Federal Reserve — FOMC Statement (USA, 2021)

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 Sys- tem was held by videoconference on Tuesday, Decem- ber 14, 2021, at 9:00 a.m. and continued on Wednesday, December 15, 2021, at 9:00 a.m.1 Paulson, and William Wascher, Associate Economists Lorie K. Logan, Manager, System Open Market Account Attendance Patricia Zobel, Deputy Manager, System Open Market 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 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 James Bullard, Esther L. George, Naureen Hassan, Sally Davies, Deputy Director, Division of 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 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 L pez-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 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. 2 Attended Tuesday s session only. 3 Attended through the discussion of policy normalization considerations. 4 Attended through the discussion of policy normalization considerations and all of Wednesday s session. Page 1_____________________________________________________________________________________________ Edward Nelson and Annette Vissing-J rgensen, 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 Molloy,3 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 mar- kets responded to significant new information about the economy and monetary policy, as well as the emergence of the Omicron variant. Overall, domestic financial con- ditions tightened modestly but remained near historically accommodative levels. Expectations for an earlier re- duction 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 poten- tial drivers of the notable decline in far-forward sover- eign yields in the United States and other advanced econ- omies. 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 af- fected by social distancing was consistent with this inter- pretation. 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, expec- tations for a reduction in policy accommodation shifted forward notably. Respondents to the Open Market Page 2Federal Open Market Committee_____________________________________________________________________________________________ Desk s surveys of primary dealers and market partici- pants 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 re- spondent 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 in- dicated expectations for earlier increases in the target range than at the time of the November meeting, expec- tations 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 re- ported in the Desk surveys suggested considerable un- certainty about the path of the federal funds rate, as sur- vey 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 reduc- ing accommodation when warranted, although expecta- tions for the timing of the first decline in the balance sheet were diffuse. The manager turned next to a discussion of foreign de- velopments. Foreign policy-sensitive rates were rela- tively steady over the intermeeting period, as several cen- tral banks in advanced foreign economies (AFEs) sig- naled somewhat cautious approaches to the removal of policy accommodation. Market participants continued to focus on risks related to economic and financial de- velopments 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 Jan- uary to decline. Following the resolution, the Treasury was expected to increase bill issuance to restore the Treasury General Account to more normal levels. Mar- ket participants generally were not anticipating signifi- cant strains in m