(Bloomberg) -- Following are the minutes of the FederalReserve's Open Market Committee meeting that concluded Aug. 1.
A joint meeting of the Federal Open Market Committee and theBoard of Governors was held in the offices of the Board ofGovernors of the Federal Reserve System in Washington, D.C., onTuesday, July 31, 2018, at 10:00 a.m. and continued onWednesday, August 1, 2018, at 9:00 a.m.1
PRESENT:
Jerome H. Powell, Chairman
John C. Williams, Vice Chairman
Thomas I. Barkin
Raphael W. Bostic
Lael Brainard
Loretta J. Mester
Randal K. Quarles
James Bullard, Charles L. Evans, Esther L. George, EricRosengren, and Michael Strine, Alternate Members of the FederalOpen Market Committee
Patrick Harker, Robert S. Kaplan, and Neel Kashkari, Presidentsof the Federal Reserve Banks of Philadelphia, Dallas, andMinneapolis, respectively
Mark A. Gould, First Vice President, Federal Reserve Bank of SanFrancisco
James A. Clouse, Secretary
Matthew M. Luecke, Deputy Secretary
David W. Skidmore, Assistant Secretary
Michelle A. Smith, Assistant Secretary
Mark E. Van Der Weide, General Counsel
Michael Held, Deputy General Counsel
Steven B. Kamin, Economist
Thomas Laubach, Economist
David W. Wilcox, Economist
Kartik B. Athreya, Thomas A. Connors, Mary Daly, David E. Lebow,Trevor A. Reeve, Ellis W. Tallman, William Wascher, and BethAnne 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 ofGovernors
Matthew J. Eichner,2 Director, Division of Reserve BankOperations and Payment Systems, Board of Governors; Michael S.Gibson, Director, Division of Supervision and Regulation, Boardof Governors; Andreas Lehnert, Director, Division of FinancialStability, Board of Governors
Rochelle M. Edge, Deputy Director, Division of Monetary Affairs,Board of Governors
Jon Faust, Senior Special Adviser to the Chairman, Office ofBoard Members, Board of Governors
Antulio N. Bomfim, Special Adviser to the Chairman, Office ofBoard Members, Board of Governors
Joseph W. Gruber and John M. Roberts, Special Advisers to theBoard, Office of Board Members, Board of Governors
Linda Robertson, Assistant to the Board, Office of BoardMembers, Board of Governors
Christopher J. Erceg, Senior Associate Director, Division ofInternational Finance, Board of Governors; Gretchen C. Weinbach,Senior Associate Director, Division of Monetary Affairs, Boardof Governors
Ellen E. Meade, Edward Nelson, and Robert J. Tetlow, SeniorAdvisers, Division of Monetary Affairs, Board of Governors;Jeremy B. Rudd, Senior Adviser, Division of Research andStatistics, Board of Governors
John J. Stevens, Associate Director, Division of Research andStatistics, Board of Governors
Luca Guerrieri, Deputy Associate Director, Division of FinancialStability, Board of Governors
Glenn Follette and Shane M. Sherlund, Assistant Directors,Division of Research and Statistics, Board of Governors;Christopher J. Gust, Assistant Director, Division of MonetaryAffairs, Board of Governors
Penelope A. Beattie,3 Assistant to the Secretary, Office of theSecretary, Board of Governors
Etienne Gagnon,4 Section Chief, Division of Monetary Affairs,Board of Governors; Matthias Paustian,4 Section Chief, Divisionof Research and Statistics, Board of Governors
David H. Small, Project Manager, Division of Monetary Affairs,Board of Governors
Hess T. Chung,4 Group Manager, Division of Research andStatistics, Board of Governors
Andrea Ajello, Edward Herbst, and Bernd Schlusche,4 PrincipalEconomists, Division of Monetary Affairs, Board of Governors
Randall A. Williams, Senior Information Manager, Division ofMonetary Affairs, Board of Governors
James M. Trevino,4 Technology Analyst, Division of MonetaryAffairs, Board of Governors
Michael Dotsey, Beverly Hirtle, and Christopher J. Waller,Executive Vice Presidents, Federal Reserve Banks ofPhiladelphia, New York, and St. Louis, respectively
Anna Paulson, Senior Vice President, Federal Reserve Bank ofChicago
Joe Peek, Vice President, Federal Reserve Bank of Boston
Karel Mertens, Senior Economic Policy Advisor, Federal ReserveBank of Dallas
A. Lee Smith, Senior Economist, Federal Reserve Bank of KansasCity
Brent Meyer, Policy Advisor and Economist, Federal Reserve Bankof Atlanta
Cristina Arellano, Monetary Advisor, Federal Reserve Bank ofMinneapolis
Monetary Policy Options at the Effective Lower Bound
The staff provided a briefing that summarized its analysis ofthe extent to which some of the Committee's monetary policytools could provide adequate policy accommodation if, in futureeconomic downturns, the policy rate were again to becomeconstrained by the effective lower bound (ELB).5 The staffexamined simulations from the staff's FRB/US model and variousother economic models to assess the likelihood of the policyrate returning to the ELB and to evaluate how much additionalpolicy accommodation could be delivered by the current toolkit.This toolkit included threshold-based forward-guidance policies,in which the Committee communicates that the federal funds ratewill remain at the ELB until either inflation or theunemployment rate reaches a certain threshold, and balance sheetpolicies, involving increases in the size or duration of theFederal Reserve's asset holdings.
The staff's analysis indicated that under various policy rules,including those prescribing aggressive reductions in the federalfunds rate in response to adverse economic shocks, there was ameaningful risk that the ELB could bind sometime during the nextdecade. That analysis also implied that threshold-based forwardguidance and balance sheet actions could provide additionalaccommodation that could help support economic activity andmitigate disinflationary pressures in these episodes. In themodel simulations, because of unanticipated shocks and lags inthe transmission of the effects of monetary policy actions oneconomic activity and inflation, the effectiveness of monetarypolicy in general, including for-ward-guidance and balance sheetpolicies, was limited in mitigating the initial downturn in theeconomy. The staff noted that there was considerable uncertaintysurrounding the estimated effects of those policies on theeconomy; in addition, estimates of how frequently the ELB couldbind in the future differed across the models that the staffexamined.
In the discussion that followed the staff's briefing,participants generally agreed that their current toolkit couldprovide significant accommodation but expressed concern aboutthe potential limits on policy effectiveness stemming from theELB. They viewed it as a matter of prudent planning to evaluatepotential policy options in advance of such ELB events. Manyparticipants commented on the monetary policy implications ofthe ap-parent secular decline in neutral real interest rates.That decline was viewed as likely driven by various factors,including slower trend growth of the labor force andproductivity as well as increased demand for safe assets. Insuch circumstances, those participants saw monetary policy ashaving less scope than in the past to reduce the federal fundsrate in response to negative shocks. Accordingly, in their view,spells at the ELB could become more frequent and protracted thanin the past, consistent with the staff's analysis. Moreover, thesecular decline in interest rates was a global phenomenon, and acouple of participants emphasized that this decline in-creasedthe likelihood that the ELB could bind simultaneously in anumber of countries. A few other participants raised the concernthat frequent or extended ELB episodes could result inexpectations for inflation that were below the Committee'ssymmetric 2 percent objective, further limiting the scope forreductions in the federal funds rate to serve as a buffer forthe economy and increasing the likelihood of ELB episodes.Fiscal policy was viewed as a potentially important tool inaddressing a future economic downturn in which monetary policywas constrained by the ELB; however, countercyclical fiscalpolicy actions in the United States may be con-strained by thehigh and rising level of federal government debt. A couple ofparticipants saw macroprudential and regulatory policies astools that could be used to mitigate the risk of financialimbalances inducing an economic downturn in which the ELBconstrained the federal funds rate.
Participants generally agreed that both forward guidance andbalance sheet actions would be effective tools to use if thefederal funds rate were to become constrained by the ELB. In theAddendum to the Policy Normalization Principles and Plansstatement issued in June 2017, the Committee indicated that itwould be prepared to use its full range of tools, includingaltering the size and composition of its balance sheet, iffuture economic conditions were to warrant a more accommodativemonetary policy than can be achieved solely by reducing thefederal funds rate. However, participants acknowledged thatthere may be limits to the effectiveness of these tools inaddressing an ELB episode. They also emphasized that there wasconsiderable uncertainty about the economic effects of thesetools. Consistent with that view, a few participants noted thateconomic researchers had not yet reached a consensus about theeffectiveness of unconventional policies. A number ofparticipants indicated that there might be significant costsassociated with the use of unconventional policies, and thatthese costs might limit, in particular, the extent to which theCommittee should engage in large-scale asset purchases.
Participants discussed the prominent role that previouscommunications about forward guidance and balance sheet actions,in conjunction with those policy measures, had in shaping publicexpectations about the potential future use of these tools andin determining their effectiveness. In general, advancecommunications about these policies were seen as important inreinforcing public understanding of the Committee's commitmentto achieving its dual-mandate objectives. However, severalparticipants cautioned against being too specific about how theCommittee would deploy such tools. In particular, it wasdifficult to anticipate the forces that might push the economyinto a recession, and thus preserving some flexibility inresponding to an economic downturn could be appropriate.Moreover, although making multiyear commitments regarding assetpurchases or the future path of the federal funds rate couldenhance the effectiveness of these policies, such commitmentscould unduly constrain the choices of the Committee in thefuture.
While the Committee's current toolkit was judged to beeffective, participants agreed, as a matter of prudent planning,to discuss their policy options further and to broaden thediscussion to include the evaluation of potential alternativepolicy strategies for addressing the ELB. Building on theirdiscussions at previous meetings, participants suggested that anumber of possible alternatives might be worth consideration andagreed to return to this topic at future meetings. Severalparticipants indicated that it would be desirable to holdperiodic and systematic reviews in which the Committee assessedthe strengths and weaknesses of its current monetary policyframework.
Developments in Financial Markets and Open Market Operations
The manager of the System Open Market Account (SOMA) provided asummary of developments in domestic and global financial marketsover the intermeeting period. Asset prices were influenced by anumber of factors, including reports concerning trade tensionsamong the United States and its major trading partners, foreignmonetary policy developments, and data pointing to strong growthmomentum in the United States. Escalating trade tensions betweenChina and the United States prompted notable market moves,particularly in foreign exchange markets. News on an agreementbe-tween the United States and the European Union to continuetalks to resolve their trade disputes provided some support forglobal equity prices. The manager summarized recent policyannouncements by the European Central Bank (ECB) and the Bank ofJapan (BOJ). European yields moved lower following a revision ofthe ECB's forward guidance at its June meeting concerning assetpurchases and the path of short-term rates. The Japanese yieldcurve steepened following re-ports that the BOJ may facilitatean increase in longer-term interest rates. At its July meeting,the BOJ announced a number of changes with respect to forwardguidance on its policy outlook, including its intention to keepinterest rates low for an extended period. Mean-while,expectations concerning the path of monetary policy in theUnited States were little changed over the intermeeting period.Futures quotes indicated that market participants placed highodds on a further quarter-point firming in the federal fundsrate at the September FOMC meeting. Responses to the Open MarketDesk's Survey of Primary Dealers and Survey of MarketParticipants indicated that concerns about trade tensions hadnot affected the outlook for U.S. monetary policy.
The deputy manager followed with a discussion of money marketsand open market operations. Money market rates had moved up inline with the 20 basis point increase in the interest on excessreserves (IOER) rate at the June meeting. Over the daysfollowing the June FOMC meeting, the effective federal fundsrate (EFFR) moved up relative to the IOER rate, reportedlyreflecting some special factors in the federal funds market,including increased demand for overnight funding by banks inconnection with liquidity regulations and a pull-back by FederalHome Loan Banks in their lending in the federal funds market.These developments proved temporary, and the EFFR subsequentlyreturned to a level about 4 basis points below the IOER rate.The deputy manager also discussed the Desk's plans for small-value purchases of agency mortgage-backed securities (MBS). Thestaff projected that principal payments from the FederalReserve's holdings of agency MBS would fall below the FOMC'smonthly redemption cap beginning in October. If principalpayments followed this anticipated trajectory, the Desk plannedto begin conducting monthly small-value purchases of agency MBSat that time to maintain operational readiness. The deputymanager also discussed the Federal Housing Finance Agency'sSingle Security Initiative, under which Uniform Mortgage-BackedSecurities (UMBS) would be issued by both Fannie Mae and FreddieMac beginning in June 2019. The Desk planned to develop thecapability to conduct UMBS transactions and, to more efficientlymanage the portfolio, convert some portion of the SOMA'sexisting agency MBS holdings to UMBS where appropriate.
By unanimous vote, the Committee ratified the Desk's domestictransactions over the intermeeting period. There were nointervention operations in foreign currencies for the System'saccount during the intermeeting period.
Staff Review of the Economic Situation
The information reviewed for the July 31-August 1 meetingindicated that labor market conditions continued to strengthenin recent months and that real gross domestic product (GDP) roseat a strong rate in the first half of the year. Consumer priceinflation, as measured by the 12-month percentage change in theprice index for personal consumption expenditures (PCE),remained near 2 percent in June. Survey-based measures oflonger-run inflation expectations were little changed onbalance.
Total nonfarm payroll employment expanded at a strong pace againin June. The national unemployment rate moved up to 4.0 percent,but the labor force participation rate rose by a similar amount,leaving the employment-to-population ratio unchanged from May.The three-month moving averages of the unemployment rates forAfrican Americans, Asians, and Hispanics were each at or belowthe lows achieved during the previous expansion. The share ofworkers employed part time for economic reasons edged down toits lowest level since late 2007. The rate of private-sector jobopenings ticked down in May but remained elevated, while therate of quits moved higher; initial claims for unemploymentinsurance benefits continued to be low through mid-July.
Recent readings showed that increases in hourly laborcompensation stepped up modestly over the past year. Theemployment cost index for private workers in-creased 2.9 percentover the 12 months ending in June (compared with 2.4 percentover the same 12 months a year earlier), and average hourlyearnings for all employees rose 2.7 percent over that period(compared with 2.5 percent over the same 12 months a yearearlier). (Data on compensation per hour that reflected thecomprehensive revision of the national income and productaccounts by the Bureau of Economic Analysis (BEA) were notavailable at the time of the meeting.)
Total industrial production was little changed, on net, fromApril to June despite solid increases in the output of themining sector. Over the first half of the year, manufacturingproduction rose at a modest pace. Automakers' assembly schedulessuggested a sizable in-crease in light motor vehicle productionin the third quarter, and broader indicators of manufacturingproduction, such as the new orders indexes from national andregional manufacturing surveys, pointed to solid gains infactory output in the near term.
Real PCE rose briskly in the second quarter after a modest gainin the first quarter. Light motor vehicle sales maintained arobust pace in June, and indicators of vehicle demand were mixedbut generally favorable. More broadly, recent readings on keyfactors that influence consumer spending--including gains inemployment, real disposable personal income, and households' networth--continued to be supportive of solid real PCE growth inthe near term. Consumer sentiment, as measured by the Universityof Michigan Surveys of Consumers, remained upbeat in June andJuly.
Residential investment declined again in the second quarter.Starts for new single-family homes were little changed, onaverage, in May and June, but starts of multifamily unitsdeclined on net. The issuance of building permits for both typesof housing was lower in the second quarter than in the firstquarter, which suggested that starts might move lower in comingmonths. Sales of existing homes edged down in May and June,while sales of new homes moved up on balance.
Real private expenditures for business equipment andintellectual property rose at a moderate pace in the secondquarter after a strong gain in the first quarter. Nominalshipments of nondefense capital goods excluding air-craft rosein May and June, and forward-looking indicators of businessequipment spending--such as the back-log of unfilled capitalgoods orders, along with upbeat readings on business sentimentfrom national and regional surveys--continued to point to robustgains in equipment spending in the near term. Real businessexpenditures for nonresidential structures expanded at a solidpace again in the second quarter. However, the number of crudeoil and natural gas rigs in operation--an indicator of businessspending for structures in the drilling and mining sector--decreased slightly in recent weeks.
Total real government purchases rose at a faster rate in thesecond quarter than in the first. Real federal defense andnondefense purchases both increased in the second quarter. Realpurchases by state and local governments also moved higher;state and local government payrolls and construction spending bythose governments in-creased in the second quarter.
The nominal U.S. international trade deficit narrowed in May, asexports, led by agricultural products (particularly soybeans)and capital goods, increased strongly and imports increased onlymodestly. In June, however, advance data suggested that nominalgoods exports fell and imports rose. All told, the BEA estimatesthat net ex-ports made a positive contribution of about 1percentage point to real GDP growth in the second quarter aftera near-zero contribution in the first.
Total U.S. consumer prices, as measured by the PCE price index,increased 2.2 percent over the 12 months ending in June. CorePCE price inflation, which excludes changes in consumer food andenergy prices, was 1.9 percent over that same period. Theconsumer price index (CPI) rose 2.9 percent over the 12 monthsending in June, while core CPI inflation was 2.3 percent. Recentreadings on survey-based measures of longer-run inflationexpectations--including those from the Michigan survey and theDesk's Survey of Primary Dealers and Survey of MarketParticipants--were little changed on balance.
Incoming data suggested that foreign economic activity expandedat a moderate pace in the second quarter. Monthly indicatorspointed to a pickup in the pace of economic activity in mostadvanced foreign economies (AFEs) following a temporary dip inthe first quarter. However, real GDP growth remained moderate inthe euro area and appeared to have slowed notably in manyemerging market economies (EMEs), especially Mexico, from anunusually strong start to the year. Foreign inflation fell inthe second quarter, largely reflecting lower retail energy andfood price inflation. Underlying inflation pressures in mostforeign economies, especially in some AFEs, remained subdued.
Staff Review of the Financial Situation
Concerns regarding international trade policy weighed on marketsentiment at times over the intermeeting period, promptingnotable declines in some foreign equity markets but leaving onlya modest imprint on domestic asset prices on net. Meanwhile,FOMC communications were viewed by market participants asslightly less accommodative than expected, and domestic economicdata releases were seen as mixed. On balance, market-basedmeasures of the expected path of the federal funds rate throughthe end of 2019 edged up slightly. Yields on medium- and longer-term nominal Treasury securities were little changed. The broaddollar index moved up. Financing conditions for nonfinancialbusinesses and households remained supportive of economicactivity on balance.
Although the reactions of asset prices to FOMC communicationsduring the period were generally modest, market participantsreportedly interpreted the June FOMC statement and Summary ofEconomic Projections (SEP) as somewhat less accommodative thanexpected. The probability of an increase in the target range forthe federal funds rate occurring at the August FOMC meeting, asimplied by quotes on federal funds futures contracts, remainedclose to zero; the probability of an increase at the SeptemberFOMC meeting rose to about 90 percent by the end of theintermeeting period. Levels of the federal funds rate at the endof 2019 and 2020 implied by overnight index swap (OIS) ratesedged up slightly on net.
The nominal Treasury yield curve flattened somewhat during theintermeeting period. Measures of inflation compensation derivedfrom Treasury Inflation- Protected Securities were littlechanged on net.
Concerns about international trade disputes led to a slightdecline in sentiment toward some domestic risky assets early inthe period, but sentiment was buoyed later by positive corporateearnings releases for the second quarter. Broad U.S. equityprice indexes displayed mixed results since the June FOMCmeeting. Option-implied volatility on the S&P 500 index at theone-month horizon--the VIX--was little changed, on net, andremained only a bit above the very low levels that prevailedbefore early February. Over the intermeeting period, spreads ofyields on nonfinancial corporate bonds over those of comparable-maturity Treasury securities were little changed, on net, forboth investment- and speculative-grade firms. These spreadsremained low by historical standards.
Short-term funding markets functioned smoothly, and spreads ofunsecured rates over comparable-maturity OIS rates continued tonarrow during the intermeeting period. After the June FOMCmeeting, the EFFR rose around 20 basis points, in line with theincrease in the IOER rate, and traded well within the targetrange throughout the period.
The dollar appreciated against most currencies, with the notableexception of the Mexican peso, which appreciated on some easingof investor concerns around prospective economic policies of thenewly elected government. Escalating trade tensions contributedto an unusually sharp depreciation of the Chinese renminbi.Trade tensions also drove foreign equity prices lower, but therewas a modest reversal late in the intermeeting period followingan agreement between the United States and the European Union tohold off on tariff in-creases pending further negotiations. Onnet, equity prices were little changed in the AFEs, while theydeclined in the EMEs, led largely by a steep drop in China.Outflows from dedicated emerging market funds slowed, and EMEsovereign bond spreads narrowed slightly.
On balance, longer-term bond yields in the AFEs declinedslightly over the intermeeting period. ECB communicationsfollowing its June meeting were perceived as more accommodativethan expected and led to a noticeable decline in market-basedmeasures of policy rate expectations. The BOJ issued revisedforward guidance at its July meeting indicating that it intendsto maintain current low short- and long-term interest rates foran ex-tended period. Finally, the Bank of England held its pol-icy rate steady at its June meeting, but U.K. yields declinedslightly amid ongoing Brexit-related concerns as well as lower-than-expected inflation data.
Financing conditions for nonfinancial corporations continued tobe favorable over the intermeeting period. Gross issuance ofcorporate bonds and institutional leveraged loans picked up inMay and stayed strong in June, with the rise in corporate bondissuance concentrated in the investment-grade segment of themarket. Mean-while, the volume of equity issuance remainedrobust.
Growth of outstanding commercial and industrial (C&I) loans heldby banks was strong, on average, in June. Respondents to theJune Senior Loan Officer Opinion Sur-vey on Bank LendingPractices (SLOOS) reported that their institutions had easedstandards and terms on C&I loans in the second quarter, mostoften citing increased competition from other lenders andincreased ease of transacting in the secondary market as thereasons for doing so. Although some signs of deteriorationemerged over the intermeeting period, the credit quality ofnonfinancial corporations continued to be solid overall. Theratio of aggregate debt to assets in this sector stayed nearmultidecade highs. Gross issuance of municipal bonds in June wasrobust, continuing to increase from its slow start to the year.
Financing conditions for commercial real estate (CRE) remainedaccommodative. CRE loans at banks maintained solid growth overthe past several quarters, with growth shared across all threemajor CRE loan categories. On a weighted basis across all majorCRE loan categories, respondents to the June SLOOS reported thatstandards and demand for CRE loans continued to be unchanged, onthe whole, over the second quarter. Interest rate spreads oncommercial mortgage-backed securities (CMBS) were little changedover the intermeeting period and remained near their post-crisislows, while issuance of non-agency and agency CMBS maintained asolid pace in the second quarter.
Most borrowers in the residential mortgage market continued toface accommodative financing conditions. For borrowers with lowcredit scores, credit conditions continued to ease but stayedtight overall. Growth in home-purchase mortgages slowed a bit,and refinancing activity continued to be muted over the pastyear, with both developments partly reflecting the rise inmortgage rates earlier this year. Relative to the June FOMCmeeting, interest rates on 30-year conforming mortgages andyields on agency MBS were little changed.
Financing conditions in consumer credit markets were littlechanged so far this year, on balance, and remained largelysupportive of growth in household spending. Growth in consumercredit picked up in May from the more moderate pace seen earlierthis year. Despite rising interest rates, financing ratesremained low compared with historical levels, and recenthousehold surveys indicated that consumers' assessments ofbuying conditions for autos and other expensive durable goodswere generally positive. Credit supply conditions also continuedto be largely supportive of spending. A moderate net fraction ofJuly SLOOS respondents reported easing standards on auto loansover the previous three months after several quarters in whichbanks had reported tightening standards. However, a significantnet fraction of banks reportedly continued to tighten standardsfor credit card accounts.
The staff provided its latest report on potential risks tofinancial stability; the report again characterized thefinancial vulnerabilities of the U.S. financial system asmoderate on balance. This overall assessment incorporated thestaff's judgment that vulnerabilities associated with assetvaluation pressures continued to be elevated, with no majorasset class exhibiting valuations below their historicalmidpoints. Additionally, the staff judged vulnerabilities fromfinancial-sector leverage and maturity and liquiditytransformation to be low, vulnerabilities from householdleverage as being in the low-to-moderate range, andvulnerabilities from leverage in the nonfinancial businesssector as elevated.
Staff Economic Outlook
In the U.S. economic forecast prepared for this FOMC meeting,the staff continued to project that the economy would expand atan above-trend pace. Real GDP was forecast to increase in thesecond half of this year at a pace that was just a little slowerthan in the first half of the year. Over the 2018-20 period,output was projected to rise further above the staff's estimateof potential out-put, and the unemployment rate was projected todecline further below the staff's estimate of the longer-runnatural rate. However, with labor market conditions alreadytight, the staff continued to assume that the projected declinein the unemployment rate will be attenuated by a greater-than-usual cyclical improvement in the labor force participationrate. Relative to the forecast pre-pared for the June meeting,the projection for real GDP growth was revised up a little,primarily in response to stronger incoming data on householdspending. In addition, the staff continued to anticipate thatsupply constraints might restrain output growth somewhat in themedium term. The unemployment rate was projected to be a littlehigher over the next few quarters than in the previous forecast,but it was essentially unrevised there-after.
The staff forecast for total PCE price inflation in 2018 wasrevised down a little, mainly because of a slower-than-expectedincrease in consumer energy prices in the second quarter and adownward revision to the forecast for energy price inflation inthe second half of this year. The staff continued to projectthat total PCE inflation would remain near the Committee's 2percent objective over the medium term and that core PCE priceinflation would run slightly higher than total inflation overthat period because of a projected decline in consumer energyprices in 2019 and 2020.
The staff viewed the uncertainty around its projections for realGDP growth, the unemployment rate, and inflation as similar tothe average of the past 20 years. The staff saw the risks to theforecasts for real GDP growth and the unemployment rate asbalanced. On the upside, household spending and businessinvestment could expand faster over the next few years than thestaff projected, supported in part by the tax cuts enacted lastyear. On the downside, trade policies could move in a directionthat would have significant negative effects on economic growth.Another possibility was that recent fiscal policy actions couldproduce less of a boost to aggregate demand than assumed in thebaseline projection, as the current tightness of resourceutilization may result in smaller multiplier effects than wouldbe typical at other points in the business cycle. Risks to theinflation projection also were seen as balanced. The upside riskthat inflation could increase more than expected in an economythat was projected to move further above its potential wascounterbalanced by the downside risk that longer-term inflationexpectations may be lower than was assumed in the staffforecast.
Participants' Views on Current Conditions and the EconomicOutlook
In their discussion of the economic situation and the outlook,meeting participants agreed that information received since theFOMC met in June indicated that the labor market had continuedto strengthen and that economic activity had been rising at astrong rate. Job gains had been strong, on average, in recentmonths, and the unemployment rate had stayed low. Householdspending and business fixed investment had grown strongly. On a12-month basis, both overall inflation and core inflation, whichexcludes changes in food and energy prices, had remained near 2percent. Indicators of longer-term inflation expectations werelittle changed, on balance.
Participants generally noted that economic growth in the secondquarter had been strong; incoming data indicated considerablemomentum in spending by households and businesses. Severalparticipants stressed the possibility that real GDP growth inthe second quarter may have been boosted by transitory factors,including an outsized increase in U.S. exports. For the secondhalf of the year, participants generally expected that GDPgrowth would likely slow from its second-quarter rate but wouldstill exceed that of potential output. Participants noted anumber of favorable economic factors that were sup-portingabove-trend GDP growth; these included a strong labor market,stimulative federal tax and spending policies, accommodativefinancial conditions, and continued high levels of household andbusiness confidence. Participants generally viewed the risks tothe economic outlook as roughly balanced.
Reports from business contacts confirmed a robust pace ofexpansion in several sectors of the economy, including energy,manufacturing, and services. Crude oil production was reportedas having grown rapidly. In contrast to other sectors,residential construction activity appeared to have softenedsomewhat, possibly reflecting declining home affordability,higher mortgage rates, scarcity of available lots in certaincities, and delays in building approvals. However, a couple ofparticipants reported vibrancy in industrial and multifamilyconstruction activity. Business contacts in various sectors hadcited labor shortages and other supply constraints asimpediments to production. Furthermore, recent tariff in-creaseshad put upward pressure on input prices. Business contacts in afew Districts reported that uncertainty regarding trade policyhad led to some reductions or de-lays in their investmentspending. Nonetheless, a number of participants indicated thatmost businesses concerned about trade disputes had not yet cutback their capital expenditures or hiring but might do so iftrade tensions were not resolved soon. Several participantsobserved that the agricultural sector had been adverselyaffected by significant declines in crop and livestock pricesover the intermeeting period. A couple of participants notedthat this development likely partly flowed from trade tensions.
Participants agreed that labor market conditions hadstrengthened further over the intermeeting period. Pay-rolls hadgrown strongly in June, and labor market tight-ness wasreflected in recent readings on rates of private-sector jobopenings and quits and on job-to-job switching by workers.Although the unemployment rate in-creased slightly in June, thisincrease was accompanied by an uptick in the labor forceparticipation rate.
Many participants commented on the fact that measures ofaggregate nominal wage growth had so far picked up onlymodestly. Among the factors cited as containing the pickup inwage growth were low trend productivity growth, lags in theresponse of nominal wage growth to resource pressures, andimprovements in the terms of employment that were not recordedin the wage data. Alternatively, the recent pace of nominal wagegrowth might indicate continued slack in the labor market.However, some participants expected a pickup in aggregatenominal wage growth to occur before long, with a number ofparticipants reporting that wage pressures in their Districtswere rising or that firms now exhibited greater willingness togrant wage increases.
Participants noted that both overall inflation and inflation foritems other than food and energy remained near 2 percent on a12-month basis. A few participants ex-pressed increasedconfidence that the recent return of inflation to near theCommittee's longer-term 2 percent objective would be sustained.Several participants commented that increases in the prices ofparticular goods, such as those induced by the tariff increases,would likely be one source of short-term upward pressure on theinflation rate, although offsetting influences--including thenegative effects that trade developments were having onagricultural prices--were also noted. Reports from severalDistricts suggested that firms had greater scope than in therecent past to raise prices in response to strong demand orincreases in input costs, including those associated with tariffincreases and recent rises in fuel and freight expenses. Manyparticipants anticipated that, over the medium term, high levelsof resource utilization and stable inflation expectations wouldkeep inflation near 2 percent. However, some participantsobserved that inflation in recent years had shown only a weakconnection to measures of resource pressures or indicated thatthey would like to see further evidence that measures ofunderlying inflation or readings on inflation expectations wereon course to attain levels consistent with sustained achievementof the Committee's symmetric 2 percent inflation objective.Although a few participants observed that the trimmed meanmeasure of inflation calculated by the Federal Reserve Bank ofDallas was still below 2 percent, a couple noted forecasts thatthis measure would reach 2 percent by the end of the year. Someparticipants raised the concern that a prolonged period in whichthe economy operated be-yond potential could give rise toinflationary pressures or to financial imbalances that couldeventually trigger an economic downturn.
Participants commented on a number of risks and un-certaintiesassociated with their outlook for economic activity, the labormarket, and inflation over the medium term. They generallycontinued to see fiscal policy and the strengthening of thelabor market as supportive of economic growth in the near term.Some noted larger or more persistent positive effects of thesefactors as an upside risk to the outlook. A few participantsindicated, however, that a faster-than-expected fading of thefiscal impetus or a greater-than-anticipated subsequent fiscaltightening constituted a downside risk. In addition, allparticipants pointed to ongoing trade disagreements and proposedtrade measures as an important source of un-certainty and risks.Participants observed that if a large-scale and prolongeddispute over trade policies developed, there would likely beadverse effects on business sentiment, investment spending, andemployment. Moreover, wide-ranging tariff increases would alsore-duce the purchasing power of U.S. households. Furthernegative effects in such a scenario could include reductions inproductivity and disruptions of supply chains. Other downsiderisks cited included the possibility of a significant weakeningin the housing sector, a sharp in-crease in oil prices, or asevere slowdown in EMEs.
Participants remarked on the extent to which financialconditions remained supportive of economic expansion. Over theintermeeting period, only a small change in overall financialconditions occurred, with modest movements on net in equityprices and in the foreign exchange value of the dollar. Theyield curve had flattened further over the intermeeting period.
Participants who commented on financial stability noted thatasset valuations remained elevated and corporate borrowing termsremained easy. They also noted that regulatory changesintroduced in the past decade had helped to reduce thesusceptibility of the financial sector to runs and to strengthenthe capital positions of banks and other financial institutions.In discussing the capital positions of large banks, a fewparticipants emphasized that financial stability risks could bereduced if these institutions further boosted their capitalcushions while their profits are strong and the economic outlookis favorable; arguments for and against the activation of thecountercyclical capital buffer as a means of furtherstrengthening the capital positions of large banks werediscussed in this context.
In their consideration of monetary policy, participantsdiscussed the implications of recent economic and financialdevelopments for the economic outlook and the associated risksto that outlook. Participants remarked on recent above-trendgrowth in real GDP and on indicators of resource utilization.Some commented that consumer spending had been quite strong inthe second quarter, confirming their impressions that the first-quarter weakness had been temporary. Several participants alsopointed to the continued strength in business fixed investment,although the persistent weakness and the risk of a furtherslowdown in residential investment were also noted. A fewparticipants suggested there could still be some labor marketslack, citing recent increases in labor force participationrates relative to prevailing demo-graphically driven downwardtrends; the participation rate of prime-age men, in particular,was still below its previous business cycle peak. Otherparticipants judged that labor market conditions were tight,pointing to other data, including job quits and openings rates,and anecdotes from contacts.
Participants generally characterized inflation as running closeto the Committee's objective of 2 percent, and most of those whoexpressed a view indicated that recent readings on inflation hadcome in close to their expectations. Consistent with their SEPsubmissions in June, several participants remarked thatinflation, measured on a 12-month basis, was likely to movemodestly above the Committee's objective for a time. Otherspointed to some indicators suggesting that long-term inflationexpectations could be below levels consistent with theCommittee's 2 percent inflation objective.
Participants generally judged that the current stance ofmonetary policy remained accommodative, supporting strong labormarket conditions and inflation of around 2 percent.Participants agreed that it would be appropriate for theCommittee to leave the target range for the federal funds rateunchanged at this meeting.
With regard to the medium term, various participants indicatedthat information gathered since the Committee met in June hadnot significantly altered their outlook for the U.S. economy.Many participants suggested that if incoming data continued tosupport their current economic outlook, it would likely soon beappropriate to take another step in removing policyaccommodation. Participants generally expected that furthergradual in-creases in the target range for the federal fundsrate would be consistent with a sustained expansion of economicactivity, strong labor market conditions, and inflation near theCommittee's symmetric 2 percent objective over the medium term.Many participants reiterated that the actual path for thefederal funds rate would ultimately depend on the incoming dataand on how those data affect the economic outlook.
Participants discussed the economic forces and risks they saw asproviding the rationale for gradual increases in the federalfunds rate as well as scenarios that might cause them to departfrom this expected path. Among other factors, they pointed touncertainty about the appropriate level of the federal fundsrate over the longer run and to constraints on the provision ofmonetary accommodation during ELB episodes as reasons forproceeding gradually in the removal of accommodation. Someparticipants noted that stronger underlying momentum in theeconomy was an upside risk; most ex-pressed the view that anescalation in international trade disputes was a potentiallyconsequential downside risk for real activity. Some participantssuggested that, in the event of a major escalation in tradedisputes, the complex nature of trade issues, including theentire range of their effects on output and inflation, presenteda challenge in determining the appropriate monetary policyresponse.
Participants also discussed the possible implications of aflattening in the term structure of market interest rates.Several participants cited statistical evidence for the UnitedStates that inversions of the yield curve have of-ten precededrecessions. They suggested that policy-makers should pay closeattention to the slope of the yield curve in assessing theeconomic and policy outlook. Other participants emphasized thatinferring economic causality from statistical correlations wasnot appropriate. A number of global factors were seen ascontributing to downward pressure on term premiums, includingcentral bank asset purchase programs and the strong worldwidedemand for safe assets. In such an environment, an inversion ofthe yield curve might not have the significance that thehistorical record would suggest; the signal to be taken from theyield curve needed to be considered in the context of othereconomic and financial indicators.
A couple of participants commented on issues related to theoperating framework for the implementation of monetary policy,including, among other things, the implications of changes infinancial market regulations for the demand for reserves and forthe size and composition of the Federal Reserve's balance sheet.These participants judged that it would be important for theCommittee to resume its discussion of operating frameworksbefore too long. The Chairman suggested that the Committee wouldlikely resume a discussion of operating frameworks in the fall.
Many participants noted that it would likely be appropriate inthe not-too-distant future to revise the Commit-tee'scharacterization of the stance of monetary policy in itspostmeeting statement. They agreed that the statement's languagethat “the stance of monetary policy re-mains accommodative”would, at some point fairly soon, no longer be appropriate.Participants noted that the federal funds rate was moving closerto the range of estimates of its neutral level. A number ofparticipants emphasized the considerable uncertainty inestimates of the neutral rate of interest, stemming from sourcessuch as fiscal policy and large-scale asset purchase programs.Against this background, continuing to provide an explicitassessment of the federal funds rate relative to its neutrallevel could convey a false sense of precision.
Committee Policy Action
In their discussion of monetary policy for the period ahead,members judged that information received since the FOMC met inJune indicated that the labor market had continued to strengthenand that economic activity had been rising at a strong rate. Jobgains had been strong, on average, in recent months, and theunemployment rate had stayed low. Household spending andbusiness fixed investment had grown strongly.
On a 12-month basis, both overall inflation and inflation foritems other than food and energy remained near 2 per-cent.Indicators of longer-term inflation expectations were littlechanged, on balance.
Policymakers viewed the recent data as indicating that theoutlook for the economy was evolving about as they had expected.Consequently, members expected that further gradual increases inthe target range for the federal funds rate would be consistentwith sustained expansion of economic activity, strong labormarket conditions, and inflation near the Committee's symmetric2 percent objective over the medium term.
Members continued to judge that the risks to the economic out-look appeared roughly balanced.
After assessing the incoming data, current conditions, and theoutlook for economic activity, the labor market, and inflation,members agreed to maintain the target range for the federalfunds rate at 1¾ to 2 percent. They noted that the stance ofmonetary policy remained accommodative, thereby supportingstrong labor market conditions and a sustained return to 2percent inflation.
Members agreed that the timing and size of future adjustments tothe target range for the federal funds rate would depend ontheir assessments of realized and expected economic conditionsrelative to the objectives of maximum employment and 2 percentinflation. They re-iterated that this assessment would take intoaccount a wide range of information, including measures of labormarket conditions, indicators of inflation pressures andinflation expectations, and readings on financial andinternational developments.
At the conclusion of the discussion, the Committee voted toauthorize and direct the Federal Reserve Bank of New York, untilit was instructed otherwise, to exe-cute transactions in theSOMA in accordance with the following domestic policy directive,to be released at 2:00 p.m.:
“Effective August 2, 2018, the Federal Open Market Committeedirects the Desk to under-take open market operations asnecessary to maintain the federal funds rate in a target rangeof 1¾ to 2 percent, including overnight reverse repurchaseoperations (and reverse repurchase operations with maturities ofmore than one day when necessary to accommodate weekend,holiday, or similar trading conventions) at an offer-ing rate of1.75 percent, in amounts limited only by the value of Treasurysecurities held outright in the System Open Market Account thatare available for such operations and by a per-counterpartylimit of $30 billion per day.
The Committee directs the Desk to continue rolling over atauction the amount of principal payments from the FederalReserve's holdings of Treasury securities maturing during eachcalendar month that exceeds $24 billion, and to re-invest inagency mortgage-backed securities the amount of principalpayments from the Federal Reserve's holdings of agency debt andagency mortgage-backed securities received during each calendarmonth that exceeds $16 billion. Small deviations from theseamounts for operational reasons are acceptable.
The Committee also directs the Desk to engage in dollar roll andcoupon swap transactions as necessary to facilitate settlementof the Federal Reserve's agency mortgage-backed securitiestransactions.”
The vote also encompassed approval of the statement below to bereleased at 2:00 p.m.:
“Information received since the Federal Open Market Committeemet in June indicates that the labor market has continued tostrengthen and that economic activity has been rising at astrong rate. Job gains have been strong, on average, in recentmonths, and the unemployment rate has stayed low. Householdspending and business fixed investment have grown strongly. On a12-month basis, both overall inflation and inflation for itemsother than food and energy remain near 2 percent. Indicators oflonger-term inflation expectations are little changed, onbalance.
Consistent with its statutory mandate, the Committee seeks tofoster maximum employment and price stability. The Committeeexpects that further gradual increases in the target range forthe federal funds rate will be consistent with sustainedexpansion of economic activity, strong labor market conditions,and inflation near the Committee's symmetric 2 percent objectiveover the medium term. Risks to the economic outlook appearroughly balanced.
In view of realized and expected labor market conditions andinflation, the Committee decided to maintain the target rangefor the federal funds rate at 1¾ to 2 percent. The stance ofmonetary policy remains accommodative, thereby supporting stronglabor market conditions and a sustained return to 2 percentinflation.
In determining the timing and size of future adjustments to thetarget range for the federal funds rate, the Committee willassess realized and expected economic conditions relative to itsmaximum employment objective and its symmetric 2 percentinflation objective. This assessment will take into account awide range of information, including measures of labor marketconditions, indicators of inflation pressures and inflationexpectations, and readings on financial and internationaldevelopments.”
Voting for this action: Jerome H. Powell, John C. Williams,Thomas I. Barkin, Raphael W. Bostic, Lael Brainard, Esther L.George, Loretta J. Mester, and Ran-dal K. Quarles.
Voting against this action: None.
Ms. George voted as alternate member at this meeting.
Consistent with the Committee's decision to leave the targetrange for the federal funds rate unchanged, the Board ofGovernors voted unanimously to leave the interest rates onrequired and excess reserve balances un-changed at 1.95 percentand voted unanimously to approve establishment of the primarycredit rate (discount rate) at the existing level of 2½ percent,effective Au-gust 2, 2018.6
It was agreed that the next meeting of the Committee would beheld on Tuesday-Wednesday, September 25-26, 2018. The meetingadjourned at 9:45 a.m. on Au-gust 1, 2018.
Notation Vote
By notation vote completed on July 3, 2018, the Committeeunanimously approved the minutes of the Committee meeting heldon June 12-13, 2018.
James A. Clouse
Secretary
1 The Federal Open Market Committee is referenced as the “FOMC”and the “Committee” in these minutes.
2 Attended through the discussion of developments in financialmarkets and open market operations.
3 Attended Tuesday session only.
4 Attended through the discussion of monetary policy options atthe effective lower bound.
5 In the analysis, the staff assumed that the ELB was 12.5 basispoints, equal to the midpoint of the target range for thefederal funds rate from December 2008 to December 2015.
6 The second vote of the Board also encompassed approval of theestablishment of the interest rates for secondary and seasonalcredit under the existing formulas for computing such rates.
SOURCE: Federal Reserve Board
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