(Bloomberg) --
Following are the minutes of the FederalReserve's Open Market Committee meeting that concluded May 1.
The Federal Reserve Board and the Federal Open Market Committeeon Wednesday released the attached minutes of the Committeemeeting held on April 30-May 1, 2019.
Selection of Committee Officer
By unanimous vote, the Committee selected Anna Paulson to serveas Associate Economist, effective April 30, 2019, until theselection of her successor at the first regularly scheduledmeeting of the Committee in 2020.
Balance Sheet Normalization
Participants resumed their discussion of issues related tobalance sheet normalization with a focus on the long-runmaturity composition of the System Open Market Account (SOMA)portfolio. The staff presented two illustrative scenarios as away of highlighting a range of implications of different long-run target portfolio compositions. In the first scenario, thematurity composition of the U.S. Treasury securities in thetarget portfolio was similar to that of the universe ofcurrently outstanding U.S. Treasury securities (a “proportional”portfolio). In the second, the target portfolio contained onlyshorter-term securities with maturities of three years or less(a “shorter maturity” portfolio). The staff provided estimatesof the capacity that the Committee would have under eachscenario to provide economic stimulus through a maturityextension program (MEP). The staff also provided estimates ofthe extent to which term premiums embedded in longer-termTreasury yields might be affected under the two differentscenarios. Based on the staff's standard modeling framework, allelse equal, a move to the illustrative shorter maturityportfolio would put significant upward pressure on term premiumsand imply that the path of the federal funds rate would need tobe correspondingly lower to achieve the same macroeconomicoutcomes as in the baseline outlook. However, the staff notedthe uncertainties inherent in the analysis, including thedifficulties in estimating the effects of changes in SOMAholdings on longer-term interest rates and the economy moregenerally.
The staff presentation also considered illustrative gradual andaccelerated transition paths to each long-run target portfolio.Under the illustrative “gradual” transition, reinvestments ofmaturing Treasury holdings, principal payments on agencymortgage-backed securities (MBS), and purchases to accommodategrowth in Federal Reserve liabilities would be directed toTreasury securities with maturities in the long-run targetportfolio. Under the illustrative “accelerated” transition, thereinvestment of principal payments on agency MBS and purchasesto accommodate growth in Federal Reserve liabilities would bedirected to Treasury bills until the weighted average maturity(WAM) of the SOMA portfolio reached the WAM associated with thetarget portfolio. Depending on the combination of long-runtarget composition and the transition plan for arriving at thatcomposition, the staff reported that, in the illustrativescenarios, it could take from 5 years to more than 15 years forthe WAM of the SOMA portfolio to reach its long-run level.
In its Statement Regarding Monetary Policy Implementation andBalance Sheet Normalization, the Committee noted that it isprepared to adjust the size and composition of the balance sheetto achieve its macroeconomic objectives in a scenario in whichthe federal funds rate is constrained by the effective lowerbound. Against this backdrop, participants discussed thebenefits and costs of alternative long-run target portfoliocompositions in supporting the use of balance sheet policies insuch scenarios.
In their discussion of a shorter maturity portfolio, manyparticipants noted the advantage of increased capacity for theFederal Reserve to conduct an MEP, which could be helpful inproviding policy accommodation in a future economic downturngiven the secular decline in neutral real interest rates and theassociated reduced scope for lowering the federal funds rate inresponse to negative economic shocks. Several participantsviewed an MEP as a useful initial option to address a futuredownturn in which the Committee judged that it needed to employbalance sheet actions to provide appropriate policyaccommodation. Participants acknowledged the staff analysissuggesting that creating space to conduct an MEP by moving to ashorter maturity portfolio composition could boost term premiumsand result in a lower path for the federal funds rate, reducingthe capacity to ease financial conditions with adjustments inshort term rates. A number of participants noted, however, thatthe estimates of the effect of a move to a shorter maturityportfolio composition on the long-run neutral federal funds rateare subject to substantial uncertainty and are based on a numberof strong modeling assumptions. For example, estimates of termpremium effects based on experience during the crisis couldoverstate the effects that would be associated with a gradualevolution of the composition of the SOMA portfolio. In addition,a shift in the composition of the SOMA portfolio could result inchanges in the supply of securities that would tend to offsetupward pressure on term premiums. Nonetheless, otherparticipants expressed concern about the potential that ashorter maturity portfolio composition could result in a lowerlong-run neutral federal funds rate. Moreover, while a shortermaturity portfolio would provide substantial capacity to conductan MEP, some participants raised questions about theeffectiveness of MEPs as a policy tool relative to that of thefederal funds rate or other unconventional policy tools. Theseparticipants noted that, in a situation in which it would beappropriate to employ unconventional policy tools, they likelywould prefer to employ forward guidance or large-scale purchasesof assets ahead of an MEP. In the view of these participants,the potential benefit of transitioning to a shorter maturitySOMA composition in terms of increased ability to conduct an MEPmight not be worth the potential costs.
In their discussion of a proportional portfolio composition,participants observed that moving to this target SOMAcomposition would not be expected to have much effect on currentstaff estimates of term premiums and thus would likely notreduce the scope for lowering the target range for the federalfunds rate target in response to adverse economic shocks. As aresult, several participants judged the proportional targetcomposition to be well aligned with the Committee's previousstatements that changes in the target range for the federalfunds rate are the primary means by which the Committee adjuststhe stance of monetary policy. In addition, several participantsnoted that while the staff analysis suggested a proportionalportfolio would not contain as much capacity to conduct an MEPas a shorter maturity portfolio, it still would containmeaningful capacity along these lines. Some participants notedthat a proportional portfolio would also help maintain thetraditional separation between the Federal Reserve's decisionsregarding the composition of the SOMA portfolio and the maturitycomposition of Treasury debt held by the private sector.However, a number of participants judged that it would bedesirable to structure the SOMA portfolio in a way that wouldprovide more capacity to conduct an MEP than in the proportionalportfolio. In addition, a couple of participants noted that ashorter maturity portfolio would maintain a narrow gap betweenthe average maturity of the assets in the SOMA portfolio and theshort average maturity of the Federal Reserve's primaryliabilities.
Participants also discussed the financial stability implicationsthat could be associated with alternative long-run targetportfolio compositions. A couple of participants noted that aproportional portfolio could imply a relatively flat yieldcurve, which could result in greater incentives for “reach foryield” behavior in the financial system. That said, a fewparticipants noted that a shorter maturity portfolio couldaffect financial stability risks by increasing the incentivesfor the private sector to issue short-term debt. A couple ofparticipants judged that financial market functioning might beadversely affected if the holdings in the shorter maturityportfolio accounted for too large a share of total shortermaturity Treasury securities outstanding.
In discussing the transition to the desired long-run SOMAportfolio composition, several participants noted that a gradualpace of transition could help avoid unwanted effects onfinancial conditions. However, participants observed that thegradual transition paths described in the staff presentationwould take many years to complete. Against this backdrop, a fewparticipants discussed the possibility of following some type ofaccelerated transition, perhaps including sales of the SOMA'sresidual holdings of agency MBS. In addition, severalparticipants suggested that the Committee could communicate itsplans about the SOMA portfolio composition in terms of a desiredchange over an intermediate horizon rather than a specific long-run target. Several participants expressed the view that adecision regarding the long-run composition of the portfoliowould not need to be made for some time, and a couple ofparticipants highlighted the importance of making such adecision in the context of the ongoing review of the FederalReserve's monetary policy strategies, tools, and communicationspractices. Some participants noted the importance of developingan effective communication plan to describe the Committee'sdecisions regarding the long-run target composition for the SOMAportfolio and the transition to that target composition.
Developments in Financial Markets and Open Market Operations
The manager of the SOMA reviewed developments in financialmarkets over the intermeeting period. In the United States,prices for equities and other risk assets reportedly were buoyedby perceptions of an accommodative stance of monetary policy,incoming economic data pointing to continued solid economicexpansion, and some signs of receding downside risks to theglobal outlook. Treasury yields declined over the period, addingto their substantial drop since September, and the expected pathof the federal funds rate as implied by futures prices shifteddown as well. Market participants attributed these moves in partto FOMC communications indicating that the Committee wouldcontinue to be patient in evaluating the need for any furtheradjustments of the target range for the federal funds rate.Softer incoming data on inflation may also have contributed tothe downward revision in the expected path of policy. Nearly allrespondents on the Open Market Desk's latest surveys of primarydealers and market participants anticipated that the federalfunds target range would be unchanged for the remainder of theyear. In reviewing global developments, the manager noted thatmarket prices appeared to reflect perceptions of improvedeconomic prospects in China. However, investors reportedlyremained concerned about the economic outlook for Europe and theUnited Kingdom.
The manager also reported on developments related to open marketoperations. In light of the declines in interest rates sinceNovember last year, principal payments on the Federal Reserve'sholdings of agency MBS were projected to exceed the $20 billionredemption cap by a modest amount sometime this summer. Asdirected by the Committee, any principal payments received onagency MBS in excess of the cap would be reinvested in agencyMBS. The Desk planned to conduct any such operations bypurchasing uniform MBS rather than Fannie Mae and Freddie Macsecurities. Consistent with the Balance Sheet NormalizationPrinciples and Plans released following the March meeting,reinvestments of maturing Treasury securities beginning on May 2would be based on a cap on monthly Treasury redemptions of $15billion--down from the $30 billion monthly redemption cap thathad been in place since October of last year.
The deputy manager reviewed developments in domestic moneymarkets. Reserve balances declined by $150 billion over theintermeeting period and reached a low point of just below $1.5trillion on April 23. The decline in reserves stemmed from areduction in the SOMA's agency MBS and Treasury holdings of $46billion, reducing the SOMA portfolio to $3.92 trillion, and froma shift in the composition of liabilities, predominantly relatedto the increase in the Treasury General Account (TGA).
The TGA was volatile during the intermeeting period. In earlyApril, the Treasury reduced bill issuance and allowed the TGAbalance to fall in anticipation of individual tax receipts. Astax receipts arrived after the tax date, the TGA rose to morethan $400 billion, resulting in a sharp decline in reserves overthe last two weeks of April. Against this backdrop, thedistribution of rates on traded volumes in overnight unsecuredmarkets 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 toincrease short-term borrowing, particularly through Federal HomeLoan Bank (FHLB) advances and in the federal funds market.Although some banks continued to hold large quantities ofreserves, other banks were operating with reserve balancescloser to their lowest comfortable levels as reported in themost recent Senior Financial Officer Survey. This distributionof reserves may have contributed to somewhat more sustainedupward pressure on the federal funds rate than had beenexperienced in recent years around tax-payment dates. Inaddition, 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 inrepo lending by those funds. Elevated repo rates contributed toupward pressure on the federal funds rate, as FHLBs reportedlyshifted some of their liquidity investments out of federal fundsand into the repo market. In addition, some market participantspointed to heightened demand for federal funds at month end bysome banks in connection with their efforts to meet liquiditycoverage ratio requirements as contributing to upward pressureon the federal funds rate.
The deputy manager also discussed a staff proposal in which theBoard would implement a 5 basis point technical adjustment tothe Interest on Required Reserves (IORR) and IOER rates. Theproposed action would bring these rates to 15 basis points belowthe top of the target range for the federal funds rate and 10basis points above the bottom of the range and the overnightreverse repurchase agreement (ON RRP) offer rate. As with theprevious technical adjustments in June and December 2018, theproposed adjustment was intended to foster trading in thefederal funds market well within the target range established bythe FOMC.
A technical adjustment would reduce the spread between the IOERrate and the ON RRP offering rate to 10 basis points, thesmallest since the introduction of the ON RRP facility. Thestaff judged that the narrower spread did not pose a significantrisk of increased take-up at the ON RRP facility because reporates had been trading well above the ON RRP offer rate for sometime. However, if it became appropriate in the future to furtherlower the IOER rate, the staff noted that the Committee mightwish to first consider where to set the ON RRP offer raterelative to the target range for the federal funds rate tomitigate this risk.
The manager concluded the briefing on financial marketdevelopments and open market operations with a review of therole of standing swap lines in supporting financial stability.He recommended that the Committee vote to renew these swap linesat this meeting following the usual annual schedule.
The Committee voted unanimously to renew the reciprocal currencyarrangements with the Bank of Canada and the Bank of Mexico;these arrangements are associated with the Federal Reserve'sparticipation in the North American Framework Agreement of 1994.In addition, the Committee voted unanimously to renew the dollarand foreign currency liquidity swap arrangements with the Bankof Canada, the Bank of England, the Bank of Japan, the EuropeanCentral Bank, and the Swiss National Bank. The votes to renewthe Federal Reserve's participation in these standingarrangements occur annually at the April or May FOMC meeting.
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 available for the April 30-May 1 meetingindicated that labor market conditions remained strong and thatreal gross domestic product (GDP) increased at a solid rate inthe first quarter even as household spending and business fixedinvestment rose more slowly in the first quarter than in thefourth quarter of last year. Consumer price inflation, asmeasured by the 12-month percentage change in the price indexfor 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 werelittle changed.
Total nonfarm payroll employment recorded a strong gain inMarch, and the unemployment rate held steady at 3.8 percent. Thelabor force participation rate declined a little in March afterhaving risen, on balance, in the previous few months, and theemployment-to-population ratio edged down. The unemploymentrates for African Americans, Asians, and Hispanics in March wereat or below their levels at the end of the previous economicexpansion, though persistent differentials in unemployment ratesacross groups remained. The share of workers employed part timefor economic reasons edged up in March but was still below thelows reached in late 2007. The rate of private-sector jobopenings in February declined slightly from the elevated levelthat prevailed for much of the past year, while the rate ofquits was unchanged at a high level; the four-week movingaverage of initial claims for unemployment insurance benefitsthrough mid-April was near historically low levels. Averagehourly earnings for all employees rose 3.2 percent over the 12months ending in March, a somewhat faster pace than a yearearlier. The employment cost index for private-sector workersincreased 2.8 percent over the 12 months ending in March, thesame as a year earlier.
Industrial production edged down in March and for the firstquarter overall. Manufacturing output declined moderately in thefirst quarter, primarily reflecting a decrease in the output ofmotor vehicles and parts; outside of motor vehicles and parts,manufacturing production was little changed. Mining outputdeclined, on net, over the three months ending in March.Automakers' assembly schedules suggested that the production oflight motor vehicles would move up in the near term, and neworders indexes from national and regional manufacturing surveyspointed to modest gains in overall factory output in the comingmonths. However, industry news indicated that aircraftproduction would slow in the second quarter.
Consumer expenditures slowed in the first quarter, but monthlydata suggested some improvement toward the end of the quarter.Real PCE increased at a robust pace in March after having beenunchanged in February, perhaps partly reflecting a delay in taxrefunds from February into March that was due, in part, to thepartial government shutdown. Similarly, sales of light motorvehicles rose sharply in March, although the average pace ofsales in the first quarter was slower than in the fourthquarter. Key factors that influence consumer spending--including a low unemployment rate, ongoing gains in real laborcompensation, and still elevated measures of households' networth--were supportive of solid near-term gains in consumerexpenditures. In addition, consumer sentiment, as measured bythe University of Michigan Surveys of Consumers, edged down inApril but was still upbeat. The staff reported preliminaryanalysis of the levels of and trends in average household wealthby racial and ethnic groups as measured by the Federal ReserveBoard's Distributional Financial Accounts initiative.
Real residential investment declined at a slower rate in thefirst quarter than it did over the course of 2018. After anappreciable uptick in January, starts of new single-family homesfell in February and were little changed in March. Meanwhile,starts of multifamily units rose in February and stayed at thatlevel in March. Building permit issuance for new single-familyhomes--which tends to be a good indicator of the underlyingtrend in construction of such homes--declined a little inFebruary and March. Sales of both new and existing homesincreased, on net, over the February-and-March period.
Growth in real private expenditures for business equipment andintellectual property slowed in the first quarter, reflectingboth a slower increase in transportation equipment spendingafter a strong fourth-quarter gain and a decline in spending onother types of equipment outside of high tech. Nominal shipmentsof nondefense capital goods excluding aircraft were littlechanged, on net, in February and March, but they rose for thequarter as a whole. Forward-looking indicators of businessequipment spending pointed to sluggish increases in the nearterm. Orders for nondefense capital goods excluding aircraftincreased noticeably in March but were only a little above thelevel of shipments, and readings on business sentiment improveda bit but were still softer than last year. Real businessexpenditures for nonresidential structures outside of thedrilling and mining sector increased somewhat in the firstquarter after having declined for several quarters. Investmentin drilling and mining structures moved down in the firstquarter, and the number of crude oil and natural gas rigs inoperation-- an indicator of business spending for structures inthe drilling and mining sector--declined, on net, from mid-Marchthrough late April.
Total real government purchases increased in the first quarter.Real purchases by the federal government were unchanged, as arelatively strong increase in defense purchases was offset by adecline in nondefense purchases stemming from the effects of thepartial federal government shutdown. Real purchases by state andlocal governments increased briskly; payrolls of thosegovernments expanded solidly in the first quarter, and nominalstate and local construction spending rose markedly.
The nominal U.S. international trade deficit narrowedsignificantly in January and a touch more in February. Afterdeclining in December, the value of U.S. exports rose in Januaryand February. However, the average dollar value of exports inthe first two months of the year was only slightly above itsfourth-quarter value. Imports fell in January before edging atouch higher in February, with the average of the two monthsdeclining relative to the fourth quarter. The Bureau of EconomicAnalysis estimated that the contribution of net exports to realGDP 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. Thisincrease was somewhat slower than a year earlier, as core PCEprice inflation (which excludes changes in consumer food andenergy prices) slowed to 1.6 percent, consumer food priceinflation was a bit below core inflation, and consumer energyprices were little changed. The trimmed-mean measure of PCEprice inflation constructed by the Federal Reserve Bank ofDallas was 2.0 percent over that 12-month period. The consumerprice index (CPI) rose 1.9 percent over the 12 months ending inMarch, while core CPI inflation was 2.0 percent. Recent readingson survey-based measures of longer-run inflation expectations--including those from the Michigan survey, the Survey ofProfessional Forecasters, and the Desk's Survey of PrimaryDealers and Survey of Market Participants--were little changed.
Foreign economic growth in the first quarter was mixed. Amongthe emerging market economies (EMEs), real GDP contracted inSouth Korea and Mexico, but activity in China strengthened,supported by tax cuts and the easing of credit conditions. Inthe advanced foreign economies, economic indicators weredownbeat in Japan but elsewhere pointed to some improvement froma weak fourth quarter; GDP growth rebounded in the euro area andalso appeared to pick up in Canada and the United Kingdom.Foreign inflation slowed further early this year, partlyreflecting lower retail energy prices.
Staff Review of the Financial Situation
Investor sentiment continued to improve over the intermeetingperiod. Broad equity price indexes rose notably and corporatebond spreads narrowed amid a decline in market volatility, andfinancing conditions for businesses and households also eased.Market participants cited more accommodative than expectedmonetary policy communications coupled with strong U.S. andChinese data releases and positive sentiment about tradenegotiations between the United States and China as factors thatcontributed to these developments.
Communications following the March FOMC meeting were generallyviewed by investors as having a more accommodative tone thanexpected. The market-implied path for the federal funds rateshifted downward modestly, on net, resulting in a flat toslightly downward sloping expected path of the policy rate overthe next few FOMC meetings. Market participants assigned greaterprobability to a lower target range of the federal funds ratethan 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 ofthe future path of the policy rate in the Summary of EconomicProjections, recent communications suggesting a patient approachto monetary policy, and weaker-than-expected euro-area datareleases early in the period among factors that contributed tothis decrease. These factors reportedly outweighed stronger-than-expected economic data releases for the United States andChina and optimism related to trade negotiations between the twocountries later in the period. Measures of inflationcompensation based on Treasury Inflation Protected Securitieswere changed little, on net, and remained below their early fall2018 levels.
Major U.S. equity price indexes increased over the intermeetingperiod, with the S&P 500 equity index returning to the levels itreached 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 orinverted yield curve on bank profits; bank stocks subsequentlyretraced this decline partly in response to strong first-quarterearnings at some of the largest U.S. banks, ending the period abit 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 overyields of comparable-maturity Treasury securities narrowed.
Conditions in short-term funding markets remained stable duringthe intermeeting period. The EFFR rose to 5 basis points abovethe IOER rate after the federal income tax deadline on April 15.While a similar dynamic occurred around previous tax dates, themagnitude of the change was larger than in previous years.Spreads on commercial paper and negotiable certificates ofdeposits changed little across the maturity spectrum.
Global sovereign yields declined along with U.S. Treasury yieldsfollowing the March FOMC meeting. Foreign equity pricesincreased, on balance, amid optimism around trade negotiationsbetween the United States and China, stronger-than-expectedChinese data, and accommodative communications from some foreigncentral banks. Pronounced political and policy uncertainties ledto a significant tightening of financial conditions in Turkey,Argentina, and, to a lesser extent, Brazil, but spillovers toother EMEs were limited, and EME credit spreads were generallylittle changed on net.
The broad dollar index increased modestly, supported by thestrength of U.S. economic data relative to foreign data and theaccommodative tone from foreign central banks. The British pounddeclined over the intermeeting period amid protracteddiscussions ahead of the original Brexit deadline, which wasextended to October 31.
Financing conditions for nonfinancial businesses remainedgenerally accommodative during the intermeeting period. Grossissuance of corporate bonds was strong against a backdrop ofnarrower corporate spreads and improved risk sentiment. Issuanceof institutional leveraged loans increased, but refinancingvolumes were low and loans spreads remained somewhat elevated.Respondents to the April 2019 Senior Loan Officer Opinion Surveyon Bank Lending Practices (SLOOS) reported easing some key termsfor commercial and industrial (C&I) loans to large and middle-market firms. For instance, banks reported narrowing loan ratespreads, easing loan covenants, and increasing the maximum sizeand reducing the costs of credit lines to these firms. C&I loanson banks' balance sheets grew at a robust pace in the firstquarter of 2019. Gross equity issuance edged up later in theperiod and the volume of corporate bond upgrades slightlyoutpaced that of downgrades, suggesting that credit quality ofnonfinancial corporations, on balance, improved.
Financing conditions for the commercial real estate (CRE) sectorremained accommodative, and issuance of agency and non-agencycommercial mortgage backed securities grew steadily. CRE loanson banks' balance sheets continued to grow in the first quarter,albeit at a slower pace than in previous quarters. Banks in theApril SLOOS reported weaker demand across all major types of CREloans. However, they also reported tightening lending standardsfor these loans.
Financing conditions in the residential mortgage market alsoremained supportive over the intermeeting period. Home mortgagerates decreased about 5 basis points, to levels comparable with2017. Consistent with lower mortgage rates, home-purchasemortgage originations increased, reversing a yearlong decline.
Consumer credit conditions remained broadly supportive of growthin household spending, with all categories of consumer loansrecording steady growth in the first quarter. According to theApril SLOOS, commercial banks left lending standards for autoloans and other consumer loans unchanged in the first quarter.However, credit card interest rates rose and standardsreportedly tightened for some borrowers.
The staff provided an update on its assessments of potentialrisks to financial stability. The staff judged asset valuationpressures in equity and corporate debt markets to have increasedsignificantly this year, though not quite to the elevated levelsthat prevailed for much of last year. The staff also reportedthat in the leveraged loan market risk spreads had narrowed andnonprice terms had loosened further. The build-up in overallnonfinancial business debt to levels close to historical highsrelative to GDP was viewed as a factor that could amplifyadverse shocks to the business sector and the economy morebroadly. The staff continued to judge risks associated withhousehold-sector debt as moderate. Both the risks associatedwith financial leverage and the vulnerabilities related tomaturity transformation were viewed as being low, as they havebeen for some time. The staff also noted that the sustainedgrowth of lending by banks to nonbank financial firmsrepresented an increase in financial interconnectedness.
Staff Economic Outlook
The projection for U.S. economic activity prepared by the stafffor the April-May FOMC meeting was revised up on net. Real GDPgrowth was forecast to slow in the near term from its solidfirst-quarter pace, as sizable contributions from inventoryinvestment and net exports were not expected to persist. Theprojection for real GDP growth over the medium term was revisedup, primarily reflecting a lower assumed path for interestrates, a slightly higher trajectory for equity prices, andsomewhat less appreciation of the broad real dollar. The staff'slower path for interest rates reflected a methodological changein how the staff sets its assumptions about the future path forthe federal funds rate in its forecast. Real GDP was forecast toexpand at a rate above the staff's estimate of potential outputgrowth in 2019 and 2020 and then slow to a pace below potentialoutput growth in 2021. The unemployment rate was projected todecline a little further below the staff's estimate of itslonger-run natural rate and to bottom out in late 2020. Withlabor market conditions still judged to be tight, the staffcontinued to assume that projected employment gains wouldmanifest in smaller-than-usual downward pressure on theunemployment rate and in larger-than-usual upward pressure onthe labor force participation rate.
The staff's forecast for inflation was revised down slightly,reflecting some recent softer-than-expected readings on consumerprice inflation that were not expected to persist along with thestaff's assessment that the level to which inflation would tendto move in the absence of resource slack or supply shocks was abit lower in the medium term than previously assumed. As aresult, core PCE price inflation was expected to move up in thenear term but nevertheless to run just below 2 percent over themedium term. Total PCE price inflation was forecast to run a bitbelow core inflation in 2020 and 2021, reflecting projecteddeclines in energy prices.
The staff viewed the uncertainty around its projections for realGDP growth, the unemployment rate, and inflation as generallysimilar to the average of the past 20 years. The staff also sawthe risks to the forecasts for real GDP growth and theunemployment rate as roughly balanced. On the upside, householdspending and business investment could expand faster than thestaff projected, supported by the tax cuts enacted at the end of2017, still strong overall labor market conditions, favorablefinancial conditions, and upbeat consumer sentiment. On thedownside, the softening in some economic indicators since latelast year could be the leading edge of a significant slowing inthe pace of economic growth. Moreover, trade policies andforeign economic developments could move in directions that havesignificant negative effects on U.S. economic growth. Risks tothe inflation projection also were seen as balanced. The upsiderisk that inflation could increase more than expected in aneconomy that was still projected to be operating notably abovepotential for an extended period was counterbalanced by thedownside risks that recent soft data on consumer prices couldpersist and that longer-term inflation expectations may be lowerthan was assumed in the staff forecast, as well as thepossibility that the dollar could appreciate if foreign economicconditions deteriorated.
Participants' Views on Current Conditions and the EconomicOutlook
Participants agreed that labor markets had remained strong overthe intermeeting period and that economic activity had risen ata solid rate. Job gains had been solid, on average, in recentmonths, and the unemployment rate had stayed low. Participantsalso observed that growth in household spending and businessfixed investment had slowed in the first quarter. Overallinflation and inflation for items other than food and energy,both measured on a 12-month basis, had declined and were runningbelow 2 percent. On balance, market-based measures of inflationcompensation had remained low in recent months, and survey-basedmeasures of longerterm inflation expectations were littlechanged.
Participants continued to view sustained expansion of economicactivity, with strong labor market conditions, and inflationnear the Committee's symmetric 2 percent objective as the mostlikely outcomes. Participants noted the unexpected strength infirst-quarter GDP growth, but some observed that the compositionof growth, with large contributions from inventories and netexports and more modest contributions from consumption andinvestment, suggested that GDP growth in the near term wouldlikely moderate from its strong pace of last year. For this yearas a whole, a number of participants mentioned that they hadmarked up their projections for real GDP growth, reflecting, inpart, the strong first-quarter reading. Participants citedcontinuing strength in labor market conditions, improvements inconsumer confidence and in financial conditions, or diminisheddownside risks both domestically and abroad, as factors likelyto support solid growth over the remainder of the year. Someparticipants observed that, in part because of the waningimpetus from fiscal policy and past removal of monetary policyaccommodation, they expected real GDP growth to slow over themedium term, moving back toward their estimates of trend outputgrowth.
In their discussion of the household sector, participantsdiscussed recent indicators, including retail sales and lightmotor vehicle sales for March, which rose from relatively weakreadings in some previous months. Taken together, thesedevelopments suggested that the first quarter softness inhousehold spending was likely to prove temporary. With thestrong jobs market, rising incomes, and upbeat consumersentiment, growth in PCE in coming months was expected to besolid. Several participants also noted that while the housingsector had been a drag on GDP growth for some time, recent datapointed to some signs of stabilization. With mortgage rates attheir lowest levels in more than a year, a few participantsthought that residential construction could begin to makepositive contributions to GDP growth in the near term; a fewothers were less optimistic.
Participants noted that growth of business fixed investment hadmoderated in the first quarter relative to the average pacerecorded last year and discussed whether this more moderategrowth was likely to persist. A number of participants expressedoptimism that there would be continued growth in capitalexpenditures this year, albeit probably at a slower pace than in2018. Several participants observed that financial conditionsand business sentiment had continued to improve, consistent withreports from business contacts in a number of Districts;however, a few others reported less buoyant business sentimentMany participants suggested that their own concerns from earlierin the year about downside risks from slowing global economicgrowth and the deterioration in financial conditions or similarconcerns expressed by their business contacts had abated to someextent. However, a few participants noted that ongoingchallenges in the agricultural sector, including thoseassociated with trade uncertainty and low prices, had beenexacerbated by severe flooding in recent weeks.
Participants observed that inflation pressures remained mutedand that the most recent data on overall inflation, andinflation for items other than food and energy, had come inlower than expected. At least part of the recent softness ininflation could be attributed to idiosyncratic factors thatseemed likely to have only transitory effects on inflation,including unusually sharp declines in the prices of apparel andof portfolio management services. Some research suggests thatidiosyncratic factors that largely affected acylical sectors inthe economy had accounted for a substantial portion of thefluctuations in inflation over the past couple of years.Consistent with the view that recent lower inflation readingscould be temporary, a number of participants mentioned thetrimmed mean measure of PCE price inflation, produced by theFederal Reserve Bank of Dallas, which removes the influence ofunusually large changes in the prices of individual items ineither direction; these participants observed that the trimmedmean measure had been stable at or close to 2 percent overrecent months. Participants continued to view inflation near theCommittee's symmetric 2 percent objective as the most likelyoutcome, 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-terminflation expectations could be below levels consistent with theCommittee's 2 percent target or at risk of falling below thatlevel.
Participants agreed that labor market conditions remainedstrong. Job gains in the March employment report were solid, theunemployment rate remained low, and, while the labor forceparticipation rate moved down a touch, it remained high relativeto estimates of its underlying demographically driven, downwardtrend. Contacts in a number of Districts continued to reportshortages of qualified workers, in some cases inducingbusinesses to find novel ways to attract new workers. A fewparticipants commented that labor market conditions in theirDistricts were putting upward pressure on compensation levelsfor lower-wage jobs, although there were few reports of a broad-based pickup in wage growth. Several participants noted thatbusiness contacts expressed optimism that despite tight labormarkets they would be able to find workers or would findtechnological solutions for labor shortage problems.
Participants commented on risks associated with their outlookfor economic activity over the medium term. Some participantsviewed risks to the downside for real GDP growth as havingdecreased, partly because prospects for a sharp slowdown inglobal economic growth, particularly in China and Europe, haddiminished. These improvements notwithstanding, mostparticipants observed that downside risks to the outlook forgrowth remain.
In discussing developments in financial markets, a number ofparticipants noted that financial market conditions had improvedfollowing the period of stress observed over the fourth quarterof last year and that the volatility in prices and financialconditions had subsided. These factors were thought to havehelped buoy consumer and business confidence or to havemitigated short-term downside risks to the real economy. Moregenerally, the improvement in financial conditions was regardedby many participants as providing support for the outlook foreconomic growth and employment.
Among those participants who commented on financial stability,most highlighted recent developments related to leveraged loansand corporate bonds as well as the current high level ofnonfinancial corporate indebtedness. A few participantssuggested that heightened leverage and associated debt burdenscould render the business sector more sensitive to economicdownturns than would otherwise be the case. A couple ofparticipants suggested that increases in bank capital in currentcircumstances with solid economic growth and strong profitscould help support financial and macroeconomic stability overthe longer run. A couple of participants observed that assetvaluations in some markets appeared high, relative tofundamentals. A few participants commented on the positive rolethat the Board's semi-annual Financial Stability Report couldplay in facilitating public discussion of risks that could bepresent in some segments of the financial system.
In their discussion of monetary policy, participants agreed thatit would be appropriate to maintain the current target range forthe federal funds rate at 2¼ to 2½ percent. Participants judgedthat the labor market remained strong, and that informationreceived over the intermeeting period showed that economicactivity grew at a solid rate. However, both overall inflationand inflation for items other than food and energy had declinedand were running below the Committee's 2 percent objective. Anumber of participants observed that some of the risks anduncertainties that had surrounded their outlooks earlier in theyear had moderated, including those related to the globaleconomic outlook, Brexit, and trade negotiations. That said,these and other sources of uncertainty remained. In light ofglobal economic and financial developments as well as mutedinflation pressures, participants generally agreed that apatient approach to determining future adjustments to the targetrange for the federal funds rate remained appropriate.Participants noted that even if global economic and financialconditions continued to improve, a patient approach would likelyremain warranted, especially in an environment of continuedmoderate economic growth and muted inflation pressures.
Participants discussed the potential policy implications ofcontinued low inflation readings. Many participants viewed therecent dip in PCE inflation as likely to be transitory, andparticipants generally anticipated that a patient approach topolicy adjustments was likely to be consistent with sustainedexpansion of economic activity, strong labor market conditions,and inflation near the Committee's symmetric 2 percentobjective. Several participants also judged that patience inadjusting policy was consistent with the Committee's balancedapproach to achieving its objectives in current circumstances inwhich resource utilization appeared to be high while inflationcontinued to run below the Committee's symmetric 2 percentobjective. However, a few participants noted that if the economyevolved as they expected, the Committee would likely need tofirm the stance of monetary policy to sustain the economicexpansion and keep inflation at levels consistent with theCommittee's objective, or that the Committee would need to beattentive to the possibility that inflation pressures couldbuild quickly in an environment of tight resource utilization.In contrast, a few other participants observed that subduedinflation coupled with real wage gains roughly in line withproductivity growth might indicate that resource utilization wasnot as high as the recent low readings of the unemployment rateby themselves would suggest. Several participants commented thatif inflation did not show signs of moving up over comingquarters, there was a risk that inflation expectations couldbecome anchored at levels below those consistent with theCommittee's symmetric 2 percent objective--a development thatcould make it more difficult to achieve the 2 percent inflationobjective on a sustainable basis over the longer run.Participants emphasized that their monetary policy decisionswould continue to depend on their assessments of the economicoutlook and risks to the outlook, as informed by a wide range ofdata.
Committee Policy Action
In their discussion of monetary policy for the period ahead,members judged that the information received since the Committeemet in March indicated that the labor market remained strong andthat economic activity had risen at a solid rate. Job gains hadbeen solid, on average, in recent months, and the unemploymentrate had remained low. Growth of household spending and businessfixed investment had slowed in the first quarter. On a 12-monthbasis, overall inflation and inflation for items other than foodand energy had declined and were running below 2 percent. Onbalance, market-based measures of inflation compensation hadremained low in recent months, and survey-based measures oflongerterm inflation expectations were little changed.
In their consideration of the economic outlook, members notedthat financial conditions had improved since the turn of theyear, and many uncertainties affecting the U.S. and globaleconomic outlooks had receded, though some risks remained.Despite solid economic growth and a strong labor market,inflation pressures remained muted. Members continued to viewsustained expansion of economic activity, strong labor marketconditions, and inflation near the Committee's symmetric 2percent objective as the most likely outcomes for the U.S.economy. In light of global economic and financial developmentsand muted inflation pressures, members concurred that theCommittee could be patient as it determined what futureadjustments to the target range for the federal funds rate maybe appropriate to support those outcomes.
After assessing current conditions and the outlook for economicactivity, the labor market, and inflation, members decided tomaintain the target range for the federal funds rate at 2¼ to 2½percent. Members agreed that in determining the timing and sizeof future adjustments to the target range for the federal fundsrate, the Committee would assess realized and expected economicconditions relative to the Committee's maximum-employment andsymmetric 2 percent inflation objectives. They reiterated thatthis assessment would take into account a wide range ofinformation, including measures of labor market conditions,indicators of inflation pressures and inflation expectations,and readings on financial and international developments. Moregenerally, members noted that decisions regarding near-termadjustments of the stance of monetary policy would appropriatelyremain dependent on the evolution of the outlook as informed byincoming data.
With regard to the post-meeting statement, members agreed toremove references to a slowing in the pace of economic growthand little-changed payroll employment, consistent with strongerincoming information on these indicators. The description ofgrowth in household spending and business fixed investment inthe first quarter was revised to recognize that incoming datahad confirmed earlier information that suggested these aspectsof economic activity had slowed at that time.
Members also agreed to revise the description of inflation tonote that inflation for items other than food and energy haddeclined and was now running below 2 percent. Members observedthat a patient approach to determining future adjustments to thetarget range for the federal funds rate would likely remainappropriate for some time, especially in an environment ofmoderate economic growth and muted inflation pressures, even ifglobal economic and financial conditions continued to improve.
At the conclusion of the discussion, the Committee voted toauthorize and direct the Federal Reserve Bank of New York, untilinstructed otherwise, to execute transactions in the SOMA inaccordance with the following domestic policy directive, to bereleased at 2:00 p.m.:
“Effective May 2, 2019, the Federal Open Market Committeedirects the Desk to undertake open market operations asnecessary to maintain the federal funds rate in a target rangeof 2¼ to 2½ 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 offering rate of2.25 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.
Effective May 2, 2019, the Committee directs the Desk to rollover at auction the amount of principal payments from theFederal Reserve's holdings of Treasury securities maturingduring each calendar month that exceeds $15 billion. TheCommittee directs the Desk to continue reinvesting in agencymortgage-backed securities the amount of principal payments fromthe Federal Reserve's holdings of agency debt and agencymortgage-backed securities received during each calendar monththat exceeds $20 billion. Small deviations from these amountsfor 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 March indicates that the labor market remains strong andthat economic activity rose at a solid rate. Job gains have beensolid, on average, in recent months, and the unemployment ratehas remained low. Growth of household spending and businessfixed investment slowed in the first quarter. On a 12-monthbasis, overall inflation and inflation for items other than foodand energy have declined and are running below 2 percent. Onbalance, market-based measures of inflation compensation haveremained low in recent months, and survey-based measures oflonger-term inflation expectations are little changed.
Consistent with its statutory mandate, the Committee seeks tofoster maximum employment and price stability. In support ofthese goals, the Committee decided to maintain the target rangefor the federal funds rate at 2¼ to 2½ percent. The Committeecontinues to view sustained expansion of economic activity,strong labor market conditions, and inflation near theCommittee's symmetric 2 percent objective as the most likelyoutcomes. In light of global economic and financial developmentsand muted inflation pressures, the Committee will be patient asit determines what future adjustments to the target range forthe federal funds rate may be appropriate to support theseoutcomes.
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,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 federalfunds rate in a target range of 2¼ to 2½ percent, the Board ofGovernors voted unanimously to lower the interest rates onrequired and excess reserve balances to 2.35 percent, effectiveMay 2, 2019. Setting the interest rate paid on required andexcess reserve balances 15 basis points below the top of thetarget range for the federal funds rate was intended to fostertrading in the federal funds market at rates well within theFOMC's target range. The Board of Governors also votedunanimously to approve establishment of the primary credit rateat the existing level of 3.00 percent, effective May 2, 2019.
Update from Subcommittee on Communications Governor Claridareported on the progress of the review of the Federal Reserve'sstrategic framework for monetary policy. Fed Listens events tohear stakeholders' views on the strategy, tools, andcommunications that would best enable the Federal Reserve tomeet its statutory objectives of maximum employment and pricestability had already taken place in two Federal ReserveDistricts. Numerous additional events were planned, including aresearch conference scheduled for June at the Federal ReserveBank of Chicago. Following these public activities, theCommittee was on course to begin its deliberations about thestrategic framework at meetings in the second half of 2019.
It was agreed that the next meeting of the Committee would beheld on Tuesday-Wednesday, June 18- 19, 2019. The meetingadjourned at 9:50 a.m. on May 1, 2019.
Notation Vote
By notation vote completed on April 9, 2019, the Committeeunanimously approved the minutes of the Committee meeting heldon March 19-20, 2019. _______________________ James A. ClouseSecretary
SOURCE: Federal Reserve Board
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