Text of U.S. Federal Reserve’s May Meeting Minutes
Text of U.S. Federal Reserve’s May Meeting Minutes
(Bloomberg) --
Following are the minutes of the Federal
Reserve's Open Market Committee meeting that concluded May 1.
The Federal Reserve Board and the Federal Open Market Committee
on Wednesday released the attached minutes of the Committee
meeting held on April 30-May 1, 2019.
Selection of Committee Officer
By unanimous vote, the Committee selected Anna Paulson to serve
as Associate Economist, effective April 30, 2019, until the
selection of her successor at the first regularly scheduled
meeting of the Committee in 2020.
Balance Sheet Normalization
Participants resumed their discussion of issues related to
balance sheet normalization with a focus on the long-run
maturity composition of the System Open Market Account (SOMA)
portfolio. The staff presented two illustrative scenarios as a
way of highlighting a range of implications of different long-
run target portfolio compositions. In the first scenario, the
maturity composition of the U.S. Treasury securities in the
target portfolio was similar to that of the universe of
currently outstanding U.S. Treasury securities (a “proportional”
portfolio). In the second, the target portfolio contained only
shorter-term securities with maturities of three years or less
(a “shorter maturity” portfolio). The staff provided estimates
of the capacity that the Committee would have under each
scenario to provide economic stimulus through a maturity
extension program (MEP). The staff also provided estimates of
the extent to which term premiums embedded in longer-term
Treasury yields might be affected under the two different
scenarios. Based on the staff’s standard modeling framework, all
else equal, a move to the illustrative shorter maturity
portfolio would put significant upward pressure on term premiums
and imply that the path of the federal funds rate would need to
be correspondingly lower to achieve the same macroeconomic
outcomes as in the baseline outlook. However, the staff noted
the uncertainties inherent in the analysis, including the
difficulties in estimating the effects of changes in SOMA
holdings on longer-term interest rates and the economy more
generally.
The staff presentation also considered illustrative gradual and
accelerated transition paths to each long-run target portfolio.
Under the illustrative “gradual” transition, reinvestments of
maturing Treasury holdings, principal payments on agency
mortgage-backed securities (MBS), and purchases to accommodate
growth in Federal Reserve liabilities would be directed to
Treasury securities with maturities in the long-run target
portfolio. Under the illustrative “accelerated” transition, the
reinvestment of principal payments on agency MBS and purchases
to accommodate growth in Federal Reserve liabilities would be
directed to Treasury bills until the weighted average maturity
(WAM) of the SOMA portfolio reached the WAM associated with the
target portfolio. Depending on the combination of long-run
target composition and the transition plan for arriving at that
composition, the staff reported that, in the illustrative
scenarios, it could take from 5 years to more than 15 years for
the WAM of the SOMA portfolio to reach its long-run level.
In its Statement Regarding Monetary Policy Implementation and
Balance Sheet Normalization, the Committee noted that it is
prepared to adjust the size and composition of the balance sheet
to achieve its macroeconomic objectives in a scenario in which
the federal funds rate is constrained by the effective lower
bound. Against this backdrop, participants discussed the
benefits and costs of alternative long-run target portfolio
compositions in supporting the use of balance sheet policies in
such scenarios.
In their discussion of a shorter maturity portfolio, many
participants noted the advantage of increased capacity for the
Federal Reserve to conduct an MEP, which could be helpful in
providing policy accommodation in a future economic downturn
given the secular decline in neutral real interest rates and the
associated reduced scope for lowering the federal funds rate in
response to negative economic shocks. Several participants
viewed an MEP as a useful initial option to address a future
downturn in which the Committee judged that it needed to employ
balance sheet actions to provide appropriate policy
accommodation. Participants acknowledged the staff analysis
suggesting that creating space to conduct an MEP by moving to a
shorter maturity portfolio composition could boost term premiums
and result in a lower path for the federal funds rate, reducing
the capacity to ease financial conditions with adjustments in
short term rates. A number of participants noted, however, that
the estimates of the effect of a move to a shorter maturity
portfolio composition on the long-run neutral federal funds rate
are subject to substantial uncertainty and are based on a number
of strong modeling assumptions. For example, estimates of term
premium effects based on experience during the crisis could
overstate the effects that would be associated with a gradual
evolution of the composition of the SOMA portfolio. In addition,
a shift in the composition of the SOMA portfolio could result in
changes in the supply of securities that would tend to offset
upward pressure on term premiums. Nonetheless, other
participants expressed concern about the potential that a
shorter maturity portfolio composition could result in a lower
long-run neutral federal funds rate. Moreover, while a shorter
maturity portfolio would provide substantial capacity to conduct
an MEP, some participants raised questions about the
effectiveness of MEPs as a policy tool relative to that of the
federal funds rate or other unconventional policy tools. These
participants noted that, in a situation in which it would be
appropriate to employ unconventional policy tools, they likely
would prefer to employ forward guidance or large-scale purchases
of assets ahead of an MEP. In the view of these participants,
the potential benefit of transitioning to a shorter maturity
SOMA composition in terms of increased ability to conduct an MEP
might not be worth the potential costs.
In their discussion of a proportional portfolio composition,
participants observed that moving to this target SOMA
composition would not be expected to have much effect on current
staff estimates of term premiums and thus would likely not
reduce the scope for lowering the target range for the federal
funds rate target in response to adverse economic shocks. As a
result, several participants judged the proportional target
composition to be well aligned with the Committee’s previous
statements that changes in the target range for the federal
funds rate are the primary means by which the Committee adjusts
the stance of monetary policy. In addition, several participants
noted that while the staff analysis suggested a proportional
portfolio would not contain as much capacity to conduct an MEP
as a shorter maturity portfolio, it still would contain
meaningful capacity along these lines. Some participants noted
that a proportional portfolio would also help maintain the
traditional separation between the Federal Reserve’s decisions
regarding the composition of the SOMA portfolio and the maturity
composition of Treasury debt held by the private sector.
However, a number of participants judged that it would be
desirable to structure the SOMA portfolio in a way that would
provide more capacity to conduct an MEP than in the proportional
portfolio. In addition, a couple of participants noted that a
shorter maturity portfolio would maintain a narrow gap between
the average maturity of the assets in the SOMA portfolio and the
short average maturity of the Federal Reserve’s primary
liabilities.
Participants also discussed the financial stability implications
that could be associated with alternative long-run target
portfolio compositions. A couple of participants noted that a
proportional portfolio could imply a relatively flat yield
curve, which could result in greater incentives for “reach for
yield” behavior in the financial system. That said, a few
participants noted that a shorter maturity portfolio could
affect financial stability risks by increasing the incentives
for the private sector to issue short-term debt. A couple of
participants judged that financial market functioning might be
adversely affected if the holdings in the shorter maturity
portfolio accounted for too large a share of total shorter
maturity Treasury securities outstanding.
In discussing the transition to the desired long-run SOMA
portfolio composition, several participants noted that a gradual
pace of transition could help avoid unwanted effects on
financial conditions. However, participants observed that the
gradual transition paths described in the staff presentation
would take many years to complete. Against this backdrop, a few
participants discussed the possibility of following some type of
accelerated transition, perhaps including sales of the SOMA’s
residual holdings of agency MBS. In addition, several
participants suggested that the Committee could communicate its
plans about the SOMA portfolio composition in terms of a desired
change over an intermediate horizon rather than a specific long-
run target. Several participants expressed the view that a
decision regarding the long-run composition of the portfolio
would not need to be made for some time, and a couple of
participants highlighted the importance of making such a
decision in the context of the ongoing review of the Federal
Reserve’s monetary policy strategies, tools, and communications
practices. Some participants noted the importance of developing
an effective communication plan to describe the Committee’s
decisions regarding the long-run target composition for the SOMA
portfolio and the transition to that target composition.
Developments in Financial Markets and Open Market Operations
The manager of the SOMA reviewed developments in financial
markets over the intermeeting period. In the United States,
prices for equities and other risk assets reportedly were buoyed
by perceptions of an accommodative stance of monetary policy,
incoming economic data pointing to continued solid economic
expansion, and some signs of receding downside risks to the
global outlook. Treasury yields declined over the period, adding
to their substantial drop since September, and the expected path
of the federal funds rate as implied by futures prices shifted
down as well. Market participants attributed these moves in part
to FOMC communications indicating that the Committee would
continue to be patient in evaluating the need for any further
adjustments of the target range for the federal funds rate.
Softer incoming data on inflation may also have contributed to
the downward revision in the expected path of policy. Nearly all
respondents on the Open Market Desk’s latest surveys of primary
dealers and market participants anticipated that the federal
funds target range would be unchanged for the remainder of the
year. In reviewing global developments, the manager noted that
market prices appeared to reflect perceptions of improved
economic prospects in China. However, investors reportedly
remained concerned about the economic outlook for Europe and the
United Kingdom.
The manager also reported on developments related to open market
operations. In light of the declines in interest rates since
November last year, principal payments on the Federal Reserve’s
holdings of agency MBS were projected to exceed the $20 billion
redemption cap by a modest amount sometime this summer. As
directed by the Committee, any principal payments received on
agency MBS in excess of the cap would be reinvested in agency
MBS. The Desk planned to conduct any such operations by
purchasing uniform MBS rather than Fannie Mae and Freddie Mac
securities. Consistent with the Balance Sheet Normalization
Principles and Plans released following the March meeting,
reinvestments of maturing Treasury securities beginning on May 2
would be based on a cap on monthly Treasury redemptions of $15
billion--down from the $30 billion monthly redemption cap that
had been in place since October of last year.
The deputy manager reviewed developments in domestic money
markets. Reserve balances declined by $150 billion over the
intermeeting period and reached a low point of just below $1.5
trillion on April 23. The decline in reserves stemmed from a
reduction in the SOMA’s agency MBS and Treasury holdings of $46
billion, reducing the SOMA portfolio to $3.92 trillion, and from
a shift in the composition of liabilities, predominantly related
to the increase in the Treasury General Account (TGA).
The TGA was volatile during the intermeeting period. In early
April, the Treasury reduced bill issuance and allowed the TGA
balance to fall in anticipation of individual tax receipts. As
tax receipts arrived after the tax date, the TGA rose to more
than $400 billion, resulting in a sharp decline in reserves over
the last two weeks of April. Against this backdrop, the
distribution of rates on traded volumes in overnight unsecured
markets 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 to
increase short-term borrowing, particularly through Federal Home
Loan Bank (FHLB) advances and in the federal funds market.
Although some banks continued to hold large quantities of
reserves, other banks were operating with reserve balances
closer to their lowest comfortable levels as reported in the
most recent Senior Financial Officer Survey. This distribution
of reserves may have contributed to somewhat more sustained
upward pressure on the federal funds rate than had been
experienced in recent years around tax-payment dates. In
addition, 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 in
repo lending by those funds. Elevated repo rates contributed to
upward pressure on the federal funds rate, as FHLBs reportedly
shifted some of their liquidity investments out of federal funds
and into the repo market. In addition, some market participants
pointed to heightened demand for federal funds at month end by
some banks in connection with their efforts to meet liquidity
coverage ratio requirements as contributing to upward pressure
on the federal funds rate.
The deputy manager also discussed a staff proposal in which the
Board would implement a 5 basis point technical adjustment to
the Interest on Required Reserves (IORR) and IOER rates. The
proposed action would bring these rates to 15 basis points below
the top of the target range for the federal funds rate and 10
basis points above the bottom of the range and the overnight
reverse repurchase agreement (ON RRP) offer rate. As with the
previous technical adjustments in June and December 2018, the
proposed adjustment was intended to foster trading in the
federal funds market well within the target range established by
the FOMC.
A technical adjustment would reduce the spread between the IOER
rate and the ON RRP offering rate to 10 basis points, the
smallest since the introduction of the ON RRP facility. The
staff judged that the narrower spread did not pose a significant
risk of increased take-up at the ON RRP facility because repo
rates had been trading well above the ON RRP offer rate for some
time. However, if it became appropriate in the future to further
lower the IOER rate, the staff noted that the Committee might
wish to first consider where to set the ON RRP offer rate
relative to the target range for the federal funds rate to
mitigate this risk.
The manager concluded the briefing on financial market
developments and open market operations with a review of the
role of standing swap lines in supporting financial stability.
He recommended that the Committee vote to renew these swap lines
at this meeting following the usual annual schedule.
The Committee voted unanimously to renew the reciprocal currency
arrangements with the Bank of Canada and the Bank of Mexico;
these arrangements are associated with the Federal Reserve’s
participation in the North American Framework Agreement of 1994.
In addition, the Committee voted unanimously to renew the dollar
and foreign currency liquidity swap arrangements with the Bank
of Canada, the Bank of England, the Bank of Japan, the European
Central Bank, and the Swiss National Bank. The votes to renew
the Federal Reserve’s participation in these standing
arrangements occur annually at the April or May FOMC meeting.
By unanimous vote, the Committee ratified the Desk’s domestic
transactions over the intermeeting period. There were no
intervention operations in foreign currencies for the System’s
account during the intermeeting period.
Staff Review of the Economic Situation
The information available for the April 30-May 1 meeting
indicated that labor market conditions remained strong and that
real gross domestic product (GDP) increased at a solid rate in
the first quarter even as household spending and business fixed
investment rose more slowly in the first quarter than in the
fourth quarter of last year. Consumer price inflation, as
measured by the 12-month percentage change in the price index
for 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 were
little changed.
Total nonfarm payroll employment recorded a strong gain in
March, and the unemployment rate held steady at 3.8 percent. The
labor force participation rate declined a little in March after
having risen, on balance, in the previous few months, and the
employment-to-population ratio edged down. The unemployment
rates for African Americans, Asians, and Hispanics in March were
at or below their levels at the end of the previous economic
expansion, though persistent differentials in unemployment rates
across groups remained. The share of workers employed part time
for economic reasons edged up in March but was still below the
lows reached in late 2007. The rate of private-sector job
openings in February declined slightly from the elevated level
that prevailed for much of the past year, while the rate of
quits was unchanged at a high level; the four-week moving
average of initial claims for unemployment insurance benefits
through mid-April was near historically low levels. Average
hourly earnings for all employees rose 3.2 percent over the 12
months ending in March, a somewhat faster pace than a year
earlier. The employment cost index for private-sector workers
increased 2.8 percent over the 12 months ending in March, the
same as a year earlier.
Industrial production edged down in March and for the first
quarter overall. Manufacturing output declined moderately in the
first quarter, primarily reflecting a decrease in the output of
motor vehicles and parts; outside of motor vehicles and parts,
manufacturing production was little changed. Mining output
declined, on net, over the three months ending in March.
Automakers’ assembly schedules suggested that the production of
light motor vehicles would move up in the near term, and new
orders indexes from national and regional manufacturing surveys
pointed to modest gains in overall factory output in the coming
months. However, industry news indicated that aircraft
production would slow in the second quarter.
Consumer expenditures slowed in the first quarter, but monthly
data suggested some improvement toward the end of the quarter.
Real PCE increased at a robust pace in March after having been
unchanged in February, perhaps partly reflecting a delay in tax
refunds from February into March that was due, in part, to the
partial government shutdown. Similarly, sales of light motor
vehicles rose sharply in March, although the average pace of
sales in the first quarter was slower than in the fourth
quarter. Key factors that influence consumer spending--
including a low unemployment rate, ongoing gains in real labor
compensation, and still elevated measures of households’ net
worth--were supportive of solid near-term gains in consumer
expenditures. In addition, consumer sentiment, as measured by
the University of Michigan Surveys of Consumers, edged down in
April but was still upbeat. The staff reported preliminary
analysis of the levels of and trends in average household wealth
by racial and ethnic groups as measured by the Federal Reserve
Board’s Distributional Financial Accounts initiative.
Real residential investment declined at a slower rate in the
first quarter than it did over the course of 2018. After an
appreciable uptick in January, starts of new single-family homes
fell in February and were little changed in March. Meanwhile,
starts of multifamily units rose in February and stayed at that
level in March. Building permit issuance for new single-family
homes--which tends to be a good indicator of the underlying
trend in construction of such homes--declined a little in
February and March. Sales of both new and existing homes
increased, on net, over the February-and-March period.
Growth in real private expenditures for business equipment and
intellectual property slowed in the first quarter, reflecting
both a slower increase in transportation equipment spending
after a strong fourth-quarter gain and a decline in spending on
other types of equipment outside of high tech. Nominal shipments
of nondefense capital goods excluding aircraft were little
changed, on net, in February and March, but they rose for the
quarter as a whole. Forward-looking indicators of business
equipment spending pointed to sluggish increases in the near
term. Orders for nondefense capital goods excluding aircraft
increased noticeably in March but were only a little above the
level of shipments, and readings on business sentiment improved
a bit but were still softer than last year. Real business
expenditures for nonresidential structures outside of the
drilling and mining sector increased somewhat in the first
quarter after having declined for several quarters. Investment
in drilling and mining structures moved down in the first
quarter, and the number of crude oil and natural gas rigs in
operation-- an indicator of business spending for structures in
the drilling and mining sector--declined, on net, from mid-March
through late April.
Total real government purchases increased in the first quarter.
Real purchases by the federal government were unchanged, as a
relatively strong increase in defense purchases was offset by a
decline in nondefense purchases stemming from the effects of the
partial federal government shutdown. Real purchases by state and
local governments increased briskly; payrolls of those
governments expanded solidly in the first quarter, and nominal
state and local construction spending rose markedly.
The nominal U.S. international trade deficit narrowed
significantly in January and a touch more in February. After
declining in December, the value of U.S. exports rose in January
and February. However, the average dollar value of exports in
the first two months of the year was only slightly above its
fourth-quarter value. Imports fell in January before edging a
touch higher in February, with the average of the two months
declining relative to the fourth quarter. The Bureau of Economic
Analysis estimated that the contribution of net exports to real
GDP 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. This
increase was somewhat slower than a year earlier, as core PCE
price inflation (which excludes changes in consumer food and
energy prices) slowed to 1.6 percent, consumer food price
inflation was a bit below core inflation, and consumer energy
prices were little changed. The trimmed-mean measure of PCE
price inflation constructed by the Federal Reserve Bank of
Dallas was 2.0 percent over that 12-month period. The consumer
price index (CPI) rose 1.9 percent over the 12 months ending in
March, while core CPI inflation was 2.0 percent. Recent readings
on survey-based measures of longer-run inflation expectations--
including those from the Michigan survey, the Survey of
Professional Forecasters, and the Desk’s Survey of Primary
Dealers and Survey of Market Participants--were little changed.
Foreign economic growth in the first quarter was mixed. Among
the emerging market economies (EMEs), real GDP contracted in
South Korea and Mexico, but activity in China strengthened,
supported by tax cuts and the easing of credit conditions. In
the advanced foreign economies, economic indicators were
downbeat in Japan but elsewhere pointed to some improvement from
a weak fourth quarter; GDP growth rebounded in the euro area and
also appeared to pick up in Canada and the United Kingdom.
Foreign inflation slowed further early this year, partly
reflecting lower retail energy prices.
Staff Review of the Financial Situation
Investor sentiment continued to improve over the intermeeting
period. Broad equity price indexes rose notably and corporate
bond spreads narrowed amid a decline in market volatility, and
financing conditions for businesses and households also eased.
Market participants cited more accommodative than expected
monetary policy communications coupled with strong U.S. and
Chinese data releases and positive sentiment about trade
negotiations between the United States and China as factors that
contributed to these developments.
Communications following the March FOMC meeting were generally
viewed by investors as having a more accommodative tone than
expected. The market-implied path for the federal funds rate
shifted downward modestly, on net, resulting in a flat to
slightly downward sloping expected path of the policy rate over
the next few FOMC meetings. Market participants assigned greater
probability to a lower target range of the federal funds rate
than 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 of
the future path of the policy rate in the Summary of Economic
Projections, recent communications suggesting a patient approach
to monetary policy, and weaker-than-expected euro-area data
releases early in the period among factors that contributed to
this decrease. These factors reportedly outweighed stronger-
than-expected economic data releases for the United States and
China and optimism related to trade negotiations between the two
countries later in the period. Measures of inflation
compensation based on Treasury Inflation Protected Securities
were changed little, on net, and remained below their early fall
2018 levels.
Major U.S. equity price indexes increased over the intermeeting
period, with the S&P 500 equity index returning to the levels it
reached 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 or
inverted yield curve on bank profits; bank stocks subsequently
retraced this decline partly in response to strong first-quarter
earnings at some of the largest U.S. banks, ending the period a
bit 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 over
yields of comparable-maturity Treasury securities narrowed.
Conditions in short-term funding markets remained stable during
the intermeeting period. The EFFR rose to 5 basis points above
the IOER rate after the federal income tax deadline on April 15.
While a similar dynamic occurred around previous tax dates, the
magnitude of the change was larger than in previous years.
Spreads on commercial paper and negotiable certificates of
deposits changed little across the maturity spectrum.
Global sovereign yields declined along with U.S. Treasury yields
following the March FOMC meeting. Foreign equity prices
increased, on balance, amid optimism around trade negotiations
between the United States and China, stronger-than-expected
Chinese data, and accommodative communications from some foreign
central banks. Pronounced political and policy uncertainties led
to a significant tightening of financial conditions in Turkey,
Argentina, and, to a lesser extent, Brazil, but spillovers to
other EMEs were limited, and EME credit spreads were generally
little changed on net.
The broad dollar index increased modestly, supported by the
strength of U.S. economic data relative to foreign data and the
accommodative tone from foreign central banks. The British pound
declined over the intermeeting period amid protracted
discussions ahead of the original Brexit deadline, which was
extended to October 31.
Financing conditions for nonfinancial businesses remained
generally accommodative during the intermeeting period. Gross
issuance of corporate bonds was strong against a backdrop of
narrower corporate spreads and improved risk sentiment. Issuance
of institutional leveraged loans increased, but refinancing
volumes were low and loans spreads remained somewhat elevated.
Respondents to the April 2019 Senior Loan Officer Opinion Survey
on Bank Lending Practices (SLOOS) reported easing some key terms
for commercial and industrial (C&I) loans to large and middle-
market firms. For instance, banks reported narrowing loan rate
spreads, easing loan covenants, and increasing the maximum size
and reducing the costs of credit lines to these firms. C&I loans
on banks’ balance sheets grew at a robust pace in the first
quarter of 2019. Gross equity issuance edged up later in the
period and the volume of corporate bond upgrades slightly
outpaced that of downgrades, suggesting that credit quality of
nonfinancial corporations, on balance, improved.
Financing conditions for the commercial real estate (CRE) sector
remained accommodative, and issuance of agency and non-agency
commercial mortgage backed securities grew steadily. CRE loans
on banks’ balance sheets continued to grow in the first quarter,
albeit at a slower pace than in previous quarters. Banks in the
April SLOOS reported weaker demand across all major types of CRE
loans. However, they also reported tightening lending standards
for these loans.
Financing conditions in the residential mortgage market also
remained supportive over the intermeeting period. Home mortgage
rates decreased about 5 basis points, to levels comparable with
2017. Consistent with lower mortgage rates, home-purchase
mortgage originations increased, reversing a yearlong decline.
Consumer credit conditions remained broadly supportive of growth
in household spending, with all categories of consumer loans
recording steady growth in the first quarter. According to the
April SLOOS, commercial banks left lending standards for auto
loans and other consumer loans unchanged in the first quarter.
However, credit card interest rates rose and standards
reportedly tightened for some borrowers.
The staff provided an update on its assessments of potential
risks to financial stability. The staff judged asset valuation
pressures in equity and corporate debt markets to have increased
significantly this year, though not quite to the elevated levels
that prevailed for much of last year. The staff also reported
that in the leveraged loan market risk spreads had narrowed and
nonprice terms had loosened further. The build-up in overall
nonfinancial business debt to levels close to historical highs
relative to GDP was viewed as a factor that could amplify
adverse shocks to the business sector and the economy more
broadly. The staff continued to judge risks associated with
household-sector debt as moderate. Both the risks associated
with financial leverage and the vulnerabilities related to
maturity transformation were viewed as being low, as they have
been for some time. The staff also noted that the sustained
growth of lending by banks to nonbank financial firms
represented an increase in financial interconnectedness.
Staff Economic Outlook
The projection for U.S. economic activity prepared by the staff
for the April-May FOMC meeting was revised up on net. Real GDP
growth was forecast to slow in the near term from its solid
first-quarter pace, as sizable contributions from inventory
investment and net exports were not expected to persist. The
projection for real GDP growth over the medium term was revised
up, primarily reflecting a lower assumed path for interest
rates, a slightly higher trajectory for equity prices, and
somewhat less appreciation of the broad real dollar. The staff’s
lower path for interest rates reflected a methodological change
in how the staff sets its assumptions about the future path for
the federal funds rate in its forecast. Real GDP was forecast to
expand at a rate above the staff’s estimate of potential output
growth in 2019 and 2020 and then slow to a pace below potential
output growth in 2021. The unemployment rate was projected to
decline a little further below the staff’s estimate of its
longer-run natural rate and to bottom out in late 2020. With
labor market conditions still judged to be tight, the staff
continued to assume that projected employment gains would
manifest in smaller-than-usual downward pressure on the
unemployment rate and in larger-than-usual upward pressure on
the labor force participation rate.
The staff’s forecast for inflation was revised down slightly,
reflecting some recent softer-than-expected readings on consumer
price inflation that were not expected to persist along with the
staff’s assessment that the level to which inflation would tend
to move in the absence of resource slack or supply shocks was a
bit lower in the medium term than previously assumed. As a
result, core PCE price inflation was expected to move up in the
near term but nevertheless to run just below 2 percent over the
medium term. Total PCE price inflation was forecast to run a bit
below core inflation in 2020 and 2021, reflecting projected
declines in energy prices.
The staff viewed the uncertainty around its projections for real
GDP growth, the unemployment rate, and inflation as generally
similar to the average of the past 20 years. The staff also saw
the risks to the forecasts for real GDP growth and the
unemployment rate as roughly balanced. On the upside, household
spending and business investment could expand faster than the
staff projected, supported by the tax cuts enacted at the end of
2017, still strong overall labor market conditions, favorable
financial conditions, and upbeat consumer sentiment. On the
downside, the softening in some economic indicators since late
last year could be the leading edge of a significant slowing in
the pace of economic growth. Moreover, trade policies and
foreign economic developments could move in directions that have
significant negative effects on U.S. economic growth. Risks to
the inflation projection also were seen as balanced. The upside
risk that inflation could increase more than expected in an
economy that was still projected to be operating notably above
potential for an extended period was counterbalanced by the
downside risks that recent soft data on consumer prices could
persist and that longer-term inflation expectations may be lower
than was assumed in the staff forecast, as well as the
possibility that the dollar could appreciate if foreign economic
conditions deteriorated.
Participants’ Views on Current Conditions and the Economic
Outlook
Participants agreed that labor markets had remained strong over
the intermeeting period and that economic activity had risen at
a solid rate. Job gains had been solid, on average, in recent
months, and the unemployment rate had stayed low. Participants
also observed that growth in household spending and business
fixed investment had slowed in the first quarter. Overall
inflation and inflation for items other than food and energy,
both measured on a 12-month basis, had declined and were running
below 2 percent. On balance, market-based measures of inflation
compensation had remained low in recent months, and survey-based
measures of longerterm inflation expectations were little
changed.
Participants continued to view sustained expansion of economic
activity, with strong labor market conditions, and inflation
near the Committee's symmetric 2 percent objective as the most
likely outcomes. Participants noted the unexpected strength in
first-quarter GDP growth, but some observed that the composition
of growth, with large contributions from inventories and net
exports and more modest contributions from consumption and
investment, suggested that GDP growth in the near term would
likely moderate from its strong pace of last year. For this year
as a whole, a number of participants mentioned that they had
marked up their projections for real GDP growth, reflecting, in
part, the strong first-quarter reading. Participants cited
continuing strength in labor market conditions, improvements in
consumer confidence and in financial conditions, or diminished
downside risks both domestically and abroad, as factors likely
to support solid growth over the remainder of the year. Some
participants observed that, in part because of the waning
impetus from fiscal policy and past removal of monetary policy
accommodation, they expected real GDP growth to slow over the
medium term, moving back toward their estimates of trend output
growth.
In their discussion of the household sector, participants
discussed recent indicators, including retail sales and light
motor vehicle sales for March, which rose from relatively weak
readings in some previous months. Taken together, these
developments suggested that the first quarter softness in
household spending was likely to prove temporary. With the
strong jobs market, rising incomes, and upbeat consumer
sentiment, growth in PCE in coming months was expected to be
solid. Several participants also noted that while the housing
sector had been a drag on GDP growth for some time, recent data
pointed to some signs of stabilization. With mortgage rates at
their lowest levels in more than a year, a few participants
thought that residential construction could begin to make
positive contributions to GDP growth in the near term; a few
others were less optimistic.
Participants noted that growth of business fixed investment had
moderated in the first quarter relative to the average pace
recorded last year and discussed whether this more moderate
growth was likely to persist. A number of participants expressed
optimism that there would be continued growth in capital
expenditures this year, albeit probably at a slower pace than in
2018. Several participants observed that financial conditions
and business sentiment had continued to improve, consistent with
reports from business contacts in a number of Districts;
however, a few others reported less buoyant business sentiment
Many participants suggested that their own concerns from earlier
in the year about downside risks from slowing global economic
growth and the deterioration in financial conditions or similar
concerns expressed by their business contacts had abated to some
extent. However, a few participants noted that ongoing
challenges in the agricultural sector, including those
associated with trade uncertainty and low prices, had been
exacerbated by severe flooding in recent weeks.
Participants observed that inflation pressures remained muted
and that the most recent data on overall inflation, and
inflation for items other than food and energy, had come in
lower than expected. At least part of the recent softness in
inflation could be attributed to idiosyncratic factors that
seemed likely to have only transitory effects on inflation,
including unusually sharp declines in the prices of apparel and
of portfolio management services. Some research suggests that
idiosyncratic factors that largely affected acylical sectors in
the economy had accounted for a substantial portion of the
fluctuations in inflation over the past couple of years.
Consistent with the view that recent lower inflation readings
could be temporary, a number of participants mentioned the
trimmed mean measure of PCE price inflation, produced by the
Federal Reserve Bank of Dallas, which removes the influence of
unusually large changes in the prices of individual items in
either direction; these participants observed that the trimmed
mean measure had been stable at or close to 2 percent over
recent months. Participants continued to view inflation near the
Committee’s symmetric 2 percent objective as the most likely
outcome, 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-term
inflation expectations could be below levels consistent with the
Committee’s 2 percent target or at risk of falling below that
level.
Participants agreed that labor market conditions remained
strong. Job gains in the March employment report were solid, the
unemployment rate remained low, and, while the labor force
participation rate moved down a touch, it remained high relative
to estimates of its underlying demographically driven, downward
trend. Contacts in a number of Districts continued to report
shortages of qualified workers, in some cases inducing
businesses to find novel ways to attract new workers. A few
participants commented that labor market conditions in their
Districts were putting upward pressure on compensation levels
for lower-wage jobs, although there were few reports of a broad-
based pickup in wage growth. Several participants noted that
business contacts expressed optimism that despite tight labor
markets they would be able to find workers or would find
technological solutions for labor shortage problems.
Participants commented on risks associated with their outlook
for economic activity over the medium term. Some participants
viewed risks to the downside for real GDP growth as having
decreased, partly because prospects for a sharp slowdown in
global economic growth, particularly in China and Europe, had
diminished. These improvements notwithstanding, most
participants observed that downside risks to the outlook for
growth remain.
In discussing developments in financial markets, a number of
participants noted that financial market conditions had improved
following the period of stress observed over the fourth quarter
of last year and that the volatility in prices and financial
conditions had subsided. These factors were thought to have
helped buoy consumer and business confidence or to have
mitigated short-term downside risks to the real economy. More
generally, the improvement in financial conditions was regarded
by many participants as providing support for the outlook for
economic growth and employment.
Among those participants who commented on financial stability,
most highlighted recent developments related to leveraged loans
and corporate bonds as well as the current high level of
nonfinancial corporate indebtedness. A few participants
suggested that heightened leverage and associated debt burdens
could render the business sector more sensitive to economic
downturns than would otherwise be the case. A couple of
participants suggested that increases in bank capital in current
circumstances with solid economic growth and strong profits
could help support financial and macroeconomic stability over
the longer run. A couple of participants observed that asset
valuations in some markets appeared high, relative to
fundamentals. A few participants commented on the positive role
that the Board’s semi-annual Financial Stability Report could
play in facilitating public discussion of risks that could be
present in some segments of the financial system.
In their discussion of monetary policy, participants agreed that
it would be appropriate to maintain the current target range for
the federal funds rate at 2¼ to 2½ percent. Participants judged
that the labor market remained strong, and that information
received over the intermeeting period showed that economic
activity grew at a solid rate. However, both overall inflation
and inflation for items other than food and energy had declined
and were running below the Committee’s 2 percent objective. A
number of participants observed that some of the risks and
uncertainties that had surrounded their outlooks earlier in the
year had moderated, including those related to the global
economic outlook, Brexit, and trade negotiations. That said,
these and other sources of uncertainty remained. In light of
global economic and financial developments as well as muted
inflation pressures, participants generally agreed that a
patient approach to determining future adjustments to the target
range for the federal funds rate remained appropriate.
Participants noted that even if global economic and financial
conditions continued to improve, a patient approach would likely
remain warranted, especially in an environment of continued
moderate economic growth and muted inflation pressures.
Participants discussed the potential policy implications of
continued low inflation readings. Many participants viewed the
recent dip in PCE inflation as likely to be transitory, and
participants generally anticipated that a patient approach to
policy adjustments was likely to be consistent with sustained
expansion of economic activity, strong labor market conditions,
and inflation near the Committee’s symmetric 2 percent
objective. Several participants also judged that patience in
adjusting policy was consistent with the Committee’s balanced
approach to achieving its objectives in current circumstances in
which resource utilization appeared to be high while inflation
continued to run below the Committee’s symmetric 2 percent
objective. However, a few participants noted that if the economy
evolved as they expected, the Committee would likely need to
firm the stance of monetary policy to sustain the economic
expansion and keep inflation at levels consistent with the
Committee’s objective, or that the Committee would need to be
attentive to the possibility that inflation pressures could
build quickly in an environment of tight resource utilization.
In contrast, a few other participants observed that subdued
inflation coupled with real wage gains roughly in line with
productivity growth might indicate that resource utilization was
not as high as the recent low readings of the unemployment rate
by themselves would suggest. Several participants commented that
if inflation did not show signs of moving up over coming
quarters, there was a risk that inflation expectations could
become anchored at levels below those consistent with the
Committee’s symmetric 2 percent objective--a development that
could make it more difficult to achieve the 2 percent inflation
objective on a sustainable basis over the longer run.
Participants emphasized that their monetary policy decisions
would continue to depend on their assessments of the economic
outlook and risks to the outlook, as informed by a wide range of
data.
Committee Policy Action
In their discussion of monetary policy for the period ahead,
members judged that the information received since the Committee
met in March indicated that the labor market remained strong and
that economic activity had risen at a solid rate. Job gains had
been solid, on average, in recent months, and the unemployment
rate had remained low. Growth of household spending and business
fixed investment had slowed in the first quarter. On a 12-month
basis, overall inflation and inflation for items other than food
and energy had declined and were running below 2 percent. On
balance, market-based measures of inflation compensation had
remained low in recent months, and survey-based measures of
longerterm inflation expectations were little changed.
In their consideration of the economic outlook, members noted
that financial conditions had improved since the turn of the
year, and many uncertainties affecting the U.S. and global
economic outlooks had receded, though some risks remained.
Despite solid economic growth and a strong labor market,
inflation pressures remained muted. Members continued to view
sustained expansion of economic activity, strong labor market
conditions, and inflation near the Committee’s symmetric 2
percent objective as the most likely outcomes for the U.S.
economy. In light of global economic and financial developments
and muted inflation pressures, members concurred that the
Committee could be patient as it determined what future
adjustments to the target range for the federal funds rate may
be appropriate to support those outcomes.
After assessing current conditions and the outlook for economic
activity, the labor market, and inflation, members decided to
maintain the target range for the federal funds rate at 2¼ to 2½
percent. Members agreed that in determining the timing and size
of future adjustments to the target range for the federal funds
rate, the Committee would assess realized and expected economic
conditions relative to the Committee’s maximum-employment and
symmetric 2 percent inflation objectives. They reiterated that
this assessment would take into account a wide range of
information, including measures of labor market conditions,
indicators of inflation pressures and inflation expectations,
and readings on financial and international developments. More
generally, members noted that decisions regarding near-term
adjustments of the stance of monetary policy would appropriately
remain dependent on the evolution of the outlook as informed by
incoming data.
With regard to the post-meeting statement, members agreed to
remove references to a slowing in the pace of economic growth
and little-changed payroll employment, consistent with stronger
incoming information on these indicators. The description of
growth in household spending and business fixed investment in
the first quarter was revised to recognize that incoming data
had confirmed earlier information that suggested these aspects
of economic activity had slowed at that time.
Members also agreed to revise the description of inflation to
note that inflation for items other than food and energy had
declined and was now running below 2 percent. Members observed
that a patient approach to determining future adjustments to the
target range for the federal funds rate would likely remain
appropriate for some time, especially in an environment of
moderate economic growth and muted inflation pressures, even if
global economic and financial conditions continued to improve.
At the conclusion of the discussion, the Committee voted to
authorize and direct the Federal Reserve Bank of New York, until
instructed otherwise, to execute transactions in the SOMA in
accordance with the following domestic policy directive, to be
released at 2:00 p.m.:
“Effective May 2, 2019, the Federal Open Market Committee
directs the Desk to undertake open market operations as
necessary to maintain the federal funds rate in a target range
of 2¼ to 2½ percent, including overnight reverse repurchase
operations (and reverse repurchase operations with maturities of
more than one day when necessary to accommodate weekend,
holiday, or similar trading conventions) at an offering rate of
2.25 percent, in amounts limited only by the value of Treasury
securities held outright in the System Open Market Account that
are available for such operations and by a per-counterparty
limit of $30 billion per day.
Effective May 2, 2019, the Committee directs the Desk to roll
over at auction the amount of principal payments from the
Federal Reserve’s holdings of Treasury securities maturing
during each calendar month that exceeds $15 billion. The
Committee directs the Desk to continue reinvesting in agency
mortgage-backed securities the amount of principal payments from
the Federal Reserve’s holdings of agency debt and agency
mortgage-backed securities received during each calendar month
that exceeds $20 billion. Small deviations from these amounts
for operational reasons are acceptable.
The Committee also directs the Desk to engage in dollar roll and
coupon swap transactions as necessary to facilitate settlement
of the Federal Reserve’s agency mortgage-backed securities
transactions.”
The vote also encompassed approval of the statement below to be
released at 2:00 p.m.:
“Information received since the Federal Open Market Committee
met in March indicates that the labor market remains strong and
that economic activity rose at a solid rate. Job gains have been
solid, on average, in recent months, and the unemployment rate
has remained low. Growth of household spending and business
fixed investment slowed in the first quarter. On a 12-month
basis, overall inflation and inflation for items other than food
and energy have declined and are running below 2 percent. On
balance, market-based measures of inflation compensation have
remained low in recent months, and survey-based measures of
longer-term inflation expectations are little changed.
Consistent with its statutory mandate, the Committee seeks to
foster maximum employment and price stability. In support of
these goals, the Committee decided to maintain the target range
for the federal funds rate at 2¼ to 2½ percent. The Committee
continues to view sustained expansion of economic activity,
strong labor market conditions, and inflation near the
Committee’s symmetric 2 percent objective as the most likely
outcomes. In light of global economic and financial developments
and muted inflation pressures, the Committee will be patient as
it determines what future adjustments to the target range for
the federal funds rate may be appropriate to support these
outcomes.
In determining the timing and size of future adjustments to the
target range for the federal funds rate, the Committee will
assess realized and expected economic conditions relative to its
maximum employment objective and its symmetric 2 percent
inflation objective. This assessment will take into account a
wide range of information, including measures of labor market
conditions, indicators of inflation pressures and inflation
expectations, and readings on financial and international
developments.”
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 federal
funds rate in a target range of 2¼ to 2½ percent, the Board of
Governors voted unanimously to lower the interest rates on
required and excess reserve balances to 2.35 percent, effective
May 2, 2019. Setting the interest rate paid on required and
excess reserve balances 15 basis points below the top of the
target range for the federal funds rate was intended to foster
trading in the federal funds market at rates well within the
FOMC’s target range. The Board of Governors also voted
unanimously to approve establishment of the primary credit rate
at the existing level of 3.00 percent, effective May 2, 2019.
Update from Subcommittee on Communications Governor Clarida
reported on the progress of the review of the Federal Reserve’s
strategic framework for monetary policy. Fed Listens events to
hear stakeholders’ views on the strategy, tools, and
communications that would best enable the Federal Reserve to
meet its statutory objectives of maximum employment and price
stability had already taken place in two Federal Reserve
Districts. Numerous additional events were planned, including a
research conference scheduled for June at the Federal Reserve
Bank of Chicago. Following these public activities, the
Committee was on course to begin its deliberations about the
strategic framework at meetings in the second half of 2019.
It was agreed that the next meeting of the Committee would be
held on Tuesday-Wednesday, June 18- 19, 2019. The meeting
adjourned at 9:50 a.m. on May 1, 2019.
Notation Vote
By notation vote completed on April 9, 2019, the Committee
unanimously approved the minutes of the Committee meeting held
on March 19-20, 2019. _______________________ James A. Clouse
Secretary
SOURCE: Federal Reserve Board
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