Federal Reserve — FOMC Statement (USA, 2023)

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 Sys- tem was held in the offices of the Board of Governors on Tuesday, December 12, 2023, at 10:30 a.m. and con- tinued 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 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 through the discussion of developments in finan- cial markets and open market operations. 3 Attended through the discussion of the economic and finan- cial situation. Page 1_____________________________________________________________________________________________ Jon Faust, Senior Special Adviser to the Chair, Division Achilles Sangster II, Senior Information Manager, of Board Members, Board Division of Monetary Affairs, Board Glenn Follette, Associate Director, Division of Adam H. Shapiro, Vice President, Federal Reserve Research and Statistics, Board Bank of San Francisco Joseph W. Gruber, Executive Vice President, Federal Shane M. Sherlund, Associate Director, Division of Reserve Bank of Kansas City Research and Statistics, Board Valerie S. Hinojosa, Section Chief, Division of Nitish Ranjan Sinha, Special Adviser to the Board, Monetary Affairs, Board Division of Board Members, Board Jasper J. Hoek, Deputy Associate Director, Division of Balint Szoke, Senior Economist, Division of Monetary International Finance, Board Affairs, Board Jane E. Ihrig, Special Adviser to the Board, Division of Giorgio Topa, Economic Research Advisor, Federal Board Members, Board Reserve Bank of New York Elizabeth Klee, Senior Associate Director, Division of Clara Vega, Special Adviser to the Board, Division of Financial Stability, Board Board Members, Board David E. Lebow, Senior Associate Director, Division Annette Vissing-J rgensen, Senior Adviser, Division of of Research and Statistics, Board Monetary Affairs, Board Andreas Lehnert, Director, Division of Financial Jeffrey D. Walker,2 Associate Director, Division of 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 L pez-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 4 Attended Tuesday s session only. 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. Finan- cial conditions eased, driven by a decline in interest rates, an increase in equity prices, and a depreciation in the dol- lar. The rise in equity prices was supported by the de- cline in Treasury yields and by earnings growth that ex- ceeded consensus expectations. Implied volatility for equities diminished notably. The easing in financial con- ditions 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 matur- ities 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 Page 2Federal Open Market Committee_____________________________________________________________________________________________ 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 indicat- ing that issuance of Treasury securities was likely to be more skewed toward shorter-dated maturities than pre- viously 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 in- flation derivatives over the intermeeting period sug- gested 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 sug- gested 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 mar- ket 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 typi- cal 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 re- duction in usage of the facility. Respondents to the Desk surveys again reduced their expectations for the trajec- tory 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 monit