a more explicit form of forward guidance for the path of the federal funds rate and provide more clarity regarding purchases of Treasury securities and agency MBS as more information about the trajectory of the economy becomes available. A number of participants judged that it was important for forward guidance and asset purchases to be structured in a way that provides the accommodation necessary to support rapid economic recovery and fosters a durable return of inflation and inflation expectations to levels consistent with the Committee's symmetric 2 percent objective. Many participants remarked that the completion of the monetary policy framework review, together with the announcement of the conclusions arising from the review and the release of a revised Committee statement on its goals and policy strategy, would help clarify further how the Committee intends to conduct monetary policy going forward. Committee Policy Action In their discussion of monetary policy for this meeting, members agreed that the coronavirus outbreak was causing tremendous human and economic hardship across the United States and around the world. The virus and the measures taken to protect public health had induced sharp declines in economic activity and a surge in job losses. Consumer price inflation was being held down by weaker demand and significantly lower oil prices. Financial conditions had improved, in part reflecting policy measures to support the economy and the flow of credit to U.S. households, businesses, and communities. Members agreed that the Federal Reserve was committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum-employment and price-stability goals. Members further concurred that the ongoing public health crisis would weigh heavily on economic activity, employment, and inflation in the near term and posed considerable downside risks to the economic outlook over the medium term. In light of these developments, members decided to maintain the target range for the federal funds rate at 0 to 1/4 percent. Members noted that they expected to maintain this target range until they were confident that the economy had weathered recent events and was on track to achieve the Committee's maximum-employment and price-stability goals. Members agreed that they would continue to monitor the implications of incoming information for the economic outlook, including information related to public health, as well as global developments and muted inflation pressures, and would use the Committee's tools and act as appropriate to support the economy. In determining the timing and size of future adjustments to the stance of monetary policy, members noted that they would assess realized and expected economic conditions relative to the Committee's maximum-employment objective and its symmetric 2 percent inflation objective. 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. To support the flow of credit to households and businesses, members agreed that over coming months it would be appropriate for the Federal Reserve to increase its holdings of Treasury securities and agency MBS and agency CMBS at least at the current pace to sustain smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions. In addition, the Desk would continue to offer large-scale overnight and term repo operations. Members agreed that they would closely monitor developments and be prepared to adjust their plans as appropriate. 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, for release at 2:00 p.m.: "Effective June 11, 2020, 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 0 to 1/4 percent. Increase the System Open Market Account holdings of Treasury securities, agency mortgage-backed securities (MBS), and agency commercial mortgage-backed securities (CMBS) at least at the current pace to sustain smooth functioning of markets for these securities, thereby fostering effective transmission of monetary policy to broader financial conditions. Conduct term and overnight repurchase agreement operations to support effective policy implementation and the smooth functioning of short-term U.S. dollar funding markets. Conduct overnight reverse repurchase agreement operations at an offering rate of 0.00 percent and with a per-counterparty limit of $30 billion per day; the per-counterparty limit can be temporarily increased at the discretion of the Chair. Roll over at auction all principal payments from the Federal Reserve's holdings of Treasury securities and reinvest all principal payments from the Federal Reserve's holdings of agency debt and agency MBS in agency MBS and all principal payments from holdings of agency CMBS in agency CMBS. Allow modest deviations from stated amounts for purchases and reinvestments, if needed for operational reasons. Engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions." The vote also encompassed approval of the statement below for release at 2:00 p.m.: "The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals. The coronavirus outbreak is causing tremendous human and economic hardship across the United States and around the world. The virus and the measures taken to protect public health have induced sharp declines in economic activity and a surge in job losses. Weaker demand and significantly lower oil prices are holding down consumer price inflation. Financial conditions have improved, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses. The ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term. In light of these developments, the Committee decided to maintain the target range for the federal funds rate at 0 to 1/4 percent. The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals. The Committee will continue to monitor the implications of incoming information for the economic outlook, including information related to public health, as well as global developments and muted inflation pressures, and will use its tools and act as appropriate to support the economy. In determining the timing and size of future adjustments to the stance of monetary policy, 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. To support the flow of credit to households and businesses, over coming months the Federal Reserve will increase its holdings of Treasury securities and agency residential and commercial mortgage-backed securities at least at the current pace to sustain smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions. In addition, the Open Market Desk will continue to offer large-scale overnight and term repurchase agreement operations. The Committee will closely monitor developments and is prepared to adjust its plans as appropriate." Voting for this action: Jerome H. Powell, John C. Williams, Michelle W. Bowman, Lael Brainard, Richard H. Clarida, Patrick Harker, Robert S. Kaplan, Neel Kashkari, 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 at 0.10 percent. The Board of Governors also voted unanimously to approve establishment of the primary credit rate at the existing level of 0.25 percent, effective June 11, 2020. It was agreed that the next meeting of the Committee would be held on Tuesday–Wednesday, July 28–29, 2020. The meeting adjourned at 10:05 a.m. on June 10, 2020. Notation Vote By notation vote completed on May 19, 2020, the Committee unanimously approved the minutes of the Committee meeting held on April 28–29, 2020. _______________________ 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 economic developments and the outlook, and all of Wednesday's session. Return to text 4. Attended through the discussion of forward guidance, asset purchases, and yield caps or targets. Return to text 5. Attended through the discussion of economic developments and the outlook. Return to text 6. Attended from the discussion of economic developments and the outlook through the end of Tuesday's session. Return to text

2020-06-10

Statement

The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals. The coronavirus outbreak is causing tremendous human and economic hardship across the United States and around the world. The virus and the measures taken to protect public health have induced sharp declines in economic activity and a surge in job losses. Weaker demand and significantly lower oil prices are holding down consumer price inflation. Financial conditions have improved, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses. The ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term. In light of these developments, the Committee decided to maintain the target range for the federal funds rate at 0 to 1/4 percent. The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals. The Committee will continue to monitor the implications of incoming information for the economic outlook, including information related to public health, as well as global developments and muted inflation pressures, and will use its tools and act as appropriate to support the economy. In determining the timing and size of future adjustments to the stance of monetary policy, 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. To support the flow of credit to households and businesses, over coming months the Federal Reserve will increase its holdings of Treasury securities and agency residential and commercial mortgage-backed securities at least at the current pace to sustain smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions. In addition, the Open Market Desk will continue to offer large-scale overnight and term repurchase agreement operations. The Committee will closely monitor developments and is prepared to adjust its plans as appropriate. Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Patrick Harker; Robert S. Kaplan; Neel Kashkari; Loretta J. Mester; and Randal K. Quarles. Implementation Note issued June 10, 2020

2020-05-20

Minute

Minutes of the Federal Open Market Committee April 28–29, 2020 A joint meeting of the Federal Open Market Committee and the Board of Governors was held by conference call on Tuesday, April 28, 2020, at 1:00 p.m. and continued on Wednesday, April 29, 2020, at 9:00 a.m.1 PRESENT: Jerome H. Powell, Chair John C. Williams, Vice Chair Michelle W. Bowman Lael Brainard Richard H. Clarida Patrick Harker Robert S. Kaplan Neel Kashkari Loretta J. Mester Randal K. Quarles Thomas I. Barkin, Raphael W. Bostic, Mary C. Daly, Charles L. Evans, and Michael Strine, 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 Michelle A. Smith, Assistant Secretary Mark E. Van Der Weide, General Counsel Michael Held, Deputy General Counsel Thomas Laubach, Economist Stacey Tevlin, Economist Beth Anne Wilson, Economist Shaghil Ahmed, Michael Dotsey, Joseph W. Gruber, David E. Lebow, Trevor A. Reeve, Ellis W. Tallman, William Wascher, and Mark L.J. Wright, Associate Economists Lorie K. Logan, 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,2 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 Chair, Office of Board Members, Board of Governors Joshua Gallin, Special Adviser to the Chair, Office of Board Members, Board of Governors Antulio N. Bomfim, Wendy E. Dunn, Ellen E. Meade, Chiara Scotti, and Ivan Vidangos, 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 Brian M. Doyle, Senior Associate Director, Division of International Finance, Board of Governors; John J. Stevens, Senior Associate Director, Division of Research and Statistics, Board of Governors Edward Nelson, Senior Adviser, Division of Monetary Affairs, Board of Governors Marnie Gillis DeBoer and Min Wei, Associate Directors, Division of Monetary Affairs, Board of Governors; Glenn Follette, Associate Director, Division of Research and Statistics, Board of Governors Eric C. Engstrom, Deputy Associate Director, Division of Monetary Affairs, Board of Governors; Patrick E. McCabe and John M. Roberts, Deputy Associate Directors, Division of Research and Statistics, Board of Governors; Andrea Raffo, Deputy Associate Director, Division of International Finance, Board of Governors; Jeffrey D. Walker,2 Deputy Associate Director, Division of Reserve Bank Operations and Payment Systems, Board of Governors Brian J. Bonis and Rebecca Zarutskie, Assistant Directors, Division of Monetary Affairs, Board of Governors; Ricardo Correa, Assistant Director, Division of International Finance, Board of Governors Penelope A. Beattie,2 Section Chief, Office of the Secretary, Board of Governors David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors Michele Cavallo, Edward Herbst, and Ander Perez-Orive, Principal Economists, Division of Monetary Affairs, Board of Governors Randall A. Williams, Senior Information Manager, Division of Monetary Affairs, Board of Governors Ron Feldman, First Vice President, Federal Reserve Bank of Minneapolis David Altig, Kartik B. Athreya, Sylvain Leduc, Daleep Singh, and Christopher J. Waller, Executive Vice Presidents, Federal Reserve Banks of Atlanta, Richmond, San Francisco, New York, and St. Louis, respectively Spencer Krane, Senior Vice President, Federal Reserve Bank of Chicago Scott Frame, Anna Kovner, Giovanni Olivei, and Patricia Zobel, Vice Presidents, Federal Reserve Banks of Dallas, New York, Boston, and New York, respectively A. Lee Smith, Research and Policy Advisor, Federal Reserve Bank of Kansas City Developments in Financial Markets and Open Market Operations The System Open Market Account (SOMA) manager first discussed developments in financial markets. Financial conditions had shown notable improvement over recent weeks. Equity price indexes were up substantially from the lows of late March, safe-haven demands for the dollar had receded, and measures of realized and implied volatility across markets had diminished. Market participants pointed to swift and forceful actions taken by the Federal Reserve, coupled with strong fiscal measures, and some indications of a slowing in the spread of the coronavirus (COVID-19) in major economies as factors contributing to these developments. That said, market participants remained very uncertain about the economic outlook, and contacts highlighted an array of remaining risks, including those in corporate credit markets, emerging markets, and mortgage markets. In corporate credit markets, concerns about potential defaults were rising, and ratings agencies had put on negative watch or downgraded many issuers. In emerging markets, the steep decline in commodity prices was exacerbating financial pressures for some emerging market economies (EMEs), which were also facing strains arising from capital outflows and a reduction in trade activity. And in mortgage markets, the likely increase in mortgage delinquencies associated with forbearance polices and an eventual rise in defaults were sources of concern for bank and nonbank lenders. Open Market Desk surveys suggested that market participants anticipated a sharp near-term decline in economic activity, followed by some recovery later this year. Against this backdrop, market participants generally expected the target range for the federal funds rate to remain at the effective lower bound for the next couple of years. Respondents to Desk surveys attached almost no probability to the FOMC implementing negative policy rates. Some survey respondents indicated that they expected modifications to the Committee's forward guidance, but not at the current meeting. The manager then reviewed recent open market operations. Since mid-March, at the direction of the FOMC, the Desk had purchased very large quantities of Treasury and agency mortgage-backed securities (MBS) in order to support the smooth functioning of these critical markets. The Desk evaluated a broad array of indicators to assess market functioning. These indicators suggested considerable improvement in market functioning, and the Desk gradually scaled back the pace of purchases accordingly. Market participants anticipated that the pace of purchases would slow after the June meeting, but they expected that outright securities holdings in the SOMA portfolio would continue to expand at least through the end of the year. The SOMA manager expected that, if conditions continued to improve, the pace of purchases could be reduced somewhat further; however, consistent with the directive, the Desk was prepared to increase purchases as needed should market functioning worsen. Conditions in money markets had improved over recent weeks. The intense strains across a range of short-term funding markets that emerged in March had subsided. The expansion of Federal Reserve repurchase agreement (repo) operations, the enhancement and expansion of funding available through the discount window and swap lines, and the funding provided through the Primary Dealer Credit Facility (PDCF), the Money Market Mutual Fund Liquidity Facility (MMLF), and the Commercial Paper Funding Facility (CPFF) were likely important in relieving pressures across a range of short-term funding markets. The manager noted that, despite these improvements, rates in some term funding markets remained elevated, although forward measures suggested the upward pressure on these rates might ease in coming weeks. With conditions in short-term funding markets having improved substantially and with repo operations no longer needed to maintain ample reserve levels, the manager noted that it might be appropriate to position the Federal Reserve's repurchase operations in a backstop role. For example, the minimum bid rate in repo operations could be increased somewhat relative to the level of the interest rate on excess reserves (the IOER rate). Later in the intermeeting period, short-term interest rates drifted lower and settled at near-zero levels. Although rates appeared stable, the manager suggested that circumstances could arise in which temporarily raising the per-counterparty limit on the overnight reverse repo operation would support policy implementation. The manager also noted that some market participants anticipated that the Federal Reserve might increase the IOER rate in order to move the federal funds rate closer to the middle of the target range and to address market functioning issues that could arise over time with overnight rates at very low levels. However, there appeared to be limited risk that the federal funds rate would move below the target range, as the Federal Home Loan Banks—the dominant lenders in the federal funds market—can earn a zero rate on balances maintained in their account at the Federal Reserve. Moreover, there were few signs to date that the low level of overnight funding rates had adversely affected market functioning, and trading volumes remained robust. The SOMA manager noted that the staff would continue to monitor developments. 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 occur 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 coronavirus outbreak and the measures taken to protect public health were severely disrupting economic activity in the United States and abroad. The available information for the April 28–29 meeting indicated that U.S. labor market conditions deteriorated substantially in March and April, and real gross domestic product (GDP) declined sharply in the first quarter of the year. In addition, a variety of economic indicators were already pointing toward an extraordinary contraction in GDP in the second quarter. 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 February. Job losses surged in March, even though the drop in total nonfarm payroll employment reflected only those changes that had occurred through the mid-month reference period of the establishment survey. In addition, the unemployment rate jumped to 4.4 percent in March, and the labor force participation rate decreased notably. After economic shutdowns started to occur on a widespread basis, initial claims for unemployment insurance benefits skyrocketed in the second half of March through the first half of April, a development that pointed to substantial job losses in April. Nominal wage growth remained moderate, as average hourly earnings for all employees increased 3.1 percent over the 12 months ending in March. Total PCE price inflation and core PCE price inflation, which excludes consumer food and energy prices, both increased 1.8 percent over the 12 months ending in February. The trimmed mean measure of 12-month PCE price inflation constructed by the Federal Reserve Bank of Dallas was 2.0 percent in February. The consumer price index (CPI) rose 1.5 percent over the 12 months ending in March, and the core CPI increased 2.1 percent over the same period. The total CPI rose less than the core CPI mostly because of substantial declines in consumer energy prices, which were reflecting significantly lower crude oil prices. Recent readings on survey-based measures of longer-run inflation expectations were little changed on balance. The University of Michigan Surveys of Consumers measure for the next 5 to 10 years edged up in April, and the 3‑year‑ahead measure from the Federal Reserve Bank of New York's Survey of Consumer Expectations edged down in March; both measures remained in their recent ranges. Real PCE declined steeply in the first quarter of the year. The components of the nominal retail sales data used to estimate PCE, along with the sales of light motor vehicles, fell substantially in March, reflecting the effects of the widespread economic shutdowns. Moreover, the consumer sentiment measures from both the Michigan and the Conference Board surveys deteriorated substantially over March and April. Real disposable personal income was about flat in the first quarter, so the personal saving rate moved up notably with the decline in spending. In contrast to other sectors of the economy, real residential investment expanded strongly in the first quarter as a whole, al­though housing-sector activity had started to slow dramatically late in the quarter. Starts and building permit issuance for single-family homes, along with starts of multifamily units, tumbled in March. In addition, sales of both new and existing homes contracted sharply in March, and survey measures of builders' sentiment plunged in April. Real business fixed investment slumped in the first quarter following moderate declines over the previous three quarters. Spending for business equipment fell considerably in the first quarter, led by a sharp decrease in purchases of transportation equipment. Business investment in nonresidential structures also dropped notably. The coronavirus outbreak and the effects on economic activity of measures to contain it, together with the associated elevated level of uncertainty, were likely reflected in recent downbeat readings on business sentiment in national and regional surveys and appeared to weigh heavily on business investment. In addition, the effects of substantial further declines in crude oil prices were being seen in the falling number of crude oil and natural gas rigs in operation through late April, an indicator of business spending on structures in the drilling and mining sector. Total industrial production fell precipitously in March, as the coronavirus outbreak led many factories to close late in the month. The decline in manufacturing output was led by a pullback in the production of motor vehicles and related parts. Output in the mining sector—which includes crude oil extraction—also decreased significantly in the wake of the recent declines in crude oil prices. Total real government purchases only edged up in the first quarter, led by a modest increase in federal purchases. State and local purchases were about flat, reflecting the effects of public school closures beginning in mid-March. Real exports declined sharply in the first quarter. However, imports declined at a much faster rate so that net exports made a sizable positive contribution to GDP growth. Much of the quarterly decline in trade volumes reflected a sharp drop in March due to weak demand globally and disruptions related to the coronavirus outbreak. The fall in exports was concentrated in services, particularly those parts of the sector held down by travel restrictions. Foreign economic activity fell sharply in the first quarter of the year amid widespread mandatory business shutdowns and strict social-distancing measures to contain the spread of the coronavirus outbreak. In China, where lockdowns were first implemented, real GDP contracted sharply in the first quarter, and Canada, Korea, and Singapore also saw substantial declines. Monthly indicators suggested that activity also plummeted in March and April in many other economies, particularly in the euro area and the United Kingdom, which both saw purchasing managers indexes fall to record-low levels. Many foreign governments announced large fiscal packages to address the sudden loss of income by firms and households. Many foreign central banks cut policy rates, initiated or enhanced credit facilities, relaxed capital requirements for financial institutions, and ramped up asset purchase programs to alleviate liquidity concerns in foreign capital markets. Foreign inflation fell steeply, reflecting large drops in energy prices related to plunging oil prices, while core inflation pressures generally remained muted. Staff Review of the Financial Situation In the middle part of March, financial markets experienced record declines in the prices of risky assets, widespread illiquidity, and elevated volatility, as uncertainty regarding the effects of the coronavirus outbreak on the global economy jumped. However, following the announcement and subsequent launching of a number of Federal Reserve emergency liquidity programs, the passage of the Cares Act (Coronavirus Aid, Relief, and Economic Security Act), and early signs of a decline in outbreak intensity in the United States and many major foreign economies, the extreme volatility and illiquidity subsided and prices of most risky assets increased notably. Over the intermeeting period, on net, the S&P 500 index rose, option-implied volatility fell, and Treasury yields declined, while corporate bond spreads widened somewhat. Financing conditions for businesses, households, and state and local governments were strained over the intermeeting period. However, the Federal Reserve's announcements and start-ups of emergency liquidity facilities appeared to improve conditions in many of these markets. These facilities were established with the approval of the Secretary of the Treasury under the authority of section 13(3) of the Federal Reserve Act and were designed to support the flow of credit to businesses, households, and state and local governments. Treasury markets experienced extreme volatility in mid-March, and market liquidity became substantially impaired as investors sold large volumes of medium- and long-term Treasury securities. Following a period of extraordinarily rapid purchases of Treasury securities and agency MBS by the Federal Reserve, Treasury market liquidity gradually improved through the remainder of the intermeeting period, and Treasury yields became less volatile. Although market depth remained exceptionally low and bid-ask spreads for off-the-run securities and long-term on-the-run securities remained elevated, bid-ask spreads for short-term on-the-run securities fell close to levels seen earlier in the year. Yields on nominal Treasury securities declined across the maturity spectrum, with the 10- and 30-year yields ending the period near all-time lows. A straight read of market quotes suggested that the expected federal funds rate would remain under 25 basis points through 2022. Measures of inflation compensation based on Treasury Inflation-Protected Securities (TIPS) ended the period higher, on net, but were still low by historical standards. Inflation compensation fell sharply in the first half of March but subsequently recovered, as overall financial conditions and TIPS liquidity improved. The market for agency MBS also experienced substantial stresses in mid-March, and agency MBS spreads to Treasury yields widened and were volatile. However, market conditions for agency MBS improved significantly in the second half of March, supported by the Federal Reserve's additional purchases of these securities. Stock price indexes were exceptionally volatile early in the intermeeting period, and one-month option-implied volatility on the S&P 500 index reached a record high. Equity market volatility moved down substantially over the remainder of the intermeeting period but remained elevated, and equity prices more than retraced their earlier declines to end the intermeeting period notably higher. Broad stock price index increases over the intermeeting period were led by the energy, consumer discretionary, basic materials, and health-care sectors. Broad equity price indexes remained, however, markedly below peaks registered earlier this year. Corporate bond spreads over comparable-maturity Treasury yields widened sharply in the beginning of the intermeeting period, and they subsequently retraced most of their increases to end up only somewhat higher on net. Corporate bond spreads at the end of the intermeeting period still stood significantly above their levels in January. In short-term funding markets, strains intensified in mid-March. Spreads of yields of term money market instruments over comparable-maturity overnight index swap rates increased sharply, and issuance of unsecured commercial paper, negotiable certificates of deposit, and short-term municipal debt declined substantially and shifted to very short maturities. Institutional prime money market funds (MMFs) experienced heavy redemptions and reportedly faced difficulties selling assets amid impaired secondary-market liquidity. The announcements and start-ups of several Federal Reserve emergency liquidity facilities in the second half of March helped stabilize short-term funding markets, and, by the end of the intermeeting period, spreads had narrowed across the board. Repo rates were elevated in mid-March but normalized following the very large inflows of funds into government MMFs, the expansion of the Federal Reserve's repo operations, and the announcement of the PDCF. The effective federal funds rate was at the top of the target range for a few days following the March FOMC meeting and, after declining in the second half of March, stayed at around 5 basis points for most of April. Early in the period, cascading shutdowns in many countries weighed heavily on risk sentiment abroad. Many foreign financial markets experienced severe illiquidity and substantial volatility, and foreign equity indexes posted large declines. However, extraordinary monetary and fiscal policy actions in the United States and abroad helped improve market sentiment, and most major foreign equity indexes subsequently rebounded notably. That said, compared with early this year, foreign equity indexes stayed sharply lower, and option-implied equity volatility abroad remained elevated. Advanced-economy sovereign yields were also volatile, but most sovereign yields ended the period somewhat lower. By the end of the intermeeting period, policy rates in most major advanced foreign economies (AFEs) were at or near their effective lower bounds. In mid-March, Emerging Market Bond Index (EMBI) spreads widened sharply, and capital outflows from EMEs reached record levels. As global sentiment improved somewhat, those capital outflows slowed and EMBI spreads partially retraced earlier increases. Strong demand for dollars amid flight to safety globally, together with disruptions in U.S. short-term funding markets, caused severe strains in funding markets for dollars abroad, especially early in the intermeeting period. The premiums paid by investors to borrow dollars using the foreign exchange swap market over the costs of directly borrowing dollars widened sharply as the end of the first quarter approached. FOMC actions, including several changes to the standing central bank liquidity swap lines and a temporary expansion in the number of central bank counterparties, as well as the announcement of the FIMA (Foreign and International Monetary Authorities) Repo Facility, notably improved conditions in the foreign exchange swap market. Nonetheless, conditions in this market remained strained. Over the period, the staff's broad dollar index increased, with the dollar appreciating modestly against AFE currencies and notably against EME currencies. Currencies of vulnerable commodity exporters, such as Mexico and Brazil, depreciated sharply. At the end of the intermeeting period, the broad dollar index remained significantly higher than at the beginning of the year. Financing conditions for nonfinancial businesses were strained in March, particularly for lower-rated firms and small businesses. Federal Reserve announcements of facilities to support the flow of credit to businesses, households, and state and local governments appeared to improve financing conditions in many markets, although conditions had yet to normalize. Issuance of speculative-grade bonds and leveraged loans was extremely low in March but resumed, at a slow pace, in April. Investment-grade issuance, while relatively slow in early March, was robust following the Federal Reserve's announcements in late March of the Primary Market Corporate Credit Facility and the Secondary Market Corporate Credit Facility. Conditions in the market for corporate bonds and loans improved further in response to the Federal Reserve's announcement in April that it would expand these facilities to include firms that had been recently downgraded to just below investment-grade status. Commercial and industrial (C&I) lending conditions were somewhat tight. Although C&I loans increased strongly, this increase was largely driven by firms drawing down existing lines of credit; they reportedly did so to shore up liquidity for precautionary motives and to meet funding needs. In the April Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS), banks reported having tightened their C&I lending standards and terms for firms of all sizes. Credit quality and the earnings outlook of nonfinancial corporations deteriorated substantially, and market analysts forecast a large volume of downgrades of nonfinancial corporate bonds, including a substantial volume from triple-B to speculative grade. Credit conditions for small businesses were tight. Concerns about the finances of state and local governments contributed to a marked deterioration in credit conditions in the municipal bond market in March. Although strains lessened amid Federal Reserve announcements on emergency lending facilities to support the flow of credit and liquidity to state and local governments—specifically, expansions to the MMLF and the CPFF and the establishment of the Municipal Liquidity Facility—spreads remained high and issuance subdued at the end of the intermeeting period. Financing conditions for commercial real estate (CRE) were strained. Non-agency commercial mortgage-backed securities (CMBS) issuance shut down, al­though secondary-market spreads narrowed following the extension of the Term Asset-Backed Securities Loan Facility (TALF) to include non-agency CMBS as eligible collateral. Meanwhile, agency CMBS issuance continued, supported by the Federal Reserve's purchases of these securities. Most April SLOOS respondents reported having tightened lending standards for CRE loans. CRE loans on banks' books increased in the second half of March, in part because banks were unable to securitize some nonresidential loans. Financing conditions in residential mortgage markets were tight for low-rated borrowers and other borrowers who rely on nonconforming mortgages. Many mortgage originators and warehouse lenders announced tighter underwriting standards on new originations. Despite a considerable widening of the spread between the primary mortgage rate and MBS yields, primary mortgage interest rates were low by historical standards, and available indicators suggested that refinancing activity remained elevated. The volume of mortgage rate locks for home-purchase loans dropped materially in early April, reflecting in part declines in homebuyer demand and disruptions in the home search and purchase process. Financing conditions in consumer credit markets tightened somewhat on net. Spreads on consumer asset-backed securities jumped in mid-March, and primary-market issuance came to a halt. However, in response to the announcement of the TALF and to diminished broader financial market uncertainty, spreads retraced most of their increase in the early part of the period, and primary-market issuance resumed. Though banks in the April SLOOS reported tightening standards on new consumer loans, respondents also experienced weaker demand for all consumer loan types. Auto loan interest rates dropped sharply in early April as manufacturers introduced attractive financing programs to boost sales. The staff assessed the stability of the financial system during the coronavirus outbreak. The banking sector, including the large banks, was resilient coming into this period. Banks were able to meet surging demand for draws on credit lines while also building loan loss reserves to absorb higher expected defaults. In other parts of the financial system, however, some notable vulnerabilities that had been identified in previous financial stability assessments exacerbated financial strains. In March, institutional prime MMFs and other institutions relying on unstable funding sources faced significant stress, a situation that put in jeopardy the orderly functioning of some financial markets. Federal Reserve actions to enhance the liquidity and functioning of key markets reduced these stresses notably. Open-end mutual funds that invest in corporate bonds and loans—institutions that typically face a timing mismatch between investors' ability to redeem shares and the funds' ability to sell assets—experienced heavy outflows and liquidity strains in mid-March. Redemptions later eased, however, amid the general improvement in financial markets. Business debt, which appeared to be high compared with fundamentals before the coronavirus outbreak, seemed poised to rise further as businesses borrowed to maintain their capacity to restart operations. Values of CRE faced the risk of large declines in response to the coronavirus outbreak, al­though updated readings were not yet available. The staff provided a preliminary reading on potential emerging risks to financial stability in the aftermath of the coronavirus outbreak. This reading highlighted possible vulnerabilities in mortgage servicers, insurance companies, and large, highly leveraged financial intermediaries. Staff Economic Outlook The projection for the U.S. economy prepared by the staff for the April FOMC meeting was downgraded notably from the March meeting forecast in response to information on the spread of the coronavirus and the measures undertaken to contain it both at home and abroad. U.S. real GDP was forecast to plummet and the unemployment rate to soar in the second quarter of this year. The substantial fiscal policy measures and monetary policy support that had been put in place were expected to help mitigate the deterioration in economic conditions and help boost the recovery. The staff noted that, importantly, the future performance of the economy would depend on the evolution of the coronavirus outbreak and the measures undertaken to contain it. Under the staff's baseline assumptions that the current restrictions on social interactions and business operations would ease gradually this year, real GDP was forecast to rise appreciably and the unemployment rate to decline considerably in the second half of the year, al­though a complete recovery was not expected by year-end. Inflation was projected to weaken this year, reflecting both the deterioration in resource utilization and sizable expected declines in consumer energy prices. Under the baseline assumptions, economic conditions were projected to continue to improve, and inflation to pick back up, over the next two years. The staff observed that uncertainty regarding the economic effects of the coronavirus outbreak was extremely elevated and that the historical behavior of the U.S. economy in response to past economic shocks provided limited guidance for making judgments about how the economy might evolve over coming quarters. In light of the significant uncertainty and downside risks associated with the evolution of the coronavirus outbreak, how much the economy would weaken, and how long it would take to recover, the staff judged that a more pessimistic projection was no less plausible than the baseline forecast. In this scenario, a second wave of the coronavirus outbreak, with another round of strict restrictions on social interactions and business operations, was assumed to begin around year-end, inducing a decrease in real GDP, a jump in the unemployment rate, and renewed downward pressure on inflation next year. Compared with the baseline, the disruption to economic activity was more severe and protracted in this scenario, with real GDP and inflation lower and the unemployment rate higher by the end of the medium-term projection. Participants' Views on Current Conditions and the Economic Outlook Participants noted that the coronavirus outbreak was causing tremendous human and economic hardship across the United States and around the world. The virus and the measures taken to protect public health were inducing sharp declines in economic activity and a surge in job losses. Weaker demand and significantly lower oil prices were holding down consumer price inflation. The disruptions to economic activity here and abroad had significantly affected financial conditions and had impaired the flow of credit to U.S. households and businesses. Participants judged that the effects of the coronavirus outbreak and the ongoing public health crisis would continue to weigh heavily on economic activity, employment, and inflation in the near term and would pose considerable risks to the economic outlook over the medium term. Participants assessed that the second quarter would likely see overall economic activity decline at an unprecedented rate. Participants relayed information from their Districts that the burdens of the present crisis would fall disproportionately on the most vulnerable and financially constrained households in the economy. Participants agreed that recently enacted fiscal programs were delivering valuable direct financial aid to households, businesses, and communities that would provide some relief during the economic shutdown. In addition, economic activity was being supported by actions taken by the Federal Reserve, including lending facilities created under the authority of section 13(3) of the Federal Reserve Act, some of which included capital allocated by the U.S. Treasury. These programs had helped maintain the flow of credit to households, businesses, and state and local governments, while supporting the smooth functioning of financial markets. Regarding the economic activity of households, participants noted that the pandemic and efforts to mitigate the spread of the disease were having severely adverse effects on aggregate household spending and consumer confidence. Participants reported that consumer spending had plummeted across all parts of the country and in most categories of spending, with especially sharp declines in expenditures for categories that had been most affected by social distancing, such as hotel, fuel, air travel, restaurant, theater, and other retail products and services. Participants noted that even after government-imposed social-distancing restrictions came to an end, consumer spending in these categories likely would not return quickly to more normal levels. Survey-based measures of consumer confidence also plunged, a development that participants and District contacts attributed to households' concerns regarding the risk of job loss or difficulty in meeting financial obligations. Participants noted that some households experiencing job losses may not immediately face lower total income because of the support from recently enacted fiscal programs. Even in such cases, however, participants observed that household spending would likely be held down by a decrease in confidence and an increase in precautionary saving. Participants noted that business activity and investment spending had also fallen dramatically since the previous meeting as a result of efforts to contain the coronavirus outbreak. Manufacturing output declined sharply in March and was expected by participants to drop even more rapidly in April. In all Districts, some businesses had been forced to close temporarily because of social distancing restrictions. Businesses that were able to remain open to some degree were also substantially affected by the pandemic, with many experiencing either substantial drops in new orders and sales or supply chain disruptions. There were widespread reports from District contacts of firms reducing their payrolls and curtailing plans for investment spending. Some industries were especially hard hit, including airlines, cruise ships, restaurants, and tourism. Participants reported that many firms were seeking loans, payment deferrals, or grants to help address critical financial obligations and that the Paycheck Protection Program (PPP) was providing valuable assistance to small businesses in this respect. Participants also noted the disproportionate burdens or particular challenges being faced by small businesses; these challenges included lower cash buffers, fewer financing options, and, more recently, tighter lending standards. Participants expressed concerns that a large number of small businesses may not be able to endure a shock that had long-lasting financial effects. Participants were further concerned that even after social-distancing requirements were eased, some business models may no longer be economically viable, which could occur, for example, if consumers voluntarily continued to avoid participating in particular forms of economic activity. In addition, participants expressed concern that the possibility of secondary outbreaks of the virus may cause businesses for some time to be reluctant to engage in new projects, rehire workers, or make new capital expenditures. Participants observed that conditions in the energy sector had become especially difficult. A sharp reduction in global demand for petroleum had led to unused supply that was overwhelming storage capacity, resulting in a plunge in oil prices. Some participants expressed concern that low energy prices, if they were to persist, had the potential to create a wave of bankruptcies in the energy sector. In addition, the agricultural sector was under severe stress due to falling prices for some farm commodities and pandemic-related disruptions, such as the closing of some food processing plants. With regard to the labor market, participants noted that incoming data confirmed that an extreme decline in employment was under way. Nationally, initial claims for unemployment insurance benefits had totaled more than 25 million from mid-March to the time of the meeting, and participants expected that the unemployment rate would soon reach the highest levels of the post–World War II period. District contacts reported that a significant portion of workers had been able to switch to working remotely. Although many employers were trying to keep workers on their payrolls, over time, as conditions persisted, there had begun to be widespread furloughs and layoffs. Participants were concerned that temporary layoffs could become permanent, and that workers who lose employment could face a loss of job-specific skills or may become discouraged and exit the labor force. Participants were additionally concerned that employees who were on low incomes would be the most severely affected by job cuts because they were employed in the industries most affected by the response to the outbreak or because their jobs were not amenable to being carried out remotely. With regard to inflation, participants noted that it had been running below the Committee's 2 percent longer-run objective before the coronavirus outbreak. While the pandemic had created some supply constraints, which had generated upward pressure on the prices of some goods, the pandemic had also reduced demand, which had exerted downward pressure on prices. The overall effect of the outbreak on prices was seen as disinflationary. In addition, a stronger dollar and lower oil prices were factors likely to put downward pressure on inflation, and market-based measures of inflation compensation remained very low. Participants observed that the return of inflation to the Committee's 2 percent longer-run objective would likely be further delayed but that the accommodative stance of monetary policy would be helpful in achieving the 2 percent inflation objective over the longer run. Participants noted that recently enacted fiscal programs were crucial for limiting the severity of the economic downturn. In particular, the Cares Act and other legislation, which represented more than $2 trillion in federal spending in total, had provided direct help to households, businesses, and communities. For example, the PPP was providing a financial lifeline to small businesses, the expansion of unemployment benefits was helping restore lost income for laid-off workers, and the Treasury had provided a necessary financial backstop to many Federal Reserve lending facilities. Participants acknowledged that even greater fiscal support may be necessary if the economic downturn persists. Participants commented that, in addition to weighing heavily on economic activity in the near term, the economic effects of the pandemic created an extraordinary amount of uncertainty and considerable risks to economic activity in the medium term. Participants discussed several alternative scenarios with regard to the behavior of economic activity in the medium term that all seemed about equally likely. These scenarios differed in the assumed length of the pandemic and the consequent economic disruptions. On the one hand, a number of participants judged that there was a substantial likelihood of additional waves of outbreak in the near or medium term. In such scenarios, it was believed likely that there would be further economic disruptions, including additional periods of mandatory social distancing, greater supply chain dislocations, and a substantial number of business closures and loss of income; in total, such developments could lead to a protracted period of severely reduced economic activity. On the other hand, economic activity could recover more quickly if the pandemic subsided enough for households and businesses to become sufficiently confident to relax or modify social-distancing behaviors over the next several months. Beyond these considerations, participants noted the risk that foreign economies, particularly EMEs, could come under extreme pressure as a result of the pandemic and that this strain could spill over to and hamper U.S. economic activity. Participants stressed that measures taken in the areas of health-care policy and fiscal policy, together with actions by the private sector, would be important in shaping the timing and speed of the U.S. economy's return to more normal conditions. In addition, participants agreed that recent actions taken by the Federal Reserve were essential in helping reduce downside risks to the economic outlook. Participants also noted several risks to long-term economic performance that were posed by the pandemic. One of these risks was that workers who lose employment as a result of the pandemic may experience a loss of skills, lose access to adequate childcare or eldercare, or become discouraged and exit the labor force. The longer-term behavior of firms could be affected as well—for instance, if necessary but costly transmission-mitigation strategies lowered firms' productivity; if business investment shifted down permanently; if many firms need to adjust their business models in the aftermath of the pandemic; or if business closures, particularly those of small firms, became widespread. A few participants noted that higher levels of government indebtedness, which would be exacerbated by fiscal expenditures that were necessary to combat the economic effects of the pandemic, could put downward pressure on growth in aggregate potential output. Regarding developments in financial markets, participants agreed that ongoing actions by the Federal Reserve had been instrumental in easing strains in some essential financial markets and supporting the flow of credit. These actions included large-scale purchases of Treasury securities and agency MBS, measures to reduce strains in global U.S. dollar funding markets, and the launch of programs to support the flow of credit in the economy for households, businesses of all sizes, and state and local governments. Banks had entered the crisis well capitalized and had been able to provide necessary credit to businesses and households. A number of participants commented on potential risks to financial stability. Participants were concerned that banks could come under greater stress, particularly if adverse scenarios for the spread of the pandemic and economic activity were realized, and so this sector should be monitored carefully. Participants saw risks to banks and some other financial institutions as exacerbated by high levels of indebtedness among nonfinancial corporations that prevailed before the pandemic; this indebtedness increased these firms' risk of insolvency. The upcoming financial stress tests for banks were seen as important for measuring the ability of large banks to withstand future downside scenarios. A number of participants emphasized that regulators should encourage banks to prepare for possible downside scenarios by further limiting payouts to shareholders, thereby preserving loss-absorbing capital. Indeed, historical loss models might understate losses in this context. A few participants stressed that the activities of some nonbank financial institutions presented vulnerabilities to the financial system that could worsen in the event of a protracted economic downturn and that these institutions and activities should be monitored closely. In their consideration of monetary policy at this meeting, participants noted that the Federal Reserve was committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals. In light of their assessment that the ongoing public health crisis would weigh heavily on economic activity, employment, and inflation in the near term and posed considerable risks to the economic outlook over the medium term, all participants judged that it would be appropriate to maintain the target range for the federal funds rate at 0 to 1/4 percent. Keeping the target range at the effective lower bound, after quickly reducing it by 150 basis points in March, would continue to provide support to the economy and promote the Committee's maximum employment and price stability goals. Participants also judged that it would be appropriate to maintain the target range for the federal funds rate at its present level until policymakers were confident that the economy had weathered recent events and was on track to achieve the Committee's maximum employment and price stability goals. Participants also assessed that it was appropriate for the Federal Reserve to continue to purchase Treasury securities and agency residential-mortgage-backed securities (RMBS) and CMBS in the amounts needed to support smooth market functioning. These open market purchases would continue to support the flow of credit to households and businesses and thereby foster the effective transmission of monetary policy to broader financial conditions. In addition, the Desk would continue to offer large-scale overnight and term repo operations. Participants noted that it was important to continue to monitor market conditions closely and that the Committee was prepared to adjust its plans as appropriate to support smooth functioning in the markets for these securities. Participants also commented that the multiple lending facilities established by the Federal Reserve under the authority of section 13(3) of the Federal Reserve Act and, in some cases, involving capital allocated by the Treasury were supporting financial market functioning and the flow of credit to households, businesses of all sizes, and state and local governments. In this way, these emergency lending facilities were intended to help support the economy until pandemic-related credit market disruptions had abated. Several participants commented further that it would be important for the Federal Reserve to remain ready to adjust these emergency lending facilities as appropriate based on its monitoring of financial market functioning and credit conditions. While participants agreed that the current stance of monetary policy remained appropriate, they noted that the Committee could, at upcoming meetings, further clarify its intentions with respect to its future monetary policy decisions. Some participants commented that the Committee could make its forward guidance for the path for the federal funds rate more explicit. For example, the Committee could adopt outcome-based forward guidance that would specify macroeconomic outcomes—such as a certain level of the unemployment rate or of the inflation rate—that must be achieved before the Committee would consider raising the target range for the federal funds rate. The Committee could also consider date-based forward guidance that would indicate that the target range could be raised only after a specified amount of time had elapsed. These participants noted that such explicit forms of forward guidance could help ensure that the public's expectations regarding the future conduct of monetary policy continued to reflect the Committee's intentions. Several participants observed that the completion, most likely later this year, of the monetary policy framework review, together with the announcement of the conclusions arising from the review, would help further clarify the Committee's intentions with respect to its future monetary policy actions. Several participants also remarked that the Committee may need to provide further clarity regarding its intentions for purchases of Treasury securities and agency MBS; these participants noted that, without further communication on this matter, uncertainty about the evolution of the Federal Reserve's asset purchases could increase over time. Several participants remarked that a program of ongoing Treasury securities purchases could be used in the future to keep longer-term yields low. A few participants also noted that the balance sheet could be used to reinforce the Committee's forward guidance regarding the path of the federal funds rate through Federal Reserve purchases of Treasury securities on a scale necessary to keep Treasury yields at short- to medium-term maturities capped at specified levels for a period of time. Committee Policy Action In their discussion of monetary policy for this meeting, members agreed that the coronavirus outbreak was causing tremendous human and economic hardship across the United States and around the world. The virus and the measures taken to protect public health were inducing sharp declines in economic activity and a surge in job losses. Consumer price inflation was being held down by weaker demand and significantly lower oil prices. The disruptions to global economic activity had significantly affected financial conditions and impaired the flow of credit to U.S. households and businesses. Members agreed that the Federal Reserve was committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals. Members further concurred that the ongoing public health crisis would weigh heavily on economic activity, employment, and inflation in the near term, and posed considerable downside risks to the economic outlook over the medium term. In light of these developments, members decided to maintain the target range for the federal funds rate at 0 to 1/4 percent. Members noted that they expected to maintain this target range until they were confident that the economy had weathered recent events and was on track to achieve the Committee's maximum employment and price stability goals. Members agreed that they would continue to monitor the implications of incoming information for the economic outlook, including information related to public health, as well as global developments and muted inflation pressures, and would use the Committee's tools and act as appropriate to support the economy. In determining the timing and size of future adjustments to the stance of monetary policy, members noted that they would assess realized and expected economic conditions relative to the Committee's maximum employment objective and its symmetric 2 percent inflation objective. 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. To support the flow of credit to households and businesses, members agreed that it was appropriate for the Federal Reserve to continue to purchase Treasury securities and agency RMBS and CMBS in the amounts needed to support smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions. In addition, the Desk would continue to offer large-scale overnight and term repo operations. Members agreed that they would closely monitor market conditions and be prepared to adjust their plans as appropriate. 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, for release at 2:00 p.m.: "Effective April 30, 2020, 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 0 to 1/4 percent. Increase the System Open Market Account holdings of Treasury securities, agency mortgage-backed securities (MBS), and agency commercial mortgage-backed securities (CMBS) in the amounts needed to support the smooth functioning of markets for these securities. Conduct term and overnight repurchase agreement operations to support effective policy implementation and the smooth functioning of short-term U.S. dollar funding markets. Conduct overnight reverse repurchase agreement operations at an offering rate of 0.00 percent and with a per-counterparty limit of $30 billion per day; the per-counterparty limit can be temporarily increased at the discretion of the Chair. Roll over at auction all principal payments from the Federal Reserve's holdings of Treasury securities and reinvest all principal payments from the Federal Reserve's holdings of agency debt and agency MBS in agency MBS and all principal payments from holdings of agency CMBS in agency CMBS. Engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions." The vote also encompassed approval of the statement below for release at 2:00 p.m.: "The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals. The coronavirus outbreak is causing tremendous human and economic hardship across the United States and around the world. The virus and the measures taken to protect public health are inducing sharp declines in economic activity and a surge in job losses. Weaker demand and significantly lower oil prices are holding down consumer price inflation. The disruptions to economic activity here and abroad have significantly affected financial conditions and have impaired the flow of credit to U.S. households and businesses. The ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term. In light of these developments, the Committee decided to maintain the target range for the federal funds rate at 0 to 1/4 percent. The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals. The Committee will continue to monitor the implications of incoming information for the economic outlook, including information related to public health, as well as global developments and muted inflation pressures, and will use its tools and act as appropriate to support the economy. In determining the timing and size of future adjustments to the stance of monetary policy, 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. To support the flow of credit to households and businesses, the Federal Reserve will continue to purchase Treasury securities and agency residential and commercial mortgage-backed securities in the amounts needed to support smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions. In addition, the Open Market Desk will continue to offer large-scale overnight and term repurchase agreement operations. The Committee will closely monitor market conditions and is prepared to adjust its plans as appropriate." Voting for this action: Jerome H. Powell, John C. Williams, Michelle W. Bowman, Lael Brainard, Richard H. Clarida, Patrick Harker, Robert S. Kaplan, Neel Kashkari, 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 at 0.10 percent. The Board of Governors also voted unanimously to approve establishment of the primary credit rate at the existing level of 0.25 percent, effective April 30, 2020. It was agreed that the next meeting of the Committee would be held on Tuesday–Wednesday, June 9–10, 2020. The meeting adjourned at 10:10 a.m. on April 29, 2020. Notation Votes To address intensifying strains in global financial markets early in the intermeeting period, the Committee unanimously approved the following measures to help maintain the flow of credit to U.S. households and businesses: By notation vote concluded on March 19, the Committee approved amendments to the Authorization for Foreign Currency Operations ("Foreign Authorization") and to the Foreign Currency Directive ("Foreign Directive").3 The Foreign Authorization amendments authorized the establishment of temporary U.S. dollar liquidity arrangements (swap lines). The Foreign Directive was amended to direct the Federal Reserve Bank of New York to establish and maintain temporary dollar liquidity arrangements with the Reserve Bank of Australia, the Banco Central do Brasil, the Danmarks Nationalbank (Denmark), the Bank of Korea, the Banco de Mexico, the Reserve Bank of New Zealand, the Norges Bank (Norway), the Monetary Authority of Singapore, and the Sveriges Riksbank (Sweden). These arrangements will be in place for at least six months. Like the Federal Reserve's standing U.S. dollar liquidity swap lines with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank, these temporary arrangements should help lessen heightened strains in global U.S. dollar funding markets, thereby mitigating the effects of these strains on the supply of credit to U.S. households and businesses. By notation vote concluded on March 23, the Committee approved a statement indicating that the Federal Reserve will continue to purchase Treasury securities and agency MBS in the amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions and that these purchases will include agency CMBS. In conjunction with approval of the statement, the Committee also authorized and directed the Federal Reserve Bank of New York to execute transactions in the SOMA in accordance with these planned purchases. Previously, the Committee had announced that it would purchase at least $500 billion of Treasury securities and at least $200 billion of agency MBS. By notation vote concluded on March 31, the Committee amended the Authorization for Domestic Open Market Operations to authorize, and adopted a resolution to approve, the establishment of a temporary repo facility for foreign and international monetary authorities (FIMA Repo Facility).3 The facility will be in place for at least six months and will allow FIMA account holders to temporarily exchange their U.S. Treasury securities held with the Federal Reserve for U.S. dollars, which can then be made available to institutions in their jurisdictions. By providing foreign and international monetary authorities with an alternative temporary source of U.S. dollars other than sales of securities in the open market, the facility should help support the smooth functioning of the U.S. Treasury market. In addition, the FIMA Repo Facility should—along with the U.S. dollar liquidity swap lines the Federal Reserve has established with other central banks—help ease strains in global U.S. dollar funding markets. By notation vote completed on April 7, 2020, the Committee unanimously approved the minutes of the Committee meeting held on March 15, 2020. _______________________ 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's session only. Return to text 3. Committee organizational documents are available at https://www.federalreserve.gov/monetarypolicy/rules_authorizations.htm. Return to text

2020-04-29

Statement

The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals. The coronavirus outbreak is causing tremendous human and economic hardship across the United States and around the world. The virus and the measures taken to protect public health are inducing sharp declines in economic activity and a surge in job losses. Weaker demand and significantly lower oil prices are holding down consumer price inflation. The disruptions to economic activity here and abroad have significantly affected financial conditions and have impaired the flow of credit to U.S. households and businesses. The ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term. In light of these developments, the Committee decided to maintain the target range for the federal funds rate at 0 to 1/4 percent. The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals. The Committee will continue to monitor the implications of incoming information for the economic outlook, including information related to public health, as well as global developments and muted inflation pressures, and will use its tools and act as appropriate to support the economy. In determining the timing and size of future adjustments to the stance of monetary policy, 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. To support the flow of credit to households and businesses, the Federal Reserve will continue to purchase Treasury securities and agency residential and commercial mortgage-backed securities in the amounts needed to support smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions. In addition, the Open Market Desk will continue to offer large-scale overnight and term repurchase agreement operations. The Committee will closely monitor market conditions and is prepared to adjust its plans as appropriate. Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Patrick Harker; Robert S. Kaplan; Neel Kashkari; Loretta J. Mester; and Randal K. Quarles. Implementation Note issued April 29, 2020

2020-03-23

Statement

The Federal Reserve is committed to use its full range of tools to support the U.S. economy in this challenging time and thereby promote its maximum employment and price stability goals. The Federal Open Market Committee is taking further actions to support the flow of credit to households and businesses by addressing strains in the markets for Treasury securities and agency mortgage-backed securities. The Federal Reserve will continue to purchase Treasury securities and agency mortgage-backed securities in the amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions. The Committee will include purchases of agency commercial mortgage-backed securities in its agency mortgage-backed security purchases. In addition, the Open Market Desk will continue to offer large-scale overnight and term repurchase agreement operations. The Committee will continue to closely monitor market conditions, and will assess the appropriate pace of its securities purchases at future meetings. Voting (by notation) for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Patrick Harker; Robert S. Kaplan; Neel Kashkari; Loretta J. Mester; and Randal K. Quarles. In a related set of actions, the Federal Reserve announced additional measures to support the flow of credit to households and businesses. More information can be found on the Federal Reserve Board's website. In connection with these plans, the Committee voted unanimously to authorize and direct the Federal Reserve Bank of New York, until instructed otherwise, to execute transactions in the System Open Market Account in accordance with the following domestic policy directive: "Effective March 23, 2020, 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 0 to 1/4 percent. The Committee directs the Desk to increase the System Open Market Account holdings of Treasury securities and agency mortgage-backed securities (MBS) in the amounts needed to support the smooth functioning of markets for Treasury securities and agency MBS. The Committee also directs the Desk to include purchases of agency commercial mortgage-backed securities in its agency mortgage-backed security purchases. The Committee also directs the Desk to continue conducting term and overnight repurchase agreement operations to ensure that the supply of reserves remains ample and to support the smooth functioning of short-term U.S. dollar funding markets. In addition, the Committee directs the Desk to conduct 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 0.00 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 all principal payments from the Federal Reserve's holdings of Treasury securities and to reinvest all principal payments from the Federal Reserve's holdings of agency debt and agency mortgage-backed securities received during each calendar month in agency mortgage-backed securities. 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." More information regarding open market operations and reinvestments may be found on the Federal Reserve Bank of New York's website. For media inquiries, call 202-452-2955. Federal Reserve announces extensive new measures to support the economy

2020-03-15

Statement

The coronavirus outbreak has harmed communities and disrupted economic activity in many countries, including the United States. Global financial conditions have also been significantly affected. Available economic data show that the U.S. economy came into this challenging period on a strong footing. Information received since the Federal Open Market Committee met in January indicates that the labor market remained strong through February and economic activity rose at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although household spending rose at a moderate pace, business fixed investment and exports remained weak. More recently, the energy sector has come under stress. On a 12‑month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation have declined; survey-based measures of longer-term inflation expectations are little changed. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The effects of the coronavirus will weigh on economic activity in the near term and pose risks to the economic outlook. In light of these developments, the Committee decided to lower the target range for the federal funds rate to 0 to 1/4 percent. The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals. This action will help support economic activity, strong labor market conditions, and inflation returning to the Committee's symmetric 2 percent objective. The Committee will continue to monitor the implications of incoming information for the economic outlook, including information related to public health, as well as global developments and muted inflation pressures, and will use its tools and act as appropriate to support the economy. In determining the timing and size of future adjustments to the stance of monetary policy, 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. The Federal Reserve is prepared to use its full range of tools to support the flow of credit to households and businesses and thereby promote its maximum employment and price stability goals. To support the smooth functioning of markets for Treasury securities and agency mortgage-backed securities that are central to the flow of credit to households and businesses, over coming months the Committee will increase its holdings of Treasury securities by at least $500 billion and its holdings of agency mortgage-backed securities by at least $200 billion. The Committee will also reinvest all principal payments from the Federal Reserve's holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. In addition, the Open Market Desk has recently expanded its overnight and term repurchase agreement operations. The Committee will continue to closely monitor market conditions and is prepared to adjust its plans as appropriate. Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Patrick Harker; Robert S. Kaplan; Neel Kashkari; and Randal K. Quarles. Voting against this action was Loretta J. Mester, who was fully supportive of all of the actions taken to promote the smooth functioning of markets and the flow of credit to households and businesses but preferred to reduce the target range for the federal funds rate to 1/2 to 3/4 percent at this meeting. In a related set of actions to support the credit needs of households and businesses, the Federal Reserve announced measures related to the discount window, intraday credit, bank capital and liquidity buffers, reserve requirements, and—in coordination with other central banks—the U.S. dollar liquidity swap line arrangements. More information can be found on the Federal Reserve Board's website. For media inquiries, call 202-452-2955. Implementation Note issued March 15, 2020 Federal Reserve actions to support the flow of credit to households and businesses Coordinated central bank action to enhance the provision of U.S. dollar liquidity

N/A

Minute

Minutes of the Federal Open Market Committee March 15, 2020 A joint meeting of the Federal Open Market Committee and the Board of Governors was held by videoconference on Sunday, March 15, 2020, at 10:00 a.m.1 PRESENT: Jerome H. Powell, Chair John C. Williams, Vice Chair Michelle W. Bowman Lael Brainard Richard H. Clarida Patrick Harker Robert S. Kaplan Neel Kashkari Loretta J. Mester Randal K. Quarles Thomas I. Barkin, Raphael W. Bostic, Mary C. Daly, and Charles L. Evans, 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 Michelle A. Smith, Assistant Secretary Mark E. Van Der Weide, General Counsel Michael Held, Deputy General Counsel Thomas Laubach, Economist Stacey Tevlin, Economist Beth Anne Wilson, Economist Shaghil Ahmed, Michael Dotsey, Joseph W. Gruber, Beverly Hirtle, David E. Lebow, Trevor A. Reeve, and Ellis W. Tallman, Associate Economists Lorie K. Logan, Manager, System Open Market Account Ann E. Misback, Secretary, Office of the Secretary, Board of Governors Matthew J. Eichner, 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 Chair, Office of Board Members, Board of Governors Joshua Gallin, Special Adviser to the Chair, Office of Board Members, Board of Governors Antulio N. Bomfim, Brian M. Doyle, Wendy E. Dunn, and Ellen E. Meade, 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 Edward Nelson, Senior Adviser, Division of Monetary Affairs, Board of Governors Andrew Figura and John M. Roberts, Deputy Associate Directors, Division of Research and Statistics, Board of Governors Rebecca Zarutskie, Assistant Director, Division of Monetary Affairs, Board of Governors Brett Berger, Adviser, Division of International Finance, Board of Governors Randall A. Williams, Senior Information Manager, Division of Monetary Affairs, Board of Governors Jose Acosta, Senior Communications Analyst, Division of Information Technology, Board of Governors Ellen J. Bromagen and Ron Feldman, First Vice Presidents, Federal Reserve Banks of Chicago and Minneapolis, respectively Kartik B. Athreya, Anna Paulson, Daleep Singh, and Christopher J. Waller, Executive Vice Presidents, Federal Reserve Banks of Richmond, Chicago, New York, and St. Louis, respectively Paula Tkac, Robert G. Valletta, and Nathaniel Wuerffel, Senior Vice Presidents, Federal Reserve Banks of Atlanta, San Francisco, and New York, respectively George A. Kahn, Matthew D. Raskin, and Patricia Zobel, Vice Presidents, Federal Reserve Banks of Kansas City, New York, and New York, respectively Karel Mertens, Senior Economic Policy Advisor, Federal Reserve Bank of Dallas Developments in Financial Markets and Open Market Operations The System Open Market Account (SOMA) manager first reviewed developments in domestic and global financial markets. Financial markets remained exceptionally volatile amid the global spread of the coronavirus and uncertainty regarding its effects. Since the meeting of the FOMC in late January, the S&P 500 index declined 18 percent, nominal U.S. Treasury yields moved 60 to 100 basis points lower, and market-based measures of inflation compensation fell 75 to 100 basis points. Investment-grade and high-yield credit spreads widened about 120 basis points and 360 basis points, respectively. The U.S. dollar appreciated notably against most currencies, with the exception of other safe-haven currencies, and crude oil prices dropped 40 percent. Against this backdrop, expectations for the path of the federal funds rate adjusted sharply. Implied rates on federal funds futures contracts suggested the Committee was expected to reduce the target range 1 full percentage point at its upcoming scheduled meeting following the 50 basis point reduction in the target range in early March. In addition, market participants reportedly anticipated that the Committee would announce additional purchases of Treasury securities and agency mortgage-backed securities (MBS). Trading conditions across a range of markets were severely strained. In corporate bond markets, trading activity and liquidity were at very low levels, although not back to the low point reached in 2008. Market participants expected that actions taken to slow the spread of the virus could have significant effects on the credit worthiness of certain borrowers, particularly those at the lower end of the credit spectrum. Market participants also increasingly pointed to concerns in other segments of the debt market. In securitized markets, including those for asset-backed securities (ABS) and commercial mortgage-backed securities (CMBS), primary market issuance slowed, and secondary market trading had become less orderly, with money managers selling short-dated liquid products to meet investor redemptions. In the Treasury market, following several consecutive days of deteriorating conditions, market participants reported an acute decline in market liquidity. A number of primary dealers found it especially difficult to make markets in off-the-run Treasury securities and reported that this segment of the market had ceased to function effectively. This disruption in intermediation was attributed, in part, to sales of off-the-run Treasury securities and flight-to-quality flows into the most liquid, on-the-run Treasury securities. Conditions in short-term funding markets also deteriorated sharply amid a decline in market liquidity and challenges in dealer intermediation. Over recent days, the premium paid to obtain dollars through the foreign exchange swap market increased sharply, and the volumes in term repurchase agreement (repo) markets dropped significantly. Issuance of commercial paper (CP) maturing beyond one week reportedly almost dried up at the end of the week before the meeting, and primary- and secondary-market liquidity for financial and nonfinancial CP was described as nearly nonexistent at a time when investor concern about issuer credit risk was rising. The manager then summarized actions taken by the Desk to address some of the strains in financial markets. Repo lending operations were greatly expanded to address the acute worsening in term funding markets; these operations included the addition of large-scale one- and three-month term repo operations. Despite the sizable offering of additional term repo, take-up was well below the offered amounts, and there was little improvement in Treasury market functioning. As a result, the Chair, in consultation with the FOMC, instructed the Desk to conduct purchases of Treasury securities across a range of maturities. The Desk also revised the schedule of Treasury purchases, announcing that $37 billion of the monthly scheduled purchases would be completed on Friday, March 13. These purchases were conducted across the curve. Market participants suggested that the operations had been helpful in addressing some funding pressures, but trading conditions in Treasury, mortgage, and credit markets remained severely strained. The SOMA manager noted that, if the FOMC directed the Desk to conduct additional purchases of MBS and Treasury securities, the Desk could initially conduct such purchases at a more rapid pace to more quickly address liquidity strains. By unanimous vote, the Committee ratified the Desk's domestic transactions over the intermeeting period. No intervention operations occurred in foreign currencies for the System's account during the intermeeting period. Staff Review of the Economic Situation The coronavirus outbreak was disrupting economic activity in many countries, including the United States, by the time of the March 15 meeting. There were limited available U.S. economic data, however, that covered the period since the intensification of concerns about the domestic effects of the outbreak. Information that predated that period indicated that labor market conditions had remained strong through February and that real gross domestic product (GDP) appeared to have been increasing at a moderate pace in the first two months of the year. 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 January. Survey-based measures of longer-run inflation expectations were little changed. Total nonfarm payroll employment expanded strongly in January and February, and the unemployment rate was at its 50‑year low of 3.5 percent in February. Meanwhile, the labor force participation rate and the employment-to-population ratio edged up on net. Initial claims for unemployment insurance benefits—a timely indicator of a deterioration in labor market conditions—remained near historically low levels through early March, which was still before economic shutdowns started to take place in the United States. Nominal wage growth was moderate on balance. Average hourly earnings for all employees increased 3 percent over the 12 months ending in February. The employment cost index for private-sector workers increased 2.7 percent over the 12 months ending in December, while total labor compensation per hour in the business sector—a highly volatile measure of wage gains—rose 3.6 percent over the four quarters of last year. Total consumer prices, as measured by the PCE price index, increased 1.7 percent over the 12 months ending in January. Core PCE price inflation (which excludes changes in consumer food and energy prices) was 1.6 percent over that same 12-month period. The trimmed mean measure of 12-month PCE price inflation constructed by the Federal Reserve Bank of Dallas was 2.1 percent in January. The consumer price index (CPI) rose 2.3 percent over the 12 months ending in February, and the core CPI increased 2.4 percent over that same period. Recent readings on survey-based measures of longer-run inflation expectations were little changed, on balance, in recent months. The Survey of Professional Forecasters measure for the next 10 years was unchanged in the first quarter, as was the longer-run measure from the Blue Chip survey in March. The University of Michigan Surveys of Consumers measure for the next 5 to 10 years edged down in February and remained in the lower part of its prevailing range in early March. The three-year-ahead measure from the Federal Reserve Bank of New York's Survey of Consumer Expectations edged up in February and remained in its recent range. Real PCE growth was moderate in January. The components of the nominal retail sales data used to estimate PCE edged down in February, and the pace of sales of light motor vehicles in January and February was above its fourth-quarter average. However, the consumer sentiment measure from the Michigan survey started to decline notably in early March, and other daily and weekly sentiment measures—such as the Bloomberg Consumer Comfort Index, the Morning Consult confidence index, and the Rasmussen Consumer Index—were also deteriorating. Both starts and building permit issuance for single-family homes increased in January over their fourth-quarter averages, and starts of multifamily units also moved up. New and existing home sales in January were both above their average fourth-quarter levels. Nominal shipments and new orders of nondefense capital goods excluding aircraft increased solidly in January, although the anticipated resumption of deliveries of the Boeing 737 Max was delayed until later in the year. Nominal business expenditures for nonresidential structures outside of the drilling and mining sector increased in January. The total number of crude oil and natural gas rigs in operation—an indicator of business spending for structures in the drilling and mining sector—was edging up through mid-March and was not yet showing any of the expected falloff from the recent sharp declines in crude oil prices. The available data suggested that manufacturing production moved up in February after edging down in January, leaving the level of factory output little changed, on net, over the past 12 months. Although output in the mining sector—which includes crude oil extraction—had increased in January, available data indicated that output in this sector would decrease in February; the recent sharp declines in crude oil prices pointed to a reduction in mining-sector production over at least the near term. Total real government purchases appeared to be increasing moderately. Federal defense spending rose in January and February, and federal employment was boosted by hiring for the 2020 census. State and local government payrolls expanded strongly in January and February, and nominal construction spending by these governments increased solidly in January. The nominal U.S. international trade deficit narrowed in January, as a steep fall in imports more than offset a decline in exports. The fall in imports, which followed a sizable fourth-quarter decline, was led by lower imports of industrial supplies, automotive products, and capital goods. The decline in exports was driven by lower exports of capital goods and industrial supplies. Available indicators suggested that both exports and imports likely declined in February, in part reflecting disruptions related to the coronavirus outbreak. The pace of economic growth abroad was already subdued before the outbreak. In the advanced foreign economies (AFEs), real GDP growth had slowed sharply at the end of 2019, and indicators pointed to only a modest pickup in economic growth early this year. In the emerging market economies (EMEs), incoming data had been more positive, as indicators for high-tech and manufacturing production in Asian economies outside of China were upbeat, and the effects of social protests in Chile and Hong Kong, along with the effects of the General Motors strike on Mexican economic activity, had faded. By early February, however, the coronavirus outbreak in China brought economic activity in many parts of the country to a standstill. Hubei province, the epicenter of the outbreak and a manufacturing hub, was put under quarantine, and factories across the country were shut down. Foreign economic indicators for the more recent period, following the spread of the virus to the rest of the world, were generally not yet available. However, widespread shutdowns together with lower commodity prices and tighter financial conditions suggested that activity was weakening sharply in most foreign economies. Staff Review of the Financial Situation Concerns about the coronavirus outbreak dominated financial market developments at home and abroad over the intermeeting period. Equity prices, sovereign yields, and the market-implied expected trajectory of the federal funds rate all plummeted, and the volatility of asset prices soared. Late in the intermeeting period, short-term funding markets showed signs of stress, with elevated demand for repo funding and increased short-term spreads. Trading conditions for Treasury securities and MBS were impaired. Moreover, primary issuance of investment-grade corporate bonds was sporadic, and that of speculative-grade corporate bonds and leveraged loans virtually stopped after late February. Data from before the escalation of coronavirus concerns in late February suggested that financial conditions for nonfinancial businesses and for households had generally remained supportive of economic activity and spending, but developments late in the intermeeting period pointed to tightening credit conditions. Expectations for the path of the federal funds rate declined sharply over the intermeeting period. Toward the end of the period, a straight read of overnight index swap (OIS) quotes suggested that the federal funds rate would remain below 25 basis points at least until the middle of 2021. After the 50 basis point decrease in the target range on March 3, prices of federal funds futures options suggested that investors assigned a significant probability to the target range decreasing to 0 to 25 basis points at or before the scheduled March meeting. Yields on nominal Treasury securities plummeted across the maturity spectrum, with the 10- and 30-year yields reaching all-time lows at some point. A staff term structure model largely attributed the decline in the 10-year yield to lower expected future short-term rates. Measures of inflation compensation based on Treasury Inflation-Protected Securities fell sharply and reached a historical low at the 5-to-10-year horizon late in the intermeeting period. Uncertainty regarding future interest rates increased sharply over the intermeeting period. At one point, the one-month-ahead swaption-implied volatility of the 10-year swap rate surpassed its highest level seen during the "taper tantrum" episode in mid-2013. Treasury market functioning was severely impaired late in the intermeeting period, with some dealers reportedly unwilling to make markets for clients and the normal linkage between cash and futures markets broken. Market depth was extremely thin, and bid-ask spreads widened sharply. Broad stock price indexes plummeted because of a flight to safety amid escalating concerns about global economic activity. Although the declines were broad based, the airline, energy, and bank sectors were among the worst performers. Stock price indexes were extremely volatile, and the one-month option-implied volatility on the S&P 500 index soared, sometimes reaching levels not seen since the fall of 2008. Corporate bond spreads over comparable-maturity Treasury yields widened significantly, and spreads on speculative-grade energy bonds widened especially sharply amid plunging oil prices. The 50 basis point decrease in the target range for the federal funds rate announced on March 3 passed through fully to overnight unsecured and secured rates. Conditions in domestic short-term funding markets showed signs of funding strains late in the intermeeting period. The rates on unsecured CP and negotiable certificates of deposit with maturities exceeding one month increased sharply relative to OIS rates, with pronounced effects for issuers in the energy and transportation sectors. Overnight and term repo rates were elevated late in the intermeeting period, and the take-up of the Federal Reserve's repo operations increased substantially for both overnight and term operations. Over the intermeeting period, foreign risk asset prices plummeted amid a rapid deterioration of investor sentiment due to the global spread of the coronavirus. Major foreign equity indexes dropped sharply over the intermeeting period, while option-implied volatility measures climbed to their highest levels since the Global Financial Crisis. EME fund outflows accelerated late in the period as emerging market bond spreads widened notably. Most AFE long-term sovereign yields ended the period notably lower. Inflation compensation in the euro area reached new lows. In response to the economic effect of the virus, several central banks cut policy rates and injected liquidity. The broad dollar index strengthened notably over the period, boosted by safe-haven demand, predominantly against EME currencies, and despite a significant decline in U.S. yields. Safe-haven demand also bolstered the Japanese yen and Swiss franc. Policy actions by Chinese authorities supported the Chinese renminbi, which depreciated about 1.5 percent against the dollar on net. Other EME currencies, such as the Brazilian real and Mexican peso, depreciated sharply, as market participants viewed them as particularly vulnerable to a global economic slowdown and declining commodity prices. Oil prices declined over 40 percent on expectations of lower demand due to the virus outbreak and an unexpected price cut by Saudi Arabia amid a breakdown of negotiations between OPEC and Russia to reduce production levels. Financing conditions for nonfinancial firms were strained over the late part of the intermeeting period. After robust issuance earlier in the first quarter, corporate bond issuance came to a near standstill around late February in the midst of elevated volatility following the escalation of concerns about the coronavirus outbreak. Later in the intermeeting period, investment-grade bond issuance resumed intermittently, but speculative-grade issuance and leveraged loan issuance virtually stopped. In addition, some firms reportedly postponed plans to go public. Commercial and industrial loan growth was modest. Credit quality indicators for nonfinancial corporations had been solid earlier in the quarter but deteriorated following the escalation of the coronavirus outbreak, particularly for the speculative-grade and energy segments of the market. Measures of the year-ahead expected default rate increased in March to levels slightly under those observed during the oil price plunge in early 2016, reflecting higher expected default rates among speculative-grade firms as well as energy firms. In addition, the outlook for corporate earnings deteriorated somewhat, as equity analysts revised down their earnings per share estimates a notch, and several firms warned that the coronavirus outbreak could hurt their earnings and make them difficult to predict. The supply of credit to small businesses over the fourth quarter of last year had remained relatively accommodative, but loan originations ticked down in January, consistent with ongoing reports of weak loan demand. Market turmoil spilled into municipal bond markets late in the intermeeting period, as spreads widened substantially and some borrowers became hesitant to come to the market. Credit conditions in the municipal market had been accommodative over the early part of the intermeeting period, and issuance volumes in late February were reportedly boosted by strong investor demand for low-risk assets. Financing conditions in the commercial real estate (CRE) sector worsened late in the intermeeting period, as issuance of CMBS slowed and spreads widened notably to around levels seen in 2016. Data from before the escalation of concerns over the coronavirus outbreak pointed to accommodative financing conditions. CRE loan growth at banks remained solid through February and CRE debt outstanding increased modestly through mid-February, according to available data. The primary mortgage rate increased sharply toward the end of the period as MBS market liquidity deteriorated, after falling substantially in February and early March. Capacity constraints at mortgage originators reportedly intensified, while borrower interest in refinancing increased significantly from already elevated levels. Moreover, additional constraints emerged as it became more difficult to conduct operations that usually happen face-to-face. Financing conditions in consumer credit markets worsened late in the intermeeting period. Strains began appearing in consumer ABS markets, although less so than in other fixed-income markets. In March, consumer ABS spreads widened sharply, liquidity deteriorated, and new issuance became sporadic. Lenders in consumer credit markets began developing programs to assist borrowers whose finances were affected by the outbreak. Earlier in the intermeeting period, financing conditions had been generally supportive of growth. Credit card balances and auto loan balances both appeared to grow solidly through February, according to banks' data, continuing their growth in the fourth quarter. Conditions for subprime credit card borrowers remained relatively tight but showed some signs of easing. Staff Economic Outlook The projection for the U.S. economy prepared by the staff for the March FOMC meeting was downgraded significantly from the January meeting forecast in response to news on the spread of the coronavirus at home and abroad and in response to a related substantial markdown of the staff's foreign economic outlook, along with recent financial market movements. Real GDP was forecast to decline and the unemployment rate to rise, on net, in the first half of this year. Given the downside risks and the elevated uncertainty about how much the economy would weaken and how long it would take to recover, the staff provided two plausible economic scenarios that spanned a range of possibilities. Importantly, the future performance of the economy would depend on the evolution of the virus outbreak and the measures undertaken to contain it. In one scenario, economic activity started to rebound in the second half of this year. In a more adverse scenario, the economy entered recession this year, with a recovery much slower to take hold and not materially under way until next year. In both scenarios, inflation was projected to weaken, reflecting both the deterioration in resource utilization and sizable expected declines in consumer energy prices. Participants' Views on Current Conditions and the Economic Outlook Participants noted that the coronavirus outbreak was harming communities and disrupting economic activity in many countries, including the United States, and that global financial conditions had also been significantly affected. Participants expressed their deep concern for those whose health had been harmed and observed that the matter was, above all, a public health emergency. They commented that the measures—such as social distancing—taken in response to the pandemic, while needed to contain the outbreak, would nevertheless take a toll on U.S. economic activity in the near term. Participants noted that available economic data showed that the U.S. economy came into this challenging period on a strong footing. Information received since the Committee met in January indicated that the labor market remained strong through February and that economic activity rose at a moderate rate. Job gains had been solid, on average, in recent months, and the unemployment rate had remained low. Although household spending had risen at a moderate pace, business fixed investment and exports had remained weak; furthermore, in recent weeks the energy sector had come under stress due to the sharp drop in oil prices. On a 12-month basis, overall inflation and inflation for items other than food and energy had been running below 2 percent. Survey-based measures of longer-term inflation expectations had been little changed. However, market-based measures of inflation compensation had declined. All participants viewed the near-term U.S. economic outlook as having deteriorated sharply in recent weeks and as having become profoundly uncertain. Many participants had repeatedly downgraded their outlook of late in response to the rapidly evolving situation. All saw U.S. economic activity as likely to decline in the coming quarter and viewed downside risks to the economic outlook as having increased significantly. Participants noted that the timing of the resumption of growth in the U.S. economy depended on the containment measures put in place, as well as the success of those measures, and on the responses of other policies, including fiscal policy. With regard to households' behavior, participants noted that, although consumption spending had been a key driver of growth in economic activity through the first two months of this year, the pandemic was starting to impair consumer confidence and to exert an adverse effect on household balance sheets. Participants reported that wide-ranging social-distancing measures were in operation or in prospect in their Districts. These measures—which included temporary closures of some physical locations, such as stores and restaurants, in which consumers purchased goods and services—would have the effect of reducing in-person transactions by households. Online shopping could substitute for some of this activity but was unlikely to replace it fully. The housing market was likely to be disrupted by social distancing, by financial uncertainty—including difficulties that households and businesses would face in meeting mortgage or rental payments—and by volatility in the market for MBS. Participants stressed the major downside risk that the spread of the virus might intensify in those areas of the country currently less affected, thereby sidelining many more U.S. workers and further damping purchases by consumers. Participants expressed concern that households with low incomes had less of a savings buffer with which to meet expenses during the interruption to economic activity. This situation made those households more vulnerable to a downturn in the economy and tended to magnify the reduction in aggregate demand associated with the nation's response to the pandemic. Participants relayed reports on business sectors already badly hit by the response to the coronavirus outbreak. These sectors included those affected by the cancellation of many events, decisions by firms and households to reduce travel, government-mandated reductions in entry from abroad, and cutbacks on economic activity that required in-person interaction. Firms directly affected included those connected to air travel, cruise lines, hotels, tourism services, sports and recreation, entertainment, hospitality, and restaurants. In the past week, pullbacks in purchases at retail stores, except for emergency buying, had reportedly intensified significantly. In addition, the energy sector had come under stress because of recent large declines in oil prices. Many U.S. businesses had moved to telework arrangements; other businesses, however, could not readily shift to telework status or had limited telework technology. Participants observed that the coronavirus outbreak had inevitably hurt business confidence and that the expected length and severity of the restrictions on economic activity that involved in-person interaction would importantly affect the size of the response of investment spending to the situation. Participants expressed concern about the financial strain that many U.S. firms were under because of the loss of business and the extraordinary turbulence in financial markets. With regard to supply chains, many contacts had reported that some linkages in China had been restored and that they were able to draw on inventory supplies and on alternative supply chains; however, in some areas of the country, the construction industry had reported continuing disruptions to supply chains from China. Participants indicated that disruptions in the European economy and recent restrictions on travel from Europe to the United States would adversely affect the U.S. economy's supply chains; so too, if it eventuated, would a large increase in U.S. worker unavailability because of health reasons. Several participants emphasized concern about the capacity of the health care system in the current situation and welcomed measures taken to prevent the system's overall capacity from being exceeded. Participants noted that foreign economic growth for the first half of this year would be badly hit by the severe disruptions to economic activity abroad associated with the response to the coronavirus outbreak, including the recent measures taken in major European countries. However, some encouraging signs had come from China in recent weeks in the form of indications of increasing production and of more purchases of U.S. goods. With regard to the labor market, participants noted that some firms would likely need to cut employment immediately. Other firms, however, were looking for ways to retain employees during the period of reduced economic activity, in order to maintain capacity and be able to ramp up production once the public health crisis abated and demand rebounded. Measures that reportedly helped partially substitute for layoffs included the encouragement by employers of voluntary leaves of absence, non-replacement of departing workers, and increased reliance on the delivery of goods to customers in place of on-site purchases. Participants observed that businesses would be more likely to lay off workers on a major scale if the downturn in economic activity came to be perceived as likely to be protracted. Participants commented that workers most severely affected in the current situation were those who were ill, those with low incomes, those connected to the most hard-hit sectors, and those with irregular or contingent employment. They also noted that many workers had jobs that did not permit working from home. With regard to inflation, participants noted that it had been running below the Committee's 2 percent longer-run objective before the coronavirus outbreak. They remarked that a stronger dollar, weaker demand, and lower oil prices were factors likely to put downward pressure on inflation in the period ahead and observed that this meant that the return of inflation to the Committee's 2 percent longer-run objective would likely be further delayed. Participants indicated, however, that implementing a more accommodative stance of monetary policy at this meeting could be useful in helping offset these factors over time and in achieving the 2 percent inflation objective over the longer run, by helping prevent circumstances of persistent resource slack or a lasting decline in inflation expectations. Participants all agreed that the effects of the pandemic would weigh on economic activity in the near term and that the duration of this period of weakness was uncertain. They further concurred that the unpredictable effects of the coronavirus outbreak were a source of major downside risks to the economic outlook. Participants raised several alternative scenarios with regard to the likely behavior of economic activity in the second half of this year. These scenarios differed from one another in the assumed length and severity of disruptions to economic activity. Several participants emphasized that the temporary nature of the shock to economic activity, the fact that the shock arose in the nonfinancial sector, and the healthy state of the U.S. banking system all implied that the current situation was not directly comparable with the previous decade's financial crisis and it need not be followed by negative effects on economic activity as long-lasting as those associated with that crisis. Participants stressed that measures taken in the areas of health care policy and fiscal policy, together with actions by the private sector, would be important in shaping the timing and speed of the U.S. economy's return to normal conditions. Participants agreed that the Federal Reserve's efforts to relieve stress in financial markets would help limit downside near-term outcomes by supporting credit flows to households and businesses, and that a more accommodative monetary policy stance would provide support to economic activity beyond the near term. Among the downside risks to this year's U.S. economic outlook, participants prominently cited the possibility of the virus outbreak becoming more widespread than expected. Such an event could lead to more wide-ranging temporary shutdowns, with adverse implications for the production of goods and services and for aggregate demand. With regard to financial developments over the intermeeting period, participants noted that financial markets had exhibited extraordinary turbulence and stresses. Participants commented on the conditions of high volatility and illiquidity characterizing the markets for U.S. Treasury securities, especially off-the-run longer-term securities, and for agency MBS. Participants expressed concern about the disruptions to the functioning of these markets, especially in view of their status as cornerstones for the operation of the U.S. and global financial systems and for the transmission of monetary policy. Participants observed that Federal Reserve operations in recent days had provided some relief with regard to the liquidity problems, but they noted that severe illiquidity continued to prevail in key securities markets. Many participants pointed to other dislocations in funding markets that could impede financial intermediation to households and businesses. They highlighted the acute problems that many firms were facing in issuing CP and corporate bonds. Participants further noted that many businesses were tapping their backup credit lines with commercial banks. Participants also discussed the implications of recent financial market turbulence for money market funds and government bond funds and for debt issuance by state and local governments. In their consideration of monetary policy at this meeting, most participants judged that it would be appropriate to lower the target range for the federal funds rate by 100 basis points, to 0 to 1/4 percent. In discussing the reasons for such a decision, these participants pointed to a likely decline in economic activity in the near term related to the effects of the coronavirus outbreak and the extremely large degree of uncertainty regarding how long and severe such a decline in activity would be. In light of the sharply increased downside risks to the economic outlook posed by the global coronavirus outbreak, these participants noted that risk-management considerations pointed toward a forceful monetary policy response, with the majority favoring a 100 basis point cut that would bring the target range to its effective lower bound (ELB). With regard to monetary policy beyond this meeting, these participants judged that it would be appropriate to maintain the target range for the federal funds rate at 0 to 1/4 percent until policymakers were confident that the economy had weathered recent events and was on track to achieve the Committee's maximum employment and price stability goals. A few participants preferred a 50 basis point cut at this meeting and noted that such a decision would provide support to economic activity in the face of the anticipated effects of the coronavirus. These participants preferred to wait until there was greater assurance that the transmission mechanism of monetary policy via financial markets and the supply of credit to households and businesses was working effectively. This would allow fiscal and public health policy responses to the coronavirus outbreak to take hold and preserve the ability of the Committee to lower the target range, which was close to the ELB, in the event of a further deterioration in the economic outlook. In addition, these participants noted that a lowering of the target range by 100 basis points, coming so soon after the reduction of 50 basis points less than two weeks earlier, ran the risk of sending an overly negative signal about the economic outlook. Participants also considered open market operations to purchase Treasury securities and agency MBS to support the smooth functioning of these securities markets, which in turn would help support the supply of credit to households and businesses. Participants generally agreed that, over the coming months, it would be appropriate to increase the Federal Reserve's holdings of Treasury securities by at least $500 billion and its holdings of agency MBS by at least $200 billion. Additionally, all principal payments from the Federal Reserve's holdings of agency debt and agency MBS would be reinvested in agency MBS. Those Treasury and agency MBS purchases would be in addition to the recently expanded overnight and term repo operations conducted by the Desk. Participants stressed that it was important to communicate that the Committee would be prepared to increase the size of the securities purchases, as needed, on the basis of its close monitoring of market conditions. Some participants noted that it was important to stress in communications that the primary purpose of these asset purchases was to support the smooth functioning of Treasury and agency MBS markets rather than to provide further monetary policy accommodation by pushing down longer-term yields. A couple of participants noted that because some of the purchases would be at longer maturities, the purchases could provide some accommodation by lowering longer-term yields. Participants discussed some of the possible communications challenges associated with the Committee's policy decisions at this meeting. Several participants noted that it would be important to communicate clearly and consistently about the rationale for the policy decisions taken at this meeting. Some participants remarked that the Committee's policy actions regarding the target range and balance sheet could be interpreted as conveying negative news about the economic outlook. A few participants also remarked that lowering the target range to the ELB could increase the likelihood that some market interest rates would turn negative, or foster investor expectations of negative policy rates. Such expectations would run counter to participants' previously expressed views that they would prefer to use other monetary policy tools to provide further accommodation at the ELB. Additionally, several participants remarked that the public might view the ability of the Committee to provide further monetary policy accommodation as being limited. However, some participants noted that the Committee would still be able to provide monetary policy accommodation even after lowering the target range for the federal funds rate to the ELB. In particular, new forward guidance or balance sheet measures could be introduced. Participants also indicated strong support for related actions taken by the Board of Governors to support the credit needs of households and businesses: to lower the primary credit rate by 150 basis points to 1/4 percent and to allow depository institutions to borrow from the discount window for periods as long as 90 days in order to encourage more active use of the discount window on the part of depository institutions to meet unexpected funding needs to encourage depository institutions to utilize intraday credit to support the provision of liquidity to households and businesses and the smooth functioning of payment systems to encourage banks to use their capital and liquidity buffers as they provide loans to households and businesses affected by the coronavirus and undertake other supportive actions in a safe and sound manner to reduce reserve requirements to 0 percent in light of the shift to an ample-reserves regime and to support lending to households and businesses by depository institutions Participants also indicated support for enhancing, in coordination with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank, the provision of liquidity via the standing U.S. dollar liquidity swap line arrangements. The pricing on the standing U.S. dollar swap arrangements would be lowered by 25 basis points so that the new rate would be the U.S. dollar OIS rate plus 25 basis points, and U.S. dollars would be offered by foreign central banks with an 84-day maturity, in addition to the 1-week maturity operations. Following this discussion, the Chair indicated that these changes to the standing U.S. dollar liquidity swap line arrangements would be implemented consistent with the procedures described in the Authorization for Foreign Currency Operations. Participants generally commented that these additional measures would be helpful in supporting the flow of credit to households and businesses. A few participants commented that stigma associated with the discount window may still be present or that further action, such as a relaunch of the Term Auction Facility, might be needed to encourage banks to take up additional funding. A few other participants noted that discount window stigma should be less of a concern than it was previously. In particular, these participants cited the lowering of the primary credit rate to the top of the target range for the federal funds rate, offering term funding for up to 90 days, and regulators encouraging banks to use the discount window to continue prudently lending to households and businesses. Several participants commented that banks should be discouraged from repurchasing shares from, or paying dividends to, their equity holders in the wake of the proposed measures. Participants generally noted that other measures to support the flow of credit to households and businesses, including those that relied on section 13(3) of the Federal Reserve Act, might be needed in such an uncertain and rapidly evolving environment and that it would be prudent for the Federal Reserve to develop and remain prepared to implement such measures. Committee Policy Action In their discussion of monetary policy for this meeting, members noted that the coronavirus outbreak had harmed communities and disrupted economic activity in many countries, including the United States, and that global financial conditions had also been significantly affected. Available economic data showed that the U.S. economy came into this challenging period on a strong footing, with a strong labor market, a low unemployment rate, and moderate growth in household spending, although business fixed investment and exports had remained weak. More recently, the energy sector had come under stress. On a 12-month basis, overall inflation and inflation for items other than food and energy were running below 2 percent. Market-based measures of inflation compensation had declined, and survey-based measures of longer-term inflation expectations were little changed. Members judged that the effects of the coronavirus would weigh on economic activity in the near term and would pose risks to the economic outlook. In light of these developments, almost all members agreed to lower the target range for the federal funds rate to 0 to 1/4 percent. These members expected that the target range would be maintained at this level until they were confident that the economy had weathered recent events and was on track to achieve the Committee's maximum employment and price stability goals. One member preferred to lower the target range by 50 basis points, to 1/2 to 3/4 percent, at this meeting, in support of the actions taken to promote smooth market functioning and the flow of credit to households and businesses and in light of the anticipated effects of the coronavirus on economic activity and the economic outlook. In this participant's view, a 50 basis point cut would preserve space for further cuts in the target range that could be implemented when market conditions had improved enough to ensure that the monetary policy transmission mechanism was functioning. Members noted that they would continue to monitor the implications of incoming information for the economic outlook, including information related to public health as well as global developments and muted inflation pressures, and that the Committee would use its tools and act as appropriate to support the economy. Members observed that, in determining the timing and size of future adjustments to the stance of monetary policy, the Committee would assess realized and expected economic conditions relative to its maximum-employment objective and its symmetric 2 percent inflation objective. They also agreed that those 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 emphasized that the Federal Reserve was prepared to use its full range of tools to support the flow of credit to households and businesses and thereby promote its maximum-employment and price-stability goals. To support the smooth functioning of markets for Treasury securities and agency MBS that are central to the flow of credit to households and businesses, over coming months the Committee agreed to increase its holdings of Treasury securities by at least $500 billion and its holdings of agency MBS by at least $200 billion. The Committee also agreed to reinvest all principal payments from the Federal Reserve's holdings of agency debt and MBS in agency MBS. In addition, members noted that the Desk had recently expanded its overnight and term repo operations. Members indicated that they would continue to closely monitor market conditions and that the Committee was prepared to adjust its plans as appropriate. 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: "Effective March 16, 2020, 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 0 to 1/4 percent. The Committee directs the Desk to increase over coming months the System Open Market Account holdings of Treasury securities and agency mortgage-backed securities (MBS) by at least $500 billion and by at least $200 billion, respectively. The Committee instructs the Desk to conduct these purchases at a pace appropriate to support the smooth functioning of markets for Treasury securities and agency MBS. The Committee also directs the Desk to continue conducting term and overnight repurchase agreement operations to ensure that the supply of reserves remains ample and to support the smooth functioning of short-term U.S. dollar funding markets. In addition, the Committee directs the Desk to conduct 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 0.00 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 all principal payments from the Federal Reserve's holdings of Treasury securities and to reinvest all principal payments from the Federal Reserve's holdings of agency debt and agency mortgage-backed securities received during each calendar month in agency mortgage-backed securities. 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 for release at 5:00 p.m.: "The coronavirus outbreak has harmed communities and disrupted economic activity in many countries, including the United States. Global financial conditions have also been significantly affected. Available economic data show that the U.S. economy came into this challenging period on a strong footing. Information received since the Federal Open Market Committee met in January indicates that the labor market remained strong through February and economic activity rose at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although household spending rose at a moderate pace, business fixed investment and exports remained weak. More recently, the energy sector has come under stress. On a 12‑month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation have declined; survey-based measures of longer-term inflation expectations are little changed. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The effects of the coronavirus will weigh on economic activity in the near term and pose risks to the economic outlook. In light of these developments, the Committee decided to lower the target range for the federal funds rate to 0 to 1/4 percent. The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals. This action will help support economic activity, strong labor market conditions, and inflation returning to the Committee's symmetric 2 percent objective. The Committee will continue to monitor the implications of incoming information for the economic outlook, including information related to public health, as well as global developments and muted inflation pressures, and will use its tools and act as appropriate to support the economy. In determining the timing and size of future adjustments to the stance of monetary policy, 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. The Federal Reserve is prepared to use its full range of tools to support the flow of credit to households and businesses and thereby promote its maximum employment and price stability goals. To support the smooth functioning of markets for Treasury securities and agency mortgage-backed securities that are central to the flow of credit to households and businesses, over coming months the Committee will increase its holdings of Treasury securities by at least $500 billion and its holdings of agency mortgage-backed securities by at least $200 billion. The Committee will also reinvest all principal payments from the Federal Reserve's holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. In addition, the Open Market Desk has recently expanded its overnight and term repurchase agreement operations. The Committee will continue to closely monitor market conditions and is prepared to adjust its plans as appropriate." Voting for this action: Jerome H. Powell, John C. Williams, Michelle W. Bowman, Lael Brainard, Richard H. Clarida, Patrick Harker, Robert S. Kaplan, Neel Kashkari, and Randal K. Quarles. Voting against this action: Loretta J. Mester President Mester was fully supportive of all of the actions taken to promote the smooth functioning of markets and the flow of credit to households and businesses but voted against the FOMC action because she preferred to reduce the target range for the federal funds rate to 1/2 to 3/4 percent at this meeting. Consistent with the Committee's decision to lower the target range for the federal funds rate to 0 to 1/4 percent, the Board of Governors voted unanimously to lower the interest rate paid on required and excess reserve balances to 0.10 percent and voted unanimously to approve a 1-1/2 percentage point decrease in the primary credit rate to 0.25 percent, effective March 16, 2020. The Board also approved changes to allow Reserve Banks to extend primary credit loans for as long as 90 days and that could be prepaid or renewed on request. In addition, the Board approved a reduction in reserve requirement ratios applicable to net transaction deposits above the exemption threshold to 0 percent effective with the reserve maintenance period beginning on March 26, 2020. It was agreed that the next meeting of the Committee would be held on Tuesday–Wednesday, April 28–29, 2020. The meeting adjourned at 2:40 p.m. on March 15, 2020. Notation Vote By notation vote completed on February 18, 2020, the Committee unanimously approved the minutes of the Committee meeting held on January 28–29, 2020. Videoconference meeting of March 2 A joint meeting of the Federal Open Market Committee and the Board of Governors was held by videoconference on March 2, 2020, at 7:30 p.m. to review developments related to the outbreak of the coronavirus and discuss steps that could be taken to provide support to the economy. As background for the Committee's discussion, the staff reviewed recent developments in financial markets and provided an assessment of the evolving risks to the economic outlook. The SOMA manager noted that since mid-February when concerns about the spread of the coronavirus beyond China had begun to intensify, global risk asset prices and sovereign yields had declined sharply. U.S. and global equity indexes were lower than at the time of the Committee's meeting in January and implied equity market volatility had risen to levels not seen since 2015. The deterioration in risk sentiment had also been reflected in a significant widening in U.S. and European corporate credit spreads and in peripheral European spreads. Amid the ongoing market volatility, issuance of investment-grade and high-yield corporate bonds and of leveraged loans had generally dried up. Money markets had been resilient during the broader financial market volatility; pricing and trading conditions in offshore U.S. dollar funding markets had also been stable. Market functioning had remained orderly despite deterioration in liquidity conditions in Treasury, equity, and credit markets. Financial market participants' views on the likely course of U.S. monetary policy had changed since the Committee's January meeting. The expected path of the federal funds rate embedded in futures prices had shifted down significantly over the period. Market commentary had interpreted Chair Powell's February 28 statement as indicating the FOMC was prepared to lower the target range for the federal funds rate at or before the March meeting to support the achievement of the Committee's maximum employment and price stability goals. Expectations for global monetary and fiscal easing had increased, with some market commentary noting the possibility of a coordinated effort across central banks or fiscal authorities. The SOMA manager noted that the situation remained highly fluid with key risks, including those associated with funding for corporate borrowers, operational vulnerabilities associated with the transition to alternative work arrangements, and the potential for impaired market functioning. The staff then provided an update on current conditions and changes to the economic outlook since the FOMC's January meeting. Available indicators for China suggested that the spread of the coronavirus had been associated with a collapse in economic activity during the first quarter, with spillovers to the global economy from the drop in Chinese demand and disruption of supply chains. Although there were some tentative signs that the coronavirus in China was being contained and production was beginning to resume, the outbreak of the virus in other foreign economies was weighing on consumer and business sentiment and depressing consumption in those countries. All told, foreign economic activity was expected to be significantly weaker during the first half of 2020 than the staff had anticipated at the time of the January FOMC meeting. The staff noted that the spread of the virus was at an earlier stage in the United States and its effects were not yet visible in monthly economic indicators, although there had been some softening in daily sentiment indexes and travel-related transactions. The outlook for real economic activity over the remainder of the year was highly uncertain and depended on the spread of the virus and the measures taken to contain it. Scenarios involving a greater spread of the coronavirus and more severe social-distancing actions would be associated with a greater shutdown of production and disruption of supply chains, larger negative effects on consumer and business sentiment, more significant increases in unemployment, and worsening financial conditions. Reductions in demand, coupled with a stronger U.S. dollar and weaker commodity prices, were expected to put downward pressure on inflation, with the magnitude of the softening in core inflation depending on the severity of the situation. FOMC participants discussed the significant outbreaks of the coronavirus that had emerged recently in a few countries outside China and the likelihood that the virus would spread widely around the world, including in the United States. While the economic outlook at the time of the Committee's January meeting had been favorable, the potential spread of the virus and the measures needed to protect communities from it represented a material downside risk to the U.S. economy. A forceful monetary policy action could provide a clear signal to the public that policymakers recognized the potential economic significance of the situation and were willing to move decisively to support the achievement of the Committee's dual mandate goals and counter the recent tightening of financial conditions. Although a reduction in the policy rate would not slow the spread of infection or remedy broken supply chains, it could help shore up the confidence of households, businesses, and financial markets; ease financial strains of consumers and firms; and provide meaningful support to the economy in the face of a large shock to demand. Accordingly, participants supported a reduction of 50 basis points in the target range for the federal funds rate. On March 3, 2020, the Committee completed the vote 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: "Effective March 4, 2020, 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. In light of recent and expected increases in the Federal Reserve's non-reserve liabilities, the Committee directs the Desk to continue purchasing Treasury bills at least into the second quarter of 2020 to maintain over time ample reserve balances at or above the level that prevailed in early September 2019. The Committee also directs the Desk to continue conducting term and overnight repurchase agreement operations at least through April 2020 to ensure that the supply of reserves remains ample even during periods of sharp increases in non-reserve liabilities, and to mitigate the risk of money market pressures that could adversely affect policy implementation. In addition, the Committee directs the Desk to conduct 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 all principal payments from the Federal Reserve's holdings of Treasury securities and to continue reinvesting all principal payments from the Federal Reserve's holdings of agency debt and agency mortgage-backed securities received during each calendar month. Principal payments from agency debt and agency mortgage-backed securities up to $20 billion per month will continue to be reinvested in Treasury securities to roughly match the maturity composition of Treasury securities outstanding; principal payments in excess of $20 billion per month will continue to be reinvested in agency mortgage-backed securities. 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 for release at 10:00 a.m. on March 3, 2020: "The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity. In light of these risks and in support of achieving its maximum employment and price stability goals, the Federal Open Market Committee decided today to lower the target range for the federal funds rate by 1/2 percentage point, to 1 to 1-1/4 percent. The Committee is closely monitoring developments and their implications for the economic outlook and will use its tools and act as appropriate to support the economy." Voting for this action: Jerome H. Powell, John C. Williams, Michelle W. Bowman, Lael Brainard, Richard H. Clarida, Patrick Harker, Robert S. Kaplan, Neel Kashkari, Loretta J. Mester, and Randal K. Quarles. Consistent with the Committee's decision to lower the target range for the federal funds rate to 1 to 1-1/4 percent, the Board of Governors completed on March 3, 2020, unanimous votes to lower the interest rate paid on required and excess reserve balances to 1.10 percent and to approve a 1/2 percentage point decrease in the primary credit rate to 1.75 percent, effective March 4, 2020. _______________________ James A. Clouse Secretary 1. The Federal Open Market Committee is referenced as the "FOMC" and the "Committee" in these minutes. Return to text

2020-03-03

Statement

The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity. In light of these risks and in support of achieving its maximum employment and price stability goals, the Federal Open Market Committee decided today to lower the target range for the federal funds rate by 1/2 percentage point, to 1 to 1‑1/4 percent. The Committee is closely monitoring developments and their implications for the economic outlook and will use its tools and act as appropriate to support the economy. Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Patrick Harker; Robert S. Kaplan; Neel Kashkari; Loretta J. Mester; and Randal K. Quarles. For media inquiries, call 202-452-2955. Implementation Note issued March 3, 2020

N/A

Minute

Minutes of the Federal Open Market Committee March 15, 2020 A joint meeting of the Federal Open Market Committee and the Board of Governors was held by videoconference on Sunday, March 15, 2020, at 10:00 a.m.1 PRESENT: Jerome H. Powell, Chair John C. Williams, Vice Chair Michelle W. Bowman Lael Brainard Richard H. Clarida Patrick Harker Robert S. Kaplan Neel Kashkari Loretta J. Mester Randal K. Quarles Thomas I. Barkin, Raphael W. Bostic, Mary C. Daly, and Charles L. Evans, 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 Michelle A. Smith, Assistant Secretary Mark E. Van Der Weide, General Counsel Michael Held, Deputy General Counsel Thomas Laubach, Economist Stacey Tevlin, Economist Beth Anne Wilson, Economist Shaghil Ahmed, Michael Dotsey, Joseph W. Gruber, Beverly Hirtle, David E. Lebow, Trevor A. Reeve, and Ellis W. Tallman, Associate Economists Lorie K. Logan, Manager, System Open Market Account Ann E. Misback, Secretary, Office of the Secretary, Board of Governors Matthew J. Eichner, 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 Chair, Office of Board Members, Board of Governors Joshua Gallin, Special Adviser to the Chair, Office of Board Members, Board of Governors Antulio N. Bomfim, Brian M. Doyle, Wendy E. Dunn, and Ellen E. Meade, 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 Edward Nelson, Senior Adviser, Division of Monetary Affairs, Board of Governors Andrew Figura and John M. Roberts, Deputy Associate Directors, Division of Research and Statistics, Board of Governors Rebecca Zarutskie, Assistant Director, Division of Monetary Affairs, Board of Governors Brett Berger, Adviser, Division of International Finance, Board of Governors Randall A. Williams, Senior Information Manager, Division of Monetary Affairs, Board of Governors Jose Acosta, Senior Communications Analyst, Division of Information Technology, Board of Governors Ellen J. Bromagen and Ron Feldman, First Vice Presidents, Federal Reserve Banks of Chicago and Minneapolis, respectively Kartik B. Athreya, Anna Paulson, Daleep Singh, and Christopher J. Waller, Executive Vice Presidents, Federal Reserve Banks of Richmond, Chicago, New York, and St. Louis, respectively Paula Tkac, Robert G. Valletta, and Nathaniel Wuerffel, Senior Vice Presidents, Federal Reserve Banks of Atlanta, San Francisco, and New York, respectively George A. Kahn, Matthew D. Raskin, and Patricia Zobel, Vice Presidents, Federal Reserve Banks of Kansas City, New York, and New York, respectively Karel Mertens, Senior Economic Policy Advisor, Federal Reserve Bank of Dallas Developments in Financial Markets and Open Market Operations The System Open Market Account (SOMA) manager first reviewed developments in domestic and global financial markets. Financial markets remained exceptionally volatile amid the global spread of the coronavirus and uncertainty regarding its effects. Since the meeting of the FOMC in late January, the S&P 500 index declined 18 percent, nominal U.S. Treasury yields moved 60 to 100 basis points lower, and market-based measures of inflation compensation fell 75 to 100 basis points. Investment-grade and high-yield credit spreads widened about 120 basis points and 360 basis points, respectively. The U.S. dollar appreciated notably against most currencies, with the exception of other safe-haven currencies, and crude oil prices dropped 40 percent. Against this backdrop, expectations for the path of the federal funds rate adjusted sharply. Implied rates on federal funds futures contracts suggested the Committee was expected to reduce the target range 1 full percentage point at its upcoming scheduled meeting following the 50 basis point reduction in the target range in early March. In addition, market participants reportedly anticipated that the Committee would announce additional purchases of Treasury securities and agency mortgage-backed securities (MBS). Trading conditions across a range of markets were severely strained. In corporate bond markets, trading activity and liquidity were at very low levels, although not back to the low point reached in 2008. Market participants expected that actions taken to slow the spread of the virus could have significant effects on the credit worthiness of certain borrowers, particularly those at the lower end of the credit spectrum. Market participants also increasingly pointed to concerns in other segments of the debt market. In securitized markets, including those for asset-backed securities (ABS) and commercial mortgage-backed securities (CMBS), primary market issuance slowed, and secondary market trading had become less orderly, with money managers selling short-dated liquid products to meet investor redemptions. In the Treasury market, following several consecutive days of deteriorating conditions, market participants reported an acute decline in market liquidity. A number of primary dealers found it especially difficult to make markets in off-the-run Treasury securities and reported that this segment of the market had ceased to function effectively. This disruption in intermediation was attributed, in part, to sales of off-the-run Treasury securities and flight-to-quality flows into the most liquid, on-the-run Treasury securities. Conditions in short-term funding markets also deteriorated sharply amid a decline in market liquidity and challenges in dealer intermediation. Over recent days, the premium paid to obtain dollars through the foreign exchange swap market increased sharply, and the volumes in term repurchase agreement (repo) markets dropped significantly. Issuance of commercial paper (CP) maturing beyond one week reportedly almost dried up at the end of the week before the meeting, and primary- and secondary-market liquidity for financial and nonfinancial CP was described as nearly nonexistent at a time when investor concern about issuer credit risk was rising. The manager then summarized actions taken by the Desk to address some of the strains in financial markets. Repo lending operations were greatly expanded to address the acute worsening in term funding markets; these operations included the addition of large-scale one- and three-month term repo operations. Despite the sizable offering of additional term repo, take-up was well below the offered amounts, and there was little improvement in Treasury market functioning. As a result, the Chair, in consultation with the FOMC, instructed the Desk to conduct purchases of Treasury securities across a range of maturities. The Desk also revised the schedule of Treasury purchases, announcing that $37 billion of the monthly scheduled purchases would be completed on Friday, March 13. These purchases were conducted across the curve. Market participants suggested that the operations had been helpful in addressing some funding pressures, but trading conditions in Treasury, mortgage, and credit markets remained severely strained. The SOMA manager noted that, if the FOMC directed the Desk to conduct additional purchases of MBS and Treasury securities, the Desk could initially conduct such purchases at a more rapid pace to more quickly address liquidity strains. By unanimous vote, the Committee ratified the Desk's domestic transactions over the intermeeting period. No intervention operations occurred in foreign currencies for the System's account during the intermeeting period. Staff Review of the Economic Situation The coronavirus outbreak was disrupting economic activity in many countries, including the United States, by the time of the March 15 meeting. There were limited available U.S. economic data, however, that covered the period since the intensification of concerns about the domestic effects of the outbreak. Information that predated that period indicated that labor market conditions had remained strong through February and that real gross domestic product (GDP) appeared to have been increasing at a moderate pace in the first two months of the year. 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 January. Survey-based measures of longer-run inflation expectations were little changed. Total nonfarm payroll employment expanded strongly in January and February, and the unemployment rate was at its 50‑year low of 3.5 percent in February. Meanwhile, the labor force participation rate and the employment-to-population ratio edged up on net. Initial claims for unemployment insurance benefits—a timely indicator of a deterioration in labor market conditions—remained near historically low levels through early March, which was still before economic shutdowns started to take place in the United States. Nominal wage growth was moderate on balance. Average hourly earnings for all employees increased 3 percent over the 12 months ending in February. The employment cost index for private-sector workers increased 2.7 percent over the 12 months ending in December, while total labor compensation per hour in the business sector—a highly volatile measure of wage gains—rose 3.6 percent over the four quarters of last year. Total consumer prices, as measured by the PCE price index, increased 1.7 percent over the 12 months ending in January. Core PCE price inflation (which excludes changes in consumer food and energy prices) was 1.6 percent over that same 12-month period. The trimmed mean measure of 12-month PCE price inflation constructed by the Federal Reserve Bank of Dallas was 2.1 percent in January. The consumer price index (CPI) rose 2.3 percent over the 12 months ending in February, and the core CPI increased 2.4 percent over that same period. Recent readings on survey-based measures of longer-run inflation expectations were little changed, on balance, in recent months. The Survey of Professional Forecasters measure for the next 10 years was unchanged in the first quarter, as was the longer-run measure from the Blue Chip survey in March. The University of Michigan Surveys of Consumers measure for the next 5 to 10 years edged down in February and remained in the lower part of its prevailing range in early March. The three-year-ahead measure from the Federal Reserve Bank of New York's Survey of Consumer Expectations edged up in February and remained in its recent range. Real PCE growth was moderate in January. The components of the nominal retail sales data used to estimate PCE edged down in February, and the pace of sales of light motor vehicles in January and February was above its fourth-quarter average. However, the consumer sentiment measure from the Michigan survey started to decline notably in early March, and other daily and weekly sentiment measures—such as the Bloomberg Consumer Comfort Index, the Morning Consult confidence index, and the Rasmussen Consumer Index—were also deteriorating. Both starts and building permit issuance for single-family homes increased in January over their fourth-quarter averages, and starts of multifamily units also moved up. New and existing home sales in January were both above their average fourth-quarter levels. Nominal shipments and new orders of nondefense capital goods excluding aircraft increased solidly in January, although the anticipated resumption of deliveries of the Boeing 737 Max was delayed until later in the year. Nominal business expenditures for nonresidential structures outside of the drilling and mining sector increased in January. The total number of crude oil and natural gas rigs in operation—an indicator of business spending for structures in the drilling and mining sector—was edging up through mid-March and was not yet showing any of the expected falloff from the recent sharp declines in crude oil prices. The available data suggested that manufacturing production moved up in February after edging down in January, leaving the level of factory output little changed, on net, over the past 12 months. Although output in the mining sector—which includes crude oil extraction—had increased in January, available data indicated that output in this sector would decrease in February; the recent sharp declines in crude oil prices pointed to a reduction in mining-sector production over at least the near term. Total real government purchases appeared to be increasing moderately. Federal defense spending rose in January and February, and federal employment was boosted by hiring for the 2020 census. State and local government payrolls expanded strongly in January and February, and nominal construction spending by these governments increased solidly in January. The nominal U.S. international trade deficit narrowed in January, as a steep fall in imports more than offset a decline in exports. The fall in imports, which followed a sizable fourth-quarter decline, was led by lower imports of industrial supplies, automotive products, and capital goods. The decline in exports was driven by lower exports of capital goods and industrial supplies. Available indicators suggested that both exports and imports likely declined in February, in part reflecting disruptions related to the coronavirus outbreak. The pace of economic growth abroad was already subdued before the outbreak. In the advanced foreign economies (AFEs), real GDP growth had slowed sharply at the end of 2019, and indicators pointed to only a modest pickup in economic growth early this year. In the emerging market economies (EMEs), incoming data had been more positive, as indicators for high-tech and manufacturing production in Asian economies outside of China were upbeat, and the effects of social protests in Chile and Hong Kong, along with the effects of the General Motors strike on Mexican economic activity, had faded. By early February, however, the coronavirus outbreak in China brought economic activity in many parts of the country to a standstill. Hubei province, the epicenter of the outbreak and a manufacturing hub, was put under quarantine, and factories across the country were shut down. Foreign economic indicators for the more recent period, following the spread of the virus to the rest of the world, were generally not yet available. However, widespread shutdowns together with lower commodity prices and tighter financial conditions suggested that activity was weakening sharply in most foreign economies. Staff Review of the Financial Situation Concerns about the coronavirus outbreak dominated financial market developments at home and abroad over the intermeeting period. Equity prices, sovereign yields, and the market-implied expected trajectory of the federal funds rate all plummeted, and the volatility of asset prices soared. Late in the intermeeting period, short-term funding markets showed signs of stress, with elevated demand for repo funding and increased short-term spreads. Trading conditions for Treasury securities and MBS were impaired. Moreover, primary issuance of investment-grade corporate bonds was sporadic, and that of speculative-grade corporate bonds and leveraged loans virtually stopped after late February. Data from before the escalation of coronavirus concerns in late February suggested that financial conditions for nonfinancial businesses and for households had generally remained supportive of economic activity and spending, but developments late in the intermeeting period pointed to tightening credit conditions. Expectations for the path of the federal funds rate declined sharply over the intermeeting period. Toward the end of the period, a straight read of overnight index swap (OIS) quotes suggested that the federal funds rate would remain below 25 basis points at least until the middle of 2021. After the 50 basis point decrease in the target range on March 3, prices of federal funds futures options suggested that investors assigned a significant probability to the target range decreasing to 0 to 25 basis points at or before the scheduled March meeting. Yields on nominal Treasury securities plummeted across the maturity spectrum, with the 10- and 30-year yields reaching all-time lows at some point. A staff term structure model largely attributed the decline in the 10-year yield to lower expected future short-term rates. Measures of inflation compensation based on Treasury Inflation-Protected Securities fell sharply and reached a historical low at the 5-to-10-year horizon late in the intermeeting period. Uncertainty regarding future interest rates increased sharply over the intermeeting period. At one point, the one-month-ahead swaption-implied volatility of the 10-year swap rate surpassed its highest level seen during the "taper tantrum" episode in mid-2013. Treasury market functioning was severely impaired late in the intermeeting period, with some dealers reportedly unwilling to make markets for clients and the normal linkage between cash and futures markets broken. Market depth was extremely thin, and bid-ask spreads widened sharply. Broad stock price indexes plummeted because of a flight to safety amid escalating concerns about global economic activity. Although the declines were broad based, the airline, energy, and bank sectors were among the worst performers. Stock price indexes were extremely volatile, and the one-month option-implied volatility on the S&P 500 index soared, sometimes reaching levels not seen since the fall of 2008. Corporate bond spreads over comparable-maturity Treasury yields widened significantly, and spreads on speculative-grade energy bonds widened especially sharply amid plunging oil prices. The 50 basis point decrease in the target range for the federal funds rate announced on March 3 passed through fully to overnight unsecured and secured rates. Conditions in domestic short-term funding markets showed signs of funding strains late in the intermeeting period. The rates on unsecured CP and negotiable certificates of deposit with maturities exceeding one month increased sharply relative to OIS rates, with pronounced effects for issuers in the energy and transportation sectors. Overnight and term repo rates were elevated late in the intermeeting period, and the take-up of the Federal Reserve's repo operations increased substantially for both overnight and term operations. Over the intermeeting period, foreign risk asset prices plummeted amid a rapid deterioration of investor sentiment due to the global spread of the coronavirus. Major foreign equity indexes dropped sharply over the intermeeting period, while option-implied volatility measures climbed to their highest levels since the Global Financial Crisis. EME fund outflows accelerated late in the period as emerging market bond spreads widened notably. Most AFE long-term sovereign yields ended the period notably lower. Inflation compensation in the euro area reached new lows. In response to the economic effect of the virus, several central banks cut policy rates and injected liquidity. The broad dollar index strengthened notably over the period, boosted by safe-haven demand, predominantly against EME currencies, and despite a significant decline in U.S. yields. Safe-haven demand also bolstered the Japanese yen and Swiss franc. Policy actions by Chinese authorities supported the Chinese renminbi, which depreciated about 1.5 percent against the dollar on net. Other EME currencies, such as the Brazilian real and Mexican peso, depreciated sharply, as market participants viewed them as particularly vulnerable to a global economic slowdown and declining commodity prices. Oil prices declined over 40 percent on expectations of lower demand due to the virus outbreak and an unexpected price cut by Saudi Arabia amid a breakdown of negotiations between OPEC and Russia to reduce production levels. Financing conditions for nonfinancial firms were strained over the late part of the intermeeting period. After robust issuance earlier in the first quarter, corporate bond issuance came to a near standstill around late February in the midst of elevated volatility following the escalation of concerns about the coronavirus outbreak. Later in the intermeeting period, investment-grade bond issuance resumed intermittently, but speculative-grade issuance and leveraged loan issuance virtually stopped. In addition, some firms reportedly postponed plans to go public. Commercial and industrial loan growth was modest. Credit quality indicators for nonfinancial corporations had been solid earlier in the quarter but deteriorated following the escalation of the coronavirus outbreak, particularly for the speculative-grade and energy segments of the market. Measures of the year-ahead expected default rate increased in March to levels slightly under those observed during the oil price plunge in early 2016, reflecting higher expected default rates among speculative-grade firms as well as energy firms. In addition, the outlook for corporate earnings deteriorated somewhat, as equity analysts revised down their earnings per share estimates a notch, and several firms warned that the coronavirus outbreak could hurt their earnings and make them difficult to predict. The supply of credit to small businesses over the fourth quarter of last year had remained relatively accommodative, but loan originations ticked down in January, consistent with ongoing reports of weak loan demand. Market turmoil spilled into municipal bond markets late in the intermeeting period, as spreads widened substantially and some borrowers became hesitant to come to the market. Credit conditions in the municipal market had been accommodative over the early part of the intermeeting period, and issuance volumes in late February were reportedly boosted by strong investor demand for low-risk assets. Financing conditions in the commercial real estate (CRE) sector worsened late in the intermeeting period, as issuance of CMBS slowed and spreads widened notably to around levels seen in 2016. Data from before the escalation of concerns over the coronavirus outbreak pointed to accommodative financing conditions. CRE loan growth at banks remained solid through February and CRE debt outstanding increased modestly through mid-February, according to available data. The primary mortgage rate increased sharply toward the end of the period as MBS market liquidity deteriorated, after falling substantially in February and early March. Capacity constraints at mortgage originators reportedly intensified, while borrower interest in refinancing increased significantly from already elevated levels. Moreover, additional constraints emerged as it became more difficult to conduct operations that usually happen face-to-face. Financing conditions in consumer credit markets worsened late in the intermeeting period. Strains began appearing in consumer ABS markets, although less so than in other fixed-income markets. In March, consumer ABS spreads widened sharply, liquidity deteriorated, and new issuance became sporadic. Lenders in consumer credit markets began developing programs to assist borrowers whose finances were affected by the outbreak. Earlier in the intermeeting period, financing conditions had been generally supportive of growth. Credit card balances and auto loan balances both appeared to grow solidly through February, according to banks' data, continuing their growth in the fourth quarter. Conditions for subprime credit card borrowers remained relatively tight but showed some signs of easing. Staff Economic Outlook The projection for the U.S. economy prepared by the staff for the March FOMC meeting was downgraded significantly from the January meeting forecast in response to news on the spread of the coronavirus at home and abroad and in response to a related substantial markdown of the staff's foreign economic outlook, along with recent financial market movements. Real GDP was forecast to decline and the unemployment rate to rise, on net, in the first half of this year. Given the downside risks and the elevated uncertainty about how much the economy would weaken and how long it would take to recover, the staff provided two plausible economic scenarios that spanned a range of possibilities. Importantly, the future performance of the economy would depend on the evolution of the virus outbreak and the measures undertaken to contain it. In one scenario, economic activity started to rebound in the second half of this year. In a more adverse scenario, the economy entered recession this year, with a recovery much slower to take hold and not materially under way until next year. In both scenarios, inflation was projected to weaken, reflecting both the deterioration in resource utilization and sizable expected declines in consumer energy prices. Participants' Views on Current Conditions and the Economic Outlook Participants noted that the coronavirus outbreak was harming communities and disrupting economic activity in many countries, including the United States, and that global financial conditions had also been significantly affected. Participants expressed their deep concern for those whose health had been harmed and observed that the matter was, above all, a public health emergency. They commented that the measures—such as social distancing—taken in response to the pandemic, while needed to contain the outbreak, would nevertheless take a toll on U.S. economic activity in the near term. Participants noted that available economic data showed that the U.S. economy came into this challenging period on a strong footing. Information received since the Committee met in January indicated that the labor market remained strong through February and that economic activity rose at a moderate rate. Job gains had been solid, on average, in recent months, and the unemployment rate had remained low. Although household spending had risen at a moderate pace, business fixed investment and exports had remained weak; furthermore, in recent weeks the energy sector had come under stress due to the sharp drop in oil prices. On a 12-month basis, overall inflation and inflation for items other than food and energy had been running below 2 percent. Survey-based measures of longer-term inflation expectations had been little changed. However, market-based measures of inflation compensation had declined. All participants viewed the near-term U.S. economic outlook as having deteriorated sharply in recent weeks and as having become profoundly uncertain. Many participants had repeatedly downgraded their outlook of late in response to the rapidly evolving situation. All saw U.S. economic activity as likely to decline in the coming quarter and viewed downside risks to the economic outlook as having increased significantly. Participants noted that the timing of the resumption of growth in the U.S. economy depended on the containment measures put in place, as well as the success of those measures, and on the responses of other policies, including fiscal policy. With regard to households' behavior, participants noted that, although consumption spending had been a key driver of growth in economic activity through the first two months of this year, the pandemic was starting to impair consumer confidence and to exert an adverse effect on household balance sheets. Participants reported that wide-ranging social-distancing measures were in operation or in prospect in their Districts. These measures—which included temporary closures of some physical locations, such as stores and restaurants, in which consumers purchased goods and services—would have the effect of reducing in-person transactions by households. Online shopping could substitute for some of this activity but was unlikely to replace it fully. The housing market was likely to be disrupted by social distancing, by financial uncertainty—including difficulties that households and businesses would face in meeting mortgage or rental payments—and by volatility in the market for MBS. Participants stressed the major downside risk that the spread of the virus might intensify in those areas of the country currently less affected, thereby sidelining many more U.S. workers and further damping purchases by consumers. Participants expressed concern that households with low incomes had less of a savings buffer with which to meet expenses during the interruption to economic activity. This situation made those households more vulnerable to a downturn in the economy and tended to magnify the reduction in aggregate demand associated with the nation's response to the pandemic. Participants relayed reports on business sectors already badly hit by the response to the coronavirus outbreak. These sectors included those affected by the cancellation of many events, decisions by firms and households to reduce travel, government-mandated reductions in entry from abroad, and cutbacks on economic activity that required in-person interaction. Firms directly affected included those connected to air travel, cruise lines, hotels, tourism services, sports and recreation, entertainment, hospitality, and restaurants. In the past week, pullbacks in purchases at retail stores, except for emergency buying, had reportedly intensified significantly. In addition, the energy sector had come under stress because of recent large declines in oil prices. Many U.S. businesses had moved to telework arrangements; other businesses, however, could not readily shift to telework status or had limited telework technology. Participants observed that the coronavirus outbreak had inevitably hurt business confidence and that the expected length and severity of the restrictions on economic activity that involved in-person interaction would importantly affect the size of the response of investment spending to the situation. Participants expressed concern about the financial strain that many U.S. firms were under because of the loss of business and the extraordinary turbulence in financial markets. With regard to supply chains, many contacts had reported that some linkages in China had been restored and that they were able to draw on inventory supplies and on alternative supply chains; however, in some areas of the country, the construction industry had reported continuing disruptions to supply chains from China. Participants indicated that disruptions in the European economy and recent restrictions on travel from Europe to the United States would adversely affect the U.S. economy's supply chains; so too, if it eventuated, would a large increase in U.S. worker unavailability because of health reasons. Several participants emphasized concern about the capacity of the health care system in the current situation and welcomed measures taken to prevent the system's overall capacity from being exceeded. Participants noted that foreign economic growth for the first half of this year would be badly hit by the severe disruptions to economic activity abroad associated with the response to the coronavirus outbreak, including the recent measures taken in major European countries. However, some encouraging signs had come from China in recent weeks in the form of indications of increasing production and of more purchases of U.S. goods. With regard to the labor market, participants noted that some firms would likely need to cut employment immediately. Other firms, however, were looking for ways to retain employees during the period of reduced economic activity, in order to maintain capacity and be able to ramp up production once the public health crisis abated and demand rebounded. Measures that reportedly helped partially substitute for layoffs included the encouragement by employers of voluntary leaves of absence, non-replacement of departing workers, and increased reliance on the delivery of goods to customers in place of on-site purchases. Participants observed that businesses would be more likely to lay off workers on a major scale if the downturn in economic activity came to be perceived as likely to be protracted. Participants commented that workers most severely affected in the current situation were those who were ill, those with low incomes, those connected to the most hard-hit sectors, and those with irregular or contingent employment. They also noted that many workers had jobs that did not permit working from home. With regard to inflation, participants noted that it had been running below the Committee's 2 percent longer-run objective before the coronavirus outbreak. They remarked that a stronger dollar, weaker demand, and lower oil prices were factors likely to put downward pressure on inflation in the period ahead and observed that this meant that the return of inflation to the Committee's 2 percent longer-run objective would likely be further delayed. Participants indicated, however, that implementing a more accommodative stance of monetary policy at this meeting could be useful in helping offset these factors over time and in achieving the 2 percent inflation objective over the longer run, by helping prevent circumstances of persistent resource slack or a lasting decline in inflation expectations. Participants all agreed that the effects of the pandemic would weigh on economic activity in the near term and that the duration of this period of weakness was uncertain. They further concurred that the unpredictable effects of the coronavirus outbreak were a source of major downside risks to the economic outlook. Participants raised several alternative scenarios with regard to the likely behavior of economic activity in the second half of this year. These scenarios differed from one another in the assumed length and severity of disruptions to economic activity. Several participants emphasized that the temporary nature of the shock to economic activity, the fact that the shock arose in the nonfinancial sector, and the healthy state of the U.S. banking system all implied that the current situation was not directly comparable with the previous decade's financial crisis and it need not be followed by negative effects on economic activity as long-lasting as those associated with that crisis. Participants stressed that measures taken in the areas of health care policy and fiscal policy, together with actions by the private sector, would be important in shaping the timing and speed of the U.S. economy's return to normal conditions. Participants agreed that the Federal Reserve's efforts to relieve stress in financial markets would help limit downside near-term outcomes by supporting credit flows to households and businesses, and that a more accommodative monetary policy stance would provide support to economic activity beyond the near term. Among the downside risks to this year's U.S. economic outlook, participants prominently cited the possibility of the virus outbreak becoming more widespread than expected. Such an event could lead to more wide-ranging temporary shutdowns, with adverse implications for the production of goods and services and for aggregate demand. With regard to financial developments over the intermeeting period, participants noted that financial markets had exhibited extraordinary turbulence and stresses. Participants commented on the conditions of high volatility and illiquidity characterizing the markets for U.S. Treasury securities, especially off-the-run longer-term securities, and for agency MBS. Participants expressed concern about the disruptions to the functioning of these markets, especially in view of their status as cornerstones for the operation of the U.S. and global financial systems and for the transmission of monetary policy. Participants observed that Federal Reserve operations in recent days had provided some relief with regard to the liquidity problems, but they noted that severe illiquidity continued to prevail in key securities markets. Many participants pointed to other dislocations in funding markets that could impede financial intermediation to households and businesses. They highlighted the acute problems that many firms were facing in issuing CP and corporate bonds. Participants further noted that many businesses were tapping their backup credit lines with commercial banks. Participants also discussed the implications of recent financial market turbulence for money market funds and government bond funds and for debt issuance by state and local governments. In their consideration of monetary policy at this meeting, most participants judged that it would be appropriate to lower the target range for the federal funds rate by 100 basis points, to 0 to 1/4 percent. In discussing the reasons for such a decision, these participants pointed to a likely decline in economic activity in the near term related to the effects of the coronavirus outbreak and the extremely large degree of uncertainty regarding how long and severe such a decline in activity would be. In light of the sharply increased downside risks to the economic outlook posed by the global coronavirus outbreak, these participants noted that risk-management considerations pointed toward a forceful monetary policy response, with the majority favoring a 100 basis point cut that would bring the target range to its effective lower bound (ELB). With regard to monetary policy beyond this meeting, these participants judged that it would be appropriate to maintain the target range for the federal funds rate at 0 to 1/4 percent until policymakers were confident that the economy had weathered recent events and was on track to achieve the Committee's maximum employment and price stability goals. A few participants preferred a 50 basis point cut at this meeting and noted that such a decision would provide support to economic activity in the face of the anticipated effects of the coronavirus. These participants preferred to wait until there was greater assurance that the transmission mechanism of monetary policy via financial markets and the supply of credit to households and businesses was working effectively. This would allow fiscal and public health policy responses to the coronavirus outbreak to take hold and preserve the ability of the Committee to lower the target range, which was close to the ELB, in the event of a further deterioration in the economic outlook. In addition, these participants noted that a lowering of the target range by 100 basis points, coming so soon after the reduction of 50 basis points less than two weeks earlier, ran the risk of sending an overly negative signal about the economic outlook. Participants also considered open market operations to purchase Treasury securities and agency MBS to support the smooth functioning of these securities markets, which in turn would help support the supply of credit to households and businesses. Participants generally agreed that, over the coming months, it would be appropriate to increase the Federal Reserve's holdings of Treasury securities by at least $500 billion and its holdings of agency MBS by at least $200 billion. Additionally, all principal payments from the Federal Reserve's holdings of agency debt and agency MBS would be reinvested in agency MBS. Those Treasury and agency MBS purchases would be in addition to the recently expanded overnight and term repo operations conducted by the Desk. Participants stressed that it was important to communicate that the Committee would be prepared to increase the size of the securities purchases, as needed, on the basis of its close monitoring of market conditions. Some participants noted that it was important to stress in communications that the primary purpose of these asset purchases was to support the smooth functioning of Treasury and agency MBS markets rather than to provide further monetary policy accommodation by pushing down longer-term yields. A couple of participants noted that because some of the purchases would be at longer maturities, the purchases could provide some accommodation by lowering longer-term yields. Participants discussed some of the possible communications challenges associated with the Committee's policy decisions at this meeting. Several participants noted that it would be important to communicate clearly and consistently about the rationale for the policy decisions taken at this meeting. Some participants remarked that the Committee's policy actions regarding the target range and balance sheet could be interpreted as conveying negative news about the economic outlook. A few participants also remarked that lowering the target range to the ELB could increase the likelihood that some market interest rates would turn negative, or foster investor expectations of negative policy rates. Such expectations would run counter to participants' previously expressed views that they would prefer to use other monetary policy tools to provide further accommodation at the ELB. Additionally, several participants remarked that the public might view the ability of the Committee to provide further monetary policy accommodation as being limited. However, some participants noted that the Committee would still be able to provide monetary policy accommodation even after lowering the target range for the federal funds rate to the ELB. In particular, new forward guidance or balance sheet measures could be introduced. Participants also indicated strong support for related actions taken by the Board of Governors to support the credit needs of households and businesses: to lower the primary credit rate by 150 basis points to 1/4 percent and to allow depository institutions to borrow from the discount window for periods as long as 90 days in order to encourage more active use of the discount window on the part of depository institutions to meet unexpected funding needs to encourage depository institutions to utilize intraday credit to support the provision of liquidity to households and businesses and the smooth functioning of payment systems to encourage banks to use their capital and liquidity buffers as they provide loans to households and businesses affected by the coronavirus and undertake other supportive actions in a safe and sound manner to reduce reserve requirements to 0 percent in light of the shift to an ample-reserves regime and to support lending to households and businesses by depository institutions Participants also indicated support for enhancing, in coordination with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank, the provision of liquidity via the standing U.S. dollar liquidity swap line arrangements. The pricing on the standing U.S. dollar swap arrangements would be lowered by 25 basis points so that the new rate would be the U.S. dollar OIS rate plus 25 basis points, and U.S. dollars would be offered by foreign central banks with an 84-day maturity, in addition to the 1-week maturity operations. Following this discussion, the Chair indicated that these changes to the standing U.S. dollar liquidity swap line arrangements would be implemented consistent with the procedures described in the Authorization for Foreign Currency Operations. Participants generally commented that these additional measures would be helpful in supporting the flow of credit to households and businesses. A few participants commented that stigma associated with the discount window may still be present or that further action, such as a relaunch of the Term Auction Facility, might be needed to encourage banks to take up additional funding. A few other participants noted that discount window stigma should be less of a concern than it was previously. In particular, these participants cited the lowering of the primary credit rate to the top of the target range for the federal funds rate, offering term funding for up to 90 days, and regulators encouraging banks to use the discount window to continue prudently lending to households and businesses. Several participants commented that banks should be discouraged from repurchasing shares from, or paying dividends to, their equity holders in the wake of the proposed measures. Participants generally noted that other measures to support the flow of credit to households and businesses, including those that relied on section 13(3) of the Federal Reserve Act, might be needed in such an uncertain and rapidly evolving environment and that it would be prudent for the Federal Reserve to develop and remain prepared to implement such measures. Committee Policy Action In their discussion of monetary policy for this meeting, members noted that the coronavirus outbreak had harmed communities and disrupted economic activity in many countries, including the United States, and that global financial conditions had also been significantly affected. Available economic data showed that the U.S. economy came into this challenging period on a strong footing, with a strong labor market, a low unemployment rate, and moderate growth in household spending, although business fixed investment and exports had remained weak. More recently, the energy sector had come under stress. On a 12-month basis, overall inflation and inflation for items other than food and energy were running below 2 percent. Market-based measures of inflation compensation had declined, and survey-based measures of longer-term inflation expectations were little changed. Members judged that the effects of the coronavirus would weigh on economic activity in the near term and would pose risks to the economic outlook. In light of these developments, almost all members agreed to lower the target range for the federal funds rate to 0 to 1/4 percent. These members expected that the target range would be maintained at this level until they were confident that the economy had weathered recent events and was on track to achieve the Committee's maximum employment and price stability goals. One member preferred to lower the target range by 50 basis points, to 1/2 to 3/4 percent, at this meeting, in support of the actions taken to promote smooth market functioning and the flow of credit to households and businesses and in light of the anticipated effects of the coronavirus on economic activity and the economic outlook. In this participant's view, a 50 basis point cut would preserve space for further cuts in the target range that could be implemented when market conditions had improved enough to ensure that the monetary policy transmission mechanism was functioning. Members noted that they would continue to monitor the implications of incoming information for the economic outlook, including information related to public health as well as global developments and muted inflation pressures, and that the Committee would use its tools and act as appropriate to support the economy. Members observed that, in determining the timing and size of future adjustments to the stance of monetary policy, the Committee would assess realized and expected economic conditions relative to its maximum-employment objective and its symmetric 2 percent inflation objective. They also agreed that those 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 emphasized that the Federal Reserve was prepared to use its full range of tools to support the flow of credit to households and businesses and thereby promote its maximum-employment and price-stability goals. To support the smooth functioning of markets for Treasury securities and agency MBS that are central to the flow of credit to households and businesses, over coming months the Committee agreed to increase its holdings of Treasury securities by at least $500 billion and its holdings of agency MBS by at least $200 billion. The Committee also agreed to reinvest all principal payments from the Federal Reserve's holdings of agency debt and MBS in agency MBS. In addition, members noted that the Desk had recently expanded its overnight and term repo operations. Members indicated that they would continue to closely monitor market conditions and that the Committee was prepared to adjust its plans as appropriate. 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: "Effective March 16, 2020, 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 0 to 1/4 percent. The Committee directs the Desk to increase over coming months the System Open Market Account holdings of Treasury securities and agency mortgage-backed securities (MBS) by at least $500 billion and by at least $200 billion, respectively. The Committee instructs the Desk to conduct these purchases at a pace appropriate to support the smooth functioning of markets for Treasury securities and agency MBS. The Committee also directs the Desk to continue conducting term and overnight repurchase agreement operations to ensure that the supply of reserves remains ample and to support the smooth functioning of short-term U.S. dollar funding markets. In addition, the Committee directs the Desk to conduct 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 0.00 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 all principal payments from the Federal Reserve's holdings of Treasury securities and to reinvest all principal payments from the Federal Reserve's holdings of agency debt and agency mortgage-backed securities received during each calendar month in agency mortgage-backed securities. 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 for release at 5:00 p.m.: "The coronavirus outbreak has harmed communities and disrupted economic activity in many countries, including the United States. Global financial conditions have also been significantly affected. Available economic data show that the U.S. economy came into this challenging period on a strong footing. Information received since the Federal Open Market Committee met in January indicates that the labor market remained strong through February and economic activity rose at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although household spending rose at a moderate pace, business fixed investment and exports remained weak. More recently, the energy sector has come under stress. On a 12‑month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation have declined; survey-based measures of longer-term inflation expectations are little changed. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The effects of the coronavirus will weigh on economic activity in the near term and pose risks to the economic outlook. In light of these developments, the Committee decided to lower the target range for the federal funds rate to 0 to 1/4 percent. The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals. This action will help support economic activity, strong labor market conditions, and inflation returning to the Committee's symmetric 2 percent objective. The Committee will continue to monitor the implications of incoming information for the economic outlook, including information related to public health, as well as global developments and muted inflation pressures, and will use its tools and act as appropriate to support the economy. In determining the timing and size of future adjustments to the stance of monetary policy, 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. The Federal Reserve is prepared to use its full range of tools to support the flow of credit to households and businesses and thereby promote its maximum employment and price stability goals. To support the smooth functioning of markets for Treasury securities and agency mortgage-backed securities that are central to the flow of credit to households and businesses, over coming months the Committee will increase its holdings of Treasury securities by at least $500 billion and its holdings of agency mortgage-backed securities by at least $200 billion. The Committee will also reinvest all principal payments from the Federal Reserve's holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. In addition, the Open Market Desk has recently expanded its overnight and term repurchase agreement operations. The Committee will continue to closely monitor market conditions and is prepared to adjust its plans as appropriate." Voting for this action: Jerome H. Powell, John C. Williams, Michelle W. Bowman, Lael Brainard, Richard H. Clarida, Patrick Harker, Robert S. Kaplan, Neel Kashkari, and Randal K. Quarles. Voting against this action: Loretta J. Mester President Mester was fully supportive of all of the actions taken to promote the smooth functioning of markets and the flow of credit to households and businesses but voted against the FOMC action because she preferred to reduce the target range for the federal funds rate to 1/2 to 3/4 percent at this meeting. Consistent with the Committee's decision to lower the target range for the federal funds rate to 0 to 1/4 percent, the Board of Governors voted unanimously to lower the interest rate paid on required and excess reserve balances to 0.10 percent and voted unanimously to approve a 1-1/2 percentage point decrease in the primary credit rate to 0.25 percent, effective March 16, 2020. The Board also approved changes to allow Reserve Banks to extend primary credit loans for as long as 90 days and that could be prepaid or renewed on request. In addition, the Board approved a reduction in reserve requirement ratios applicable to net transaction deposits above the exemption threshold to 0 percent effective with the reserve maintenance period beginning on March 26, 2020. It was agreed that the next meeting of the Committee would be held on Tuesday–Wednesday, April 28–29, 2020. The meeting adjourned at 2:40 p.m. on March 15, 2020. Notation Vote By notation vote completed on February 18, 2020, the Committee unanimously approved the minutes of the Committee meeting held on January 28–29, 2020. Videoconference meeting of March 2 A joint meeting of the Federal Open Market Committee and the Board of Governors was held by videoconference on March 2, 2020, at 7:30 p.m. to review developments related to the outbreak of the coronavirus and discuss steps that could be taken to provide support to the economy. As background for the Committee's discussion, the staff reviewed recent developments in financial markets and provided an assessment of the evolving risks to the economic outlook. The SOMA manager noted that since mid-February when concerns about the spread of the coronavirus beyond China had begun to intensify, global risk asset prices and sovereign yields had declined sharply. U.S. and global equity indexes were lower than at the time of the Committee's meeting in January and implied equity market volatility had risen to levels not seen since 2015. The deterioration in risk sentiment had also been reflected in a significant widening in U.S. and European corporate credit spreads and in peripheral European spreads. Amid the ongoing market volatility, issuance of investment-grade and high-yield corporate bonds and of leveraged loans had generally dried up. Money markets had been resilient during the broader financial market volatility; pricing and trading conditions in offshore U.S. dollar funding markets had also been stable. Market functioning had remained orderly despite deterioration in liquidity conditions in Treasury, equity, and credit markets. Financial market participants' views on the likely course of U.S. monetary policy had changed since the Committee's January meeting. The expected path of the federal funds rate embedded in futures prices had shifted down significantly over the period. Market commentary had interpreted Chair Powell's February 28 statement as indicating the FOMC was prepared to lower the target range for the federal funds rate at or before the March meeting to support the achievement of the Committee's maximum employment and price stability goals. Expectations for global monetary and fiscal easing had increased, with some market commentary noting the possibility of a coordinated effort across central banks or fiscal authorities. The SOMA manager noted that the situation remained highly fluid with key risks, including those associated with funding for corporate borrowers, operational vulnerabilities associated with the transition to alternative work arrangements, and the potential for impaired market functioning. The staff then provided an update on current conditions and changes to the economic outlook since the FOMC's January meeting. Available indicators for China suggested that the spread of the coronavirus had been associated with a collapse in economic activity during the first quarter, with spillovers to the global economy from the drop in Chinese demand and disruption of supply chains. Although there were some tentative signs that the coronavirus in China was being contained and production was beginning to resume, the outbreak of the virus in other foreign economies was weighing on consumer and business sentiment and depressing consumption in those countries. All told, foreign economic activity was expected to be significantly weaker during the first half of 2020 than the staff had anticipated at the time of the January FOMC meeting. The staff noted that the spread of the virus was at an earlier stage in the United States and its effects were not yet visible in monthly economic indicators, although there had been some softening in daily sentiment indexes and travel-related transactions. The outlook for real economic activity over the remainder of the year was highly uncertain and depended on the spread of the virus and the measures taken to contain it. Scenarios involving a greater spread of the coronavirus and more severe social-distancing actions would be associated with a greater shutdown of production and disruption of supply chains, larger negative effects on consumer and business sentiment, more significant increases in unemployment, and worsening financial conditions. Reductions in demand, coupled with a stronger U.S. dollar and weaker commodity prices, were expected to put downward pressure on inflation, with the magnitude of the softening in core inflation depending on the severity of the situation. FOMC participants discussed the significant outbreaks of the coronavirus that had emerged recently in a few countries outside China and the likelihood that the virus would spread widely around the world, including in the United States. While the economic outlook at the time of the Committee's January meeting had been favorable, the potential spread of the virus and the measures needed to protect communities from it represented a material downside risk to the U.S. economy. A forceful monetary policy action could provide a clear signal to the public that policymakers recognized the potential economic significance of the situation and were willing to move decisively to support the achievement of the Committee's dual mandate goals and counter the recent tightening of financial conditions. Although a reduction in the policy rate would not slow the spread of infection or remedy broken supply chains, it could help shore up the confidence of households, businesses, and financial markets; ease financial strains of consumers and firms; and provide meaningful support to the economy in the face of a large shock to demand. Accordingly, participants supported a reduction of 50 basis points in the target range for the federal funds rate. On March 3, 2020, the Committee completed the vote 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: "Effective March 4, 2020, 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. In light of recent and expected increases in the Federal Reserve's non-reserve liabilities, the Committee directs the Desk to continue purchasing Treasury bills at least into the second quarter of 2020 to maintain over time ample reserve balances at or above the level that prevailed in early September 2019. The Committee also directs the Desk to continue conducting term and overnight repurchase agreement operations at least through April 2020 to ensure that the supply of reserves remains ample even during periods of sharp increases in non-reserve liabilities, and to mitigate the risk of money market pressures that could adversely affect policy implementation. In addition, the Committee directs the Desk to conduct 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 all principal payments from the Federal Reserve's holdings of Treasury securities and to continue reinvesting all principal payments from the Federal Reserve's holdings of agency debt and agency mortgage-backed securities received during each calendar month. Principal payments from agency debt and agency mortgage-backed securities up to $20 billion per month will continue to be reinvested in Treasury securities to roughly match the maturity composition of Treasury securities outstanding; principal payments in excess of $20 billion per month will continue to be reinvested in agency mortgage-backed securities. 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 for release at 10:00 a.m. on March 3, 2020: "The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity. In light of these risks and in support of achieving its maximum employment and price stability goals, the Federal Open Market Committee decided today to lower the target range for the federal funds rate by 1/2 percentage point, to 1 to 1-1/4 percent. The Committee is closely monitoring developments and their implications for the economic outlook and will use its tools and act as appropriate to support the economy." Voting for this action: Jerome H. Powell, John C. Williams, Michelle W. Bowman, Lael Brainard, Richard H. Clarida, Patrick Harker, Robert S. Kaplan, Neel Kashkari, Loretta J. Mester, and Randal K. Quarles. Consistent with the Committee's decision to lower the target range for the federal funds rate to 1 to 1-1/4 percent, the Board of Governors completed on March 3, 2020, unanimous votes to lower the interest rate paid on required and excess reserve balances to 1.10 percent and to approve a 1/2 percentage point decrease in the primary credit rate to 1.75 percent, effective March 4, 2020. _______________________ James A. Clouse Secretary 1. The Federal Open Market Committee is referenced as the "FOMC" and the "Committee" in these minutes. Return to text

2020-01-29

Statement

Information received since the Federal Open Market Committee met in December indicates that the labor market remains strong and that economic activity has been rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although household spending has been rising at a moderate pace, business fixed investment and exports remain weak. On a 12‑month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee decided to maintain the target range for the federal funds rate at 1‑1/2 to 1-3/4 percent. The Committee judges that the current stance of monetary policy is appropriate to support sustained expansion of economic activity, strong labor market conditions, and inflation returning to the Committee's symmetric 2 percent objective. The Committee will continue to monitor the implications of incoming information for the economic outlook, including global developments and muted inflation pressures, as it assesses the appropriate path of the target range for the federal funds rate. 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 monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Patrick Harker; Robert S. Kaplan; Neel Kashkari; Loretta J. Mester; and Randal K. Quarles. Implementation Note issued January 29, 2020

2020-02-19

Minute

Minutes of the Federal Open Market Committee January 28-29, 2020 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 28, 2020, at 10:00 a.m. and continued on Wednesday, January 29, 2020, at 9:00 a.m.1 PRESENT: Jerome H. Powell, Chairman John C. Williams, Vice Chairman Michelle W. Bowman Lael Brainard Richard H. Clarida Patrick Harker Robert S. Kaplan Neel Kashkari Loretta J. Mester Randal K. Quarles Thomas I. Barkin, Raphael W. Bostic, Mary C. Daly, Charles L. Evans, and Michael Strine,2 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 Michelle A. Smith, Assistant Secretary Mark E. Van Der Weide, General Counsel Michael Held, Deputy General Counsel Thomas Laubach, Economist Stacey Tevlin, Economist Beth Anne Wilson, Economist Shaghil Ahmed, Marc Giannoni, Joseph W. Gruber, David E. Lebow, Trevor A. Reeve, Ellis W. Tallman, William Wascher, and Mark L.J. Wright, Associate Economists Lorie K. Logan, Manager, System Open Market Account Ann E. Misback, Secretary, Office of the Secretary, Board of Governors Eric Belsky,3 Director, Division of Consumer and Community Affairs, Board of Governors; Matthew J. Eichner,4 Director, Division of Reserve Bank Operations and Payment Systems, Board of Governors; Michael S. Gibson, Director, Division of Supervision and Regulation, Board of Governors; Steven B. Kamin, Director, Division of International Finance, 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 Jon Faust, Senior Special Adviser to the Chair, Office of Board Members, Board of Governors Joshua Gallin, Special Adviser to the Chair, Office of Board Members, Board of Governors Antulio N. Bomfim, Brian M. Doyle, Wendy E. Dunn, Ellen E. Meade, and Ivan Vidangos, Special Advisers 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 David Bowman,5 Senior Associate Director, Division of Monetary Affairs, Board of Governors; Eric M. Engen and Michael G. Palumbo, Senior Associate Directors, Division of Research and Statistics, Board of Governors; John W. Schindler, Senior Associate Director, Division of Financial Stability, Board of Governors Don H. Kim and Edward Nelson, Senior Advisers, Division of Monetary Affairs, Board of Governors Eric C. Engstrom, Senior Adviser, Division of Research and Statistics, and Deputy Associate Director, Division of Monetary Affairs, Board of Governors Elizabeth Klee,3 Associate Director, Division of Financial Stability, Board of Governors Christopher J. Gust,5 Deputy Associate Director, Division of Monetary Affairs, Board of Governors; Norman J. Morin and Steven A. Sharpe, Deputy Associate Directors, Division of Research and Statistics, Board of Governors; Jeffrey D. Walker,4 Deputy Associate Director, Division of Reserve Bank Operations and Payment Systems, Board of Governors; Paul R. Wood,3 Deputy Associate Director, Division of International Finance, Board of Governors Ricardo Correa and Stephanie E. Curcuru,6 Assistant Directors, Division of International Finance, Board of Governors; Giovanni Favara and Zeynep Senyuz,5 Assistant Directors, Division of Monetary Affairs, Board of Governors Penelope A. Beattie,3 Section Chief, Office of the Secretary, Board of Governors; Dana L. Burnett, Section Chief, Division of Monetary Affairs, Board of Governors Hess T. Chung,3 Group Manager, Division of Research and Statistics, Board of Governors David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors Michele Cavallo, Jonathan E. Goldberg, Judit Temesvary, and Francisco Vazquez-Grande, Principal Economists, Division of Monetary Affairs, Board of Governors; Daniel J. Vine, Principal Economist, Division of Research and Statistics, Board of Governors Francesco Ferrante, Senior Economist, Division of International Finance, Board of Governors; Michael Siemer,3 Senior Economist, Division of Research and Statistics, Board of Governors; Manjola Tase, Senior Economist, Division of Monetary Affairs, Board of Governors James Hebden,3 Senior Technology Analyst, Division of Monetary Affairs, Board of Governors Mark A. Gould, First Vice President, Federal Reserve Bank of San Francisco David Altig,3 Kartik B. Athreya, Jeffrey Fuhrer, Anna Paulson, and Christopher J. Waller, Executive Vice Presidents, Federal Reserve Banks of Atlanta, Richmond, Boston, Chicago, and St. Louis, respectively Julie Ann Remache,5 Samuel Schulhofer-Wohl,5 and Keith Sill, Senior Vice Presidents, Federal Reserve Banks of New York, Chicago, and Philadelphia, respectively Jonathan P. McCarthy, Ed Nosal, Matthew D. Raskin,5 and Patricia Zobel, Vice Presidents, Federal Reserve Banks of New York, Atlanta, New York, and New York, respectively Larry Wall,3 Executive Director, Federal Reserve Bank of Atlanta Òscar Jordà, Senior Policy Advisor, Federal Reserve Bank of San Francisco Edward S. Prescott,3 Senior Economist and Policy Advisor, Federal Reserve Bank of Cleveland Brent Bundick, Research and Policy Advisor, Federal Reserve Bank of Kansas City Annual Organizational Matters7 The agenda for this meeting reported that advices of the election of the following members and alternate members of the Federal Open Market Committee for a term beginning January 28, 2020, were received and that these individuals executed their oaths of office. The elected members and alternate members were as follows: John C. Williams, 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 Thomas I. Barkin, President of the Federal Reserve Bank of Richmond, 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 Robert S. Kaplan, President of the Federal Reserve Bank of Dallas, with Raphael W. Bostic, President of the Federal Reserve Bank of Atlanta, as alternate Neel Kashkari, President of the Federal Reserve Bank of Minneapolis, with Mary C. Daly, 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 2021: Jerome H. Powell Chairman John C. Williams Vice Chairman James A. Clouse Secretary Matthew M. Luecke Deputy Secretary Michelle A. Smith Assistant Secretary Mark E. Van Der Weide General Counsel Michael Held Deputy General Counsel Richard M. Ashton Assistant General Counsel Thomas Laubach Economist Stacey Tevlin Economist Beth Anne Wilson Economist     Shaghil Ahmed Michael Dotsey Marc Giannoni Joseph W. Gruber Beverly Hirtle David E. Lebow Trevor A. Reeve Ellis W. Tallman William Wascher Mark L.J. Wright Associate Economists By unanimous vote, the Committee selected the Federal Reserve Bank of New York to execute transactions for the System Open Market Account (SOMA). By unanimous vote, the Committee selected Lorie K. Logan to serve at the pleasure of the Committee as manager of the SOMA, on the understanding that her selection was subject to being satisfactory to the Federal Reserve Bank of New York. Secretary's note: The Federal Reserve Bank of New York subsequently sent advice that the manager selection indicated previously was satisfactory. By unanimous vote, the Committee voted to reaffirm without revision the Authorization for Domestic Open Market Operations 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 28, 2020) 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, 1.B, 1.C and 1.D 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 28, 2020) 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; iii. 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 28, 2020) 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 three sets of changes, effective February 1, 2020. These changes consisted of (1) an update to the rules for eligibility for access to FOMC information to reflect two new policies approved by the Board; (2) the addition of references to existing Federal Reserve polices that help safeguard FOMC information; and (3) organizational and technical changes to improve the consistency and accuracy of Program language. By unanimous vote, the Committee provided approval for the publication of a Federal Register notice of proposed rulemaking that seeks public comment on minor and technical updates to the FOMC Rules Regarding Availability of Information, which are the Committee's Freedom of Information Act rules. Review of Monetary Policy Strategy, Tools, and Communication Practices Participants continued their discussion related to the ongoing review of the Federal Reserve's monetary policy strategy, tools, and communication practices. At this meeting, the discussion focused on two topics: the potential interactions between monetary policy and financial stability and the potential use of inflation ranges around the Committee's 2 percent inflation objective. The staff briefing on the first topic noted that in the current environment of low neutral rates, achieving the Committee's dual-mandate goals of maximum employment and price stability would require low policy rates frequently, regardless of the monetary policy strategy and tools chosen. Consequently, policy strategies and tools that help support a stronger economy and anchor inflation expectations at a level consistent with the Committee's objective in a low-neutral-rate environment can help promote financial stability. In addition, the staff reported that the available empirical evidence suggests that the effects of changes in policy rates on asset prices and risk premiums tend to be modest relative to the historical fluctuations in those measures. However, there may be circumstances in which a persistently accommodative policy stance that is otherwise consistent with the dual-mandate goals may contribute to an increase in financial system vulnerabilities, including through increased borrowing, financial leverage, and valuation pressures. The staff noted that clear communications of the Committee's ongoing assessments of the interactions between monetary policy and financial stability could help avoid large interest rate surprises that could otherwise contribute to financial vulnerabilities. The briefing concluded with a short review of how other central banks have approached this issue, including the use of financial instability escape clauses to provide leeway for the central bank to deviate from its usual monetary policy strategy if financial vulnerabilities become significant. In their discussion of the effects that alternative monetary policy strategies and tools might have on financial stability, participants noted that macroeconomic stability and the achievement of the Committee's dual mandate depended on a stable financial system. An unstable financial system may amplify shocks to the economy and exacerbate increases in unemployment or drive inflation further away from the Committee's goal. With respect to the relationship between monetary policy and financial stability, some participants noted that evidence regarding the link between the policy stance and elevated financial vulnerabilities was limited, with a couple of participants further observing that there were not many episodes of persistently low interest rates. In addition, some past episodes of heightened financial vulnerabilities were associated with excessive risk-taking behavior that did not seem to be very responsive to typical changes in interest rates. A number of participants judged that, under some circumstances, low policy rates might help foster financial stability provided they are needed to support strong economic conditions and price stability. Some participants remarked, however, that keeping policy rates low to achieve both of the Committee's dual-mandate objectives may contribute to a buildup of financial vulnerabilities, especially at times when the economy is at or above full employment, a development that could pose future risks to the economy and to the ability of the Committee to achieve its dual mandate. Participants discussed how financial stability considerations should be incorporated in the conduct of monetary policy. They generally agreed that supervisory, regulatory, and macroprudential tools should be the primary means to address financial stability risks. A few participants commented that this is especially the case when addressing risks associated with structural features such as the current low level of neutral interest rates. A number of participants noted that countercyclical macroprudential tools, such as the countercyclical capital buffer, could be used to address cyclical financial stability risks. However, various participants noted that while these tools could be deployed proactively to lean against the buildup of financial vulnerabilities, they have some limitations in the context of the U.S. financial system, where the few available tools are, for the most part, not designed to address vulnerabilities outside the banking sector. In addition, these tools are not within the authority of the Committee, and their use requires coordination with other prudential regulators. Recognizing these limitations, many participants remarked that the Committee should not rule out the possibility of adjusting the stance of monetary policy to mitigate financial stability risks, particularly when those risks have important implications for the economic outlook and when macroprudential tools had been or were likely to be ineffective at mitigating those risks. Nevertheless, many participants noted that the current knowledge of the interactions between the stance of monetary policy and financial vulnerabilities is too imprecise to warrant systematically adjusting monetary policy in response to the evolution of financial stability risks. As a result, monetary policy should be guided primarily by the outlook for employment and inflation, and it should respond to financial stability risks only insofar as such risks significantly threaten the achievement of the Committee's mandate. Several participants observed that the monetary policy measures needed to curb financial stability risks could be quite large, and the resulting effects on employment and inflation could place a high hurdle for such measures. Some participants remarked that, because financial stability risks are a consideration for achieving the Committee's dual mandate, a clear communications strategy would be needed to convey the Committee's assessments of financial vulnerabilities and their potential implications for the monetary policy outlook. Several participants noted that a communications strategy could include the possible use of financial instability escape clauses to help explain the rationale for policy actions when a buildup of financial vulnerabilities poses risks to the achievement of the Committee's goals. The staff's briefing on considerations regarding the use of an inflation range focused on three different concepts of an inflation range. First, an uncertainty range could communicate the magnitude of the inherent variability of inflation that would still be consistent with achieving the Committee's symmetric inflation objective. Second, an operational range could signal that, under some conditions, the Committee would prefer inflation to be away from its longer-run objective for a time; such a range could potentially be used as part of a makeup policy strategy, including one based on average inflation targeting, or in other strategies aimed at offsetting the adverse effects of a binding effective lower bound on policy rates. Third, an indifference range could communicate that monetary policy would not respond to deviations of inflation within that range. The briefing also summarized the experiences of foreign central banks that use inflation ranges; these ranges were typically put in place many years ago, often in conjunction with adopting an inflation target. The staff highlighted the communications challenges that could arise if an inflation range were introduced at a time when inflation had been running below the central bank's objective for a number of years. In this environment, the introduction of a symmetric range around the point objective could be misinterpreted as a sign that the central bank was not concerned about inflation remaining below its stated goal, a situation that could lead to inflation expectations drifting down to the lower end of the range. Participants expressed a range of views on the potential benefits and costs of different types of inflation ranges. Most participants expressed concern that introducing a symmetric inflation range around the 2 percent objective following an extended period of inflation mostly running somewhat below 2 percent could be misperceived as a signal that the Committee was comfortable with continued misses below its symmetric inflation objective. Many participants agreed that an uncertainty range could be misinterpreted as an indifference range and hence as a lack of commitment by the Committee to its symmetric 2 percent inflation objective. Some participants suggested that it was not clear that introducing a range would help much in achieving the Committee's inflation objective; they noted that introducing a range could make that objective less clear to the public. Instead of establishing a range, the Committee could continue to communicate that its inflation objective was symmetric around 2 percent. While inflation is inherently variable, the Committee then could emphasize its intention for inflation to be centered on the 2 percent objective. Nevertheless, in view of the inherent variability of inflation, several participants judged that there could be some benefit in communicating the inflation objective with a symmetric range around the point target. In addition, a few participants suggested that an inflation range could convey the uncertainty associated with the available array of inflation measures or that the Committee's communications could more explicitly reference other measures of inflation. Several participants also stated that employing an asymmetric operational range for a time—with 2 percent being at or near the lower end of that range—while still maintaining the longer-run target of 2 percent could help communicate that the Committee intended inflation to average 2 percent over time, which in turn could help keep longer-run inflation expectations at levels consistent with its objective. Participants expected that, at upcoming meetings, they would continue their deliberations on the Committee's review of monetary policy strategy, tools, and communication practices. Participants continued to anticipate that the review will likely be completed around the middle of this year. Developments in Financial Markets and Open Market Operations The SOMA manager reviewed developments in financial markets over the intermeeting period. For most of the period, risk asset prices rose as market participants focused on a perceived reduction in downside risks to the economic outlook, favorable data on foreign economic activity, and expectations of continued monetary policy accommodation in the United States and other major economies. Some market participants suggested that the Federal Reserve's actions in the fourth quarter to maintain ample reserve levels might have contributed to some degree to the rise in equity and other risk asset prices. Over the final few days of the intermeeting period, financial markets responded to news of the spread of the coronavirus that started in China, which reportedly contributed to downward moves in Treasury yields and, to a lesser extent, U.S. equity prices. On balance, U.S. financial conditions became more accommodative over the intermeeting period, with equity prices rising notably. Despite signs of reduced risks to the outlook and of some stabilization in economic activity abroad, financial market participants' views on the likely course of U.S. monetary policy appeared to have changed little over the intermeeting period. Market-based indicators continued to point to expectations that the target range for the federal funds rate will be lowered by roughly 30 basis points this year. This was consistent with responses to the Open Market Desk's survey, which continued to indicate that, while market participants viewed no change this year in the target range as the most likely outcome, they placed a higher probability on a reduction in the target range over the year than on an increase. Market commentary attributed the stability in federal funds rate expectations despite the perceived reduction in downside risks partly to the Committee's communications; some market participants reportedly regarded those communications as signaling a relatively high bar for changes to the target range. In addition, results from the Desk's surveys suggested that, notwithstanding the abatement in some risks over recent months, many market participants continued to see risks to the economic outlook as skewed to the downside. The manager turned next to a review of money market developments and Desk operations. The federal funds rate was stable over the year-end date and remained close to the interest on excess reserves (IOER) rate. Ongoing reserve management purchases of Treasury bills and the Desk's repurchase agreement (repo) operations kept aggregate reserves above the level that prevailed in early September, contributing to relatively calm money market conditions around year-end. Market participants cited funding from the additional longer-term repo operations spanning year-end and increased capacity in daily operations as helping to maintain stable conditions in short-term funding markets. In addition, market participants prepared earlier than usual for year-end, with borrowers increasing their term borrowing from private lenders and lenders apparently expanding their lending capacity. Since year-end, money market rates remained stable, with the Desk's longer-term repos maturing with no discernible effect on market conditions and reserve management purchases of Treasury bills proceeding smoothly. At the current pace of $60 billion per month, the staff's estimates suggested that after April of this year, the Desk's reserve management purchases will restore the permanent base of reserves to levels above those prevailing in early September 2019. Al­though reserves are projected to be above $1.5 trillion before April, a surge in the Treasury General Account balance during the April tax season is expected to briefly reduce reserve levels and, in the absence of repo operations, bring reserves down temporarily to around $1.5 trillion. The manager discussed a potential plan for gradually transitioning to an operational approach designed to maintain ample reserve levels without the active use of repo operations to supply reserves. Under this plan, repo operations would be maintained at least through April to ensure ample reserve conditions. However, the Desk would continue the gradual reduction and consolidation of its repo offerings ahead of April, with the plan of phasing out term repo operations after April. As part of this transition, the minimum bid rate on repo operations could be gradually lifted, and the Committee could consider whether there is a role for repo operations in the implementation framework. In the second quarter, the manager expected reserve conditions to support slowing the pace of Treasury bill purchases, with the goal of eventually aligning growth of the Federal Reserve's Treasury holdings with trend growth in its liabilities. As that time approaches, the Committee might wish to consider the appropriate maturity composition of reserve management purchases of Treasury securities. The manager noted that, al­though the pace of Treasury purchases would likely continue into the second quarter, the rate of expansion in the Federal Reserve's balance sheet would moderate during the first half of 2020 as repo outstanding was gradually reduced. The manager's briefing addressed the possibility of a small technical adjustment to the Federal Reserve's administered rates in light of the stability in money market conditions over recent months. With this adjustment, the Board would lift the interest rates on required and excess reserves by 5 basis points, and the FOMC would implement an equal-sized upward adjustment to the overnight reverse repurchase agreement offer rate. This technical adjustment would reverse the small downward adjustment to administered rates made in September, when money markets were volatile. By unanimous vote, the Committee ratified the Desk's domestic transactions over the intermeeting period. No intervention operations occurred in foreign currencies for the System's account during the intermeeting period. Staff Review of the Economic Situation The information available for the January 28–29 meeting indicated that labor market conditions remained strong and that real gross domestic product (GDP) increased at a moderate rate in the fourth quarter of 2019. 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 November. Survey-based measures of longer-run inflation expectations were little changed. Total nonfarm payroll employment rose in December, and the solid pace of job gains over the second half of 2019 was somewhat above that for the first half. However, the rate of increase in payrolls in 2019 was slower than in 2018, whether or not one accounted for the anticipated effects of the Bureau of Labor Statistics' benchmark revision to payroll employment, which was scheduled for early February. The unemployment rate held steady at its 50‑year low of 3.5 percent in December, and the labor force participation rate and the employment-to-population ratio were unchanged as well. The unemployment rates for African Americans, Asians, Hispanics, and whites were below their levels at the end of the previous economic expansion. Although persistent differentials between these rates remained, they have generally narrowed during the expansion. The average share of workers employed part time for economic reasons in November stayed below its level in late 2007. The rate of private-sector job openings declined, on net, in October and November but was still at a fairly high level; the rate of quits, which was also at a high level, edged up. The four-week moving average of initial claims for unemployment insurance benefits through mid-January remained near historically low levels. Nominal wage growth was moderate, with average hourly earnings for all employees increasing 2.9 percent over the 12 months ending in December. Total consumer prices, as measured by the PCE price index, increased 1.5 percent over the 12 months ending in November. Core PCE price inflation (which excludes changes in consumer food and energy prices) was 1.6 percent over that same 12-month period. Consumer food price inflation was lower than core inflation, and consumer energy prices declined. The trimmed mean measure of 12-month PCE price inflation constructed by the Federal Reserve Bank of Dallas remained at 2 percent in November. The consumer price index (CPI) and the core CPI both rose 2.3 percent over the 12 months ending in December. Recent readings on survey-based measures of longer-run inflation expectations were little changed, on balance, in recent months. The University of Michigan Surveys of Consumers' measure for the next 5 to 10 years moved back up in early January after having fallen to its lowest value on record in December. Meanwhile, the 3-year-ahead measure from the Federal Reserve Bank of New York's Survey of Consumer Expectations remained near its historical low in December. Real PCE appeared to have risen more slowly in the fourth quarter than in the third quarter. Retail sales were soft during the fourth quarter, and sales of light motor vehicles declined in December after a strong gain in November. However, key factors that influence consumer spending—including the low unemployment rate, the upward trend in real disposable income, high levels of households' net worth, and generally low interest rates—remained supportive of solid real PCE growth in the near term. In addition, recent readings on consumer confidence from both the University of Michigan and the Conference Board surveys were strong. Real residential investment appeared to have increased solidly again in the fourth quarter. Starts for single-family homes increased sharply over the November and December period, building permit issuance for such homes rose on net, and starts of multifamily units also moved up. Existing home sales increased, on balance, in November and December, while new home sales declined. All told, the data on residential construction and sales continued to suggest that the decline in mortgage rates since late 2018 had been boosting housing activity. The available data pointed to another decline in real nonresidential private fixed investment in the fourth quarter, with a further contraction in structures investment more than offsetting a modest rise in investment in equipment and intangibles. Nominal shipments and new orders of nondefense capital goods excluding aircraft were little changed in the fourth quarter. Although some measures of business sentiment improved, analysts' expectations of firms' longer-term profit growth edged down further, concerns about trade developments continued to weigh on firms' investment decisions, and reduced deliveries of the Boeing 737 Max were likely restraining investment. Nominal business expenditures for nonresidential structures outside of the drilling and mining sector continued to decline in November. The total number of crude oil and natural gas rigs in operation—an indicator of business spending for structures in the drilling and mining sector—was little changed, on net, through mid-January, though still below levels seen over the latter part of 2019. Industrial production (IP) increased, on net, in November and December, partly because of a pickup in motor vehicle production following the strike at General Motors. Even so, IP was lower than a year earlier, with declines in manufacturing production and the output of utilities only partly offset by an increase in mining output. Automakers' schedules suggested that assemblies of light motor vehicles would increase in the first quarter, but that gain appeared likely to be offset by Boeing's curtailed production of the 737 Max aircraft and, more generally, by mixed readings on new orders from national and regional manufacturing surveys. Total real government purchases appeared to have increased moderately in the fourth quarter. Nominal defense spending in November and December pointed to only a moderate rise in real federal government purchases. Real purchases by state and local governments looked to have risen a little faster than in the third quarter; nominal construction spending by these governments increased solidly in November, and state and local payrolls expanded modestly in December. Real net exports were estimated to have provided a substantial boost to real GDP growth in the fourth quarter. Available monthly data suggested that imports fell significantly, led by declines in consumer goods and automobiles, while exports were about flat. Incoming data suggested that foreign economic growth slowed further in the fourth quarter to a very subdued pace. In the advanced foreign economies (AFEs), growth appeared to have remained weak as the manufacturing slump continued and a consumption tax hike in Japan led to a sharp contraction in household spending. In the emerging economies, social unrest weighed heavily on economic activity in Hong Kong and Chile, while the labor strike at General Motors was a further drag on Mexico's already weak economy. In contrast, early GDP releases showed a pickup in growth in China and some other Asian economies, though news of the coronavirus outbreak raised questions about the sustainability of that pickup. Foreign inflation rose in the wake of temporary factors in India and China, while it remained soft in most AFEs, in part reflecting previous declines in energy prices and muted core inflation pressures. Staff Review of the Financial Situation Investor sentiment improved, on balance, over the intermeeting period, mostly reflecting progress related to the phase-one trade deal between the United States and China and its subsequent signing, the perception that the probability of a disorderly Brexit had declined, signs of stabilization in the global economic outlook, and, reportedly, continued confidence that monetary policy in the United States and other major economies would remain accommodative in the near term. Late in the period, concerns about the spread of the coronavirus and uncertainty about its potential economic effect weighed negatively on investor sentiment and led to moderate declines in the prices of risky assets. On net, equity prices increased notably over the intermeeting period, while corporate bond spreads were little changed and yields on nominal Treasury securities declined. Financing conditions for businesses and households eased a bit further and generally remained supportive of spending and economic activity. Federal Reserve communications over the intermeeting period reportedly reinforced investors' beliefs that a near-term change to the target range for the federal funds rate was unlikely. Consistent with those reports, a straight read of the probability distributions for the federal funds rate implied by options prices suggested that investors assigned a high probability to the target range remaining unchanged over the next few months. Expectations for the federal funds rate at the end of 2020, as implied by overnight index swap quotes, moved down slightly, on net, and implied about a 30 basis point decline in the federal funds rate from its current level. Yields on nominal Treasury securities declined, on net, across the maturity spectrum over the intermeeting period, while the spread between the yields on nominal 10‑ and 2-year Treasury securities was little changed. Measures of inflation compensation over the next 5 years and 5 to 10 years ahead based on Treasury Inflation-Protected Securities decreased, on net, but remained above their October 2019 lows. Broad stock price indexes increased notably, on balance, over the intermeeting period, with gains largely attributed to improved market sentiment about trade negotiations and a perceived lower probability of a disorderly Brexit. Late in the period, equity prices retraced some of their gains, as concerns about the spread of the coronavirus weighed negatively on risk sentiment. Overall movements in stock prices varied widely across economic sectors, with stocks of firms in the information technology and utilities sectors significantly outperforming aggregate indexes, while stock prices of firms in the energy sector declined markedly. Option-implied volatility on the S&P 500 index increased a bit, on balance, while corporate credit spreads were little changed. Conditions in domestic short-term funding markets, including in secured financing, were stable over the intermeeting period, even over year-end. Rates declined slightly, likely reflecting increased liquidity and a higher level of reserves provided by the Desk's open market operations. The effective federal funds rate remained close to the IOER rate, and spreads for term unsecured commercial paper and negotiable certificates of deposit narrowed substantially, particularly after year-end. The Desk's open market operations proceeded smoothly. For most of the intermeeting period, foreign equity prices rose amid progress on U.S.–China trade negotiations, generally favorable data on global economic activity, and the reduced risk of a disorderly Brexit following the U.K. general election. Late in the period, however, concerns about the coronavirus outbreak in China weighed on risk sentiment. On balance, most major foreign equity indexes increased modestly, and AFE long-term sovereign yields ended the period somewhat lower. U.K. and Canadian yields declined more than elsewhere against the backdrop of central bank communications that were interpreted as increasing the likelihood of policy easing in those countries. The broad dollar index weakened slightly over the period, predominantly against emerging market currencies. The Chinese renminbi appreciated notably against the dollar on positive trade policy developments, but this gain was more than undone late in the period by concerns about the coronavirus. The Mexican peso strengthened against the dollar, supported by progress on the U.S.-Mexico-Canada Agreement (USMCA) and Bank of Mexico communications that were perceived as less accommodative than expected. Financing conditions for nonfinancial firms remained accommodative, on balance, with corporate borrowing costs staying near historical lows during the intermeeting period. Gross issuance of investment-grade corporate bonds was subdued in January and December after surging in November. Issuance of speculative-grade bonds over the intermeeting period remained about in line with the average pace over December and January in recent years. Institutional leveraged loan issuance continued to be robust in December, reflecting solid refinancing activity and moderate new money issuance. Meanwhile, commercial and industrial (C&I) loans on banks' balance sheets contracted in the fourth quarter. Respondents to the January 2020 Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS) reported that borrower demand weakened for C&I loans over the fourth quarter, and lending standards on such loans were little changed. Gross equity issuance through seasoned offerings remained robust in December, while initial public offerings continued to be quite light. The credit quality of nonfinancial corporations and the earnings outlook remained generally stable in recent months. Credit conditions for both small businesses and municipalities remained accommodative on net. In the commercial real estate (CRE) sector, financing conditions also remained generally accommodative. The volume of agency and non-agency commercial mortgage-backed securities issuance grew notably in the fourth quarter, buoyed by lower interest rates, and the growth of CRE loans on banks' books picked up over this period. Responses to the January 2020 SLOOS suggested that lending standards and demand for most CRE loan categories were unchanged in the fourth quarter. Financing conditions in the residential mortgage market remained accommodative on balance. Mortgage rates decreased notably during the intermeeting period, reaching recent-year lows. Home-purchase originations remained around post-crisis highs, and mortgage refinancing activity continued at a strong pace through December. Financing conditions in consumer credit markets remained supportive of growth in consumer spending, although the supply of credit remained relatively tight for nonprime borrowers. The growth of credit card balances slowed in the fourth quarter, and, according to the January SLOOS, commercial banks tightened their standards on credit card loans over this period. Auto loan growth maintained a solid pace in recent months amid declining interest rates through year-end. The staff provided an update on its assessments of potential risks to financial stability. On balance, the financial vulnerabilities of the U.S. financial system were characterized as moderate. The staff judged that asset valuation pressures had increased in recent months to an elevated level. Asset valuation pressures were characterized as fairly widespread across a number of markets, similar to the situation in much of 2017 and 2018. In assessing vulnerabilities stemming from borrowing in the household and business sectors, the staff noted that, while the ratio of household debt to nominal GDP was fairly low, the ratio of business debt to nominal GDP was high by historical standards. At the same time, major financial institutions were viewed as resilient, in part because of high levels of capital at banks. Nonetheless, the staff noted that banks had announced that they intend to allow their capital ratios to decline closer to regulatory requirements over the medium term. Vulnerabilities stemming from funding risk were characterized as moderate. While the money market strains in September raised some questions about vulnerabilities in funding markets, the staff assessed that the core of the financial system remains resilient to vulnerabilities from maturity and liquidity transformation. Staff Economic Outlook The projection for U.S. real GDP growth prepared by the staff for the January FOMC meeting was stronger than in the previous forecast. Data pertaining to the fourth quarter of 2019, particularly on imports, suggested output rose faster at the end of the year than was previously projected, and this faster pace seemed consistent with the solid employment gains in the fourth quarter. In addition, more supportive financial conditions and the anticipated effects of the phase-one trade deal between the United States and China pushed up the staff's GDP forecast for this year and next. All told, real GDP growth was projected to be about the same in 2020 as in 2019 and then to slow modestly in the coming years, partly because of a fading boost from fiscal policy. Output was forecast to expand at a rate a little above the staff's estimate of its potential rate of growth in 2020 and 2021 and then to slow to a pace slightly below potential output growth in 2022. The unemployment rate was projected to decline a little further this year and to remain at that lower level through 2022; the unemployment rate was anticipated to be below the staff's estimate of its longer-run natural rate throughout the forecast period. The staff's forecasts for both total and core PCE price inflation over the 2020–22 period were essentially unrevised. Core inflation was still projected to step up a little in 2020 but to run a bit below 2 percent both this year and over the next two years. Total PCE price inflation was projected to be a little lower than core inflation in 2020 because of a projected decline in consumer energy prices and to be the same as core inflation in 2021 and 2022. The staff continued to view the uncertainty around its projections for real GDP growth, the unemployment rate, and inflation as generally similar to the average of the past 20 years. The staff viewed the downside risks to economic activity as having diminished a bit further since the previous forecast but still judged that the risks to the forecast for real GDP growth were tilted to the downside, with a corresponding skew to the upside for the unemployment rate. Important factors influencing this assessment were that foreign economic and geopolitical developments still seemed more likely to move in directions that could have significant negative effects on the U.S. economy than to resolve more favorably than assumed. In addition, softness in business investment and manufacturing production last year, as well as the recent weakness in imports, was seen as pointing to the possibility of a more substantial slowing in economic growth than the staff projected. The risks to the inflation projection were also viewed as having a downward skew, in part because of the downside risks to the forecast for economic activity. Participants' Views on Current Conditions and the Economic Outlook Participants agreed that the labor market had remained strong over the intermeeting period and that economic activity had risen at a moderate rate. Job gains had been solid, on average, in recent months, and the unemployment rate had remained low. Al­though household spending had risen at a moderate pace, business fixed investment and exports had remained weak. On a 12‑month basis, overall inflation and inflation for items other than food and energy were running below 2 percent. Market-based measures of inflation compensation remained low; survey-based measures of longer-term inflation expectations were little changed. Participants generally judged that the current stance of monetary policy was appropriate to support sustained expansion of economic activity, strong labor market conditions, and inflation returning to the Committee's symmetric 2 percent objective. They expected economic growth to continue at a moderate pace, supported by accommodative monetary and financial conditions. In addition, some trade uncertainties had diminished recently, and there were some signs of stabilization in global growth. Nonetheless, uncertainties about the outlook remained, including those posed by the outbreak of the coronavirus. In their discussion of the household sector, participants noted that spending growth had moderated in the fourth quarter. However, they generally expected that, in the period ahead, consumption spending would likely remain on a firm footing, supported by strong labor market conditions, rising incomes, and healthy household balance sheets. Some participants noted the upbeat tone of consumer surveys, and a few commented that their District contacts had reported solid retail sales during the holiday shopping season. In addition, many participants were encouraged by the significant pickup since last summer in residential investment, a development that reflected, in part, the effects of lower mortgage rates. With respect to the business sector, participants observed that business investment and exports remained weak and that manufacturing output had declined over the past year. Looking ahead, participants were generally cautiously optimistic about the effects on the business sector of the recent favorable trade developments and the signs of stabilization in global growth. Many participants expressed the view that these developments might boost business confidence or raise export demand, which would help strengthen or at least stabilize business investment. A few participants remarked that contacts in their Districts had noted that business sentiment was brighter or that companies were intending to expand their capital expenditures this year. Several other participants, however, judged that the effect of the recent trade agreement with China would be relatively limited, as trade uncertainty would likely remain elevated, with the possibility remaining of the emergence of new tensions as well as the reescalation of existing tensions. They noted that the agreement would still leave a large portion of tariffs in place and that many firms had already been making production and supply chain adjustments in response to trade tensions. Participants also commented on ongoing challenges facing the energy and agriculture sectors. A couple of participants remarked that activity in the energy sector continued to be weak, and a few noted that financial conditions in the agricultural sector would likely remain challenging for many despite farm subsidies from the federal government and recent optimism surrounding trade prospects. Participants judged that conditions in the labor market remained strong, with the unemployment rate at a 50‑year low and continued solid job gains, on average. Al­though the upcoming annual benchmark revision was expected to reduce estimates of recent payroll growth, participants expected payroll employment to expand at a healthy pace this year. Business contacts in many Districts indicated continued strong labor demand, with several participants mentioning that contacts reported difficulties in finding qualified workers or that observed wage growth might currently understate the degree of tightness in the labor market. However, a number of participants indicated that aggregate measures of nominal wages continued to rise at a moderate pace broadly in line with productivity growth and the rate of inflation. Several participants commented on potential reasons for the absence of stronger broad-based wage pressures, including technological changes that could substitute for labor, increased willingness of employees to forgo wage gains for greater job stability, adjustments in nonwage portions of compensation packages, and the possibility that the labor market was not as tight as the historically low unemployment rate would suggest. Many participants pointed to the strong performance of labor force participation despite the downward pressures associated with an aging population, and several raised the possibility that there was some room for labor force participation to rise further. In their discussion of inflation developments, participants noted that recent readings on overall and core PCE price inflation, measured on a 12-month basis, had continued to run below 2 percent. Overall, participants described their inflation outlook as having changed little since December. Participants generally expected inflation to move closer to 2 percent in the coming months as the unusually low readings in early 2019 drop out of the 12-month calculation. Participants also expected that, as the economic expansion continues and resource utilization remains high, inflation would return to the 2 percent objective on a sustainable basis. A few participants expressed less confidence in this outlook for inflation and commented that inflation had averaged less than 2 percent over the past several years even as resource utilization had increased, or pointed to downward pressures from global or technology-related factors that could continue to suppress inflation. A couple of participants, however, noted that some alternative inflation indicators, including trimmed mean measures, suggested that there had been a modest step-up in underlying inflation during 2019 or that underlying inflation could already be at a level consistent with the Committee's goal. Participants generally saw the distribution of risks to the outlook for economic activity as somewhat more favorable than at the previous meeting, al­though a number of downside risks remained prominent. The easing of trade tensions resulting from the recent agreement with China and the passage of the USMCA as well as tentative signs of stabilization in global economic growth helped reduce downside risks and appeared to buoy business sentiment. The risk of a "hard" Brexit had appeared to recede further. In addition, statistical models designed to estimate the probability of recession using financial market data suggested that the likelihood of a recession occurring over the next year had fallen notably in recent months. Still, participants generally expected trade-related uncertainty to remain somewhat elevated, and they were mindful of the possibility that the tentative signs of stabilization in global growth could fade. Geopolitical risks, especially in connection with the Middle East, remained. The threat of the coronavirus, in addition to its human toll, had emerged as a new risk to the global growth outlook, which participants agreed warranted close watching. In their discussion of financial stability, participants acknowledged the staff report suggesting that overall financial vulnerabilities remained moderate and that the financial system remained resilient. Nonetheless, several participants observed that equity, corporate debt, and CRE valuations were elevated and drew attention to high levels of corporate indebtedness and weak underwriting standards in leveraged loan markets. Some participants expressed the concern that financial imbalances—including overvaluation and excessive indebtedness—could amplify an adverse shock to the economy, that the current conditions of low interest rates and labor market tightness could increase risks to financial stability, or that cyber attacks could affect the U.S. financial system. Several participants noted that planned increases in dividend payouts by large banks and the associated decline in capital buffers might leave those banks with less capacity to weather adverse shocks—which could have negative implications for the economy—or that lower bank capital ratios could be associated with greater tail risks to GDP growth. On the other hand, capital levels at U.S. banks were quite high relative to other sectors of the financial system, raising questions about the potential migration of lending activities away from the U.S. banking sector to areas outside the oversight of federal banking supervisors. In their consideration of monetary policy at this meeting, participants judged that it would be appropriate to maintain the target range for the federal funds rate at 1-1/2 to 1-3/4 percent to support sustained expansion of economic activity, strong labor market conditions, and inflation returning to the Committee's symmetric 2 percent objective. With regard to monetary policy beyond this meeting, participants viewed the current stance of policy as likely to remain appropriate for a time, provided that incoming information about the economy remained broadly consistent with this economic outlook. Of course, if developments emerged that led to a material reassessment of the outlook, an adjustment to the stance of monetary policy would be appropriate, in order to foster achievement of the Committee's dual-mandate objectives. In commenting on the monetary policy outlook, participants concurred that maintaining the current stance of policy would give the Committee time for a fuller assessment of the ongoing effects on economic activity of last year's shift to a more accommodative policy stance and would also allow policymakers to accumulate further information bearing on the economic outlook. Participants discussed how maintaining the current policy stance for a time could be helpful in supporting U.S. economic activity and employment in the face of global developments that have been weighing on spending decisions. With regard to the Committee's price-stability objective, participants observed that the current degree of monetary policy accommodation would be useful in facilitating a return of inflation to 2 percent. Several participants noted that inflation returning to 2 percent would help ensure that longer-term inflation expectations remained consistent with the Committee's longer-run inflation objective. A few participants stressed that the Committee should be more explicit about the need to achieve its inflation goal on a sustained basis. Several participants suggested that inflation modestly exceeding 2 percent for a period would be consistent with the achievement of the Committee's longer-run inflation objective and that such mild overshooting might underscore the symmetry of that objective. With regard to the Committee's maximum employment objective, a few participants observed that the actual level of employment might still be below maximum employment and that maintaining the present monetary policy stance would allow the economy to achieve that maximum level. A couple of other participants expressed concern that tight labor markets have in the past been associated with economic and financial imbalances and that the emergence of such imbalances might jeopardize the longer-run attainment of the Committee's dual-mandate goals. Participants discussed the open market operations that the Federal Reserve had undertaken since September to implement monetary policy, as well as forthcoming operational measures. Participants agreed that the operations undertaken by the Desk since mid-September had been effective in helping to stabilize conditions in money markets and that implementation of the plan that the Committee announced in October to purchase Treasury bills and conduct repo operations had proceeded smoothly. Participants observed that enactment of this plan had succeeded in replenishing reserve balances to levels at or above those prevailing in early September 2019 and in ensuring continued control of the federal funds rate. Many participants stressed that, as reserves approached durably ample levels, the need for sizable Treasury bill purchases and repo operations would diminish and that such operations could be gradually scaled back or phased out. Beyond that point, regular open market operations would be required over time in order to accommodate the trend growth in the Federal Reserve's liabilities and maintain an ample level of reserves. Participants who commented on the Desk's proposal for the transition to the ample-reserves regime indicated that they were comfortable with that proposal. They remarked that the details of the Committee's plans would be adjusted as appropriate to support effective implementation of monetary policy. Participants noted that it would be important to continue to communicate to the public that open market operations now and in the period ahead were technical operations aimed at achieving and maintaining ample reserves and that any adjustments to those operations were not intended to represent a change in the stance of monetary policy. Several participants suggested that the Committee should resume before long its discussion of the role that repo operations might play in an ample-reserves regime, including the possible creation of a standing repo facility. A couple of these participants cited the potential for such a facility to reduce the banking system's demand for reserves over the longer term. Committee Policy Action In their discussion of monetary policy for this meeting, members noted that information received since the FOMC met in December indicated that the labor market remained strong and that economic activity had been rising at a moderate rate. Job gains had been solid, on average, in recent months, and the unemployment rate had remained low. Although household spending had been rising at a moderate pace, business fixed investment and exports remained weak. On a 12‑month basis, overall inflation and inflation for items other than food and energy were running below 2 percent. Market-based measures of inflation compensation remained low; survey-based measures of longer-term inflation expectations were little changed. Members agreed to maintain the target range for the federal funds rate at 1-1/2 to 1-3/4 percent. Members judged that the current stance of monetary policy was appropriate to support sustained expansion of economic activity, strong labor market conditions, and inflation returning to the Committee's symmetric 2 percent objective. Members also 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 maximum employment objective and its symmetric 2 percent inflation objective. And they concurred 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 that incoming data warranted a change in the statement's description of recent rises in household spending from "strong" to "moderate." They also agreed to describe the current monetary policy stance as consistent with inflation "returning to," rather than being "near," their symmetric 2 percent longer-run objective. In commenting on this change in wording, a few members noted that the new language would make the postmeeting statement more consistent with the Committee's outlook or might usefully affirm the symmetry of the Committee's inflation goal and indicate that policymakers were not satisfied with inflation outcomes that were persistently below 2 percent. 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, for release at 2:00 p.m.: "Effective January 30, 2020, 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. In light of recent and expected increases in the Federal Reserve's non-reserve liabilities, the Committee directs the Desk to continue purchasing Treasury bills at least into the second quarter of 2020 to maintain over time ample reserve balances at or above the level that prevailed in early September 2019. The Committee also directs the Desk to continue conducting term and overnight repurchase agreement operations at least through April 2020 to ensure that the supply of reserves remains ample even during periods of sharp increases in non-reserve liabilities, and to mitigate the risk of money market pressures that could adversely affect policy implementation. In addition, the Committee directs the Desk to conduct 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 all principal payments from the Federal Reserve's holdings of Treasury securities and to continue reinvesting all principal payments from the Federal Reserve's holdings of agency debt and agency mortgage-backed securities received during each calendar month. Principal payments from agency debt and agency mortgage-backed securities up to $20 billion per month will continue to be reinvested in Treasury securities to roughly match the maturity composition of Treasury securities outstanding; principal payments in excess of $20 billion per month will continue to be reinvested in agency mortgage-backed securities. 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 for release at 2:00 p.m.: "Information received since the Federal Open Market Committee met in December indicates that the labor market remains strong and that economic activity has been rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although household spending has been rising at a moderate pace, business fixed investment and exports remain weak. On a 12‑month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee decided to maintain the target range for the federal funds rate at 1-1/2 to 1-3/4 percent. The Committee judges that the current stance of monetary policy is appropriate to support sustained expansion of economic activity, strong labor market conditions, and inflation returning to the Committee's symmetric 2 percent objective. The Committee will continue to monitor the implications of incoming information for the economic outlook, including global developments and muted inflation pressures, as it assesses the appropriate path of the target range for the federal funds rate. 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, Michelle W. Bowman, Lael Brainard, Richard H. Clarida, Patrick Harker, Robert S. Kaplan, Neel Kashkari, 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 raise the interest rates on required and excess reserve balances to 1.60 percent. Setting the interest rate paid on required and excess reserve balances 10 basis points above the bottom of the target range for the federal funds rate is intended to foster trading in the federal funds market at rates well within the FOMC's target range. The Board of Governors also voted unanimously to approve establishment of the primary credit rate at the existing level of 2.25 percent, effective January 30, 2020. It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, March 17-18, 2020. The meeting adjourned at 9:50 a.m. on January 29, 2020. Notation Vote By notation vote completed on January 2, 2020, the Committee unanimously approved the minutes of the Committee meeting held on December 10-11, 2019. _______________________ 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's session only. Return to text 3. Attended through the discussion of the review of the monetary policy framework. Return to text 4. Attended through the discussion of developments in financial markets and open market operations. Return to text 5. Attended the discussion of developments in financial markets and open market operations. Return to text 6. Attended the discussion of economic developments and the outlook. Return to text 7. Committee organizational documents are available at https://www.federalreserve.gov/monetarypolicy/rules_authorizations.htm. 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

2020-01-03

Minute

Minutes of the Federal Open Market Committee December 10–11, 2019 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 10, 2019, at 10:00 a.m. and continued on Wednesday, December 11, 2019, at 9:00 a.m.1 PRESENT: Jerome H. Powell, Chair John C. Williams, Vice Chair Michelle W. Bowman Lael Brainard James Bullard Richard H. Clarida Charles L. Evans Esther L. George Randal K. Quarles Eric Rosengren Patrick Harker, Robert S. Kaplan, Neel Kashkari, Loretta J. Mester, and Michael Strine, Alternate Members of the Federal Open Market Committee Thomas I. Barkin, Raphael W. Bostic, and Mary C. Daly, Presidents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco, 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 Stacey Tevlin, Economist Rochelle M. Edge, Eric M. Engen, Christopher J. Waller, William Wascher, Jonathan L. Willis, and Beth Anne Wilson, Associate Economists Lorie K. Logan, Manager, System Open Market Account2 Ann E. Misback, Secretary, Office of the Secretary, Board of Governors Eric Belsky,3 Director, Division of Consumer and Community Affairs, Board of Governors; Matthew J. Eichner,4 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 Trevor A. Reeve, Deputy Director, Division of Monetary Affairs, Board of Governors Jon Faust, Senior Special Adviser to the Chair, Office of Board Members, Board of Governors Joshua Gallin, Special Adviser to the Chair, Office of Board Members, Board of Governors Brian M. Doyle, Wendy E. Dunn, Joseph W. Gruber, Ellen E. Meade, and Ivan Vidangos, 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; Diana Hancock, Senior Associate Director, Division of Research and Statistics, Board of Governors Antulio N. Bomfim and Robert J. Tetlow, Senior Advisers, Division of Monetary Affairs, Board of Governors Eric C. Engstrom, Senior Adviser, Division of Research and Statistics, and Deputy Associate Director, Division of Monetary Affairs, Board of Governors Elizabeth K. Kiser, Associate Director, Division of Research and Statistics, Board of Governors; Elizabeth Klee, Associate Director, Division of Financial Stability, Board of Governors; David López-Salido, Associate Director, Division of Monetary Affairs, Board of Governors Glenn Follette, Patrick E. McCabe,5 and John M. Roberts, Deputy Associate Directors, Division of Research and Statistics, Board of Governors; Matteo Iacoviello and Andrea Raffo,6 Deputy Associate Directors, Division of International Finance, Board of Governors; Jeffrey D. Walker,3 Deputy Associate Director, Division of Reserve Bank Operations and Payment Systems, Board of Governors Etienne Gagnon, Assistant Director, Division of Monetary Affairs, Board of Governors; Paul Lengermann, Assistant Director, Division of Research and Statistics, Board of Governors Penelope A. Beattie,3 Section Chief, Office of the Secretary, Board of Governors; Seung J. Lee,7 Section Chief, Division of International Finance, Board of Governors David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors Michele Cavallo and Kurt F. Lewis, Principal Economists, Division of Monetary Affairs, Board of Governors; Laura J. Feiveson,3 Principal Economist, Division of Research and Statistics, Board of Governors Nils Goernemann,3 Senior Economist, Division of International Finance, Board of Governors Donielle A. Winford, Information Management Analyst, Division of Monetary Affairs, Board of Governors Becky C. Bareford, First Vice President, Federal Reserve Bank of Richmond David Altig, Michael Dotsey, Jeffrey Fuhrer,3 and Sylvain Leduc, Executive Vice Presidents, Federal Reserve Banks of Atlanta, Philadelphia, Boston, and San Francisco, respectively Todd E. Clark, Marc Giannoni,3 and Spencer Krane, Senior Vice Presidents, Federal Reserve Banks of Cleveland, Dallas, and Chicago, respectively Jonathan P. McCarthy, Alexander L. Wolman, and Patricia Zobel, Vice Presidents, Federal Reserve Banks of New York, Richmond, and New York, respectively Thomas D. Tallarini, Jr., Assistant Vice President, Federal Reserve Bank of Minneapolis Karel Mertens,3 Senior Economic Policy Advisor, Federal Reserve Bank of Dallas Daniel Cooper, Senior Economist and Policy Advisor, Federal Reserve Bank of Boston Scott Davis, Senior Research Economist and Advisor, Federal Reserve Bank of Dallas Julie Hotchkiss,3 Research Economist and Senior Advisor, Federal Reserve Bank of Atlanta Review of Monetary Policy Strategy, Tools, and Communication Practices Participants continued to discuss issues related to the ongoing review of the Federal Reserve's monetary policy strategy, tools, and communication practices. The staff summarized the feedback received through the Fed Listens initiative, a series of 14 public-facing events conducted around the country with a broad range of individuals and groups. These events engaged with the public directly on issues pertaining to the dual-mandate objectives of maximum employment and stable prices. Representatives from underserved communities who participated in the Fed Listens events generally saw the current strong labor market as providing significant benefits to their communities, most notably by creating greater opportunities for individuals who have experienced difficulty finding jobs in the past. Nevertheless, these representatives noted that the benefits from current labor market conditions flowing to people in their communities were less than those implied by national statistics, and they expressed concerns that the recent gains might not be sustained in the event of an economic downturn. Business representatives reported experiencing challenges finding qualified workers and described several initiatives to attract and retain workers, including training programs and a willingness to employ individuals who are unlikely to have been considered in less favorable labor market conditions. Inflation developments elicited fewer comments at these events and were generally seen as posing less of a challenge than labor market conditions. Representatives of retirees mentioned difficulties associated with the rising costs of health care and prescription drugs, whereas those representing low- and middle-income communities pointed to the rising costs of basic necessities such as housing, utilities, and food. Business representatives emphasized the importance of low and stable inflation for planning and decisionmaking. Event participants were concerned about rising costs of living and generally perceived low inflation as desirable from that perspective. Event participants were asked about monetary policymakers' concerns regarding overall inflation running persistently below 2 percent; they noted that the Federal Reserve could better communicate its reasons for these concerns. When asked about the effects of changes in interest rates, representatives of underserved communities said that such changes had little effect on many members of their communities who have limited or no access to credit. Representatives of retirees conveyed a more negative view of low interest rates, given the greater reliance of wealthier retirees on interest income. Business representatives generally found the low interest rate environment beneficial. The staff briefing also included an analysis of distributional considerations for monetary policy. Consistent with the feedback received at the Fed Listens events, the evidence reviewed by the staff showed that workers who are young, less educated, African American, or Hispanic tend to face a greater-than-average risk of losing their jobs during recessions. The staff used simulations from a specific macroeconomic model to explore how heterogeneity of households might affect the transmission of economic shocks and changes in monetary policy to the economy. The staff's simulations embedded the assumption that households have limited ability to borrow, which makes some households' consumption spending more sensitive to changes in income. As a result, in these simulations, downturns lead to larger contractions in aggregate demand than would be the case if all households could borrow to support their consumption spending in response to a loss in income. The amplification of recessionary shocks was especially large when the monetary policy response was constrained by the effective lower bound (ELB) on the policy interest rate. Overall, the analysis suggested that the costs of recessions, as well as the benefits of economic stabilization, might be larger than suggested by models that did not account for differences across households regarding their access to credit. Participants agreed that the Fed Listens outreach efforts had informed their understanding of the goals and tradeoffs associated with monetary policy and had provided highly useful input into their deliberations. Several participants voiced their desire to continue the conversations initiated at the Fed Listens events. Participants also shared their appreciation of the feedback they receive on a regular basis from members of the public, including through the Federal Reserve System's extensive networks of contacts and community outreach efforts. A few participants emphasized that policymakers' engagement with the public helps build trust, fosters transparency, and reinforces the credibility of the Federal Reserve. Participants generally saw the feedback from Fed Listens events as reinforcing the importance of sustaining the economic expansion so that the effects of a persistently strong job market reach more of those who, in the past, had experienced difficulty finding employment. Several participants mentioned that sustaining strong labor market conditions helps workers build skills and cement their attachment to the labor force in a manner that might reduce the scarring effects of future downturns and might increase the maximum sustainable level of employment over the longer run. A number of participants also emphasized that sustaining strong labor market conditions is helpful for meeting the Committee's symmetric 2 percent inflation goal. Some participants spoke to some of the challenges associated with assessing the maximum level of employment. A few participants noted that aggregate statistics mask significant heterogeneity in labor market outcomes. A few others pointed to the continued absence of significant wage and price pressure—traditionally seen as a symptom of a tight labor market—even as the unemployment rate had moved below most estimates of its longer-run level. A few participants raised the possibility that the maximum sustainable level of employment had increased as the expansion continued to draw workers who would otherwise not be in the labor force. Regarding inflation, participants recognized that segments of the public generally do not regard the fact that aggregate inflation is running modestly below the Committee's 2 percent goal as a problem. A few participants noted that the public's view on this issue was understandable from the perspective of households and businesses going about their daily lives in an economy with low and stable inflation. That said, a couple of participants cautioned that inflation could emerge as a concern among members of the public if it became more volatile or ran at levels substantially away from the Committee's goal. Many participants also warned about the macroeconomic consequences of not achieving 2 percent on a sustained basis. In particular, if inflation ran persistently below the Committee's objective, longer-term inflation expectations could drift down, resulting in lower actual inflation. With lower inflation, nominal interest rates would be lower as well and therefore closer to the ELB. As a result, the scope for monetary policy to support the economy in a future downturn through interest rate cuts would be reduced, a situation that would likely worsen economic outcomes for households and businesses. In light of these considerations, participants generally agreed that they need to communicate more clearly to the public their rationale for, and commitment to, achieving 2 percent inflation on a sustained basis and of ensuring that longer-run inflation expectations are anchored at levels consistent with this objective. To ensure the effectiveness of these and other communications, several participants stressed that the Federal Reserve needs to adapt its communications to various audiences. A few participants emphasized that communications about the Committee's resolve to return inflation to 2 percent need to be backed with actions and results to ensure that the public sees these communications as credible. With respect to the role of distributional considerations in the pursuit of the dual-mandate objectives, several participants noted that it was important for policymakers to be cognizant of how monetary policy affects different segments of the population. Most participants commented on the large costs that recessions and high unemployment impose on communities, notably on their most vulnerable constituents, and stressed the need for monetary policy to seek to avoid recessions in the first place or reduce their severity when they occur. A number of these participants emphasized that, while monetary policy actions can have different effects across groups, monetary policy actions that are driven by the pursuit of maximum employment and stable prices ultimately benefit all groups. Participants viewed the role of monetary policy as supporting a strong, stable economy that benefits all Americans. Various participants noted that monetary policy is a blunt instrument whose effects cannot be targeted to specific communities. Several participants remarked that while monetary policy actions can improve the conditions of vulnerable communities, notably by supporting a strong job market, these actions may not reduce inequality in wealth and income. For these and other reasons, many participants emphasized that policies other than monetary policy are appropriate to directly address inequality. In addition, a couple of participants cautioned that maintaining accommodative financial conditions could be counterproductive if doing so fueled financial imbalances and exacerbated the next economic downturn. Participants agreed that their review of monetary policy strategy, tools, and communication practices would continue at future meetings and, as a result, that the Committee would not reaffirm its existing Statement on Longer-Run Goals and Monetary Policy Strategy at the January 2020 meeting. The Committee plans to revisit this statement closer to the conclusion of the review, likely around the middle of 2020. Developments in Financial Markets and Open Market Operations The System Open Market Account manager first reviewed developments in financial markets over the intermeeting period. Market prices appeared to respond mainly to signs of stabilization in the U.S. and global economies and to developments associated with trade policy. Market participants noted some risks to the outlook including Brexit and geopolitical factors. Regarding expectations for U.S. monetary policy, the Open Market Trading Desk's surveys and market-based indicators pointed to a very high perceived likelihood of no change in the target range for the federal funds rate at this meeting. The expected path of the federal funds rate implied by the medians of survey respondents' modal forecasts remained essentially flat through 2020. Survey- and market-implied uncertainty about the near-term outlook for monetary policy declined, with market commentary attributing the decrease in part to the Committee's October communications. Survey respondents placed a higher probability on a reduction in the target range over 2020 than an increase. The manager turned next to a review of money market developments since the October meeting, starting with an update on the implementation of the Committee's strategy to ensure ample reserves. Reserve management purchases of Treasury bills continued at a pace of $60 billion per month, with propositions remaining strong and little discernible effect on market functioning. While these purchases accumulated, the Desk continued to conduct regular repurchase agreement (repo) operations in order to maintain reserves at or above the level that prevailed in early September. Repos outstanding from these Desk operations totaled roughly $215 billion per day, consisting of both overnight and term operations. As reserve levels increased, the distribution of reserves across bank types became comparable with where it was in early September. The federal funds rate and other overnight money market rates fell modestly and were close to the interest on excess reserves (IOER) rate for most of the period. The intraday dispersion of rates was also lower than when reserves were at similar levels before September. In addition to helping keep reserves ample, repo operations likely have reduced pressures in money markets and the dispersion in money market rates. With respect to conditions around year-end, the manager noted that forward measures of market pricing continued to indicate expectations of temporary upward pressures on some secured rates. Money market rates are often volatile around year-end, and Federal Reserve operations are not intended to eliminate all year-end pressures but rather to ensure that reserve supply remains ample and to mitigate the risk that such pressures could adversely affect the implementation of monetary policy. The Desk had already conducted three longer-term repo operations spanning year-end—for a total of $75 billion—and planned to announce an additional longer-term operation, as well as increase the amount of overnight repo offered around the year-end date. The manager reported that the Desk is closely monitoring reserves and money market conditions and that it is prepared to adjust plans as needed. The manager discussed two operational considerations around policy implementation. The first involved the risk that future Treasury bill purchases could have a larger effect on liquidity in the Treasury bill market in light of expected seasonal declines in bill issuance and the Federal Reserve's growing ownership share of outstanding bills. If this risk were to materialize, the Federal Reserve could consider expanding the universe of securities purchased for reserve management purposes to include coupon-bearing Treasury securities with a short time to maturity. Purchases of these short-dated securities would not affect broader financial conditions or the stance of monetary policy. The manager also discussed expectations to gradually transition away from active repo operations next year as Treasury bill purchases supply a larger base of reserves. The calendar of repo operations starting in mid-January could reflect a gradual reduction in active repo operations. The manager indicated that some repos might be needed at least through April, when tax payments will sharply reduce reserve levels. As reserves remain ample, the manager noted that it may become appropriate at some point to implement a technical adjustment to the IOER rate and the offered rate on overnight reverse repurchase (ON RRP) agreements. Should conditions warrant this adjustment, the IOER rate could move closer to the middle of the target range for the federal funds rate, and the ON RRP rate could be realigned with the bottom of the target range. The manager also noted that the Federal Reserve Bank of New York communicated to its customers that the remuneration rate on the foreign repo pool will be revised to be generally equivalent to the overnight reverse repo rate. This action may reduce activity in the pool to some extent and increase the level of reserves. 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 available for the December 10–11 meeting indicated that labor market conditions remained strong and that real gross domestic product (GDP) was increasing at a moderate rate in the second half of 2019. 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. Survey-based measures of longer-run inflation expectations were little changed. Total nonfarm payroll employment surged in November, boosted in part by the return of auto workers who had previously been on strike in October. The average pace of job gains over the three months ending in November, which is unaffected by the strike, was stronger than earlier in 2019. However, the rate of increase in payrolls so far this year was slower than last year, even accounting for the anticipated effects of the Bureau of Labor Statistics' benchmark revision to payroll employment, which will be incorporated in the published data in February 2020. The unemployment rate ticked up in October but then moved back down to its 50-year low of 3.5 percent in November; the labor force participation rate and the employment-to-population ratio held steady, on balance, over those two months. The unemployment rates for African Americans, Asians, Hispanics, and whites were little changed, on net, over the past two months; the unemployment rate for each group was below its level at the end of the previous economic expansion, though persistent differentials between these rates remained. The average share of workers employed part time for economic reasons in November stayed below its level in late 2007. Both the rate of private-sector job openings and the rate of quits edged down in September, but these readings were still at fairly elevated levels. The four-week moving average of initial claims for unemployment insurance benefits through late November remained near historically low levels. In general, recent measures of nominal wage growth continued to be moderate. Total labor compensation per hour in the business sector increased 3.7 percent over the four quarters ending in the third quarter. The employment cost index for private-sector workers rose 2.7 percent over the 12 months ending in September, while average hourly earnings for all employees increased 3.1 percent over the 12 months ending in November. Total consumer prices, as measured by the PCE price index, increased 1.3 percent over the 12 months ending in October. Core PCE price inflation (which excludes changes in consumer food and energy prices) was 1.6 percent over that same 12-month period, while consumer food price inflation was lower than core inflation and consumer energy prices declined. The trimmed mean measure of 12-month PCE price inflation constructed by the Federal Reserve Bank of Dallas remained at 2 percent in October. The consumer price index (CPI) rose 2.1 percent over the 12 months ending in November, while core CPI inflation was 2.3 percent. Recent readings on survey-based measures of longer-run inflation expectations—including those from the University of Michigan Surveys of Consumers, the Survey of Professional Forecasters, the Survey of Consumer Expectations from the Federal Reserve Bank of New York, and the Desk's Survey of Primary Dealers and Survey of Market Participants—were little changed, on balance; the Michigan survey measure ticked back down in early December to the bottom of its recent range after ticking up in November. Real PCE continued to expand in October following a strong gain in the third quarter. Sales of light motor vehicles rose markedly in November. Key factors that influence consumer spending—including the low unemployment rate, the upward trend in real disposable income, high levels of households' net worth, and generally low interest rates—were supportive of solid real PCE growth in the near term. The Michigan survey measure of consumer sentiment rose again in early December to an upbeat level and had more than recovered from its drop in August; the Conference Board survey measure of consumer confidence remained at a favorable level in November. Real residential investment appeared to be increasing further after rising solidly in the third quarter. Both starts and building permit issuance for single-family homes increased in October, and starts of multifamily units also rose. Existing home sales continued to increase in October, al­though new home sales edged down following a solid gain in the third quarter. All told, the data on construction and sales continued to suggest that the decline in mortgage rates since late 2018 has been boosting housing activity. Real nonresidential private fixed investment remained weak overall after declining in the second and third quarters. Nominal shipments and new orders of nondefense capital goods excluding aircraft increased solidly in October following a string of decreases, al­though many forward-looking indicators pointed to continued softness in business equipment spending. Most measures of business sentiment were still downbeat, analysts' expectations of firms' longer-term profit growth edged down further, and concerns about trade developments continued to weigh on firms' investment decisions. Nominal business expenditures for nonresidential structures outside of the drilling and mining sector continued to decline in October, and the total number of crude oil and natural gas rigs in operation—an indicator of business spending for structures in the drilling and mining sector—fell further through early December. Industrial production decreased in October and remained notably lower than at the beginning of the year. Production in October continued to be held down by the strike at General Motors, al­though the end of the strike and automakers' schedules suggested that assemblies of light motor vehicles would rebound in November. Overall manufacturing production appeared likely to remain soft in coming months, reflecting generally weak readings on new orders from national and regional manufacturing surveys, declining domestic business investment, slow economic growth abroad, and a persistent drag from trade developments. Total real government purchases were increasing slowly in the fourth quarter. Nominal defense spending in October pointed to only a modest rise in real federal government purchases. Real purchases by state and local governments looked to be moving roughly sideways; state and local payrolls expanded modestly, on net, over October and November, and nominal construction spending by these governments was about flat in October. The nominal U.S. international trade deficit narrowed in October. Exports fell a little, with declines in all export categories except for services and industrial supplies. Imports fell much more, and the declines were broad based, with the largest contributions coming from imports of consumer goods and automotive products. Available trade data suggested that the contribution of net exports to real GDP growth, which was slightly negative in the third quarter, would turn somewhat positive in the fourth quarter. Foreign economic growth slowed further in the third quarter amid continued weakness in the global manufacturing sector. Recent monthly indicators pointed to a stabilization in the pace of economic growth in China and several advanced foreign economies. However, other indicators suggested that social unrest weighed heavily on economic activity in several countries, most notably in Hong Kong, and that weakness persisted in parts of Latin America. Foreign inflation picked up somewhat as energy prices stabilized, al­though inflation remained relatively low in most foreign economies. Staff Review of the Financial Situation Investor sentiment fluctuated over the intermeeting period largely in response to ongoing trade negotiations between the United States and China. On net, equity prices increased moderately while corporate bond spreads narrowed slightly. Yields on nominal Treasury securities were little changed. Financing conditions for businesses and households remained supportive of spending and economic activity. Federal Reserve communications over the intermeeting period were viewed as suggesting that additional near-term changes to the target range for the federal funds rate were less likely than had previously been expected. A straight read of the probability distribution for the federal funds rate implied by options prices suggested that investors assigned a high probability to the target range remaining unchanged at the December FOMC meeting. Forward rates implied by overnight index swap quotes declined slightly, on net, and implied about a 25 basis point decline in the federal funds rate by the end of 2020. Nominal Treasury yields fluctuated over the intermeeting period but, on net, the Treasury curve was little changed. Measures of inflation compensation over the next 5 years and 5 to 10 years ahead based on Treasury Inflation-Protected Securities increased slightly from near multiyear low levels. Broad stock price indexes increased moderately over the intermeeting period amid movements largely attributed to trade-related developments and stronger-than-expected U.S. employment reports. Option-implied volatility on the S&P 500 index increased modestly but remained near the low end of its historical distribution. On net, corporate credit spreads narrowed slightly. Conditions in short-term funding markets were stable over the intermeeting period. Interest rates for overnight secured and unsecured loans fell in line with the 25 basis point decrease in the target range for the federal funds rate at the October FOMC meeting. Trading in money markets was orderly, with volumes in normal ranges and spreads narrower relative to the IOER rate. Pressures on rates at October month-end and November mid-month—both days with sizable settlements of Treasury auctions—were muted compared with other recent Treasury issuance days. The Desk's open market operations aimed at maintaining ample reserves proceeded smoothly. As in U.S. markets, sentiment in foreign financial markets fluctuated in response to news on U.S.–China trade negotiations. Most foreign equity price indexes and long-term sovereign yields in Germany, the United Kingdom, and Japan increased modestly on net. The broad dollar index ended the period little changed. Political unrest in Hong Kong and Latin America garnered some financial market attention and led to a weakening of some Latin American currencies, notably the Chilean peso, but the imprint on broader financial markets was limited. Financing conditions for nonfinancial businesses remained accommodative. Gross issuance of corporate bonds was robust, on average, in October and November. Gross issuance of institutional leveraged loans remained near recent monthly averages. Meanwhile, commercial and industrial loans held by banks contracted in October but increased modestly in November. The credit quality of nonfinancial corporations deteriorated slightly in recent months but remained solid overall. After particularly strong gross equity issuance in September, initial public offerings declined and seasoned offerings remained solid in October and November. Credit conditions for both small businesses and municipalities stayed accommodative. In the commercial real estate (CRE) sector, financing conditions also remained generally accommodative. Commercial mortgage-backed securities (CMBS) spreads widened slightly over the intermeeting period but remained near the low end of their post-crisis range. Agency and non-agency CMBS issuance increased in October to a post-crisis high. CRE loan growth at banks also increased in October relative to recent quarters. Financing conditions in the residential mortgage market remained accommodative over the intermeeting period. Mortgage rates were little changed since the October FOMC meeting. Consistent with this year's decline in mortgage rates, home-purchase originations and refinancing originations both rose. Mortgage credit standards were little changed. Financing conditions in consumer credit markets remained generally supportive of growth in consumer spending, al­though conditions continued to be tight for nonprime borrowers. Auto loans increased, consistent with significant declines in auto loan interest rates this year. Credit card debt grew at a solid pace, and interest rates on credit card debt began to fall. Consumer asset‑backed securities issuance was strong through October as spreads stabilized at levels that were somewhat above their post-crisis averages. Staff Economic Outlook The projection for U.S. real GDP growth prepared by the staff for the December FOMC meeting was revised up a little for the second half of 2019 relative to the previous projection. This revision primarily reflected incoming data for household spending and business investment that were somewhat stronger than expected. Even with this upward revision, real GDP was forecast to rise more slowly in the second half of the year than in the first half, mostly because of continued soft business investment and slower increases in government spending. The forecast for real GDP growth over the medium term was also revised up a bit, on balance, primarily in response to a somewhat higher projected path for equity prices. Nevertheless, real GDP growth was still expected to slow modestly in the coming years, largely because of a fading boost from fiscal policy. Output was forecast to expand at a rate a little above the staff's estimate of its potential rate of growth in 2019 through 2021 and then to slow to a pace slightly below potential output growth in 2022. The unemployment rate was projected to be roughly flat at around its current level through 2022 and to remain below the staff's estimate of its longer-run natural rate. The staff's forecast for total PCE price inflation in 2019 was revised down a bit, as a downward revision to core PCE prices in response to recent data was partly offset by an upward revision to consumer energy prices. Beyond 2019, core inflation was expected to be above its pace this year, and this projection was revised up a touch because of the slightly tighter resource utilization in the current forecast. The projection for total inflation in 2020 was a little lower than for core inflation due to a projected decline in consumer energy prices. Over the remainder of the medium-term projection, total inflation was expected to be about the same as core inflation, al­though both inflation measures were forecast to continue to run a bit below 2 percent through 2022. The staff continued to view the uncertainty around its projections for real GDP growth, the unemployment rate, and inflation as generally similar to the average of the past 20 years. The staff viewed the downside risks to economic activity as having eased a bit since the previous forecast but still judged that the risks to the forecast for real GDP growth were tilted to the downside, with a corresponding skew to the upside for the unemployment rate. Important factors influencing this assessment were that international trade tensions and foreign economic developments seemed more likely to move in directions that could have significant negative effects on the U.S. economy than to resolve more favorably than assumed. In addition, softness in business investment and manufacturing production so far this year were seen as pointing to the possibility of a more substantial slowing in economic growth than the staff projected. The risks to the inflation projection were also viewed as having a downward skew, in part because of the downside risks to the forecast for economic activity. 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 2019 through 2022 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. Participants agreed that the labor market had remained strong over the intermeeting period and that economic activity had risen at a moderate rate. Job gains had been solid, on average, in recent months, and the unemployment rate had remained low. Al­though household spending had risen at a strong pace, business fixed investment and exports had remained weak. On a 12-month basis, overall inflation and inflation for items other than food and energy were running below 2 percent. Market-based measures of inflation compensation remained low; survey-based measures of longer-term inflation expectations were little changed. Participants generally expected sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective as the most likely outcomes. This outlook reflected, at least in part, the support provided by the current stance of monetary policy. Nevertheless, global developments, related to both persistent uncertainty regarding international trade and weakness in economic growth abroad, continued to pose some risks to the outlook, and inflation pressures remained muted. In their discussion of the household sector, participants agreed that spending had increased at a strong pace. They generally expected that consumption spending would likely remain on a firm footing, supported by strong labor market conditions, rising incomes, and solid consumer confidence. In addition, residential investment had continued to pick up, reflecting, in part, the effects of lower mortgage rates. Many participants commented that business contacts in consumer-related industries reported strong demand or that contacts were optimistic about the holiday retail spending season. However, some participants observed that recent data on retail sales or motor vehicle spending had decelerated slightly. With respect to the business sector, participants saw trade developments and concerns about the global economic growth outlook as the main factors contributing to weak business investment and exports. Participants generally expected these factors to continue to damp business investment and exports. They expressed similar concerns about activity in manufacturing industries. A few participants noted that the current weakness in capital expenditures could lead to a slower pace of productivity growth in future years. A few others observed that businesses were diversifying their supply chains or investing in technology to adapt to persistent uncertainty regarding international trade, which might mitigate the effects of such uncertainty on future business spending. A number of participants commented on challenges facing the energy and agriculture sectors. A few participants remarked that activity in the energy sector was especially weak, reflecting low petroleum prices, low profitability, and tight financing conditions for energy-producing firms. Several participants noted that the agricultural sector also faced a number of difficulties, including those associated with trade developments, weak export demand, and challenging financial positions for many farmers. A couple of participants noted that farm subsidies from the federal government were offsetting a portion of the financial strain on farmers. Participants judged that conditions in the labor market remained strong, with the unemployment rate at a 50-year low, job gains remaining solid, and some measures of labor force participation increasing further. The unemployment rate was likely to remain low going forward, and various participants remarked that there were some indications that further strengthening in overall labor market conditions was possible without creating undesirable pressures on resources. In particular, a number of participants noted that the labor force participation rate could rise further still. Moreover, measures of wage growth had generally remained moderate. However, a few participants commented that increases in the labor force would likely moderate as slack in the labor market diminished. In addition, a couple of participants remarked that the preliminary benchmark revision released in August by the Bureau of Labor Statistics had indicated that payroll employment gains would likely show less momentum coming into this year once those revisions are incorporated in published data early next year. A couple of other participants thought it was important to better understand the quality of jobs being created. Business contacts in many Districts indicated continued strong labor demand, with firms reporting difficulties in finding qualified workers or broadening their recruiting to include traditionally marginalized groups. A number of participants noted that wage pressures were evident for some industries in their Districts, and a couple of participants commented that firms were responding to those pressures in a variety of ways, including investing in technology that could serve as a substitute for labor. In their discussion of inflation developments, participants noted that recent readings on overall and core PCE inflation, measured on a 12-month change basis, had continued to run below 2 percent. Survey-based measures of longer-term inflation expectations were little changed, and market-based measures of inflation compensation remained low. A few participants commented on factors that may temporarily exert upward pressure on some measures of inflation in the coming months. Assessing all these factors, participants generally expected that inflation would return to the 2 percent objective as the economic expansion continued and resource utilization remained high. However, weakness abroad and subdued global inflation pressures were cited as sources of risk to this assessment. Participants who expressed less confidence that inflation would return promptly to the 2 percent objective commented that inflation had averaged less than 2 percent over the past several years even as resource utilization had increased or that global or technology-related factors were exerting downward pressure on inflation that could be difficult to overcome. Participants also discussed risks regarding the outlook for economic activity. While many saw the risks as tilted somewhat to the downside, some risks were seen to have eased over recent months. In particular, there were some tentative signs that trade tensions with China were easing, and the probability of a no-deal Brexit was judged to have lessened further. In addition, there were indications that the prospects for global economic growth may be stabilizing. A number of participants observed that the domestic economy was showing resilience in the face of headwinds from global developments. Moreover, statistical models designed to gauge the probability of recession using financial market data, including those based on information from the Treasury yield curve, suggested that the likelihood of a recession occurring over the medium term had fallen noticeably in recent months. However, new uncertainties had emerged regarding trade policy with Argentina, Brazil, and France, and political tensions in Hong Kong persisted. In their consideration of monetary policy at this meeting, participants judged that it would be appropriate to maintain the target range for the federal funds rate at 1-1/2 to 1-3/4 percent to support sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective. As reflected in their SEP projections, participants regarded the current stance of monetary policy as likely to remain appropriate for a time as long as incoming information about the economy remained broadly consistent with the economic outlook. Of course, if developments emerged that led to a material reassessment of the outlook, the stance of policy would need to adjust in a way that fostered the Committee's dual-mandate objectives. A number of participants agreed that maintaining the current stance of monetary policy would give the Committee some time to assess the full effects on the economy of its policy decisions and communications over the course of this year along with other information bearing on the economic outlook. Participants also discussed how maintaining the current stance of policy for a time could be helpful for cushioning the economy from the global developments that have been weighing on economic activity and for returning inflation to the Committee's symmetric objective of 2 percent. Participants generally expressed concerns regarding inflation continuing to fall short of 2 percent. Al­though a number of participants noted that some of the factors currently holding down inflation were likely to prove transitory, various participants were concerned that indicators were suggesting that the level of longer-term inflation expectations was too low. A few participants raised the concern that keeping interest rates low over a long period might encourage excessive risk-taking, which could exacerbate imbalances in the financial sector. These participants offered various perspectives on the relationship between financial stability and policies that keep interest rates persistently low. They remarked that such policies could be inconsistent with sustaining maximum employment, could make the next recession more severe than otherwise, or could strengthen the case for the active use of macroprudential tools to guard against emerging imbalances. Various participants remarked on issues related to the implementation of monetary policy, highlighting topics for further discussion at future meetings. Among the topics mentioned were the potential role of a standing repo facility in an ample-reserves regime, the setting of administered rates, and the composition of the Federal Reserve's holdings of Treasury securities over the longer run. Committee Policy Action In their discussion of monetary policy for this meeting, members noted that information received since the FOMC met in October indicated that the labor market remained strong and that economic activity had been rising at a moderate rate. Job gains had been solid, on average, in recent months, and the unemployment rate had remained low. Al­though household spending had been rising at a strong pace, business fixed investment and exports remained weak. On a 12‑month basis, overall inflation and inflation for items other than food and energy were running below 2 percent. Market-based measures of inflation compensation remained low; survey-based measures of longer-term inflation expectations were little changed. Members agreed to maintain the target range for the federal funds rate at 1-1/2 to 1-3/4 percent. Members judged that the current stance of monetary policy is appropriate to support sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective. Members also 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 maximum employment objective and its symmetric 2 percent inflation objective. And they concurred 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 state that they judged that "the current stance of monetary policy is appropriate" to support the achievement of the Committee's policy objectives. Members discussed their options regarding references to global developments and muted inflation pressures in the statement. In their judgment, these factors, cited in previous postmeeting statements as part of the rationale for adjusting the stance of policy, remained salient features of the outlook. Accordingly, they agreed to cite them in the sentence indicating that "the Committee will continue to monitor the implications of incoming information for the economic outlook." With the retention of these references to global developments and muted inflation pressures, members agreed that the text on uncertainties about the outlook could be removed. A few members suggested that the language stating that monetary policy would support inflation "near" 2 percent could be misinterpreted as suggesting that policymakers were comfortable with inflation running below that level; they preferred language that referred to returning inflation to the Committee's symmetric 2 percent objective. Other members thought that the reference to "near" 2 percent was intended to encompass modest deviations of inflation above and below 2 percent. 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 December 12, 2019, 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. In light of recent and expected increases in the Federal Reserve's non-reserve liabilities, the Committee directs the Desk to continue purchasing Treasury bills at least into the second quarter of 2020 to maintain over time ample reserve balances at or above the level that prevailed in early September 2019. The Committee also directs the Desk to continue conducting term and overnight repurchase agreement operations at least through January 2020 to ensure that the supply of reserves remains ample even during periods of sharp increases in non-reserve liabilities, and to mitigate the risk of money market pressures that could adversely affect policy implementation. In addition, the Committee directs the Desk to conduct 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 1.45 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 all principal payments from the Federal Reserve's holdings of Treasury securities and to continue reinvesting all principal payments from the Federal Reserve's holdings of agency debt and agency mortgage-backed securities received during each calendar month. Principal payments from agency debt and agency mortgage-backed securities up to $20 billion per month will continue to be reinvested in Treasury securities to roughly match the maturity composition of Treasury securities outstanding; principal payments in excess of $20 billion per month will continue to be reinvested in agency mortgage-backed securities. 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 October indicates that the labor market remains strong and that economic activity has been rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Al­though household spending has been rising at a strong pace, business fixed investment and exports remain weak. On a 12‑month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee decided to maintain the target range for the federal funds rate at 1-1/2 to 1-3/4 percent. The Committee judges that the current stance of monetary policy is appropriate to support sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective. The Committee will continue to monitor the implications of incoming information for the economic outlook, including global developments and muted inflation pressures, as it assesses the appropriate path of the target range for the federal funds rate. 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, Michelle W. Bowman, Lael Brainard, James Bullard, Richard H. Clarida, Charles L. Evans, Esther L. George, Randal K. Quarles, and Eric S. Rosengren. 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 1.55 percent and voted unanimously to approve establishment of the primary credit rate at the existing level of 2.25 percent, effective December 12, 2019. Organizational Matters By unanimous vote, Lorie K. Logan was selected to serve at the pleasure of the Committee as manager, System Open Market Account, on the understanding that her 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 Ms. Logan as manager was satisfactory to the Federal Reserve Bank of New York. It was agreed that the next meeting of the Committee would be held on Tuesday–Wednesday, January 28–29, 2020. The meeting adjourned at 10:00 a.m. on December 11, 2019. Notation Vote By notation vote completed on November 19, 2019, the Committee unanimously approved the minutes of the Committee meeting held on October 29–30, 2019. _______________________ 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. The Committee appointed Lorie K. Logan to serve as the manager of the System Open Market Account at the conclusion of the meeting. Return to text 3. Attended through the discussion of the review of the monetary policy framework. Return to text 4. Attended through the discussion of developments in financial markets and open market operations. Return to text 5. Attended Tuesday's session only. Return to text 6. Attended through the discussion of developments in financial markets and open market operations, and from the discussion of current monetary policy through the end of the meeting. Return to text 7. Attended the discussion of economic developments and the outlook. Return to text

2019-12-11

Statement

Information received since the Federal Open Market Committee met in October indicates that the labor market remains strong and that economic activity has been rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although household spending has been rising at a strong pace, business fixed investment and exports remain weak. On a 12‑month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee decided to maintain the target range for the federal funds rate at 1‑1/2 to 1-3/4 percent. The Committee judges that the current stance of monetary policy is appropriate to support sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective. The Committee will continue to monitor the implications of incoming information for the economic outlook, including global developments and muted inflation pressures, as it assesses the appropriate path of the target range for the federal funds rate. 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 monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; James Bullard; Richard H. Clarida; Charles L. Evans; Esther L. George; Randal K. Quarles; and Eric S. Rosengren. Implementation Note issued December 11, 2019

2019-10-30

Statement

Information received since the Federal Open Market Committee met in September indicates that the labor market remains strong and that economic activity has been rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although household spending has been rising at a strong pace, business fixed investment and exports remain weak. On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the Committee decided to lower the target range for the federal funds rate to 1-1/2 to 1-3/4 percent. This action supports the Committee's view that sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective are the most likely outcomes, but uncertainties about this outlook remain. The Committee will continue to monitor the implications of incoming information for the economic outlook as it assesses the appropriate path of the target range for the federal funds rate. 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 monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; James Bullard; Richard H. Clarida; Charles L. Evans; and Randal K. Quarles. Voting against this action were: Esther L. George and Eric S. Rosengren, who preferred at this meeting to maintain the target range at 1-3/4 percent to 2 percent. Implementation Note issued October 30, 2019

2019-11-20

Minute

Minutes of the Federal Open Market Committee October 29-30, 2019 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 29, 2019, at 9:00 a.m. and continued on Wednesday, October 30, 2019, at 9:00 a.m.1 PRESENT: Jerome H. Powell, Chair John C. Williams, Vice Chair Michelle W. Bowman Lael Brainard James Bullard Richard H. Clarida Charles L. Evans Esther L. George Randal K. Quarles Eric Rosengren Patrick Harker, Robert S. Kaplan, Neel Kashkari, Loretta J. Mester, and Michael Strine, Alternate Members of the Federal Open Market Committee Thomas I. Barkin, Raphael W. Bostic, and Mary C. Daly, Presidents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco, 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 Stacey Tevlin, Economist Rochelle M. Edge, Eric M. Engen, Anna Paulson, Christopher J. Waller, William Wascher, and Beth Anne Wilson, Associate Economists Lorie K. Logan, Manager pro tem, System Open Market Account Ann E. Misback, Secretary, Office of the Secretary, Board of Governors Eric Belsky,2 Director, Division of Consumer and Community Affairs, Board of Governors; Matthew J. Eichner,3 Director, Division of Reserve Bank Operations and Payment Systems, Board of Governors; Andreas Lehnert, Director, Division of Financial Stability, Board of Governors Jennifer J. Burns, Deputy Director, Division of Supervision and Regulation, 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; Trevor A. Reeve, Deputy Director, Division of Monetary Affairs, Board of Governors Jon Faust, Senior Special Adviser to the Chair, Office of Board Members, Board of Governors Joshua Gallin, Special Adviser to the Chair, Office of Board Members, Board of Governors Brian M. Doyle, Wendy E. Dunn, Joseph W. Gruber, Ellen E. Meade, and Ivan Vidangos, 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; David E. Lebow, Senior Associate Director, Division of Research and Statistics, Board of Governors Antulio N. Bomfim, Senior Adviser, Division of Monetary Affairs, Board of Governors Michael Hsu,4 Associate Director, Division of Supervision and Regulation, Board of Governors; David López-Salido and Min Wei, Associate Directors, Division of Monetary Affairs, Board of Governors Glenn Follette, Deputy Associate Director, Division of Research and Statistics, Board of Governors; Christopher J. Gust, Deputy Associate Director, Division of Monetary Affairs, Board of Governors; Jeffrey D. Walker,3 Deputy Associate Director, Division of Reserve Bank Operations and Payment Systems, Board of Governors; Paul R. Wood,2 Deputy Associate Director, Division of International Finance, Board of Governors Eric C. Engstrom, Senior Adviser, Division of Research and Statistics, and Deputy Associate Director, Division of Monetary Affairs, Board of Governors Stephanie E. Curcuru, Assistant Director, Division of International Finance, Board of Governors; Giovanni Favara, Laura Lipscomb,4 Zeynep Senyuz,4 and Rebecca Zarutskie,2 Assistant Directors, Division of Monetary Affairs, Board of Governors; Shane M. Sherlund, Assistant Director, Division of Research and Statistics, Board of Governors Penelope A. Beattie,5 Section Chief, Office of the Secretary, Board of Governors; Matthew Malloy,4 Section Chief, Division of Monetary Affairs, Board of Governors Mark A. Carlson,3 Senior Economic Project Manager, Division of Monetary Affairs, Board of Governors David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors Alyssa G. Anderson,4 Anna Orlik, and Bernd Schlusche,2 Principal Economists, Division of Monetary Affairs, Board of Governors; Cristina Fuentes-Albero2 and Christopher J. Nekarda,6 Principal Economists, Division of Research and Statistics, Board of Governors Valerie Hinojosa, 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, Jeffrey Fuhrer, and Glenn D. Rudebusch, Executive Vice Presidents, Federal Reserve Banks of Atlanta, Richmond, Boston, and San Francisco, respectively Angela O'Connor,4 Marc Giannoni,2 Paolo A. Pesenti, Samuel Schulhofer-Wohl,4 Raymond Testa,4 and Nathaniel Wuerffel,4 Senior Vice Presidents, Federal Reserve Banks of New York, Dallas, New York, Chicago, New York, and New York, respectively Satyajit Chatterjee, Richard K. Crump,6 George A. Kahn, Rebecca McCaughrin,4 and Patricia Zobel,7 Vice Presidents, Federal Reserve Banks of Philadelphia, New York, Kansas City, New York, and New York, respectively Larry Wall,2 Executive Director, Federal Reserve Bank of Atlanta Edward S. Prescott, Senior Economic and Policy Advisor, Federal Reserve Bank of Cleveland Nicolas Petrosky-Nadeau,6 Senior Research Advisor, Federal Reserve Bank of San Francisco Stefania D'Amico2 and Thomas B. King,2 Senior Economists and Research Advisors, Federal Reserve Bank of Chicago Alex Richter, Senior Research Economist and Advisor, Federal Reserve Bank of Dallas Benjamin Malin, Senior Research Economist, Federal Reserve Bank of Minneapolis Review of Monetary Policy Strategy, Tools, and Communication Practices Committee participants continued their discussions related to the ongoing review of the Federal Reserve's monetary policy strategy, tools, and communication practices. Staff briefings provided an assessment of a range of monetary policy tools that the Committee could employ to provide additional economic stimulus and bolster inflation outcomes, particularly in future episodes in which the policy rate would be constrained by the effective lower bound (ELB). The staff first discussed policy rate tools, focusing on three forms of forward guidance—qualitative, which provides a nonspecific indication of the expected duration of accommodation; date-based, which specifies a date beyond which accommodation could start to be reduced; and outcome-based, which ties the possible start of a reduction of accommodation to the achievement of certain macroeconomic outcomes. The briefing addressed communications challenges associated with each form of forward guidance, including the need to avoid conveying a more negative economic outlook than the FOMC expects. Nonetheless, the staff suggested that forward guidance generally had been effective in easing financial conditions and stimulating economic activity in circumstances when the policy rate was above the ELB and when it was at the ELB. The briefing also discussed negative interest rates, a policy option implemented by several foreign central banks. The staff noted that al­though the evidence so far suggested that this tool had provided accommodation in jurisdictions where it had been employed, there were also indications of possible adverse side effects. Moreover, differences between the U.S. financial system and the financial systems of those jurisdictions suggested that the foreign experience may not provide a useful guide in assessing whether negative rates would be effective in the United States. The second part of the staff briefing focused on balance sheet policy tools. The staff discussed the benefits and costs associated with the large-scale asset purchase programs implemented by the Federal Reserve after the financial crisis. In general, the staff's review of the historical experience suggested that the benefits of large-scale asset purchase programs were significant and that many of the potential costs of such programs identified at the time either did not materialize or materialized to a smaller degree than initially feared. In addition, the staff presentation noted that—taking account of investor expectations ahead of the announcement of each new program—the effects of asset purchases did not appear to have diminished materially across consecutive programs. However, going forward, such policies might not be as effective because longer-term interest rates would likely be much lower at the onset of a future asset purchase program than they were before the financial crisis. The staff also compared the benefits and costs associated with asset purchase programs that are of a fixed cumulative size and those that are flow-based—where purchases continue at a specific pace until certain macroeconomic outcomes are achieved—and examined the potential effectiveness of using asset purchases to place ceilings on interest rates. The briefing also discussed lending programs that could facilitate the flow of credit to households or businesses. Participants discussed the relative merits of qualitative, date-based, and outcome-based forward guidance. A number of participants noted that each of these three forms of forward guidance could be effective in providing accommodation, depending on circumstances both at and away from the ELB. They also suggested that different types of forward guidance would likely be needed to address varying economic conditions, and that the communications regarding forward guidance needed to be tailored to explain the Committee's evaluation of the economic outlook. In particular, several participants emphasized that to guard against the possibility of adverse feedback loops in which forward guidance is interpreted by the public as a sign of a sharply deteriorating economic outlook, thus leading households and businesses to become even more cautious in their spending decisions, the Committee would need to clearly communicate how its announced policy could help promote better economic outcomes. Participants saw both benefits and costs associated with outcome-based forward guidance relative to other forms of forward guidance. On the one hand, relative to qualitative or date-based forward guidance, outcome-based forward guidance has the advantage of creating an explicit link between future monetary policy actions and macroeconomic conditions, thereby helping to support economic stabilization efforts and foster transparency and accountability. On the other hand, outcome-based forward guidance could be complex and difficult to explain and, hence, could potentially be less effective than qualitative or date-based forward guidance if those hurdles could not be overcome. A few participants commented that outcome-based forward guidance, tied to inflation outcomes, could be a useful tool to reinforce the Committee's commitment to its symmetric 2 percent objective. Participants also discussed the benefits and costs of using different types of balance sheet policy. Participants generally agreed that the balance sheet policies implemented by the Federal Reserve after the crisis had eased financial conditions and had contributed to the economic recovery, and that those tools had become an important part of the Committee's current toolkit. However, some participants pointed out that research had produced a sizable range of estimates of the magnitude of the economic effects of balance sheet actions. In addition, some participants noted that the effectiveness of these tools might be diminished in the future, as longer-term interest rates have declined to very low levels and would likely be even lower following an adverse shock that could lead to the resumption of large-scale asset purchases; as a result, there might be limited scope for balance sheet tools to provide accommodation. Several participants commented on the advantages and disadvantages of flow-based asset purchase programs tied to the achievement of economic outcomes. On the one hand, such programs adjusted automatically in response to the performance of the economy and, hence, were more straightforward to implement and communicate. On the other hand, flow-based asset purchase programs may result in the balance sheet rising to undesirable levels. A few participants also commented that, barring significant dislocations to particular segments of the markets, they would restrict asset purchases to Treasury securities to avoid perceptions that the Federal Reserve was engaging in credit allocation across sectors of the economy. In considering policy tools that the Federal Reserve had not used in the recent past, participants discussed the benefits and costs of using balance sheet tools to cap rates on short- or long-maturity Treasury securities through open market operations as necessary. A few participants saw benefits to capping longer-term interest rates that more directly influence household and business spending. In addition, capping longer-maturity interest rates using balance sheet tools, if judged as credible by market participants, might require a smaller amount of asset purchases to provide a similar amount of accommodation as a quantity-based program purchasing longer-maturity securities. However, many participants raised concerns about capping long-term rates. Some of those participants noted that uncertainty regarding the neutral federal funds rate and regarding the effects of rate ceiling policies on future interest rates and inflation made it difficult to determine the appropriate level of the rate ceiling or when that ceiling should be removed; that maintaining a rate ceiling could result in an elevated level of the Federal Reserve's balance sheet or significant volatility in its size or maturity composition; or that managing longer-term interest rates might be seen as interacting with the federal debt management process. By contrast, a majority of participants saw greater benefits in using balance sheet tools to cap shorter-term interest rates and reinforce forward guidance about the near-term path of the policy rate. All participants judged that negative interest rates currently did not appear to be an attractive monetary policy tool in the United States. Participants commented that there was limited scope to bring the policy rate into negative territory, that the evidence on the beneficial effects of negative interest rates abroad was mixed, and that it was unclear what effects negative rates might have on the willingness of financial intermediaries to lend and on the spending plans of households and businesses. Participants noted that negative interest rates would entail risks of introducing significant complexity or distortions to the financial system. In particular, some participants cautioned that the financial system in the United States is considerably different from those in countries that implemented negative interest rate policies, and that negative rates could have more significant adverse effects on market functioning and financial stability here than abroad. Notwithstanding these considerations, participants did not rule out the possibility that circumstances could arise in which it might be appropriate to reassess the potential role of negative interest rates as a policy tool. Overall, participants generally agreed that the forward guidance and balance sheet policies followed by the Federal Reserve after the financial crisis had been effective in providing stimulus at the ELB. With estimates of equilibrium real interest rates having declined notably over recent decades, policymakers saw less room to reduce the federal funds rate to support the economy in the event of a downturn. In addition, against a background of inflation undershooting the symmetric 2 percent objective for several years, some participants raised the concern that the scope to reduce the federal funds rate to provide support to economic activity in future recessions could be reduced further if inflation shortfalls continued and led to a decline in inflation expectations. Therefore, participants generally agreed it was important for the Committee to keep a wide range of tools available and employ them as appropriate to support the economy. Doing so would help ensure the anchoring of inflation expectations at a level consistent with the Committee's symmetric 2 percent inflation objective. Some participants noted that the form of the policy response would depend critically on the circumstances the Committee faced at the time. Several participants suggested that communicating to the public clearly and convincingly in advance about how the Committee intended to provide accommodation at the ELB would enhance public confidence and support the effectiveness of whichever tool the Committee selected. Some participants thought it would be helpful for the Committee to evaluate how its tools could be utilized in different economic scenarios, such as when longer-term interest rates were significantly below current levels, and discuss which actions would best address the challenges posed by each scenario. Several participants noted that, particularly if monetary policy became severely constrained at the ELB, expansionary fiscal policy would be especially important in addressing an economic downturn. Participants expected that, at upcoming meetings, they would continue their deliberations on the Committee's review of the monetary policy framework as well as the Committee's Statement on Longer-Run Goals and Monetary Policy Strategy. They also generally agreed that the Committee's consideration of possible modifications to its policy strategy, tools, and communication practices would take some time and that the process would be careful, deliberate, and patient. A number of participants judged that the review could be completed around the middle of 2020. Developments in Financial Markets and Open Market Operations The manager pro tem first reviewed developments in financial markets over the intermeeting period. Early in the period, market participants focused on signs of weakness in U.S. economic data with some soft data from business surveys viewed as substantiating concerns that global headwinds were spilling over to the U.S. economy. Later in the period, markets responded to news suggesting favorable developments around Brexit and a partial U.S.-China trade deal. On balance, U.S. financial conditions ended the period little changed. Regarding the outlook for U.S. monetary policy, the Open Market Desk's surveys and market-based indicators pointed to a high likelihood of a 25 basis point cut in the target range at the October meeting. The probability that survey respondents placed on this outcome was broadly similar to the probability of a 25 basis point cut ahead of the July and September meetings. Further ahead, the path implied by the medians of survey respondents' modal forecasts for the federal funds rate remained essentially flat after this meeting. Meanwhile, the market-implied path suggested that investors expected around 25 basis points of additional easing by the end of 2020, after the anticipated easing at this meeting. The manager pro tem next turned to a review of money market developments since early October. On October 11, the Committee announced its decision to maintain reserves at or above the level that prevailed in early September through a program of Treasury bill purchases and repurchase agreement (repo) operations. After the announcement, the Desk conducted regular operations that offered at least $75 billion in overnight repo funding and between $135 and $170 billion in term funding. These operations fostered conditions that helped maintain the federal funds rate within the target range through two channels. First, they provided funding in repo markets that dampened repo market pressure that would otherwise have passed through to the federal funds market, and second, they increased the supply of reserves in the banking system. In anticipation of another projected sharp decline in reserves and expected rate pressures around October 31, the Desk announced an increase in the size of overnight repos to $120 billion, and an increase in the size of the two term repo operations that crossed the October month-end to $45 billion. With respect to purchases of Treasury bills for reserve management purposes, the Desk had purchased more than half of the initial $60 billion monthly amount for October, and propositions at the five operations conducted to date had been strong. Respondents to the Desk surveys expected reserve management purchases of Treasury bills to continue at the same pace for some time. The combination of repo operations and bill purchases lifted reserve levels above those observed in early September. The manager pro tem noted that diminished willingness of some dealers to intermediate across money markets ahead of the year-end could result in upward pressure on short-term money market rates. Forward measures of market pricing continued to indicate expectations for such pressures around the year-end. The Desk planned to continue its close monitoring of reserves and money market conditions, as well as dealer participation in repo operations, particularly given balance sheet constraints heading into year-end. The Desk discussed its intentions to further adjust operations around year-end as needed to mitigate the risk of money market pressures that could adversely affect policy implementation, and to maintain over time a level of reserve balances at or above those that prevailed in early September. The manager pro tem finished by noting that the Federal Reserve Bank of New York would soon release a request for public comment on a plan to publish a series of backward looking Secured Overnight Financing Rate (SOFR) averages and a daily SOFR index to support the transition away from instruments based on LIBOR (London interbank offered rate). Publication of these series was expected to begin in the first half of 2020. 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. Review of Options for Repo Operations to Support Control of the Federal Funds Rate The staff briefed participants on the recent experience with using repo operations to support control of the federal funds rate and on possibly maintaining a role for repo operations in the monetary policy implementation framework over the longer run. Ongoing capacity for repo operations could be viewed as useful in an ample-reserves regime as a way of providing insurance against unexpected stresses in money markets that could drive the federal funds rate outside the Committee's target range over a sustained period. The staff presented two potential approaches for conducting repo operations if the Committee decided to maintain an ongoing role for such operations. Under the first approach, the Desk would conduct modestly sized, relatively frequent repo operations designed to provide a high degree of readiness should the need for larger operations arise; under the second approach, the FOMC would establish a standing fixed-rate facility that could serve as an automatic money market stabilizer.8 Assessing these two approaches involved several considerations, including the degree of assurance of control over the federal funds rate, the likelihood that participation in the Federal Reserve's repo operations could become stigmatized, the possibility that the operations could encourage the Federal Reserve's counterparties to take on excessive liquidity risks in their portfolios, and the potential disintermediation of financial transactions currently undertaken by private counterparties. Regular, modestly sized repo operations likely would pose relatively little risk of stigma or moral hazard, but they may provide less assurance of control over the federal funds rate because it might be difficult for the Federal Reserve to anticipate money market pressures and scale up its repo operations accordingly. A standing fixed-rate repo facility would likely provide substantial assurance of control over the federal funds rate, but use of the facility could become stigmatized, particularly if the rate was set at a relatively high level. Conversely, a standing facility with a rate set at a relatively low level could result in larger and more frequent repo operations than would be appropriate. And by effectively standing ready to provide a form of liquidity on an as-needed basis, such a facility could increase the risk that some institutions may take on an undesirably high amount of liquidity risk. In their comments following the staff presentation, participants emphasized the importance of maintaining reserves at a level consistent with the Committee's choice of an ample-reserves monetary policy implementation framework, in which control over the level of the federal funds rate is exercised primarily through the setting of the Federal Reserve's administered rates and in which active management of the supply of reserves is not required. Some participants indicated that, in such an environment, they would have some tolerance for allowing the federal funds rate to vary from day to day and to move occasionally outside its target range, especially in those instances associated with easily identifiable technical events; a couple of participants expressed discomfort with such misses. Participants expressed a range of views on the relative merits of the two approaches described by the staff for conducting repo operations. Many participants noted that, once an ample supply of reserves is firmly established, there might be little need for a standing repo facility or for frequent repo operations. Some of these participants indicated that a basic principle in implementing an ample-reserves framework is to maintain reserves on an ongoing basis at levels that would obviate the need for open market operations to address pressures in funding markets in all but exceptional circumstances. Many participants remarked, however, that even in an environment with ample reserves, a standing facility could serve as a useful backstop to support control of the federal funds rate in the event of outsized shocks to the system. Several of these participants also suggested that, if a standing facility were created that allowed banks to monetize a portion of their securities holdings at times of market stress, banks could possibly reduce their demand for reserves in normal times, which could make it feasible for the monetary policy implementation framework to operate with a significantly smaller quantity of reserves than would otherwise be needed. A couple of participants pointed out that establishing a standing facility would be similar to the practice of some other major central banks. A number of participants noted that, before deciding whether to implement a standing repo facility, additional work would be necessary to assess the likely implications of different design choices for a standing repo facility, such as pricing, eligible counterparties, and the set of acceptable collateral. Echoing issues raised at the Committee's June 2019 meeting, various participants commented on the need to carefully evaluate these design choices to guard against the potential for moral hazard, stigma, disintermediation risk, or excessive volatility in the Federal Reserve's balance sheet. A couple of other participants suggested that an approach based on modestly sized, frequent repo operations that could be quickly and substantially ramped up in response to emerging market pressures would mitigate the moral hazard, disintermediation, and stigmatization risks associated with a standing repo facility. Participants made no decisions at this meeting on the longer-run role of repo operations in the ample-reserves regime or on an approach for conducting repo operations over the longer run. They generally agreed that they should continue to monitor the market effects of the Federal Reserve's ongoing repo operations and Treasury bill purchases and that additional analysis of the recent period of money market dislocations or of fluctuations in the Federal Reserve's non-reserve liabilities was warranted. Some participants called for further research on the role that the financial regulatory environment or other factors may have played in the recent dislocations. Staff Review of the Economic Situation The information available for the October 29–30 meeting indicated that labor market conditions remained strong and that real gross domestic product (GDP) increased at a moderate rate in the third quarter. 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 August. Survey-based measures of longer-run inflation expectations were little changed. Total nonfarm payroll employment expanded at a slower pace in September than in the previous two months, but the average pace for the third quarter was similar to that for the first half of the year. However, the pace of job gains so far this year was slower than last year, even after accounting for the anticipated effects of the Bureau of Labor Statistics' benchmark revision to payroll employment, which will be incorporated in the published data in February 2020. The unemployment rate moved down to a 50-year low of 3.5 percent in September, while the labor force participation rate held steady and the employment-to-population ratio moved up. The unemployment rates for Asians, Hispanics, and whites each moved lower in September, but the rate for African Americans was unchanged; the unemployment rate for each group was below its level at the end of the previous economic expansion, though persistent differentials between these rates remained. The average share of workers employed part time for economic reasons in September continued to be below its level in late 2007. The rate of private-sector job openings declined in August, and the rate of quits also edged down, but both readings were still at relatively elevated levels. The four-week moving average of initial claims for unemployment insurance benefits through mid-October remained near historically low levels. Average hourly earnings for all employees rose 2.9 percent over the 12 months ending in September, roughly similar to the pace a year earlier. Total consumer prices, as measured by the PCE price index, increased 1.4 percent over the 12 months ending in August. Core PCE price inflation (which excludes changes in consumer food and energy prices) was 1.8 percent over that same 12-month period, while consumer food price inflation was well below core inflation, and consumer energy prices declined. The trimmed mean measure of 12-month PCE price inflation constructed by the Federal Reserve Bank of Dallas remained at 2 percent in August. The consumer price index (CPI) rose 1.7 percent over the 12 months ending in September, while core CPI inflation was 2.4 percent. Recent readings on survey-based measures of longer-run inflation expectations—including those from the University of Michigan Surveys of Consumers, the Blue Chip Economic Indicators, and the Desk's Survey of Primary Dealers and Survey of Market Participants—were little changed, on balance, al­though the Michigan survey measure ticked down to the low end of its recent range. Real PCE rose solidly in the third quarter following a stronger gain in the second quarter. Overall consumer spending rose steadily in recent months, and sales of light motor vehicles through September maintained their robust second-quarter pace. Key factors that influence consumer spending—including the low unemployment rate, further gains in real disposable income, high levels of households' net worth, and generally low borrowing rates—were supportive of solid real PCE growth in the near term. The Michigan survey measure of consumer sentiment rose again in October and had mostly recovered from its August slump, while the Conference Board survey measure of consumer confidence remained at a favorable level. Real residential investment turned up solidly in the third quarter following six consecutive quarters of contraction. This upturn was consistent with the rise in single-family starts in the third quarter, and building permits for such units—which tend to be a good indicator for the underlying trend in the construction of such homes—also increased. Both new and existing home sales increased, on net, in August and September. Taken together, the data on construction and sales suggested that the decline in mortgage rates since late 2018 was starting to show through to housing activity. Real nonresidential private fixed investment declined further in the third quarter. Nominal shipments of nondefense capital goods excluding aircraft decreased over August and September, and forward-looking indicators generally pointed to continued softness in business equipment spending. Orders for nondefense capital goods excluding aircraft decreased over those two months and were still below the level of shipments, most measures of business sentiment deteriorated, analysts' expectations of firms' longer-term profit growth declined somewhat further, and concerns about trade developments continued to weigh on firms' investment decisions. Business expenditures for nonresidential structures decreased markedly further in the third 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 decline through mid-October. Industrial production declined in September and was notably lower than at the beginning of the year. Production in September was held down by the strike at General Motors, and automakers' schedules indicated that assemblies of light motor vehicles would remain low in October before rebounding in November. Overall manufacturing production appeared likely to remain soft in coming months, reflecting generally weak readings on new orders from national and regional manufacturing surveys, declining domestic business investment, weak GDP growth abroad, and a persistent drag from trade developments. Total real government purchases rose at a slower pace in the third quarter than in the second quarter. Real federal purchases decelerated, reflecting smaller increases in both defense and nondefense spending. Federal hiring of temporary workers for next year's decennial census was quite modest during the quarter. Real purchases by state and local governments also rose at a slower pace, as the boost from a faster expansion in state and local payrolls was partially offset by a decrease in real construction spending by these governments. The nominal U.S. international trade deficit widened in August, reflecting a subdued pace of export growth and a moderate pace of import growth. Export growth was subdued due to lackluster exports of services and capital goods. Advance estimates for September suggested that goods imports fell more than exports, pointing to a narrowing of the monthly trade deficit. The Bureau of Economic Analysis estimated that net exports made a slight negative contribution to real GDP growth in the third quarter. Incoming data suggested that growth in the foreign economies remained subpar in the third quarter. In several advanced foreign economies (AFEs), indicators showed continued weakness in the manufacturing sector, especially in the euro area and the United Kingdom. Similarly, GDP growth remained subdued in China and several other emerging economies in Asia, and indicators suggested that growth in Latin America also remained weak. Foreign inflation appeared to have moderated a bit in the third quarter, reflecting declines in energy prices. Inflation remained relatively low in most foreign economies. Staff Review of the Financial Situation Investor sentiment weakened over the early part of the intermeeting period, reflecting a few weaker-than-expected domestic data releases, but later strengthened on increased optimism regarding ongoing trade negotiations between the United States and China and positive Brexit news. On net, equity prices and corporate bond spreads were little changed, and the Treasury yield curve steepened a bit. Financing conditions for businesses and households remained generally supportive of spending and economic activity. September FOMC communications were viewed as slightly less accommodative than expected, with investors reportedly surprised by the Summary of Economic Projections showing that a majority of FOMC participants anticipated no further easing this year. Incoming data early in the intermeeting period—particularly the disappointing readings on business activity—prompted a decline in the market-implied path for the policy rate, but that decline was later partly reversed as market participants apparently grew more optimistic on the prospects for a U.S.–China trade deal and Brexit negotiations. Late in the period, quotes on federal funds futures options contracts indicated that market participants assigned a very high probability to a 25 basis point reduction in the target range of the federal funds rate at the October FOMC meeting. In addition, market-implied expectations for the federal funds rate at year-end and next year moved down. Yields on nominal U.S. Treasury securities moved down in the early part of the intermeeting period but later retraced their declines. On net, the Treasury yield curve steepened a bit, mostly reflecting a modest decline in short-term yields. Measures of inflation compensation over the next 5 years and 5 to 10 years ahead based on Treasury Inflation-Protected Securities inched down and remained near multiyear low levels. Broad stock price indexes fell by as much as 4 percent during the first half of the intermeeting period but recovered afterward, ending the period roughly unchanged. Option-implied volatility on the S&P 500 index declined slightly and ended the period below the middle of its historical distribution. On net, corporate credit spreads were little changed. Domestic short-term funding markets were volatile in mid-September and exhibited additional, albeit modest, pressures around the September quarter-end and the mid-October Treasury settlement date. These pressures were alleviated in part by the Desk's overnight and term repo operations that began on September 17. After smoothing through rate volatility over the period, interest rates for overnight unsecured and secured funding declined roughly in line with the reduction in the target range for the federal funds rate at the September FOMC meeting and the associated 30 basis point decrease in the interest on excess reserves (IOER) rate. The effective federal funds rate (EFFR) was more volatile than usual over the intermeeting period, with the EFFR–IOER spread ranging between 2 basis points and 10 basis points. Rates on overnight commercial paper (CP) and short-term negotiable certificates of deposit declined fairly quickly following the announcement of Desk operations on September 17, al­though some CP rates remained elevated into October. The FOMC's October 11 announcement of Treasury bill purchases and repo operations to maintain reserves at or above their early-September level appeared to improve expectations about funding market conditions through the remainder of the year. These communications reportedly did not materially affect yields on longer-term Treasury securities. Financial markets in the AFEs followed a pattern similar to that seen in the United States. AFE financial conditions tightened early in the intermeeting period on disappointing activity data, both in the United States and abroad, and subsequently recovered on perceived better prospects for trade and Brexit negotiations. Movements in the exchange value of the dollar against most currencies were relatively modest, and the broad dollar index declined slightly. Relative to the dollar, the British pound appreciated on Brexit developments, and the Argentinian peso continued to depreciate amid the country's political developments. The mid-September increases in U.S. Treasury repo rates spilled over to borrowing rates in the international dollar funding market. However, the measures taken by the Federal Reserve to keep the federal funds rate in the target range also calmed dollar funding conditions in the foreign exchange swap market. Financing conditions for nonfinancial businesses remained generally accommodative during the intermeeting period. Gross issuance of corporate bonds, which was strong in September, experienced a typical seasonal decline in October. Gross issuance of institutional leveraged loans remained solid but slightly below 2019 monthly averages. Meanwhile, growth of commercial and industrial (C&I) loans at banks was modest in the third quarter as a whole. Respondents to the October 2019 Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS) reported that borrower demand weakened for C&I loans over the third quarter, while lending standards on such loans were about unchanged. Gross equity issuance through both initial and seasoned offerings picked up to a strong pace in September but moderated in October. The credit quality of nonfinancial corporations deteriorated slightly in recent months but remained solid on balance. Credit conditions for both small businesses and municipalities stayed accommodative on net. In the commercial real estate (CRE) sector, financing conditions also remained generally accommodative. The volume of agency and non-agency commercial mortgage-backed securities issuance was strong in September, in part supported by recent declines in interest rates. Growth of CRE loans on banks' books was little changed in the third quarter. Banks in the October SLOOS reported tighter lending standards for all types of CRE loans; they also reported weaker demand for construction lending and stronger demand for the other CRE lending categories. Financing conditions in the residential mortgage market remained accommodative on balance. Mortgage rates were little changed since the September FOMC meeting and stayed near their lowest level since mid-2016. In September, home-purchase originations remained around the relatively high level seen during the previous two months, while refinancing originations jumped to their highest level since late 2012. In the October SLOOS, banks left their lending standards basically unchanged for most residential real estate loan categories over the third quarter. However, for subprime loans, a moderate net percentage of banks reported tightening standards. Financing conditions in consumer credit markets remained generally supportive of household spending, al­though conditions continued to be tight for credit card borrowers with nonprime credit scores. Interest rates on auto loans fell, on net, since the beginning of the year, and interest rates on credit card accounts leveled off through August. According to the October SLOOS, commercial banks tightened their standards on credit cards and other consumer loans over the third quarter. Additionally, banks reported that their standards on auto loans and their willingness to make consumer installment loans were about unchanged on balance. The staff provided an update on its assessments of potential risks to financial stability. On balance, the staff characterized the financial vulnerabilities of the U.S. financial system as moderate. The staff judged that, for many asset classes, valuation pressures eased over the past year. Appetite for risk in the leveraged loan market remained elevated, but less so than last year, especially for lower-rated loans. In addition, CRE prices remained high relative to rental income. In assessing vulnerabilities stemming from borrowing in the household and business sectors, the staff noted that, while household borrowing continued to decline relative to nominal GDP, business leverage remained at or near record-high levels. The risks associated with leverage at financial institutions were viewed as being low, as they have been for some time, largely because of high capital ratios at large banks. Nonetheless, the staff noted that the resilience of financial institutions could be undermined by low interest rates and banks' announced plans to increase payouts to shareholders. The staff assessed vulnerabilities stemming from funding risk as modest. In addition, the staff discussed the potential for liquidity transformation by open-ended mutual funds investing in bank loans to lead to market dislocations under stress scenarios, while noting that outflows from such funds have not often been associated with such dislocations. Staff Economic Outlook The projection for U.S. real GDP growth prepared by the staff for the October FOMC meeting was revised down a little for the second half of this year relative to the previous projection. This revision reflected the estimated effects of the strike at General Motors along with some other small factors. Even without this downward revision, real GDP was forecast to rise more slowly in the second half of the year than in the first half, mostly because of continued soft business investment and slower increases in government spending. The medium-term projection for real GDP growth was essentially unchanged, as revisions to the staff's assumptions about factors on which the forecast was conditioned, such as financial market variables, were small and offsetting. Real GDP was expected to decelerate modestly over the medium term, mostly because of a waning boost from fiscal policy. Output was forecast to expand at a rate a little above the staff's estimate of its potential rate of growth in 2019 and 2020 and then to slow to a pace slightly below potential output growth in 2021 and 2022. The unemployment rate was projected to be roughly flat through 2022 and to remain below the staff's estimate of its longer-run natural rate. The staff's forecast for core PCE price inflation this year was revised down a little in response to recent data. Beyond this year, the projection for core inflation was unrevised, and the forecast for total inflation was a little lower in 2020 because of a downward revision in projected consumer energy prices. Both total inflation and core inflation were forecast to move up slightly next year, as the low inflation readings early this year were viewed as transitory; nevertheless, both inflation measures were forecast to continue to run somewhat below 2 percent through 2022. The staff continued to view the uncertainty around its projections for real GDP growth, the unemployment rate, and inflation as generally similar to the average of the past 20 years. Moreover, the staff still judged that the risks to the forecast for real GDP growth were tilted to the downside, with a corresponding skew to the upside for the unemployment rate. Important factors in that assessment were that international trade tensions and foreign economic developments seemed more likely to move in directions that could have significant negative effects on the U.S. economy than to resolve more favorably than assumed. In addition, softness in business investment and manufacturing so far this year was seen as pointing to the possibility of a more substantial slowing in economic growth than the staff projected. The risks to the inflation projection were also viewed as having a downward skew, in part because of the downside risks to the forecast for economic activity. Participants' Views on Current Conditions and the Economic Outlook Participants agreed that the labor market had remained strong over the intermeeting period and that economic activity had risen at a moderate rate. Job gains had been solid, on average, in recent months, and the unemployment rate had remained low. Al­though household spending had risen at a strong pace, business fixed investment and exports had remained weak. On a 12‑month basis, overall inflation and inflation for items other than food and energy were running below 2 percent. Market-based measures of inflation compensation remained low; survey-based measures of longer-term inflation expectations were little changed. Participants generally viewed the economic outlook as positive. Participants judged that sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective were the most likely outcomes, and they indicated that their views on these outcomes had changed little since the September meeting. Uncertainties associated with trade tensions as well as geopolitical risks had eased somewhat, though they remained elevated. In addition, inflation pressures remained muted. The risk that a global growth slowdown would further weigh on the domestic economy remained prominent. In their discussion of the household sector, participants agreed that consumer spending was increasing at a strong pace. They also generally expected that, in the period ahead, household spending would likely remain on a firm footing, supported by strong labor market conditions, rising incomes, and favorable financial conditions. In addition, survey measures of consumer confidence remained high, and a couple of participants commented that business contacts in consumer-facing industries reported strong demand. Many participants noted that components of household spending that are thought to be particularly sensitive to interest rates had improved, including purchases of consumer durables. In addition, residential investment had turned up. Most participants who reported on spending by households in their Districts also cited favorable conditions for consumer spending, al­though several participants reported mixed data on spending or an increase in precautionary savings in their Districts. In their discussions of the business sector, participants saw trade tensions and concerns about the global growth outlook as the main factors contributing to weak business investment and exports and the associated restraint on domestic economic growth. Moreover, participants generally expected that trade uncertainty and sluggish global growth would continue to damp investment spending and exports. A number of participants judged that tight labor market conditions were also causing firms to forego investment expenditures, or invest in automation systems to reduce the need for additional hiring. However, business sentiment appeared to remain strong for some industries, particularly those most closely connected with consumer goods. Participants discussed developments in the manufacturing, energy, and agricultural sectors of the U.S. economy. Manufacturing production remained weak, and continuing concerns about global growth and trade uncertainty suggested that conditions were unlikely to improve materially over the near term. In addition, the labor strike at General Motors had disrupted motor vehicle output, and ongoing issues at Boeing were slowing manufacturing in the commercial aircraft industry. A couple of participants noted that activity was particularly weak for the energy industry, in part because of low petroleum prices. In addition, a few participants noted ongoing challenges in the agricultural sector, including those associated with lower crop yields, tariffs, weak export demand, and difficult financial positions for many farmers. One bright spot for the agricultural sector was that some commodity prices had firmed recently. Participants judged that conditions in the labor market remained strong, with the unemployment rate near historical lows and continued solid job gains, on average. In addition, some participants commented on the strength or improvement in labor force participation nationally or in their Districts. However, the pace of increases in employment had slowed some, on net, in recent months. On the one hand, the slowing could be interpreted as a natural consequence of the economy being near full employment. On the other hand, slowing job gains might also be indicative of some cooling in labor demand, which may be consistent with an observed decline in the rate of job openings and decreases in other measures of labor market tightness. Several participants commented that the preliminary benchmark revision released in August by the Bureau of Labor Statistics had indicated that payroll employment gains would likely show less momentum coming into this year once those revisions are incorporated in published data early next year. Growth of wages had also slowed this year by some measures. Consistent with strong national data on the labor market, business contacts in many Districts indicated continued strong labor demand, with firms still reporting difficulties finding qualified workers, or broadening their recruiting to include traditionally marginalized groups. In their discussion of inflation developments, participants noted that readings on overall and core PCE inflation, measured on a 12-month change basis, had continued to run below the Committee's symmetric 2 percent objective. While survey-based measures of longer-term inflation expectations were generally little changed, some measures of households' inflation expectations had moved down to historically low levels. Market-based measures of inflation compensation remained low, with some longer-term measures being at or near multi-year lows. Weakness in the global economy, perceptions of downside risks to growth, and subdued global inflation pressures were cited as factors tilting inflation risk to the downside, and a few participants commented that they expected inflation to run below 2 percent for some time. Some other participants, however, saw the recent inflation data as consistent with their previous assessment that much of the weakness seen early in the year would be transitory, or that some recent monthly readings seemed broadly consistent with the Committee's longer-run inflation objective of 2 percent. A couple of participants noted that some measures of inflation could temporarily move above 2 percent early next year because of the transitory effects of tariffs. Participants also discussed risks regarding the outlook for economic activity, which remained tilted to the downside. Some risks were seen to have eased a bit, although they remained elevated. There were some tentative signs that trade tensions were easing, the probability of a no-deal Brexit was judged to have lessened, and some other geopolitical tensions had diminished. Several participants noted that statistical models designed to gauge the probability of recession, including those based on information from the yield curve, suggested that the likelihood of a recession occurring over the medium term had fallen somewhat over the intermeeting period. However, other downside risks had not diminished. In particular, some further signs of a global slowdown in economic growth emerged; weakening in the global economy could further restrain the domestic economy, and the risk that the weakness in domestic business spending, manufacturing, and exports could give rise to slower hiring and weigh on household spending remained prominent. Among those participants who commented on financial stability, most highlighted the risks associated with high levels of corporate indebtedness and elevated valuation pressures for a variety of risky assets. Al­though financial stability risks overall were seen as moderate, several participants indicated that imbalances in the corporate debt market had grown over the economic expansion and raised the concern that deteriorating credit quality could lead to sharp increases in risk spreads in corporate bond markets; these developments could amplify the effects of an adverse shock to the economy. Several participants were concerned that some banks had reduced the sizes of their capital buffers at a time when they should be rising. A few participants observed that valuations in equity and bond markets were high by historical standards and that CRE valuations were also elevated. A couple of participants indicated that market participants may be overly optimistic in the pricing of risk for corporate debt. A couple of participants judged that the monitoring of financial stability vulnerabilities should also encompass risks related to climate change. In their consideration of the monetary policy options at this meeting, most participants believed that a reduction of 25 basis points in the target range for the federal funds rate would be appropriate. In discussing the reasons for such a decision, these participants continued to point to global developments weighing on the economic outlook, the need to provide insurance against potential downside risks to the economic outlook, and the importance of returning inflation to the Committee's symmetric 2 percent objective on a sustained basis. A couple of participants who were supportive of a rate cut at this meeting indicated that the decision to reduce the federal funds rate by 25 basis points was a close call relative to the option of leaving the federal funds rate unchanged at this meeting. Many participants judged that an additional modest easing at this meeting was appropriate in light of persistent weakness in global growth and elevated uncertainty regarding trade developments. Nonetheless, these participants noted that incoming data had continued to suggest that the economy had proven resilient in the face of continued headwinds from global developments and that previous adjustments to monetary policy would continue to help sustain economic growth. In addition, several participants suggested that a modest easing of policy at this meeting would likely better align the target range for the federal funds rate with a variety of indicators used to assess the appropriate policy stance, including estimates of the neutral interest rate and the slope of the yield curve. A couple of participants judged that there was more room for the labor market to improve. Accordingly, they saw further accommodation as best supporting both of the Committee's dual-mandate objectives. Many participants continued to view the downside risks surrounding the economic outlook as elevated, further underscoring the case for a rate cut at this meeting. In particular, risks to the outlook associated with global economic growth and international trade were still seen as significant despite some encouraging geopolitical and trade-related developments over the intermeeting period. In light of these risks, a number of participants were concerned that weakness in business spending, manufacturing, and exports could spill over to labor markets and consumer spending and threaten the economic expansion. A few participants observed that the considerations favoring easing at this meeting were reinforced by the proximity of the federal funds rate to the ELB. In their view, providing adequate accommodation while still away from the ELB would best mitigate the possibility of a costly return to the ELB. Many participants also cited the level of inflation or inflation expectations as justifying a reduction of 25 basis points in the federal funds rate at this meeting. Inflation continued to run below the Committee's symmetric 2 percent objective, and inflationary pressures remained muted. Several participants raised concerns that measures of inflation expectations remained low and could decline further without a more accommodative policy stance. A couple of these participants, pointing to experiences in Japan and the euro area, were concerned that persistent inflation shortfalls could lead to a decline in longer-run inflation expectations and less room to reduce the federal funds rate in the event of a future recession. In general, the participants who justified further easing at this meeting based on considerations related to inflation viewed this action as helping to move inflation up to the Committee's 2 percent objective on a sustained basis and to anchor inflation expectations at levels consistent with that objective. Some participants favored maintaining the existing target range for the federal funds rate at this meeting. These participants suggested that the baseline projection for the economy remained favorable, with inflation expected to move up and stay near the Committee's 2 percent objective. They also judged that policy accommodation was already adequate and, in light of lags in the transmission of monetary policy, preferred to take some time to assess the economic effects of the Committee's previous policy actions before easing policy further. Several participants noted that downside risks had diminished over the intermeeting period and saw little indication that weakness in business sentiment was spilling over into labor markets and consumer spending. A few participants raised the concern that a further easing of monetary policy at this meeting could encourage excessive risk-taking and exacerbate imbalances in the financial sector. With regard to monetary policy beyond this meeting, most participants judged that the stance of policy, after a 25 basis point reduction at this meeting, would be well calibrated to support the outlook of moderate growth, a strong labor market, and inflation near the Committee's symmetric 2 percent objective and likely would remain so as long as incoming information about the economy did not result in a material reassessment of the economic outlook. However, participants noted that policy was not on a preset course and that they would be monitoring the effects of the Committee's recent policy actions, as well as other information bearing on the economic outlook, in assessing the appropriate path of the target range for the federal funds rate. A couple of participants expressed the view that the Committee should reinforce its postmeeting statement with additional communications indicating that another reduction in the federal funds rate was unlikely in the near term unless incoming information was consistent with a significant slowdown in the pace of economic activity. Committee Policy Action In their discussion of monetary policy for this meeting, members noted that information received since the September meeting indicated that the labor market remained strong and that economic activity had been rising at a moderate rate. Job gains had been solid, on average, in recent months, and the unemployment rate had remained low. Household spending had been rising at a strong pace. However, business fixed investment and exports remained weak, as softness in global growth and international trade developments continued to weigh on those sectors. On a 12-month basis, both the overall inflation rate and inflation for items other than food and energy were running below 2 percent. Market-based measures of inflation compensation remained low. Survey-based measures of longer-term inflation expectations were little changed. In light of the implications of global developments for the economic outlook as well as muted inflation pressures, most members agreed to lower the target range for the federal funds rate to 1-1/2 to 1-3/4 percent at this meeting. The members who supported this action viewed it as consistent with helping offset the effects on aggregate demand of weak global growth and trade developments, insuring against downside risks arising from those sources, and promoting a more rapid return of inflation to the Committee's symmetric 2 percent objective. Two members preferred to maintain the current target range for the federal funds rate at this meeting. These members indicated that the economic outlook remained positive and that they anticipated, under an unchanged policy stance, continued strong labor market conditions and solid growth in activity, with inflation gradually moving up to the Committee's 2 percent objective. 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 maximum-employment objective and its symmetric 2 percent inflation objective. They also agreed that those 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. With regard to the postmeeting statement, members agreed to update the language of the Committee's description of incoming data to acknowledge that investment spending and U.S. exports had remained weak. In describing the monetary policy outlook, they also agreed to remove the "act as appropriate" language and emphasize that the Committee would continue to monitor the implications of incoming information for the economic outlook as it assessed the appropriate path of the target range for the federal funds rate. This change was seen as consistent with the view that the current stance of monetary policy was likely to remain appropriate as long as the economy performed broadly in line with the Committee's expectations and that policy was not on a preset course and could change if developments emerged that led to a material reassessment of the economic outlook. 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 October 31, 2019, 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. In light of recent and expected increases in the Federal Reserve's non-reserve liabilities, the Committee directs the Desk to purchase Treasury bills at least into the second quarter of next year to maintain over time ample reserve balances at or above the level that prevailed in early September 2019. The Committee also directs the Desk to conduct term and overnight repurchase agreement operations at least through January of next year to ensure that the supply of reserves remains ample even during periods of sharp increases in non-reserve liabilities, and to mitigate the risk of money market pressures that could adversely affect policy implementation. In addition, the Committee directs the Desk to conduct 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 1.45 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 all principal payments from the Federal Reserve's holdings of Treasury securities and to continue reinvesting all principal payments from the Federal Reserve's holdings of agency debt and agency mortgage-backed securities received during each calendar month. Principal payments from agency debt and agency mortgage-backed securities up to $20 billion per month will continue to be reinvested in Treasury securities to roughly match the maturity composition of Treasury securities outstanding; principal payments in excess of $20 billion per month will continue to be reinvested in agency mortgage-backed securities. 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 remains strong and that economic activity has been rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although household spending has been rising at a strong pace, business fixed investment and exports remain weak. On a 12‑month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the Committee decided to lower the target range for the federal funds rate to 1-1/2 to 1-3/4 percent. This action supports the Committee's view that sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective are the most likely outcomes, but uncertainties about this outlook remain. The Committee will continue to monitor the implications of incoming information for the economic outlook as it assesses the appropriate path of the target range for the federal funds rate. 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, Michelle W. Bowman, Lael Brainard, James Bullard, Richard H. Clarida, Charles L. Evans, and Randal K. Quarles. Voting against this action: Esther L. George and Eric Rosengren. President George dissented at this meeting because she believed that an unchanged setting of monetary policy was appropriate based on incoming data and the outlook for economic activity over the medium term. Recognizing risks to the outlook from the effects of trade developments and weaker global activity, President George would be prepared to adjust policy should incoming data point to a materially weaker outlook for the economy. President Rosengren dissented because he judged that monetary policy was already accommodative and that additional accommodation was not needed for an economy in which labor markets are very tight. He judged that providing additional accommodation posed risks of further inflating the prices of risky assets and encouraging households and firms to take on too much leverage. Consistent with the Committee's decision to lower the target range for the federal funds rate to 1-1/2 to 1-3/4 percent, the Board of Governors voted unanimously to lower the interest rate paid on required and excess reserve balances to 1.55 percent and voted unanimously to approve a 1/4 percentage point decrease in the primary credit rate to 2.25 percent, effective October 31, 2019. It was agreed that the next meeting of the Committee would be held on Tuesday–Wednesday, December 10–11, 2019. The meeting adjourned at 9:50 a.m. on October 30, 2019. Notation Vote By notation vote completed on October 8, 2019, the Committee unanimously approved the minutes of the Committee meeting held on September 17–18, 2019. Videoconference meeting of October 4, 2019 The Committee met by videoconference on October 4, 2019, to review developments in money markets and to discuss steps the Committee could take to facilitate efficient and effective implementation of monetary policy. The staff reviewed recent developments in money markets and the effect of the Desk's continued offering of overnight and term repo operations. Staff analysis and market commentary suggested that many factors contributed to the funding stresses that emerged in mid-September. In particular, financial institutions' internal risk limits and balance sheet costs may have slowed the distribution of liquidity across the system at a time when reserves had dropped sharply and Treasury issuance was elevated. Al­though money market conditions had since improved, market participants expressed uncertainty about how funding market conditions may evolve over coming months, especially around year-end. Further out, the April 2020 tax season, with associated reductions in reserves around that time, was viewed as another point at which money market pressures could emerge. The manager pro tem reviewed options that the Committee could consider to boost the level of reserves in the banking system and to address temporary money market pressures that could adversely affect monetary policy implementation. These options included a program of Treasury bill purchases coupled with overnight and term repo operations to maintain reserves at or above their early September level. During their discussion, all FOMC participants agreed that control over the federal funds rate was a priority and that recent money market developments suggested it was appropriate to consider steps at this time to maintain a level of reserves consistent with the Committee's chosen ample-reserves regime. Given the projected decline in reserves around year-end and in the spring of 2020, they judged that it was important to reach consensus soon on a near-term plan and associated communications. All participants expressed support for a plan to purchase Treasury bills into the second quarter of 2020 and to continue conducting overnight and term repo operations at least through January of next year. Many participants supported conducting operations to maintain reserve balances around the level that prevailed in early September. Some others suggested moving to an even higher level of reserves to provide an extra buffer and greater assurance of control over the federal funds rate. In discussing the pace of Treasury bill purchases, many participants supported a relatively rapid pace to boost reserve levels quickly, while others supported a more moderate pace of purchases. Participants generally judged that Treasury bill purchases and the associated increase in reserves would, over time, result in a gradual reduction in the need for repo operations. A few participants indicated that purchasing Treasury notes and bonds with limited remaining maturities could also be considered as a way to boost reserves, particularly if the Federal Reserve faced constraints on the pace at which it could purchase Treasury bills. Participants generally acknowledged some uncertainty over the efficient and effective level of reserves and noted it would be prudent to continue to monitor money market developments and stand ready to adjust the plan as necessary. Overall, participants agreed that the pace of purchases as well as the parameters of the repo operations were technical details of monetary policy implementation not intended to affect the stance of monetary policy and should be communicated as such. Most participants preferred not to wait until the October 29–30 FOMC meeting to issue a public statement regarding the planned Treasury bill purchases and repo operations. They noted that releasing a statement before the October 29–30 FOMC meeting would help reinforce the point that these actions were technical and not intended to affect the stance of policy. In addition, a few participants remarked that an earlier release would allow the Desk to begin boosting the level of reserves sooner. A couple of participants, however, wanted to wait until the October 29–30 FOMC meeting to announce the plan so as not to surprise market participants or lead them to infer that the Committee regarded the situation as dire and thus requiring immediate action. The Chair proposed having the staff produce a draft statement that the Committee could comment on early in the following week. Formal approval could occur by notation vote with an anticipated release of a statement to the public on October 11, 2019. Participants discussed longer-term issues that the Committee might want to study once the near-term plan was in place. In particular, many participants mentioned that the Committee may want to continue its previous discussion of a standing repo facility as a part of the long-run implementation framework. Almost all of these participants noted that such a facility was an option to provide a backstop to buffer shocks that could adversely affect policy implementation, and several of these participants mentioned the potential for the facility to support banks' liquidity risk management while reducing the demand for reserves. Other participants, instead, highlighted that policy implementation had worked well with larger quantities of reserves and focused their discussion on actions to firmly establish an ample supply of reserves over the longer run. A number of participants noted that a discussion of a broader range of factors that affect the level and volatility of reserves may be appropriate at a future meeting. On October 11, 2019, the Committee approved by notation vote the following statement that outlines steps to ensure that the supply of reserves remains ample so that control over the level of the federal funds rate and other short-term interest rates is exercised primarily through the setting of the Federal Reserve's administered rates, and in which active management of the supply of reserves is not required. STATEMENT REGARDING MONETARY POLICY IMPLEMENTATION (Adopted October 11, 2019) Consistent with its January 2019 Statement Regarding Monetary Policy Implementation and Balance Sheet Normalization, the Committee reaffirms its intention to implement monetary policy in a regime in which an ample supply of reserves ensures that control over the level of the federal funds rate and other short-term interest rates is exercised primarily through the setting of the Federal Reserve's administered rates, and in which active management of the supply of reserves is not required. To ensure that the supply of reserves remains ample, the Committee approved by notation vote completed on October 11, 2019, the following steps: In light of recent and expected increases in the Federal Reserve's non-reserve liabilities, the Federal Reserve will purchase Treasury bills at least into the second quarter of next year in order to maintain over time ample reserve balances at or above the level that prevailed in early September 2019. In addition, the Federal Reserve will conduct term and overnight repurchase agreement operations at least through January of next year to ensure that the supply of reserves remains ample even during periods of sharp increases in non-reserve liabilities, and to mitigate the risk of money market pressures that could adversely affect policy implementation. These actions are purely technical measures to support the effective implementation of the FOMC's monetary policy, and do not represent a change in the stance of monetary policy. The Committee will continue to monitor money market developments as it assesses the level of reserves most consistent with efficient and effective policy implementation. The Committee stands ready to adjust the details of these plans as necessary to foster efficient and effective implementation of monetary policy. In connection with these plans, the Federal Open Market Committee voted unanimously to authorize and direct the Federal Reserve Bank of New York, until instructed otherwise, to execute transactions in the System Open Market Account in accordance with the following domestic policy directive: "Effective October 15, 2019, 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. In light of recent and expected increases in the Federal Reserve's non-reserve liabilities, the Committee directs the Desk to purchase Treasury bills at least into the second quarter of next year to maintain over time ample reserve balances at or above the level that prevailed in early September 2019. The Committee also directs the Desk to conduct term and overnight repurchase agreement operations at least through January of next year to ensure that the supply of reserves remains ample even during periods of sharp increases in non-reserve liabilities, and to mitigate the risk of money market pressures that could adversely affect policy implementation. In addition, the Committee directs the Desk to conduct 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 1.70 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 all principal payments from the Federal Reserve's holdings of Treasury securities and to continue reinvesting all principal payments from the Federal Reserve's holdings of agency debt and agency mortgage-backed securities received during each calendar month. Principal payments from agency debt and agency mortgage-backed securities up to $20 billion per month will continue to be reinvested in Treasury securities to roughly match the maturity composition of Treasury securities outstanding; principal payments in excess of $20 billion per month will continue to be reinvested in agency mortgage-backed securities. 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." _______________________ 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 the discussion of the review of monetary policy strategy, tools, and communication practices. Return to text 3. Attended through the discussion of the review of options for repo operations to support control of the federal funds rate. Return to text 4. Attended the discussion of developments in financial markets and open market operations through the discussion of the review of options for repo operations to support control of the federal funds rate. Return to text 5. Attended through the discussion of developments in financial markets and open market operations. Return to text 6. Attended the discussion of economic developments and the outlook. Return to text 7. Attended the discussion of developments in financial markets and open market operations through the end of the meeting. Return to text 8. The staff briefed the Committee in June 2019 on the possible role of a standing repo facility in the monetary policy implementation framework. Return to text

2019-10-11

Statement

Consistent with its January 2019 Statement Regarding Monetary Policy Implementation and Balance Sheet Normalization, the Committee reaffirms its intention to implement monetary policy in a regime in which an ample supply of reserves ensures that control over the level of the federal funds rate and other short-term interest rates is exercised primarily through the setting of the Federal Reserve's administered rates, and in which active management of the supply of reserves is not required. To ensure that the supply of reserves remains ample, the Committee approved by notation vote completed on October 11, 2019 the following steps: In light of recent and expected increases in the Federal Reserve's non-reserve liabilities, the Federal Reserve will purchase Treasury bills at least into the second quarter of next year in order to maintain over time ample reserve balances at or above the level that prevailed in early September 2019. In addition, the Federal Reserve will conduct term and overnight repurchase agreement operations at least through January of next year to ensure that the supply of reserves remains ample even during periods of sharp increases in non-reserve liabilities, and to mitigate the risk of money market pressures that could adversely affect policy implementation. These actions are purely technical measures to support the effective implementation of the FOMC's monetary policy, and do not represent a change in the stance of monetary policy. The Committee will continue to monitor money market developments as it assesses the level of reserves most consistent with efficient and effective policy implementation. The Committee stands ready to adjust the details of these plans as necessary to foster efficient and effective implementation of monetary policy. In connection with these plans, the Federal Open Market Committee voted unanimously to authorize and direct the Federal Reserve Bank of New York, until instructed otherwise, to execute transactions in the System Open Market Account in accordance with the following domestic policy directive: "Effective October 15, 2019, 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. In light of recent and expected increases in the Federal Reserve's non-reserve liabilities, the Committee directs the Desk to purchase Treasury bills at least into the second quarter of next year to maintain over time ample reserve balances at or above the level that prevailed in early September 2019. The Committee also directs the Desk to conduct term and overnight repurchase agreement operations at least through January of next year to ensure that the supply of reserves remains ample even during periods of sharp increases in non-reserve liabilities, and to mitigate the risk of money market pressures that could adversely affect policy implementation. In addition, the Committee directs the Desk to conduct 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 1.70 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 all principal payments from the Federal Reserve's holdings of Treasury securities and to continue reinvesting all principal payments from the Federal Reserve's holdings of agency debt and agency mortgage-backed securities received during each calendar month. Principal payments from agency debt and agency mortgage-backed securities up to $20 billion per month will continue to be reinvested in Treasury securities to roughly match the maturity composition of Treasury securities outstanding; principal payments in excess of $20 billion per month will continue to be reinvested in agency mortgage-backed securities. 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." More information about these plans may be found on the Federal Reserve Bank of New York's website. Frequently Asked Questions for the Federal Open Market Committee's Statement Regarding Monetary Policy Implementation (PDF) Statement Regarding Treasury Bill Purchases and Repurchase Operations FAQs: Repurchase Agreement Operations FAQs: Treasury Reserve Management and Reinvestment Purchases

N/A

Minute

Minutes of the Federal Open Market Committee October 29-30, 2019 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 29, 2019, at 9:00 a.m. and continued on Wednesday, October 30, 2019, at 9:00 a.m.1 PRESENT: Jerome H. Powell, Chair John C. Williams, Vice Chair Michelle W. Bowman Lael Brainard James Bullard Richard H. Clarida Charles L. Evans Esther L. George Randal K. Quarles Eric Rosengren Patrick Harker, Robert S. Kaplan, Neel Kashkari, Loretta J. Mester, and Michael Strine, Alternate Members of the Federal Open Market Committee Thomas I. Barkin, Raphael W. Bostic, and Mary C. Daly, Presidents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco, 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 Stacey Tevlin, Economist Rochelle M. Edge, Eric M. Engen, Anna Paulson, Christopher J. Waller, William Wascher, and Beth Anne Wilson, Associate Economists Lorie K. Logan, Manager pro tem, System Open Market Account Ann E. Misback, Secretary, Office of the Secretary, Board of Governors Eric Belsky,2 Director, Division of Consumer and Community Affairs, Board of Governors; Matthew J. Eichner,3 Director, Division of Reserve Bank Operations and Payment Systems, Board of Governors; Andreas Lehnert, Director, Division of Financial Stability, Board of Governors Jennifer J. Burns, Deputy Director, Division of Supervision and Regulation, 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; Trevor A. Reeve, Deputy Director, Division of Monetary Affairs, Board of Governors Jon Faust, Senior Special Adviser to the Chair, Office of Board Members, Board of Governors Joshua Gallin, Special Adviser to the Chair, Office of Board Members, Board of Governors Brian M. Doyle, Wendy E. Dunn, Joseph W. Gruber, Ellen E. Meade, and Ivan Vidangos, 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; David E. Lebow, Senior Associate Director, Division of Research and Statistics, Board of Governors Antulio N. Bomfim, Senior Adviser, Division of Monetary Affairs, Board of Governors Michael Hsu,4 Associate Director, Division of Supervision and Regulation, Board of Governors; David López-Salido and Min Wei, Associate Directors, Division of Monetary Affairs, Board of Governors Glenn Follette, Deputy Associate Director, Division of Research and Statistics, Board of Governors; Christopher J. Gust, Deputy Associate Director, Division of Monetary Affairs, Board of Governors; Jeffrey D. Walker,3 Deputy Associate Director, Division of Reserve Bank Operations and Payment Systems, Board of Governors; Paul R. Wood,2 Deputy Associate Director, Division of International Finance, Board of Governors Eric C. Engstrom, Senior Adviser, Division of Research and Statistics, and Deputy Associate Director, Division of Monetary Affairs, Board of Governors Stephanie E. Curcuru, Assistant Director, Division of International Finance, Board of Governors; Giovanni Favara, Laura Lipscomb,4 Zeynep Senyuz,4 and Rebecca Zarutskie,2 Assistant Directors, Division of Monetary Affairs, Board of Governors; Shane M. Sherlund, Assistant Director, Division of Research and Statistics, Board of Governors Penelope A. Beattie,5 Section Chief, Office of the Secretary, Board of Governors; Matthew Malloy,4 Section Chief, Division of Monetary Affairs, Board of Governors Mark A. Carlson,3 Senior Economic Project Manager, Division of Monetary Affairs, Board of Governors David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors Alyssa G. Anderson,4 Anna Orlik, and Bernd Schlusche,2 Principal Economists, Division of Monetary Affairs, Board of Governors; Cristina Fuentes-Albero2 and Christopher J. Nekarda,6 Principal Economists, Division of Research and Statistics, Board of Governors Valerie Hinojosa, 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, Jeffrey Fuhrer, and Glenn D. Rudebusch, Executive Vice Presidents, Federal Reserve Banks of Atlanta, Richmond, Boston, and San Francisco, respectively Angela O'Connor,4 Marc Giannoni,2 Paolo A. Pesenti, Samuel Schulhofer-Wohl,4 Raymond Testa,4 and Nathaniel Wuerffel,4 Senior Vice Presidents, Federal Reserve Banks of New York, Dallas, New York, Chicago, New York, and New York, respectively Satyajit Chatterjee, Richard K. Crump,6 George A. Kahn, Rebecca McCaughrin,4 and Patricia Zobel,7 Vice Presidents, Federal Reserve Banks of Philadelphia, New York, Kansas City, New York, and New York, respectively Larry Wall,2 Executive Director, Federal Reserve Bank of Atlanta Edward S. Prescott, Senior Economic and Policy Advisor, Federal Reserve Bank of Cleveland Nicolas Petrosky-Nadeau,6 Senior Research Advisor, Federal Reserve Bank of San Francisco Stefania D'Amico2 and Thomas B. King,2 Senior Economists and Research Advisors, Federal Reserve Bank of Chicago Alex Richter, Senior Research Economist and Advisor, Federal Reserve Bank of Dallas Benjamin Malin, Senior Research Economist, Federal Reserve Bank of Minneapolis Review of Monetary Policy Strategy, Tools, and Communication Practices Committee participants continued their discussions related to the ongoing review of the Federal Reserve's monetary policy strategy, tools, and communication practices. Staff briefings provided an assessment of a range of monetary policy tools that the Committee could employ to provide additional economic stimulus and bolster inflation outcomes, particularly in future episodes in which the policy rate would be constrained by the effective lower bound (ELB). The staff first discussed policy rate tools, focusing on three forms of forward guidance—qualitative, which provides a nonspecific indication of the expected duration of accommodation; date-based, which specifies a date beyond which accommodation could start to be reduced; and outcome-based, which ties the possible start of a reduction of accommodation to the achievement of certain macroeconomic outcomes. The briefing addressed communications challenges associated with each form of forward guidance, including the need to avoid conveying a more negative economic outlook than the FOMC expects. Nonetheless, the staff suggested that forward guidance generally had been effective in easing financial conditions and stimulating economic activity in circumstances when the policy rate was above the ELB and when it was at the ELB. The briefing also discussed negative interest rates, a policy option implemented by several foreign central banks. The staff noted that al­though the evidence so far suggested that this tool had provided accommodation in jurisdictions where it had been employed, there were also indications of possible adverse side effects. Moreover, differences between the U.S. financial system and the financial systems of those jurisdictions suggested that the foreign experience may not provide a useful guide in assessing whether negative rates would be effective in the United States. The second part of the staff briefing focused on balance sheet policy tools. The staff discussed the benefits and costs associated with the large-scale asset purchase programs implemented by the Federal Reserve after the financial crisis. In general, the staff's review of the historical experience suggested that the benefits of large-scale asset purchase programs were significant and that many of the potential costs of such programs identified at the time either did not materialize or materialized to a smaller degree than initially feared. In addition, the staff presentation noted that—taking account of investor expectations ahead of the announcement of each new program—the effects of asset purchases did not appear to have diminished materially across consecutive programs. However, going forward, such policies might not be as effective because longer-term interest rates would likely be much lower at the onset of a future asset purchase program than they were before the financial crisis. The staff also compared the benefits and costs associated with asset purchase programs that are of a fixed cumulative size and those that are flow-based—where purchases continue at a specific pace until certain macroeconomic outcomes are achieved—and examined the potential effectiveness of using asset purchases to place ceilings on interest rates. The briefing also discussed lending programs that could facilitate the flow of credit to households or businesses. Participants discussed the relative merits of qualitative, date-based, and outcome-based forward guidance. A number of participants noted that each of these three forms of forward guidance could be effective in providing accommodation, depending on circumstances both at and away from the ELB. They also suggested that different types of forward guidance would likely be needed to address varying economic conditions, and that the communications regarding forward guidance needed to be tailored to explain the Committee's evaluation of the economic outlook. In particular, several participants emphasized that to guard against the possibility of adverse feedback loops in which forward guidance is interpreted by the public as a sign of a sharply deteriorating economic outlook, thus leading households and businesses to become even more cautious in their spending decisions, the Committee would need to clearly communicate how its announced policy could help promote better economic outcomes. Participants saw both benefits and costs associated with outcome-based forward guidance relative to other forms of forward guidance. On the one hand, relative to qualitative or date-based forward guidance, outcome-based forward guidance has the advantage of creating an explicit link between future monetary policy actions and macroeconomic conditions, thereby helping to support economic stabilization efforts and foster transparency and accountability. On the other hand, outcome-based forward guidance could be complex and difficult to explain and, hence, could potentially be less effective than qualitative or date-based forward guidance if those hurdles could not be overcome. A few participants commented that outcome-based forward guidance, tied to inflation outcomes, could be a useful tool to reinforce the Committee's commitment to its symmetric 2 percent objective. Participants also discussed the benefits and costs of using different types of balance sheet policy. Participants generally agreed that the balance sheet policies implemented by the Federal Reserve after the crisis had eased financial conditions and had contributed to the economic recovery, and that those tools had become an important part of the Committee's current toolkit. However, some participants pointed out that research had produced a sizable range of estimates of the magnitude of the economic effects of balance sheet actions. In addition, some participants noted that the effectiveness of these tools might be diminished in the future, as longer-term interest rates have declined to very low levels and would likely be even lower following an adverse shock that could lead to the resumption of large-scale asset purchases; as a result, there might be limited scope for balance sheet tools to provide accommodation. Several participants commented on the advantages and disadvantages of flow-based asset purchase programs tied to the achievement of economic outcomes. On the one hand, such programs adjusted automatically in response to the performance of the economy and, hence, were more straightforward to implement and communicate. On the other hand, flow-based asset purchase programs may result in the balance sheet rising to undesirable levels. A few participants also commented that, barring significant dislocations to particular segments of the markets, they would restrict asset purchases to Treasury securities to avoid perceptions that the Federal Reserve was engaging in credit allocation across sectors of the economy. In considering policy tools that the Federal Reserve had not used in the recent past, participants discussed the benefits and costs of using balance sheet tools to cap rates on short- or long-maturity Treasury securities through open market operations as necessary. A few participants saw benefits to capping longer-term interest rates that more directly influence household and business spending. In addition, capping longer-maturity interest rates using balance sheet tools, if judged as credible by market participants, might require a smaller amount of asset purchases to provide a similar amount of accommodation as a quantity-based program purchasing longer-maturity securities. However, many participants raised concerns about capping long-term rates. Some of those participants noted that uncertainty regarding the neutral federal funds rate and regarding the effects of rate ceiling policies on future interest rates and inflation made it difficult to determine the appropriate level of the rate ceiling or when that ceiling should be removed; that maintaining a rate ceiling could result in an elevated level of the Federal Reserve's balance sheet or significant volatility in its size or maturity composition; or that managing longer-term interest rates might be seen as interacting with the federal debt management process. By contrast, a majority of participants saw greater benefits in using balance sheet tools to cap shorter-term interest rates and reinforce forward guidance about the near-term path of the policy rate. All participants judged that negative interest rates currently did not appear to be an attractive monetary policy tool in the United States. Participants commented that there was limited scope to bring the policy rate into negative territory, that the evidence on the beneficial effects of negative interest rates abroad was mixed, and that it was unclear what effects negative rates might have on the willingness of financial intermediaries to lend and on the spending plans of households and businesses. Participants noted that negative interest rates would entail risks of introducing significant complexity or distortions to the financial system. In particular, some participants cautioned that the financial system in the United States is considerably different from those in countries that implemented negative interest rate policies, and that negative rates could have more significant adverse effects on market functioning and financial stability here than abroad. Notwithstanding these considerations, participants did not rule out the possibility that circumstances could arise in which it might be appropriate to reassess the potential role of negative interest rates as a policy tool. Overall, participants generally agreed that the forward guidance and balance sheet policies followed by the Federal Reserve after the financial crisis had been effective in providing stimulus at the ELB. With estimates of equilibrium real interest rates having declined notably over recent decades, policymakers saw less room to reduce the federal funds rate to support the economy in the event of a downturn. In addition, against a background of inflation undershooting the symmetric 2 percent objective for several years, some participants raised the concern that the scope to reduce the federal funds rate to provide support to economic activity in future recessions could be reduced further if inflation shortfalls continued and led to a decline in inflation expectations. Therefore, participants generally agreed it was important for the Committee to keep a wide range of tools available and employ them as appropriate to support the economy. Doing so would help ensure the anchoring of inflation expectations at a level consistent with the Committee's symmetric 2 percent inflation objective. Some participants noted that the form of the policy response would depend critically on the circumstances the Committee faced at the time. Several participants suggested that communicating to the public clearly and convincingly in advance about how the Committee intended to provide accommodation at the ELB would enhance public confidence and support the effectiveness of whichever tool the Committee selected. Some participants thought it would be helpful for the Committee to evaluate how its tools could be utilized in different economic scenarios, such as when longer-term interest rates were significantly below current levels, and discuss which actions would best address the challenges posed by each scenario. Several participants noted that, particularly if monetary policy became severely constrained at the ELB, expansionary fiscal policy would be especially important in addressing an economic downturn. Participants expected that, at upcoming meetings, they would continue their deliberations on the Committee's review of the monetary policy framework as well as the Committee's Statement on Longer-Run Goals and Monetary Policy Strategy. They also generally agreed that the Committee's consideration of possible modifications to its policy strategy, tools, and communication practices would take some time and that the process would be careful, deliberate, and patient. A number of participants judged that the review could be completed around the middle of 2020. Developments in Financial Markets and Open Market Operations The manager pro tem first reviewed developments in financial markets over the intermeeting period. Early in the period, market participants focused on signs of weakness in U.S. economic data with some soft data from business surveys viewed as substantiating concerns that global headwinds were spilling over to the U.S. economy. Later in the period, markets responded to news suggesting favorable developments around Brexit and a partial U.S.-China trade deal. On balance, U.S. financial conditions ended the period little changed. Regarding the outlook for U.S. monetary policy, the Open Market Desk's surveys and market-based indicators pointed to a high likelihood of a 25 basis point cut in the target range at the October meeting. The probability that survey respondents placed on this outcome was broadly similar to the probability of a 25 basis point cut ahead of the July and September meetings. Further ahead, the path implied by the medians of survey respondents' modal forecasts for the federal funds rate remained essentially flat after this meeting. Meanwhile, the market-implied path suggested that investors expected around 25 basis points of additional easing by the end of 2020, after the anticipated easing at this meeting. The manager pro tem next turned to a review of money market developments since early October. On October 11, the Committee announced its decision to maintain reserves at or above the level that prevailed in early September through a program of Treasury bill purchases and repurchase agreement (repo) operations. After the announcement, the Desk conducted regular operations that offered at least $75 billion in overnight repo funding and between $135 and $170 billion in term funding. These operations fostered conditions that helped maintain the federal funds rate within the target range through two channels. First, they provided funding in repo markets that dampened repo market pressure that would otherwise have passed through to the federal funds market, and second, they increased the supply of reserves in the banking system. In anticipation of another projected sharp decline in reserves and expected rate pressures around October 31, the Desk announced an increase in the size of overnight repos to $120 billion, and an increase in the size of the two term repo operations that crossed the October month-end to $45 billion. With respect to purchases of Treasury bills for reserve management purposes, the Desk had purchased more than half of the initial $60 billion monthly amount for October, and propositions at the five operations conducted to date had been strong. Respondents to the Desk surveys expected reserve management purchases of Treasury bills to continue at the same pace for some time. The combination of repo operations and bill purchases lifted reserve levels above those observed in early September. The manager pro tem noted that diminished willingness of some dealers to intermediate across money markets ahead of the year-end could result in upward pressure on short-term money market rates. Forward measures of market pricing continued to indicate expectations for such pressures around the year-end. The Desk planned to continue its close monitoring of reserves and money market conditions, as well as dealer participation in repo operations, particularly given balance sheet constraints heading into year-end. The Desk discussed its intentions to further adjust operations around year-end as needed to mitigate the risk of money market pressures that could adversely affect policy implementation, and to maintain over time a level of reserve balances at or above those that prevailed in early September. The manager pro tem finished by noting that the Federal Reserve Bank of New York would soon release a request for public comment on a plan to publish a series of backward looking Secured Overnight Financing Rate (SOFR) averages and a daily SOFR index to support the transition away from instruments based on LIBOR (London interbank offered rate). Publication of these series was expected to begin in the first half of 2020. 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. Review of Options for Repo Operations to Support Control of the Federal Funds Rate The staff briefed participants on the recent experience with using repo operations to support control of the federal funds rate and on possibly maintaining a role for repo operations in the monetary policy implementation framework over the longer run. Ongoing capacity for repo operations could be viewed as useful in an ample-reserves regime as a way of providing insurance against unexpected stresses in money markets that could drive the federal funds rate outside the Committee's target range over a sustained period. The staff presented two potential approaches for conducting repo operations if the Committee decided to maintain an ongoing role for such operations. Under the first approach, the Desk would conduct modestly sized, relatively frequent repo operations designed to provide a high degree of readiness should the need for larger operations arise; under the second approach, the FOMC would establish a standing fixed-rate facility that could serve as an automatic money market stabilizer.8 Assessing these two approaches involved several considerations, including the degree of assurance of control over the federal funds rate, the likelihood that participation in the Federal Reserve's repo operations could become stigmatized, the possibility that the operations could encourage the Federal Reserve's counterparties to take on excessive liquidity risks in their portfolios, and the potential disintermediation of financial transactions currently undertaken by private counterparties. Regular, modestly sized repo operations likely would pose relatively little risk of stigma or moral hazard, but they may provide less assurance of control over the federal funds rate because it might be difficult for the Federal Reserve to anticipate money market pressures and scale up its repo operations accordingly. A standing fixed-rate repo facility would likely provide substantial assurance of control over the federal funds rate, but use of the facility could become stigmatized, particularly if the rate was set at a relatively high level. Conversely, a standing facility with a rate set at a relatively low level could result in larger and more frequent repo operations than would be appropriate. And by effectively standing ready to provide a form of liquidity on an as-needed basis, such a facility could increase the risk that some institutions may take on an undesirably high amount of liquidity risk. In their comments following the staff presentation, participants emphasized the importance of maintaining reserves at a level consistent with the Committee's choice of an ample-reserves monetary policy implementation framework, in which control over the level of the federal funds rate is exercised primarily through the setting of the Federal Reserve's administered rates and in which active management of the supply of reserves is not required. Some participants indicated that, in such an environment, they would have some tolerance for allowing the federal funds rate to vary from day to day and to move occasionally outside its target range, especially in those instances associated with easily identifiable technical events; a couple of participants expressed discomfort with such misses. Participants expressed a range of views on the relative merits of the two approaches described by the staff for conducting repo operations. Many participants noted that, once an ample supply of reserves is firmly established, there might be little need for a standing repo facility or for frequent repo operations. Some of these participants indicated that a basic principle in implementing an ample-reserves framework is to maintain reserves on an ongoing basis at levels that would obviate the need for open market operations to address pressures in funding markets in all but exceptional circumstances. Many participants remarked, however, that even in an environment with ample reserves, a standing facility could serve as a useful backstop to support control of the federal funds rate in the event of outsized shocks to the system. Several of these participants also suggested that, if a standing facility were created that allowed banks to monetize a portion of their securities holdings at times of market stress, banks could possibly reduce their demand for reserves in normal times, which could make it feasible for the monetary policy implementation framework to operate with a significantly smaller quantity of reserves than would otherwise be needed. A couple of participants pointed out that establishing a standing facility would be similar to the practice of some other major central banks. A number of participants noted that, before deciding whether to implement a standing repo facility, additional work would be necessary to assess the likely implications of different design choices for a standing repo facility, such as pricing, eligible counterparties, and the set of acceptable collateral. Echoing issues raised at the Committee's June 2019 meeting, various participants commented on the need to carefully evaluate these design choices to guard against the potential for moral hazard, stigma, disintermediation risk, or excessive volatility in the Federal Reserve's balance sheet. A couple of other participants suggested that an approach based on modestly sized, frequent repo operations that could be quickly and substantially ramped up in response to emerging market pressures would mitigate the moral hazard, disintermediation, and stigmatization risks associated with a standing repo facility. Participants made no decisions at this meeting on the longer-run role of repo operations in the ample-reserves regime or on an approach for conducting repo operations over the longer run. They generally agreed that they should continue to monitor the market effects of the Federal Reserve's ongoing repo operations and Treasury bill purchases and that additional analysis of the recent period of money market dislocations or of fluctuations in the Federal Reserve's non-reserve liabilities was warranted. Some participants called for further research on the role that the financial regulatory environment or other factors may have played in the recent dislocations. Staff Review of the Economic Situation The information available for the October 29–30 meeting indicated that labor market conditions remained strong and that real gross domestic product (GDP) increased at a moderate rate in the third quarter. 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 August. Survey-based measures of longer-run inflation expectations were little changed. Total nonfarm payroll employment expanded at a slower pace in September than in the previous two months, but the average pace for the third quarter was similar to that for the first half of the year. However, the pace of job gains so far this year was slower than last year, even after accounting for the anticipated effects of the Bureau of Labor Statistics' benchmark revision to payroll employment, which will be incorporated in the published data in February 2020. The unemployment rate moved down to a 50-year low of 3.5 percent in September, while the labor force participation rate held steady and the employment-to-population ratio moved up. The unemployment rates for Asians, Hispanics, and whites each moved lower in September, but the rate for African Americans was unchanged; the unemployment rate for each group was below its level at the end of the previous economic expansion, though persistent differentials between these rates remained. The average share of workers employed part time for economic reasons in September continued to be below its level in late 2007. The rate of private-sector job openings declined in August, and the rate of quits also edged down, but both readings were still at relatively elevated levels. The four-week moving average of initial claims for unemployment insurance benefits through mid-October remained near historically low levels. Average hourly earnings for all employees rose 2.9 percent over the 12 months ending in September, roughly similar to the pace a year earlier. Total consumer prices, as measured by the PCE price index, increased 1.4 percent over the 12 months ending in August. Core PCE price inflation (which excludes changes in consumer food and energy prices) was 1.8 percent over that same 12-month period, while consumer food price inflation was well below core inflation, and consumer energy prices declined. The trimmed mean measure of 12-month PCE price inflation constructed by the Federal Reserve Bank of Dallas remained at 2 percent in August. The consumer price index (CPI) rose 1.7 percent over the 12 months ending in September, while core CPI inflation was 2.4 percent. Recent readings on survey-based measures of longer-run inflation expectations—including those from the University of Michigan Surveys of Consumers, the Blue Chip Economic Indicators, and the Desk's Survey of Primary Dealers and Survey of Market Participants—were little changed, on balance, al­though the Michigan survey measure ticked down to the low end of its recent range. Real PCE rose solidly in the third quarter following a stronger gain in the second quarter. Overall consumer spending rose steadily in recent months, and sales of light motor vehicles through September maintained their robust second-quarter pace. Key factors that influence consumer spending—including the low unemployment rate, further gains in real disposable income, high levels of households' net worth, and generally low borrowing rates—were supportive of solid real PCE growth in the near term. The Michigan survey measure of consumer sentiment rose again in October and had mostly recovered from its August slump, while the Conference Board survey measure of consumer confidence remained at a favorable level. Real residential investment turned up solidly in the third quarter following six consecutive quarters of contraction. This upturn was consistent with the rise in single-family starts in the third quarter, and building permits for such units—which tend to be a good indicator for the underlying trend in the construction of such homes—also increased. Both new and existing home sales increased, on net, in August and September. Taken together, the data on construction and sales suggested that the decline in mortgage rates since late 2018 was starting to show through to housing activity. Real nonresidential private fixed investment declined further in the third quarter. Nominal shipments of nondefense capital goods excluding aircraft decreased over August and September, and forward-looking indicators generally pointed to continued softness in business equipment spending. Orders for nondefense capital goods excluding aircraft decreased over those two months and were still below the level of shipments, most measures of business sentiment deteriorated, analysts' expectations of firms' longer-term profit growth declined somewhat further, and concerns about trade developments continued to weigh on firms' investment decisions. Business expenditures for nonresidential structures decreased markedly further in the third 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 decline through mid-October. Industrial production declined in September and was notably lower than at the beginning of the year. Production in September was held down by the strike at General Motors, and automakers' schedules indicated that assemblies of light motor vehicles would remain low in October before rebounding in November. Overall manufacturing production appeared likely to remain soft in coming months, reflecting generally weak readings on new orders from national and regional manufacturing surveys, declining domestic business investment, weak GDP growth abroad, and a persistent drag from trade developments. Total real government purchases rose at a slower pace in the third quarter than in the second quarter. Real federal purchases decelerated, reflecting smaller increases in both defense and nondefense spending. Federal hiring of temporary workers for next year's decennial census was quite modest during the quarter. Real purchases by state and local governments also rose at a slower pace, as the boost from a faster expansion in state and local payrolls was partially offset by a decrease in real construction spending by these governments. The nominal U.S. international trade deficit widened in August, reflecting a subdued pace of export growth and a moderate pace of import growth. Export growth was subdued due to lackluster exports of services and capital goods. Advance estimates for September suggested that goods imports fell more than exports, pointing to a narrowing of the monthly trade deficit. The Bureau of Economic Analysis estimated that net exports made a slight negative contribution to real GDP growth in the third quarter. Incoming data suggested that growth in the foreign economies remained subpar in the third quarter. In several advanced foreign economies (AFEs), indicators showed continued weakness in the manufacturing sector, especially in the euro area and the United Kingdom. Similarly, GDP growth remained subdued in China and several other emerging economies in Asia, and indicators suggested that growth in Latin America also remained weak. Foreign inflation appeared to have moderated a bit in the third quarter, reflecting declines in energy prices. Inflation remained relatively low in most foreign economies. Staff Review of the Financial Situation Investor sentiment weakened over the early part of the intermeeting period, reflecting a few weaker-than-expected domestic data releases, but later strengthened on increased optimism regarding ongoing trade negotiations between the United States and China and positive Brexit news. On net, equity prices and corporate bond spreads were little changed, and the Treasury yield curve steepened a bit. Financing conditions for businesses and households remained generally supportive of spending and economic activity. September FOMC communications were viewed as slightly less accommodative than expected, with investors reportedly surprised by the Summary of Economic Projections showing that a majority of FOMC participants anticipated no further easing this year. Incoming data early in the intermeeting period—particularly the disappointing readings on business activity—prompted a decline in the market-implied path for the policy rate, but that decline was later partly reversed as market participants apparently grew more optimistic on the prospects for a U.S.–China trade deal and Brexit negotiations. Late in the period, quotes on federal funds futures options contracts indicated that market participants assigned a very high probability to a 25 basis point reduction in the target range of the federal funds rate at the October FOMC meeting. In addition, market-implied expectations for the federal funds rate at year-end and next year moved down. Yields on nominal U.S. Treasury securities moved down in the early part of the intermeeting period but later retraced their declines. On net, the Treasury yield curve steepened a bit, mostly reflecting a modest decline in short-term yields. Measures of inflation compensation over the next 5 years and 5 to 10 years ahead based on Treasury Inflation-Protected Securities inched down and remained near multiyear low levels. Broad stock price indexes fell by as much as 4 percent during the first half of the intermeeting period but recovered afterward, ending the period roughly unchanged. Option-implied volatility on the S&P 500 index declined slightly and ended the period below the middle of its historical distribution. On net, corporate credit spreads were little changed. Domestic short-term funding markets were volatile in mid-September and exhibited additional, albeit modest, pressures around the September quarter-end and the mid-October Treasury settlement date. These pressures were alleviated in part by the Desk's overnight and term repo operations that began on September 17. After smoothing through rate volatility over the period, interest rates for overnight unsecured and secured funding declined roughly in line with the reduction in the target range for the federal funds rate at the September FOMC meeting and the associated 30 basis point decrease in the interest on excess reserves (IOER) rate. The effective federal funds rate (EFFR) was more volatile than usual over the intermeeting period, with the EFFR–IOER spread ranging between 2 basis points and 10 basis points. Rates on overnight commercial paper (CP) and short-term negotiable certificates of deposit declined fairly quickly following the announcement of Desk operations on September 17, al­though some CP rates remained elevated into October. The FOMC's October 11 announcement of Treasury bill purchases and repo operations to maintain reserves at or above their early-September level appeared to improve expectations about funding market conditions through the remainder of the year. These communications reportedly did not materially affect yields on longer-term Treasury securities. Financial markets in the AFEs followed a pattern similar to that seen in the United States. AFE financial conditions tightened early in the intermeeting period on disappointing activity data, both in the United States and abroad, and subsequently recovered on perceived better prospects for trade and Brexit negotiations. Movements in the exchange value of the dollar against most currencies were relatively modest, and the broad dollar index declined slightly. Relative to the dollar, the British pound appreciated on Brexit developments, and the Argentinian peso continued to depreciate amid the country's political developments. The mid-September increases in U.S. Treasury repo rates spilled over to borrowing rates in the international dollar funding market. However, the measures taken by the Federal Reserve to keep the federal funds rate in the target range also calmed dollar funding conditions in the foreign exchange swap market. Financing conditions for nonfinancial businesses remained generally accommodative during the intermeeting period. Gross issuance of corporate bonds, which was strong in September, experienced a typical seasonal decline in October. Gross issuance of institutional leveraged loans remained solid but slightly below 2019 monthly averages. Meanwhile, growth of commercial and industrial (C&I) loans at banks was modest in the third quarter as a whole. Respondents to the October 2019 Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS) reported that borrower demand weakened for C&I loans over the third quarter, while lending standards on such loans were about unchanged. Gross equity issuance through both initial and seasoned offerings picked up to a strong pace in September but moderated in October. The credit quality of nonfinancial corporations deteriorated slightly in recent months but remained solid on balance. Credit conditions for both small businesses and municipalities stayed accommodative on net. In the commercial real estate (CRE) sector, financing conditions also remained generally accommodative. The volume of agency and non-agency commercial mortgage-backed securities issuance was strong in September, in part supported by recent declines in interest rates. Growth of CRE loans on banks' books was little changed in the third quarter. Banks in the October SLOOS reported tighter lending standards for all types of CRE loans; they also reported weaker demand for construction lending and stronger demand for the other CRE lending categories. Financing conditions in the residential mortgage market remained accommodative on balance. Mortgage rates were little changed since the September FOMC meeting and stayed near their lowest level since mid-2016. In September, home-purchase originations remained around the relatively high level seen during the previous two months, while refinancing originations jumped to their highest level since late 2012. In the October SLOOS, banks left their lending standards basically unchanged for most residential real estate loan categories over the third quarter. However, for subprime loans, a moderate net percentage of banks reported tightening standards. Financing conditions in consumer credit markets remained generally supportive of household spending, al­though conditions continued to be tight for credit card borrowers with nonprime credit scores. Interest rates on auto loans fell, on net, since the beginning of the year, and interest rates on credit card accounts leveled off through August. According to the October SLOOS, commercial banks tightened their standards on credit cards and other consumer loans over the third quarter. Additionally, banks reported that their standards on auto loans and their willingness to make consumer installment loans were about unchanged on balance. The staff provided an update on its assessments of potential risks to financial stability. On balance, the staff characterized the financial vulnerabilities of the U.S. financial system as moderate. The staff judged that, for many asset classes, valuation pressures eased over the past year. Appetite for risk in the leveraged loan market remained elevated, but less so than last year, especially for lower-rated loans. In addition, CRE prices remained high relative to rental income. In assessing vulnerabilities stemming from borrowing in the household and business sectors, the staff noted that, while household borrowing continued to decline relative to nominal GDP, business leverage remained at or near record-high levels. The risks associated with leverage at financial institutions were viewed as being low, as they have been for some time, largely because of high capital ratios at large banks. Nonetheless, the staff noted that the resilience of financial institutions could be undermined by low interest rates and banks' announced plans to increase payouts to shareholders. The staff assessed vulnerabilities stemming from funding risk as modest. In addition, the staff discussed the potential for liquidity transformation by open-ended mutual funds investing in bank loans to lead to market dislocations under stress scenarios, while noting that outflows from such funds have not often been associated with such dislocations. Staff Economic Outlook The projection for U.S. real GDP growth prepared by the staff for the October FOMC meeting was revised down a little for the second half of this year relative to the previous projection. This revision reflected the estimated effects of the strike at General Motors along with some other small factors. Even without this downward revision, real GDP was forecast to rise more slowly in the second half of the year than in the first half, mostly because of continued soft business investment and slower increases in government spending. The medium-term projection for real GDP growth was essentially unchanged, as revisions to the staff's assumptions about factors on which the forecast was conditioned, such as financial market variables, were small and offsetting. Real GDP was expected to decelerate modestly over the medium term, mostly because of a waning boost from fiscal policy. Output was forecast to expand at a rate a little above the staff's estimate of its potential rate of growth in 2019 and 2020 and then to slow to a pace slightly below potential output growth in 2021 and 2022. The unemployment rate was projected to be roughly flat through 2022 and to remain below the staff's estimate of its longer-run natural rate. The staff's forecast for core PCE price inflation this year was revised down a little in response to recent data. Beyond this year, the projection for core inflation was unrevised, and the forecast for total inflation was a little lower in 2020 because of a downward revision in projected consumer energy prices. Both total inflation and core inflation were forecast to move up slightly next year, as the low inflation readings early this year were viewed as transitory; nevertheless, both inflation measures were forecast to continue to run somewhat below 2 percent through 2022. The staff continued to view the uncertainty around its projections for real GDP growth, the unemployment rate, and inflation as generally similar to the average of the past 20 years. Moreover, the staff still judged that the risks to the forecast for real GDP growth were tilted to the downside, with a corresponding skew to the upside for the unemployment rate. Important factors in that assessment were that international trade tensions and foreign economic developments seemed more likely to move in directions that could have significant negative effects on the U.S. economy than to resolve more favorably than assumed. In addition, softness in business investment and manufacturing so far this year was seen as pointing to the possibility of a more substantial slowing in economic growth than the staff projected. The risks to the inflation projection were also viewed as having a downward skew, in part because of the downside risks to the forecast for economic activity. Participants' Views on Current Conditions and the Economic Outlook Participants agreed that the labor market had remained strong over the intermeeting period and that economic activity had risen at a moderate rate. Job gains had been solid, on average, in recent months, and the unemployment rate had remained low. Al­though household spending had risen at a strong pace, business fixed investment and exports had remained weak. On a 12‑month basis, overall inflation and inflation for items other than food and energy were running below 2 percent. Market-based measures of inflation compensation remained low; survey-based measures of longer-term inflation expectations were little changed. Participants generally viewed the economic outlook as positive. Participants judged that sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective were the most likely outcomes, and they indicated that their views on these outcomes had changed little since the September meeting. Uncertainties associated with trade tensions as well as geopolitical risks had eased somewhat, though they remained elevated. In addition, inflation pressures remained muted. The risk that a global growth slowdown would further weigh on the domestic economy remained prominent. In their discussion of the household sector, participants agreed that consumer spending was increasing at a strong pace. They also generally expected that, in the period ahead, household spending would likely remain on a firm footing, supported by strong labor market conditions, rising incomes, and favorable financial conditions. In addition, survey measures of consumer confidence remained high, and a couple of participants commented that business contacts in consumer-facing industries reported strong demand. Many participants noted that components of household spending that are thought to be particularly sensitive to interest rates had improved, including purchases of consumer durables. In addition, residential investment had turned up. Most participants who reported on spending by households in their Districts also cited favorable conditions for consumer spending, al­though several participants reported mixed data on spending or an increase in precautionary savings in their Districts. In their discussions of the business sector, participants saw trade tensions and concerns about the global growth outlook as the main factors contributing to weak business investment and exports and the associated restraint on domestic economic growth. Moreover, participants generally expected that trade uncertainty and sluggish global growth would continue to damp investment spending and exports. A number of participants judged that tight labor market conditions were also causing firms to forego investment expenditures, or invest in automation systems to reduce the need for additional hiring. However, business sentiment appeared to remain strong for some industries, particularly those most closely connected with consumer goods. Participants discussed developments in the manufacturing, energy, and agricultural sectors of the U.S. economy. Manufacturing production remained weak, and continuing concerns about global growth and trade uncertainty suggested that conditions were unlikely to improve materially over the near term. In addition, the labor strike at General Motors had disrupted motor vehicle output, and ongoing issues at Boeing were slowing manufacturing in the commercial aircraft industry. A couple of participants noted that activity was particularly weak for the energy industry, in part because of low petroleum prices. In addition, a few participants noted ongoing challenges in the agricultural sector, including those associated with lower crop yields, tariffs, weak export demand, and difficult financial positions for many farmers. One bright spot for the agricultural sector was that some commodity prices had firmed recently. Participants judged that conditions in the labor market remained strong, with the unemployment rate near historical lows and continued solid job gains, on average. In addition, some participants commented on the strength or improvement in labor force participation nationally or in their Districts. However, the pace of increases in employment had slowed some, on net, in recent months. On the one hand, the slowing could be interpreted as a natural consequence of the economy being near full employment. On the other hand, slowing job gains might also be indicative of some cooling in labor demand, which may be consistent with an observed decline in the rate of job openings and decreases in other measures of labor market tightness. Several participants commented that the preliminary benchmark revision released in August by the Bureau of Labor Statistics had indicated that payroll employment gains would likely show less momentum coming into this year once those revisions are incorporated in published data early next year. Growth of wages had also slowed this year by some measures. Consistent with strong national data on the labor market, business contacts in many Districts indicated continued strong labor demand, with firms still reporting difficulties finding qualified workers, or broadening their recruiting to include traditionally marginalized groups. In their discussion of inflation developments, participants noted that readings on overall and core PCE inflation, measured on a 12-month change basis, had continued to run below the Committee's symmetric 2 percent objective. While survey-based measures of longer-term inflation expectations were generally little changed, some measures of households' inflation expectations had moved down to historically low levels. Market-based measures of inflation compensation remained low, with some longer-term measures being at or near multi-year lows. Weakness in the global economy, perceptions of downside risks to growth, and subdued global inflation pressures were cited as factors tilting inflation risk to the downside, and a few participants commented that they expected inflation to run below 2 percent for some time. Some other participants, however, saw the recent inflation data as consistent with their previous assessment that much of the weakness seen early in the year would be transitory, or that some recent monthly readings seemed broadly consistent with the Committee's longer-run inflation objective of 2 percent. A couple of participants noted that some measures of inflation could temporarily move above 2 percent early next year because of the transitory effects of tariffs. Participants also discussed risks regarding the outlook for economic activity, which remained tilted to the downside. Some risks were seen to have eased a bit, although they remained elevated. There were some tentative signs that trade tensions were easing, the probability of a no-deal Brexit was judged to have lessened, and some other geopolitical tensions had diminished. Several participants noted that statistical models designed to gauge the probability of recession, including those based on information from the yield curve, suggested that the likelihood of a recession occurring over the medium term had fallen somewhat over the intermeeting period. However, other downside risks had not diminished. In particular, some further signs of a global slowdown in economic growth emerged; weakening in the global economy could further restrain the domestic economy, and the risk that the weakness in domestic business spending, manufacturing, and exports could give rise to slower hiring and weigh on household spending remained prominent. Among those participants who commented on financial stability, most highlighted the risks associated with high levels of corporate indebtedness and elevated valuation pressures for a variety of risky assets. Al­though financial stability risks overall were seen as moderate, several participants indicated that imbalances in the corporate debt market had grown over the economic expansion and raised the concern that deteriorating credit quality could lead to sharp increases in risk spreads in corporate bond markets; these developments could amplify the effects of an adverse shock to the economy. Several participants were concerned that some banks had reduced the sizes of their capital buffers at a time when they should be rising. A few participants observed that valuations in equity and bond markets were high by historical standards and that CRE valuations were also elevated. A couple of participants indicated that market participants may be overly optimistic in the pricing of risk for corporate debt. A couple of participants judged that the monitoring of financial stability vulnerabilities should also encompass risks related to climate change. In their consideration of the monetary policy options at this meeting, most participants believed that a reduction of 25 basis points in the target range for the federal funds rate would be appropriate. In discussing the reasons for such a decision, these participants continued to point to global developments weighing on the economic outlook, the need to provide insurance against potential downside risks to the economic outlook, and the importance of returning inflation to the Committee's symmetric 2 percent objective on a sustained basis. A couple of participants who were supportive of a rate cut at this meeting indicated that the decision to reduce the federal funds rate by 25 basis points was a close call relative to the option of leaving the federal funds rate unchanged at this meeting. Many participants judged that an additional modest easing at this meeting was appropriate in light of persistent weakness in global growth and elevated uncertainty regarding trade developments. Nonetheless, these participants noted that incoming data had continued to suggest that the economy had proven resilient in the face of continued headwinds from global developments and that previous adjustments to monetary policy would continue to help sustain economic growth. In addition, several participants suggested that a modest easing of policy at this meeting would likely better align the target range for the federal funds rate with a variety of indicators used to assess the appropriate policy stance, including estimates of the neutral interest rate and the slope of the yield curve. A couple of participants judged that there was more room for the labor market to improve. Accordingly, they saw further accommodation as best supporting both of the Committee's dual-mandate objectives. Many participants continued to view the downside risks surrounding the economic outlook as elevated, further underscoring the case for a rate cut at this meeting. In particular, risks to the outlook associated with global economic growth and international trade were still seen as significant despite some encouraging geopolitical and trade-related developments over the intermeeting period. In light of these risks, a number of participants were concerned that weakness in business spending, manufacturing, and exports could spill over to labor markets and consumer spending and threaten the economic expansion. A few participants observed that the considerations favoring easing at this meeting were reinforced by the proximity of the federal funds rate to the ELB. In their view, providing adequate accommodation while still away from the ELB would best mitigate the possibility of a costly return to the ELB. Many participants also cited the level of inflation or inflation expectations as justifying a reduction of 25 basis points in the federal funds rate at this meeting. Inflation continued to run below the Committee's symmetric 2 percent objective, and inflationary pressures remained muted. Several participants raised concerns that measures of inflation expectations remained low and could decline further without a more accommodative policy stance. A couple of these participants, pointing to experiences in Japan and the euro area, were concerned that persistent inflation shortfalls could lead to a decline in longer-run inflation expectations and less room to reduce the federal funds rate in the event of a future recession. In general, the participants who justified further easing at this meeting based on considerations related to inflation viewed this action as helping to move inflation up to the Committee's 2 percent objective on a sustained basis and to anchor inflation expectations at levels consistent with that objective. Some participants favored maintaining the existing target range for the federal funds rate at this meeting. These participants suggested that the baseline projection for the economy remained favorable, with inflation expected to move up and stay near the Committee's 2 percent objective. They also judged that policy accommodation was already adequate and, in light of lags in the transmission of monetary policy, preferred to take some time to assess the economic effects of the Committee's previous policy actions before easing policy further. Several participants noted that downside risks had diminished over the intermeeting period and saw little indication that weakness in business sentiment was spilling over into labor markets and consumer spending. A few participants raised the concern that a further easing of monetary policy at this meeting could encourage excessive risk-taking and exacerbate imbalances in the financial sector. With regard to monetary policy beyond this meeting, most participants judged that the stance of policy, after a 25 basis point reduction at this meeting, would be well calibrated to support the outlook of moderate growth, a strong labor market, and inflation near the Committee's symmetric 2 percent objective and likely would remain so as long as incoming information about the economy did not result in a material reassessment of the economic outlook. However, participants noted that policy was not on a preset course and that they would be monitoring the effects of the Committee's recent policy actions, as well as other information bearing on the economic outlook, in assessing the appropriate path of the target range for the federal funds rate. A couple of participants expressed the view that the Committee should reinforce its postmeeting statement with additional communications indicating that another reduction in the federal funds rate was unlikely in the near term unless incoming information was consistent with a significant slowdown in the pace of economic activity. Committee Policy Action In their discussion of monetary policy for this meeting, members noted that information received since the September meeting indicated that the labor market remained strong and that economic activity had been rising at a moderate rate. Job gains had been solid, on average, in recent months, and the unemployment rate had remained low. Household spending had been rising at a strong pace. However, business fixed investment and exports remained weak, as softness in global growth and international trade developments continued to weigh on those sectors. On a 12-month basis, both the overall inflation rate and inflation for items other than food and energy were running below 2 percent. Market-based measures of inflation compensation remained low. Survey-based measures of longer-term inflation expectations were little changed. In light of the implications of global developments for the economic outlook as well as muted inflation pressures, most members agreed to lower the target range for the federal funds rate to 1-1/2 to 1-3/4 percent at this meeting. The members who supported this action viewed it as consistent with helping offset the effects on aggregate demand of weak global growth and trade developments, insuring against downside risks arising from those sources, and promoting a more rapid return of inflation to the Committee's symmetric 2 percent objective. Two members preferred to maintain the current target range for the federal funds rate at this meeting. These members indicated that the economic outlook remained positive and that they anticipated, under an unchanged policy stance, continued strong labor market conditions and solid growth in activity, with inflation gradually moving up to the Committee's 2 percent objective. 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 maximum-employment objective and its symmetric 2 percent inflation objective. They also agreed that those 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. With regard to the postmeeting statement, members agreed to update the language of the Committee's description of incoming data to acknowledge that investment spending and U.S. exports had remained weak. In describing the monetary policy outlook, they also agreed to remove the "act as appropriate" language and emphasize that the Committee would continue to monitor the implications of incoming information for the economic outlook as it assessed the appropriate path of the target range for the federal funds rate. This change was seen as consistent with the view that the current stance of monetary policy was likely to remain appropriate as long as the economy performed broadly in line with the Committee's expectations and that policy was not on a preset course and could change if developments emerged that led to a material reassessment of the economic outlook. 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 October 31, 2019, 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. In light of recent and expected increases in the Federal Reserve's non-reserve liabilities, the Committee directs the Desk to purchase Treasury bills at least into the second quarter of next year to maintain over time ample reserve balances at or above the level that prevailed in early September 2019. The Committee also directs the Desk to conduct term and overnight repurchase agreement operations at least through January of next year to ensure that the supply of reserves remains ample even during periods of sharp increases in non-reserve liabilities, and to mitigate the risk of money market pressures that could adversely affect policy implementation. In addition, the Committee directs the Desk to conduct 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 1.45 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 all principal payments from the Federal Reserve's holdings of Treasury securities and to continue reinvesting all principal payments from the Federal Reserve's holdings of agency debt and agency mortgage-backed securities received during each calendar month. Principal payments from agency debt and agency mortgage-backed securities up to $20 billion per month will continue to be reinvested in Treasury securities to roughly match the maturity composition of Treasury securities outstanding; principal payments in excess of $20 billion per month will continue to be reinvested in agency mortgage-backed securities. 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 remains strong and that economic activity has been rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although household spending has been rising at a strong pace, business fixed investment and exports remain weak. On a 12‑month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the Committee decided to lower the target range for the federal funds rate to 1-1/2 to 1-3/4 percent. This action supports the Committee's view that sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective are the most likely outcomes, but uncertainties about this outlook remain. The Committee will continue to monitor the implications of incoming information for the economic outlook as it assesses the appropriate path of the target range for the federal funds rate. 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, Michelle W. Bowman, Lael Brainard, James Bullard, Richard H. Clarida, Charles L. Evans, and Randal K. Quarles. Voting against this action: Esther L. George and Eric Rosengren. President George dissented at this meeting because she believed that an unchanged setting of monetary policy was appropriate based on incoming data and the outlook for economic activity over the medium term. Recognizing risks to the outlook from the effects of trade developments and weaker global activity, President George would be prepared to adjust policy should incoming data point to a materially weaker outlook for the economy. President Rosengren dissented because he judged that monetary policy was already accommodative and that additional accommodation was not needed for an economy in which labor markets are very tight. He judged that providing additional accommodation posed risks of further inflating the prices of risky assets and encouraging households and firms to take on too much leverage. Consistent with the Committee's decision to lower the target range for the federal funds rate to 1-1/2 to 1-3/4 percent, the Board of Governors voted unanimously to lower the interest rate paid on required and excess reserve balances to 1.55 percent and voted unanimously to approve a 1/4 percentage point decrease in the primary credit rate to 2.25 percent, effective October 31, 2019. It was agreed that the next meeting of the Committee would be held on Tuesday–Wednesday, December 10–11, 2019. The meeting adjourned at 9:50 a.m. on October 30, 2019. Notation Vote By notation vote completed on October 8, 2019, the Committee unanimously approved the minutes of the Committee meeting held on September 17–18, 2019. Videoconference meeting of October 4, 2019 The Committee met by videoconference on October 4, 2019, to review developments in money markets and to discuss steps the Committee could take to facilitate efficient and effective implementation of monetary policy. The staff reviewed recent developments in money markets and the effect of the Desk's continued offering of overnight and term repo operations. Staff analysis and market commentary suggested that many factors contributed to the funding stresses that emerged in mid-September. In particular, financial institutions' internal risk limits and balance sheet costs may have slowed the distribution of liquidity across the system at a time when reserves had dropped sharply and Treasury issuance was elevated. Al­though money market conditions had since improved, market participants expressed uncertainty about how funding market conditions may evolve over coming months, especially around year-end. Further out, the April 2020 tax season, with associated reductions in reserves around that time, was viewed as another point at which money market pressures could emerge. The manager pro tem reviewed options that the Committee could consider to boost the level of reserves in the banking system and to address temporary money market pressures that could adversely affect monetary policy implementation. These options included a program of Treasury bill purchases coupled with overnight and term repo operations to maintain reserves at or above their early September level. During their discussion, all FOMC participants agreed that control over the federal funds rate was a priority and that recent money market developments suggested it was appropriate to consider steps at this time to maintain a level of reserves consistent with the Committee's chosen ample-reserves regime. Given the projected decline in reserves around year-end and in the spring of 2020, they judged that it was important to reach consensus soon on a near-term plan and associated communications. All participants expressed support for a plan to purchase Treasury bills into the second quarter of 2020 and to continue conducting overnight and term repo operations at least through January of next year. Many participants supported conducting operations to maintain reserve balances around the level that prevailed in early September. Some others suggested moving to an even higher level of reserves to provide an extra buffer and greater assurance of control over the federal funds rate. In discussing the pace of Treasury bill purchases, many participants supported a relatively rapid pace to boost reserve levels quickly, while others supported a more moderate pace of purchases. Participants generally judged that Treasury bill purchases and the associated increase in reserves would, over time, result in a gradual reduction in the need for repo operations. A few participants indicated that purchasing Treasury notes and bonds with limited remaining maturities could also be considered as a way to boost reserves, particularly if the Federal Reserve faced constraints on the pace at which it could purchase Treasury bills. Participants generally acknowledged some uncertainty over the efficient and effective level of reserves and noted it would be prudent to continue to monitor money market developments and stand ready to adjust the plan as necessary. Overall, participants agreed that the pace of purchases as well as the parameters of the repo operations were technical details of monetary policy implementation not intended to affect the stance of monetary policy and should be communicated as such. Most participants preferred not to wait until the October 29–30 FOMC meeting to issue a public statement regarding the planned Treasury bill purchases and repo operations. They noted that releasing a statement before the October 29–30 FOMC meeting would help reinforce the point that these actions were technical and not intended to affect the stance of policy. In addition, a few participants remarked that an earlier release would allow the Desk to begin boosting the level of reserves sooner. A couple of participants, however, wanted to wait until the October 29–30 FOMC meeting to announce the plan so as not to surprise market participants or lead them to infer that the Committee regarded the situation as dire and thus requiring immediate action. The Chair proposed having the staff produce a draft statement that the Committee could comment on early in the following week. Formal approval could occur by notation vote with an anticipated release of a statement to the public on October 11, 2019. Participants discussed longer-term issues that the Committee might want to study once the near-term plan was in place. In particular, many participants mentioned that the Committee may want to continue its previous discussion of a standing repo facility as a part of the long-run implementation framework. Almost all of these participants noted that such a facility was an option to provide a backstop to buffer shocks that could adversely affect policy implementation, and several of these participants mentioned the potential for the facility to support banks' liquidity risk management while reducing the demand for reserves. Other participants, instead, highlighted that policy implementation had worked well with larger quantities of reserves and focused their discussion on actions to firmly establish an ample supply of reserves over the longer run. A number of participants noted that a discussion of a broader range of factors that affect the level and volatility of reserves may be appropriate at a future meeting. On October 11, 2019, the Committee approved by notation vote the following statement that outlines steps to ensure that the supply of reserves remains ample so that control over the level of the federal funds rate and other short-term interest rates is exercised primarily through the setting of the Federal Reserve's administered rates, and in which active management of the supply of reserves is not required. STATEMENT REGARDING MONETARY POLICY IMPLEMENTATION (Adopted October 11, 2019) Consistent with its January 2019 Statement Regarding Monetary Policy Implementation and Balance Sheet Normalization, the Committee reaffirms its intention to implement monetary policy in a regime in which an ample supply of reserves ensures that control over the level of the federal funds rate and other short-term interest rates is exercised primarily through the setting of the Federal Reserve's administered rates, and in which active management of the supply of reserves is not required. To ensure that the supply of reserves remains ample, the Committee approved by notation vote completed on October 11, 2019, the following steps: In light of recent and expected increases in the Federal Reserve's non-reserve liabilities, the Federal Reserve will purchase Treasury bills at least into the second quarter of next year in order to maintain over time ample reserve balances at or above the level that prevailed in early September 2019. In addition, the Federal Reserve will conduct term and overnight repurchase agreement operations at least through January of next year to ensure that the supply of reserves remains ample even during periods of sharp increases in non-reserve liabilities, and to mitigate the risk of money market pressures that could adversely affect policy implementation. These actions are purely technical measures to support the effective implementation of the FOMC's monetary policy, and do not represent a change in the stance of monetary policy. The Committee will continue to monitor money market developments as it assesses the level of reserves most consistent with efficient and effective policy implementation. The Committee stands ready to adjust the details of these plans as necessary to foster efficient and effective implementation of monetary policy. In connection with these plans, the Federal Open Market Committee voted unanimously to authorize and direct the Federal Reserve Bank of New York, until instructed otherwise, to execute transactions in the System Open Market Account in accordance with the following domestic policy directive: "Effective October 15, 2019, 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. In light of recent and expected increases in the Federal Reserve's non-reserve liabilities, the Committee directs the Desk to purchase Treasury bills at least into the second quarter of next year to maintain over time ample reserve balances at or above the level that prevailed in early September 2019. The Committee also directs the Desk to conduct term and overnight repurchase agreement operations at least through January of next year to ensure that the supply of reserves remains ample even during periods of sharp increases in non-reserve liabilities, and to mitigate the risk of money market pressures that could adversely affect policy implementation. In addition, the Committee directs the Desk to conduct 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 1.70 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 all principal payments from the Federal Reserve's holdings of Treasury securities and to continue reinvesting all principal payments from the Federal Reserve's holdings of agency debt and agency mortgage-backed securities received during each calendar month. Principal payments from agency debt and agency mortgage-backed securities up to $20 billion per month will continue to be reinvested in Treasury securities to roughly match the maturity composition of Treasury securities outstanding; principal payments in excess of $20 billion per month will continue to be reinvested in agency mortgage-backed securities. 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." _______________________ 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 the discussion of the review of monetary policy strategy, tools, and communication practices. Return to text 3. Attended through the discussion of the review of options for repo operations to support control of the federal funds rate. Return to text 4. Attended the discussion of developments in financial markets and open market operations through the discussion of the review of options for repo operations to support control of the federal funds rate. Return to text 5. Attended through the discussion of developments in financial markets and open market operations. Return to text 6. Attended the discussion of economic developments and the outlook. Return to text 7. Attended the discussion of developments in financial markets and open market operations through the end of the meeting. Return to text 8. The staff briefed the Committee in June 2019 on the possible role of a standing repo facility in the monetary policy implementation framework. Return to text

2019-09-18

Statement

Information received since the Federal Open Market Committee met in July indicates that the labor market remains strong and that economic activity has been rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although household spending has been rising at a strong pace, business fixed investment and exports have weakened. On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the Committee decided to lower the target range for the federal funds rate to 1-3/4 to 2 percent. This action supports the Committee's view that sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective are the most likely outcomes, but uncertainties about this outlook remain. As the Committee contemplates the future path of the target range for the federal funds rate, it will continue to monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective. 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 monetary policy action were Jerome H. Powell, Chair, John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Charles L. Evans; and Randal K. Quarles. Voting against the action were James Bullard, who preferred at this meeting to lower the target range for the federal funds rate to 1-1/2 to 1-3/4 percent; and Esther L. George and Eric S. Rosengren, who preferred to maintain the target range at 2 percent to 2-1/4 percent. Implementation Note issued September 18, 2019

2019-10-09

Minute

Minutes of the Federal Open Market Committee September 17–18, 2019 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 17, 2019, at 10:15 a.m. and continued on Wednesday, September 18, 2019, at 9:00 a.m.1 PRESENT: Jerome H. Powell, Chair John C. Williams, Vice Chair Michelle W. Bowman Lael Brainard James Bullard Richard H. Clarida Charles L. Evans Esther L. George Randal K. Quarles Eric Rosengren Patrick Harker, Robert S. Kaplan, Neel Kashkari, Loretta J. Mester, and Michael Strine, Alternate Members of the Federal Open Market Committee Thomas I. Barkin, Raphael W. Bostic, and Mary C. Daly, Presidents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco, 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 Stacey Tevlin, Economist Rochelle M. Edge, Eric M. Engen, William Wascher, Jonathan L. Willis, and Beth Anne Wilson, Associate Economists Lorie K. Logan, Manager pro tem, System Open Market Account Ann E. Misback, Secretary, Office of the Secretary, Board of Governors Eric Belsky,2 Director, Division of Consumer and Community Affairs, 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; Trevor A. Reeve, Deputy Director, Division of Monetary Affairs, Board of Governors Jon Faust, Senior Special Adviser to the Chair, Office of Board Members, Board of Governors Joshua Gallin, Special Adviser to the Chair, Office of Board Members, Board of Governors Brian M. Doyle, Wendy E. Dunn, Joseph W. Gruber, Ellen E. Meade, and Ivan Vidangos, 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 Antulio Bomfim, Jane E. Ihrig, 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 David López-Salido, Associate Director, Division of Monetary Affairs, Board of Governors; John J. Stevens, Associate Director, Division of Research and Statistics, Board of Governors Andrew Figura and John M. Roberts, Deputy Associate Directors, Division of Research and Statistics, Board of Governors; Christopher J. Gust, Deputy Associate Director, Division of Monetary Affairs, Board of Governors; Matteo Iacoviello and Andrea Raffo,2 Deputy Associate Directors, Division of International Finance, Board of Governors; Jeffrey D. Walker,3 Deputy Associate Director, Division of Reserve Bank Operations and Payment Systems, Board of Governors Zeynep Senyuz,4 Assistant Director, Division of Monetary Affairs, Board of Governors Penelope A. Beattie,5 Assistant to the Secretary, Office of the Secretary, Board of Governors Martin Bodenstein,2 Section Chief, Division of International Finance, Board of Governors David H. Small,6 Project Manager, Division of Monetary Affairs, Board of Governors Hess T. Chung,2 Group Manager, Division of Research and Statistics, Board of Governors Jonathan E. Goldberg, Edward Herbst,2 and Benjamin K. Johannsen, Principal Economists, Division of Monetary Affairs, Board of Governors Fabian Winkler,2 Senior Economist, Division of Monetary Affairs, Board of Governors Randall A. Williams,2 Senior Information Manager, Division of Monetary Affairs, Board of Governors James Hebden,2 Senior Technology Analyst, 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 David Altig,2 Kartik B. Athreya, Michael Dotsey, Jeffrey Fuhrer,2 Sylvain Leduc, Simon Potter,7 and Ellis W. Tallman, Executive Vice Presidents, Federal Reserve Banks of Atlanta, Richmond, Philadelphia, Boston, San Francisco, New York, and Cleveland, respectively David Andolfatto, Marc Giannoni, Evan F. Koenig,2 Paula Tkac, and Mark L.J. Wright, Senior Vice Presidents, Federal Reserve Banks of St. Louis, Dallas, Dallas, Atlanta, and Minneapolis, respectively Jonas Fisher, Giovanni Olivei, Giorgio Topa, and Patricia Zobel, Vice Presidents, Federal Reserve Banks of Chicago, Boston, New York, and New York, respectively Jonas Arias,2 Thorsten Drautzburg,2 and Leonardo Melosi,2 Senior Economists, Federal Reserve Banks of Philadelphia, Philadelphia, and Chicago, respectively Fernando Duarte,2 Financial Economist, Federal Reserve Bank of New York Review of Monetary Policy Strategy, Tools, and Communication Practices Committee participants continued their discussions related to the ongoing review of the Federal Reserve's monetary policy strategy, tools, and communication practices. Staff briefings provided an assessment of the risk that the federal funds rate could, in some future downturn, be constrained by the effective lower bound (ELB) and discussed options for mitigating the costs associated with this constraint. The staff's analysis suggested that the ELB would likely bind in most future recessions, which could make it more difficult for the FOMC to achieve its longer-run objectives of maximum employment and symmetric 2 percent inflation. The staff discussed several options for mitigating ELB risks, including using forward guidance and balance sheet policies earlier and more aggressively than in the past. The staff also illustrated the properties of "makeup" strategies using model simulations. Under such strategies, policymakers would promise to make up for past inflation shortfalls with a sustained accommodative stance of policy that is intended to generate higher future inflation. These strategies are designed to provide accommodation at the ELB by keeping the policy rate low for an extended period in order to support an economic recovery. Because of their properties both at and away from the ELB, makeup strategies may also more firmly anchor inflation expectations at 2 percent than a policy strategy that does not compensate for past inflation misses. The staff analysis emphasized, however, that the benefits of makeup strategies depend importantly on the private sector's understanding of these strategies and their confidence that future policymakers would follow through on promises to keep policy accommodative. Participants generally agreed with the staff's analysis that the risk of future ELB episodes had likely increased over time, and that future ELB episodes and the reduced effect of resource utilization on inflation could inhibit the Committee's ability to achieve its employment and inflation objectives. The increased ELB risk was attributed in part to structural changes in the U.S. economy that had lowered the longer-run real short-term interest rate and thus the neutral level of the policy rate. In this context, a couple of participants noted that uncertainty about the neutral rate made it especially challenging to determine any appropriate changes to the current framework. In light of a low neutral rate and shortfalls of inflation below the 2 percent objective for several years, some participants raised the concern that the policy space to reduce the federal funds rate in response to future recessions could be compressed further if inflation shortfalls continued and led to a decline in inflation expectations, a risk that was also discussed in the staff analysis. These participants pointed to long, ongoing ELB spells in other major foreign economies and suggested that, to avoid similar circumstances in the United States, it was important to be aggressive when confronted with forces holding inflation below objective. A couple of participants judged that the lack of monetary policy space abroad and the possibility that fiscal space in the United States might be limited reinforced the case for strengthening the FOMC's monetary policy framework as a matter of prudent planning. With regard to the current monetary policy framework, participants agreed that this framework served the Committee well in the aftermath of the financial crisis. A number of participants noted that the Committee's experience with forward guidance and balance sheet policies would likely allow the Committee to deploy these tools earlier and more aggressively in the event that they were needed. A few indicated that the uncertainty about the effectiveness of these policies was smaller than the uncertainty surrounding the effectiveness of a makeup strategy. Participants generally agreed that the current framework also served the Committee well by providing a strong commitment to achieving the Committee's maximum-employment and symmetric inflation objectives. Such a commitment was seen as flexible enough to allow the Committee to choose policy actions that best support its objectives in a wide array of economic circumstances. Because of the downside risk to inflation and employment associated with the ELB, most participants were open to the possibility that the dual-mandate objectives of maximum employment and stable prices could be best served by strategies that deliver inflation rates that over time are, on average, equal to the Committee's longer-run objective of 2 percent. Promoting such outcomes may require aiming for inflation somewhat above 2 percent when the policy rate was away from the ELB, recognizing that inflation would tend to be lower than 2 percent when the policy rate was constrained by the ELB. Participants suggested several alternatives for doing so, including strategies that make up for past inflation shortfalls and those that respond more aggressively to below-target inflation than to above-target inflation. In this context, several participants suggested that the adoption of a target range for inflation could be helpful in achieving the Committee's objective of 2 percent inflation, on average, as it could help communicate to the public that periods in which the Committee judged inflation to be moderately away from its 2 percent objective were appropriate. A couple of participants suggested analyzing policies in which there was a target range for inflation whose midpoint was modestly higher than 2 percent or in which 2 percent was an inflation floor; these policies might enhance policymakers' scope to provide accommodation as appropriate when the neutral real interest rate was low. Although ensuring inflation outcomes averaging 2 percent over time was seen as important, many participants noted that the illustrated makeup strategies delivered only modest benefits in the staff's model simulations. These modest benefits in part reflected that the responsiveness of inflation to resource slack had diminished, making it more difficult to provide sufficient accommodation to push inflation back to the Committee's objective in a timely manner. Some participants suggested that the modest effects were particularly pronounced using the FRB/US model and indicated the need for more robustness analysis of simulation results along several dimensions and for further comparison to other alternative strategies. In addition, several participants noted that the implementation of the makeup strategies in the form of either average inflation targeting or price-level targeting in the simulations was tied too rigidly to the details of particular rules. An advantage of the current framework over such alternative approaches is that it has provided the Committee with the flexibility to assess a broad range of factors and information in choosing its policy actions, and these actions can vary depending on economic circumstances in order to best achieve the Committee's dual mandate. Similarly, makeup strategies could be implemented more flexibly in order to deliver more accommodation during a future downturn and through the subsequent recovery than what could be achieved with a mechanical makeup rule. Participants also discussed a number of challenges associated with makeup strategies. Many participants expressed reservations with the makeup strategies analyzed by the staff. Some participants raised the concern that the effective use of the makeup strategies in the form of the average inflation targeting and price-level targeting rules that the staff presented depended on future policymakers following through on commitments to keep policy accommodative for a long time. Such commitments might be difficult for future policymakers to follow through on, especially in situations in which the labor market was strong and inflation was above target. A few participants acknowledged that credibly committing to makeup strategies posed challenges. However, they pointed to the commitments that central banks around the world made to inflation targeting as examples in which similar challenges had been overcome. A couple of participants raised the concern that keeping policy rates low for a long time could lead to excessive risk-taking in financial markets and threaten financial stability. However, a couple of other participants judged that macroprudential tools could be used to help ensure that any overleveraging of households and firms did not threaten the financial system, while monetary policy needed to be focused on achieving maximum employment and symmetric 2 percent inflation. A few participants viewed the communication challenges associated with average-inflation targeting strategies, including the difficulty of conveying the dangers of low inflation to the public, as greater than for some other strategies that use threshold-based forward guidance. Several participants noted that makeup strategies could unduly limit the policy response in situations in which inflation had been running above 2 percent amid signs of an impending economic downturn. Accordingly, these participants favored makeup strategies that only reversed past inflation shortfalls relative to makeup strategies that reversed both past inflation shortfalls and past overruns. Participants continued to discuss the benefits of the Committee's review of the monetary policy framework as well as the Committee's Statement on Longer-Run Goals and Monetary Policy Strategy, which articulates the Committee's approach to monetary policy. As they did at their meeting in July, participants mentioned several issues that this statement might possibly address. These issues included the conduct of monetary policy in the presence of the ELB constraint, the role of inflation expectations in the Committee's pursuit of its inflation goal, the best means of conveying the Committee's balanced approach to monetary policy, the symmetry of its inflation goal, and the time frame over which the Committee aimed to achieve it. Participants expected that they would continue their deliberations on these and other topics pertinent to the review at upcoming meetings. They also generally agreed that the Committee's consideration of possible modifications to its policy strategy, tools, and communication practices would take some time, and that the process would be careful, deliberate, and patient. Developments in Financial Markets and Open Market Operations The manager pro tem first discussed developments in global financial markets over the intermeeting period. Global financial markets were volatile over the intermeeting period, with market participants reacting to incoming information about U.S.–China trade tensions and the global growth outlook. In the weeks following the July FOMC meeting, U.S. yields declined sharply and risk asset prices fell amid a spate of largely negative news about risks to the global economic outlook. These price moves reversed to some degree in September as developments on trade and economic data turned more positive. On net, Treasury yields remained substantially lower, while the S&P 500 and corporate credit spreads reversed most or all of their earlier losses to end the period little changed. Even after the partial rebound in September, market- and survey-based indicators of policy rate expectations suggested that investors viewed it as very likely that the Committee would ease policy further at this meeting. All respondents from the Desk's Survey of Primary Dealers and Survey of Market Participants viewed a 25 basis point decrease in the target range as the most likely outcome at this meeting. Looking beyond September, most survey respondents expected another 25 basis point cut by year-end. Further out, while the median of respondents' modal forecasts for the end of 2020 pointed to no rate cuts next year, individual forecasts were much more dispersed, with nearly half of respondents expecting at least one additional 25 basis point cut in 2020, and about one-fourth expecting two or more cuts. Market participants remained attentive to a range of global risk factors that could affect the policy rate path, including trade tensions between the United States and China, developments in Europe, political tensions in Hong Kong, uncertainties related to Brexit, and escalating geopolitical tension in the Middle East following attacks on Saudi oil facilities. The manager pro tem turned next to a discussion of money market conditions. Money markets were stable over most of the period, and the reduction in the interest on excess reserves (IOER) rate following the July FOMC meeting fully passed through to money market rates. However, money markets became highly volatile just before the September meeting, apparently spurred partly by large corporate tax payments and Treasury settlements, and remained so through the time of the meeting. In an environment of greater perceived uncertainty about potential outflows related to the corporate tax payment date, typical lenders in money markets were less willing to accommodate increased dealer demand for funding. Moreover, some banks maintained reserve levels significantly above those reported in the Senior Financial Officer Survey about their lowest comfortable level of reserves rather than lend in repo markets. Money market mutual funds reportedly also held back some liquidity in order to cushion against potential outflows. Rates on overnight Treasury repurchase agreements rose to over 5 percent on September 16 and above 8 percent on September 17. Highly elevated repo rates passed through to rates in unsecured markets. Federal Home Loan Banks reportedly scaled back their lending in the federal funds market in order to maintain some liquidity in anticipation of higher demand for advances from their members and to shift more of their overnight funding into repo. In this environment, the effective federal funds rate (EFFR) rose to the top of the target range on September 16. The following morning, in accordance with the FOMC's directive to the Desk to foster conditions to maintain the EFFR in the target range, the Desk conducted overnight repurchase operations for up to $75 billion. After the operation, rates in secured and unsecured markets declined sharply. Rates in secured markets were trading around 2.5 percent after the operation. Market participants reportedly expected that additional temporary open market operations would be necessary both over subsequent days and around the end of the quarter. Many also reportedly expected another 5 basis point technical adjustment of the IOER 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 during the intermeeting period. Staff Review of the Economic Situation The information available for the September 17–18 meeting indicated that labor market conditions remained strong and that real gross domestic product (GDP) appeared to be increasing at a moderate rate in the third quarter. Consumer price inflation, as measured by the 12-month percentage change in the price index for personal consumption expenditures (PCE), was below 2 percent in July. Survey-based measures of longer-run inflation expectations were little changed. Total nonfarm payroll employment expanded at a solid pace in July and August, al­though at a slower rate than in the first half of the year. (Separately, the Bureau of Labor Statistics' preliminary estimate of the upcoming benchmark revision to payroll employment, which will be incorporated in the published data in February 2020, indicated that the revised pace of average monthly job gains from April 2018 to March 2019 would be notably slower than in the current published data.) The unemployment rate remained at 3.7 percent through August, and both the labor force participation rate and the employment-to-population ratio moved up. The unemployment rates for African Americans and Hispanics declined over July and August, while the rates for whites and Asians increased; the unemployment rate for each group was below its level at the end of the previous economic expansion, though persistent differentials between these rates remained. The average share of workers employed part time for economic reasons in July and August continued to be below its level in late 2007. Both the rate of private-sector job openings and the rate of quits moved roughly sideways in June and July and were still at relatively high levels; the four-week moving average of initial claims for unemployment insurance benefits through early September was near historically low levels. Total labor compensation per hour in the business sector increased 4.4 percent over the four quarters ending in the second quarter, a faster rate than a year earlier. Average hourly earnings for all employees rose 3.2 percent over the 12 months ending in August, the same pace as a year earlier. Total consumer prices, as measured by the PCE price index, increased 1.4 percent over the 12 months ending in July. This increase was slower than a year earlier, as core PCE price inflation (which excludes changes in consumer food and energy prices) moved down to 1.6 percent, consumer food price inflation remained below core inflation, and consumer energy prices declined. The average monthly change in core PCE prices in recent months was faster than earlier this year, suggesting that the soft inflation readings during the earlier period were transitory. The trimmed mean measure of 12-month PCE price inflation constructed by the Federal Reserve Bank of Dallas remained at 2 percent in July. The consumer price index (CPI) rose 1.7 percent over the 12 months ending in August, while core CPI inflation was 2.4 percent. Recent survey-based measures of longer-run inflation expectations were little changed on balance. The preliminary September reading from the University of Michigan Surveys of Consumers dipped after edging up in August, but it remained within its recent range; the measures of longer-run inflation expectations from the Desk's Survey of Primary Dealers and Survey of Market Participants were little changed. Real consumer expenditures appeared to be rising solidly in the third quarter after expanding strongly in the second quarter. Real PCE rose briskly in July, while the components of the nominal retail sales data used by the Bureau of Economic Analysis (BEA) to estimate PCE were flat in August and the rate of sales of light motor vehicles only edged up, suggesting some slowing in consumer spending growth in the third quarter from its strong second-quarter pace. Key factors that influence consumer spending—including a low unemployment rate, further gains in real disposable income, high levels of households' net worth, and generally low borrowing rates—were supportive of solid real PCE growth in the near term. The preliminary September reading on the Michigan survey measure of consumer sentiment picked up a little after weakening notably in August, al­though the Conference Board survey measure of consumer confidence did not show a similar decline in August. Real residential investment seemed to be picking up a little in the third quarter after declining over the previous year and a half. Starts of new single-family homes were higher in July and August than the second-quarter average, and starts of multifamily units rose in August after falling back in July. 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 higher in July and August than its second-quarter average. Sales of existing homes rose modestly in July, while new home sales declined following an outsized increase in June. Real nonresidential private fixed investment looked to be declining further in the third quarter. Nominal shipments of nondefense capital goods excluding aircraft decreased in July, and forward-looking indicators generally pointed to continued softness in business equipment spending. Orders for nondefense capital goods excluding aircraft increased in June but were still below the level of shipments, most measures of business sentiment deteriorated, analysts' expectations of firms' longer-term profit growth declined further, and trade policy concerns continued to weigh on firms' investment decisions. Nominal business expenditures for nonresidential structures outside the drilling and mining sector decreased 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—continued to decline through mid-September. Industrial production increased modestly, on net, over July and August, but production remained notably lower than at the beginning of the year. Automakers' assembly schedules indicated that the production of light motor vehicles would be roughly flat in the near term (al­though the labor strike at General Motors was expected to temporarily disrupt vehicle production), while new orders indexes from national and regional manufacturing surveys and a persistent drag from trade tariffs pointed toward continued softness in factory output in coming months. Total real government purchases appeared to be rising at a slower pace in the third quarter than in the second quarter. Federal defense spending over July and August decelerated, and federal hiring of temporary workers for next year's decennial census was modest in August. State and local government payrolls rose moderately over July and August, and nominal spending by these governments on structures in July was below its second-quarter average. The nominal U.S. international trade deficit remained about unchanged in June before narrowing in July. Exports, which had been soft over most of the past year, declined sharply in June but partially rebounded in July. This pattern was particularly notable in exports of non-aircraft capital goods and consumer goods. Imports also declined sharply in June and then declined a little further in July. Imports of oil and consumer goods fell in June, while imports of capital goods dropped significantly in July. The BEA estimated that the change in net exports was a drag of about 3/4 percentage point on real GDP growth in the second quarter. Foreign economic growth remained subdued in the second quarter. Growth picked up in Canada as oil production rebounded, but growth slowed sharply in Europe amid a downturn in manufacturing activity and persistent policy-related uncertainty. Growth also slowed in China and India. Recent indicators suggested widespread weakness in manufacturing abroad even as services activity appeared to be holding up relatively well. Foreign inflation rose in the second quarter, pushed up by earlier increases in oil prices as well as by rising food prices in some emerging economies. However, data on foreign core consumer prices showed little sign of underlying inflationary pressures abroad. Late in the intermeeting period, an attack on a key oil facility in Saudi Arabia disrupted Saudi oil production and caused an initial spike in prices on near-dated oil futures contracts. Staff Review of the Financial Situation Financial market developments over the intermeeting period were driven by an escalation in international trade tensions, growing concerns about the global economic growth outlook, and the prospect of more policy accommodation by central banks. Nominal Treasury yields posted very large declines in August as investors reacted to the U.S. Administration's announcement of additional tariffs on Chinese goods, along with the depreciation of the Chinese renminbi through the perceived threshold of 7 renminbi per U.S. dollar and the associated implications of these actions for the global economic outlook. Treasury yields partially rebounded following better-than-expected incoming economic data in the United States and abroad, a perceived reduction in the probability of a no‑deal Brexit, and some positive headlines about trade policy. The market-implied path of the federal funds rate shifted down on net. Broad equity price indexes were down as much as 6 percent in early August but almost fully recovered by the end of the intermeeting period. Spreads on investment-grade corporate bonds widened modestly, while those on speculative-grade corporate bonds were little changed on net. Financing conditions for businesses and households were largely unaffected by the intermeeting turbulence in financial markets and remained generally supportive of spending and economic activity. Measures of expectations of the near- and medium-term path for the federal funds rate were particularly sensitive to news about U.S.–China trade tensions, while FOMC communications had only modest effects on market-based measures of policy rate expectations. A straight read of the option-implied probability distribution of the federal funds rate suggested that the odds investors attached to a 25 basis point reduction in the target range of the federal funds rate at the September FOMC meeting increased from about 50 percent at the time of the July FOMC meeting to 90 percent by the end of the intermeeting period. Respondents to the Desk's Survey of Primary Dealers and Survey of Market Participants assigned, on average, similarly high odds to a rate decrease at the September FOMC meeting. In addition, market-implied expectations for the federal funds rate at year-end and beyond moved down. A straight read of OIS (overnight index swap) forward rates suggested that investors expected the federal funds rate to decline about 45 basis points by year-end, to a level nearly 10 basis points lower than was expected at the time of the July FOMC meeting, and to decrease an additional roughly 45 basis points by the end of 2020. Nominal Treasury yields decreased, on net, over the intermeeting period, with longer-term yields falling the most. The spread between 10‑year and 3-month Treasury yields became a bit more negative, while the spread between 10-year and 2-year Treasury yields turned negative for the first time since 2007 and fluctuated around zero until the September FOMC meeting. Measures of inflation compensation derived from Treasury Inflation-Protected Securities declined on net. Broad stock price indexes decreased slightly, on net, over the intermeeting period amid heightened volatility. The escalation of trade tensions between China and the United States weighed on equity prices, but investors' expectations that major central banks would shift toward more accommodative monetary policies provided some support. Equity prices were also boosted by better-than-anticipated corporate earnings and retail-sector data. Stock prices of firms with high exposure to China underperformed the broader market somewhat, as did bank stocks amid downward revisions to banks' earnings forecasts. Conversely, the stock prices of utilities and real estate firms increased noticeably, reportedly benefiting from demand by investors reaching for less cyclical and higher-yielding assets. One-month option-implied volatility on the S&P 500 index—the VIX—was little changed, on net, over the intermeeting period and remained at the lower end of its historical distribution after retracing a sharp increase in early August. Despite the volatility in many domestic and global financial markets over the intermeeting period, conditions in domestic short-term funding markets remained stable until the Monday before the September FOMC meeting, when flows associated with a combination of corporate tax payments and Treasury coupon securities settlements led to significant tightening of conditions, particularly for overnight funding. The EFFR rose to the top of the target range on September 16 and exceeded it by 5 basis points on September 17, after which funding pressures eased somewhat following the Desk's open market operations. On net, the EFFR averaged 2.14 percent over the current intermeeting period, with the spread to the IOER rate down a bit relative to the previous intermeeting period. Early in the intermeeting period, bond yields in the advanced foreign economies (AFEs) plunged and foreign equities declined notably following an increase in U.S.–China trade tensions. Some weakness in foreign economic data, growing concerns about global growth, and the prospect of more monetary policy accommodation abroad contributed to further declines in yields. Later in the period, AFE yields partially rebounded and foreign equity prices fully recovered on some easing of U.S.­â€“China trade tensions, as well as perceptions of reduced political uncertainty in the United Kingdom and Italy. Financial market reactions were mixed after the European Central Bank (ECB) announced a package of policy easing measures, including a rate cut on deposits at the ECB, resumption of its asset purchase program, and more favorable terms for longer-term lending to banks. The dollar appreciated against emerging market currencies but was little changed, on balance, against AFE currencies, leaving the broad dollar index slightly higher. Emerging market sovereign bond spreads widened notably. The Argentine peso depreciated sharply and Argentine sovereign yields soared following the defeat of the current pro-market president in the primary election and the subsequent announcement of plans for debt restructuring and the imposition of capital controls. Financing conditions for nonfinancial businesses remained accommodative. Overall issuance of corporate bonds was solid in August, driven by resilient investment-grade issuance. While speculative-grade corporate bond issuance was somewhat subdued in August, it was comparable to that seen over the same period in 2018. Growth of commercial and industrial loans at banks ticked up, driven by faster growth at large domestic banks. There were no initial public equity offerings by domestic firms in August amid increased market volatility, but several deals were expected to be completed in the coming months. On balance, the credit quality of nonfinancial corporations weakened slightly, with the volume of nonfinancial corporate bond downgrades modestly outpacing that of upgrades in recent months. Credit conditions for both small businesses and municipalities remained accommodative on balance. In the commercial real estate (CRE) sector, financing conditions remained generally accommodative. Bank CRE loan growth slowed moderately since the second quarter, driven by slower growth in loans secured by nonfarm nonresidential properties. The volume of agency and non-agency commercial mortgage-backed securities issuance was slightly weaker in July and August than in the same period last year, though industry analysts reportedly anticipated that issuance would soon pick up in response to recent declines in interest rates. Financing conditions in the residential mortgage market eased over the intermeeting period. Residential mortgage rates declined less than long-term Treasury yields, as the increase in prepayment risk and the rise in implied interest rate volatility reportedly reduced the demand for mortgage-backed securities. Home-purchase originations and refinancing originations both rose. Financing conditions in consumer credit markets remained generally supportive of growth in consumer spending, al­though supply conditions continued to be tight for subprime credit card borrowers. Consumer credit expanded at a moderate pace in the second quarter overall, with bank credit data pointing to continued growth through July and August. In consumer asset-backed securities markets, issuance was solid, and spreads remained at relatively low levels, though somewhat above their post-crisis averages. Staff Economic Outlook The projection for U.S. economic activity prepared by the staff for the September FOMC meeting was little changed in the near term; real GDP growth was still forecast to be slower in the second half of the year than in the first half, mostly attributable to continued soft business investment and a slower increase in government spending. The projection for real GDP growth over the medium term was a bit weaker than the previous forecast, primarily reflecting the effects of a higher projected path for the foreign exchange value of the dollar and a lower trajectory for economic growth abroad, which were partially offset by a lower assumed path for interest rates. Real GDP was forecast to expand at a rate a little above the staff's estimate of potential output growth in 2019 and 2020 and then slow to a pace slightly below potential output growth in 2021 and 2022. The unemployment rate was projected to be roughly flat through 2022 and to remain below the staff's estimate of its longer-run natural rate, which was revised down a little. In addition, the staff revised up its estimate of the level of trend productivity in recent years after incorporating the BEA's recent annual revisions to the national income and product accounts. Both of these supply-side adjustments led to a somewhat higher projected path for potential output, implying that estimates of current and projected resource utilization were less tight than the staff previously assumed. The staff's forecast of total PCE price inflation for this year was revised down somewhat, reflecting slightly lower projected paths for consumer food and energy prices, along with a little lower forecast for core PCE prices. The core PCE price inflation forecast for this year was revised down to reflect recent data as well as downward-revised data for earlier in the year from the BEA's annual revision. Both total and core inflation were projected to move up slightly next year, as the low readings early this year were expected to be transitory; nevertheless, both inflation measures were forecast to continue to run below 2 percent through 2022. The staff continued to view the uncertainty around its projections for real GDP growth, the unemployment rate, and inflation as generally similar to the average of the past 20 years. Moreover, the staff still judged that the risks to the forecast for real GDP growth were tilted to the downside, with a corresponding skew to the upside for the unemployment rate. Important factors in that assessment were that international trade tensions and foreign economic developments seemed more likely to move in directions that could have significant negative effects on the U.S. economy than to resolve more favorably than assumed. In addition, softness in business investment and manufacturing so far this year was seen as pointing to the possibility of a more substantial slowing in economic growth than the staff projected. The risks to the inflation projection were also viewed as having a downward skew, in part because of the downside risks to the forecast for economic activity 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 2019 through 2022 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, which is an addendum to these minutes. Participants agreed that the labor market had remained strong over the intermeeting period and that economic activity had risen at a moderate rate. Job gains had been solid, on average, in recent months, and the unemployment rate had remained low. Al­though household spending had risen at a strong pace, business fixed investment and exports had weakened. On a 12-month basis, overall inflation and inflation for items other than food and energy were running below 2 percent. Market-based measures of inflation compensation remained low; survey-based measures of longer-term inflation expectations were little changed. Participants generally viewed the baseline economic outlook as positive and indicated that their views of the most likely outcomes for economic activity and inflation had changed little since the July meeting. However, for most participants, that economic outlook was premised on a somewhat more accommodative path for policy than in July. Participants generally had become more concerned about risks associated with trade tensions and adverse developments in the geopolitical and global economic spheres. In addition, inflation pressures continued to be muted. Many participants expected that real GDP growth would moderate to around its potential rate in the second half of the year. Participants agreed that consumer spending was increasing at a strong pace. They also expected that, in the period ahead, household spending would likely remain on a firm footing, supported by strong labor market conditions, rising incomes, and accommodative financial conditions. Several participants indicated that the housing sector was starting to rebound, stimulated by a significant decline in mortgage rates. With regard to the contrast between robust consumption growth and weak investment growth, several participants mentioned that uncertainties in the business outlook and sustained weak investment could eventually lead to slower hiring, which, in turn, could damp the growth of income and consumption. In their discussion of the business sector, participants saw trade tensions and concerns about the global outlook as the main factors weighing on business investment, exports, and manufacturing production. Participants judged that trade uncertainty and global developments would continue to affect firms' investment spending, and that this uncertainty was discouraging them from investing in their businesses. A couple of participants noted that businesses had the capacity to adjust to ongoing uncertainty concerning trade, and some firms were reconfiguring supply chains and making logistical arrangements as part of contingency planning to mitigate the effects of trade tensions on their businesses. Participants discussed developments in the manufacturing and the agricultural sectors of the U.S. economy. Manufacturing production remained lower than at the beginning of the year, and recent indicators suggested that conditions were unlikely to improve materially over the near term. Participants saw the ongoing global slowdown and trade uncertainty as contributing importantly to these declines. A few participants noted ongoing challenges in the agricultural sector, including those associated with tariffs, weak export demand, and more intense financial burdens arising from the increase in carryover debt in preceding years. Participants commented on the potential disruption to global oil production arising from the attack on Saudi Arabia's facilities. Participants judged that conditions in the labor market remained strong, with the unemployment rate near historical lows and continued solid job gains, on average, in recent months. The labor force participation rate of prime-age individuals, especially of prime-age women, moved up in August, continuing its upward trajectory, and the unemployment rate of African Americans fell to its lowest rate on record. However, a number of participants noted that, although the labor market was clearly in a strong position, the preliminary benchmark revision by the Bureau of Labor Statistics indicated that payroll employment gains would likely show less momentum coming into this year when the revisions are incorporated in published data early next year. A few participants observed that it would be important to be vigilant in monitoring incoming data for any sign of softening in labor market conditions. That said, reports from business contacts in many Districts pointed to continued strong labor demand, with some firms still reporting difficulties finding qualified workers and others broadening their recruiting to include traditionally marginalized groups. In some Districts, employers were also expanding training and provision of nonwage benefits, which could help sustain their expansion of hiring against a background of a very tight national labor market without spurring above-trend aggregate wage growth. Some firms were also reluctant to raise wages because of their limited pricing power, while others thought the wages they were offering were in line with the skill sets of the workers available to fill new positions. Participants generally viewed overall wage growth as broadly consistent with modest average rates of labor productivity growth in recent years and as exerting little upward pressure on inflation. A couple of participants noted that, with inflationary pressures remaining muted and wage growth moderate even as employment and spending expanded further, they had again adjusted downward their estimates of the longer-run normal unemployment rate. In their discussion of inflation developments, participants noted that, despite a recent firming in the incoming data, readings on overall and core PCE inflation had continued to run below the Committee's symmetric 2 percent objective. Furthermore, in light of weakness in the global economy, perceptions of downside risks to growth, and subdued inflation pressures, some participants continued to view the risks to the outlook for inflation as weighted to the downside. Some participants, however, saw the recent inflation data as consistent with their previous assessment that much of the weakness seen early in the year was transitory. In this connection, several participants noted that recent monthly readings, notably for CPI inflation, seemed broadly consistent with the Committee's longer-run inflation objective of 2 percent, while the trimmed mean measure of PCE inflation, constructed by the Federal Reserve Bank of Dallas, remained at 2 percent in July. In their discussion of the outlook for inflation, participants generally agreed that, under appropriate policy, inflation would move up to the Committee's 2 percent objective over the medium term. Participants saw inflation expectations as reasonably well anchored, but many participants observed that market-based measures of inflation compensation and some survey measures of consumers' inflation expectations were at historically low levels. Some of these participants further noted that longer-term inflation expectations could be somewhat below levels consistent with the Committee's 2 percent inflation objective, or that continued weakness in inflation could prompt expectations to drift lower. Participants generally judged that downside risks to the outlook for economic activity had increased somewhat since their July meeting, particularly those stemming from trade policy uncertainty and conditions abroad. In addition, al­though readings on the labor market and the overall economy continued to be strong, a clearer picture of protracted weakness in investment spending, manufacturing production, and exports had emerged. Participants also noted that there continued to be a significant probability of a no-deal Brexit, and that geopolitical tensions had increased in Hong Kong and the Middle East. Several participants commented that, in the wake of this increase in downside risk, the weakness in business spending, manufacturing, and exports could give rise to slower hiring, a development that would likely weigh on consumption and the overall economic outlook. Several participants noted that statistical models designed to gauge the probability of recession, including those based on information from the yield curve, suggested that the likelihood of a recession occurring over the medium term had increased notably in recent months. However, a couple of these participants stressed the difficulty of extracting the right signal from these probability models, especially in the current period of unusually low levels of term premiums. With regard to developments in financial markets, participants noted that longer-term U.S. Treasury rates had been volatile over the intermeeting period but, on net, had registered a sizable decline. Participants observed that a key source of downward pressure on Treasury rates arose from flight-to-safety flows, driven by downside risks to global growth, escalating trade tensions, and disappointing global data. Low interest rates abroad were also considered an important influence on U.S. longer-term rates. Participants expressed a range of views about the implications of low longer-term Treasury rates. Some participants judged that a prolonged inversion of the yield curve could be a matter of concern. Participants also noted that equity prices had exhibited volatility but had been largely flat, on balance, over the intermeeting period. Several participants cited considerations that led them to be concerned about financial stability, including low risk spreads and a buildup of corporate debt, corporate stock buybacks financed through low-cost leverage, and the pace of lending in the CRE market. However, several others pointed to signs that the financial system remained resilient. In their consideration of the monetary policy options at this meeting, most participants believed that a reduction of 25 basis points in the target range for the federal funds rate would be appropriate. In discussing the reasons for such a decision, these participants pointed to considerations related to the economic outlook, risk management, and the need to center inflation and inflation expectations on the Committee's longer-run objective of 2 percent. Participants noted that there had been little change in their economic outlook since the July meeting and that incoming data had continued to suggest that the pace of economic expansion was consistent with the maintenance of strong labor market conditions. However, a couple of participants pointed out that data revisions announced in recent months implied that the economy had likely entered the year with somewhat less momentum than previously thought. In addition, data received since July had confirmed the weakening in business fixed investment and exports. One risk that the economy faced was that the softness recorded of late in firms' capital formation, manufacturing, and exporting activities might spread to their hiring decisions, with adverse implications for household income and spending. Participants observed that such an eventuality was not embedded in their baseline outlook; however, a couple of them indicated that this was partly because they assumed that an appropriate adjustment to the policy rate path would help forestall that eventuality. Several also noted that, because monetary policy actions affected economic activity with a lag, it was appropriate to provide the requisite policy accommodation now to support economic activity over coming quarters. Participants favoring a modest adjustment to the stance of monetary policy at this juncture cited other risks to the economic outlook that further underscored the case for such a move. As their discussion of risks had highlighted, downside risks had become more pronounced since July: Trade uncertainty had increased, prospects for global growth had become more fragile, and various intermeeting developments had intensified geopolitical risks. Against this background, risk-management considerations implied that it would be prudent for the Committee to adopt a somewhat more accommodative stance of policy. In addition, a number of participants suggested that a reduction at this meeting in the target range for the federal funds rate would likely better align the target range with a variety of indicators of the appropriate policy stance, including those based on estimates of the neutral interest rate. A few participants observed that the considerations favoring easing were reinforced by the proximity of the federal funds rate to the ELB. If policymakers provided adequate accommodation while still away from the ELB, this course of action would help forestall the possibility of a prolonged ELB episode. Many participants also cited the level of inflation or inflation expectations as justifying a reduction of 25 basis points in the federal funds rate at this meeting. Inflation had generally fallen short of the Committee's objective for several years and, notwithstanding some stronger recent monthly readings on inflation, the 12-month rate was still below 2 percent. Some estimates of trend inflation were also below 2 percent. Several participants additionally stressed that survey measures of longer-term inflation expectations and market-based measures of inflation compensation were near historical lows and that these values pointed to the possibility that inflation expectations were below levels consistent with the 2 percent objective or could soon fall below such levels. Against this backdrop, participants suggested that a policy easing would help underline policymakers' commitment to the symmetric 2 percent longer-run objective. With inflation pressures muted and U.S. inflation likely being weighed down by global disinflationary forces, policymakers saw little chance of an outsized increase in inflation in response to additional policy accommodation and argued that such an increase, should it occur, could be addressed in a straightforward manner using conventional monetary policy tools. Several participants favored maintaining the existing target range for the federal funds rate at this meeting. These participants suggested that the baseline projection for the economy had changed very little since the Committee's previous meeting and that the state of the economy and the economic outlook did not justify a shift away from the current policy stance, which they felt was already adequately accommodative. They acknowledged the uncertainties that currently figured importantly in evaluations of the economic outlook, but they contended that the key uncertainties were unlikely to be resolved soon. Furthermore, as they did not believe that these uncertainties would derail the expansion, they did not see further policy accommodation as needed at this time. Changes in the stance of policy, they believed, should instead occur only when the macroeconomic data readily justified those moves. In this connection, a couple of participants suggested that, if it decided to provide more policy accommodation at the present juncture, the Committee might be taking out too much insurance against possible future shocks, leaving monetary policy with less scope to boost aggregate demand in the event that such shocks materialized. A few of the participants favoring an unchanged target range for the federal funds rate also expressed concern that an easing of monetary policy at this meeting could exacerbate financial imbalances. A couple of participants indicated their preference for a 50 basis point cut in the federal funds rate at this meeting. These participants suggested that a larger policy move would help reduce the risk of an economic downturn and would more appropriately recognize important recent developments, such as slowing job gains, weakening investment, and continued low values of market-based measures of inflation compensation. In addition, these participants stressed the need for a policy stance—possibly one using enhanced forward guidance—that was sufficiently accommodative to make it unlikely that the United States would experience a protracted period of the kind seen abroad in which the economy became mired in a combination of undesirably low inflation, weak economic activity, and near-zero policy rates. They also argued that it was desirable for the Committee to seek and maintain a level of accommodation sufficient to deliver inflation at 2 percent on a sustained basis and that such a policy would be consistent with inflation exceeding 2 percent for a time. With regard to monetary policy beyond this meeting, participants agreed that policy was not on a preset course and would depend on the implications of incoming information for the evolution of the economic outlook. A few participants judged that the expectations regarding the path of the federal funds rate implied by prices in financial markets were currently suggesting greater provision of accommodation at coming meetings than they saw as appropriate and that it might become necessary for the Committee to seek a better alignment of market expectations regarding the policy rate path with policymakers' own expectations for that path. Several participants suggested that the Committee's postmeeting statement should provide more clarity about when the recalibration of the level of the policy rate in response to trade uncertainty would likely come to an end. Participants' Discussion of Recent Money Market Developments The manager pro tem provided a summary of the most recent developments in money markets. Open market operations conducted on the previous day had helped to ease strains in money markets, but the EFFR had nonetheless printed 5 basis points above the top of the target range. With significant pressures still evident in repo markets and the federal funds market, and in accordance with the FOMC's directive to maintain the federal funds rate within the target range, the Desk conducted another repo operation on the morning of the second day of the meeting. The staff presented a proposal to lower the IOER rate and the overnight reverse repurchase agreement rate by 5 basis points, relative to the target range for the federal funds rate, in order to foster trading of federal funds within the target range. Participants agreed that developments in money markets over recent days implied that the Committee should soon discuss the appropriate level of reserve balances sufficient to support efficient and effective implementation of monetary policy in the context of the ample-reserves regime that the Committee had chosen. A few participants noted the possibility of resuming trend growth of the balance sheet to help stabilize the level of reserves in the banking system. Participants agreed that any Committee decision regarding the trend pace of balance sheet expansion necessary to maintain a level of reserve balances appropriate to facilitate policy implementation should be clearly distinguished from past large-scale asset purchase programs that were aimed at altering the size and composition of the Federal Reserve's asset holdings in order to provide monetary policy accommodation and ease overall financial conditions. Several participants suggested that such a discussion could benefit from also considering the merits of introducing a standing repurchase agreement facility as part of the framework for implementing monetary policy. Committee Policy Action In their discussion of monetary policy for this meeting, members noted that information received since the July meeting indicated that the labor market remained strong and that economic activity had been rising at a moderate rate. Job gains had been solid, on average, in recent months, and the unemployment rate had remained low. Household spending had been rising at a strong pace. However, business fixed investment and exports had weakened, and this outcome suggested that risks and uncertainty associated with international trade developments and with ongoing weakness in global economic growth were continuing to weigh on the domestic economy. On a 12-month basis, both the overall inflation rate and inflation for items other than food and energy were running below 2 percent. Market-based measures of inflation compensation remained low. Survey-based measures of longer-term inflation expectations were little changed. In light of these developments, most members agreed to lower the target range for the federal funds rate to 1-3/4 to 2 percent at this meeting. With this adjustment to policy, those members who supported the policy action sought to make the overall stance of monetary policy most consistent with helping to offset the effects on aggregate demand of weak global growth and trade policy uncertainty, insure against further downside risks arising from those sources and from geopolitical developments, and promote a more rapid return of inflation to the Committee's symmetric 2 percent objective than would otherwise occur. A couple of these members observed that, because monetary policy actions affected aggregate spending with a lag, the present meeting was an appropriate occasion for providing accommodation that would support economic activity in the period ahead. Two members preferred to maintain the current target range for the federal funds rate at this meeting. These members noted that economic data received over the intermeeting period had been largely positive and that they anticipated, under an unchanged policy stance, continued strong labor markets and solid growth in activity, with inflation gradually moving up to the Committee's 2 percent objective. These members also suggested that providing further accommodation during a period of high economic activity and elevated asset prices could have adverse consequences for financial stability. One member preferred a reduction in the target range of 50 basis points in the federal funds rate at this meeting. This member suggested that such a larger rate adjustment would be more consistent with the achievement of the Committee's objectives over time and, in particular, with helping preclude the possibility of a protracted period in which inflation and employment were below the Committee's objectives. 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 maximum-employment objective and its symmetric 2 percent inflation objective. They also agreed that those 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. With regard to the postmeeting statement, members agreed to update the language of the Committee's description of incoming data to acknowledge the weakening in investment spending and in U.S. exports, as well as the recent strong rate of increase of household spending. 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 September 19, 2019, 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 1.70 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 all principal payments from the Federal Reserve's holdings of Treasury securities and to continue reinvesting all principal payments from the Federal Reserve's holdings of agency debt and agency mortgage-backed securities received during each calendar month. Principal payments from agency debt and agency mortgage-backed securities up to $20 billion per month will continue to be reinvested in Treasury securities to roughly match the maturity composition of Treasury securities outstanding; principal payments in excess of $20 billion per month will continue to be reinvested in agency mortgage-backed securities. 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 remains strong and that economic activity has been rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Al­though household spending has been rising at a strong pace, business fixed investment and exports have weakened. On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the Committee decided to lower the target range for the federal funds rate to 1-3/4 to 2 percent. This action supports the Committee's view that sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective are the most likely outcomes, but uncertainties about this outlook remain. As the Committee contemplates the future path of the target range for the federal funds rate, it will continue to monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective. 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, Michelle W. Bowman, Lael Brainard, Richard H. Clarida, Charles L. Evans, and Randal K. Quarles. Voting against this action: James Bullard, Esther L. George, and Eric Rosengren. President Bullard dissented because he believed that lowering the target range for the federal funds rate by 50 basis points at this time would provide insurance against further declines in expected inflation and a slowing economy subject to elevated downside risks. In addition, a 50 basis point cut at this time would help promote a more rapid return of inflation and inflation expectations to target. President George dissented because she believed that an unchanged setting of policy was appropriate based on incoming data and the outlook for economic activity over the medium term. Recognizing the risks to the outlook from the effects of trade policy and weaker global activity, President George would be prepared to adjust policy should incoming data point to a materially weaker outlook for the economy. President Rosengren dissented because he judged that monetary policy was already accommodative. In his view, additional accommodation was not needed for an economy in which labor markets are already tight and could pose risks of further inflating the prices of risky assets and encouraging households and firms to take on too much leverage. Consistent with the Committee's decision to lower the target range for the federal funds rate to 1-3/4 to 2 percent, the Board of Governors voted unanimously to lower the interest rate paid on required and excess reserve balances to 1.80 percent and voted unanimously to approve a 1/4 percentage point decrease in the primary credit rate to 2.50 percent, effective September 19, 2019. It was agreed that the next meeting of the Committee would be held on Tuesday–Wednesday, October 29–30, 2019. The meeting adjourned at 10:40 a.m. on September 18, 2019. Notation Vote By notation vote completed on August 20, 2019, the Committee unanimously approved the minutes of the Committee meeting held on July 30–31, 2019. _______________________ 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 the review of the monetary policy framework. Return to text 3. Attended through the discussion of developments in financial markets and open market operations. Return to text 4. Attended the discussion of developments in financial markets and open market operations. Return to text 5. Attended Tuesday's session only. Return to text 6. Attended the discussion of the review of the monetary policy framework through the end of the meeting. Return to text 7. Attended opening remarks for Tuesday session only. Return to text

2019-08-21

Minute

Minutes of the Federal Open Market Committee July 30–31, 2019 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 30, 2019, at 10:00 a.m. and continued on Wednesday, July 31, 2019, at 9:00 a.m.1 PRESENT: Jerome H. Powell, Chair John C. Williams, Vice Chair Michelle W. Bowman Lael Brainard James Bullard Richard H. Clarida Charles L. Evans Esther L. George Randal K. Quarles Eric Rosengren Patrick Harker, Robert S. Kaplan, Neel Kashkari, Loretta J. Mester, and Michael Strine, Alternate Members of the Federal Open Market Committee Thomas I. Barkin, Raphael W. Bostic, and Mary C. Daly, Presidents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco, 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 Stacey Tevlin, Economist Rochelle M. Edge, Beverly Hirtle, Christopher J. Waller, William Wascher, and Beth Anne Wilson, Associate Economists Lorie K. Logan, Manager pro tem, System Open Market Account Ann E. Misback,2 Secretary, Office of the Secretary, Board of Governors Eric Belsky,3 Director, Division of Consumer and Community Affairs, Board of Governors; Matthew J. Eichner,4 Director, Division of Reserve Bank Operations and Payment Systems, Board of Governors; Andreas Lehnert, Director, Division of Financial Stability, Board of Governors Margie Shanks,5 Deputy Secretary, Office of the Secretary, Board of Governors Arthur Lindo, Deputy Director, Division of Supervision and Regulation, Board of Governors; Trevor A. Reeve, Deputy Director, Division of Monetary Affairs, Board of Governors Jon Faust, Senior Special Adviser to the Chair, Office of Board Members, Board of Governors Joshua Gallin, Special Adviser to the Chair, Office of Board Members, Board of Governors Brian M. Doyle,6 Wendy E. Dunn, 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 Shaghil Ahmed, 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 Don Kim, Edward Nelson, and Robert J. Tetlow, Senior Advisers, Division of Monetary Affairs, Board of Governors; S. Wayne Passmore, Senior Adviser, Division of Research and Statistics, Board of Governors Marnie Gillis DeBoer and Min Wei, Associate Directors, Division of Monetary Affairs, Board of Governors; Elizabeth Klee, Associate Director, Division of Financial Stability, Board of Governors; John J. Stevens, Associate Director, Division of Research and Statistics, Board of Governors Norman J. Morin, Deputy Associate Director, Division of Research and Statistics, Board of Governors; Andrea Raffo, Deputy Associate Director, Division of International Finance, Board of Governors; Jeffrey D. Walker,4 Deputy Associate Director, Division of Reserve Bank Operations and Payment Systems, Board of Governors Etienne Gagnon, Section Chief, 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 Alyssa G. Anderson, Principal Economist, Division of Monetary Affairs, Board of Governors; Dario Caldara3 and Albert Queralto,3 Principal Economists, Division of International Finance, Board of Governors Isabel Cairó,3 Senior Economist, Division of Research and Statistics, Board of Governors Randall A. Williams, Senior Information Manager, Division of Monetary Affairs, Board of Governors Ellen J. Bromagen, First Vice President, Federal Reserve Bank of Chicago David Altig, Michael Dotsey, and Jeffrey Fuhrer, Executive Vice Presidents, Federal Reserve Banks of Atlanta, Philadelphia, and Boston, respectively Marc Giannoni,3 Spencer Krane, and Paula Tkac,3 Senior Vice Presidents, Federal Reserve Banks of Dallas, Chicago, and Atlanta, respectively Robert G. Valletta, Group Vice President, Federal Reserve Bank of San Francisco Terry Fitzgerald, Christopher J. Neely,3 and Patricia Zobel, Vice Presidents, Federal Reserve Banks of Minneapolis, St. Louis, and New York, respectively Andreas L. Hornstein, Senior Advisor, Federal Reserve Bank of Richmond Karel Mertens, Senior Economic Policy Advisor, Federal Reserve Bank of Dallas Joseph G. Haubrich, Senior Economic and Policy Advisor, Federal Reserve Bank of Cleveland Brent Bundick, Research and Policy Advisor, Federal Reserve Bank of Kansas City Vasco Curdia,3 Research Advisor, Federal Reserve Bank of San Francisco Review of Monetary Policy Strategy, Tools, and Communication Practices Committee participants began their discussions related to the ongoing review of the Federal Reserve's monetary policy strategy, tools, and communication practices. Staff briefings provided a retrospective on the Federal Reserve's monetary policy actions since the financial crisis, together with background and analysis regarding some key issues. In its policy response during the recession and the subsequent economic recovery, the Committee lowered the federal funds rate to its effective lower bound (ELB) and provided additional monetary policy accommodation through both forward guidance about the expected path of the policy rate and balance sheet policy. These actions eased financial conditions and provided substantial support to economic activity; they therefore figured importantly in helping promote the recovery in the labor market and in preventing inflation from falling substantially below the Committee's objective. The presentation noted, however, that over the past several years, inflation had tended to run modestly below the Committee's longer-run goal of 2 percent, while some indicators of longer-run inflation expectations currently stood at low levels. The staff also provided results from model simulations that illustrated possible challenges to the achievement of the Committee's dual-mandate goals over the medium term. These challenges included the proximity of the policy rate to the ELB, imprecise knowledge about the neutral value of the policy rate and the longer-run normal level of the unemployment rate, the diminished response of inflation to resource utilization, and uncertainty about the relationship between inflation expectations and inflation outcomes. In their discussion, participants welcomed the review of the monetary policy framework. They noted that the inclusion of feedback from the public as part of the review, via the Fed Listens events, had improved the transparency of the review process, enhanced the Federal Reserve's public accountability, and provided insights into the positive implications of strong labor markets and high rates of employment for various communities. Furthermore, participants agreed that the review was timely and warranted, in light of the use over the past decade of new policy tools and the emergence of changes in the structure and operation of the U.S. economy. These changes included the long period during which the federal funds rate was at the ELB, the probable recurrence of ELB episodes if the neutral level of the policy rate remains at historically low levels, and the challenges that policymakers face in influencing inflation and inflation expectations when the response of inflation to resource utilization has diminished. Participants generally agreed that the Committee's consideration of possible modifications to its policy strategy, tools, and communication practices would take some time and that the process would be careful, deliberate, and patient. With regard to the current monetary policy framework, participants agreed that this framework had served the Committee and the U.S. economy well over the past decade. They judged that forward guidance and balance sheet actions had provided policy accommodation during the ELB period and had supported economic activity and a return to strong labor market conditions while also bringing inflation closer to the Committee's longer-run goal of 2 percent than would otherwise have been the case. In addition, participants noted that the Committee's balanced approach to promoting its dual mandate of maximum employment and price stability had facilitated Committee policy actions aimed at supporting the labor market and economic activity even during times when the provision of accommodation was potentially associated with the risk of inflation running persistently above 2 percent. Participants further observed that such inflation risks—along with several of the other perceived risks of providing substantial accommodation through nontraditional policy tools, including possible adverse implications for financial stability—had not been realized. In particular, a number of participants commented that, as many of the potential costs of the Committee's asset purchases had failed to materialize, the Federal Reserve might have been able to make use of balance sheet tools even more aggressively over the past decade in providing appropriate levels of accommodation. However, several participants remarked that considerable uncertainties remained about the costs and efficacy of asset purchases, and a couple of participants suggested that, taking account of the uncertainties and the perceived constraints facing policymakers in the years following the recession, the Committee's decisions on the amount of policy accommodation to provide through asset purchases had been appropriate. In their discussion of policy tools, participants noted that the experience acquired by the Committee with the use of forward guidance and asset purchases has led to an improved understanding of how these tools operate; as a result, the Committee could proceed more confidently and preemptively in using these tools in the future if economic circumstances warranted. Participants discussed the extent to which forward guidance and balance sheet actions could substitute for reductions in the policy rate when the policy rate is constrained by the ELB. Overall, participants judged that the Federal Reserve's ability to provide monetary policy accommodation at the ELB through the use of forward guidance and balance sheet tools, while helpful in mitigating the effects of the constraint on monetary policy arising from the lower bound, did not eliminate the risk of protracted periods in which the ELB hinders the conduct of policy. If policymakers are not able to provide sufficient accommodation at the ELB through the use of forward guidance or balance sheet actions, the constraints posed by the ELB could be an impediment to the attainment of the Federal Reserve's dual-mandate objectives over time and put at risk the anchoring of inflation expectations at the Committee's longer-run inflation objective. Participants looked forward to a detailed discussion over coming meetings of alternative strategies for monetary policy. Some participants offered remarks on general features of some of the monetary policy strategies that they would be discussing and on the relationship between those strategies and the current framework. A few of the options mentioned were "makeup strategies," in which the realization of inflation below the 2 percent objective would give rise to policy actions designed to deliver inflation above the objective for a time. In principle, such makeup strategies could be designed to promote a 2 percent inflation rate, on average, over some period. In such circumstances, market expectations that the central bank would seek to "make up" inflation shortfalls following periods during which the ELB was binding could help ease overall financial conditions and thus help support economic activity during ELB episodes. However, many participants noted that the benefits of makeup strategies in supporting economic activity and stabilizing inflation depended heavily on the private sector's understanding of those strategies and confidence that future policymakers would take actions consistent with those strategies. A few participants suggested that an alternative means of delivering average inflation equal to the Committee's longer-run objective might involve aiming for inflation somewhat in excess of 2 percent when the policy rate was away from the ELB, recognizing that inflation would tend to move lower when the policy rate was constrained by the ELB. Another possibility might be for the Committee to express the inflation goal as a range centered on 2 percent and aim to achieve inflation outcomes in the upper end of the range in periods when resource utilization was high. A couple of participants noted that an adoption of a target range would be consistent with the practice of some other central banks. A few other participants suggested that the adoption of a range could convey a message that small deviations of inflation from 2 percent were unlikely to give rise to sizable policy responses. A couple of participants expressed concern that if policymakers regularly failed to respond appropriately to persistent, relatively small shortfalls of inflation below the 2 percent longer-run objective, inflation expectations and average observed inflation could drift below that objective. Participants also discussed the Committee's Statement on Longer-Run Goals and Monetary Policy Strategy. Participants noted that this statement had been helpful in articulating and clarifying the Federal Reserve's approach to monetary policy. The Committee first released this document in January 2012 and had renewed it, with a few modifications, every year since then. On the basis of the monetary policy and economic experience of the past decade, participants cited a number of topics that they would likely discuss in detail in their deliberations during the review and that might motivate possible modifications to the statement. These topics included the conduct of monetary policy in the presence of the ELB constraint, the role of inflation expectations in monetary policy, the best means of conveying the Committee's balanced approach to monetary policy and the symmetry of its inflation goal, the relationship between the Committee's strategy and its decisions about the settings of its policy tools, the implications of the low value of the neutral policy rate and of uncertainty about the values of the neutral policy rate and the longer-run normal rate of unemployment, the potential benefits and costs of unemployment running below its longer-run normal rate in conditions of muted inflation pressures, and the time frame over which policymakers aimed to achieve their dual-mandate goals. A couple of participants emphasized the availability to policymakers of other communication tools through which the Committee could elaborate on its policy strategy and the challenges that monetary policy faced in the current environment, while also indicating that the Committee retains flexibility and optionality to achieve its objectives. Participants highlighted the importance of the Summary of Economic Projections (SEP) in conveying participants' modal outlooks, with several participants suggesting that modifications to the SEP's format might enhance policy communications. Participants also commented on the importance of considering the connections between monetary policy and financial stability. Participants expected that, at upcoming meetings, they would continue their deliberations on the review of the Federal Reserve's monetary policy strategy, tools, and communication practices. These additional discussions would consider various topics, such as alternative policy strategies, options for enhanced use of existing monetary policy tools, possible additions to the policy toolkit, potential changes to communication practices, the relationship between monetary policy and financial stability, and the distributional effects of monetary policy. Developments in Financial Markets and Open Market Operations The manager pro tem discussed developments in financial markets over the intermeeting period. Regarding market participants' views about the July FOMC meeting, nearly all respondents from the July Open Market Desk surveys of dealers and market participants expected a 25 basis point cut in the target range for the federal funds rate, a substantial shift from the June surveys when a significant majority had a modal forecast for no change. Survey responses also suggested that expectations had coalesced around a modal forecast for a total of two 25 basis point cuts in the target range in 2019 and no change thereafter through year-end 2021. Regarding balance sheet policy, survey respondents that expected a rate cut at this meeting were almost evenly split on whether the Committee would also choose to end balance runoff immediately after the meeting or to maintain the existing plan to halt runoff at the end of September. Market participants generally judged that a two-month change in the timing of the end of the balance sheet runoff would have only a small effect on the path of the balance sheet and thus very little, if any, economic effect. Expectations for near-term domestic policy easing had occurred against the backdrop of a global shift toward more accommodative monetary policy. Several central banks had eased policy over the past month and a number of others shifted to an easing bias. Market participants were particularly attentive to a statement after the European Central Bank's Governing Council meeting that was perceived as affirming expectations for further easing and additional asset purchases. These changes to the policy outlook in the United States and across a number of countries appeared to play an important role in supporting financial conditions and offsetting some of the drag on growth from trade tensions and other risks. Somewhat reduced concern among market participants about important risks to the global outlook also appeared to support risk asset prices. Following the G-20 (Group of Twenty) meeting in late June, fewer Desk contacts and respondents to the Desk surveys expected a significant escalation of U.S.-China trade tensions. In addition, investor sentiment was bolstered by news that the Administration and Congress had reached a budget and debt ceiling agreement that, if passed, would remove another source of risk later this year. That said, contacts recognized that some potentially sizeable downside risks remained. Many survey respondents still viewed U.S.-China trade risks as skewed to the downside, and many Desk contacts judged that the risks of a "no-deal" Brexit had increased. The manager pro tem next discussed developments in money markets and open market operations. The spreads of the effective federal funds rate (EFFR) and the median Eurodollar rate relative to the interest on excess reserves (IOER) rate had increased some and become more variable over recent months, with a notable pickup in daily changes in these spreads since late March. Moreover, the range of rates in unsecured markets each day had widened. Market participants pointed to pressures in repurchase agreement (repo) markets as one factor contributing to the uptick in volatility in unsecured rates. These pressures, in turn, seemed to stem partly from elevated dealer inventories of Treasury securities and dealers' associated financing needs. Market participants also pointed to lower reserve balances as a factor affecting rates in unsecured money market rates. Over the intermeeting period, the level of reserves was little changed on net; however, some market participants noted the association between the gradual increase in unsecured rates relative to the IOER rate over recent months and the declining level of reserves since System Open Market Account (SOMA) redemptions began. The level of reserves was expected to decline appreciably over coming months, partly reflecting an anticipated sizable increase in the Treasury's balance at the Federal Reserve following the agreement on the federal budget and debt ceiling. The manager pro tem updated the Committee on Desk plans to resume CUSIP (Committee on Uniform Securities Identification Procedures) aggregation of SOMA holdings of Fannie Mae and Freddie Mac agency mortgage-backed securities (MBS) to reduce administrative costs and operational complexity, and the Desk expects to release a statement in August with details on the aggregation strategy. 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 available for the July 30–31 meeting indicated that labor market conditions remained strong and that real gross domestic product (GDP) increased at a moderate rate in the second quarter. Consumer price inflation, as measured by the 12-month percentage change in the price index for personal consumption expenditures (PCE), was below 2 percent in June. Survey-based measures of longer-run inflation expectations were little changed. Total nonfarm payroll employment expanded at a solid rate, on average, in recent months, supported by a brisk gain in June. The unemployment rate edged up to 3.7 percent in June but was still at a historically low level. The labor force participation rate also moved up somewhat but was close to its average over the previous few years, and the employment-to-population ratio stayed flat. The unemployment rates for African Americans and Asians declined in June, the rate for whites was unchanged, and the rate for Hispanics edged up; the unemployment rate for each group was below its level at the end of the previous economic expansion, though persistent differentials between these rates remained. The share of workers employed part time for economic reasons in June continued to be below the lows reached in late 2007. The rate of private-sector job openings held steady in May, while the rate of quits edged down but was still at a high level; the four-week moving average of initial claims for unemployment insurance benefits through mid-July was near historically low levels. Average hourly earnings for all employees rose 3.1 percent over the 12 months ending in June, somewhat faster than a year earlier. The employment cost index for private-sector workers increased 2.6 percent over the 12 months ending in June, the same as a year earlier. (Data on compensation per hour that reflected the recent annual update of the national income and product accounts by the Bureau of Economic Analysis (BEA) were not available at the time of the meeting.) Total consumer prices, as measured by the PCE price index, increased 1.4 percent over the 12 months ending in June. This increase was slower than a year earlier, as core PCE price inflation (which excludes changes in consumer food and energy prices) moved down to 1.6 percent, consumer food price inflation remained below core inflation, and consumer energy prices declined. The average monthly change in the core PCE price index during the second quarter was faster than in the first quarter, suggesting that some of the soft inflation readings early in the year were transitory. The trimmed mean measure of 12-month PCE price inflation constructed by the Federal Reserve Bank of Dallas remained at or near 2 percent in recent months. The consumer price index (CPI) rose 1.6 percent over the 12 months ending in June, while core CPI inflation was 2.1 percent. Recent survey-based measures of longer-run inflation expectations were little changed on balance. The preliminary July reading from the University of Michigan Surveys of Consumers moved back up after dipping in June but was still at a relatively low level; the measures from the Desk's Survey of Primary Dealers and Survey of Market Participants were little changed. Real consumer expenditures rose briskly in the second quarter after a sluggish gain in the first quarter, supported in part by a robust pace of light motor vehicle sales in May and June. However, real PCE rose more slowly in June than in the first five months of the year, suggesting some deceleration in consumer spending going into the third quarter. Key factors that influence consumer spending—including a low unemployment rate, further gains in real disposable income, and elevated measures of households' net worth—were supportive of solid real PCE growth in the near term. In addition, the preliminary July reading on the Michigan survey measure of consumer sentiment remained at an upbeat level. Real residential investment declined again in the second quarter. Al­though starts of new single-family homes rose in June, the average in the second quarter was lower than in the first quarter; starts of multifamily units fell back in June but rose for the second quarter as a whole. 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 at roughly the same level in June as its first-quarter average. On net in May and June, sales of new homes declined, while sales of existing homes rose. Real nonresidential private fixed investment edged down in the second quarter, as a decline in expenditures on nonresidential structures more than offset an increase in expenditures for business equipment and intellectual property. Forward-looking indicators of fixed investment were mixed. Orders for nondefense capital goods excluding aircraft increased in June, and some measures of business sentiment improved. However, analysts' expectations of firms' longer-term profit growth remained soft, trade policy concerns appeared to be weighing on investment, 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 decrease in recent weeks. Industrial production (IP) was unchanged in June, as a decrease in the output of utilities offset increases in the output of manufacturers and mines. For the second quarter as a whole, both total IP and manufacturing output declined, while mining output rose notably, supported by a strong gain in crude oil extraction. Automakers' assembly schedules suggested that production of light motor vehicles would move up somewhat in the third quarter. However, new orders indexes from national and regional manufacturing surveys pointed toward continued softness in manufacturing production in coming months. Total real government purchases rose solidly in the second quarter. Federal defense spending increased, and nondefense purchases returned to more typical levels after the partial federal government shutdown in the first quarter. Real purchases by state and local governments rose moderately, boosted by a strong gain in spending on structures and an increase in the payrolls of those governments. The nominal U.S. international trade deficit widened in May relative to April, as imports increased more than exports. In June, preliminary data indicated declining nominal goods exports and imports. Within exports, declines were particularly notable for exports of consumer goods and capital goods, the latter of which had already been depressed by the suspension of Boeing 737 MAX exports. All told, the BEA estimates that net exports, after adding moderately to first-quarter GDP growth, subtracted a similar amount from GDP growth in the second quarter on declining exports and flat imports. Incoming data suggested that growth in the foreign economies remained subdued in the second quarter. In several key advanced foreign economies, including the euro area, recent indicators pointed to slowing economic growth amid continued weakness in manufacturing and persistent policy-related uncertainty. Similarly, in China, real GDP growth slowed notably in the second quarter after a first-quarter jump. In contrast, growth in Canada and, to a lesser extent, Latin America appeared to pick up from a weak first-quarter pace. Foreign inflation remained muted but rose a bit from lows earlier in the year, largely reflecting higher energy prices. Staff Review of the Financial Situation Over the intermeeting period, financial market developments reflected noticeable shifts in expectations for monetary policy in response to Federal Reserve communications, economic data releases, and trade policy developments. Federal Reserve communications were generally regarded as more accommodative than had been anticipated, exerting downward pressure on measures of the expected path for the federal funds rate. However, some better-than-expected economic data releases and a slight improvement in the outlook regarding trade partially offset these declines. Yields on nominal Treasury securities were little changed on net. Equity prices increased, corporate bond spreads narrowed, and inflation compensation rose modestly. Financing conditions for businesses and households were little changed over the intermeeting period and remained generally supportive of spending. Measures of expectations for near-term domestic monetary policy exhibited notable shifts and reversals over the intermeeting period and ended the period little changed, on net, with market participants still attaching high odds to a 25 basis point reduction in the target range for the federal funds rate at the July FOMC meeting. Consistent with significant variation in near-term expectations for monetary policy, market-based indicators of interest rate uncertainty for shorter maturities over the near term remained somewhat elevated. Over the intermeeting period, market-based expectations for the federal funds rate for the end of this year and beyond moved down slightly on net. A straight read of OIS (overnight index swap) forward rates implied that the federal funds rate would decline about 60 basis points in 2019 and about 35 basis points in 2020. The nominal U.S. Treasury yield curve was little changed, on net, over the intermeeting period. Both the near-term forward spread and the spread between 10‑year and 3-month Treasury yields are still in the bottom decile of their respective distributions since 1971. On net, in the weeks following the June FOMC meeting, 5‑year and 5-to-10-year inflation compensation based on Treasury Inflation-Protected Securities (TIPS) moved up modestly. More-accommodative-than-expected Federal Reserve communications, stronger-than-expected inflation data releases, and rising oil prices—amid increased geopolitical tensions with Iran—contributed to the upward pressure on inflation compensation. Broad stock price indexes increased, on net, over the intermeeting period, with notable increases following the June FOMC communications, the Chair's July Monetary Policy Report testimony, and announcements regarding trade negotiations following the G-20 meeting. Additionally, there was a slight positive reaction to news of an agreement on the federal budget and debt limit. Equity price increases were broad based across major sectors, with technology, financial, and communication services firms outperforming broad indexes. One-month option-implied volatility on the S&P 500 index—the VIX—decreased slightly, on net, and corporate credit spreads narrowed. Conditions in domestic short-term funding markets remained fairly stable. Overnight interest rates in both unsecured and secured markets were somewhat elevated over the period. In particular, repo rates were elevated on and after the June quarter-end, with the SOFR (Secured Overnight Financing Rate) averaging 8 basis points above the IOER rate over the intermeeting period. However, the EFFR remained well within the target range, averaging 5 basis points above the IOER rate. Rates on commercial paper and negotiable certificates of deposit declined somewhat. Accommodative central bank communications, both in the United States and abroad, and some easing of trade tensions generally supported foreign risky assets over the intermeeting period. Global equity indexes increased modestly, while emerging market sovereign spreads narrowed. On balance, the broad dollar index ended the period modestly lower. Notably, the British pound depreciated significantly against the U.S. dollar, reportedly as developments led investors to raise the probability they attached to a no-deal Brexit. Most sovereign long-term bond yields edged lower, on net, reflecting firming expectations for further policy accommodation amid growing concerns about the global economic outlook. Italian yields declined notably, in part as the government passed some fiscal consolidation measures. The European Central Bank left its policy rate unchanged at its July meeting but signaled possible rate cuts at coming meetings and said it will explore options for additional asset purchases. Several emerging market central banks, including South Korea, Turkey, and Indonesia, lowered policy rates over the period. Financing conditions for nonfinancial businesses remained accommodative. Gross issuance of corporate bonds remained robust in June, followed by a typical seasonal decline in July. Issuance of institutional leveraged loans increased notably in May but in June, it returned to the more moderate pace observed earlier this year. Respondents to the July 2019 Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS) reported that, on net, banks continued to ease standards and terms on commercial and industrial loans to large and middle-market firms in the second quarter, with many citing aggressive competition as the reason for doing so. Gross equity issuance has been strong in recent months. The credit quality of nonfinancial corporations continued to show signs of stabilization in June following some deterioration earlier in the year. Credit conditions for both small businesses and municipalities remained accommodative on balance. In the commercial real estate (CRE) sector, financing conditions remained generally accommodative despite a modest deceleration in bank loan growth. Banks in the July SLOOS reported that standards were about unchanged, on net, in the second quarter for most CRE loan categories. Agency and non-agency commercial MBS issuance was strong in the second quarter, as yield spreads ticked down. Financing conditions in the residential mortgage market remained accommodative over the intermeeting period. Mortgage rates were little changed since the June FOMC meeting but remained about 1 percentage point below their late-2018 level. These conditions have supported a modest increase in home-purchase origination volume in recent months. Refinance originations have risen as well but remain near historical lows. In consumer credit markets, financing conditions were little changed in recent months and remained generally supportive of consumer spending. Growth in consumer credit in April and May was up a bit from earlier in the year due to a pickup in credit card balances. Banks in the July SLOOS continued to report tightened standards for credit cards over the second quarter. The staff provided an update on its assessments of potential risks to financial stability. On balance, the staff continued to view vulnerabilities as moderate. The staff judged asset valuation pressures to be notable in a number of markets, supported in part by the low level of Treasury yields. In assessing vulnerabilities stemming from leverage in the household and business sectors, the staff noted that business leverage was high while household leverage was moderate. The staff viewed the buildup in nonfinancial business-sector debt as a factor that could amplify adverse shocks to the business sector and the economy more generally. Within business debt, the staff also reported that in the leveraged loan market, the share of new loans to risky borrowers was at a record high, and credit extended by private equity firms had continued to grow. At the same time, financial institutions were viewed as resilient, as the risks associated with financial leverage and funding risk were still viewed as low despite some signs of rising leverage and continued inflows into run-prone funds. Separately, the staff noted that market liquidity was, overall, in good shape, al­though sudden price drops had become more frequent in some markets. Staff Economic Outlook The projection for U.S. economic activity prepared by the staff for the July FOMC meeting was revised up somewhat in the near term, as an upward revision to households' real disposable income in the first half of the year led to a slightly higher second-half forecast for consumer spending. Even so, real GDP growth was still forecast to rise more slowly in the second half of the year than in the first half, primarily reflecting continued soft business investment and a slower increase in government spending. The projection for real GDP growth over the medium term was a little stronger, supported by the effects of a higher projected path for equity prices and a lower trajectory for interest rates. Real GDP was forecast to expand at a rate a little above the staff's estimate of potential output growth in 2019 and 2020 and then slow to a pace slightly below potential output growth in 2021. The unemployment rate was projected to be roughly flat through 2021 and to remain below the staff's estimate of its longer-run natural rate. With labor market conditions judged to be 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's forecast of total PCE price inflation this year was revised up a touch, reflecting a slightly higher projected path for consumer energy prices, while the forecast for core PCE price inflation was unrevised at a level below 2 percent. Both total and core inflation were projected to move up slightly next year, as the low readings early this year were expected to be transitory, but nevertheless to continue to run below 2 percent. The staff continued to view the uncertainty around its projections for real GDP growth, the unemployment rate, and inflation as generally similar to the average of the past 20 years. Moreover, the staff still judged that the risks to the forecast for real GDP growth were tilted to the downside, with a corresponding skew to the upside for the unemployment rate. Important factors in that assessment were that international trade tensions and foreign economic developments seemed more likely to move in directions that could have significant negative effects on the U.S. economy than to resolve more favorably than assumed. In addition, softness in business investment and manufacturing so far this year was seen as pointing to the possibility of a more substantial slowing in economic growth than the staff projected. With the risks to the forecast for economic activity tilted to the downside, the risks to the inflation projection were also viewed as having a downward skew. Participants' Views on Current Conditions and the Economic Outlook Participants agreed that the labor market had remained strong over the intermeeting period and that economic activity had risen at a moderate rate. Job gains had been solid, on average, in recent months, and the unemployment rate had remained low. Al­though growth of household spending had picked up from earlier in the year, growth of business fixed investment had been soft. On a 12-month basis, overall inflation and inflation for items other than food and energy were running below 2 percent. Market-based measures of inflation compensation remained low; survey-based measures of longer-term inflation expectations were little changed. Participants continued to view a sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective as the most likely outcomes. This outlook was predicated on financial conditions that were more accommodative than earlier this year. More accommodative financial conditions, in turn, partly reflected market reaction to the downward adjustment through the course of the year in the Committee's assessment of the appropriate path for the target range of the federal funds rate in light of weak global economic growth, trade policy uncertainty, and muted inflation pressures. Participants generally noted that incoming data over the intermeeting period had been largely positive and that the economy had been resilient in the face of ongoing global developments. The economy continued to expand at a moderate pace, and participants generally expected GDP growth to slow a bit to around its estimated potential rate in the second half of the year. However, participants also observed that global economic growth had been disappointing, especially in China and the euro area, and that trade policy uncertainty, al­though waning some over the intermeeting period, remained elevated and looked likely to persist. Furthermore, inflation pressures continued to be muted, notwithstanding the firming in the overall and core PCE price indexes in the three months ending in June relative to earlier in the year. In their discussion of the business sector, participants generally saw uncertainty surrounding trade policy and concerns about global growth as continuing to weigh on business confidence and firms' capital expenditure plans. Participants generally judged that the risks associated with trade uncertainty would remain a persistent headwind for the outlook, with a number of participants reporting that their business contacts were making decisions based on their view that uncertainties around trade were not likely to dissipate anytime soon. Some participants observed that trade uncertainties had receded somewhat, especially with the easing of trade tensions with Mexico and China. Several participants noted that, over the intermeeting period, business sentiment seemed to improve a bit and commented that the data for new capital goods orders had improved. Some participants expressed the view that the effects of trade uncertainty had so far been modest and referenced reports from business contacts in their Districts that investment plans were continuing, though with a more cautious posture. Participants also discussed developments across the manufacturing, agriculture, and energy sectors of the U.S. economy. Manufacturing production had declined so far this year, dragged down in part by weak real exports, the ongoing global slowdown, and trade uncertainties. Several participants noted ongoing challenges in the agricultural sector, including those associated with increased trade uncertainty, weak export demand, and the effects of wet weather and severe flooding. A couple of participants commented on the decline in energy prices since last fall and the associated reduction in economic activity in the energy sector. Participants commented on the robust pace of consumer spending. Noting the important role that household spending was currently playing in supporting the expansion, participants judged that household spending would likely continue to be supported by strong labor market conditions, rising incomes, and upbeat consumer sentiment. A few participants noted that the continued softness in residential investment was a concern, and that the expected boost to housing activity from the decline in mortgage rates since last fall had not yet materialized. In contrast, a couple of participants reported that some recent indicators of housing activity in their Districts had been somewhat more positive of late. In their discussion of the labor market, participants judged that conditions remained strong, with the unemployment rate near historical lows and continued solid job gains, on average, in recent months. Job gains in June were stronger than expected, following a weak reading in May. Looking ahead, participants expected the labor market to remain strong, with the pace of job gains slower than last year but above what is estimated to be necessary to hold labor utilization steady. Reports from business contacts pointed to continued strong labor demand, with many firms reporting difficulty finding workers to meet current demand. Several participants reported seeing notable wage pressures for lower-wage workers. However, participants viewed overall wage growth as broadly consistent with the modest average rates of labor productivity growth in recent years and, consequently, as not exerting much upward pressure on inflation. Several participants remarked that there seemed to be little sign of overheating in labor markets, citing the combination of muted inflation pressures and moderate wage growth. Regarding inflation developments, some participants stressed that, even with the firming of readings for consumer prices in recent months, both overall and core PCE price inflation rates continued to run below the Committee's symmetric 2 percent objective; the latest reading on the 12-month change in the core PCE price index was 1.6 percent. Furthermore, continued weakness in global economic growth and ongoing trade tensions had the potential to slow U.S. economic activity and thus further delay a sustained return of inflation to the 2 percent objective. Many other participants, however, saw the recent inflation data as consistent with the view that the lower readings earlier this year were largely transitory, and noted that the trimmed mean measure of PCE price inflation constructed by the Federal Reserve Bank of Dallas was running around 2 percent. A few participants noted differences in the behavior of measures of cyclical and acyclical components of inflation. By some estimates, the cyclical component of inflation continued to firm; the acyclical component, which appeared to be influenced by sectoral and technological changes, was largely responsible for the low level of inflation and not likely to respond much to monetary policy actions. In their discussion of the outlook for inflation, participants generally anticipated that with appropriate policy, inflation would move up to the Committee's 2 percent objective over the medium term. However, market-based measures of inflation compensation and some survey measures of consumers' inflation expectations remained low, al­though they had moved up some of late. A few participants remarked that inflation expectations appeared to be reasonably well anchored at levels consistent with the Committee's 2 percent inflation objective. However, some participants stressed that the prolonged shortfall in inflation from the long-run goal could cause inflation expectations to drift down—a development that might make it more difficult to achieve the Committee's mandated goals on a sustained basis, especially in the current environment of global disinflationary pressures. A couple of participants observed that, al­though some indicators of longer-term inflation expectations, like TIPS-based inflation compensation and the Michigan survey measure, had not changed substantially this year, on net, they were notably lower than their levels several years ago. Participants generally judged that downside risks to the outlook for economic activity had diminished somewhat since their June meeting. The strong June employment report suggested that the weak May payroll figures were not a precursor to a more material slowdown in job growth. The agreement between the United States and China to resume negotiations appeared to ease trade tensions somewhat. In addition, many participants noted that the recent agreement on the federal debt ceiling and budget appropriations substantially reduced near-term fiscal policy uncertainty. Moreover, the possibility of favorable outcomes of trade negotiations could be a factor that would provide a boost to economic activity in the future. Still, important downside risks persisted. In particular, participants were mindful that trade tensions were far from settled and that trade uncertainties could intensify again. Continued weakness in global economic growth remained a significant downside risk, and some participants noted that the likelihood of a no-deal Brexit had increased. In their discussion of financial market developments, participants observed that financial conditions remained supportive of economic growth, with borrowing rates low and stock prices near all-time highs. Participants observed that current financial conditions appeared to be premised importantly on expectations that the Federal Reserve would ease policy to help offset the drag on economic growth stemming from the weaker global outlook and uncertainties associated with international trade as well as to provide some insurance to address various downside risks. Participants also discussed the decline in yields on longer-term nominal Treasury securities in recent months. A few participants expressed the concern that the inversion of the Treasury yield curve, as evidenced by the 10-year yield falling below the 3-month yield, had persisted for about two months, which could indicate that market participants anticipated weaker economic conditions in the future and that the Federal Reserve would soon need to lower the federal funds rate substantially in response. The longer-horizon real forward rate implied by TIPS had also declined, suggesting that the longer-run normal level of the real federal funds rate implicit in market prices was lower. Among those participants who commented on financial stability, most highlighted recent credit market developments, the elevated valuations in some asset markets, and the high level of nonfinancial corporate indebtedness. Several participants noted that high levels of corporate debt and leveraged lending posed some risks to the outlook. A few participants discussed the fast growth of private credit markets—a sector not subject to the same degree of regulatory scrutiny and requirements that applies in the banking sector—and commented that it was important to monitor this market. Several participants observed that valuations in equity and corporate bond markets were near all-time highs and that CRE valuations were also elevated. A couple of participants noted that the low level of Treasury yields—a factor seen as supporting asset prices across a range of markets—was a potential source of risk if yields moved sharply higher. However, these participants judged that in the near term, such risks were small in light of the monetary policy outlooks in the United States and abroad and generally subdued inflation. A few participants expressed the concern that capital ratios at the largest banks had continued to fall at a time when they should ideally be rising and that capital ratios were expected to decline further. Another view was that financial stability risks at present are moderate and that the largest banks would continue to maintain very substantial capital cushions in light of a range of regulatory requirements, including rigorous stress tests. In their discussion of monetary policy decisions at this meeting, those participants who favored a reduction in the target range for the federal funds rate pointed to three broad categories of reasons for supporting that action. First, while the overall outlook remained favorable, there had been signs of deceleration in economic activity in recent quarters, particularly in business fixed investment and manufacturing. A pronounced slowing in economic growth in overseas economies—perhaps related in part to developments in, and uncertainties surrounding, international trade—appeared to be an important factor in this deceleration. More generally, such developments were among those that had led most participants over recent quarters to revise down their estimates of the policy rate path that would be appropriate to promote maximum employment and stable prices. Second, a policy easing at this meeting would be a prudent step from a risk-management perspective. Despite some encouraging signs over the intermeeting period, many of the risks and uncertainties surrounding the economic outlook that had been a source of concern in June had remained elevated, particularly those associated with the global economic outlook and international trade. On this point, a number of participants observed that policy authorities in many foreign countries had only limited policy space to support aggregate demand should the downside risks to global economic growth be realized. Third, there were concerns about the outlook for inflation. A number of participants observed that overall inflation had continued to run below the Committee's 2 percent objective, as had inflation for items other than food and energy. Several of these participants commented that the fact that wage pressures had remained only moderate despite the low unemployment rate could be a sign that the longer-run normal level of the unemployment rate is appreciably lower than often assumed. Participants discussed indicators for longer-term inflation expectations and inflation compensation. A number of them concluded that the modest increase in market-based measures of inflation compensation over the intermeeting period likely reflected market participants' expectation of more accommodative monetary policy in the near future; others observed that, while survey measures of inflation expectations were little changed from June, the level of expectations by at least some measures was low. Most participants judged that long-term inflation expectations either were already below the Committee's 2 percent goal or could decline below the level consistent with that goal should there be a continuation of the pattern of inflation coming in persistently below 2 percent. A couple of participants indicated that they would have preferred a 50 basis point cut in the federal funds rate at this meeting rather than a 25 basis point reduction. They favored a stronger action to better address the stubbornly low inflation rates of the past several years, recognizing that the apparent low sensitivity of inflation to levels of resource utilization meant that a notably stronger real economy might be required to speed the return of inflation to the Committee's inflation objective. Several participants favored maintaining the same target range at this meeting, judging that the real economy continued to be in a good place, bolstered by confident consumers, a strong job market, and a low rate of unemployment. These participants acknowledged that there were lingering risks and uncertainties about the global economy in general, and about international trade in particular, but they viewed those risks as having diminished over the intermeeting period. In addition, they viewed the news on inflation over the intermeeting period as consistent with their forecasts that inflation would move up to the Committee's 2 percent objective at an acceptable pace without an adjustment in policy at this meeting. Finally, a few participants expressed concerns that further monetary accommodation presented a risk to financial stability in certain sectors of the economy or that a reduction in the target range for the federal funds rate at this meeting could be misinterpreted as a negative signal about the state of the economy. Participants also discussed the timing of ending the reduction in the Committee's aggregate securities holdings in the SOMA. Ending the reduction of securities holdings in August had the advantage of avoiding the appearance of inconsistency in continuing to allow the balance sheet to run off while simultaneously lowering the target range for the federal funds rate. But ending balance sheet reduction earlier than under its previous plan posed some risk of fostering the erroneous impression that the Committee viewed the balance sheet as an active tool of policy. Because the proposed change would end the reduction of its aggregate securities holdings only two months earlier than previously indicated, policymakers concluded that there were only small differences between the two options in their implications for the balance sheet and thus also in their economic effects. In their discussion of the outlook for monetary policy beyond this meeting, participants generally favored an approach in which policy would be guided by incoming information and its implications for the economic outlook and that avoided any appearance of following a preset course. Most participants viewed a proposed quarter-point policy easing at this meeting as part of a recalibration of the stance of policy, or mid-cycle adjustment, in response to the evolution of the economic outlook over recent months. A number of participants suggested that the nature of many of the risks they judged to be weighing on the economy, and the absence of clarity regarding when those risks might be resolved, highlighted the need for policymakers to remain flexible and focused on the implications of incoming data for the outlook. Committee Policy Action In their discussion of monetary policy for this meeting, members noted that while there had been some improvement in economic conditions over the intermeeting period and the overall outlook remained favorable, significant risks and uncertainties attending the outlook remained. In particular, sluggish U.S. business fixed investment spending and manufacturing output had lingered, suggesting that risks and uncertainties associated with weak global economic growth and in international trade were weighing on the domestic economy. Strong labor markets and rising incomes continued to support the outlook for consumer spending, but modest growth in prices and wages suggested that inflation pressures remained muted. Inflation had continued to run below the Committee's 2 percent symmetric objective. Market-based measures of inflation compensation moved up modestly from the low levels recorded in June, but a portion of this change likely reflected the expectation by market participants of additional near-term monetary accommodation. Survey-based measures of longer-term inflation expectations were little changed. On this basis, all but two members agreed to lower the target range for the federal funds rate to 2 to 2-1/4 percent at this meeting. With this adjustment to policy, those members who voted for the policy action sought to better position the overall stance of policy to help counter the effects on the outlook of weak global growth and trade policy uncertainty, insure against any further downside risks from those sources, and promote a faster return of inflation to the Committee's symmetric 2 percent objective than would otherwise be the case. Those members noted that the action taken at this meeting should be viewed as part of an ongoing reassessment of the appropriate path of the federal funds rate that began in late 2018. Two members preferred to maintain the current target range for the federal funds rate. In explaining their policy views, those members noted that economic data collected over the intermeeting period had been largely positive and that they anticipated continued strong labor markets and solid growth in activity, with inflation gradually moving up to the Committee's 2 percent target. One member also noted that a further easing in policy at a time when the economy is very strong and asset prices are elevated could have adverse implications for financial stability. 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 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. Members generally agreed that it was important to maintain optionality in setting the future target range for the federal funds rate and, more generally, that near-term adjustments of the stance of monetary policy would appropriately remain dependent on the implications of incoming information for the economic outlook. With regard to the postmeeting statement, the Committee implemented several adjustments in the description of the economic situation, including a revision to recognize that market-based measures of inflation compensation "remain low." The Committee stated that the reduction in the target range for the federal funds rate supported its view that "sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective" remained the most likely outcomes, but "uncertainties about this outlook remain." The phrase "as the Committee contemplates the future path" of the target range for the federal funds rate was added to underscore the Committee's intention to carefully assess incoming information before deciding on future policy adjustments. The statement noted that the Committee would "continue to monitor the implications of incoming information for the economic outlook" and would "act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective." Finally, the Committee announced the conclusion of the reduction of securities holdings in the SOMA. Ending the runoff of securities holdings two months earlier than initially planned was seen as having only very small effects on the balance sheet, with negligible implications for the economic outlook, and was helpful in simplifying communications regarding the usage of the Committee's policy tools. 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 August 1, 2019, 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. Effective August 1, 2019, the Committee directs the Desk to roll over at auction all principal payments from the Federal Reserve's holdings of Treasury securities and to reinvest all principal payments from the Federal Reserve's holdings of agency debt and agency mortgage-backed securities received during each calendar month. Principal payments from agency debt and agency mortgage-backed securities up to $20 billion per month will be reinvested in Treasury securities to roughly match the maturity composition of Treasury securities outstanding; principal payments in excess of $20 billion per month will continue to be reinvested in agency mortgage-backed securities. 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 remains strong and that economic activity has been rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Al­though growth of household spending has picked up from earlier in the year, growth of business fixed investment has been soft. On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the Committee decided to lower the target range for the federal funds rate to 2 to 2-1/4 percent. This action supports the Committee's view that sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective are the most likely outcomes, but uncertainties about this outlook remain. As the Committee contemplates the future path of the target range for the federal funds rate, it will continue to monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective. 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. The Committee will conclude the reduction of its aggregate securities holdings in the System Open Market Account in August, two months earlier than previously indicated." Voting for this action: Jerome H. Powell, John C. Williams, Michelle W. Bowman, Lael Brainard, James Bullard, Richard H. Clarida, Charles L. Evans, Randal K. Quarles. Voting against this action: Esther L. George and Eric Rosengren. President George dissented because she believed that an unchanged setting of policy was appropriate based on the incoming data and the outlook for economic activity over the medium term. Recognizing risks to the outlook from the crosscurrents emanating from trade policy uncertainty and weaker global activity, President George would be prepared to adjust policy should incoming data point to a materially weaker outlook for the economy. President Rosengren dissented because he did not see a clear and compelling case for additional accommodation at this time given that the unemployment rate stood near 50-year lows, inflation seemed likely to rise toward the Committee's 2 percent target, and financial stability concerns were elevated, as indicated by near-record equity prices and corporate leverage. Consistent with the Committee's decision to lower the target range for the federal funds rate to 2 to 2-1/4 percent, the Board of Governors voted unanimously to lower the interest rate paid on required and excess reserve balances to 2.10 percent and voted unanimously to approve a 1/4 percentage point decrease in the primary credit rate to 2.75 percent, effective August 1, 2019.7 Reinvestment Plans The manager pro tem described the Desk's plans for reinvestments in light of the Committee's decision to conclude the reduction of aggregate securities holdings in the SOMA portfolio effective August 1. In accordance with the directive to the Desk, beginning on August 1, all principal payments from Treasury securities, agency debt, and agency MBS will be reinvested. Principal payments from Treasury securities held in the SOMA portfolio will be reinvested through rollovers in Treasury auctions. The Desk also will reinvest principal payments from agency debt and agency MBS securities of up to $20 billion per month in Treasury securities in a manner that roughly matches the maturity composition of Treasury securities outstanding. The Desk plans to purchase these Treasury securities in the secondary market across 11 sectors of different maturities and security types approximately in proportion to the 12-month average of the amount outstanding in each sector relative to the total amount outstanding across sectors, as measured at the end of July. The Desk will continue to reinvest agency debt and agency MBS principal payments in excess of $20 billion per month in agency MBS. Given the Committee's decision to bring forward the timing of these purchases to August, the Desk planned to release an operational statement to provide more details on the plans for reinvestment operations. It was agreed that the next meeting of the Committee would be held on Tuesday–Wednesday, September 17–18, 2019. The meeting adjourned at 11:15 a.m. on July 31, 2019. Notation Vote By notation vote completed on July 9, 2019, the Committee unanimously approved the minutes of the Committee meeting held on June 18–19, 2019. _______________________ 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 economic developments and outlook. Return to text 3. Attended the discussion of the review of monetary policy framework. Return to text 4. Attended through the discussion of developments in financial markets and open market operations. Return to text 5. Attended the discussion of economic developments and outlook through discussion of monetary policy. Return to text 6. Attended Tuesday session only. Return to text 7. In taking this action, the Board approved requests to establish that rate submitted by the boards of directors of the Federal Reserve Banks of Philadelphia, Chicago, St. Louis, 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 August 1, 2019, 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 Boston, New York, Cleveland, Richmond, Atlanta, Minneapolis, and Kansas City were informed of the Secretary of the Board's approval of their establishment of a primary credit rate of 2.75 percent, effective August 1, 2019.) A second vote of the Board 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

2019-07-31

Statement

Information received since the Federal Open Market Committee met in June indicates that the labor market remains strong and that economic activity has been rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although growth of household spending has picked up from earlier in the year, growth of business fixed investment has been soft. On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the Committee decided to lower the target range for the federal funds rate to 2 to 2-1/4 percent. This action supports the Committee's view that sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective are the most likely outcomes, but uncertainties about this outlook remain. As the Committee contemplates the future path of the target range for the federal funds rate, it will continue to monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective. 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. The Committee will conclude the reduction of its aggregate securities holdings in the System Open Market Account in August, two months earlier than previously indicated. Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; James Bullard; Richard H. Clarida; Charles L. Evans; and Randal K. Quarles. Voting against the action were Esther L. George and Eric S. Rosengren, who preferred at this meeting to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent. Implementation Note issued July 31, 2019

2019-07-10

Minute

Minutes of the Federal Open Market Committee June 18-19, 2019 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 18, 2019, at 10:30 a.m. and continued on Wednesday, June 19, 2019, at 9:00 a.m.1 PRESENT: Jerome H. Powell, Chair John C. Williams, Vice Chair Michelle W. Bowman Lael Brainard James Bullard Richard H. Clarida Charles L. Evans Esther L. George Randal K. Quarles Eric Rosengren Patrick Harker, Robert S. Kaplan, Neel Kashkari, Loretta J. Mester, and Michael Strine, Alternate Members of the Federal Open Market Committee Thomas I. Barkin, Raphael W. Bostic, and Mary C. Daly, Presidents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco, 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 Stacey Tevlin, Economist Rochelle M. Edge, Eric M. Engen, Anna Paulson, Christopher J. Waller, William Wascher, and Beth Anne Wilson,2 Associate Economists Lorie K. Logan, Manager pro tem,3 System Open Market Account Ann E. Misback, Secretary, Office of the Secretary, Board of Governors Matthew J. Eichner,4 Director, Division of Reserve Bank Operations and Payment Systems, Board of Governors; Andreas Lehnert, Director, Division of Financial Stability, Board of Governors Jennifer J. Burns, Deputy Director, Division of Supervision and Regulation, Board of Governors; Michael T. Kiley, Deputy Director, Division of Financial Stability, Board of Governors; Trevor A. Reeve, Deputy Director, Division of Monetary Affairs, Board of Governors Jon Faust, Senior Special Adviser to the Chair, Office of Board Members, Board of Governors Joshua Gallin, Special Adviser to the Chair, Office of Board Members, Board of Governors Brian M. Doyle, Wendy E. Dunn,2 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 Shaghil Ahmed, Senior Associate Director, Division of International Finance, Board of Governors Jane E. Ihrig and Don H. Kim, Senior Advisers, Division of Monetary Affairs, Board of Governors; Jeremy B. Rudd, Senior Adviser, Division of Research and Statistics, Board of Governors Marnie Gillis DeBoer and Min Wei, Associate Directors, Division of Monetary Affairs, Board of Governors Christopher J. Gust,4 Deputy Associate Director, Division of Monetary Affairs, Board of Governors; Matteo Iacoviello and Paul R. Wood,2 Deputy Associate Directors, Division of International Finance, Board of Governors; Jeffrey D. Walker,4 Deputy Associate Director, Division of Reserve Bank Operations and Payment Systems, Board of Governors Burcu Duygan-Bump, Andrew Figura, Glenn Follette, Patrick E. McCabe, and Paul A. Smith, Assistant Directors, Division of Research and Statistics, Board of Governors; Laura Lipscomb,4 Zeynep Senyuz,4 and Rebecca Zarutskie, Assistant Directors, Division of Monetary Affairs, Board of Governors; Steve Spurry,4 Assistant Director, Division of Supervision and Regulation, Board of Governors Matthew Malloy,4 Section Chief, Division of Monetary Affairs, Board of Governors Penelope A. Beattie,2 Assistant to the Secretary, Office of the Secretary, Board of Governors Mark A. Carlson,4 Senior Economic Project Manager, Division of Monetary Affairs, Board of Governors Sean Savage, Senior Project Manager, Division of Monetary Affairs, Board of Governors David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors Heather A. Wiggins,4 Group Manager, Division of Monetary Affairs, Board of Governors Maria Otoo, Principal Economist, Division of Research and Statistics, Board of Governors; Lubomir Petrasek, Marcelo Rezende, and Francisco Vazquez-Grande, Principal Economists, Division of Monetary Affairs, Board of Governors; Patrice Robitaille,2 Principal Economist, Division of International Finance, Board of Governors Donielle A. Winford, Information Management Analyst, Division of Monetary Affairs, Board of Governors Andre Anderson, First Vice President, Federal Reserve Bank of Atlanta David Altig and Kartik B. Athreya, Executive Vice Presidents, Federal Reserve Banks of Atlanta and Richmond, respectively Edward S. Knotek II, Paolo A. Pesenti, Mark L.J. Wright, and Nathaniel Wuerffel,4 Senior Vice Presidents, Federal Reserve Banks of Cleveland, New York, Minneapolis, and New York, respectively Roc Armenter, Patrick Dwyer,4 George A. Kahn, Giovanni Olivei, Rania Perry,4 Benedict Wensley,4 and Patricia Zobel, Vice Presidents, Federal Reserve Banks of Philadelphia, New York, Kansas City, Boston, New York, New York, and New York, respectively Gara Afonso4 and Scott Sherman,4 Assistant Vice Presidents, Federal Reserve Bank of New York Nicolas Petrosky-Nadeau, Senior Research Advisor, Federal Reserve Bank of San Francisco Jim Dolmas, Senior Research Economist, Federal Reserve Bank of Dallas Standing Repurchase Facility The staff briefed the Committee on the possible role of a standing fixed-rate repurchase agreement (repo) facility as part of the monetary policy implementation framework; a facility of this type would allow counterparties to obtain temporary liquidity at a fixed rate of interest through repurchase transactions with the Federal Reserve involving their holdings of select securities eligible for open market operations. The staff presentation noted how such a facility could provide a backstop against unusual spikes in the federal funds rate and other money market rates and might also provide incentives for banks to shift the composition of their portfolios of liquid assets away from reserves and toward high-quality securities. Key design features for such a facility, including the fixed rate offered to counterparties, the set of eligible counterparties, and the range of securities eligible to be placed at the facility, would influence the effectiveness of a facility in achieving either of these objectives. The staff noted a number of considerations that could arise in setting these design parameters, including potential repercussions in unsecured and secured funding markets, the eligibility of counterparties in weak financial condition, the potential that turning to such a facility could become stigmatized, and issues of a level playing field across different classes of counterparties. Participants commented on a number of issues in connection with key design parameters for a repo facility. In terms of the setting of the facility's fixed rate, many participants acknowledged a tradeoff in determining the level of the rate relative to other money market rates. On the one hand, establishing the rate at a narrow spread above money market rates would likely provide better interest rate control and could also be helpful in avoiding stigma that can be associated with the use of standing lending facilities with fixed rates set well above the level of money market rates. On the other hand, setting the rate close to the level of money market rates could result in very sizable Federal Reserve operations on a daily basis that could be viewed as disintermediating the activity of private entities in money markets. In considering the eligible set of counterparties for a repo facility, a number of participants noted that making the facility available only to primary dealers would likely imply that the effects of the facility would be most direct on repo markets, while the influence on the federal funds market would be only indirect. A couple of participants noted that, particularly if banks were eligible counterparties, it would be important for counterparties of all sizes to have access to funding through the facility on the same terms. A few participants noted that a facility could enhance financial stability by providing a means by which nonbank counterparties can readily obtain liquidity against their high-quality assets. A couple of other participants noted ways that a repo facility could have unintended effects on financial stability; for example, if reserves help support overall financial stability, a facility that significantly reduced the demand for reserves might not be beneficial. Many participants commented on issues associated with the availability of such a facility to firms in different states of financial condition. Several thought there should not be a guarantee of access to such a facility regardless of a firm's financial condition, while a number of others were willing to consider how such a facility could be structured to work effectively in a stressed environment where high-quality liquid assets were used as collateral. A few participants noted that the availability of the facility to banks during periods of stress, particularly when they might be in weak financial condition, could be an important factor determining whether a facility would significantly reduce banks' demand for reserves in normal times. In their discussion of key objectives for establishing a repo facility, some participants raised questions about whether such a facility is needed in an ample-reserves framework, noting that the current ample-reserves regime has provided good interest rate control. Other participants commented on the potential benefits of such a facility as a way to enhance interest rate control in the current implementation regime or as a means to operate in the current implementation framework but with a significantly smaller quantity of reserves than at present. A couple of participants noted that a facility could damp volatility in repo rates. Several participants noted that a facility could possibly aid with multiple policy objectives. A number of participants noted that the policy objectives for a fixed-rate standing repo facility would have implications for the appropriate design for the facility. Several participants recognized the need to carefully evaluate possible parameter settings to guard against unintended consequences, including the potential for moral hazard or a more volatile Federal Reserve balance sheet. In addition, several participants highlighted the importance of evaluating whether other tools or initiatives could better achieve the desired goals. Overall, no decisions were reached at this meeting; participants stated that additional work would be necessary to clearly define the objectives of such a facility and to evaluate its potential net benefits. Developments in Financial Markets and Open Market Operations The manager pro tem discussed developments in global financial markets over the intermeeting period. Trade-related developments reportedly led many market participants to take a more pessimistic view of the U.S. economic outlook. Equity prices and interest rates fell noticeably after the announcement of higher tariffs on Chinese imports in early May and then again after news that tariffs might be imposed on Mexican imports. In response to these developments, markets appeared to become more sensitive to incoming news about the outlook for global growth and inflation, including data that pointed to a continued subdued inflation environment and to slower economic growth in the United States and abroad. Treasury yields fell sharply and far-forward measures of inflation compensation dropped significantly in the United States and abroad. Against this backdrop, market participants reportedly viewed communications by Federal Reserve officials as signaling a greater likelihood of a cut in the target range for the federal funds rate later in the year. The expected path of the federal funds rate embedded in futures prices shifted down significantly over the period. In the euro area, far-forward measures of inflation compensation fell noticeably, and market participants reportedly increasingly came to believe that further monetary policy accommodation would be needed. Late in the intermeeting period, remarks by European Central Bank (ECB) President Draghi were interpreted as suggesting increased odds of further asset purchases by the ECB. Euro-area peripheral spreads to German equivalents moved sharply lower, and far-forward inflation compensation recovered modestly. The manager pro tem turned next to a review of money market developments and Open Market Desk operations. Money market rates generally stabilized at modestly lower levels over the intermeeting period, likely reflecting both the technical adjustment in the interest on excess reserves (IOER) rate following the May FOMC meeting and a sizable increase in reserve balances associated with a decline in balances held by the Treasury in its account at the Federal Reserve. Market participants reported seeing slightly more pass-through from repo rates to the federal funds rate on days with heightened firmness in repo rates. Market participants attributed recent increases in repo rates on month-end and mid-month Treasury auction settlement dates in part to elevated net dealer inventories of Treasury securities, which dealers finance in the repo market. Regarding open market operations over the period, given the substantial decline in mortgage rates over recent months and an associated increase in refinancing activity, principal payments on the Federal Reserve's holdings of agency mortgage-backed securities (MBS) had recently moved somewhat above the $20 billion monthly redemption cap. As a result, the Desk began in May to reinvest agency MBS principal payments in excess of the cap. Based on current market rates and prepayment forecasts, the Desk expected to reinvest modest amounts of agency MBS over the coming months and possibly again in 2020, particularly during the summer months. 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 available for the June 18–19 meeting indicated that labor market conditions remained strong. Real gross domestic product (GDP) appeared to be rising at a moderate rate in the second quarter, as household spending growth picked up from the weak first quarter while business fixed investment was soft. Consumer price inflation, as measured by the 12-month percentage change in the price index for personal consumption expenditures (PCE), was below 2 percent in April. Survey-based measures of longer-run inflation expectations were little changed. Total nonfarm payroll employment expanded solidly, on average, in April and May; however, job gains slowed sharply in May after a strong increase in April. The unemployment rate declined to 3.6 percent in April and remained there in May, its lowest level in 50 years. The labor force participation rate moved down somewhat in April and held steady in May, remaining close to its average over the previous few years; the employment-to-population ratio stayed flat in April and May. The unemployment rates for African Americans, Asians, and Hispanics decreased, on net, over April and May and were below their levels at the end of the previous economic expansion, though persistent differentials in unemployment rates across groups remained. The average share of workers employed part time for economic reasons over April and May continued to be below the lows reached in late 2007. The rate of private-sector job openings moved up in March and held steady in April, while the rate of quits was unchanged at a high level; the four-week moving average of initial claims for unemployment insurance benefits through early June was near historically low levels. Average hourly earnings for all employees rose 3.1 percent over the 12 months ending in May, slightly lower than in April but somewhat faster than a year earlier. Total labor compensation per hour in the business sector increased 1.6 percent over the four quarters ending in the first quarter, slower than a year earlier. Total consumer prices, as measured by the PCE price index, increased 1.5 percent over the 12 months ending in April. This increase was slower than a year earlier, as core PCE price inflation (which excludes changes in consumer food and energy prices) moved down to 1.6 percent, consumer food price inflation remained well below core inflation, and consumer energy price inflation slowed considerably to about the same rate as core inflation. The trimmed mean measure of PCE price inflation constructed by the Federal Reserve Bank of Dallas was 2.0 percent over that 12‑month period. The consumer price index (CPI) rose 1.8 percent over the 12 months ending in May, while core CPI inflation was 2.0 percent. The monthly change in core PCE prices in April and the staff's estimate of the change in May—based on the CPI data and the relevant prices from the producer price index—were higher in both of these months than the very low readings seen in January through March. Recent survey-based measures of longer-run inflation expectations were little changed on balance. While measures from the Desk's Survey of Primary Dealers and Survey of Market Participants were little changed, the preliminary June reading from the University of Michigan Surveys of Consumers dropped significantly to below its range in recent years. Growth in real consumer expenditures appeared to pick up to a solid rate in the second quarter from its weak first-quarter pace. The components of the nominal retail sales data used by the Bureau of Economic Analysis to estimate PCE increased in May, and the retail sales data for the previous two months were revised up notably. Sales of light motor vehicles rose sharply in May after stepping down in April. Key factors that influence consumer spending—including a low unemployment rate, further gains in real disposable income, and still elevated measures of households' net worth—were supportive of solid real PCE growth in the near term. In addition, the Michigan survey measure of consumer sentiment edged down in the preliminary June reading but was still at an upbeat level. Real residential investment in the second quarter looked to be continuing the decline seen earlier in the year, albeit at a slower rate. Starts of new single-family homes rose in April but fell back in May, while starts of multifamily units increased over both months. 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 at roughly the same level in May as its first-quarter average. Sales of new homes fell notably in April after a marked gain in March, and existing home sales edged down in April. Real nonresidential private fixed investment appeared soft in the second quarter. Real private expenditures for business equipment and intellectual property looked to be roughly flat, as nominal shipments of nondefense capital goods excluding aircraft moved sideways in April. Forward-looking indicators of business equipment spending pointed to possible decreases in the near term. Orders for nondefense capital goods excluding aircraft declined notably in April and continued to be below the level of shipments, readings on business sentiment deteriorated further, and analysts' expectations of firms' longer-term profit growth moved down sharply. Nominal business expenditures for nonresidential structures outside of the drilling and mining sector decreased in April, 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 decline through mid‑June. Industrial production moved down in April and picked up in May, leaving output about flat over those two months, but production was lower than at the beginning of the year. Manufacturing output declined, on net, over April and May, although mining output expanded. Automakers' assembly schedules suggested that the production of light motor vehicles would move up in the near term, but new orders indexes from national and regional manufacturing surveys pointed to continued soft total factory output in the coming months. Moreover, industry news indicated that aircraft production would continue to be slow in the near term. Total real government purchases appeared to be rising solidly in the second quarter. Federal government purchases were being boosted by strong increases in defense spending through May and the return of nondefense purchases to more typical levels after the partial federal government shutdown in the first quarter. Real purchases by state and local governments seemed to be rising modestly; total payrolls of these governments edged down over April and May, but nominal state and local construction spending expanded notably in April. Net exports added substantially to real GDP growth in the first quarter, as exports increased robustly and imports fell. After widening in March, the nominal trade deficit narrowed in April; even though exports declined, imports declined by more. The available data suggested that net exports would be a small drag on real GDP growth in the second quarter. Growth in the foreign economies remained subdued in the first quarter, as soft growth in the Canadian economy and weakness in several emerging market economies (EMEs) offset somewhat stronger growth in other advanced foreign economies (AFEs) and in China's economy. Recent indicators suggested that the pace of economic activity picked up in Canada in the second quarter but slowed in some other AFEs. Economic growth also appeared to have slowed in China. Foreign inflation remained subdued but rose a bit from lows earlier in the year, in part reflecting higher retail energy prices in many economies. Staff Review of the Financial Situation Investors' concerns about downside risks to the economic outlook weighed on financial markets over the intermeeting period. Market participants cited negative news about international trade tensions and, to a lesser extent, soft U.S. and foreign economic data as factors that contributed to these developments. Nominal Treasury yields posted notable declines and the expected path of policy shifted down considerably over the period. Equity prices declined, on net, and corporate bond spreads widened. However, financing conditions for businesses and households generally remained supportive of economic growth. FOMC communications following the May meeting had little net effect on yields, though they rose modestly following the Chair's press conference. Later in the period, the expected path of policy moved down, partly in response to incoming information pointing to a weaker economic outlook. The market-implied probability for a 25 basis point cut in the target range for the federal funds rate by the July FOMC meeting rose to about 85 percent. The market-implied path for the federal funds rate for 2019 and 2020 shifted down markedly. Based on overnight index swap rates, investors expected the federal funds rate to decline about 60 basis points by the end of this year—a downward revision of 40 basis points over the intermeeting period. Longer-term Treasury yields fell considerably over the period, with the declines driven primarily by negative headlines about trade tensions between the United States and two major trading partners, China and Mexico. Softer-than-expected domestic economic news, such as the weaker-than-expected employment data, also contributed to the declines. The spread between 10-year and 3-month Treasury yields fell to the bottom decile of its distribution since 1971. Measures of inflation compensation derived from Treasury Inflation-Protected Securities also decreased notably over the period along with declines in oil prices. Major U.S. equity price indexes declined, on net, over the intermeeting period. Equity prices fell notably over the first few weeks of the period, primarily in response to the escalation of trade tensions with China and Mexico. Firms with high China exposure and those in cyclical sectors—such as energy, information technology, industrials, communication services, and banks—posted particularly large losses. However, later in the period, stock prices regained a significant portion of their losses amid an easing of trade tensions with Mexico and expectations of a more accommodative stance of policy. One-month option-implied volatility on the S&P 500 index—the VIX—increased over the period, and corporate credit spreads widened. Conditions in short-term funding markets remained stable over the intermeeting period. Overnight interest rates in short-term funding markets declined in response to the technical adjustment that reduced the IOER rate 5 basis points to 2.35 percent after the May FOMC meeting. The average of the effective federal funds rate over the period was about 6 basis points below the level just before the May FOMC meeting, well within the FOMC's target range. Rates on commercial paper and negotiable certificates of deposit also declined somewhat. Escalation of trade tensions and soft economic data also weighed on foreign financial markets. Most major global equity price indexes declined, on net, and EME sovereign spreads widened modestly. In the AFEs, policy expectations and sovereign yields declined notably, in part reflecting more-accommodative monetary policy communications by major central banks. The broad dollar index rose a bit over the intermeeting period. The Japanese yen and Swiss franc, which are viewed as safe-haven currencies, appreciated against the dollar. The British pound depreciated amid increased uncertainty around Brexit. Increased trade tensions contributed to some depreciation of the Chinese renminbi. The value of the Mexican peso against the dollar fluctuated in response to announcements related to potential tariffs on imports from Mexico but ended the period only slightly lower. Financing conditions for nonfinancial businesses continued to be accommodative overall. Gross issuance of corporate bonds was strong in May following a spell of seasonal weakness in April. The credit quality of nonfinancial corporations remained solid, as the volume of nonfinancial corporate bond upgrades outpaced that of downgrades in May. Issuance in the institutional syndicated leveraged loan market was subdued in April but rebounded in May, reflecting strong issuance beyond that associated with refinancing of maturing leveraged loans. Meanwhile, commercial and industrial lending slowed somewhat in April and May after a period of stronger growth in the first quarter. Small business credit market conditions were little changed, and credit conditions in municipal bond markets stayed accommodative on net. In the commercial real estate (CRE) sector, financing conditions continued to be generally accommodative. Commercial mortgage-backed securities (CMBS) spreads widened slightly over the intermeeting period but remained near the low end of their post-crisis range. Issuance of agency and non-agency CMBS was solid in May, and CRE lending by banks expanded in April and May at a slower rate than in the first quarter. Financing conditions in the residential mortgage market also remained supportive over the intermeeting period. Home mortgage rates decreased about 40 basis points. Since last November, mortgage rates had declined more than 1 percentage point, contributing to an increase in home-purchase mortgage originations to the solid levels seen in 2017. Financing conditions in consumer credit markets were little changed in recent months and remained generally supportive of household spending, although the supply of credit to consumers with subprime credit scores continued to be tight. Consumer credit expanded at a moderate pace in the first quarter, with bank credit data pointing to a pickup in April and May. Conditions in the consumer asset-backed securities market remained stable over the intermeeting period, with robust issuance and spreads that were little changed at low levels. Staff Economic Outlook The projection for U.S. economic activity prepared by the staff for the June FOMC meeting was revised down somewhat on balance. Real GDP growth was forecast to slow to a moderate rate in the second quarter and move down to a more modest pace in the second half of the year, primarily reflecting a more downbeat near-term outlook for business fixed investment. The projection for real GDP growth over the medium term was little changed, as the effects of a higher projected path for the broad real dollar and lower trajectory for foreign economic growth were largely counterbalanced by a lower projected path for interest rates. Real GDP was forecast to expand at a rate a little above the staff's estimate of potential output growth in 2019 and 2020 and then slow to a pace slightly below potential output growth in 2021. The unemployment rate was projected to be roughly flat through 2021 and remain below the staff's estimate of its longer-run natural rate. With labor market conditions judged to be 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's forecast for inflation was little changed on balance. The forecast for total PCE price inflation this year was revised down somewhat, reflecting a lower near-term projection for energy prices. The core inflation forecast for this year was unchanged at a level below 2 percent. Both total and core inflation were projected to move up slightly next year, as the low readings early this year were expected to be transitory, but nevertheless to continue to run below 2 percent. The staff viewed the uncertainty around its projections for real GDP growth, the unemployment rate, and inflation as generally similar to the average of the past 20 years, although uncertainty was seen to have increased since the previous forecast. Moreover, the staff also judged that the risks to the forecast for real GDP growth had tilted to the downside, with a skew to the upside for the unemployment rate. The increased uncertainty and shift to downside risks around the projection reflected the staff's assessment that international trade tensions and foreign economic developments seemed more likely to move in directions that could have significant negative effects on the U.S. economy than to resolve more favorably than assumed. With the risks to the forecast for economic activity tilted to the downside, the risks to the inflation projection were also viewed as having a downward skew. Participants' Views on Current Conditions and the Economic Outlook Participants judged that uncertainties and downside risks surrounding the economic outlook had increased significantly over recent weeks. While they continued to view a sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective as the most likely outcomes, many participants attached significant odds to scenarios with less favorable outcomes.5 Moreover, nearly all participants in their submissions to the Summary of Economic Projections (SEP), had revised down their assessment of the appropriate path of the federal funds rate over the projection period that would be consistent with their modal economic outlook. Many participants noted that, since the Committee's previous meeting, the economy appeared to have lost some momentum and pointed to a number of factors supporting that view including recent weak indicators for business confidence, business spending and manufacturing activity; trade developments; and signs of slowing global economic growth. Many participants noted that they viewed the risks to their growth and inflation projections, such as those emanating from greater uncertainty about trade, as shifting notably over recent weeks and that risks were now weighted to the downside. Participants discussed at some length the softness in various indicators of business fixed investment in the second quarter. Incoming data on shipments and orders of new capital goods looked weak and recent readings from some manufacturing surveys had dropped sharply. Private sector analysts had marked down their forecasts for longer-term corporate profit growth. Manufacturing production had posted declines so far this year. In addition, contacts reported that softer export sales, weaker economic activity abroad, and elevated levels of uncertainty regarding the global outlook were weighing on business sentiment and leading firms to reassess plans for investment spending. Several participants noted comments from business contacts reporting that their base case now assumed that uncertainties about the global outlook would remain prominent over the medium term and would continue to act as a drag on investment. Several participants also noted reports from some business contacts in the manufacturing sector suggesting that they were putting capital expenditures or hiring plans on hold and were reevaluating their global supply chains in light of trade uncertainties. A couple of participants, however, pointed to signs that investment might pick up, including reports from some contacts that their orders and shipments remained strong and that some contacts planned to hire more workers. A few participants also noted ongoing challenges in the agricultural sector, including those associated with increased trade uncertainty, weak export markets, wet weather, and severe flooding. A few participants remarked on the decline in energy prices and the associated reduction in activity in the energy sector. In their discussion of the household sector, participants noted that available data on consumer spending had been solid, supported by a strong labor market and rising incomes. Several participants also noted that measures of consumer sentiment remained upbeat, and a couple noted that their business contacts confirmed the view that consumer spending had rebounded from the weak patch earlier in the year. Several participants, however, noted that tariffs could eventually become a drag on consumer durables spending, especially if additional tariffs on consumer goods were imposed, and that they would be monitoring incoming data for signs of this effect. A couple of participants noted that the continued softness in the housing sector was a concern, even though the decline in mortgage rates since last fall was expected to provide stronger impetus for activity; a couple of participants were somewhat optimistic that residential investment would pick up. In their discussion of the labor market, participants cited evidence that conditions remained strong, including the very low unemployment rate and the fact that job gains had been solid, on average, in recent months. That said, job gains in May were weaker than expected and, in light of other developments, participants judged that it would be important to closely monitor incoming data for any signs of softening in labor market conditions. Reports from business contacts pointed to continued strong labor demand, with many firms planning to hire more workers. Economy-wide wage growth was seen as being broadly consistent with modest average rates of labor productivity growth in recent years. However, a few participants noted that there were limited signs of upward pressure on wage inflation. A few participants cited the combination of muted inflation pressures, moderate wage growth, and expanding employment as a possible indication that some slack remained in the labor market. Partly reflecting that combination of developments, several participants had revised down their SEP estimates of the longer-run normal rate of unemployment. Participants noted that readings on overall inflation and inflation for items other than food and energy had come in lower than expected over recent months. In light of recent softer inflation readings, perceptions of downside risks to growth, and global disinflationary pressures, many participants viewed the risks to the outlook for inflation as weighted to the downside. Several participants indicated that, while headline inflation had been close to 2 percent last year, it was noteworthy that inflation had softened this year despite continued strong labor market conditions. Participants generally noted that they revised down their SEP projections of inflation for the current year in light of recent data. They still anticipated that the overall rate of inflation would firm somewhat and move up to the Committee's longer-run symmetric objective of 2 percent over the next few years. Consistent with that view, several participants commented that alternative measures of inflation that removed the influence of unusually large changes in the prices of individual items in either direction were running around 2 percent. However, a number of participants anticipated that the return to 2 percent would take longer than previously projected even with an assumed path for the federal funds rate that was lower than in their previous projections. In their discussion of indicators of inflation expectations, participants generally observed that market-based measures of inflation compensation had declined and were at low levels. Some participants also noted that recent readings on some survey measures of consumers' inflation expectations had declined or stood at historically low levels. Many participants further noted that longer-term inflation expectations could be somewhat below levels consistent with the Committee's 2 percent inflation objective, or that the continued weakness in inflation could prompt expectations to slip further. These developments might make it more difficult to achieve their inflation objective on a sustained basis. However, several participants remarked that inflation expectations appeared to be at levels consistent with the Committee's 2 percent inflation objective. Participants generally agreed that downside risks to the outlook for economic activity had risen materially since their May meeting, particularly those associated with ongoing trade negotiations and slowing economic growth abroad. Other downside risks cited by several participants included the possibility that federal budget negotiations could result in a sharp reduction in government spending or that negotiations to raise the federal debt limit could be prolonged. A couple of participants observed that an economic deterioration in the United States, if it occurred, might be amplified by significant debt burdens for many firms. A few participants remarked that an upside risk to the outlook for economic activity and inflation included a scenario in which trade negotiations were resolved favorably and business sentiment rebounded sharply. In their discussion of financial developments, participants observed that the increase in uncertainty surrounding the global outlook had affected risk sentiment in financial markets. While overall financial conditions remained supportive of growth, those conditions appeared to be premised importantly on expectations that the Federal Reserve would ease policy in the near term to help offset the drag on economic growth stemming from uncertainties about the global outlook and other downside risks. Participants also discussed the decline in yields on longer-term Treasury securities in recent months. Many participants noted that the spread between the 10-year and 3-month Treasury yields was now negative, and several noted that their assessment of the risk of a slowing in the economic expansion had increased based on either the shape of the yield curve or other financial and economic indicators. A few participants pointed to the growth in debt issuance by nonfinancial corporations and still generally high asset valuations as developments that warranted continued monitoring. In their discussion of monetary policy decisions at this meeting, participants noted that, under their baseline outlook, the labor market was likely to remain strong with economic activity growing at a moderate pace. However, they judged that the risks and uncertainties surrounding their outlooks, particularly those related to the global economic outlook, had intensified in recent weeks. Moreover, inflation continued to run below the Committee's 2 percent objective; similarly, inflation for items other than food and energy had remained below 2 percent as well. In addition, some readings on inflation expectations had been low. The increase in risks and uncertainties surrounding the outlook was quite recent and nearly all participants agreed that it would be appropriate to maintain the current target range for the federal funds rate at 2-1/4 to 2-1/2 percent at this meeting. However, they noted that it would be important to monitor the implications of incoming information and global economic developments for the U.S. economic outlook. A couple of participants favored a cut in the target range at this meeting, judging that a prolonged period with inflation running below 2 percent warranted a more accommodative policy response to firmly center inflation and inflation expectations around the Committee's symmetric 2 percent objective. With regard to the outlook for monetary policy beyond this meeting, nearly all participants had revised down their assessment of the appropriate path for the federal funds rate over the projection period in their SEP submissions, and some had marked down their estimates of the longer-run normal level of the funds rate as well. Many participants indicated that the case for somewhat more accommodative policy had strengthened. Participants widely noted that the global developments that led to the heightened uncertainties about the economic outlook were quite recent. Many judged additional monetary policy accommodation would be warranted in the near term should these recent developments prove to be sustained and continue to weigh on the economic outlook. Several others noted that additional monetary policy accommodation could well be appropriate if incoming information showed further deterioration in the outlook. Participants stated a variety of reasons that would call for a lower path of the federal funds rate. Several participants noted that a near-term cut in the target range for the federal funds rate could help cushion the effects of possible future adverse shocks to the economy and, hence, was appropriate policy from a risk-management perspective. Some participants also noted that the continued shortfall in inflation risked a softening of inflation expectations that could slow the sustained return of inflation to the Committee's 2 percent objective. Several participants pointed out that they had revised down their estimates of the longer-run normal rate of unemployment and, as a result, saw a smaller upward contribution to inflation pressures from tight resource utilization than they had earlier. A few participants were concerned that inflation expectations had already moved below levels consistent with the Committee's symmetric 2 percent objective and that it was important to provide additional accommodation in the near term to bolster inflation expectations. A few participants judged that allowing inflation to run above 2 percent for some time could help strengthen the credibility of the Committee's commitment to its symmetric 2 percent inflation objective. Some participants suggested that although they now judged that the appropriate path of the federal funds rate would follow a flatter trajectory than they had previously assumed, there was not yet a strong case for a rate cut from current levels. They preferred to gather more information on the trajectory of the economy before concluding that a change in policy stance is warranted. A few participants expressed the view that with the economy still in a favorable position in terms of the dual mandate, an easing of policy in an attempt to increase inflation a few tenths of a percentage point risked overheating the labor markets and fueling financial imbalances. Several participants observed that the trimmed mean measure of PCE price inflation constructed by the Federal Reserve Bank of Dallas had stayed near 2 percent recently, underscoring the view that the recent low readings on inflation will prove transitory. Committee Policy Action In their discussion of monetary policy for the period ahead, members noted the significant increase in risks and uncertainties attending the economic outlook. There were signs of weakness in U.S. business spending, and foreign economic data were generally disappointing, raising concerns about the strength of global economic growth. While strong labor markets and rising incomes continued to support the outlook for consumer spending, uncertainties and risks regarding the global outlook appeared to be contributing to a deterioration in risk sentiment in financial markets and a decline in business confidence that pointed to a weaker outlook for business investment in the United States. Inflation pressures remained muted and some readings on inflation expectations were at low levels. Although nearly all members agreed to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent at this meeting, they generally agreed that risks and uncertainties surrounding the economic outlook had intensified and many judged that additional policy accommodation would be warranted if they continued to weigh on the economic outlook. One member preferred to lower the target range for the federal funds rate by 25 basis points at this meeting, stating that the Committee should ease policy at this meeting to re-center inflation and inflation expectations at the Committee's symmetric 2 percent objective. 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 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 implications of incoming information for the economic outlook. With regard to the postmeeting statement, members agreed to several adjustments in the description of the economic situation, including a revision in the description of market-based measures of inflation compensation to recognize the recent fall in inflation compensation. The Committee retained the characterization of the most likely outcomes as "sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective" but added a clause to emphasize that uncertainties about this outlook had increased. In describing the monetary policy outlook, members agreed to remove the "patient" language and to emphasize instead that, in light of these uncertainties and muted inflation pressures, the Committee would closely monitor the implications of incoming information for the economic outlook and would act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective. 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 System Open Market Account in accordance with the following domestic policy directive, to be released at 2:00 p.m.: "Effective June 20, 2019, 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 2-1/4 to 2-1/2 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 2.25 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 $15 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 May indicates that the labor market remains strong and that economic activity is rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although growth of household spending appears to have picked up from earlier in the year, indicators of business fixed investment have been soft. On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation have declined; survey-based measures of longer-term inflation expectations are little changed. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent. The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective as the most likely outcomes, but uncertainties about this outlook have increased. In light of these uncertainties and muted inflation pressures, the Committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective. 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, Michelle W. Bowman, Lael Brainard, Richard H. Clarida, Charles L. Evans, Esther L. George, Randal K. Quarles, and Eric Rosengren. Voting against this action: James Bullard. Mr. Bullard dissented because he believed that the current stance of monetary policy could be better positioned to foster progress toward the Committee's statutory objectives of maximum employment and stable prices. Particularly in light of persistent low readings on inflation and from indicators of inflation expectations along with the risks to the U.S. outlook associated with global economic developments, he noted that a policy rate reduction at the current meeting would help re-center inflation and inflation expectations at levels consistent with the Committee's symmetric 2 percent inflation objective and simultaneously provide some insurance against unexpected developments that could slow U.S. economic growth. 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 2.35 percent and voted unanimously to approve establishment of the primary credit rate at the existing level of 3.00 percent, effective June 20, 2019. Update from Subcommittee on Communications Governor Clarida provided a brief update on the work of the subcommittee on communications. The Fed Listens conferences conducted to date were viewed as successful in identifying many important issues for the strategic review of monetary policy strategy, tools, and communications. Additional Fed Listens events were planned over the remainder of the year. The Committee was likely to begin internal deliberations on aspects of the strategic review over coming FOMC meetings. It was agreed that the next meeting of the Committee would be held on Tuesday–Wednesday, July 30–31, 2019. The meeting adjourned at 10:05 a.m. on June 19, 2019. Notation Vote By notation vote completed on May 21, 2019, the Committee unanimously approved the minutes of the Committee meeting held on April 30–May 1, 2019. _______________________ 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. In the absence of the manager, the Committee's Rules of Organization provide that the deputy manager acts as manager pro tem. Return to text 4. Attended through the discussion of developments in financial markets and open market operations. Return to text 5. 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 2019 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 and policy assessments are described in the Summary of Economic Projections, which is an addendum to these minutes. Return to text

2019-06-19

Statement

Information received since the Federal Open Market Committee met in May indicates that the labor market remains strong and that economic activity is rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although growth of household spending appears to have picked up from earlier in the year, indicators of business fixed investment have been soft. On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation have declined; survey-based measures of longer-term inflation expectations are little changed. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent. The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective as the most likely outcomes, but uncertainties about this outlook have increased. In light of these uncertainties and muted inflation pressures, the Committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective. 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 monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Charles L. Evans; Esther L. George; Randal K. Quarles; and Eric S. Rosengren. Voting against the action was James Bullard, who preferred at this meeting to lower the target range for the federal funds rate by 25 basis points. Implementation Note issued June 19, 2019

2019-05-22

Minute

Minutes of the Federal Open Market Committee 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 30, 2019, at 10:00 a.m. and continued on Wednesday, May 1, 2019, at 9:00 a.m.1 PRESENT: Jerome H. Powell, Chair John C. Williams, Vice Chair Michelle W. Bowman Lael Brainard James Bullard Richard H. Clarida Charles L. Evans Esther L. George Randal K. Quarles Eric Rosengren Patrick Harker, Robert S. Kaplan, Neel Kashkari, Loretta J. Mester, and Michael Strine, Alternate Members of the Federal Open Market Committee Thomas I. Barkin, Raphael W. Bostic, and Mary C. Daly, Presidents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco, 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 Stacey Tevlin, Economist Rochelle M. Edge, Eric M. Engen, Anna Paulson, Geoffrey Tootell, William Wascher, Jonathan L. Willis, 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 Michael T. Kiley, Deputy Director, Division of Financial Stability, Board of Governors; Trevor A. Reeve, Deputy Director, Division of Monetary Affairs, Board of Governors Jon Faust, Senior Special Adviser to the Chair, Office of Board Members, Board of Governors Antulio N. Bomfim, Special Adviser to the Chair, Office of Board Members, Board of Governors Brian M. Doyle,3 Wendy E. Dunn, 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 Shaghil Ahmed and Christopher J. Erceg,4 Senior Associate Directors, Division of International Finance, Board of Governors; William F. Bassett, Senior Associate Director, Division of Financial Stability, Board of Governors; Joshua Gallin and David E. Lebow, Senior Associate Directors, Division of Research and Statistics, Board of Governors Robert J. Tetlow, Senior Adviser, Division of Monetary Affairs, Board of Governors Marnie Gillis DeBoer, Associate Director, Division of Monetary Affairs, Board of Governors; John J. Stevens, 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 Eric C. Engstrom, Deputy Associate Director, Division of Monetary Affairs, and Adviser, Division of Research and Statistics, Board of Governors Glenn Follette, Assistant Director, Division of Research and Statistics, Board of Governors; Laura Lipscomb2 and Zeynep Senyuz,2 Assistant Directors, Division of Monetary Affairs, Board of Governors Dana L. Burnett, Michele Cavallo, and Matthew Malloy,2 Section Chiefs, Division of Monetary Affairs, Board of Governors Penelope A. Beattie,5 Assistant to the Secretary, Office of the Secretary, Board of Governors David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors Juan M. Londono, Principal Economist, Division of International Finance, Board of Governors; Camelia Minoiu and Bernd Schlusche, Principal Economists, Division of Monetary Affairs, Board of Governors Brian J. Bonis,2 Lead Financial Institution and Policy Analyst, Division of Monetary Affairs, Board of Governors Randall A. Williams, Senior Information Manager, Division of Monetary Affairs, Board of Governors James M. Trevino,2 Senior Technology Analyst, Division of Monetary Affairs, Board of Governors Ron Feldman, First Vice President, Federal Reserve Bank of Minneapolis Kartik B. Athreya, Michael Dotsey, Sylvain Leduc, and Ellis W. Tallman, Executive Vice Presidents, Federal Reserve Banks of Richmond, Philadelphia, San Francisco, and Cleveland, respectively Evan F. Koenig, Antoine Martin,2 Samuel Schulhofer-Wohl, Mark L.J. Wright, and Nathaniel Wuerffel,2 Senior Vice Presidents, Federal Reserve Banks of Dallas, New York, Chicago, Minneapolis, and New York, respectively David C. Wheelock, Group Vice President, Federal Reserve Bank of St. Louis Patricia Zobel,2 Vice President, Federal Reserve Bank of New York Mary Amiti and William E. Riordan,2 Assistant Vice Presidents, Federal Reserve Banks of New York and New York, respectively John Robertson, Research Economist and Senior Advisor, Federal Reserve Bank of Atlanta Justin Meyer,2 Markets Manager, Federal Reserve Bank of New York Selection of Committee Officer By unanimous vote, the Committee selected Anna Paulson to serve as Associate Economist, effective April 30, 2019, until the selection of her successor at the first regularly scheduled meeting of the Committee in 2020. Balance Sheet Normalization Participants resumed their discussion of issues related to balance sheet normalization with a focus on the long-run maturity composition of the System Open Market Account (SOMA) portfolio. The staff presented two illustrative scenarios as a way of highlighting a range of implications of different long-run target portfolio compositions. In the first scenario, the maturity composition of the U.S. Treasury securities in the target portfolio was similar to that of the universe of currently outstanding U.S. Treasury securities (a "proportional" portfolio). In the second, the target portfolio contained only shorter-term securities with maturities of three years or less (a "shorter maturity" portfolio). The staff provided estimates of the capacity that the Committee would have under each scenario to provide economic stimulus through a maturity extension program (MEP). The staff also provided estimates of the extent to which term premiums embedded in longer-term Treasury yields might be affected under the two different scenarios. Based on the staff's standard modeling framework, all else equal, a move to the illustrative shorter maturity portfolio would put significant upward pressure on term premiums and imply that the path of the federal funds rate would need to be correspondingly lower to achieve the same macroeconomic outcomes as in the baseline outlook. However, the staff noted the uncertainties inherent in the analysis, including the difficulties in estimating the effects of changes in SOMA holdings on longer-term interest rates and the economy more generally. The staff presentation also considered illustrative gradual and accelerated transition paths to each long-run target portfolio. Under the illustrative "gradual" transition, reinvestments of maturing Treasury holdings, principal payments on agency mortgage-backed securities (MBS), and purchases to accommodate growth in Federal Reserve liabilities would be directed to Treasury securities with maturities in the long-run target portfolio. Under the illustrative "accelerated" transition, the reinvestment of principal payments on agency MBS and purchases to accommodate growth in Federal Reserve liabilities would be directed to Treasury bills until the weighted average maturity (WAM) of the SOMA portfolio reached the WAM associated with the target portfolio. Depending on the combination of long-run target composition and the transition plan for arriving at that composition, the staff reported that, in the illustrative scenarios, it could take from 5 years to more than 15 years for the WAM of the SOMA portfolio to reach its long-run level. In its Statement Regarding Monetary Policy Implementation and Balance Sheet Normalization, the Committee noted that it is prepared to adjust the size and composition of the balance sheet to achieve its macroeconomic objectives in a scenario in which the federal funds rate is constrained by the effective lower bound. Against this backdrop, participants discussed the benefits and costs of alternative long-run target portfolio compositions in supporting the use of balance sheet policies in such scenarios. In their discussion of a shorter maturity portfolio, many participants noted the advantage of increased capacity for the Federal Reserve to conduct an MEP, which could be helpful in providing policy accommodation in a future economic downturn given the secular decline in neutral real interest rates and the associated reduced scope for lowering the federal funds rate in response to negative economic shocks. Several participants viewed an MEP as a useful initial option to address a future downturn in which the Committee judged that it needed to employ balance sheet actions to provide appropriate policy accommodation. Participants acknowledged the staff analysis suggesting that creating space to conduct an MEP by moving to a shorter maturity portfolio composition could boost term premiums and result in a lower path for the federal funds rate, reducing the capacity to ease financial conditions with adjustments in short-term rates. A number of participants noted, however, that the estimates of the effect of a move to a shorter-maturity portfolio composition on the long-run neutral federal funds rate are subject to substantial uncertainty and are based on a number of strong modeling assumptions. For example, estimates of term premium effects based on experience during the crisis could overstate the effects that would be associated with a gradual evolution of the composition of the SOMA portfolio. In addition, a shift in the composition of the SOMA portfolio could result in changes in the supply of securities that would tend to offset upward pressure on term premiums. Nonetheless, other participants expressed concern about the potential that a shorter maturity portfolio composition could result in a lower long-run neutral federal funds rate. Moreover, while a shorter maturity portfolio would provide substantial capacity to conduct an MEP, some participants raised questions about the effectiveness of MEPs as a policy tool relative to that of the federal funds rate or other unconventional policy tools. These participants noted that, in a situation in which it would be appropriate to employ unconventional policy tools, they likely would prefer to employ forward guidance or large-scale purchases of assets ahead of an MEP. In the view of these participants, the potential benefit of transitioning to a shorter maturity SOMA composition in terms of increased ability to conduct an MEP might not be worth the potential costs. In their discussion of a proportional portfolio composition, participants observed that moving to this target SOMA composition would not be expected to have much effect on current staff estimates of term premiums and thus would likely not reduce the scope for lowering the target range for the federal funds rate target in response to adverse economic shocks. As a result, several participants judged the proportional target composition to be well aligned with the Committee's previous statements that changes in the target range for the federal funds rate are the primary means by which the Committee adjusts the stance of monetary policy. In addition, several participants noted that while the staff analysis suggested a proportional portfolio would not contain as much capacity to conduct an MEP as a shorter maturity portfolio, it still would contain meaningful capacity along these lines. Some participants noted that a proportional portfolio would also help maintain the traditional separation between the Federal Reserve's decisions regarding the composition of the SOMA portfolio and the maturity composition of Treasury debt held by the private sector. However, a number of participants judged that it would be desirable to structure the SOMA portfolio in a way that would provide more capacity to conduct an MEP than in the proportional portfolio. In addition, a couple of participants noted that a shorter maturity portfolio would maintain a narrow gap between the average maturity of the assets in the SOMA portfolio and the short average maturity of the Federal Reserve's primary liabilities. Participants also discussed the financial stability implications that could be associated with alternative long-run target portfolio compositions. A couple of participants noted that a proportional portfolio could imply a relatively flat yield curve, which could result in greater incentives for "reach for yield" behavior in the financial system. That said, a few participants noted that a shorter maturity portfolio could affect financial stability risks by increasing the incentives for the private sector to issue short-term debt. A couple of participants judged that financial market functioning might be adversely affected if the holdings in the shorter maturity portfolio accounted for too large a share of total shorter maturity Treasury securities outstanding. In discussing the transition to the desired long-run SOMA portfolio composition, several participants noted that a gradual pace of transition could help avoid unwanted effects on financial conditions. However, participants observed that the gradual transition paths described in the staff presentation would take many years to complete. Against this backdrop, a few participants discussed the possibility of following some type of accelerated transition, perhaps including sales of the SOMA's residual holdings of agency MBS. In addition, several participants suggested that the Committee could communicate its plans about the SOMA portfolio composition in terms of a desired change over an intermediate horizon rather than a specific long-run target. Several participants expressed the view that a decision regarding the long-run composition of the portfolio would not need to be made for some time, and a couple of participants highlighted the importance of making such a decision in the context of the ongoing review of the Federal Reserve's monetary policy strategies, tools, and communications practices. Some participants noted the importance of developing an effective communication plan to describe the Committee's decisions regarding the long-run target composition for the SOMA portfolio and the transition to that target composition. Developments in Financial Markets and Open Market Operations The manager of the SOMA reviewed developments in financial markets over the intermeeting period. In the United States, prices for equities and other risk assets reportedly were buoyed by perceptions of an accommodative stance of monetary policy, incoming economic data pointing to continued solid economic expansion, and some signs of receding downside risks to the global outlook. Treasury yields declined over the period, adding to their substantial drop since September, and the expected path of the federal funds rate as implied by futures prices shifted down as well. Market participants attributed these moves in part to FOMC communications indicating that the Committee would continue to be patient in evaluating the need for any further adjustments of the target range for the federal funds rate. Softer incoming data on inflation may also have contributed to the downward revision in the expected path of policy. Nearly all respondents on the Open Market Desk's latest surveys of primary dealers and market participants anticipated that the federal funds target range would be unchanged for the remainder of the year. In reviewing global developments, the manager noted that market prices appeared to reflect perceptions of improved economic prospects in China. However, investors reportedly remained concerned about the economic outlook for Europe and the United Kingdom. The manager also reported on developments related to open market operations. In light of the declines in interest rates since November last year, principal payments on the Federal Reserve's holdings of agency MBS were projected to exceed the $20 billion redemption cap by a modest amount sometime this summer. As directed by the Committee, any principal payments received on agency MBS in excess of the cap would be reinvested in agency MBS. The Desk planned to conduct any such operations by purchasing uniform MBS rather than Fannie Mae and Freddie Mac securities. Consistent with the Balance Sheet Normalization Principles and Plans released following the March meeting, reinvestments of maturing Treasury securities beginning on May 2 would be based on a cap on monthly Treasury redemptions of $15 billion—down from the $30 billion monthly redemption cap that had been in place since October of last year. The deputy manager reviewed developments in domestic money markets. Reserve balances declined by $150 billion over the intermeeting period and reached a low point of just below $1.5 trillion on April 23. The decline in reserves stemmed from a reduction in the SOMA's agency MBS and Treasury holdings of $46 billion, reducing the SOMA portfolio to $3.92 trillion, and from a shift in the composition of liabilities, predominantly related to the increase in the Treasury General Account (TGA). The TGA was volatile during the intermeeting period. In early April, the Treasury reduced bill issuance and allowed the TGA balance to fall in anticipation of individual tax receipts. As tax receipts arrived after the tax date, the TGA rose to more than $400 billion, resulting in a sharp decline in reserves over the last two weeks of April. Against this backdrop, the distribution of rates on traded volumes in overnight unsecured markets shifted higher. The effective federal funds rate (EFFR) moved up to 2.45 percent by the end of the intermeeting period, 5 basis points above the interest on excess reserves (IOER) rate. Several factors appeared to spur this upward pressure. Tax-related runoffs in deposits at banks reportedly led banks to increase short-term borrowing, particularly through Federal Home Loan Bank (FHLB) advances and in the federal funds market. Although some banks continued to hold large quantities of reserves, other banks were operating with reserve balances closer to their lowest comfortable levels as reported in the most recent Senior Financial Officer Survey. This distribution of reserves may have contributed to somewhat more sustained upward pressure on the federal funds rate than had been experienced in recent years around tax-payment dates. In addition, rates on Treasury repurchase agreements (repo), were, in part, pushed higher by tax-related outflows from government-only money market mutual funds and a corresponding decline in repo lending by those funds. Elevated repo rates contributed to upward pressure on the federal funds rate, as FHLBs reportedly shifted some of their liquidity investments out of federal funds and into the repo market. In addition, some market participants pointed to heightened demand for federal funds at month end by some banks in connection with their efforts to meet liquidity coverage ratio requirements as contributing to upward pressure on the federal funds rate. The deputy manager also discussed a staff proposal in which the Board would implement a 5 basis point technical adjustment to the Interest on Required Reserves (IORR) and IOER rates. The proposed action would bring these rates to 15 basis points below the top of the target range for the federal funds rate and 10 basis points above the bottom of the range and the overnight reverse repurchase agreement (ON RRP) offer rate. As with the previous technical adjustments in June and December 2018, the proposed adjustment was intended to foster trading in the federal funds market well within the target range established by the FOMC. A technical adjustment would reduce the spread between the IOER rate and the ON RRP offering rate to 10 basis points, the smallest since the introduction of the ON RRP facility. The staff judged that the narrower spread did not pose a significant risk of increased take-up at the ON RRP facility because repo rates had been trading well above the ON RRP offer rate for some time. However, if it became appropriate in the future to further lower the IOER rate, the staff noted that the Committee might wish to first consider where to set the ON RRP offer rate relative to the target range for the federal funds rate to mitigate this risk. The manager concluded the briefing on financial market developments and open market operations with a review of the role of standing swap lines in supporting financial stability. He recommended that the Committee vote to renew these swap lines at this meeting following the usual annual schedule. 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 occur 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 available for the April 30–May 1 meeting indicated that labor market conditions remained strong and that real gross domestic product (GDP) increased at a solid rate in the first quarter even as household spending and business fixed investment rose more slowly in the first quarter than in the fourth quarter of last year. Consumer price inflation, as measured by the 12-month percentage change in the price index for personal consumption expenditures (PCE), declined, on net, in recent months and was somewhat below 2 percent in March. Survey-based measures of longer-run inflation expectations were little changed. Total nonfarm payroll employment recorded a strong gain in March, and the unemployment rate held steady at 3.8 percent. The labor force participation rate declined a little in March after having risen, on balance, in the previous few months, and the employment-to-population ratio edged down. The unemployment rates for African Americans, Asians, and Hispanics in March were at or below their levels at the end of the previous economic expansion, though persistent differentials in unemployment rates across groups remained. The share of workers employed part time for economic reasons edged up in March but was still below the lows reached in late 2007. The rate of private-sector job openings in February declined slightly from the elevated level that prevailed for much of the past year, while the rate of quits was unchanged at a high level; the four-week moving average of initial claims for unemployment insurance benefits through mid-April was near historically low levels. Average hourly earnings for all employees rose 3.2 percent over the 12 months ending in March, a somewhat faster pace than a year earlier. The employment cost index for private-sector workers increased 2.8 percent over the 12 months ending in March, the same as a year earlier. Industrial production edged down in March and for the first quarter overall. Manufacturing output declined moderately in the first quarter, primarily reflecting a decrease in the output of motor vehicles and parts; outside of motor vehicles and parts, manufacturing production was little changed. Mining output declined, on net, over the three months ending in March. Automakers' assembly schedules suggested that the production of light motor vehicles would move up in the near term, and new orders indexes from national and regional manufacturing surveys pointed to modest gains in overall factory output in the coming months. However, industry news indicated that aircraft production would slow in the second quarter. Consumer expenditures slowed in the first quarter, but monthly data suggested some improvement toward the end of the quarter. Real PCE increased at a robust pace in March after having been unchanged in February, perhaps partly reflecting a delay in tax refunds from February into March that was due, in part, to the partial government shutdown. Similarly, sales of light motor vehicles rose sharply in March, although the average pace of sales in the first quarter was slower than in the fourth quarter. Key factors that influence consumer spending—including a low unemployment rate, ongoing gains in real labor compensation, and still elevated measures of households' net worth—were supportive of solid near-term gains in consumer expenditures. In addition, consumer sentiment, as measured by the University of Michigan Surveys of Consumers, edged down in April but was still upbeat. The staff reported preliminary analysis of the levels of and trends in average household wealth by racial and ethnic groups as measured by the Federal Reserve Board's Distributional Financial Accounts initiative. Real residential investment declined at a slower rate in the first quarter than it did over the course of 2018. After an appreciable uptick in January, starts of new single-family homes fell in February and were little changed in March. Meanwhile, starts of multifamily units rose in February and stayed at that level in March. Building permit issuance for new single-family homes—which tends to be a good indicator of the underlying trend in construction of such homes—declined a little in February and March. Sales of both new and existing homes increased, on net, over the February-and-March period. Growth in real private expenditures for business equipment and intellectual property slowed in the first quarter, reflecting both a slower increase in transportation equipment spending after a strong fourth-quarter gain and a decline in spending on other types of equipment outside of high tech. Nominal shipments of nondefense capital goods excluding aircraft were little changed, on net, in February and March, but they rose for the quarter as a whole. Forward-looking indicators of business equipment spending pointed to sluggish increases in the near term. Orders for nondefense capital goods excluding aircraft increased noticeably in March but were only a little above the level of shipments, and readings on business sentiment improved a bit but were still softer than last year. Real business expenditures for nonresidential structures outside of the drilling and mining sector increased somewhat in the first quarter after having declined for several quarters. Investment in drilling and mining structures moved down 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—declined, on net, from mid-March through late April. Total real government purchases increased in the first quarter. Real purchases by the federal government were unchanged, as a relatively strong increase in defense purchases was offset by a decline in nondefense purchases stemming from the effects of the partial federal government shutdown. Real purchases by state and local governments increased briskly; payrolls of those governments expanded solidly in the first quarter, and nominal state and local construction spending rose markedly. The nominal U.S. international trade deficit narrowed significantly in January and a touch more in February. After declining in December, the value of U.S. exports rose in January and February. However, the average dollar value of exports in the first two months of the year was only slightly above its fourth-quarter value. Imports fell in January before edging a touch higher in February, with the average of the two months declining relative to the fourth quarter. The Bureau of Economic Analysis estimated that the contribution of net exports to real GDP growth in the first quarter was about 1 percentage point. Total U.S. consumer prices, as measured by the PCE price index, increased 1.5 percent over the 12 months ending in March. This increase was somewhat slower than a year earlier, as core PCE price inflation (which excludes changes in consumer food and energy prices) slowed to 1.6 percent, consumer food price inflation was a bit below core inflation, and consumer energy prices were little changed. The trimmed-mean measure of PCE price inflation constructed by the Federal Reserve Bank of Dallas was 2.0 percent over that 12‑month period. The consumer price index (CPI) rose 1.9 percent over the 12 months ending in March, while core CPI inflation was 2.0 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. Foreign economic growth in the first quarter was mixed. Among the emerging market economies (EMEs), real GDP contracted in South Korea and Mexico, but activity in China strengthened, supported by tax cuts and the easing of credit conditions. In the advanced foreign economies, economic indicators were downbeat in Japan but elsewhere pointed to some improvement from a weak fourth quarter; GDP growth rebounded in the euro area and also appeared to pick up in Canada and the United Kingdom. Foreign inflation slowed further early this year, partly reflecting lower retail energy prices. Staff Review of the Financial Situation Investor sentiment continued to improve over the intermeeting period. Broad equity price indexes rose notably and corporate bond spreads narrowed amid a decline in market volatility, and financing conditions for businesses and households also eased. Market participants cited more accommodative than expected monetary policy communications coupled with strong U.S. and Chinese data releases and positive sentiment about trade negotiations between the United States and China as factors that contributed to these developments. Communications following the March FOMC meeting were generally viewed by investors as having a more accommodative tone than expected. The market-implied path for the federal funds rate shifted downward modestly, on net, resulting in a flat to slightly downward sloping expected path of the policy rate over the next few FOMC meetings. Market participants assigned greater probability to a lower target range of the federal funds rate than to a higher one beyond the next few meetings. Yields on nominal Treasury securities declined modestly, on net, during the intermeeting period. Investors cited larger-than-expected downward revisions in FOMC participants' assessments of the future path of the policy rate in the Summary of Economic Projections, recent communications suggesting a patient approach to monetary policy, and weaker-than-expected euro-area data releases early in the period among factors that contributed to this decrease. These factors reportedly outweighed stronger-than-expected economic data releases for the United States and China and optimism related to trade negotiations between the two countries later in the period. Measures of inflation compensation based on Treasury Inflation Protected Securities were changed little, on net, and remained below their early fall 2018 levels. Major U.S. equity price indexes increased over the intermeeting period, with the S&P 500 equity index returning to the levels it reached before its decline in the last quarter of 2018. Following the March FOMC meeting, bank stock prices declined, reportedly on concerns about the potential effects of a flat or inverted yield curve on bank profits; bank stocks subsequently retraced this decline partly in response to strong first-quarter earnings at some of the largest U.S. banks, ending the period a bit higher, on net. Option-implied volatility on the S&P 500—the VIX—decreased to a low level last seen in September 2018. Yields on corporate bonds continued to decline and spreads over yields of comparable-maturity Treasury securities narrowed. Conditions in short-term funding markets remained stable during the intermeeting period. The EFFR rose to 5 basis points above the IOER rate after the federal income tax deadline on April 15. While a similar dynamic occurred around previous tax dates, the magnitude of the change was larger than in previous years. Spreads on commercial paper and negotiable certificates of deposits changed little across the maturity spectrum. Global sovereign yields declined along with U.S. Treasury yields following the March FOMC meeting. Foreign equity prices increased, on balance, amid optimism around trade negotiations between the United States and China, stronger-than-expected Chinese data, and accommodative communications from some foreign central banks. Pronounced political and policy uncertainties led to a significant tightening of financial conditions in Turkey, Argentina, and, to a lesser extent, Brazil, but spillovers to other EMEs were limited, and EME credit spreads were generally little changed on net. The broad dollar index increased modestly, supported by the strength of U.S. economic data relative to foreign data and the accommodative tone from foreign central banks. The British pound declined over the intermeeting period amid protracted discussions ahead of the original Brexit deadline, which was extended to October 31. Financing conditions for nonfinancial businesses remained generally accommodative during the intermeeting period. Gross issuance of corporate bonds was strong against a backdrop of narrower corporate spreads and improved risk sentiment. Issuance of institutional leveraged loans increased, but refinancing volumes were low and loans spreads remained somewhat elevated. Respondents to the April 2019 Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS) reported easing some key terms for commercial and industrial (C&I) loans to large and middle-market firms. For instance, banks reported narrowing loan rate spreads, easing loan covenants, and increasing the maximum size and reducing the costs of credit lines to these firms. C&I loans on banks' balance sheets grew at a robust pace in the first quarter of 2019. Gross equity issuance edged up later in the period and the volume of corporate bond upgrades slightly outpaced that of downgrades, suggesting that credit quality of nonfinancial corporations, on balance, improved. Financing conditions for the commercial real estate (CRE) sector remained accommodative, and issuance of agency and non-agency commercial mortgage backed securities grew steadily. CRE loans on banks' balance sheets continued to grow in the first quarter, albeit at a slower pace than in previous quarters. Banks in the April SLOOS reported weaker demand across all major types of CRE loans. However, they also reported tightening lending standards for these loans. Financing conditions in the residential mortgage market also remained supportive over the intermeeting period. Home mortgage rates decreased about 5 basis points, to levels comparable with 2017. Consistent with lower mortgage rates, home-purchase mortgage originations increased, reversing a yearlong decline. Consumer credit conditions remained broadly supportive of growth in household spending, with all categories of consumer loans recording steady growth in the first quarter. According to the April SLOOS, commercial banks left lending standards for auto loans and other consumer loans unchanged in the first quarter. However, credit card interest rates rose and standards reportedly tightened for some borrowers. The staff provided an update on its assessments of potential risks to financial stability. The staff judged asset valuation pressures in equity and corporate debt markets to have increased significantly this year, though not quite to the elevated levels that prevailed for much of last year. The staff also reported that in the leveraged loan market risk spreads had narrowed and nonprice terms had loosened further. The build-up in overall nonfinancial business debt to levels close to historical highs relative to GDP was viewed as a factor that could amplify adverse shocks to the business sector and the economy more broadly. The staff continued to judge risks associated with household-sector debt as moderate. Both the risks associated with financial leverage and the vulnerabilities related to maturity transformation were viewed as being low, as they have been for some time. The staff also noted that the sustained growth of lending by banks to nonbank financial firms represented an increase in financial interconnectedness. Staff Economic Outlook The projection for U.S. economic activity prepared by the staff for the April–May FOMC meeting was revised up on net. Real GDP growth was forecast to slow in the near term from its solid first-quarter pace, as sizable contributions from inventory investment and net exports were not expected to persist. The projection for real GDP growth over the medium term was revised up, primarily reflecting a lower assumed path for interest rates, a slightly higher trajectory for equity prices, and somewhat less appreciation of the broad real dollar. The staff's lower path for interest rates reflected a methodological change in how the staff sets its assumptions about the future path for the federal funds rate in its forecast. Real GDP was forecast to expand at a rate above the staff's estimate of potential output growth in 2019 and 2020 and then slow to a pace below potential output growth in 2021. The unemployment rate was projected to decline a little further below the staff's estimate of its longer-run natural rate and to bottom out in late 2020. With labor market conditions still judged to be 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's forecast for inflation was revised down slightly, reflecting some recent softer-than-expected readings on consumer price inflation that were not expected to persist along with the staff's assessment that the level to which inflation would tend to move in the absence of resource slack or supply shocks was a bit lower in the medium term than previously assumed. As a result, core PCE price inflation was expected to move up in the near term but nevertheless to run just below 2 percent over the medium term. Total PCE price inflation was forecast to run a bit below core inflation in 2020 and 2021, reflecting projected declines in energy prices. The staff viewed the uncertainty around its projections for real GDP growth, the unemployment rate, and inflation as generally 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 roughly balanced. On the upside, household spending and business investment could expand faster than the staff projected, supported by the tax cuts enacted at the end of 2017, still strong overall labor market conditions, favorable financial conditions, and upbeat consumer sentiment. On the downside, the softening in some economic indicators since late last year could be the leading edge of a significant slowing in the pace of economic growth. Moreover, 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 still projected to be operating notably above potential for an extended period was counterbalanced by the downside risks that recent soft data on consumer prices could persist and that longer-term inflation expectations may be lower than was assumed in the staff forecast, as well as the possibility that the dollar could appreciate if foreign economic conditions deteriorated. Participants' Views on Current Conditions and the Economic Outlook Participants agreed that labor markets had remained strong over the intermeeting period and that economic activity had risen at a solid rate. Job gains had been solid, on average, in recent months, and the unemployment rate had stayed low. Participants also observed that growth in household spending and business fixed investment had slowed in the first quarter. Overall inflation and inflation for items other than food and energy, both measured on a 12-month basis, had declined and were running below 2 percent. On balance, market-based measures of inflation compensation had remained low in recent months, and survey-based measures of longer-term inflation expectations were little changed. Participants continued to view sustained expansion of economic activity, with strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective as the most likely outcomes. Participants noted the unexpected strength in first-quarter GDP growth, but some observed that the composition of growth, with large contributions from inventories and net exports and more modest contributions from consumption and investment, suggested that GDP growth in the near term would likely moderate from its strong pace of last year. For this year as a whole, a number of participants mentioned that they had marked up their projections for real GDP growth, reflecting, in part, the strong first-quarter reading. Participants cited continuing strength in labor market conditions, improvements in consumer confidence and in financial conditions, or diminished downside risks both domestically and abroad, as factors likely to support solid growth over the remainder of the year. Some participants observed that, in part because of the waning impetus from fiscal policy and past removal of monetary policy accommodation, they expected real GDP growth to slow over the medium term, moving back toward their estimates of trend output growth. In their discussion of the household sector, participants discussed recent indicators, including retail sales and light motor vehicle sales for March, which rose from relatively weak readings in some previous months. Taken together, these developments suggested that the first-quarter softness in household spending was likely to prove temporary. With the strong jobs market, rising incomes, and upbeat consumer sentiment, growth in PCE in coming months was expected to be solid. Several participants also noted that while the housing sector had been a drag on GDP growth for some time, recent data pointed to some signs of stabilization. With mortgage rates at their lowest levels in more than a year, a few participants thought that residential construction could begin to make positive contributions to GDP growth in the near term; a few others were less optimistic. Participants noted that growth of business fixed investment had moderated in the first quarter relative to the average pace recorded last year and discussed whether this more moderate growth was likely to persist. A number of participants expressed optimism that there would be continued growth in capital expenditures this year, albeit probably at a slower pace than in 2018. Several participants observed that financial conditions and business sentiment had continued to improve, consistent with reports from business contacts in a number of Districts; however, a few others reported less buoyant business sentiment Many participants suggested that their own concerns from earlier in the year about downside risks from slowing global economic growth and the deterioration in financial conditions or similar concerns expressed by their business contacts had abated to some extent. However, a few participants noted that ongoing challenges in the agricultural sector, including those associated with trade uncertainty and low prices, had been exacerbated by severe flooding in recent weeks. Participants observed that inflation pressures remained muted and that the most recent data on overall inflation, and inflation for items other than food and energy, had come in lower than expected. At least part of the recent softness in inflation could be attributed to idiosyncratic factors that seemed likely to have only transitory effects on inflation, including unusually sharp declines in the prices of apparel and of portfolio management services. Some research suggests that idiosyncratic factors that largely affected acylical sectors in the economy had accounted for a substantial portion of the fluctuations in inflation over the past couple of years. Consistent with the view that recent lower inflation readings could be temporary, a number of participants mentioned the trimmed mean measure of PCE price inflation, produced by the Federal Reserve Bank of Dallas, which removes the influence of unusually large changes in the prices of individual items in either direction; these participants observed that the trimmed mean measure had been stable at or close to 2 percent over recent months. Participants continued to view inflation near the Committee's symmetric 2 percent objective as the most likely outcome, but, in light of recent, softer inflation readings, some viewed the downside risks to inflation as having increased. Some participants also expressed concerns that long-term inflation expectations could be below levels consistent with the Committee's 2 percent target or at risk of falling below that level. Participants agreed that labor market conditions remained strong. Job gains in the March employment report were solid, the unemployment rate remained low, and, while the labor force participation rate moved down a touch, it remained high relative to estimates of its underlying demographically driven, downward trend. Contacts in a number of Districts continued to report shortages of qualified workers, in some cases inducing businesses to find novel ways to attract new workers. A few participants commented that labor market conditions in their Districts were putting upward pressure on compensation levels for lower-wage jobs, although there were few reports of a broad-based pickup in wage growth. Several participants noted that business contacts expressed optimism that despite tight labor markets they would be able to find workers or would find technological solutions for labor shortage problems. Participants commented on risks associated with their outlook for economic activity over the medium term. Some participants viewed risks to the downside for real GDP growth as having decreased, partly because prospects for a sharp slowdown in global economic growth, particularly in China and Europe, had diminished. These improvements notwithstanding, most participants observed that downside risks to the outlook for growth remain. In discussing developments in financial markets, a number of participants noted that financial market conditions had improved following the period of stress observed over the fourth quarter of last year and that the volatility in prices and financial conditions had subsided. These factors were thought to have helped buoy consumer and business confidence or to have mitigated short-term downside risks to the real economy. More generally, the improvement in financial conditions was regarded by many participants as providing support for the outlook for economic growth and employment. Among those participants who commented on financial stability, most highlighted recent developments related to leveraged loans and corporate bonds as well as the current high level of nonfinancial corporate indebtedness. A few participants suggested that heightened leverage and associated debt burdens could render the business sector more sensitive to economic downturns than would otherwise be the case. A couple of participants suggested that increases in bank capital in current circumstances with solid economic growth and strong profits could help support financial and macroeconomic stability over the longer run. A couple of participants observed that asset valuations in some markets appeared high, relative to fundamentals. A few participants commented on the positive role that the Board's semi-annual Financial Stability Report could play in facilitating public discussion of risks that could be present in some segments of the financial system. 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 2-1/4 to 2-1/2 percent. Participants judged that the labor market remained strong, and that information received over the intermeeting period showed that economic activity grew at a solid rate. However, both overall inflation and inflation for items other than food and energy had declined and were running below the Committee's 2 percent objective. A number of participants observed that some of the risks and uncertainties that had surrounded their outlooks earlier in the year had moderated, including those related to the global economic outlook, Brexit, and trade negotiations. That said, these and other sources of uncertainty remained. In light of global economic and financial developments as well as muted inflation pressures, participants generally agreed that a patient approach to determining future adjustments to the target range for the federal funds rate remained appropriate. Participants noted that even if global economic and financial conditions continued to improve, a patient approach would likely remain warranted, especially in an environment of continued moderate economic growth and muted inflation pressures. Participants discussed the potential policy implications of continued low inflation readings. Many participants viewed the recent dip in PCE inflation as likely to be transitory, and participants generally anticipated that a patient approach to policy adjustments was likely to be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective. Several participants also judged that patience in adjusting policy was consistent with the Committee's balanced approach to achieving its objectives in current circumstances in which resource utilization appeared to be high while inflation continued to run below the Committee's symmetric 2 percent objective. However, a few participants noted that if the economy evolved as they expected, the Committee would likely need to firm the stance of monetary policy to sustain the economic expansion and keep inflation at levels consistent with the Committee's objective, or that the Committee would need to be attentive to the possibility that inflation pressures could build quickly in an environment of tight resource utilization. In contrast, a few other participants observed that subdued inflation coupled with real wage gains roughly in line with productivity growth might indicate that resource utilization was not as high as the recent low readings of the unemployment rate by themselves would suggest. Several participants commented that if inflation did not show signs of moving up over coming quarters, there was a risk that inflation expectations could become anchored at levels below those consistent with the Committee's symmetric 2 percent objective—a development that could make it more difficult to achieve the 2 percent inflation objective on a sustainable basis over the longer run. Participants emphasized that their monetary policy decisions would continue to depend on their assessments of the economic outlook and risks to the outlook, as informed by a wide range of data. Committee Policy Action In their discussion of monetary policy for the period ahead, members judged that the information received since the Committee met in March indicated that the labor market remained strong and that economic activity had risen at a solid rate. Job gains had been solid, on average, in recent months, and the unemployment rate had remained low. Growth of household spending and business fixed investment had slowed in the first quarter. On a 12-month basis, overall inflation and inflation for items other than food and energy had declined and were running below 2 percent. On balance, market-based measures of inflation compensation had remained low in recent months, and survey-based measures of longer-term inflation expectations were little changed. In their consideration of the economic outlook, members noted that financial conditions had improved since the turn of the year, and many uncertainties affecting the U.S. and global economic outlooks had receded, though some risks remained. Despite solid economic growth and a strong labor market, inflation pressures remained muted. Members continued to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective as the most likely outcomes for the U.S. economy. In light of global economic and financial developments and muted inflation pressures, members concurred that the Committee could be patient as it determined what future adjustments to the target range for the federal funds rate may be appropriate to support those outcomes. 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 2-1/4 to 2-1/2 percent. 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 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. With regard to the postmeeting statement, members agreed to remove references to a slowing in the pace of economic growth and little-changed payroll employment, consistent with stronger incoming information on these indicators. The description of growth in household spending and business fixed investment in the first quarter was revised to recognize that incoming data had confirmed earlier information that suggested these aspects of economic activity had slowed at that time. Members also agreed to revise the description of inflation to note that inflation for items other than food and energy had declined and was now running below 2 percent. Members observed that a patient approach to determining future adjustments to the target range for the federal funds rate would likely remain appropriate for some time, especially in an environment of moderate economic growth and muted inflation pressures, even if global economic and financial conditions continued to improve. 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 May 2, 2019, 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 2-1/4 to 2-1/2 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 2.25 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. Effective May 2, 2019, 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 $15 billion. The Committee directs the Desk 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 March indicates that the labor market remains strong and that economic activity rose at a solid rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Growth of household spending and business fixed investment slowed in the first quarter. On a 12-month basis, overall inflation and inflation for items other than food and energy have declined and are running below 2 percent. On balance, market-based measures of inflation compensation have remained low in recent months, and survey-based measures of longer-term inflation expectations are little changed. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent. The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective as the most likely outcomes. In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes. 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, Michelle W. Bowman, Lael Brainard, James Bullard, Richard H. Clarida, Charles L. Evans, Esther L. George, Randal K. Quarles, and Eric Rosengren. Voting against this action: None. Consistent with the Committee's decision to maintain the federal funds rate in a target range of 2-1/4 to 2-1/2 percent, the Board of Governors voted unanimously to lower the interest rates on required and excess reserve balances to 2.35 percent, effective May 2, 2019. Setting the interest rate paid on required and excess reserve balances 15 basis points below the top of the target range for the federal funds rate was intended to foster trading in the federal funds market at rates well within the FOMC's target range. The Board of Governors also voted unanimously to approve establishment of the primary credit rate at the existing level of 3.00 percent, effective May 2, 2019. Update from Subcommittee on Communications Governor Clarida reported on the progress of the review of the Federal Reserve's strategic framework for monetary policy. Fed Listens events to hear stakeholders' views on the strategy, tools, and communications that would best enable the Federal Reserve to meet its statutory objectives of maximum employment and price stability had already taken place in two Federal Reserve Districts. Numerous additional events were planned, including a research conference scheduled for June at the Federal Reserve Bank of Chicago. Following these public activities, the Committee was on course to begin its deliberations about the strategic framework at meetings in the second half of 2019. It was agreed that the next meeting of the Committee would be held on Tuesday–Wednesday, June 18–19, 2019. The meeting adjourned at 9:50 a.m. on May 1, 2019. Notation Vote By notation vote completed on April 9, 2019, the Committee unanimously approved the minutes of the Committee meeting held on March 19–20, 2019. _______________________ 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 Wednesday session only. Return to text 4. Attended opening remarks for Tuesday session only. Return to text 5. Attended Tuesday session only. Return to text

2019-05-01

Statement

Information received since the Federal Open Market Committee met in March indicates that the labor market remains strong and that economic activity rose at a solid rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Growth of household spending and business fixed investment slowed in the first quarter. On a 12-month basis, overall inflation and inflation for items other than food and energy have declined and are running below 2 percent. On balance, market-based measures of inflation compensation have remained low in recent months, and survey-based measures of longer-term inflation expectations are little changed. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent. The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective as the most likely outcomes. In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes. 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, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; James Bullard; Richard H. Clarida; Charles L. Evans; Esther L. George; Randal K. Quarles; and Eric S. Rosengren. Implementation Note issued May 1, 2019

2019-03-20

Statement

Information received since the Federal Open Market Committee met in January indicates that the labor market remains strong but that growth of economic activity has slowed from its solid rate in the fourth quarter. Payroll employment was little changed in February, but job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Recent indicators point to slower growth of household spending and business fixed investment in the first quarter. On a 12-month basis, overall inflation has declined, largely as a result of lower energy prices; inflation for items other than food and energy remains near 2 percent. On balance, market-based measures of inflation compensation have remained low in recent months, and survey-based measures of longer-term inflation expectations are little changed. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent. The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective as the most likely outcomes. In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes. 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; Michelle W. Bowman; Lael Brainard; James Bullard; Richard H. Clarida; Charles L. Evans; Esther L. George; Randal K. Quarles; and Eric S. Rosengren. Implementation Note issued March 20, 2019

2019-04-10

Minute

Minutes of the Federal Open Market Committee March 19-20, 2019 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 19, 2019, at 10:00 a.m. and continued on Wednesday, March 20, 2019, at 9:00 a.m.1 PRESENT: Jerome H. Powell, Chair John C. Williams, Vice Chair Michelle W. Bowman Lael Brainard James Bullard Richard H. Clarida Charles L. Evans Esther L. George Randal K. Quarles Eric Rosengren Patrick Harker, Robert S. Kaplan, Neel Kashkari, Loretta J. Mester, and Michael Strine, Alternate Members of the Federal Open Market Committee Thomas I. Barkin, Raphael W. Bostic, and Mary C. Daly, Presidents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco, 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 Stacey Tevlin, Economist Thomas A. Connors, Rochelle M. Edge, Eric M. Engen, Christopher J. Waller, 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; Michael T. Kiley, Deputy Director, Division of Financial Stability, Board of Governors; Trevor A. Reeve, Deputy Director, Division of Monetary Affairs, Board of Governors Jon Faust, Senior Special Adviser to the Chair, Office of Board Members, Board of Governors Antulio N. Bomfim, Special Adviser to the Chair, Office of Board Members, Board of Governors Brian M. Doyle, Wendy E. Dunn, 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 Shaghil Ahmed, Senior Associate Director, Division of International Finance, Board of Governors; Joshua Gallin and David E. Lebow, Senior Associate Directors, Division of Research and Statistics, Board of Governors Edward Nelson, Senior Adviser, Division of Monetary Affairs, Board of Governors; Jeremy B. Rudd, Senior Adviser, Division of Research and Statistics, Board of Governors Marnie Gillis DeBoer2 and David López-Salido, Associate Directors, Division of Monetary Affairs, Board of Governors Jeffrey D. Walker,2 Deputy Associate Director, Division of Reserve Bank Operations and Payment Systems, Board of Governors Andrew Figura, Assistant Director, Division of Research and Statistics, Board of Governors; Laura Lipscomb,2 Zeynep Senyuz,2 and Rebecca Zarutskie, Assistant Directors, Division of Monetary Affairs, Board of Governors Michele Cavallo,2 Section Chief, Division of Monetary Affairs, Board of Governors Penelope A. Beattie,3 Assistant to the Secretary, Office of the Secretary, Board of Governors Mark A. Carlson, Senior Economic Project Manager, Division of Monetary Affairs, Board of Governors David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors Martin Bodenstein, Marcel A. Priebsch, and Bernd Schlusche,2 Principal Economists, Division of Monetary Affairs, Board of Governors Mary-Frances Styczynski,2 Lead Financial Institution and Policy Analyst, 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 David Altig, Kartik B. Athreya, Michael Dotsey, Glenn D. Rudebusch, Ellis W. Tallman, and Joseph S. Tracy, Executive Vice Presidents, Federal Reserve Banks of Atlanta, Richmond, Philadelphia, San Francisco, Cleveland, and Dallas, respectively Antoine Martin,2 Julie Ann Remache,2 and Mark L.J. Wright, Senior Vice Presidents, Federal Reserve Banks of New York, New York, and Minneapolis, respectively Roc Armenter,2 Kathryn B. Chen,2 Hesna Genay, Jonathan P. McCarthy, and Patricia Zobel,2 Vice Presidents, Federal Reserve Banks of Philadelphia, New York, Chicago, New York, and New York, respectively Samuel Schulhofer-Wohl, Senior Economist and Research Advisor, Federal Reserve Bank of Chicago Daniel Cooper, Senior Economist and Policy Advisor, Federal Reserve Bank of Boston Ellen Correia Golay,2 Markets Officer, Federal Reserve Bank of New York A. Lee Smith, Senior Economist, Federal Reserve Bank of Kansas City Balance Sheet Normalization Committee participants resumed their discussion from the January 2019 meeting on options for transitioning to the longer-run size of the balance sheet. The staff described options for ending the reduction in the Federal Reserve's securities holdings at the end of September 2019 and for potentially reducing the pace of redemptions of Treasury securities before that date. Reducing the pace of redemptions before ending them would be consistent with most previous changes in the Federal Reserve's balance sheet policy and would support a gradual transition to the long-run level of reserves. It could also reinforce the Committee's communications indicating that the FOMC was flexible in its plans for balance sheet normalization and that the process of balance sheet normalization would remain consistent with the attainment of the Federal Reserve's monetary policy objectives. However, continuing redemptions at the current pace through September might be simpler to communicate and would somewhat shorten the transition to the long-run level of reserves. The staff noted that reducing the pace of redemptions before September would leave reserves and the balance sheet slightly larger than continuing redemptions at the current pace through September. However, the longer-run level of reserves and size of the balance sheet would ultimately be determined by long-term demand for Federal Reserve liabilities. Staff projections of term premiums and macroeconomic outcomes did not differ substantially across the two options. The staff also described a possible interim plan for reinvesting principal payments received from agency debt and agency mortgage-backed securities (MBS) after balance sheet runoff ends and until the Committee decides on the longer-run composition of the System Open Market Account (SOMA) portfolio. Consistent with the Committee's long-standing aim to hold primarily Treasury securities in the longer run, any principal payments on agency debt and agency MBS would generally be reinvested in Treasury securities in the secondary market. These reinvestments would be allocated across sectors of the Treasury market roughly in proportion to the maturity composition of Treasury securities outstanding. However, the plan would maintain the existing $20 billion per month cap on MBS redemptions; principal payments on agency debt and agency MBS above $20 billion per month would continue to be reinvested in agency MBS. This cap would limit the pace at which the Federal Reserve's agency MBS holdings could decline if prepayments accelerated; the staff projected that the redemption cap on agency debt and agency MBS was unlikely to be reached after 2019. The staff noted that, once balance sheet runoff ended, the average level of reserves would tend to decline gradually, in line with trend growth in the Federal Reserve's nonreserve liabilities, until the Committee chose to resume growth of the balance sheet in order to maintain a level of reserves consistent with efficient and effective policy implementation. Participants judged that ending the runoff of securities holdings at the end of September would reduce uncertainty about the Federal Reserve's plans for its securities holdings and would be consistent with the Committee's decision at its January 2019 meeting to continue implementing monetary policy in a regime of ample reserves. Participants discussed advantages and disadvantages of slowing balance sheet runoff before the September stopping date. A slowing in the pace of redemptions would accord with the Committee's general practice of adjusting its holdings of securities smoothly and predictably, which might reduce the risk that market volatility would arise in connection with the conclusion of the runoff of securities holdings. However, these advantages needed to be weighed against the additional complexity of a plan that would end balance sheet runoff in steps rather than all at once. Participants reiterated their support for the FOMC's intention to return to holding primarily Treasury securities in the long run. Participants judged that adopting an interim approach for reinvesting agency debt and agency MBS principal payments into Treasury securities across a range of maturities was appropriate while the Committee continued to evaluate potential long-run maturity structures for the Federal Reserve's portfolio of Treasury securities. Many participants offered preliminary views on advantages and disadvantages of alternative compositions for the SOMA portfolio. Participants expected to further discuss the longer-run composition of the portfolio at upcoming meetings. Participants commented on considerations related to allowing the average level of reserves to decline in line with trend growth in nonreserve liabilities for a time after the end of balance sheet runoff. Several participants preferred to stabilize the average level of reserves by resuming purchases of Treasury securities relatively soon after the end of runoff, because they saw little benefit to further declines in reserve balances or because they thought the Committee should minimize the risk of interest rate volatility that could occur if the supply of reserves dropped below a point consistent with efficient and effective implementation of policy. Some others preferred to allow the average level of reserves to continue to decline for a longer time after balance sheet runoff ends because such declines could allow the Committee to learn more about underlying reserve demand, because they judged that such a process was not likely to result in excessive volatility in money market rates, or because they judged that moving to lower levels of reserves was more consistent with the Committee's previous communications indicating that it would hold no more securities than necessary for implementing monetary policy efficiently and effectively. Participants noted that the eventual resumption of purchases of securities to keep pace with growth in demand for the Federal Reserve's liabilities, whenever it occurred, would be a normal part of operations to maintain the ample-reserves monetary policy implementation regime and would not represent a change in the stance of monetary policy. Some participants suggested that, at future meetings, the Committee should discuss the potential benefits and costs of tools that might reduce reserve demand or support interest rate control. Following the discussion, the Chair proposed that the Committee communicate its intentions regarding balance sheet normalization by publishing a statement at the conclusion of the meeting. All participants agreed that it was appropriate to issue the proposed statement. BALANCE SHEET NORMALIZATION PRINCIPLES AND PLANS (Adopted March 20, 2019) In light of its discussions at previous meetings and the progress in normalizing the size of the Federal Reserve's securities holdings and the level of reserves in the banking system, all participants agreed that it is appropriate at this time for the Committee to provide additional information regarding its plans for the size of its securities holdings and the transition to the longer-run operating regime. At its January meeting, the Committee stated that it intends to continue to implement monetary policy in a regime in which an ample supply of reserves ensures that control over the level of the federal funds rate and other short-term interest rates is exercised primarily through the setting of the Federal Reserve's administered rates and in which active management of the supply of reserves is not required. The Statement Regarding Monetary Policy Implementation and Balance Sheet Normalization released in January as well as the principles and plans listed below together revise and replace the Committee's earlier Policy Normalization Principles and Plans. To ensure a smooth transition to the longer-run level of reserves consistent with efficient and effective policy implementation, the Committee intends to slow the pace of the decline in reserves over coming quarters provided that the economy and money market conditions evolve about as expected. The Committee intends to slow the reduction of its holdings of Treasury securities by reducing the cap on monthly redemptions from the current level of $30 billion to $15 billion beginning in May 2019. The Committee intends to conclude the reduction of its aggregate securities holdings in the System Open Market Account (SOMA) at the end of September 2019. The Committee intends to continue to allow its holdings of agency debt and agency mortgage-backed securities (MBS) to decline, consistent with the aim of holding primarily Treasury securities in the longer run. Beginning in October 2019, principal payments received from agency debt and agency MBS will be reinvested in Treasury securities subject to a maximum amount of $20 billion per month; any principal payments in excess of that maximum will continue to be reinvested in agency MBS. Principal payments from agency debt and agency MBS below the $20 billion maximum will initially be invested in Treasury securities across a range of maturities to roughly match the maturity composition of Treasury securities outstanding; the Committee will revisit this reinvestment plan in connection with its deliberations regarding the longer-run composition of the SOMA portfolio. It continues to be the Committee's view that limited sales of agency MBS 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 well in advance. The average level of reserves after the FOMC has concluded the reduction of its aggregate securities holdings at the end of September will likely still be somewhat above the level of reserves necessary to efficiently and effectively implement monetary policy. In that case, the Committee currently anticipates that it will likely hold the size of the SOMA portfolio roughly constant for a time. During such a period, persistent gradual increases in currency and other non-reserve liabilities would be accompanied by corresponding gradual declines in reserve balances to a level consistent with efficient and effective implementation of monetary policy. When the Committee judges that reserve balances have declined to this level, the SOMA portfolio will hold no more securities than necessary for efficient and effective policy implementation. Once that point is reached, the Committee will begin increasing its securities holdings to keep pace with trend growth of the Federal Reserve's non-reserve liabilities and maintain an appropriate level of reserves in the system. Developments in Financial Markets and Open Market Operations The manager of the SOMA discussed developments in global financial markets over the intermeeting period. In the United States, equity indexes moved higher and credit spreads tightened. Market participants attributed these moves largely to a perceived shift in the FOMC's approach to policy following communications stressing that the Committee would be patient in assessing the need for future adjustments in the target range for the federal funds rate and would be flexible on balance sheet policy. In Europe, measures announced by the European Central Bank (ECB) in March, including an extension of forward guidance on interest rates and the announcement of another round of targeted long-term refinancing operations, were followed by a decline in euro-area equity markets, particularly bank stocks, as well as declines in euro-area rates. Market contacts attributed the price reaction to a perception that the measures were not as stimulative as might have been expected, given downward revisions in the ECB's growth and inflation forecasts. In China, authorities moved toward an easier fiscal and monetary stance; China's aggregate credit growth had rebounded slightly in recent months relative to the declining trend observed last year. The Shanghai Composite index had risen notably since the turn of the year, driven in part by fiscal and monetary stimulus measures as well as perceived progress on trade negotiations. Developments around Brexit remained a source of market uncertainty. Consistent with ongoing investor uncertainty over the outcome, risk reversals on the pound-dollar currency pair continued to point to higher demand for protection against pound depreciation relative to the dollar. The deputy manager provided an overview of money market developments and policy implementation over the intermeeting period. The effective federal funds rate (EFFR) continued to be very stable at a level equal to the interest rate on excess reserves. Rates in overnight secured markets continued to exhibit some volatility, particularly on month-end dates. Market participants attributed some of the volatility in overnight secured rates to persistently high net dealer inventories of Treasury securities and to Treasury issuance coinciding with the month-end statement dates. Over the upcoming intermeeting period, with the combination of changes in the Treasury's balances at the Federal Reserve and additional asset redemptions, reserves were expected to decline to a new low of around $1.4 trillion by early May, with some notable fluctuations in reserves on days associated with tax flows. The deputy manager also discussed the transition to a long-run regime of ample reserves, following the Committee's January announcement that it intends to continue to implement monetary policy in such a regime. Once the size of the Federal Reserve's balance sheet has normalized, the Open Market Desk will at some point need to conduct open market operations to maintain a level of reserves in the banking system that the Committee deems appropriate. In doing so, the Desk will need to assess banks' demand for reserves as well as forecast other Federal Reserve liabilities and plan operations to maintain a supply of reserves sufficient to ensure that control over short-term interest rates is exercised primarily through the setting of administered rates. The deputy manager described a possible operational approach in an ample-reserves regime based on establishing a minimum operating level that would be a lower bound on the daily level of reserves. The assessment of the minimum operating level of reserves would be based on a range of information, including surveys of banks and market participants, data on banks' reserve holdings, and market monitoring. Under the proposed approach, the Desk would plan open market operations to maintain the daily level of reserves above the minimum operating level. Consistent with the Committee's intention to maintain a regime that does not require active management of the supply of reserves, the Desk could plan these open market operations over a medium-term horizon. The average level of reserves over the medium term would then be above the minimum operating level, providing a buffer of reserves to absorb daily changes in nonreserve liabilities. Following the manager and deputy manager's report, some participants commented on various aspects of the minimum operating level approach. Decisions regarding how far to allow reserves to decline would need to balance important tradeoffs. On the one hand, a lower minimum operating level might increase the risk of excessive interest rate volatility. On the other hand, a lower minimum operating level could provide more opportunities to learn about underlying reserve demand or could be viewed as more consistent with moving to the smallest securities holdings necessary for efficient and effective monetary policy implementation. However, the scope for reducing the level of reserves much further after the end of balance sheet runoff might be fairly limited. 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 available for the March 19-20 meeting indicated that labor market conditions remained strong, al­though growth in real gross domestic product (GDP) appeared to have slowed markedly in the first quarter of this year from its solid fourth-quarter pace. Consumer price inflation, as measured by the 12-month percentage change in the price index for personal consumption expenditures (PCE), was somewhat below 2 percent in December, held down in part by recent declines in consumer energy prices, while PCE price inflation for items other than food and energy was close to 2 percent; more recent readings on PCE price inflation were delayed by the earlier federal government shutdown. Survey-based measures of longer-run inflation expectations were little changed on balance. Increases in total nonfarm payroll employment remained solid, on average, in recent months; employment rose only a little in February but had expanded strongly in January. The national unemployment rate edged down, on net, over the past two months to 3.8 percent in February, and both the labor force participation rate and the employment-to-population ratio rose slightly on balance. The unemployment rates for African Americans, Asians, and Hispanics in February were at or below their levels at the end of the previous economic expansion, though persistent differentials in unemployment rates across groups remained. The share of workers employed part time for economic reasons moved down in February and was below the lows reached in late 2007. The rate of private-sector job openings in January was the same as its fourth-quarter average and remained elevated, while the rate of quits edged up in January; the four-week moving average of initial claims for unemployment insurance benefits through early March was still near historically low levels. Average hourly earnings for all employees rose 3.4 percent over the 12 months ending in February, a significantly faster pace than a year earlier. The employment cost index for private-sector workers increased 3 percent over the 12 months ending in December, somewhat faster than a year earlier. Total labor compensation per hour in the business sector increased 2.9 percent over the four quarters of 2018, about the same rate as a year earlier. Industrial production declined in January and rebounded only somewhat in February. Moreover, manufacturing output decreased over both months, as production in the motor vehicle and parts sector contracted notably in January and declines were more broad based in February. Production in the mining and utilities sectors expanded, on net, over the past two months. Automakers' assembly schedules suggested that the production of light motor vehicles would be roughly flat in the near term, and new orders indexes from national and regional manufacturing surveys pointed to only modest gains in overall factory output in the coming months. Household spending looked to be slowing around the turn of the year. Real PCE decreased markedly in December after a solid increase in the previous month, and the components of the nominal retail sales data used by the Bureau of Economic Analysis (BEA) to estimate PCE rebounded only partially in January. Key factors that influence consumer spending--including a low unemployment rate, ongoing gains in real labor compensation, and still elevated measures of households' net worth--were supportive of a pickup in consumer spending to a solid pace in the near term. In addition, consumer sentiment, as measured by the University of Michigan Surveys of Consumers, stepped up in February and early March to an upbeat level. Real residential investment appeared to be softening further in the first quarter, likely reflecting, in part, decreases in the affordability of housing arising from both the net increase in mortgage interest rates over the past year and ongoing house price appreciation. Starts of new single-family homes increased slightly, on net, over December and January, while starts of multifamily units declined. Building permit issuance for new single-family homes--which tends to be a good indicator of the underlying trend in construction of such homes--moved down over those two months. In addition, sales of both new and existing homes decreased in January. Growth in real private expenditures for business equipment and intellectual property looked to be slowing in the first quarter. Nominal shipments of nondefense capital goods excluding aircraft rose in December and January, while available indicators pointed to a decrease in transportation equipment spending in the first quarter after a strong fourth-quarter gain. Forward-looking indicators of business equipment spending--such as orders for nondefense capital goods excluding aircraft and readings on business sentiment--pointed to sluggish increases in the near term. Nominal business expenditures for nonresidential structures outside of the drilling and mining sector increased in December and January. In addition, the number of crude oil and natural gas rigs in operation--an indicator of business spending for structures in the drilling and mining sector--expanded, on balance, in February and through the middle of March. Total real government purchases appeared to be moving sideways in the first quarter. Relatively strong increases in real federal defense purchases were likely to be roughly offset by an expected decline in real nondefense purchases stemming from the effects of the partial federal government shutdown. Real purchases by state and local governments looked to be rising modestly in the first quarter, as the payrolls of those governments expanded a bit in January and February, and nominal state and local construction spending rose, on net, in December and January. The nominal U.S. international trade deficit narrowed in November before widening in December to the largest deficit since 2008. Exports declined in November and December, as exports of industrial supplies and automotive products fell in both months. Imports decreased in November before partially recovering in December, with imports of consumer goods and industrial supplies driving this swing. The BEA estimated that the change in net exports was a drag of about 1/4 percentage point on the rate of real GDP growth in the fourth quarter. Total U.S. consumer prices, as measured by the PCE price index, increased 1.7 percent over the 12 months ending in December, slightly slower than a year earlier, as consumer energy prices declined a little and consumer food prices rose only modestly. Core PCE price inflation, which excludes changes in consumer food and energy prices, was 1.9 percent over that same period, somewhat higher than a year earlier. The consumer price index (CPI) rose 1.5 percent over the 12 months ending in February, 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 Blue Chip Economic Indicators, and the Desk's Survey of Primary Dealers and Survey of Market Participants--were little changed on balance. Economic growth in foreign economies slowed further in the fourth quarter. This development reflected slowing in the Canadian economy and some emerging market economies (EMEs), including Brazil and Mexico, along with continued economic weakness in the euro area and China. In the advanced foreign economies (AFEs), recent data suggested that economic activity, especially in the manufacturing sector, remained subdued in the first quarter of this year. Economic activity also remained weak in many EMEs, particularly in Mexico and emerging Asia excluding China, al­though some data pointed to a modest pickup in China. Inflation in foreign economies slowed further early this year, partly reflecting lower retail energy prices across both AFEs and EMEs. Staff Review of the Financial Situation Investor sentiment toward risky assets continued to improve over the intermeeting period. Market participants cited accommodative monetary policy communications and optimism for a trade deal between the United States and China as factors that contributed to the improvement. Broad equity price indexes increased notably, corporate bond spreads narrowed, and measures of equity market volatility declined. Meanwhile, financing conditions for businesses and households improved slightly and generally remained supportive of economic activity. FOMC communications issued following the January meeting were generally viewed by market participants as more accommodative than expected. Subsequent communications--including the minutes of the January FOMC meeting, the Chair's semiannual testimony to the Congress, and speeches by FOMC participants—were interpreted as reflecting a patient approach to monetary policy in the near term and a likely conclusion to the Federal Reserve's balance sheet reduction by the end of this year. The market-implied path for the federal funds rate in 2019 declined slightly over the period, while investors continued to expect no change to the target range for the federal funds rate at the March FOMC meeting. The market‑implied path of the federal funds rate for 2020 and 2021 shifted down a little. Yields on nominal Treasury securities declined a bit across the Treasury yield curve over the intermeeting period. Communications from FOMC participants that were more accommodative than expected amid muted readings on inflation, communications from other major central banks that, on balance, were also regarded as more accommodative than expected, and generally mixed economic data releases reportedly contributed to the decrease in yields and outweighed improved risk sentiment. The spread between the yields on nominal 10- and 2-year Treasury securities was little changed over the period and remained in the lower end of its historical range of recent decades. Measures of inflation compensation derived from Treasury Inflation-Protected Securities increased modestly, on net, al­though they remained below levels seen last fall. Major U.S. equity price indexes increased over the intermeeting period, with broad‑based gains across sectors. Improved prospects for a trade deal between the United States and China and accommodative monetary policy were cited as driving factors that outweighed weaker-than-expected announcements of corporate earnings for the fourth quarter of 2018 and earnings projections for 2019. Consistent with reports about a potential trade deal, stock prices of firms with greater exposure to China generally outperformed the S&P 500 index. Option‑ implied volatility on the S&P 500 index at the one-month horizon--the VIX--declined and reached its lowest point this year. Spreads on investment- and speculative-grade corporate bonds narrowed, consistent with the gains in equity prices, but were still wider than levels observed last fall. Conditions in short-term funding markets generally remained stable over the intermeeting period. The EFFR was consistently equal to the rate of interest on excess reserves, while take-up in the overnight reverse repurchase agreement facility remained low. Yield spreads on commercial paper and negotiable certificates of deposit generally narrowed further from their elevated year-end levels, likely reflecting an increase in investor demand for short-term financial assets. Meanwhile, the statutory federal government debt ceiling was reestablished at $22 trillion on March 1. The prices of foreign risky assets broadly tracked the positive moves in similar U.S. assets over the intermeeting period. Communications by major central banks, which were, on net, more accommodative than expected, along with optimism regarding trade negotiations between the United States and China, contributed to the upward price moves and more than offset the effects of continued concerns about foreign economic growth. In particular, global equity prices generally ended the period higher, and dedicated emerging market funds continued to see inflows. At the same time, long-term AFE yields declined somewhat, on net, on communications from major foreign central banks and investors' concerns about foreign economic growth. The broad dollar index appreciated slightly as the extension of accommodative policies and revised guidance by major foreign central banks weighed on AFE currencies. An exception was the British pound, which strengthened a bit against the dollar, as market participants viewed recent Parliamentary votes as reducing the likelihood of a no-deal Brexit. Financing conditions for nonfinancial businesses continued to be accommodative overall. Gross issuance of both investment-grade and high-yield corporate bonds was strong in January and February, recovering from the low levels observed late last year. Issuance in the institutional syndicated leveraged loan market also recovered in the first two months of the year, as new issuance in February was in line with average monthly new issuance in 2018, and spreads narrowed somewhat from their December levels. The credit quality of nonfinancial corporations continued to show signs of deterioration, al­though actual defaults remained low overall. Commercial and industrial lending showed continued strength in January and February. Small business credit market conditions were little changed, and credit conditions in municipal bond markets stayed accommodative on net. Private-sector analysts revised down their projections for 2019 and year-ahead corporate earnings a bit. The pace of gross equity issuance was sluggish in January but ticked up in February, consistent with the uptick in the stock market. In the commercial real estate (CRE) sector, financing conditions continued to be generally accommodative. Commercial mortgage-backed securities (CMBS) spreads declined over the intermeeting period, with triple-B spreads moving down to near their late-November levels. Issuance of non-agency CMBS remained strong through February, and CRE lending by banks grew at a strong pace in February following relatively sluggish growth in January. Residential mortgage financing conditions remained accommodative on balance. Purchase mortgage origination activity was flat in December but edged up in January, as mortgage rates remained lower than the peak reached last November. Financing conditions in consumer credit markets were little changed in recent months and remained generally supportive of household spending. Credit card loan growth remained strong through December, though the pace slowed during 2018 amid tighter lending standards by commercial banks. Auto loan growth remained steady through the end of 2018. Staff Economic Outlook The U.S. economic projection prepared by the staff for the March FOMC meeting was revised down a little on balance. This revision reflected the effects of weaker-than-expected incoming data on both aggregate domestic spending and foreign economic growth that were only partially offset by a somewhat higher projected path for domestic equity prices and a lower projected trajectory for interest rates. The staff forecast that U.S. real GDP growth would slow markedly in the first quarter, reflecting a softening in growth of both consumer spending and business investment. But the staff judged that the first-quarter slowdown would be transitory and that real GDP growth would bounce back solidly in the second quarter. In the medium-term projection, real GDP growth was forecast to run at a rate similar to the staff's estimate of potential output growth in 2019 and 2020--a somewhat lower trajectory, on net, for real GDP than in the previous projection--and then slow to a pace below potential output growth in 2021. The staff revised up slightly its assumed underlying trend in the labor force participation rate, raising the level of potential output a bit, which contributed--along with the lower projected path for real GDP--to an assessment that resource utilization was a little less tight than in the previous forecast. The unemployment rate was projected to decline a little further below the staff's estimate of its longer-run natural rate but to bottom out by the end of this year and begin to edge up in 2021. With labor market conditions judged to still be 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's forecast for inflation was revised down slightly for the March FOMC meeting, reflecting some recent softer-than-expected readings on consumer prices. Core PCE price inflation was expected to remain at 1.9 percent over this year as a whole and then to edge up to 2 percent for the remainder of the medium term. Total PCE price inflation was forecast to run a bit below core inflation over the next three years, reflecting projected declines in energy prices. The staff viewed the uncertainty around its projections for real GDP growth, the unemployment rate, and inflation as generally 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 roughly balanced. On the upside, household spending and business investment could expand faster than the staff projected, supported by the tax cuts enacted at the end of 2017, still strong overall labor market conditions, and upbeat consumer sentiment. In addition, financial conditions might not tighten as much as assumed in the staff forecast. On the downside, the recent softening in a number of economic indicators could be the harbinger of a substantial deterioration in economic activity. Moreover, 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 is still projected to be operating notably above potential for an extended period was counterbalanced by the downside risk that longer‑term inflation expectations may be lower than was assumed in the staff forecast, as well as the possibility that the dollar could appreciate if foreign economic conditions deteriorated. 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 2019 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 and policy assessments are described in the Summary of Economic Projections (SEP), which is an addendum to these minutes. Participants agreed that information received since the January meeting indicated that the labor market had remained strong but that growth of economic activity had slowed from its solid rate in the fourth quarter. Payroll employment was little changed in February, but job gains had been solid, on average, in recent months, and the unemployment rate had remained low. Recent indicators pointed to slower growth of household spending and business fixed investment in the first quarter. On a 12-month basis, overall inflation had declined, largely as a result of lower energy prices; inflation for items other than food and energy remained near 2 percent. On balance, market-based measures of inflation compensation had remained low in recent months, and survey-based measures of longer-term inflation expectations were little changed. Participants continued to view a sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective as the most likely outcomes over the next few years. Underlying economic fundamentals continued to support sustained expansion, and most participants indicated that they did not expect the recent weakness in spending to persist beyond the first quarter. Nevertheless, participants generally expected the growth rate of real GDP this year to step down from the pace seen over 2018 to a rate at or modestly above their estimates of longer-run growth. Participants cited various factors as likely to contribute to the step-down, including slower foreign growth and waning effects of fiscal stimulus. A number of participants judged that economic growth in the remaining quarters of 2019 and in the subsequent couple of years would likely be a little lower, on balance, than they had previously forecast. Reasons cited for these downward revisions included disappointing news on global growth and less of a boost from fiscal policy than had previously been anticipated. In their discussion of the household sector, participants noted that softness in consumer spending had contributed importantly to the projected slowing in economic growth in the current quarter. Many participants pointed to the weakness in retail sales in December as notable, although they recognized that the data for January had shown a partial recovery in retail sales. Participants also observed that much of the recent softness likely reflected temporary factors, such as the partial federal government shutdown and December's volatility in financial markets, and that consumer sentiment had recovered after these factors had receded. Consequently, many participants expected consumer spending to proceed at a stronger pace in coming months, supported by favorable underlying factors, including a strong labor market, solid growth in household incomes, improvements in financial conditions and in households' balance sheet positions, and upbeat consumer sentiment. Participants noted, however, that the continued softness in the housing sector was a concern. Participants also commented on the apparent slowing of growth in business fixed investment in the first quarter. Factors cited as consistent with the recent softness in investment growth included downward revisions in forecasts of corporate earnings; relatively low energy prices that provided less incentive for new drilling and exploration; flattening capital goods orders; reports from contacts of softer export sales and of weaker economic activity abroad; elevated levels of uncertainty about government policies, including trade policies; and the likely effect of recent financial market volatility on business sentiment. However, many participants pointed to signs that the weakness in investment would likely abate. Some contacts in manufacturing and other sectors reported that business conditions were favorable, with strong demand for labor, business sentiment had recovered from its recent decline, and recent reductions in mortgage interest rates would provide some support for construction activity. Agricultural activity remained weak in various areas of the country, with the weakness in part reflecting adverse effects of trade policy on commodity prices. Recent widespread severe flooding had also adversely affected the agricultural sector. Participants noted that the latest readings on overall inflation had been somewhat softer than expected. However, participants observed that these readings largely reflected the effects of earlier declines in crude oil prices and that core inflation remained near 2 percent. Most participants, while seeing inflation pressures as muted, expected the overall rate of inflation to firm somewhat and to be at or near the Committee's longer-run objective of 2 percent over the next few years. Many participants indicated that, while inflation had been close to 2 percent last year, it was noteworthy that it had not shown greater signs of firming in response to strong labor market conditions and rising nominal wage growth, as well as to the short-term upward pressure on prices arising from tariff increases. Low rates of price increases in sectors of the economy that were not cyclically sensitive were cited by a couple of participants as one reason for the recent easing in inflation. A few participants observed that the pickup in productivity growth last year was a welcome development helping to bolster potential output and damp inflationary pressures. In their discussion of indicators of inflation expectations, participants noted that market-based measures of inflation compensation had risen modestly over the intermeeting period, although they remained low. A couple of participants stressed that recent readings on survey measures of inflation expectations were also still at low levels. Several participants suggested that longer-term inflation expectations could be at levels somewhat below those consistent with the Committee's 2 percent inflation objective and that this might make it more difficult to achieve that objective on a sustained basis. In their discussion of the labor market, participants cited evidence that conditions remained strong, including the very low unemployment rate, a further increase in the labor force participation rate, a low number of layoffs, near-record levels of job openings and help-wanted postings, and solid job gains, on average, in recent months. Participants observed that, following strong job gains in January, there had been little growth in payrolls in February, although a few participants pointed out that the February reading had likely been affected by adverse weather conditions. A couple of participants noted that, over the medium term, some easing in payroll growth was to be expected as economic growth slowed to its longer-run trend rate. Reports from business contacts predominantly pointed to continued strong labor demand, with firms offering both higher wages and more nonwage benefits to attract workers. Economy-wide wage growth was seen as being broadly consistent with recent rates of labor productivity growth and with inflation of 2 percent. A few participants cited the combination of muted inflation pressures and expanding employment as a possible indication that some slack remained in the labor market. Participants commented on a number of risks associated with their outlook for economic activity. A few participants noted that there remained a high level of uncertainty associated with international developments, including ongoing trade talks and Brexit deliberations, al­though a couple of participants remarked that the risks of adverse outcomes were somewhat lower than in January. Other downside risks included the possibility of sizable spillovers from a greater-than-expected economic slowdown in Europe and China, persistence of the softness in spending, or a sharp falloff in fiscal stimulus. A few participants observed that an economic deterioration in the United States, if it occurred, might be amplified by significant debt service burdens for many firms. Participants also mentioned a number of upside risks regarding the outlook for economic activity, including outcomes in which various sources of uncertainty were resolved favorably, consumer and business sentiment rebounded sharply, or the recent strengthening in labor productivity growth signaled a pickup in the underlying trend. Upside risks to the outlook for inflation included the possibility that wage pressures could rise unexpectedly and lead to greater-than-expected price increases. In their discussion of financial developments, participants observed that a good deal of the tightening over the latter part of last year in financial conditions had since been reversed; Federal Reserve communications since the beginning of this year were seen as an important contributor to the recent improvements in financial conditions. Participants noted that asset valuations had recovered strongly and also discussed the decline that had occurred in recent months in yields on longer-term Treasury securities. Several participants expressed concern that the yield curve for Treasury securities was now quite flat and noted that historical evidence suggested that an inverted yield curve could portend economic weakness; however, their discussion also noted that the unusually low level of term premiums in longer-term interest rates made historical relationships a less reliable basis for assessing the implications of the recent behavior of the yield curve. Several participants pointed to the increased debt issuance and higher leverage of nonfinancial corporations as a development that warranted continued monitoring. In their discussion of monetary policy decisions at the current meeting, participants agreed that it would be appropriate to maintain the current target range for the federal funds rate at 2-1/4 to 2-1/2 percent. Participants judged that the labor market remained strong, but that information received over the intermeeting period, including recent readings on household spending and business fixed investment, pointed to slower economic growth in the early part of this year than in the fourth quarter of 2018. Despite these indications of softer first-quarter growth, participants generally expected economic activity to continue to expand, labor markets to remain strong, and inflation to remain near 2 percent. Participants also noted significant uncertainties surrounding their economic outlooks, including those related to global economic and financial developments. In light of these uncertainties as well as continued evidence of muted inflation pressures, participants generally agreed that a patient approach to determining future adjustments to the target range for the federal funds rate remained appropriate. Several participants observed that the characterization of the Committee's approach to monetary policy as "patient" would need to be reviewed regularly as the economic outlook and uncertainties surrounding the outlook evolve. A couple of participants noted that the "patient" characterization should not be seen as limiting the Committee's options for making policy adjustments when they are deemed appropriate. With regard to the outlook for monetary policy beyond this meeting, a majority of participants expected that the evolution of the economic outlook and risks to the outlook would likely warrant leaving the target range unchanged for the remainder of the year. Several of these participants noted that the current target range for the federal funds rate was close to their estimates of its longer-run neutral level and foresaw economic growth continuing near its longer-run trend rate over the forecast period. Participants continued to emphasize that their decisions about the appropriate target range for the federal funds rate at coming meetings would depend on their ongoing assessments of the economic outlook, as informed by a wide range of data, as well as on how the risks to the outlook evolved. Several participants noted that their views of the appropriate target range for the federal funds rate could shift in either direction based on incoming data and other developments. Some participants indicated that if the economy evolved as they currently expected, with economic growth above its longer-run trend rate, they would likely judge it appropriate to raise the target range for the federal funds rate modestly later this year. Several participants expressed concerns that the public had, at times, misinterpreted the medians of participants' assessments of the appropriate level for the federal funds rate presented in the SEP as representing the consensus view of the Committee or as suggesting that policy was on a preset course. Such misinterpretations could complicate the Committee's communications regarding its view of appropriate monetary policy, particularly in circumstances when the future course of policy is unusually uncertain. Nonetheless, several participants noted that the policy rate projections in the SEP are a valuable component of the overall information provided about the monetary policy outlook. The Chair noted that he had asked the subcommittee on communications to consider ways to improve the information contained in the SEP and to improve communications regarding the role of the federal funds rate projections in the SEP as part of the policy process. Participants also discussed alternative interpretations of subdued inflation pressures in current economic circumstances and the associated policy implications. Several participants observed that limited inflationary pressures during a period of historically low unemployment could be a sign that low inflation expectations were exerting downward pressure on inflation relative to the Committee's 2 percent inflation target; in addition, subdued inflation pressures could indicate a less tight labor market than suggested by common measures of resource utilization. Consistent with these observations, several participants noted that various indicators of inflation expectations had remained at the lower end of their historical range, and a few participants commented that they had recently revised down their estimates of the longer-run unemployment rate consistent with 2 percent inflation. In light of these considerations, some participants noted that the appropriate response of the federal funds rate to signs of labor market tightening could be modest provided that signs of inflation pressures continued to be limited. Some participants regarded their judgments that the federal funds rate was likely to remain on a very flat trajectory as reflecting other factors, such as low estimates of the longer-run neutral real interest rate or risk-management considerations. A few participants observed that the appropriate path for policy, insofar as it implied lower interest rates for longer periods of time, could lead to greater financial stability risks. However, a couple of these participants noted that such financial stability risks could be addressed through appropriate use of countercyclical macroprudential policy tools or other supervisory or regulatory tools. Committee Policy Action In their discussion of monetary policy for the period ahead, members judged that the information received since the Committee met in January indicated that the labor market remained strong but that growth of economic activity had slowed from its solid rate in the fourth quarter. Payroll employment was little changed in February, but job gains had been solid, on average, in recent months, and the unemployment rate had remained low. Recent indicators pointed to slower growth of household spending and business fixed investment in the first quarter. On a 12-month basis, overall inflation had declined, largely as a result of lower energy prices; inflation for items other than food and energy remained near 2 percent. On balance, market-based measures of inflation compensation had remained low in recent months, and survey-based measures of longer-term inflations expectations were little changed. In their consideration of the economic outlook, members noted that financial conditions had improved since the beginning of year, but that some time would be needed to assess whether indications of weak economic growth in the first quarter would persist in subsequent quarters. Members also noted that inflationary pressures remained muted and that a number of uncertainties bearing on the U.S. and global economic outlook still awaited resolution. However, members continued to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective as the most likely outcomes for the U.S. economy in the period ahead. In light of global economic and financial developments and muted inflation pressures, members concurred that the Committee could be patient as it determined what future adjustments to the target range for the federal funds rate may be appropriate to support those outcomes. 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 2-1/4 to 2-1/2 percent. 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 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. With regard to the postmeeting statement, members agreed to characterize the labor market as remaining strong. While payroll employment had been little changed in February, job gains had been solid, on average, in recent months, and the unemployment rate had remained low. Members also agreed to note that growth in economic activity appeared to have slowed from its solid rate in the fourth quarter, consistent with recent indicators of household spending and business fixed investment. The description of overall inflation was revised to recognize that inflation had declined, largely as a result of lower energy prices, while still noting that inflation for items other than food and energy remained near 2 percent. 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 March 21, 2019, 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 2-1/4 to 2-1/2 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 2.25 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 $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 January indicates that the labor market remains strong but that growth of economic activity has slowed from its solid rate in the fourth quarter. Payroll employment was little changed in February, but job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Recent indicators point to slower growth of household spending and business fixed investment in the first quarter. On a 12-month basis, overall inflation has declined, largely as a result of lower energy prices; inflation for items other than food and energy remains near 2 percent. On balance, market-based measures of inflation compensation have remained low in recent months, and survey-based measures of longer-term inflation expectations are little changed. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent. The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective as the most likely outcomes. In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes. 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, Michelle W. Bowman, Lael Brainard, James Bullard, Richard H. Clarida, Charles L. Evans, Esther L. George, Randal K. Quarles, and Eric Rosengren. 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 2.40 percent and voted unanimously to approve establishment of the primary credit rate at the existing level of 3.00 percent, effective March 21, 2019. It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, April 30-May 1, 2019. The meeting adjourned at 10:00 a.m. on March 20, 2019. Notation Vote By notation vote completed on February 19, 2019, the Committee unanimously approved the minutes of the Committee meeting held on January 29-30, 2019. _______________________ 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's session only. Return to text

2019-02-20

Minute

Minutes of the Federal Open Market Committee January 29-30, 2019 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 29, 2019, at 10:00 a.m. and continued on Wednesday, January 30, 2019, at 9:00 a.m.1 PRESENT: Jerome H. Powell, Chairman John C. Williams, Vice Chairman Michelle W. Bowman Lael Brainard James Bullard Richard H. Clarida Charles L. Evans Esther L. George Randal K. Quarles Eric Rosengren Patrick Harker, Robert S. Kaplan, Neel Kashkari, Loretta J. Mester, and Michael Strine, Alternate Members of the Federal Open Market Committee Thomas I. Barkin, Raphael W. Bostic, and Mary C. Daly, Presidents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco, 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 Stacey Tevlin, Economist Thomas A. Connors, Rochelle M. Edge, Beverly Hirtle, Daniel G. Sullivan, Christopher J. Waller, William Wascher, Jonathan L. Willis, 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 J. Burns, Deputy Director, Division of Supervision and Regulation, Board of Governors; Michael T. Kiley, Deputy Director, Division of Financial Stability, Board of Governors; Trevor A. Reeve, 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 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 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 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 Marnie Gillis DeBoer,2 Associate Director, Division of Monetary Affairs, Board of Governors Jeffrey D. Walker, Deputy Associate Director, Division of Reserve Bank Operations and Payment Systems, Board of Governors Eric C. Engstrom, Deputy Associate Director, Division of Monetary Affairs, and Adviser, Division of Research and Statistics, Board of Governors Glenn Follette and Norman J. Morin, Assistant Directors, Division of Research and Statistics, Board of Governors; Christopher J. Gust, Laura Lipscomb,2 and Zeynep Senyuz,2 Assistant Directors, Division of Monetary Affairs, Board of Governors Dana L. Burnett, Michele Cavallo,2 and Dan Li, Section Chiefs, Division of Monetary Affairs, Board of Governors Sean Savage, Senior Project Manager, 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; Christopher L. Smith, Principal Economist, Division of Research and Statistics, Board of Governors Ayelen Banegas, Senior Economist, Division of Monetary Affairs, Board of Governors Luke Pettit,2 Senior Financial Institution and Policy Analyst, Division of Monetary Affairs, Board of Governors Pon Sagnanert, Financial Analyst, Division of Monetary Affairs, Board of Governors Yvette McKnight,3 Staff Assistant, Office of the Secretary, Board of Governors Meredith Black, First Vice President, Federal Reserve Bank of Dallas David Altig and Sylvain Leduc, Executive Vice Presidents, Federal Reserve Banks of Atlanta and San Francisco, respectively Bruce Fallick, Marc Giannoni, Susan McLaughlin,2 Anna Nordstrom,2 Angela O'Connor,2 Keith Sill, and Mark L.J. Wright, Senior Vice Presidents, Federal Reserve Banks of Cleveland, Dallas, New York, New York, New York, Philadelphia, and Minneapolis, respectively Roc Armenter,2 Kathryn B. Chen,2 Joe Peek, Alexander L. Wolman, and Patricia Zobel,2 Vice Presidents, Federal Reserve Banks of Philadelphia, New York, Boston, Richmond, and New York, respectively Samuel Schulhofer-Wohl, Senior Economist and Research Advisor, Federal Reserve Bank of Chicago 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 29, 2019, had been received and that these individuals had executed their oaths of office. The elected members and alternate members were as follows: John C. Williams, 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 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 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 2020: Jerome H. Powell Chairman John C. Williams 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 Stacey Tevlin Economist     Thomas A. Connors Rochelle M. Edge Eric M. Engen Beverly Hirtle Daniel G. Sullivan Geoffrey Tootell Christopher J. Waller William Wascher Jonathan L. Willis 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 Committee approved the Authorization for Domestic Open Market Operations with a revision that makes clear that small value tests for rollovers and maturities are included in the $5 billion limit of the operational readiness testing program. 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 29, 2019) 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, 1.B, 1.C and 1.D 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 29, 2019) 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; iii. 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 29, 2019) 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 reaffirmed its Program for Security of FOMC Information. 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 4.6 percent to 4.4 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 29, 2019) 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 4.4 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 deputy manager of the System Open Market Account (SOMA) provided an overview of developments in U.S. and global financial markets. Financial markets were quite volatile over the intermeeting period. Market participants pointed to a number of factors as contributing to the heightened volatility and sustained declines in risk asset prices and interest rates over recent months including a weaker outlook and greater uncertainties for foreign economies (particularly for Europe and China), perceptions of greater policy risks, and the partial shutdown of the federal government. Against this backdrop, market participants appeared to interpret FOMC communications at the time of the December meeting as not fully appreciating the tightening of financial conditions and the associated downside risks to the U.S. economic outlook that had emerged since the fall. In addition, some market reports suggested that investors perceived the FOMC to be insufficiently flexible in its approach to adjusting the path for the federal funds rate or the process for balance sheet normalization in light of those risks. The deterioration in risk sentiment late in December was reportedly amplified by poor liquidity and thin trading conditions around year-end. Early in the new year, market sentiment improved following communications by Federal Reserve officials emphasizing that the Committee could be "patient" in considering further adjustments to the stance of policy and that it would be flexible in managing the reduction of securities holdings in the SOMA. On balance, stock prices finished the period up almost 5 percent while corporate risk spreads narrowed, reversing a portion of the changes in these variables since the September FOMC meeting. The deputy manager reported results from the Open Market Desk's latest surveys of primary dealers and market participants. Regarding the outlook for policy, the median path for the federal funds rate among respondents had shifted down about 25 basis points relative to the responses from the surveys conducted ahead of the December meeting. Moreover, the average probability that respondents attached to an increase in the target range as the next policy action declined and the corresponding probabilities they attached to the possibility that the target range would be unchanged or lowered at some point this year increased. Concerning expectations for the FOMC statement, many survey respondents anticipated the retention of language pointing to the likelihood of "some further gradual increases" in the target range for the federal funds rate but many also expected the statement to emphasize patience or data dependence in the conduct of policy. Consistent with recent communications that the FOMC would be flexible in its approach to balance sheet normalization, the survey results also suggested that the respondents anticipated that the Committee would slow the balance sheet runoff in scenarios that involved a reduction in the target range for the federal funds rate. In reviewing money market developments, the deputy manager noted that federal funds continued to trade at rates close to the interest on excess reserves rate. Moreover, no signs of reserve scarcity were evident in the behavior of the federal funds rate; the correlation between daily changes in reserve balances and the federal funds rate remained close to zero. In other markets, repurchase agreement (repo) rates spiked at year-end, reportedly reflecting strong demands for financing from dealers associated with large Treasury auction net settlements on that day combined with a cutback in the supply of financing available from banks and others managing the size of their balance sheets over year-end for reporting purposes. The deputy manager noted that the Federal Reserve Bank of New York was planning to release a notice in early February for public comment on plans to include new data on selected deposits in the calculation of the overnight bank funding rate (OBFR). In addition, the staff had begun work aimed at publishing a series of backward-looking average secured overnight financing rates (SOFR) as a further step to support reference rate reform. The staff planned to solicit public feedback on this effort later this year and initiate publication of these averages by the first half of 2020. Following the briefing, participants raised a number of questions about market reports that the Federal Reserve's balance sheet runoff and associated "quantitative tightening" had been an important factor contributing to the selloff in equity markets in the closing months of last year. While respondents assessed that the reduction of securities held in the SOMA would put some modest upward pressure on Treasury yields and agency mortgage-backed securities (MBS) yields over time, they generally placed little weight on balance sheet reduction as a prime factor spurring the deterioration in risk sentiment over that period. However, some other investors reportedly held firmly to the belief that the runoff of the Federal Reserve's securities holdings was a factor putting significant downward pressure on risky asset prices, and the investment decisions of these investors, particularly in thin market conditions around the year-end, might have had an outsized effect on market prices for a time. Participants also discussed the hypothesis that investors may have taken some signal about the future path of the federal funds rate based on perceptions that the Federal Reserve was unwilling to adjust the pace of balance sheet runoff in light of economic and financial developments. 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. Long-Run Monetary Policy Implementation Frameworks Committee participants resumed their discussion from the December 2018 meeting of the appropriate long-run framework for monetary policy implementation. At the January meeting, the staff provided briefings on the effectiveness and efficiency of the Committee's current operating regime and on options for transitioning to the longer-run size of the balance sheet. The staff noted that the Committee had previously indicated that, in the longer run, it intends to operate with no more securities holdings than necessary to implement monetary policy efficiently and effectively. In considering the effectiveness of the operating regime, the staff observed that over recent years, the Federal Reserve had been able to implement monetary policy in an environment with ample reserves by adjusting administered rates--including the rates on required and excess reserve balances and the offered rate at the overnight reverse repurchase agreement facility--without needing to actively manage the supply of reserves. Over this period, the effective federal funds rate was generally steady at levels well within the Committee's target range despite substantial changes in the level of reserves in the banking system and significant changes in money markets, regulations, and financial institutions' business models. In addition, other money market rates generally moved closely with the federal funds rate. The current regime was therefore effective both in providing control of the policy rate and in ensuring transmission of the policy stance to other rates and broader financial markets. The staff briefing also included a discussion of factors relevant in judging the level of reserves that would support the efficient implementation of monetary policy. The staff suggested that maintaining a buffer of reserves above the minimum quantity that corresponds to the flat portion of the reserve demand curve could reduce the size and frequency of open market operations needed to maintain good control of the policy rate. The aggregate level of reserves had already declined by $1.2 trillion from a peak level of $2.8 trillion reached in October 2014; the decline stemmed from both reductions in asset holdings and increases in nonreserve liabilities such as Federal Reserve notes in circulation. Some recent survey information and other evidence suggested that reserves might begin to approach an efficient level later this year. Against this backdrop, the staff presented options for substantially slowing the decline in reserves by ending the reduction in asset holdings at some point over the latter half of this year and thereafter holding the size of the SOMA portfolio roughly constant for a time so that the average level of reserves would fall at a very gradual pace reflecting the trend growth in other Federal Reserve liabilities. The staff also described options for communicating plans both for the operating regime and for the completion of the normalization of the size of the balance sheet. If the Committee reached a decision to continue using its current operating regime, announcing this decision after the current meeting would help reduce uncertainty about both the long-run implementation framework and the likely evolution of the balance sheet. In addition, the Committee could revise its previous communications to make clear that it was flexible in its approach to normalizing the balance sheet and was prepared to change the details of its balance sheet normalization plans in light of economic and financial developments if necessary to support the FOMC's broader policy goals. The staff noted that, after the end of asset redemptions, the Desk could reinvest principal payments received from holdings of agency MBS in Treasury securities as directed. Participants noted some of the key advantages of the Federal Reserve's current operating regime, including good control of the policy rate in a variety of conditions and good transmission to other money market rates and broader financial markets. They observed that a regime that controlled the policy rate through active management of the supply of reserves likely would have disadvantages. In particular, the level and variability of reserve demand and supply were likely to be much larger than in the period before the crisis, and stabilizing the policy rate in this environment would require large and frequent open market operations. Participants judged that, in light of their extensive previous discussions, it was now appropriate to provide the public with more certainty that the Federal Reserve would continue to use its current operating regime. Choosing an operating regime would also allow the Committee to move forward on related issues, including plans for concluding the normalization of the size of the balance sheet. Participants emphasized the importance of describing their chosen operating regime in clear terms to enhance public understanding. Participants discussed market commentary that suggested that the process of balance sheet normalization might be influencing financial markets. Participants noted that the ongoing reduction in the Federal Reserve's asset holdings had proceeded smoothly for more than a year, with no significant effects on financial markets. The gradual reduction in securities holdings had been announced well in advance and, as intended, was proceeding largely in the background, with the federal funds rate remaining the Committee's primary tool for adjusting the stance of policy. Nonetheless, some investors might have interpreted previous communications as indicating that a very high threshold would have to be met before the Committee would be willing to adjust its balance sheet normalization plans. Participants observed that, although the target range for the federal funds rate was the Committee's primary means of adjusting the stance of policy, the balance sheet normalization process should proceed in a way that supports the achievement of the Federal Reserve's dual-mandate goals of maximum employment and stable prices. Consistent with this principle, participants agreed that it was important to be flexible in managing the process of balance sheet normalization, and that it would be appropriate to adjust the details of balance sheet normalization plans in light of economic and financial developments if necessary to achieve the Committee's macroeconomic objectives. Almost all participants thought that it would be desirable to announce before too long a plan to stop reducing the Federal Reserve's asset holdings later this year. Such an announcement would provide more certainty about the process for completing the normalization of the size of the Federal Reserve's balance sheet. A substantial majority expected that when asset redemptions ended, the level of reserves would likely be somewhat larger than necessary for efficient and effective implementation of monetary policy; if so, many suggested that some further very gradual decline in the average level of reserves, reflecting the trend growth of other liabilities such as Federal Reserve notes in circulation, could be appropriate. In these participants' view, this process would allow the Federal Reserve to arrive slowly at an efficient level of reserves while maintaining good control of short-term interest rates without needing to engage in more frequent open market operations. A few participants judged that there would be little benefit to allowing reserves to continue to fall after the end of redemptions or that this approach could have costs, such as an undue risk of volatility in short-term interest rates, that would exceed its benefits. These participants thought that upon ending asset redemptions, the Federal Reserve should begin adding to its assets to offset growth in nonreserve liabilities, so as to keep the average level of reserves relatively stable. A couple of participants suggested that a ceiling facility to mitigate temporary unexpected pressures in reserve markets could play a useful role in supporting policy implementation at lower levels of reserves. Participants commented that, in light of the Committee's longstanding plan to hold primarily Treasury securities in the long run, it would be appropriate once asset redemptions end to reinvest most, if not all, principal payments received from agency MBS in Treasury securities. Some thought that continuing to reinvest agency MBS principal payments in excess of $20 billion per month in agency MBS, as under the current balance sheet normalization plan, would simplify communications or provide a helpful backstop against scenarios in which large declines in long-term interest rates caused agency MBS prepayment speeds to increase sharply. However, some others judged that retaining the cap on agency MBS redemptions was unnecessary at this stage in the normalization process. These participants noted considerations in support of this view, including that principal payments were unlikely to reach the $20 billion level after 2019, that the cap could slightly slow the return to a portfolio of primarily Treasury securities, or that the Committee would have the flexibility to adjust the details of its balance sheet normalization plans in light of economic and financial developments. Participants commented that it would be important over time to develop and communicate plans for reinvesting agency MBS principal payments, and they expected to continue their discussion of balance sheet normalization and related issues at upcoming meetings. Following the discussion, the Chairman proposed that the Committee communicate its intentions regarding monetary policy implementation and its willingness to adjust the details of its balance sheet normalization program by publishing a statement at the conclusion of the meeting. All participants agreed with the proposed statement. STATEMENT REGARDING MONETARY POLICY IMPLEMENTATION AND BALANCE SHEET NORMALIZATION (Adopted January 30, 2019) After extensive deliberations and thorough review of experience to date, the Committee judges that it is appropriate at this time to provide additional information regarding its plans to implement monetary policy over the longer run. Additionally, the Committee is revising its earlier guidance regarding the conditions under which it could adjust the details of its balance sheet normalization program.5 Accordingly, all participants agreed to the following: The Committee intends to continue to implement monetary policy in a regime in which an ample supply of reserves ensures that control over the level of the federal funds rate and other short-term interest rates is exercised primarily through the setting of the Federal Reserve's administered rates, and in which active management of the supply of reserves is not required. The Committee continues to view changes in the target range for the federal funds rate as its primary means of adjusting the stance of monetary policy. The Committee is prepared to adjust any of the details for completing balance sheet normalization in light of economic and financial developments. 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. Staff Review of the Economic Situation The information available for the January 29-30 meeting indicated that labor market conditions continued to strengthen and that growth in real gross domestic product (GDP) was solid in the fourth quarter of last year, although the availability of data was more limited than usual because of the partial federal government shutdown that extended from December 22 to January 25. Consumer price inflation, as measured by the 12‑month percentage change in the price index for personal consumption expenditures (PCE), was a bit below 2 percent in November, held down in part by recent declines in consumer energy prices. Survey-based measures of longer-run inflation expectations were little changed. Total nonfarm payroll employment expanded strongly in December. The national unemployment rate edged up but was still at a low level of 3.9 percent, while the labor force participation rate also increased somewhat; as a result, the employment-to-population ratio remained steady in December. The unemployment rates for African Americans, Asians, and Hispanics in December were below their levels at the end of the previous economic expansion, although persistent differentials in unemployment rates across groups remained. 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 edged down in November but were still at high levels; initial claims for unemployment insurance benefits through the middle of January were near historically low levels. Average hourly earnings for all employees rose 3.2 percent over the 12 months ending in December. Industrial production increased solidly in December. Output gains were strong in the manufacturing and mining sectors, while the output of utilities declined, with warmer-than-usual temperatures lowering the demand for heating. Automakers' assembly schedules suggested that the production of light motor vehicles would ease somewhat in the first quarter, although new orders indexes from national and regional manufacturing surveys pointed to moderate gains in overall factory output in the coming months. Household spending looked to have increased strongly in the fourth quarter, as real PCE growth was strong in October and November. The release of the retail sales report for December was delayed, but available indicators--such as credit card and debit card transaction data and light motor vehicle sales--suggested that household spending growth remained strong in December. Key factors that influence consumer spending--including ongoing gains in real disposable personal income and still-elevated measures of 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, was less upbeat in early January than it had been last year but remained at a generally favorable level. Real residential investment appeared to have declined again in the fourth quarter, likely reflecting in part decreases in the affordability of housing arising from both the net increase in mortgage interest rates over the past year and ongoing, though somewhat slower, house price appreciation. Data on starts and permits for new residential construction in December were not available, 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--had moved down modestly in the previous couple of months. Sales of existing homes decreased, on net, over November and December, while data on new home sales for those two months were delayed. Growth in real private expenditures for business equipment and intellectual property looked to have picked up solidly in the fourth quarter. Nominal shipments of nondefense capital goods excluding aircraft rose, on balance, in October and November, while information on shipments for December was delayed; available indicators of transportation equipment spending in the fourth quarter were strong. Forward-looking indicators of business equipment spending--such as orders for nondefense capital goods excluding aircraft and readings on business sentiment--pointed to somewhat slower spending gains in the near term. Data on nominal business expenditures for nonresidential structures outside of the drilling and mining sector in November were not available. The number of crude oil and natural gas rigs in operation--an indicator of business spending for structures in the drilling and mining sector--was roughly flat in December and through most of January. Total real government purchases appeared to have increased moderately in the fourth quarter. Nominal defense spending in October and November pointed to solid growth in real federal purchases, although spending data for December were delayed. The partial federal government shutdown restrained real federal purchases somewhat in the fourth quarter and likely had a more significant negative effect on federal purchases in the first quarter. Real purchases by state and local governments looked to have risen modestly in the fourth quarter, as the payrolls of those governments expanded a bit over that period. Nominal state and local construction spending had risen solidly in October, but construction data for November were delayed. Data on U.S. international trade for November and December also were delayed. The available data for October suggested that the contribution of the change in net exports to real GDP growth in the fourth quarter would be much less negative than the drag of nearly 2 percentage points in the third quarter. Total U.S. consumer prices, as measured by the PCE price index, increased 1.8 percent over the 12 months ending in November. 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 1.9 percent over the 12 months ending in December, 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 and the Desk's Survey of Primary Dealers and Survey of Market Participants--were little changed. Recent data suggested that foreign economic growth was subdued in the fourth quarter relative to earlier in the year. In the advanced foreign economies (AFEs), especially the euro area, indicators of economic activity weakened further, though they remained consistent with positive economic growth. In the emerging market economies (EMEs), growth in Mexico and Brazil appeared to have slowed to a modest pace in the fourth quarter after a temporary pickup in the third quarter. The Chinese economy expanded at a slower pace than earlier in the year amid notable weakness in household spending, and Chinese imports from other emerging Asian economies turned down. Foreign inflation fell in the fourth quarter, largely reflecting lower oil prices. Inflation pressures, especially in some AFEs, generally remained muted. Staff Review of the Financial Situation Investor risk sentiment fluctuated materially over the intermeeting period. A variety of factors--including FOMC communications, weaker-than-expected data, trade policy uncertainties, the partial federal government shutdown, and concerns about the outlook for corporate earnings--were cited by market participants as contributing to a deterioration in risk sentiment early in the period. During this time, broad equity indexes declined substantially amid a sharp rise in financial market volatility, and corporate bond spreads widened notably. Subsequently, positive signals regarding trade policy, robust economic data releases, and communications from FOMC participants led to an improvement in risk sentiment. On net, the S&P 500 index rose, option-implied volatility--the VIX--fell, Treasury yields declined, and corporate spreads narrowed over the intermeeting period. Despite the intermeeting moves in financial markets, financial conditions remained notably tighter than in September 2018. Financing conditions for businesses and households tightened a bit further over the intermeeting period but remained generally supportive of spending. December FOMC communications were reportedly perceived by market participants as not fully appreciating the implications of tighter financial conditions and softening global data over recent months for the U.S. economic outlook. Subsequent communications from FOMC participants were interpreted as suggesting that the FOMC would be patient in assessing the implications of recent economic and financial developments. The market-implied path for the federal funds rate in 2019 was little changed, on net, over the intermeeting period and investors continued to expect no change to the target range for the federal funds rate at the January FOMC meeting. The market-implied path for 2020 shifted down somewhat. Nominal Treasury yields fluctuated substantially, with heightened risk aversion contributing to a significant decline in yields early in the intermeeting period. Subsequently, yields rose, though 2-, 5-, and 10-year yields still ended the period somewhat lower, on net. The spread between the yields on nominal 10- and 2-year Treasury securities was little changed over the period, and remained in the lower end of its historical range over recent decades. The near-term forward spread--the difference between the current implied three-month forward rate at a horizon six quarters ahead (derived from the Treasury yield curve) and the current yield on a three-month Treasury bill--narrowed, on net, and also was in the lower end of its historical distribution. The 5-year and 5-to-10-year-forward inflation compensation measures based on Treasury Inflation-Protected Securities (TIPS) edged down a bit over the period; both measures were down significantly from levels prevailing in the fall of last year. In U.S. risky asset markets, the S&P 500 equity index was down as much as 8 percent at one point during the period but ended the period notably higher. On net, the VIX fell substantially while corporate bond spreads narrowed a bit. The federal funds rate and other overnight funding rates rose following the increase in the target range for the federal funds rate at the December FOMC meeting. Year-end pressures in repo markets were reportedly exacerbated by a high volume of settlements of Treasury securities against a backdrop of large dealer inventories and reduced intermediation by global systemically important banks. General collateral repo rates moved up sharply at year-end but subsequently returned to normal levels. Foreign financial markets followed the same general pattern as those in the United States. On balance, foreign equity prices moved up moderately and sovereign credit spreads in EMEs narrowed. Moreover, inflows to dedicated emerging market funds resumed after two quarters of outflows. Longer-term sovereign yields in AFEs edged lower on net. The dollar depreciated broadly amid falling U.S. yields and greater investor optimism about prospects for some EMEs. The dollar depreciated notably against the British pound, on net, as market participants reportedly saw an increased likelihood of a delay in the Brexit process. The dollar also depreciated considerably against the Brazilian real and the Mexican peso following progress on pension reform in Brazil and a fiscal announcement in Mexico that was perceived as prudent. Financing conditions for nonfinancial firms tightened somewhat, on balance. Gross issuance of corporate bonds slowed considerably in December across the credit rating spectrum but rebounded in January. Even so, the volume of high-yield bonds issued by nonfinancial firms remained well below its average over the past few years. Spreads on nonfinancial corporate bonds were volatile but narrowed a bit, on net, and stayed at levels well above those that prevailed a year ago. The credit quality of nonfinancial corporations continued to show signs of deterioration, although actual corporate bond defaults remained low overall. Institutional leveraged loan issuance slowed in December to its lowest level since July 2016, as loan spreads widened substantially. Small business credit market conditions were little changed, and credit conditions in municipal bond markets stayed accommodative on net. Private-sector analysts significantly revised down their projections for corporate earnings for the fourth quarter and for 2019 as a whole. The pace of gross equity issuance through both initial and seasoned offerings was sluggish in December, amid reports that several firms may have pushed back initial equity offerings. Respondents to the January 2019 Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS) reported that lending standards for commercial and industrial (C&I) loans remained basically unchanged in the fourth quarter, after having reported easing standards over the past several quarters. Growth of C&I loans on banks' balance sheets picked up in the fourth quarter, reflecting stronger originations as well as reduced paydowns and loan sales. In the commercial real estate (CRE) sector, financing conditions remained accommodative. Although commercial mortgage backed securities (CMBS) spreads were volatile, they were little changed, on net, over the intermeeting period, and issuance of both agency and non-agency CMBS remained strong. CRE loan growth at banks continued to expand at a pace comparable with that seen over the course of 2018. Banks in the January SLOOS reported that demand was unchanged, on net, in the fourth quarter for nonfarm nonresidential loans, the largest CRE loan category, while demand was reportedly weaker for multifamily loans and construction loans. On balance, banks reported tightening their standards for all types of CRE loans in the fourth quarter. Financing conditions in the residential mortgage market also remained accommodative for most borrowers. Purchase mortgage origination activity continued to decline modestly through November, while refinancing activity continued to be muted. In consumer credit markets, financing conditions tightened a bit but, on balance, remained generally supportive of growth in household spending. Banks reported in the SLOOS that they tightened credit card lending standards during the fourth quarter. In the consumer asset-backed securities market, spreads widened somewhat amid broad market volatility. The staff provided an update on its views with respect to potential risks to financial stability. The increase in financial market volatility seen over the fall of last year was characterized as a return to historically more typical levels, following the historically low-volatility environment that persisted through much of 2017 and 2018. However, the increase in volatility in financial markets in December was viewed as substantial and as likely exacerbated by thin year-end liquidity, among other factors. Staff judged asset valuation pressures in equity and corporate debt markets to have abated somewhat in the period since the assessment presented in the November 2018 financial stability report. Staff continued to monitor developments in the leveraged loan market given the sharp rise in spreads and slowdown in issuance late last year. The build-up in overall nonfinancial business debt to levels close to historical highs relative to GDP was viewed as a factor that could amplify adverse shocks to the business sector. Staff continued to judge risks associated with household-sector debt as moderate. Both the risks associated with financial leverage and the vulnerabilities related to maturity transformation were viewed as being low, as they have been for some time. Staff Economic Outlook The U.S. economic forecast prepared by the staff for the January FOMC meeting was revised down a little, on balance, primarily reflecting somewhat lower projected paths for domestic equity prices and foreign economic growth. The staff estimated that U.S. real GDP growth was solid in the fourth quarter of last year, bolstered by consumer spending and business investment, and that the effects of the partial federal government shutdown were quite small in that quarter. Real GDP growth was expected to slow but remain solid in the first half of this year, with the effects of the partial federal government shutdown modestly restraining GDP growth in the first quarter and those effects being reversed in the second quarter. In the medium term, real GDP growth in 2019 was forecast to be at a rate above the staff's estimate of potential output growth, step down to the growth rate of potential output next year and then slow further to a pace below potential output growth in 2021. The unemployment rate was projected to decline somewhat further below the staff's estimate of its longer-run natural rate but to bottom out by the end of this year and begin to edge up in 2021. With labor market conditions judged to already be 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's forecast for inflation was little revised for the January FOMC meeting. Core PCE price inflation was still expected to step up to 2 percent over this year as a whole and then to run at that level through the medium term. Total PCE price inflation was forecast to be a little below core inflation this year and next, reflecting projected declines in energy prices, and then to run at the same level as core inflation in 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 roughly 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, as well as the possibility that the dollar could appreciate if foreign economic conditions deteriorated. Participants' Views on Current Conditions and the Economic Outlook Participants agreed that over the intermeeting period 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 remained low. Household spending had continued to grow strongly, while growth of business fixed investment had moderated from its rapid pace earlier last year. On a 12-month basis, both overall inflation and inflation for items other than food and energy had remained near 2 percent. Although market-based measures of inflation compensation had moved lower in recent months, survey-based measures of longer-term inflation expectations were little changed. Participants continued to view a sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective as the most likely outcomes over the next few years. Participants generally continued to expect the growth rate of real GDP in 2019 to step down somewhat from the pace seen over 2018 to a rate closer to their estimates of longer-run growth, with a few participants commenting that waning fiscal stimulus was expected to contribute to the step-down. Several participants commented that they had nudged down their outlooks for output growth since the December meeting, citing a softening in consumer or business sentiment, a reduction in the outlook for foreign economic growth, or the tightening in financial conditions that had occurred in recent months. In their discussion of the household sector, participants noted that recent data on spending had been strong, supported by a strong job market and rising incomes. A couple of participants commented that contacts in their Districts remained optimistic about consumer spending. However, some participants noted the recent softening in surveys of consumer sentiment. Participants observed that the recent partial federal government shutdown had presented a significant hardship for many families. A few participants also pointed to continued weakness in the housing sector, which was attributed in part to concerns about affordability among potential homebuyers. Participants noted that growth of business fixed investment had moderated from its rapid pace earlier last year. Some participants highlighted that recent surveys of business sentiment or District contacts had indicated some weakening in optimism or confidence about the economic outlook, though available indicators suggested that the level of business sentiment had remained high. Concerns about the economic outlook were variously attributed to uncertainty or worries about slowing global economic growth, including in Europe and China; trade policy; waning fiscal policy stimulus; and the partial government shutdown. Manufacturing contacts in a number of Districts indicated that such factors were causing them to delay or defer capital expenditures. In addition, a few participants noted that recent declines in oil or gasoline prices had damped plans for capital expenditures in the energy sector. A few participants observed that conditions in the agricultural sector remained difficult, citing large inventories of agricultural commodities, uncertainty about international trade policies, and concerns regarding low prices of commodities and farmland. However, a few participants commented that business optimism had increased among contacts in their Districts, or that they were planning new capital expenditures. Participants observed that both overall inflation and inflation for items other than food and energy remained near 2 percent on a 12-month basis. Participants continued to view inflation near the Committee's symmetric 2 percent objective as the most likely outcome. Some participants noted that some factors, such as the decline in oil prices, slower growth and softer inflation abroad, or appreciation of the dollar last year, had held down some recent inflation readings and may continue to do so this year. In addition, many participants commented that upward pressures on inflation appeared to be more muted than they appeared to be last year despite strengthening labor market conditions and rising input costs for some industries. In their discussion of indicators of inflation expectations, participants noted that market-based measures of inflation compensation had moved lower in recent months. Participants expressed a range of views in interpreting the decline in inflation compensation. On the one hand, that decline could stem from a decrease in expected inflation on the part of market participants. In that case, the current low levels of inflation compensation could suggest that inflation expectations are below the Committee's 2 percent inflation objective. On the other hand, the decline in inflation compensation might reflect in large part declines in risk premiums or increased concerns about downside risks to the outlook for inflation. This interpretation was seen as consistent with the behavior of the most recent survey-based measures of expected inflation, which were little changed. In their discussion of labor markets, participants agreed that conditions had continued to strengthen. Estimates of job gains in the December employment report had been strong, the unemployment rate had remained low, and the labor force participation rate had moved up. Several participants noted solid rates of hiring or other indicators of tight labor market conditions in their Districts. Some participants commented on recent indicators at the national or District levels as suggesting a pickup in wage growth. The pickup was attributed to tightening in national or District labor market conditions or to gains in the rate of productivity growth. Continued solid productivity growth was seen as a key factor necessary to support rising real wages over time. Participants commented on a number of risks associated with their outlook for economic activity, the labor market, and inflation over the medium term. Participants noted that some risks to the downside had increased, including the possibilities of a sharper-than-expected slowdown in global economic growth, particularly in China and Europe, a rapid waning of fiscal policy stimulus, or a further tightening of financial market conditions. An increase in some foreign and domestic government policy uncertainties, including those associated with Brexit, an escalation in international trade policy tensions, and the potential for additional extended federal government shutdowns were also cited as downside risks. A few participants expressed concern that longer-run inflation expectations may be lower than levels consistent with the Committee's 2 percent inflation objective. Several participants judged that risks that could lead to higher-than-expected inflation had diminished relative to downside risks. The potential that various sources of uncertainty might abate more quickly than expected was mentioned as a potential upside risk for the economic outlook. In their discussion of financial developments, participants noted that although financial market conditions had not changed much, on net, over the intermeeting period, prices had been volatile and financial conditions were materially tighter than they had been several months ago, with lower equity prices and wider corporate risk spreads. Several participants also noted that the slope of the Treasury yield curve was unusually flat by historical standards, which in the past had often been associated with a deterioration in future macroeconomic performance. Participants noted that financial asset prices appeared to be sensitive to information regarding trade policy tensions, domestic fiscal and monetary policy, and global economic growth prospects. A couple of participants noted that the rise in credit spreads over recent months, if it were to persist, could restrain future economic activity. Participants agreed that it was important to continue to monitor financial market developments and assess the implications of these developments for the economic outlook. Among those participants who commented on financial stability, a number expressed concerns about the elevated financial market volatility and the apparent decline in investors' willingness to bear risk that occurred toward the end of last year. Although these conditions had eased somewhat in recent weeks, a couple of participants noted that the strain in financial markets might have persisted or spread if it had occurred during a period of less favorable macroeconomic conditions. A couple of participants highlighted the role that decreased liquidity at the end of the year appeared to play in exacerbating changes in financial market conditions. They emphasized the need to monitor financial market structures or practices that may contribute to strained liquidity conditions. A few participants highlighted the importance of ensuring that financial institutions were able to withstand adverse financial market events--for instance, by maintaining adequate levels of capital. In their consideration of monetary policy at this meeting, participants judged that information received since December indicated that real economic activity had been rising at a solid rate, labor market conditions had continued to strengthen, and inflation had been near the Committee's objective. Participants generally expected economic activity to continue expanding at a solid pace in the period ahead, with strong labor market conditions and inflation near 2 percent. At the time of the December meeting, the Committee had noted that it would continue to monitor global economic and financial developments and assess their implications for the economic outlook. Participants observed that since then, the economic outlook had become more uncertain. Financial market volatility had remained elevated over the intermeeting period, and, despite some easing since the December FOMC meeting, overall financial conditions had tightened since September. In addition, the global economy had continued to record slower growth, and consumer and business sentiment had deteriorated. The government policy environment, including trade negotiations and the recent partial federal government shutdown, was also seen as a factor contributing to uncertainty about the economic outlook. Based on their current assessments, all participants expressed the view that it would be appropriate for the Committee to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent. With regard to the Committee's postmeeting statement, participants supported a proposed change in the forward guidance language that would replace the previous guidance referring to "some further gradual increases in the target range for the federal funds rate" with an indication that, in light of "global economic and financial developments and muted inflation pressures," the Committee would "be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate." Participants also supported a proposal to remove from the statement the characterization of risks to the economic outlook as "roughly balanced." Participants pointed to a variety of considerations that supported a patient approach to monetary policy at this juncture as an appropriate step in managing various risks and uncertainties in the outlook. With regard to the domestic economic picture, additional data would help policymakers gauge the trajectory of business and consumer sentiment, whether the recent softness in core and total inflation and inflation compensation would persist, and the effect of the tightening of financial conditions on aggregate demand. Information arriving in coming months could also shed light on the effects of the recent partial federal government shutdown on the U.S. economy and on the results of the budget negotiations occurring in the wake of the shutdown, including the possible implications for the path of fiscal policy. A patient approach would have the added benefit of giving policymakers an opportunity to judge the response of economic activity and inflation to the recent steps taken to normalize the stance of monetary policy. Furthermore, a patient posture would allow time for a clearer picture of the international trade policy situation and the state of the global economy to emerge and, in particular, could allow policymakers to reach a firmer judgment about the extent and persistence of the economic slowdown in Europe and China. Participants noted that maintaining the current target range for the federal funds rate for a time posed few risks at this point. The current level of the federal funds rate was at the lower end of the range of estimates of the neutral policy rate. Moreover, inflation pressures were muted, and asset valuations were less stretched than they had been a few months earlier. Many participants suggested that it was not yet clear what adjustments to the target range for the federal funds rate may be appropriate later this year; several of these participants argued that rate increases might prove necessary only if inflation outcomes were higher than in their baseline outlook. Several other participants indicated that, if the economy evolved as they expected, they would view it as appropriate to raise the target range for the federal funds rate later this year. Participants observed that a patient posture in these circumstances was consistent with their general approach to setting the stance of policy, in which they were importantly guided by the implications of incoming data for the economic outlook. Some participants noted that, while global economic and financial developments had been important factors leading to a patient monetary policy posture, those developments mattered because they affected assessments of the policy rate path most consistent with achievement of the Committee's dual-mandate goals of maximum employment and price stability. Many participants observed that if uncertainty abated, the Committee would need to reassess the characterization of monetary policy as "patient" and might then use different statement language. A few participants expressed concerns that in the current environment of increased uncertainty, the policy rate projections prepared as part of the Summary of Economic Projections (SEP) do not accurately convey the Committee's policy outlook. These participants were concerned that, although the individual participants' projections for the federal funds rate in the SEP reflect their individual views of the appropriate path for the policy rate conditional on the evolution of the economic outlook, at times the public had misinterpreted the median or central tendency of those projections as representing the consensus view of the Committee or as suggesting that policy was on a preset course. However, some other participants noted that the policy rate projections in the SEP are a valuable component of the overall information provided about the monetary policy outlook. 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. Job gains had been strong, on average, in recent months, and the unemployment rate had remained low. Household spending had continued to grow strongly, while growth of business fixed investment had moderated from its rapid pace earlier last year. On a 12-month basis, both overall inflation and inflation for items other than food and energy remained near 2 percent. Although market-based measures of inflation compensation had moved lower in recent months, survey-based measures of longer-term inflation expectations were little changed. In their consideration of the economic outlook, members noted that financial conditions had tightened, on net, since September, and that global growth had moderated; members also observed that a number of uncertainties, including those pertaining to the evolution of policies of the U.S. and foreign governments, still awaited resolution. However, members continued to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective as the most likely outcomes for the U.S. economy in the period ahead. In light of global economic and financial developments and muted inflation pressures, the Committee could be patient as it determined what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes. 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 2-1/4 to 2-1/2 percent. 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 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. With regard to the postmeeting statement, members agreed to change the characterization of recent growth in economic activity from "strong" to "solid," consistent with incoming information that suggested that the pace of expansion of the U.S. economy had moderated somewhat since late last year. The description of indicators of inflation expectations was revised to recognize that the downward moves in market-based measures of inflation compensation that occurred in recent months had been sustained, while also noting that survey-based measures of longer-term inflation expectations were little changed. Members also agreed to several adjustments in the description of the outlook for the economy and monetary policy. The statement language was revised to indicate that the Committee continued to view sustained expansion of economic activity, strong labor market conditions, and inflation near 2 percent as "the most likely outcomes." Members also agreed to add a sentence indicating that, in light of "global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes." This sentence was intended to convey the Committee's view that a patient and flexible approach was appropriate at this time as a way to manage risks while assessing incoming information bearing on the economic outlook. In light of the range of uncertainties associated with global economic and financial developments, the Committee decided that it was not useful at this time to express a judgment about the balance of risks. 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 January 31, 2019, 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 2-1/4 to 2-1/2 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 2.25 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 $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 December 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 remained low. Household spending has continued to grow strongly, while growth of business fixed investment has moderated from its rapid pace earlier last year. On a 12-month basis, both overall inflation and inflation for items other than food and energy remain near 2 percent. Although market-based measures of inflation compensation have moved lower in recent months, survey-based measures of longer-term inflation expectations are little changed. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent. The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective as the most likely outcomes. In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes. 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, Michelle W. Bowman, Lael Brainard, James Bullard, Richard H. Clarida, Charles L. Evans, Esther L. George, Randal K. Quarles, and Eric Rosengren. 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 2.40 percent and voted unanimously to approve establishment of the primary credit rate at the existing level of 3.00 percent, effective January 31, 2019. It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, March 19-20, 2019. The meeting adjourned at 10:30 a.m. on January 30, 2019. Notation Vote By notation vote completed on January 8, 2019, the Committee unanimously approved the minutes of the Committee meeting held on December 18-19, 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 the long-run monetary policy implementation frameworks. Return to text 3. Attended Tuesday session only. Return to text 4. Committee organizational documents are available at https://www.federalreserve.gov/monetarypolicy/rules_authorizations.htm. Return to text 5. The Committee's Policy Normalization Principles and Plans were adopted on September 16, 2014, and are available at https://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 https://www.federalreserve.gov/monetarypolicy/files/FOMC_PolicyNormalization.20150318.pdf. On June 13, 2017, the Committee adopted a second addendum to the Policy Normalization Principles and Plans, which is available at https://www.federalreserve.gov/monetarypolicy/files/FOMC_PolicyNormalization.20170613.pdf. 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

2019-01-30

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. Job gains have been strong, on average, in recent months, and the unemployment rate has remained low. Household spending has continued to grow strongly, while growth of business fixed investment has moderated from its rapid pace earlier last year. On a 12-month basis, both overall inflation and inflation for items other than food and energy remain near 2 percent. Although market-based measures of inflation compensation have moved lower in recent months, survey-based measures of longer-term inflation expectations are little changed. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent. The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective as the most likely outcomes. In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes. 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; Michelle W. Bowman; Lael Brainard; James Bullard; Richard H. Clarida; Charles L. Evans; Esther L. George; Randal K. Quarles; and Eric S. Rosengren. Implementation Note issued January 30, 2019

2019-01-09

Minute

Minutes of the Federal Open Market Committee December 18-19, 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, December 18, 2018, at 1:00 p.m. and continued on Wednesday, December 19, 2018, at 9:00 a.m.1 PRESENT: Jerome H. Powell, Chairman John C. Williams, Vice Chairman Thomas I. Barkin Raphael W. Bostic Michelle W. Bowman 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, Kartik B. Athreya, Thomas A. Connors, 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; 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 Shaghil Ahmed and Christopher J. Erceg, Senior Associate Directors, Division of International Finance, Board of Governors; Eric M. Engen, Senior Associate Director, Division of Research and Statistics, Board of Governors; Gretchen C. Weinbach,3 Senior Associate Director, Division of Monetary Affairs, Board of Governors Edward Nelson, Senior Adviser, Division of Monetary Affairs, Board of Governors Marnie Gillis DeBoer,3 David López-Salido, and Min Wei, Associate Directors, Division of Monetary Affairs, Board of Governors; John J. Stevens, Associate Director, Division of Research and Statistics, Board of Governors Steven A. Sharpe, Deputy 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 Andrew Figura and John Sabelhaus, Assistant Directors, Division of Research and Statistics, Board of Governors; Christopher J. Gust,4 Laura Lipscomb,3 and Zeynep Senyuz,3 Assistant Directors, Division of Monetary Affairs, Board of Governors Don Kim, Adviser, Division of Monetary Affairs, Board of Governors Penelope A. Beattie,5 Assistant to the Secretary, Office of the Secretary, Board of Governors Michele Cavallo,5 Section Chief, Division of Monetary Affairs, Board of Governors Mark A. Carlson,2 Senior Economic Project Manager, Division of Monetary Affairs, Board of Governors David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors Andrea Ajello and Alyssa G. Anderson,3 Principal Economists, Division of Monetary Affairs, Board of Governors Arsenios Skaperdas,3 Economist, Division of Monetary Affairs, Board of Governors Donielle A. Winford, Information Management Analyst, Division of Monetary Affairs, Board of Governors Michael Dotsey, Sylvain Leduc, Daniel G. Sullivan, Geoffrey Tootell, and Christopher J. Waller, Executive Vice Presidents, Federal Reserve Banks of Philadelphia, San Francisco, Chicago, Boston, and St. Louis, respectively Todd E. Clark, Evan F. Koenig, Antoine Martin, and Julie Ann Remache,3 Senior Vice Presidents, Federal Reserve Banks of Cleveland, Dallas, New York, and New York, respectively Roc Armenter,3 Kathryn B. Chen,3 Jonathan L. Willis, and Patricia Zobel,3 Vice Presidents, Federal Reserve Banks of Philadelphia, New York, Kansas City, and New York, respectively Gara Afonso3 and William E. Riordan,3 Assistant Vice Presidents, Federal Reserve Bank of New York. Suraj Prasanna3 and Lisa Stowe,3 Markets Officers, Federal Reserve Bank of New York. Samuel Schulhofer-Wohl,2 Senior Economist and Research Advisor, Federal Reserve Bank of Chicago Fabrizio Perri, Monetary Advisor, Federal Reserve Bank of Minneapolis Long-Run Monetary Policy Implementation Frameworks Committee participants resumed their discussion from the November 2018 FOMC meeting of potential long-run frameworks for monetary policy implementation. At the December meeting, the staff provided a set of briefings that considered various issues related to the transition to a long-run operating regime with lower levels of excess reserves than at present and to a long-run composition of the balance sheet. The staff noted that during the transition to a long-run operating regime with excess reserves below current levels, the effective federal funds rate (EFFR) could begin to rise a little above the interest on excess reserves (IOER) rate as reserves in the banking system declined gradually to a level that the Committee judges to be most appropriate for efficient and effective implementation of policy. This upward movement in the federal funds rate could be gradual. However, the staff noted that the federal funds rate and other money market rates could possibly become somewhat volatile at times as banks and financial markets adjusted to lower levels of reserve balances. Were upward pressures on the federal funds rate to emerge, it could be challenging to distinguish between pressures that were transitory and likely to abate as financial institutions adjust and those that were more persistent and associated with aggregate reserve scarcity. The staff reported on the monitoring of conditions in money markets as well as various survey and market outreach activities that could assist in detecting reserve scarcity. The staff reviewed a number of steps that the Federal Reserve could take to ensure effective monetary policy implementation were upward pressures on the federal funds rate and other money market rates to emerge. These steps included lowering the IOER rate further within the target range, using the discount window to support the efficient distribution of reserves, and slowing or smoothing the pace of reserve decline through open market operations or through slowing portfolio redemptions. The staff also discussed new ceiling tools that could help keep the EFFR within the Committee's target range, including options that would add new counterparties for the Open Market Desk's operations. The staff also provided a review of the liabilities on the Federal Reserve's balance sheet; the review described the factors that influence the size of reserve and nonreserve liabilities and discussed the increase in the size of these liabilities since the financial crisis. Additionally, the staff outlined various issues related to the long-run composition of the System Open Market Account (SOMA) portfolio, including the maturity composition of the portfolio's Treasury securities and the management of residual holdings of agency mortgage-backed securities (MBS) after the Committee has normalized the size of the balance sheet. In discussing the transition to a long-run operating regime, participants commented on the advantages and disadvantages of allowing reserves to decline to a level that could put noticeable upward pressure on the federal funds rate, at least for a time. Reducing reserves close to the lowest level that still corresponded to the flat portion of the reserve demand curve would be one approach consistent with the Committee's previously stated intention, in the Policy Normalization Principles and Plans that it issued in 2014, to "hold no more securities than necessary to implement monetary policy efficiently and effectively." However, reducing reserves to a point very close to the level at which the reserve demand curve begins to slope upward could lead to a significant increase in the volatility in short-term interest rates and require frequent sizable open market operations or new ceiling facilities to maintain effective interest rate control. These considerations suggested that it might be appropriate to instead provide a buffer of reserves sufficient to ensure that the Federal Reserve operates consistently on the flat portion of the reserve demand curve so as to promote the efficient and effective implementation of monetary policy. Participants discussed options for maintaining control of interest rates should upward pressures on money market rates emerge during the transition to a regime with lower excess reserves. Several participants commented on options that rely on existing or currently used tools, such as further technical adjustments to the IOER rate to keep the federal funds rate within the target range or using the discount window, although such options were recognized to have limitations in some situations. Some participants commented on the possibility of slowing the pace of the decline in reserves in approaching the longer-run level of reserves. Standard temporary open market operations could be used for this purpose. In addition, participants discussed options such as ending portfolio redemptions with a relatively high level of reserves still in the system and then either maintaining that level of reserves or allowing growth in nonreserve liabilities to very gradually reduce reserves further. These approaches could allow markets and banks more time to adjust to lower reserve levels while maintaining effective control of interest rates. Several participants, however, expressed concern that a slowing of redemptions could be misinterpreted as a signal about the stance of monetary policy. Some participants expressed an interest in learning more about possible options for new ceiling tools to provide firmer control of the policy rate. Participants commented on the role that the Federal Reserve's nonreserve liabilities have played in the expansion of the Federal Reserve's balance sheet since the financial crisis. Many participants noted that the magnitudes of these nonreserve liabilities--most significantly currency but also liabilities to the Treasury through the Treasury General Account and liabilities to foreign official institutions through their accounts at the Federal Reserve--are not closely related to Federal Reserve monetary policy decisions. They also remarked that the size of the Federal Reserve's balance sheet was expected to increase over time as the growth of these liabilities roughly tracks the growth of nominal gross domestic product (GDP). Additionally, participants cited the social benefits provided by these liabilities to the economy. Participants considered it important to present information on the Federal Reserve's balance sheet to the public in ways that communicated these facts. In discussing the long-run level of reserve liabilities, participants noted that it might be useful to explore ways to encourage banks to reduce their demand for reserves and to provide information to banks and the public about the likely long-run level of reserves. Participants commented on a number of issues related to the long-run composition of the SOMA portfolio. With regard to the portfolio of Treasury securities, participants discussed the advantages of different portfolio maturity compositions. Several participants noted that a portfolio of holdings weighted toward shorter maturities would provide greater flexibility to lengthen maturity if warranted by an economic downturn, while a couple of others noted that a portfolio with maturities that matched the outstanding Treasury market would have a more neutral effect on the market. With regard to the MBS portfolio, participants noted that the passive runoff of MBS holdings through principal paydowns would continue for many years after the size of the balance sheet had been normalized. Several participants commented on the possibility of reducing agency MBS holdings somewhat more quickly than the passive approach by implementing a program of very gradual MBS sales sometime after the size of the balance sheet had been normalized. Participants expected to continue their discussion of long-run implementation frameworks and related issues at upcoming meetings. They reiterated the importance of communicating clearly on the rationale for any decision made on the implementation framework. Developments in Financial Markets and Open Market Operations The SOMA manager reviewed developments in financial markets over the intermeeting period. Asset prices were volatile in recent weeks, reportedly reflecting a pullback from risk-taking by investors. In part, the deterioration in risk sentiment appeared to stem importantly from uncertainty about the state of trade negotiations between China and the United States. In addition, investors pointed to concerns about the global growth outlook, the unsettled state of Brexit negotiations, and uncertainties about the political situation in Europe. Against this backdrop, U.S. stock prices were down nearly 8 percent on the period. Risk spreads on corporate bonds widened appreciably, with market participants reportedly focusing on the potential implications of downside risks to the U.S. economic outlook for the financial condition of companies, particularly for companies at the lower end of the investment-grade spectrum. Treasury yields declined significantly, especially at longer maturities, contributing to some flattening of the Treasury yield curve. Based on readings from Treasury Inflation-Protected Securities (TIPS), the decline in nominal Treasury yields was associated with a notable drop in inflation compensation. A sizable decline in oil prices was cited as an important factor contributing to the drop in measures of inflation compensation. The deterioration in market sentiment was accompanied by a significant downward revision in the expected path of the federal funds rate based on federal funds futures quotes. In addition, futures-based measures of policy expectations moved lower in response to speeches by Federal Reserve officials. The revision in the expected policy path was less noticeable in the Desk's survey-based measures of the expected path of the federal funds rate. Desk surveys indicated that respondents placed high odds on a further quarter-point firming in the stance of monetary policy at the December meeting, but lower than the near certainty of a rate increase reported just before previous policy firmings in 2018; survey responses anticipated that the median projected path of the federal funds rate in the Summary of Economic Projections (SEP) would show only two additional quarter-point policy firmings next year--down from the three policy firmings in the median path in the September SEP results. The deputy manager followed with a discussion of money market developments and open market operations. After a fast narrowing of the spread between the IOER rate and the EFFR before the November meeting, the EFFR had remained stable at, or just 1 basis point below the level of the IOER rate since then. Some upward pressures on overnight rates were evident in the repurchase agreement (repo) market, apparently from higher issuance of Treasury bills and an associated expansion of primary dealer inventories over the intermeeting period. Banks expanded their lending in repo markets in light of higher repo rates relative to the IOER rate; the willingness of banks to lend in repo markets suggested that the reserve supply was still ample. The deputy manager noted the results of the recent Desk surveys of primary dealers and market participants indicating an increase in the median respondent's estimate of the long-run level of reserve balances to a level closer to that implied by banks' responses in the Senior Financial Officer Survey conducted in advance of the November FOMC meeting. The deputy manager also reported on paydowns on the SOMA securities holdings. Under the baseline outlook, prepayments of principal on agency MBS would remain below the $20 billion redemption cap for the foreseeable future. However, if longer-term interest rates moved substantively lower than assumed in the baseline, some modest reinvestments in MBS could occur for a few months next year concurrent with the pickup in seasonal turnover. 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 18-19 meeting indicated that labor market conditions continued to strengthen in recent months and that real GDP growth was strong. Consumer price inflation, as measured by the 12-month percentage change in the price index for personal consumption expenditures (PCE), was 2 percent in October. Survey-based measures of longer-run inflation expectations were little changed on balance. Total nonfarm payroll employment expanded further in November, and job gains were strong, on average, over recent months. The national unemployment rate remained at a very low level of 3.7 percent, and both the labor force participation rate and the employment-to-population ratio also stayed flat in November. The unemployment rates for African Americans, Asians, and Hispanics in November were below their levels at the end of the previous economic expansion. The share of workers employed part time for economic reasons was still close to the lows reached in late 2007. The rates of private-sector job openings and quits were both still at high levels in October; initial claims for unemployment insurance benefits in early December were still close to historically low levels. Total labor compensation per hour in the nonfarm business sector--a volatile measure even on a four-quarter change basis--increased 2.2 percent over the four quarters ending in the third quarter. Average hourly earnings for all employees rose 3.1 percent over the 12 months ending in November. Industrial production expanded, on net, over October and November. Output increased in the mining and utilities sectors, while manufacturing production edged down on balance. Automakers' assembly schedules suggested that production of light motor vehicles would rise in December, and new orders indexes from national and regional manufacturing surveys pointed to moderate gains in total factory output in the coming months. Household spending continued to increase at a strong pace in recent months. Real PCE growth was brisk in October, and the components of the nominal retail sales used by the Bureau of Economic Analysis to construct its estimate of PCE rose considerably in November. The pace of light motor vehicle sales edged down in November but stayed near its recent elevated level. Key factors that influence consumer spending--including ongoing 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 relatively upbeat through early December. Real residential investment appeared to be declining further in the fourth quarter, likely reflecting in part the effects of the rise in mortgage interest rates over the past year on the affordability of housing. Starts of new single-family homes decreased in October and November, although starts of multifamily units rose sharply in November. Building permit issuance for new single-family homes, which tends to be a good indicator of the underlying trend in construction of such homes, moved down modestly over recent months. Sales of new homes declined markedly in October, although existing home sales increased modestly. Growth in real private expenditures for business equipment and intellectual property looked to be picking up solidly in the fourth quarter after moderating in the previous quarter. Nominal shipments of nondefense capital goods excluding aircraft moved up in October. Forward-looking indicators of business equipment spending--such as a rising backlog of unfilled orders for nondefense capital goods excluding aircraft and upbeat readings on business sentiment--pointed to further spending gains in the near term. Nominal business expenditures for nonresidential structures outside of the drilling and mining sector declined modestly in October, while 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 November through early December. Total real government purchases appeared to be rising moderately in the fourth quarter. Nominal defense spending in October and November pointed to solid growth in real federal purchases. Real purchases by state and local governments looked to be only edging up, as nominal construction spending by these governments rose solidly in October but their payrolls declined a little in October and November. The nominal U.S. international trade deficit widened slightly in October. Exports declined a little, with decreases in exports of agricultural products and capital goods, although exports of industrial supplies increased. Imports rose a bit, with increases in imports of consumer goods and automotive products, but imports of capital goods declined sharply from September's elevated level. Available trade data suggested that the contribution of the change in net exports to the rate of real GDP growth in the fourth quarter would be much less negative than the drag of nearly 2 percentage points in the third quarter. Total U.S. consumer prices, as measured by the PCE price index, increased 2 percent over the 12 months ending in October. 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 2.2 percent over the 12 months ending in November, and core CPI inflation was also 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 continued at a moderate pace in the third quarter, as a pickup in emerging market economies (EMEs) roughly offset slowing growth in advanced foreign economies (AFEs). Among EMEs, growth in Mexico and Brazil bounced back from transitory second-quarter weakness, more than offsetting a slowdown in China and India. The softness in AFE growth partly reflected temporary factors, including disruptions from natural disasters in Japan and the adoption of new car emissions testing in Germany. Indicators for economic activity in the fourth quarter were consistent with continued moderate foreign economic growth. Foreign inflation fell in recent months, largely reflecting a significant drag from lower oil prices. Underlying inflation pressures, especially in some AFEs, remained muted. Staff Review of the Financial Situation Investors' perceptions of downside risks to the domestic and global outlook appeared to increase over the intermeeting period, reportedly driven in part by signs of slowing in foreign economies and growing concerns over escalating trade frictions. Both nominal U.S. Treasury yields and U.S. equity prices declined notably over the period. Financing conditions for businesses and households tightened a bit but generally remained supportive of economic growth. Remarks by Federal Reserve officials over the intermeeting period were interpreted by market participants as signaling a shift in the stance of policy toward a more gradual path of federal funds rate increases. The market- implied path for the federal funds rate for 2019 and 2020 shifted down markedly, while the market-implied probability for a rate hike at the December FOMC meeting declined slightly though remained high. Nominal Treasury yields fell considerably over the period, with the declines most pronounced in longer-dated maturities and contributing to a flattening of the yield curve. The spread between 10- and 2-year nominal Treasury yields narrowed to near the 20th percentile of its distribution since 1971. Investor perceptions of increased downside risks to the outlooks for domestic and foreign economic growth, including growing concerns over trade frictions between the United States and China, reportedly weighed on yields. Measures of inflation compensation derived from TIPS also decreased notably over the period along with the declines in oil prices. Concerns over escalating trade tensions, global growth prospects, and the sustainability of corporate earnings growth were among the factors that appeared to contribute to a significant drop in U.S. equity prices. The declines were largest in the technology and retail sectors. One-month option-implied volatility on the S&P 500 index--the VIX--increased over the period and corporate credit spreads widened, consistent with the selloff in equities. Over the intermeeting period, foreign financial markets were affected by perceived increases in downside risks to the global growth outlook and ongoing uncertainty about trade relations between the United States and China. Investors also focused on the state of negotiations over Brexit and the Italian government budget deficit. Equity markets in AFEs posted notable declines, and Europe-dedicated bond and equity funds reported strong outflows. Equity declines in EMEs were more modest, and emerging market funds received modest inflows on net. AFE sovereign yields declined significantly, reflecting decreases in U.S. bond yields and weaker-than-expected euro-area and U.K. economic data. Measures of inflation compensation generally fell, partly reflecting sharp decreases in oil prices. Spreads of Italian sovereign yields over German counterparts narrowed amid progress on budget negotiations between the Italian government and the European Commission. The U.S. dollar appreciated modestly; although declines in U.S. yields weighed on the dollar, deteriorating global risk sentiment provided support. Ongoing uncertainty about the passage of a Brexit withdrawal agreement put downward pressure on the exchange value of the British pound. Short-term funding markets functioned smoothly over the intermeeting period. Elevated levels of Treasury bills outstanding have continued to put upward pressure on money market rates. The EFFR held steady at or very close to the level of the IOER rate, while take-up in the overnight reverse repo facility remained near historically low levels. In offshore funding markets, the one-month foreign exchange swap basis for most major currencies increased, consistent with typical year-end pressures. Financing conditions for nonfinancial firms remained accommodative, on net, though funding conditions for capital markets tightened somewhat as spreads on nonfinancial corporate bonds widened to near the middle of their historical distribution. Gross issuance of corporate bonds also moderated in November, driven by a significant step-down in speculative-grade bond issuance, while institutional leveraged loan issuance also slowed in November. Small business credit market conditions were little changed, and credit conditions in municipal bond markets stayed accommodative on net. Private-sector analysts revised down their projections for year-ahead corporate earnings a bit. In many cases, nonfinancial firms' earnings reports suggested that tariffs were a salient concern in the changed outlook for corporate earnings. The pace of gross equity issuance through both seasoned and initial offerings moderated, consistent with the weakness and volatility in the stock market. In the commercial real estate (CRE) sector, financing conditions remained accommodative. Commercial mortgage-backed securities (CMBS) spreads widened slightly over the intermeeting period but remained near post-crisis lows. Issuance of non-agency CMBS was stable while CRE loan growth remained strong at banks. Financing conditions in the residential mortgage market also remained accommodative for most borrowers, but the demand for mortgage credit softened. Purchase mortgage origination activity declined modestly, while refinance activity remained muted. Financing conditions in consumer credit markets also remained accommodative. Broad consumer credit grew at a solid pace through September, though October and November saw credit card growth at banks edge a bit lower on average. Conditions in the consumer asset-backed securities market remained stable over the intermeeting period with slightly higher spreads and robust issuance. Staff Economic Outlook With some stronger-than-expected incoming data on economic activity and the recent tightening in financial conditions, particularly the decline in equity prices, the U.S. economic forecast prepared by the staff for the December FOMC meeting was little revised on balance. The staff continued to expect that real GDP growth would be strong in the fourth quarter of 2018, although somewhat slower than the rapid pace of growth in the previous two quarters. Over the 2018-20 period, real GDP was forecast to rise at a rate above the staff's estimate of potential output 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 by 2020 and begin to edge up in 2021. 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 be just a touch below 2 percent in 2018, with total inflation revised down a bit because of recent declines in consumer energy prices. Core PCE price inflation was forecast to move up to 2 percent in 2019 and remain at that level through the medium term; total inflation was forecast to be a little below core inflation in 2019, reflecting projected declines in energy prices, and then to run at the same level as core inflation over the following two years. The staff's medium-term projections 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' 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 and policy assessments are described in the 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 November 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 remained low. 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 inflation for items other than food and energy remained near 2 percent. Indicators of longer-term inflation expectations were little changed on balance. In assessing the economic outlook, participants noted the contrast between the strength of incoming data on economic activity and the concerns about downside risks evident in financial markets and in reports from business contacts. Recent readings on household and business spending, inflation, and labor market conditions were largely in line with participants' expectations and indicated continued strength of the economy. By contrast, financial markets were volatile and conditions had tightened over the intermeeting period, with sizable declines in equity prices and notably wider corporate credit spreads coinciding with a continued flattening of the Treasury yield curve; in part, these changes in financial conditions appeared to reflect greater concerns about the global economic outlook. Participants also reported hearing more frequent concerns about the global economic outlook from business contacts. After taking into account incoming economic data, information from business contacts, and the tightening of financial conditions, participants generally revised down their individual assessments of the appropriate path for monetary policy and indicated either no material change or only a modest downward revision in their assessment of the economic outlook. Economic growth was expected to remain above trend in 2019 and then slow to a pace closer to trend over the medium term. Participants who downgraded their assessment of the economic outlook pointed to a variety of factors underlying their assessment, including recent financial market developments, some softening in the foreign economic growth outlook, or a more pessimistic outlook for housing-sector activity. In their discussion of the household sector, participants generally characterized real PCE growth as remaining strong. Participants pointed to a number of factors that were supporting consumer spending, including further gains in wages and household income reflecting a strong labor market, expansionary federal tax policies, still-upbeat readings on consumer sentiment, recent declines in oil prices, and household balance sheets that generally remained healthy despite tighter financial conditions. Although household spending overall was seen as strong, several participants noted continued weakness in residential investment. This weakness was attributed to a variety of factors, including increased mortgage rates and rising home prices. Reports from District contacts in the auto sector were mixed. Several participants noted that business fixed investment remained solid despite a slowdown in the third quarter, as more recent data pointed to a rebound in investment spending. Business contacts in several Districts reported robust activity through the end of 2018 and planned to follow through or expand on their current capital expenditure projects. However, contacts in a number of Districts appeared less upbeat than at the time of the November meeting, as concerns about a variety of factors--including trade policy, waning fiscal stimulus, slowing global economic growth, or financial market volatility--were reportedly beginning to weigh on business sentiment. A couple of participants commented that the recent decline in oil prices could be a sign of a weakening in global demand that could weigh on capital spending by oil production companies and affect companies providing services to the oil industry. However, a couple of participants noted that the recent oil price decline could also be associated with increasing oil supply rather than softening global demand. Contacts in the agricultural sector reported that conditions remained depressed, in part because of the effects of trade policy actions on exports and farm incomes, uncertainty about future trade agreements, and continued low commodity prices. Banks continued to report a gradual increase in agricultural loan delinquencies in recent months. Nonetheless, participants cited a few recent favorable developments, including new trade mitigation payments as well as legislative action to maintain crop insurance that was seen as reducing uncertainty. Participants agreed that labor market conditions had remained strong. Payrolls continued to grow at an above-trend rate in November, 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 November, and the labor force participation rate stayed steady, which represented an improvement relative to its gradual downward-sloping underlying trend. Several participants observed that labor force participation had been improving for low-skilled workers and for prime-age workers. A couple of participants saw scope for further improvements in the labor force participation rate relative to its historical downward trend, while a couple of others judged that there was little scope for significant further improvements. 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 using various types of nonwage incentives to attract and retain workers, while in other cases, firms were responding by raising wages. Many participants observed that, at the national level, most measures of nominal wage growth had risen and were currently at levels that were broadly in line 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, but that core inflation had edged lower in recent months. A few participants noted that the recent declines in energy prices would likely only temporarily weigh on headline inflation. Several participants remarked that longer-term TIPS-based inflation compensation had declined notably since November, concurrent with both falling oil prices and a deterioration in investor risk sentiment. A few participants pointed to the decline in longer-term inflation compensation as an indication that longer-run inflation expectations may have edged lower, while several others cited survey-based measures as suggesting that longer-run expectations likely remained anchored. Participants generally continued to view recent price developments as consistent with their expectation that inflation would remain near the Committee's symmetric 2 percent objective on a sustained basis. Although a few participants pointed to anecdotal and survey evidence indicating rising input costs and pass-through of these higher costs to consumer prices, reports from business contacts and surveys in some other Districts suggested some moderation in inflationary pressure. In their discussion of financial developments, participants agreed that financial markets had been volatile and financial conditions had tightened over the intermeeting period, as equity prices declined, corporate credit spreads widened, and the Treasury yield curve continued to flatten. Some participants commented that these developments may reflect an increased focus among market participants on tail risks such as a sharp escalation of trade tensions or could be a signal of a significant slowdown in the pace of economic growth in the future. A couple of participants noted that the tightening in financial conditions so far did not appear to be restraining real activity, although a more persistent tightening would undoubtedly weigh on business and household spending. Participants agreed to continue to monitor financial market developments and assess the implications of these developments for the economic outlook. Participants commented on a number of risks associated with their outlook for economic activity, the labor market, and inflation over the medium term. Various factors that could pose downside risks for domestic economic growth and inflation were mentioned, including the possibilities of a sharper-than-expected slowdown in global economic growth, a more rapid waning of fiscal stimulus, an escalation in trade tensions, a further tightening of financial conditions, or greater-than-anticipated negative effects from the monetary policy tightening to date. A few participants expressed concern that longer-run inflation expectations would remain low, particularly if economic growth slowed more than expected. With regard to upside risks, participants noted that the effects of fiscal stimulus could turn out to be greater than expected and the uncertainties surrounding trade tensions or the global growth outlook could be resolved favorably, leading to stronger-than-expected economic outcomes, while a couple of participants suggested that tightening resource utilization in conjunction with an increase in the ability of firms to pass through increases in input costs to consumer prices could generate undesirable upward pressure on inflation. A couple of participants pointed to risks to financial stability stemming from high levels of corporate borrowing, especially by riskier firms, and elevated CRE prices. In general, participants agreed that risks to the outlook appeared roughly balanced, although some noted that downside risks may have increased of late. 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, most 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. A few participants, however, favored no change in the target range at this meeting, judging that the absence of signs of upward inflation pressure afforded the Committee some latitude to wait and see how the data would develop amid the recent rise in financial market volatility and increased uncertainty about the global economic growth outlook. With regard to the outlook for monetary policy beyond this meeting, participants generally judged that some 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. With an increase in the target range at this meeting, the federal funds rate would be at or close to the lower end of the range of estimates of the longer-run neutral interest rate, and participants expressed that recent developments, including the volatility in financial markets and the increased concerns about global growth, made the appropriate extent and timing of future policy firming less clear than earlier. Against this backdrop, many participants expressed the view that, especially in an environment of muted inflation pressures, the Committee could afford to be patient about further policy firming. A number of participants noted that, before making further changes to the stance of policy, it was important for the Committee to assess factors such as how the risks that had become more pronounced in recent months might unfold and to what extent they would affect economic activity, and the effects of past actions to remove policy accommodation, which were likely still working their way through the economy. Participants emphasized that the Committee's approach to setting the stance of policy should be importantly guided by the implications of incoming data 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; neither the pace nor the ultimate endpoint of future rate increases was known. 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 and risks to the global outlook, on the one hand, and further indicators of tightness in labor markets and possible risks to financial stability from a prolonged period of tight resource utilization, on the other hand, were noted in this context. Participants discussed ideas for effectively communicating to the public the Committee's data-dependent approach, including options for transitioning away from forward guidance language in future postmeeting statements. Several participants expressed the view that it might be appropriate over upcoming meetings to remove forward guidance entirely and replace it with language emphasizing the data-dependent nature of policy decisions. Participants supported a plan to implement another technical adjustment to the IOER rate that would place it 10 basis points below the top of the target range for the federal funds rate. This adjustment would foster trading in the federal funds market at rates well within the FOMC's target range. 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 strong rate. Job gains had been strong, on average, in recent months, and the unemployment rate had remained low. 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 inflation for items other than food and energy remained near 2 percent. Indicators of longer-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. Though financial conditions had tightened and global growth had moderated, members generally anticipated that growth would remain above trend and the labor market would remain strong. Members judged that some 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. After assessing current conditions and the outlook for economic activity, the labor market, and inflation, members decided to raise the target range for the federal funds rate to 2-1/4 to 2-1/2 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. With regard to the postmeeting statement, members agreed to modify the phrase "the Committee expects that further gradual increases" to read "the Committee judges that some further gradual increases." The use of the word "judges" in the revised phrase was intended to better convey the data-dependency of the Committee's decisions regarding the future stance of policy; the reference to "some" further gradual increases was viewed as helping indicate that, based on current information, the Committee judged that a relatively limited amount of additional tightening likely would be appropriate. While members judged that the risks to the economic outlook were roughly balanced, they decided that recent developments warranted emphasizing that the Committee would "continue to monitor global economic and financial developments and assess their implications for the economic outlook." 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 December 20, 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 2-1/4 to 2-1/2 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 2.25 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 $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 November 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 remained low. 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 judges that some 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. The Committee judges that risks to the economic outlook are roughly balanced, but will continue to monitor global economic and financial developments and assess their implications for the economic outlook. 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 2-1/4 to 2-1/2 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, Michelle W. Bowman, Lael Brainard, Richard H. Clarida, Mary C. Daly, Loretta J. Mester, and Randal K. Quarles. 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 2.40 percent, effective December 20, 2018. The Board of Governors also voted unanimously to approve a 1/4 percentage point increase in the primary credit rate (discount rate) to 3.00 percent, effective December 20, 2018.6 It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, January 29-30, 2019. The meeting adjourned at 10:50 a.m. on December 19, 2018. Notation Vote By notation vote completed on November 28, 2018, the Committee unanimously approved the minutes of the Committee meeting held on November 7-8, 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 the discussion of financial developments and open market operations through the close of the meeting. Return to text 5. Attended Tuesday session only. Return to text 6. In taking this action, the Board approved requests to establish that rate submitted by the boards of directors of the Federal Reserve Banks of Boston, Cleveland, Richmond, Atlanta, Chicago, and San Francisco. This vote also encompassed approval by the Board of Governors of the establishment of a 3.00 percent primary credit rate by the remaining Federal Reserve Banks, effective on the later of December 20, 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 New York, Philadelphia, St. Louis, Minneapolis, Kansas City, and Dallas were informed by the Secretary of the Board's approval of their establishment of a primary credit rate of 3.00 percent, effective December 20, 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

2018-12-19

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 strong rate. Job gains have been strong, on average, in recent months, and the unemployment rate has remained low. 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 judges that some 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. The Committee judges that risks to the economic outlook are roughly balanced, but will continue to monitor global economic and financial developments and assess their implications for the economic outlook. 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 2-1/4 to 2‑1/2 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; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Mary C. Daly; Loretta J. Mester; and Randal K. Quarles. Implementation Note issued December 19, 2018

2018-11-08

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 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 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; Mary C. Daly; Loretta J. Mester; and Randal K. Quarles. Implementation Note issued November 8, 2018