Federal Reserve — FOMC Statement (USA, 2024)

1 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 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 September 17 18, 2024 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. Minutes of the Federal Open Market Committee 3 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- 4 September 17 18, 2024 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. Infl