U.S. Federal Reserve Meeting Minutes for June 17 (Text)
2015-07-08 18:00:00.42 GMT
(Bloomberg) -- Following are the minutes of the Federal
Reserve’s Open Market Committee meeting that concluded on June
17.
A meeting of the Federal Open Market Committee was held in the
offices of the Board of Governors of the Federal Reserve System
in Washington, D.C., on Tuesday, June 16, 2015, at 1:00 p.m. and
continued on Wednesday, June 17, 2015, at 9:00 a.m.
PRESENT:
Janet L. Yellen, Chair
William C. Dudley, Vice Chairman
Lael Brainard
Charles L. Evans
Stanley Fischer
Jeffrey M. Lacker
Dennis P. Lockhart
Jerome H. Powell
Daniel K. Tarullo
John C. Williams
James Bullard, Esther L. George, Loretta J. Mester, and Eric
Rosengren, Alternate Members of the Federal Open Market
Committee
Narayana Kocherlakota, President of the Federal Reserve Bank of
Minneapolis
Helen E. Holcomb and Blake Prichard, First Vice Presidents,
Federal Reserve Banks of Dallas and Philadelphia, respectively
Brian F. Madigan, Secretary Matthew M. Luecke, Deputy Secretary
David W. Skidmore, Assistant Secretary Michelle A. Smith,
Assistant Secretary Scott G. Alvarez, General Counsel Thomas C.
Baxter, Deputy General Counsel Steven B. Kamin, Economist Thomas
Laubach, Economist David W. Wilcox, Economist
David Altig, Eric M. Engen,1 Michael P. Leahy, Jonathan P.
McCarthy, William R. Nelson, Glenn D. Rudebusch, and William
Wascher, Associate Economists
Simon Potter, Manager, System Open Market Account
Lorie K. Logan, Deputy Manager, System Open Market Account
Robert deV. Frierson,2 Secretary of the Board, Office of the
Secretary, Board of Governors
Michael S. Gibson, Director, Division of Banking Supervision and
Regulation, Board of Governors
James A. Clouse and Stephen A. Meyer, Deputy Directors, Division
of Monetary Affairs, Board of Governors; Daniel M. Covitz,
Deputy Director, Division of Research and Statistics, Board of
Governors
Andreas Lehnert, Deputy Director, Office of Financial Stability
Policy and Research, Board of Governors
William B. English, Senior Special Adviser to the Board, Office
of Board Members, Board of Governors
David Bowman, Andrew Figura, David Reifschneider, and Stacey
Tevlin, Special Advisers to the Board, Office of Board Members,
Board of Governors
Trevor A. Reeve, Special Adviser to the Chair, Office of Board
Members, Board of Governors
Linda Robertson, Assistant to the Board, Office of Board
Members, Board of Governors
Christopher J. Erceg and Beth Anne Wilson, Senior Associate
Directors, Division of International Finance, Board of
Governors; David E. Lebow and Michael G. Palumbo, Senior
Associate Directors, Division of Research and Statistics, Board
of Governors
Ellen E. Meade and Joyce K. Zickler, Senior Advisers, Division
of Monetary Affairs, Board of Governors Gretchen C. Weinbach,
Associate Director, Division of Monetary Affairs, Board of
Governors
1 Attended Wednesday’s session only.
2 Attended the joint session of the Federal Open Market
Committee and the Board of Governors.
Jane E. Ihrig, Deputy Associate Director, Division of Monetary
Affairs, Board of Governors
Glenn Follette and Paul A. Smith, Assistant Directors, Division
of Research and Statistics, Board of Governors
Robert J. Tetlow, Adviser, Division of Monetary Affairs, Board
of Governors
Penelope A. Beattie,2 Assistant to the Secretary, Office of the
Secretary, Board of Governors
Katie Ross,2 Manager, Office of the Secretary, Board of
Governors
David H. Small, Project Manager, Division of Monetary Affairs,
Board of Governors
Stephen Lin, Senior Economist, Division of International
Finance, Board of Governors; Deborah J. Lindner, Senior
Economist, Division of Research and Statistics, Board of
Governors
Benjamin K. Johannsen, Marcel A. Priebsch, and Francisco
Vazquez-Grande,3 Economists, Division of Monetary Affairs, Board
of Governors Randall A. Williams, Information Management
Analyst, Division of Monetary Affairs, Board of Governors
Mark A. Gould, First Vice President, Federal Reserve Bank of San
Francisco
Michael Strine, Executive Vice President, Federal Reserve Bank
of New York
Kartik B. Athreya, Evan F. Koenig, Susan McLaughlin, 3 Samuel
Schulhofer-Wohl, Ellis W. Tallman, Geoffrey Tootell, and
Christopher J. Waller, Senior Vice Presidents, Federal Reserve
Banks of Richmond, Dallas, New York, Minneapolis, Cleveland,
Boston, and St. Louis, respectively
Roc Armenter, Deborah L. Leonard, Anna Paulson, Douglas Tillett,
and Jonathan L. Willis, Vice Presidents, Federal Reserve Banks
of Philadelphia, New York, Chicago, Chicago, and Kansas City,
respectively
3 Attended Tuesday’s session only.
Developments in Financial Markets and the Federal Reserve’s
Balance Sheet
In a joint session of the Federal Open Market Committee (FOMC)
and the Board of Governors of the Federal Reserve System, the
manager of the System Open Market Account (SOMA) reported on
developments in domestic and foreign financial markets. The
manager also discussed System open market operations conducted
by the Open Market Desk during the period since the Committee
met on April 28-29. The Desk’s overnight reverse repurchase
agreement (RRP) operations continued to provide a soft floor for
money market interest rates. The manager updated the Committee
on plans for term RRP operations at the end of the second
quarter and noted that testing of the Federal Reserve’s Term
Deposit Facility continued. The manager also reviewed the
reinvestment policy for maturing Treasury securities.
Specifically, at Treasury auctions, the Desk rolls over the
maturing securities held in the SOMA into newly issued
securities in proportion to the issue amounts of the new
securities, and the Federal Reserve receives the interest rate
determined competitively in the public auction of the newly
issued securities.
The manager updated the Committee on tentative plans to improve
the calculation of the effective federal funds rate published by
the Federal Reserve Bank of New York. The effective federal
funds rate, currently defined as the volume-weighted mean of
interest rates on federal funds transactions, would be redefined
as the volume-weighted median. Staff analysis suggested that the
volume-weighted median would usually differ little from the
volume-weighted mean, but that the median would be a more robust
statistic when some trades occur at interest rates that are
unrepresentative of general market conditions or when there are
data problems such as reporting errors. The change in approach
would be implemented next year in conjunction with the
transition to the Report of Selected Money Market Rates (FR
2420) as the data source for the calculation of the effective
federal funds rate. A volume-weighted median would also be used
to construct a representative measure of conditions in the
broader set of markets covered by the new overnight bank funding
rate.4 The manager noted that additional background information
on these changes would be published by the Desk shortly
following the release of the minutes from this meeting.
Participants expressed no objections to the proposal.
The staff also provided an update to the Committee on a review
of the current system of primary dealers and the Desk’s overall
framework for establishing, maintaining, and publishing
information on the Federal Reserve’s counterparty relationships
for operations in both domestic and foreign financial markets.
While the current sets of counterparties were performing well
and meeting the Desk’s needs, the staff noted that it would
report back to the Committee in the future should potential
enhancements to the counterparty framework be identified. The
Desk anticipated that it would conduct regular reviews of the
counterparty framework approximately every three years in the
future.
By unanimous vote, the Committee ratified the Open Market Desk’s
domestic transactions over the intermeeting period. There were
no intervention operations in foreign currencies for the
System’s account over the intermeeting period.
The Board meeting concluded at the end of the discussion of
developments in financial markets and the Federal Reserve’s
balance sheet.
Staff Review of the Economic Situation
The information reviewed for the June 16-17 meeting suggested
that real gross domestic product (GDP) was increasing moderately
in the second quarter after edging down in the first quarter.
Labor market conditions improved somewhat further in recent
months. Consumer price inflation continued to run below the
FOMC’s longer-run objective of 2 percent and was restrained
significantly by earlier declines in energy prices and decreases
in prices of non-energy imports. Survey measures of longer-run
inflation expectations remained stable, while market-based
measures of inflation compensation were still low.
Total nonfarm payroll employment expanded at a faster pace in
April and May than in the first quarter. The unemployment rate
was 5.5 percent in May, about the same as its first-quarter
average. The labor force participation rate and the employment-
to-population ratio rose a bit over April and May, and the share
of workers employed part time for economic reasons edged down on
net. The rate of private-sector job openings moved up a little,
on balance, in March and April, while the rates of hiring and
quits were essentially unchanged.
4 On February 2, 2015, in addition to announcing preliminary
plans to improve the calculation of the effective federal funds
rate, the Federal Reserve Bank of New York indicated that it
planned to begin to publish an additional interest rate, the
overnight bank funding rate, which will be based on both federal
funds transactions and the Eurodollar transactions of U.S.-
managed banking offices.
Industrial production decreased during April and May after
declining in the first quarter. The output of both the
manufacturing and mining sectors fell over the past two months,
likely reflecting the continuing effects of earlier increases in
the foreign exchange value of the dollar and lower crude oil
prices. Automakers’ assembly schedules suggested that light
motor vehicle production would increase at a solid pace in the
near term, but broader indicators of manufacturing production,
such as the readings on new orders from national and regional
manufacturing surveys, generally pointed to modest gains in
factory output in the coming months.
Growth in real personal consumption expenditures (PCE) appeared
to pick up early in the second quarter from its modest pace in
the previous quarter. The components of the nominal retail sales
data used by the Bureau of Economic Analysis to construct its
estimate of PCE increased in May, and the data for sales in the
previous two months were revised up. Sales of light motor
vehicles were much higher in May than in April. Among the
factors that influence household spending, real disposable
income rose in April and gains in households’ net worth were
supported by further advances in home values. Moreover, consumer
sentiment in the University of Michigan Surveys of Consumers in
early June remained near its highest level since prior to the
most recent recession.
Activity in the housing sector improved somewhat in recent
months but continued to be slow. Starts and building permits of
both new single-family homes and multifamily units increased, on
balance, in April and May. Sales of new homes rose in April;
existing home sales moved down, although pending home sales
increased.
Growth in real private expenditures for business equipment and
intellectual property products appeared to remain relatively
slow in the second quarter. Nominal shipments of nondefense
capital goods excluding aircraft rose in April. Forward-looking
indicators, such as new orders for these capital goods along
with national and regional surveys of business conditions,
pointed to only modest increases in business equipment spending
in the near term. Firms’ nominal spending for non-residential
structures excluding drilling and mining rose in April. In
contrast, the number of oil rigs in operation continued to fall
through early June, suggesting a further decline in real
business spending for drilling and mining structures in the
second quarter.
Nominal federal spending data for April and May pointed toward a
further decline in real federal government purchases in the
second quarter. Real state and local government purchases
appeared to be rising in the second quarter, with increases in
both payrolls and nominal construction spending in recent
months.
The U.S. international trade deficit widened substantially in
March but narrowed in April, leaving the deficit modestly wider
than in February. After decreasing for four straight months,
exports increased in both March and April, as shipments to Asia
picked up following the resolution in February of labor disputes
at West Coast ports. Imports rebounded in March from the
depressed levels in January and February but fell back in April,
close to the first-quarter average. While real net exports made
a large negative contribution to the change in real GDP in the
first quarter of 2015, April data suggested that net exports
might be a considerably smaller drag on GDP growth in the second
quarter of the year.
Total U.S. consumer prices, as measured by the PCE price index,
only edged up over the 12 months ending in April, held down
primarily by earlier large declines in energy prices. Core PCE
inflation, which excludes food and energy prices, was 1.25
percent over the same 12-month period, restrained in part by
declines in the prices of non-energy imports. Measures of
expected longer-run inflation from a number of surveys,
including the Michigan survey, the Survey of Professional
Forecasters, and the Desk’s Survey of Primary Dealers, remained
stable. However, market-based measures of inflation compensation
were still low, although somewhat higher than early in the year.
Measures of labor compensation rose at moderate rates, outpacing
the rise in consumer prices over the past year. The employment
cost index increased 2.75 percent over the four quarters ending
in the first quarter, while compensation per hour in the nonfarm
business sector rose 1.75 percent over the same period. Average
hourly earnings for all employees increased 2.25 percent over
the 12 months ending in May. There were some tentative signs
that these labor compensation measures were accelerating a
little in the first quarter.
Economic growth in many foreign economies slowed in the first
quarter. Real GDP contracted in Canada, where lower oil prices
depressed investment, and in Brazil, where business and consumer
confidence weakened and high inflation prompted a significant
tightening of monetary policy. In addition, real GDP growth
slowed in China and Mexico. By contrast, the euro-area economy
continued its recovery, and real GDP growth in Japan increased
sharply. Inflation rates turned positive in recent months in
many foreign economies following the trough in oil prices
earlier this year.
Staff Review of the Financial Situation
Over the intermeeting period, longer-term Treasury yields
increased notably amid heightened volatility, apparently boosted
by a rise in yields on core euro-area sovereign bonds and, to a
lesser extent, stronger-than-anticipated news about the U.S.
labor market late in the period. The sharp rise in yields on
core euro-area sovereign bonds seemed to reflect a notable rise
in term premiums from significantly compressed levels as well as
an increase in the path of expected future short-term rates
following some positive data for the European economy.
The nominal Treasury yield curve steepened appreciably, on net,
with 2-, 5-, and 10-year yields ending the intermeeting period
about 15 to 35 basis points higher. Most of the increase in
nominal yields was attributable to a rise in real yields, as
measures of inflation compensation were relatively stable.
Various measures typically used to assess liquidity in Treasury
and mortgage-backed securities (MBS) markets were little changed
over the intermeeting period; they have generally pointed to
relatively stable market functioning over the past several
years. However, the majority of respondents to the June Senior
Credit Officer Opinion Survey on Dealer Financing Terms
indicated that, over the past five years, liquidity and
functioning in these markets, especially in Treasury markets,
have deteriorated. Respondents attributed the deterioration
primarily to securities dealers’ decreased willingness to
provide balance sheet resources for market making as a result of
both regulatory changes and changes in internal risk-management
practices.
On balance, the expected path of the federal funds rate implied
by futures contracts steepened noticeably beyond 2015, with a
portion of this shift coming after the May employment report.
Some evidence suggested that a significant part of the increase
may have reflected higher term premiums. By contrast, Federal
Reserve communications following the April FOMC meeting were
characterized by investors as generally in line with
expectations and elicited limited market reaction.
Results from the June Survey of Primary Dealers and the June
Survey of Market Participants indicated little change since the
April survey in modal forecasts of the federal funds rate
through 2018. Respondents again saw the September 2015 FOMC
meeting as the most likely time for the first increase in the
target range for the federal funds rate. The expected pace of
tightening after the initial increase in the target range for
the federal funds rate, whenever that might occur, was similar
to that reported in the April survey.
Over the intermeeting period, most broad U.S. equity price
indexes moved down a bit, on net, amid mixed macroeconomic news
and little information on earnings. Option-implied volatility on
the S&P 500 index over the next month increased, on balance, but
remained near the lower end of its historical range. Spreads on
10-year triple-B-rated corporate bonds over comparable-maturity
Treasury securities widened somewhat, on net, while spreads on
speculative-grade corporate bonds narrowed slightly.
Financing conditions for large nonfinancial businesses continued
to be accommodative. Gross corporate bond issuance remained
quite strong, and institutional leveraged loan issuance picked
up significantly. Commercial and industrial loans on banks’
balance sheets continued to increase at a solid pace. Meanwhile,
financing conditions for small businesses continued to improve,
though the growth of small business loans on banks’ books
remained subdued, partly reflecting still-tepid demand for
credit from owners of small businesses.
Financing for commercial real estate remained broadly available,
although the expansion of commercial real estate loans on banks’
books slowed in April and May, reportedly because of sales of
loans secured by nonfarm nonresidential properties into pools of
commercial mortgage-backed securities. Measures of residential
mortgage credit availability continued to improve gradually over
the intermeeting period. Nevertheless, credit remained tight for
borrowers with lower credit scores. Interest rates on 30-year
fixed-rate mortgages increased about 30 basis points, broadly in
line with MBS yields and other longer-term rates. Financing
conditions in consumer credit markets stayed accommodative in
March and April. Auto and student loans expanded at a robust
pace through April, while revolving credit picked up in March
and April after a slow start at the beginning of the year.
Sovereign bond yields in foreign economies rose notably during
the intermeeting period, especially in the advanced economies,
led by a substantial increase in German bund yields. A number of
factors may have contributed to the increase in yields,
including a reappraisal of term premiums, which appeared to have
fallen to very low levels in April. The rise in yields was also
supported by the release of some stronger-than-expected
inflation data in the euro area and by European Central Bank
communications that volatility in yields was to be expected.
Against this backdrop and with a step-up in concerns about
developments in Greece, equity prices declined in most
countries. Stock prices in Japan and especially in China were
the main exceptions. The foreign exchange value of the dollar
increased a bit, on balance, during the intermeeting period
against the currencies of major U.S. trading partners. While the
dollar declined against the euro and other European currencies,
it rose against the Canadian dollar, the yen, and many emerging
market currencies, boosted in part by the strong U.S. employment
report for May.
Staff Economic Outlook
In the economic forecast prepared by the staff for the June FOMC
meeting, real GDP growth in the second half of this year was
expected to step up from its pace in the first half. However,
economic growth in the second half was projected to be a little
lower than in the projection prepared for the April meeting,
largely reflecting a small downward revision to the forecast for
household spending. The staff’s medium-term projection for real
GDP growth was essentially unrevised from the previous forecast.
The staff continued to project that real GDP would expand at a
faster pace than potential output in 2016 and 2017, supported
primarily by increases in consumer spending, even as the
normalization of the stance of monetary policy was assumed to
proceed. The expansion in economic output over the medium term
was anticipated to trim resource slack; the unemployment rate
was expected to decline gradually to the staff’s estimate of its
longer-run natural rate.
The staff’s forecast for inflation in the near term was little
changed, and it was unrevised over the medium term. Energy
prices and non-oil import prices were expected to begin steadily
rising next year, but the staff projected that inflation would
continue to be below the Committee’s longer-run objective of 2
percent over 2016 and 2017. However, inflation was anticipated
to reach 2 percent thereafter, with inflation expectations in
the longer run assumed to be consistent with the Committee’s
objective and slack in labor and product markets projected to
have waned.
The staff viewed the extent of uncertainty around its June
projections for real GDP growth, the unemployment rate, and
inflation as similar to the average over the past 20 years. The
risks to the forecasts for real GDP growth and inflation were
seen as tilted a little to the downside, reflecting the staff’s
assessment that neither monetary policy nor fiscal policy was
well positioned to help the economy withstand substantial
adverse shocks. At the same time, the staff saw the risks around
its outlook for the unemployment rate as roughly balanced.
Participants’ Views on Current Conditions and the Economic
Outlook
In conjunction with this FOMC meeting, members of the Board of
Governors and Federal Reserve Bank presidents submitted their
projections of the most likely outcomes for real GDP growth, the
unemployment rate, inflation, and the federal funds rate for
each year from 2015 through 2017 and over the longer run,
conditional on each participant’s judgment of appropriate
monetary policy.5 The longer-run projections represent each
participant’s assessment of the rate to which each variable
would be expected to converge, over time, under appropriate
monetary policy and in the absence of further shocks to the
economy. These projections and policy assessments are described
in the Summary of Economic Projections, which is an addendum to
these minutes.
In their discussion of the economic situation and the outlook,
meeting participants viewed the information received over the
intermeeting period as indicating that economic activity was
expanding moderately after little change in the first quarter of
the year. Early in 2015, a number of factors -- including
unfavorable weather in parts of the country and labor disputes
at West Coast ports -- temporarily held down real GDP; several
analyses also suggested that difficulties with seasonal
adjustment likely contributed to an underestimate of first-
quarter real GDP. The unemployment rate was unchanged over the
period between the April and June meetings, but payroll
employment posted solid gains, and, on balance, a range of labor
market indicators suggested that underutilization of labor
resources diminished somewhat. Although participants marked down
their expectations for the rate of increase in real GDP over the
first half of the year, their projections for economic growth in
the second half of 2015 and over 2016 and 2017 were broadly
similar to those prepared for the March meeting. Under their
respective assumptions about appropriate monetary policy,
participants generally expected real GDP to expand at a rate
sufficient to continue to move labor market conditions toward
levels judged consistent with the Committee’s dual mandate.
Inflation readings available since the April meeting continued
to run below the Committee’s longer-run objective, partly
reflecting earlier declines in energy prices and continued
decreases in prices of non-energy imports. However, energy
prices appeared to have stabilized. Participants continued to
project a gradual rise in inflation toward 2 percent over the
medium term as the labor market improved further and the
transitory effects of earlier declines in energy and import
prices dissipated.
5 The incoming president of the Federal Reserve Bank of
Philadelphia assumed office after the June FOMC meeting, on July
1, and a new president of the Federal Reserve Bank of Dallas has
yet to be selected. Blake Prichard and Helen E. Holcomb, first
vice presidents of the Federal Reserve Banks of Philadelphia and
Dallas, respectively, submitted economic projections.
In discussing how to interpret the reported weakness in real GDP
during the first quarter, participants considered alternative
estimates of real economic activity based on various data-
filtering models maintained by Board and Reserve Bank staff.
These models yielded a range of estimates, but, overall, they
suggested that real activity in the first quarter was likely
stronger than the then-current official estimate of real GDP.
Some participants indicated that the higher alternative
estimates seemed more consistent with the increases in real
gross domestic income and private domestic final purchases in
the first quarter as well as the strength in employment and
hours worked. However, the alternative estimates left open the
question of when and to what extent the seasonal adjustment and
other measurement issues associated with official estimates of
GDP in the first quarter might unwind.
While participants generally saw the risks to their projections
of economic activity and the labor market as balanced, they gave
a number of reasons to be cautious in assessing the outlook.
Some pointed to the risk that the weaker-than-anticipated rise
in economic activity over the first half of the year could
reflect factors that might continue to restrain sales and
production, and that economic activity might not have sufficient
momentum to sustain progress toward the Committee’s objectives.
In particular, they were concerned that consumers could remain
cautious or that the drag on sectors affected by lower energy
prices and the higher dollar could persist. Others, however,
viewed the strength in the labor market in recent months as
potentially signaling a stronger-than-expected bounce-back in
economic activity. Several mentioned their uncertainty about
whether Greece and its official creditors would reach an
agreement and about the likely pace of economic growth abroad,
particularly in China and other emerging market economies. Other
concerns were related to whether the apparent weakness in
productivity growth recently would be reversed or continue. On
the one hand, a rebound in productivity growth in coming
quarters might restrain hiring and slow the improvement in labor
market conditions. On the other hand, if productivity growth
remained weak, the labor market might tighten more quickly and
inflation might rise more rapidly than anticipated.
At the time of the April meeting, the increase in consumer
spending was estimated to have been unexpectedly weak in the
first quarter following strong gains in the second half of 2014.
The additional information that had become available since then,
including more complete estimates of outlays for services and
revised data on retail sales, indicated that consumer spending
was somewhat better than previously reported, rising at a
moderate pace in the first quarter. In addition, the strong
rebound in motor vehicle sales and the solid gain in retail
sales in May suggested that the pace of consumer spending was
picking up in the current quarter. Moreover, a number of
fundamental factors determining consumer spending remained
positive, including the boost to real income from the earlier
decline in energy prices, low interest rates, sustained moderate
gains in wage and salary income, stronger household balance
sheets, and the high levels of households’ confidence about the
economic outlook and about their income prospects. Many
participants anticipated that these factors would support a
solid pace of consumer spending going forward. However, others
remained concerned that consumers had not increased their
spending as much as expected in response to the drop in energy
prices, and that the rise in the saving rate since last fall may
signal more cautious behavior among households that might last
for some time.
A number of participants noted that housing starts and permits
rose considerably in recent months, and indicators of sales
activity turned more positive. Nonetheless, home construction
was still below the trend that would appear consistent with
population growth, sales remained at low levels, and credit
availability was still relatively tight.
Reports on manufacturing in a number of regions offered some
signs that the sector was no longer weakening, with a couple of
Districts’ diffusion indexes turning up. Still, cutbacks in
spending on drilling and mining equipment, slow demand for other
business equipment, and the drag on exports from slow foreign
demand and previous increases in the dollar continued to weigh
on industrial production. Motor vehicle production was
highlighted as a bright spot. In those Districts in which
activity had been adversely affected by the drop in energy
prices, drilling activity was either contracting less rapidly or
was stabilizing. Higher oil production could continue to hold
down energy prices in the near term, but industry contacts
anticipated some recovery in prices over the coming year, which
should stem layoffs and cuts in capital spending in the energy
sector. Agricultural production in several Districts appeared
likely to benefit from wet weather, but weak farm income
continued to weigh on the sector. Several participants reported
that the services sector was a relative source of strength in
their Districts. In general, business contacts continued to
express optimism about stronger sales and production in the
second half of the year.
In their discussion of labor market conditions, participants
offered their views on recent developments and the progress that
had occurred in reducing underutilization of labor resources.
They generally agreed that labor market conditions had improved
somewhat over the intermeeting period, variously citing solid
increases in payroll employment and job openings; low levels of
unemployment insurance claims; and, despite an unchanged
unemployment rate, some further reduction in broader measures of
underutilization, particularly among those not actively
searching for jobs, but available and interested in work.
Several participants pointed to some favorable trends that had
developed over a longer period, such as the flattening out of
the labor force participation rate and a shift in the flow of
workers into more stable and higher-skilled jobs. A number of
participants noted that the outlook for continued job gains was
evident in reports on hiring intentions from business contacts
in their Districts who indicated that more firms planned
additions to their payrolls over the coming year than a year
earlier. While the cumulative improvements in labor market
conditions over the past year had been substantial, most
participants judged that further progress would be required to
eliminate underutilization of labor resources; some of them
anticipated that the utilization gap would close around the end
of the year. Several other participants indicated that, in their
view, labor market slack had already been largely eliminated.
The ongoing rise in labor demand appeared to have begun to
result in a firming of wage increases. Recent readings on the
employment cost index, hourly compensation, and average hourly
earnings of employees suggested some acceleration in wages.
According to business contacts in a number of Districts, many
firms looking for new workers said they had been raising wages
selectively to attract them; some had also begun to raise wages
more generally. However, several participants pointed out that,
even with the recent upturn, wage increases remain subdued.
Participants discussed how the incoming information regarding
inflation influenced their expectations for reaching the FOMC’s
2 percent inflation objective over the medium term. Total PCE
inflation continued to run below the Committee’s objective.
However, participants noted that the apparent stabilization of
crude oil prices and the foreign exchange value of the dollar
would reduce the downward pressure on inflation from falling
prices of energy and imported goods. Core PCE price inflation,
as measured on a 12-month change basis, had slowed slightly from
an already low rate. However, several participants pointed out
that the 3-month change in that index had firmed recently,
signaling some improvement in the inflation outlook. In
addition, some cited alternative measures of inflation, such as
the trimmed mean and median consumer price indexes (CPIs) and
the trimmed mean PCE, which continued to run at higher levels
than overall PCE inflation. Survey measures of longer-term
inflation expectations remained stable, and market-based
measures of inflation compensation, while still low, were higher
than earlier in the year. Nonetheless, a couple of participants
continued to be concerned that the extended period of low
inflation might persist and feed through to inflation
expectations, citing estimates from various inflation
forecasting models and the downtrend in the 10-year CPI
projections in the Survey of Professional Forecasters.
Participants continued to anticipate that, with appropriate
monetary policy, inflation would move up to or toward the
Committee’s objective over the medium term. Among the factors
influencing the trajectories of their inflation forecasts were
their outlooks for the pace of real activity, labor market
conditions and wage developments, and inflation expectations.
In their discussion of financial market developments over the
intermeeting period, several participants commented on the rise
in the 10-year Treasury yield, which accompanied a steeper run-
up in the 10-year German yield. The sharp rise in German yields
appeared to reflect a retracing of the earlier decline in German
rates to unsustainably low levels. It was noted that the
increase in U.S. yields was not especially large in a historical
context and that volatility in U.S. fixed-income markets was
still somewhat below pre-crisis levels. However, many
participants expressed concern that a failure of Greece and its
official creditors to resolve their differences could result in
disruptions in financial markets in the euro area, with possible
spillover effects on the United States. And some participants
reiterated the importance of effective Committee communications
in reducing the likelihood of an outsized financial market
reaction around the time that policy normalization begins.
During their discussion of economic conditions and monetary
policy, participants commented on a number of considerations
associated with the timing and pace of policy normalization.
Most participants judged that the conditions for policy firming
had not yet been achieved; a number of them cautioned against a
premature decision. Many participants emphasized that, in order
to determine that the criteria for beginning policy
normalization had been met, they would need additional
information indicating that economic growth was strengthening,
that labor market conditions were continuing to improve, and
that inflation was moving back toward the Committee’s objective.
Other concerns that were mentioned were the potential erosion of
the Committee’s credibility if inflation were to persist below 2
percent and the limited ability of monetary policy to offset
downside shocks to inflation and economic activity when the
federal funds rate was at its effective lower bound. Some
participants viewed the economic conditions for increasing the
target range for the federal funds rate as having been met or
were confident that they would be met shortly. They identified
several possible risks associated with delaying the start of
policy firming. One such risk was the possibility that the
Committee might need to tighten more rapidly than financial
markets currently anticipate -- an outcome that could be
associated with a significant rise in longer-term interest rates
or heightened financial market volatility. Another was that
prolonging a high degree of monetary policy accommodation might
result in an undesirable increase in inflation or might have
adverse consequences for financial and macroeconomic stability.
It was also pointed out that a prompt start to normalization
would likely convey the Committee’s confidence in prospects for
the economy. During the discussion, a number of participants
recommended that, around the time of the first increase in the
target range, the Committee consider how it would update its
communications regarding the likely path of the federal funds
rate, with several indicating that the Committee should remain
data dependent in making adjustments to the target range.
Participants also discussed plans for publishing operational
details regarding the implementation of monetary policy around
the time of the first increase in the target range. All
participants supported a staff proposal for the Federal Reserve
to issue an implementation note that would communicate
separately from the Committee’s post-meeting policy statement
the specific measures to be employed to implement the FOMC’s
decision about the stance of policy. Following scheduled FOMC
meetings, this implementation note would be released at the same
time as the Committee’s post-meeting statement; it would convey
operational details regarding the settings of the policy tools
and the changes in administered rates being employed to achieve
the Committee’s desired stance of policy, and it would include
the FOMC’s domestic policy directive to the Desk. If adjustments
to policy tools or administered rates subsequently proved
necessary to implement an unchanged policy stance, the
implementation note could be revised without altering the
Committee’s policy statement. Participants agreed that this
strategy provided a number of advantages, including focusing the
Committee’s post-meeting statement on information about economic
conditions and the stance of monetary policy; communicating the
details of policymakers’ operational decisions, including the
FOMC’s domestic policy directive, in one place; reducing the
risk that Federal Reserve communications regarding any technical
adjustments to the operation of its policy tools after the
commencement of policy firming might be mistaken as conveying
information about the stance of policy; and emphasizing that
operational decisions regarding the Federal Reserve’s policy
tools will be made in concert by the Federal Reserve Board and
the FOMC with the aim of maintaining the federal funds rate in
the range established by the FOMC. Participants also discussed
how the language of the domestic policy directive could be
revised when the first increase in the target range for the
federal funds rate becomes appropriate. It was noted that the
Committee might, in addition to providing specific instructions
to the Desk regarding operations at that time, update other
language in the directive.
Committee Policy Action
In its discussion of monetary policy for the period ahead, the
Committee agreed that the weakness in the first quarter was at
least in part the result of transitory factors, and members
anticipated that economic growth would resume in the second
quarter. Although they expressed some uncertainty about the
extent of the likely near-term pickup, members expected moderate
economic growth over the medium term. Labor market conditions
had improved somewhat further, and members anticipated further
progress in coming months. Ongoing gains in employment and wages
along with a high level of consumer confidence were expected to
provide support to household spending. Signs of stronger housing
activity were encouraging. However, the outlook for business
investment remained soft, and net exports were likely to
continue to be restrained by the earlier appreciation of the
dollar. Inflation had been well below the Committee’s longer-run
objective, but, with oil prices and the foreign exchange value
of the dollar stabilizing, members expected that inflation would
gradually rise toward 2 percent over the medium term. Members
thus saw economic conditions as continuing to approach those
consistent with warranting a start to the normalization of the
stance of monetary policy. In these circumstances, members
agreed to continue making decisions about the appropriate target
range for the federal funds rate on a meeting-by-meeting basis,
with their decisions depending on the implications of economic
and financial developments for the prospects for labor markets
and inflation.
With respect to its objective of maximum employment, the
Committee judged that, on balance, a range of labor market
indicators suggested that underutilization of labor resources
had diminished somewhat over the intermeeting period. Most
members saw room for additional progress in reducing labor
market slack, while a couple of members indicated that they
viewed the unemployment rate as very close or essentially
identical to its mandate-consistent level. Many expected that
labor market underutilization would be largely eliminated around
year-end if economic activity strengthened as they expected.
However, some members were more uncertain about the extent of
progress in the labor market to date or were concerned that if
the pace of economic growth remained slow, labor market
conditions might improve only gradually. Most agreed that they
would need more information on developments in the labor market
to establish a solid basis for assessing whether labor market
conditions had improved sufficiently to initiate tightening.
Inflation had continued to run below the Committee’s 2 percent
objective. Most members agreed that the recent stability in
crude oil prices had increased their confidence that the
downward pressure on inflation from earlier declines in energy
prices was abating, and some noted the recent stability of the
foreign exchange value of the dollar, which could eventually
stem the decline in prices of imports. Market-based measures of
inflation compensation remained low, but they had risen some
from their levels earlier in the year, and survey measures of
inflation expectations continued to be stable. However, core
inflation was still well below 2 percent. The Committee agreed
to continue to monitor inflation developments closely. In
considering the Committee’s criteria for beginning policy
normalization, all members but one indicated that they would
need to see more evidence that economic growth was sufficiently
strong and labor market conditions had firmed enough to return
inflation to the Committee’s longer-run objective over the
medium term; one member was already reasonably confident of such
an outcome.
The Committee concluded that, although it had seen some
progress, the conditions warranting an increase in the target
range for the federal funds rate had not yet been met, and that
additional information on the outlook, particularly for labor
markets and inflation, would be necessary before deciding to
implement such an increase. One member, however, indicated a
readiness to take that step at this meeting but also expressed a
willingness to wait another meeting or two for additional data
before raising the target range.
In considering how to communicate the rationale for the
Committee’s policy decision, members discussed the importance of
adjusting the language in the post-meeting statement to
acknowledge the evolution of progress toward the Committee’s
objectives. The Committee judged it appropriate to communicate
that it had seen some further improvement in labor market
conditions over the intermeeting period, stating that a range of
labor market indicators suggested that underutilization of labor
resources diminished somewhat. It also decided to indicate the
likelihood that energy prices might soon exert less downward
influence on inflation, saying that energy prices appeared to
have stabilized, and to restate its expectation that inflation
would rise gradually toward 2 percent over the medium term as
the labor market improves further and the transitory effects of
earlier declines in energy and import prices dissipate.
The Committee agreed to maintain the target range for the
federal funds rate at 0 to 0.25 percent and to reaffirm in the
statement that the Committee’s decision about how long to
maintain the current target range for the federal funds rate
would depend on its assessment of actual and expected progress
toward its objectives of maximum employment and 2 percent
inflation. Members continued to judge that their evaluation of
progress on their objectives 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. Members agreed to retain the indication that the
Committee anticipates that it will be appropriate to raise the
target range for the federal funds rate when it has seen further
improvement in the labor market and is reasonably confident that
inflation will move back to its 2 percent objective over the
medium term.
The Committee also maintained its policy of reinvesting
principal payments from agency debt and agency mortgage-backed
securities in agency mortgage-backed securities and of rolling
over maturing Treasury securities at auction. This policy, by
keeping the Committee’s holdings of longer-term securities at
sizable levels, should help maintain accommodative financial
conditions. The Committee agreed to reiterate its expectation
that, even after employment and inflation are near mandate-
consistent levels, economic conditions may, for some time,
warrant keeping the target federal funds rate below levels the
Committee views as normal in the longer run.
At the conclusion of the discussion, the Committee voted to
authorize and direct the Federal Reserve Bank of New York, until
it was instructed otherwise, to execute transactions in the SOMA
in accordance with the following domestic policy directive:
“Consistent with its statutory mandate, the Federal Open Market
Committee seeks monetary and financial conditions that will
foster maximum employment and price stability. In particular,
the Committee seeks conditions in reserve markets consistent
with federal funds trading in a range from 0 to 0.25 percent.
The Committee directs the Desk to undertake open market
operations as necessary to maintain such conditions. The
Committee directs the Desk to maintain its policy of rolling
over maturing Treasury securities into new issues and its policy
of reinvesting principal payments on all agency debt and agency
mortgage-backed securities in agency mortgage-backed securities.
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 System Open Market Account manager and the
secretary will keep the Committee informed of ongoing
developments regarding the System’s balance sheet that could
affect the attainment over time of the Committee’s objectives of
maximum employment and price stability.”
The vote encompassed approval of the statement below to be
released at 2:00 p.m.:
“Information received since the Federal Open Market Committee
met in April suggests that economic activity has been expanding
moderately after having changed little during the first quarter.
The pace of job gains picked up while the unemployment rate
remained steady. On balance, a range of labor market indicators
suggests that underutilization of labor resources diminished
somewhat. Growth in household spending has been moderate and the
housing sector has shown some improvement; however, business
fixed investment and net exports stayed soft. Inflation
continued to run below the Committee’s longer-run objective,
partly reflecting earlier declines in energy prices and
decreasing prices of non-energy imports; energy prices appear to
have stabilized. Market-based measures of inflation compensation
remain low; survey-based measures of longer-term inflation
expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to
foster maximum employment and price stability. The Committee
expects that, with appropriate policy accommodation, economic
activity will expand at a moderate pace, with labor market
indicators continuing to move toward levels the Committee judges
consistent with its dual mandate. The Committee continues to see
the risks to the outlook for economic activity and the labor
market as nearly balanced. Inflation is anticipated to remain
near its recent low level in the near term, but the Committee
expects inflation to rise gradually toward 2 percent over the
medium term as the labor market improves further and the
transitory effects of earlier declines in energy and import
prices dissipate. The Committee continues to monitor inflation
developments closely.
To support continued progress toward maximum employment and
price stability, the Committee today reaffirmed its view that
the current 0 to 0.25 percent target range for the federal funds
rate remains appropriate. In determining how long to maintain
this target range, the Committee will assess progress -- both
realized and expected -- toward its objectives of maximum
employment and 2 percent inflation. 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. The Committee anticipates that it
will be appropriate to raise the target range for the federal
funds rate when it has seen further improvement in the labor
market and is reasonably confident that inflation will move back
to its 2 percent objective over the medium term.
The Committee is maintaining its existing policy of reinvesting
principal payments from its holdings of agency debt and agency
mortgage-backed securities in agency mortgage-backed securities
and of rolling over maturing Treasury securities at auction.
This policy, by keeping the Committee’s holdings of longer-term
securities at sizable levels, should help maintain accommodative
financial conditions.
When the Committee decides to begin to remove policy
accommodation, it will take a balanced approach consistent with
its longer-run goals of maximum employment and inflation of 2
percent. The Committee currently anticipates that, even after
employment and inflation are near mandate-consistent levels,
economic conditions may, for some time, warrant keeping the
target federal funds rate below levels the Committee views as
normal in the longer run.”
Voting for this action: Janet L. Yellen, William C. Dudley, Lael
Brainard, Charles L. Evans, Stanley Fischer, Jeffrey M. Lacker,
Dennis P. Lockhart, Jerome H. Powell, Daniel K. Tarullo, and
John C. Williams.
Voting against this action: None.
It was agreed that the next meeting of the Committee would be
held on Tuesday-Wednesday, July 28-29, 2015. The meeting
adjourned at 10:40 a.m. on June 17, 2015.
Notation Votes
By notation vote completed on May 19, 2015, the Committee
unanimously approved the minutes of the Committee meeting held
on April 28-29, 2015.
By notation vote completed on June 3, 2015, the Committee
unanimously approved the selection of Brian F. Madigan to serve
as secretary, effective June 4, 2015, until the selection of a
successor at the first regularly scheduled meeting of the
Committee in 2016.
SOURCE: Federal Reserve Board
To contact the reporter on this story:
Chris Middleton in Washington at +1-202-624-1993 or
cmiddleton2@bloomberg.net
To contact the editor responsible for this story:
Marco Babic at +41-44-224-4112 or mbabic@bloomberg.net
Kristy Scheuble
2015-07-08 18:00:00.42 GMT
(Bloomberg) -- Following are the minutes of the Federal
Reserve’s Open Market Committee meeting that concluded on June
17.
A meeting of the Federal Open Market Committee was held in the
offices of the Board of Governors of the Federal Reserve System
in Washington, D.C., on Tuesday, June 16, 2015, at 1:00 p.m. and
continued on Wednesday, June 17, 2015, at 9:00 a.m.
PRESENT:
Janet L. Yellen, Chair
William C. Dudley, Vice Chairman
Lael Brainard
Charles L. Evans
Stanley Fischer
Jeffrey M. Lacker
Dennis P. Lockhart
Jerome H. Powell
Daniel K. Tarullo
John C. Williams
James Bullard, Esther L. George, Loretta J. Mester, and Eric
Rosengren, Alternate Members of the Federal Open Market
Committee
Narayana Kocherlakota, President of the Federal Reserve Bank of
Minneapolis
Helen E. Holcomb and Blake Prichard, First Vice Presidents,
Federal Reserve Banks of Dallas and Philadelphia, respectively
Brian F. Madigan, Secretary Matthew M. Luecke, Deputy Secretary
David W. Skidmore, Assistant Secretary Michelle A. Smith,
Assistant Secretary Scott G. Alvarez, General Counsel Thomas C.
Baxter, Deputy General Counsel Steven B. Kamin, Economist Thomas
Laubach, Economist David W. Wilcox, Economist
David Altig, Eric M. Engen,1 Michael P. Leahy, Jonathan P.
McCarthy, William R. Nelson, Glenn D. Rudebusch, and William
Wascher, Associate Economists
Simon Potter, Manager, System Open Market Account
Lorie K. Logan, Deputy Manager, System Open Market Account
Robert deV. Frierson,2 Secretary of the Board, Office of the
Secretary, Board of Governors
Michael S. Gibson, Director, Division of Banking Supervision and
Regulation, Board of Governors
James A. Clouse and Stephen A. Meyer, Deputy Directors, Division
of Monetary Affairs, Board of Governors; Daniel M. Covitz,
Deputy Director, Division of Research and Statistics, Board of
Governors
Andreas Lehnert, Deputy Director, Office of Financial Stability
Policy and Research, Board of Governors
William B. English, Senior Special Adviser to the Board, Office
of Board Members, Board of Governors
David Bowman, Andrew Figura, David Reifschneider, and Stacey
Tevlin, Special Advisers to the Board, Office of Board Members,
Board of Governors
Trevor A. Reeve, Special Adviser to the Chair, Office of Board
Members, Board of Governors
Linda Robertson, Assistant to the Board, Office of Board
Members, Board of Governors
Christopher J. Erceg and Beth Anne Wilson, Senior Associate
Directors, Division of International Finance, Board of
Governors; David E. Lebow and Michael G. Palumbo, Senior
Associate Directors, Division of Research and Statistics, Board
of Governors
Ellen E. Meade and Joyce K. Zickler, Senior Advisers, Division
of Monetary Affairs, Board of Governors Gretchen C. Weinbach,
Associate Director, Division of Monetary Affairs, Board of
Governors
1 Attended Wednesday’s session only.
2 Attended the joint session of the Federal Open Market
Committee and the Board of Governors.
Jane E. Ihrig, Deputy Associate Director, Division of Monetary
Affairs, Board of Governors
Glenn Follette and Paul A. Smith, Assistant Directors, Division
of Research and Statistics, Board of Governors
Robert J. Tetlow, Adviser, Division of Monetary Affairs, Board
of Governors
Penelope A. Beattie,2 Assistant to the Secretary, Office of the
Secretary, Board of Governors
Katie Ross,2 Manager, Office of the Secretary, Board of
Governors
David H. Small, Project Manager, Division of Monetary Affairs,
Board of Governors
Stephen Lin, Senior Economist, Division of International
Finance, Board of Governors; Deborah J. Lindner, Senior
Economist, Division of Research and Statistics, Board of
Governors
Benjamin K. Johannsen, Marcel A. Priebsch, and Francisco
Vazquez-Grande,3 Economists, Division of Monetary Affairs, Board
of Governors Randall A. Williams, Information Management
Analyst, Division of Monetary Affairs, Board of Governors
Mark A. Gould, First Vice President, Federal Reserve Bank of San
Francisco
Michael Strine, Executive Vice President, Federal Reserve Bank
of New York
Kartik B. Athreya, Evan F. Koenig, Susan McLaughlin, 3 Samuel
Schulhofer-Wohl, Ellis W. Tallman, Geoffrey Tootell, and
Christopher J. Waller, Senior Vice Presidents, Federal Reserve
Banks of Richmond, Dallas, New York, Minneapolis, Cleveland,
Boston, and St. Louis, respectively
Roc Armenter, Deborah L. Leonard, Anna Paulson, Douglas Tillett,
and Jonathan L. Willis, Vice Presidents, Federal Reserve Banks
of Philadelphia, New York, Chicago, Chicago, and Kansas City,
respectively
3 Attended Tuesday’s session only.
Developments in Financial Markets and the Federal Reserve’s
Balance Sheet
In a joint session of the Federal Open Market Committee (FOMC)
and the Board of Governors of the Federal Reserve System, the
manager of the System Open Market Account (SOMA) reported on
developments in domestic and foreign financial markets. The
manager also discussed System open market operations conducted
by the Open Market Desk during the period since the Committee
met on April 28-29. The Desk’s overnight reverse repurchase
agreement (RRP) operations continued to provide a soft floor for
money market interest rates. The manager updated the Committee
on plans for term RRP operations at the end of the second
quarter and noted that testing of the Federal Reserve’s Term
Deposit Facility continued. The manager also reviewed the
reinvestment policy for maturing Treasury securities.
Specifically, at Treasury auctions, the Desk rolls over the
maturing securities held in the SOMA into newly issued
securities in proportion to the issue amounts of the new
securities, and the Federal Reserve receives the interest rate
determined competitively in the public auction of the newly
issued securities.
The manager updated the Committee on tentative plans to improve
the calculation of the effective federal funds rate published by
the Federal Reserve Bank of New York. The effective federal
funds rate, currently defined as the volume-weighted mean of
interest rates on federal funds transactions, would be redefined
as the volume-weighted median. Staff analysis suggested that the
volume-weighted median would usually differ little from the
volume-weighted mean, but that the median would be a more robust
statistic when some trades occur at interest rates that are
unrepresentative of general market conditions or when there are
data problems such as reporting errors. The change in approach
would be implemented next year in conjunction with the
transition to the Report of Selected Money Market Rates (FR
2420) as the data source for the calculation of the effective
federal funds rate. A volume-weighted median would also be used
to construct a representative measure of conditions in the
broader set of markets covered by the new overnight bank funding
rate.4 The manager noted that additional background information
on these changes would be published by the Desk shortly
following the release of the minutes from this meeting.
Participants expressed no objections to the proposal.
The staff also provided an update to the Committee on a review
of the current system of primary dealers and the Desk’s overall
framework for establishing, maintaining, and publishing
information on the Federal Reserve’s counterparty relationships
for operations in both domestic and foreign financial markets.
While the current sets of counterparties were performing well
and meeting the Desk’s needs, the staff noted that it would
report back to the Committee in the future should potential
enhancements to the counterparty framework be identified. The
Desk anticipated that it would conduct regular reviews of the
counterparty framework approximately every three years in the
future.
By unanimous vote, the Committee ratified the Open Market Desk’s
domestic transactions over the intermeeting period. There were
no intervention operations in foreign currencies for the
System’s account over the intermeeting period.
The Board meeting concluded at the end of the discussion of
developments in financial markets and the Federal Reserve’s
balance sheet.
Staff Review of the Economic Situation
The information reviewed for the June 16-17 meeting suggested
that real gross domestic product (GDP) was increasing moderately
in the second quarter after edging down in the first quarter.
Labor market conditions improved somewhat further in recent
months. Consumer price inflation continued to run below the
FOMC’s longer-run objective of 2 percent and was restrained
significantly by earlier declines in energy prices and decreases
in prices of non-energy imports. Survey measures of longer-run
inflation expectations remained stable, while market-based
measures of inflation compensation were still low.
Total nonfarm payroll employment expanded at a faster pace in
April and May than in the first quarter. The unemployment rate
was 5.5 percent in May, about the same as its first-quarter
average. The labor force participation rate and the employment-
to-population ratio rose a bit over April and May, and the share
of workers employed part time for economic reasons edged down on
net. The rate of private-sector job openings moved up a little,
on balance, in March and April, while the rates of hiring and
quits were essentially unchanged.
4 On February 2, 2015, in addition to announcing preliminary
plans to improve the calculation of the effective federal funds
rate, the Federal Reserve Bank of New York indicated that it
planned to begin to publish an additional interest rate, the
overnight bank funding rate, which will be based on both federal
funds transactions and the Eurodollar transactions of U.S.-
managed banking offices.
Industrial production decreased during April and May after
declining in the first quarter. The output of both the
manufacturing and mining sectors fell over the past two months,
likely reflecting the continuing effects of earlier increases in
the foreign exchange value of the dollar and lower crude oil
prices. Automakers’ assembly schedules suggested that light
motor vehicle production would increase at a solid pace in the
near term, but broader indicators of manufacturing production,
such as the readings on new orders from national and regional
manufacturing surveys, generally pointed to modest gains in
factory output in the coming months.
Growth in real personal consumption expenditures (PCE) appeared
to pick up early in the second quarter from its modest pace in
the previous quarter. The components of the nominal retail sales
data used by the Bureau of Economic Analysis to construct its
estimate of PCE increased in May, and the data for sales in the
previous two months were revised up. Sales of light motor
vehicles were much higher in May than in April. Among the
factors that influence household spending, real disposable
income rose in April and gains in households’ net worth were
supported by further advances in home values. Moreover, consumer
sentiment in the University of Michigan Surveys of Consumers in
early June remained near its highest level since prior to the
most recent recession.
Activity in the housing sector improved somewhat in recent
months but continued to be slow. Starts and building permits of
both new single-family homes and multifamily units increased, on
balance, in April and May. Sales of new homes rose in April;
existing home sales moved down, although pending home sales
increased.
Growth in real private expenditures for business equipment and
intellectual property products appeared to remain relatively
slow in the second quarter. Nominal shipments of nondefense
capital goods excluding aircraft rose in April. Forward-looking
indicators, such as new orders for these capital goods along
with national and regional surveys of business conditions,
pointed to only modest increases in business equipment spending
in the near term. Firms’ nominal spending for non-residential
structures excluding drilling and mining rose in April. In
contrast, the number of oil rigs in operation continued to fall
through early June, suggesting a further decline in real
business spending for drilling and mining structures in the
second quarter.
Nominal federal spending data for April and May pointed toward a
further decline in real federal government purchases in the
second quarter. Real state and local government purchases
appeared to be rising in the second quarter, with increases in
both payrolls and nominal construction spending in recent
months.
The U.S. international trade deficit widened substantially in
March but narrowed in April, leaving the deficit modestly wider
than in February. After decreasing for four straight months,
exports increased in both March and April, as shipments to Asia
picked up following the resolution in February of labor disputes
at West Coast ports. Imports rebounded in March from the
depressed levels in January and February but fell back in April,
close to the first-quarter average. While real net exports made
a large negative contribution to the change in real GDP in the
first quarter of 2015, April data suggested that net exports
might be a considerably smaller drag on GDP growth in the second
quarter of the year.
Total U.S. consumer prices, as measured by the PCE price index,
only edged up over the 12 months ending in April, held down
primarily by earlier large declines in energy prices. Core PCE
inflation, which excludes food and energy prices, was 1.25
percent over the same 12-month period, restrained in part by
declines in the prices of non-energy imports. Measures of
expected longer-run inflation from a number of surveys,
including the Michigan survey, the Survey of Professional
Forecasters, and the Desk’s Survey of Primary Dealers, remained
stable. However, market-based measures of inflation compensation
were still low, although somewhat higher than early in the year.
Measures of labor compensation rose at moderate rates, outpacing
the rise in consumer prices over the past year. The employment
cost index increased 2.75 percent over the four quarters ending
in the first quarter, while compensation per hour in the nonfarm
business sector rose 1.75 percent over the same period. Average
hourly earnings for all employees increased 2.25 percent over
the 12 months ending in May. There were some tentative signs
that these labor compensation measures were accelerating a
little in the first quarter.
Economic growth in many foreign economies slowed in the first
quarter. Real GDP contracted in Canada, where lower oil prices
depressed investment, and in Brazil, where business and consumer
confidence weakened and high inflation prompted a significant
tightening of monetary policy. In addition, real GDP growth
slowed in China and Mexico. By contrast, the euro-area economy
continued its recovery, and real GDP growth in Japan increased
sharply. Inflation rates turned positive in recent months in
many foreign economies following the trough in oil prices
earlier this year.
Staff Review of the Financial Situation
Over the intermeeting period, longer-term Treasury yields
increased notably amid heightened volatility, apparently boosted
by a rise in yields on core euro-area sovereign bonds and, to a
lesser extent, stronger-than-anticipated news about the U.S.
labor market late in the period. The sharp rise in yields on
core euro-area sovereign bonds seemed to reflect a notable rise
in term premiums from significantly compressed levels as well as
an increase in the path of expected future short-term rates
following some positive data for the European economy.
The nominal Treasury yield curve steepened appreciably, on net,
with 2-, 5-, and 10-year yields ending the intermeeting period
about 15 to 35 basis points higher. Most of the increase in
nominal yields was attributable to a rise in real yields, as
measures of inflation compensation were relatively stable.
Various measures typically used to assess liquidity in Treasury
and mortgage-backed securities (MBS) markets were little changed
over the intermeeting period; they have generally pointed to
relatively stable market functioning over the past several
years. However, the majority of respondents to the June Senior
Credit Officer Opinion Survey on Dealer Financing Terms
indicated that, over the past five years, liquidity and
functioning in these markets, especially in Treasury markets,
have deteriorated. Respondents attributed the deterioration
primarily to securities dealers’ decreased willingness to
provide balance sheet resources for market making as a result of
both regulatory changes and changes in internal risk-management
practices.
On balance, the expected path of the federal funds rate implied
by futures contracts steepened noticeably beyond 2015, with a
portion of this shift coming after the May employment report.
Some evidence suggested that a significant part of the increase
may have reflected higher term premiums. By contrast, Federal
Reserve communications following the April FOMC meeting were
characterized by investors as generally in line with
expectations and elicited limited market reaction.
Results from the June Survey of Primary Dealers and the June
Survey of Market Participants indicated little change since the
April survey in modal forecasts of the federal funds rate
through 2018. Respondents again saw the September 2015 FOMC
meeting as the most likely time for the first increase in the
target range for the federal funds rate. The expected pace of
tightening after the initial increase in the target range for
the federal funds rate, whenever that might occur, was similar
to that reported in the April survey.
Over the intermeeting period, most broad U.S. equity price
indexes moved down a bit, on net, amid mixed macroeconomic news
and little information on earnings. Option-implied volatility on
the S&P 500 index over the next month increased, on balance, but
remained near the lower end of its historical range. Spreads on
10-year triple-B-rated corporate bonds over comparable-maturity
Treasury securities widened somewhat, on net, while spreads on
speculative-grade corporate bonds narrowed slightly.
Financing conditions for large nonfinancial businesses continued
to be accommodative. Gross corporate bond issuance remained
quite strong, and institutional leveraged loan issuance picked
up significantly. Commercial and industrial loans on banks’
balance sheets continued to increase at a solid pace. Meanwhile,
financing conditions for small businesses continued to improve,
though the growth of small business loans on banks’ books
remained subdued, partly reflecting still-tepid demand for
credit from owners of small businesses.
Financing for commercial real estate remained broadly available,
although the expansion of commercial real estate loans on banks’
books slowed in April and May, reportedly because of sales of
loans secured by nonfarm nonresidential properties into pools of
commercial mortgage-backed securities. Measures of residential
mortgage credit availability continued to improve gradually over
the intermeeting period. Nevertheless, credit remained tight for
borrowers with lower credit scores. Interest rates on 30-year
fixed-rate mortgages increased about 30 basis points, broadly in
line with MBS yields and other longer-term rates. Financing
conditions in consumer credit markets stayed accommodative in
March and April. Auto and student loans expanded at a robust
pace through April, while revolving credit picked up in March
and April after a slow start at the beginning of the year.
Sovereign bond yields in foreign economies rose notably during
the intermeeting period, especially in the advanced economies,
led by a substantial increase in German bund yields. A number of
factors may have contributed to the increase in yields,
including a reappraisal of term premiums, which appeared to have
fallen to very low levels in April. The rise in yields was also
supported by the release of some stronger-than-expected
inflation data in the euro area and by European Central Bank
communications that volatility in yields was to be expected.
Against this backdrop and with a step-up in concerns about
developments in Greece, equity prices declined in most
countries. Stock prices in Japan and especially in China were
the main exceptions. The foreign exchange value of the dollar
increased a bit, on balance, during the intermeeting period
against the currencies of major U.S. trading partners. While the
dollar declined against the euro and other European currencies,
it rose against the Canadian dollar, the yen, and many emerging
market currencies, boosted in part by the strong U.S. employment
report for May.
Staff Economic Outlook
In the economic forecast prepared by the staff for the June FOMC
meeting, real GDP growth in the second half of this year was
expected to step up from its pace in the first half. However,
economic growth in the second half was projected to be a little
lower than in the projection prepared for the April meeting,
largely reflecting a small downward revision to the forecast for
household spending. The staff’s medium-term projection for real
GDP growth was essentially unrevised from the previous forecast.
The staff continued to project that real GDP would expand at a
faster pace than potential output in 2016 and 2017, supported
primarily by increases in consumer spending, even as the
normalization of the stance of monetary policy was assumed to
proceed. The expansion in economic output over the medium term
was anticipated to trim resource slack; the unemployment rate
was expected to decline gradually to the staff’s estimate of its
longer-run natural rate.
The staff’s forecast for inflation in the near term was little
changed, and it was unrevised over the medium term. Energy
prices and non-oil import prices were expected to begin steadily
rising next year, but the staff projected that inflation would
continue to be below the Committee’s longer-run objective of 2
percent over 2016 and 2017. However, inflation was anticipated
to reach 2 percent thereafter, with inflation expectations in
the longer run assumed to be consistent with the Committee’s
objective and slack in labor and product markets projected to
have waned.
The staff viewed the extent of uncertainty around its June
projections for real GDP growth, the unemployment rate, and
inflation as similar to the average over the past 20 years. The
risks to the forecasts for real GDP growth and inflation were
seen as tilted a little to the downside, reflecting the staff’s
assessment that neither monetary policy nor fiscal policy was
well positioned to help the economy withstand substantial
adverse shocks. At the same time, the staff saw the risks around
its outlook for the unemployment rate as roughly balanced.
Participants’ Views on Current Conditions and the Economic
Outlook
In conjunction with this FOMC meeting, members of the Board of
Governors and Federal Reserve Bank presidents submitted their
projections of the most likely outcomes for real GDP growth, the
unemployment rate, inflation, and the federal funds rate for
each year from 2015 through 2017 and over the longer run,
conditional on each participant’s judgment of appropriate
monetary policy.5 The longer-run projections represent each
participant’s assessment of the rate to which each variable
would be expected to converge, over time, under appropriate
monetary policy and in the absence of further shocks to the
economy. These projections and policy assessments are described
in the Summary of Economic Projections, which is an addendum to
these minutes.
In their discussion of the economic situation and the outlook,
meeting participants viewed the information received over the
intermeeting period as indicating that economic activity was
expanding moderately after little change in the first quarter of
the year. Early in 2015, a number of factors -- including
unfavorable weather in parts of the country and labor disputes
at West Coast ports -- temporarily held down real GDP; several
analyses also suggested that difficulties with seasonal
adjustment likely contributed to an underestimate of first-
quarter real GDP. The unemployment rate was unchanged over the
period between the April and June meetings, but payroll
employment posted solid gains, and, on balance, a range of labor
market indicators suggested that underutilization of labor
resources diminished somewhat. Although participants marked down
their expectations for the rate of increase in real GDP over the
first half of the year, their projections for economic growth in
the second half of 2015 and over 2016 and 2017 were broadly
similar to those prepared for the March meeting. Under their
respective assumptions about appropriate monetary policy,
participants generally expected real GDP to expand at a rate
sufficient to continue to move labor market conditions toward
levels judged consistent with the Committee’s dual mandate.
Inflation readings available since the April meeting continued
to run below the Committee’s longer-run objective, partly
reflecting earlier declines in energy prices and continued
decreases in prices of non-energy imports. However, energy
prices appeared to have stabilized. Participants continued to
project a gradual rise in inflation toward 2 percent over the
medium term as the labor market improved further and the
transitory effects of earlier declines in energy and import
prices dissipated.
5 The incoming president of the Federal Reserve Bank of
Philadelphia assumed office after the June FOMC meeting, on July
1, and a new president of the Federal Reserve Bank of Dallas has
yet to be selected. Blake Prichard and Helen E. Holcomb, first
vice presidents of the Federal Reserve Banks of Philadelphia and
Dallas, respectively, submitted economic projections.
In discussing how to interpret the reported weakness in real GDP
during the first quarter, participants considered alternative
estimates of real economic activity based on various data-
filtering models maintained by Board and Reserve Bank staff.
These models yielded a range of estimates, but, overall, they
suggested that real activity in the first quarter was likely
stronger than the then-current official estimate of real GDP.
Some participants indicated that the higher alternative
estimates seemed more consistent with the increases in real
gross domestic income and private domestic final purchases in
the first quarter as well as the strength in employment and
hours worked. However, the alternative estimates left open the
question of when and to what extent the seasonal adjustment and
other measurement issues associated with official estimates of
GDP in the first quarter might unwind.
While participants generally saw the risks to their projections
of economic activity and the labor market as balanced, they gave
a number of reasons to be cautious in assessing the outlook.
Some pointed to the risk that the weaker-than-anticipated rise
in economic activity over the first half of the year could
reflect factors that might continue to restrain sales and
production, and that economic activity might not have sufficient
momentum to sustain progress toward the Committee’s objectives.
In particular, they were concerned that consumers could remain
cautious or that the drag on sectors affected by lower energy
prices and the higher dollar could persist. Others, however,
viewed the strength in the labor market in recent months as
potentially signaling a stronger-than-expected bounce-back in
economic activity. Several mentioned their uncertainty about
whether Greece and its official creditors would reach an
agreement and about the likely pace of economic growth abroad,
particularly in China and other emerging market economies. Other
concerns were related to whether the apparent weakness in
productivity growth recently would be reversed or continue. On
the one hand, a rebound in productivity growth in coming
quarters might restrain hiring and slow the improvement in labor
market conditions. On the other hand, if productivity growth
remained weak, the labor market might tighten more quickly and
inflation might rise more rapidly than anticipated.
At the time of the April meeting, the increase in consumer
spending was estimated to have been unexpectedly weak in the
first quarter following strong gains in the second half of 2014.
The additional information that had become available since then,
including more complete estimates of outlays for services and
revised data on retail sales, indicated that consumer spending
was somewhat better than previously reported, rising at a
moderate pace in the first quarter. In addition, the strong
rebound in motor vehicle sales and the solid gain in retail
sales in May suggested that the pace of consumer spending was
picking up in the current quarter. Moreover, a number of
fundamental factors determining consumer spending remained
positive, including the boost to real income from the earlier
decline in energy prices, low interest rates, sustained moderate
gains in wage and salary income, stronger household balance
sheets, and the high levels of households’ confidence about the
economic outlook and about their income prospects. Many
participants anticipated that these factors would support a
solid pace of consumer spending going forward. However, others
remained concerned that consumers had not increased their
spending as much as expected in response to the drop in energy
prices, and that the rise in the saving rate since last fall may
signal more cautious behavior among households that might last
for some time.
A number of participants noted that housing starts and permits
rose considerably in recent months, and indicators of sales
activity turned more positive. Nonetheless, home construction
was still below the trend that would appear consistent with
population growth, sales remained at low levels, and credit
availability was still relatively tight.
Reports on manufacturing in a number of regions offered some
signs that the sector was no longer weakening, with a couple of
Districts’ diffusion indexes turning up. Still, cutbacks in
spending on drilling and mining equipment, slow demand for other
business equipment, and the drag on exports from slow foreign
demand and previous increases in the dollar continued to weigh
on industrial production. Motor vehicle production was
highlighted as a bright spot. In those Districts in which
activity had been adversely affected by the drop in energy
prices, drilling activity was either contracting less rapidly or
was stabilizing. Higher oil production could continue to hold
down energy prices in the near term, but industry contacts
anticipated some recovery in prices over the coming year, which
should stem layoffs and cuts in capital spending in the energy
sector. Agricultural production in several Districts appeared
likely to benefit from wet weather, but weak farm income
continued to weigh on the sector. Several participants reported
that the services sector was a relative source of strength in
their Districts. In general, business contacts continued to
express optimism about stronger sales and production in the
second half of the year.
In their discussion of labor market conditions, participants
offered their views on recent developments and the progress that
had occurred in reducing underutilization of labor resources.
They generally agreed that labor market conditions had improved
somewhat over the intermeeting period, variously citing solid
increases in payroll employment and job openings; low levels of
unemployment insurance claims; and, despite an unchanged
unemployment rate, some further reduction in broader measures of
underutilization, particularly among those not actively
searching for jobs, but available and interested in work.
Several participants pointed to some favorable trends that had
developed over a longer period, such as the flattening out of
the labor force participation rate and a shift in the flow of
workers into more stable and higher-skilled jobs. A number of
participants noted that the outlook for continued job gains was
evident in reports on hiring intentions from business contacts
in their Districts who indicated that more firms planned
additions to their payrolls over the coming year than a year
earlier. While the cumulative improvements in labor market
conditions over the past year had been substantial, most
participants judged that further progress would be required to
eliminate underutilization of labor resources; some of them
anticipated that the utilization gap would close around the end
of the year. Several other participants indicated that, in their
view, labor market slack had already been largely eliminated.
The ongoing rise in labor demand appeared to have begun to
result in a firming of wage increases. Recent readings on the
employment cost index, hourly compensation, and average hourly
earnings of employees suggested some acceleration in wages.
According to business contacts in a number of Districts, many
firms looking for new workers said they had been raising wages
selectively to attract them; some had also begun to raise wages
more generally. However, several participants pointed out that,
even with the recent upturn, wage increases remain subdued.
Participants discussed how the incoming information regarding
inflation influenced their expectations for reaching the FOMC’s
2 percent inflation objective over the medium term. Total PCE
inflation continued to run below the Committee’s objective.
However, participants noted that the apparent stabilization of
crude oil prices and the foreign exchange value of the dollar
would reduce the downward pressure on inflation from falling
prices of energy and imported goods. Core PCE price inflation,
as measured on a 12-month change basis, had slowed slightly from
an already low rate. However, several participants pointed out
that the 3-month change in that index had firmed recently,
signaling some improvement in the inflation outlook. In
addition, some cited alternative measures of inflation, such as
the trimmed mean and median consumer price indexes (CPIs) and
the trimmed mean PCE, which continued to run at higher levels
than overall PCE inflation. Survey measures of longer-term
inflation expectations remained stable, and market-based
measures of inflation compensation, while still low, were higher
than earlier in the year. Nonetheless, a couple of participants
continued to be concerned that the extended period of low
inflation might persist and feed through to inflation
expectations, citing estimates from various inflation
forecasting models and the downtrend in the 10-year CPI
projections in the Survey of Professional Forecasters.
Participants continued to anticipate that, with appropriate
monetary policy, inflation would move up to or toward the
Committee’s objective over the medium term. Among the factors
influencing the trajectories of their inflation forecasts were
their outlooks for the pace of real activity, labor market
conditions and wage developments, and inflation expectations.
In their discussion of financial market developments over the
intermeeting period, several participants commented on the rise
in the 10-year Treasury yield, which accompanied a steeper run-
up in the 10-year German yield. The sharp rise in German yields
appeared to reflect a retracing of the earlier decline in German
rates to unsustainably low levels. It was noted that the
increase in U.S. yields was not especially large in a historical
context and that volatility in U.S. fixed-income markets was
still somewhat below pre-crisis levels. However, many
participants expressed concern that a failure of Greece and its
official creditors to resolve their differences could result in
disruptions in financial markets in the euro area, with possible
spillover effects on the United States. And some participants
reiterated the importance of effective Committee communications
in reducing the likelihood of an outsized financial market
reaction around the time that policy normalization begins.
During their discussion of economic conditions and monetary
policy, participants commented on a number of considerations
associated with the timing and pace of policy normalization.
Most participants judged that the conditions for policy firming
had not yet been achieved; a number of them cautioned against a
premature decision. Many participants emphasized that, in order
to determine that the criteria for beginning policy
normalization had been met, they would need additional
information indicating that economic growth was strengthening,
that labor market conditions were continuing to improve, and
that inflation was moving back toward the Committee’s objective.
Other concerns that were mentioned were the potential erosion of
the Committee’s credibility if inflation were to persist below 2
percent and the limited ability of monetary policy to offset
downside shocks to inflation and economic activity when the
federal funds rate was at its effective lower bound. Some
participants viewed the economic conditions for increasing the
target range for the federal funds rate as having been met or
were confident that they would be met shortly. They identified
several possible risks associated with delaying the start of
policy firming. One such risk was the possibility that the
Committee might need to tighten more rapidly than financial
markets currently anticipate -- an outcome that could be
associated with a significant rise in longer-term interest rates
or heightened financial market volatility. Another was that
prolonging a high degree of monetary policy accommodation might
result in an undesirable increase in inflation or might have
adverse consequences for financial and macroeconomic stability.
It was also pointed out that a prompt start to normalization
would likely convey the Committee’s confidence in prospects for
the economy. During the discussion, a number of participants
recommended that, around the time of the first increase in the
target range, the Committee consider how it would update its
communications regarding the likely path of the federal funds
rate, with several indicating that the Committee should remain
data dependent in making adjustments to the target range.
Participants also discussed plans for publishing operational
details regarding the implementation of monetary policy around
the time of the first increase in the target range. All
participants supported a staff proposal for the Federal Reserve
to issue an implementation note that would communicate
separately from the Committee’s post-meeting policy statement
the specific measures to be employed to implement the FOMC’s
decision about the stance of policy. Following scheduled FOMC
meetings, this implementation note would be released at the same
time as the Committee’s post-meeting statement; it would convey
operational details regarding the settings of the policy tools
and the changes in administered rates being employed to achieve
the Committee’s desired stance of policy, and it would include
the FOMC’s domestic policy directive to the Desk. If adjustments
to policy tools or administered rates subsequently proved
necessary to implement an unchanged policy stance, the
implementation note could be revised without altering the
Committee’s policy statement. Participants agreed that this
strategy provided a number of advantages, including focusing the
Committee’s post-meeting statement on information about economic
conditions and the stance of monetary policy; communicating the
details of policymakers’ operational decisions, including the
FOMC’s domestic policy directive, in one place; reducing the
risk that Federal Reserve communications regarding any technical
adjustments to the operation of its policy tools after the
commencement of policy firming might be mistaken as conveying
information about the stance of policy; and emphasizing that
operational decisions regarding the Federal Reserve’s policy
tools will be made in concert by the Federal Reserve Board and
the FOMC with the aim of maintaining the federal funds rate in
the range established by the FOMC. Participants also discussed
how the language of the domestic policy directive could be
revised when the first increase in the target range for the
federal funds rate becomes appropriate. It was noted that the
Committee might, in addition to providing specific instructions
to the Desk regarding operations at that time, update other
language in the directive.
Committee Policy Action
In its discussion of monetary policy for the period ahead, the
Committee agreed that the weakness in the first quarter was at
least in part the result of transitory factors, and members
anticipated that economic growth would resume in the second
quarter. Although they expressed some uncertainty about the
extent of the likely near-term pickup, members expected moderate
economic growth over the medium term. Labor market conditions
had improved somewhat further, and members anticipated further
progress in coming months. Ongoing gains in employment and wages
along with a high level of consumer confidence were expected to
provide support to household spending. Signs of stronger housing
activity were encouraging. However, the outlook for business
investment remained soft, and net exports were likely to
continue to be restrained by the earlier appreciation of the
dollar. Inflation had been well below the Committee’s longer-run
objective, but, with oil prices and the foreign exchange value
of the dollar stabilizing, members expected that inflation would
gradually rise toward 2 percent over the medium term. Members
thus saw economic conditions as continuing to approach those
consistent with warranting a start to the normalization of the
stance of monetary policy. In these circumstances, members
agreed to continue making decisions about the appropriate target
range for the federal funds rate on a meeting-by-meeting basis,
with their decisions depending on the implications of economic
and financial developments for the prospects for labor markets
and inflation.
With respect to its objective of maximum employment, the
Committee judged that, on balance, a range of labor market
indicators suggested that underutilization of labor resources
had diminished somewhat over the intermeeting period. Most
members saw room for additional progress in reducing labor
market slack, while a couple of members indicated that they
viewed the unemployment rate as very close or essentially
identical to its mandate-consistent level. Many expected that
labor market underutilization would be largely eliminated around
year-end if economic activity strengthened as they expected.
However, some members were more uncertain about the extent of
progress in the labor market to date or were concerned that if
the pace of economic growth remained slow, labor market
conditions might improve only gradually. Most agreed that they
would need more information on developments in the labor market
to establish a solid basis for assessing whether labor market
conditions had improved sufficiently to initiate tightening.
Inflation had continued to run below the Committee’s 2 percent
objective. Most members agreed that the recent stability in
crude oil prices had increased their confidence that the
downward pressure on inflation from earlier declines in energy
prices was abating, and some noted the recent stability of the
foreign exchange value of the dollar, which could eventually
stem the decline in prices of imports. Market-based measures of
inflation compensation remained low, but they had risen some
from their levels earlier in the year, and survey measures of
inflation expectations continued to be stable. However, core
inflation was still well below 2 percent. The Committee agreed
to continue to monitor inflation developments closely. In
considering the Committee’s criteria for beginning policy
normalization, all members but one indicated that they would
need to see more evidence that economic growth was sufficiently
strong and labor market conditions had firmed enough to return
inflation to the Committee’s longer-run objective over the
medium term; one member was already reasonably confident of such
an outcome.
The Committee concluded that, although it had seen some
progress, the conditions warranting an increase in the target
range for the federal funds rate had not yet been met, and that
additional information on the outlook, particularly for labor
markets and inflation, would be necessary before deciding to
implement such an increase. One member, however, indicated a
readiness to take that step at this meeting but also expressed a
willingness to wait another meeting or two for additional data
before raising the target range.
In considering how to communicate the rationale for the
Committee’s policy decision, members discussed the importance of
adjusting the language in the post-meeting statement to
acknowledge the evolution of progress toward the Committee’s
objectives. The Committee judged it appropriate to communicate
that it had seen some further improvement in labor market
conditions over the intermeeting period, stating that a range of
labor market indicators suggested that underutilization of labor
resources diminished somewhat. It also decided to indicate the
likelihood that energy prices might soon exert less downward
influence on inflation, saying that energy prices appeared to
have stabilized, and to restate its expectation that inflation
would rise gradually toward 2 percent over the medium term as
the labor market improves further and the transitory effects of
earlier declines in energy and import prices dissipate.
The Committee agreed to maintain the target range for the
federal funds rate at 0 to 0.25 percent and to reaffirm in the
statement that the Committee’s decision about how long to
maintain the current target range for the federal funds rate
would depend on its assessment of actual and expected progress
toward its objectives of maximum employment and 2 percent
inflation. Members continued to judge that their evaluation of
progress on their objectives 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. Members agreed to retain the indication that the
Committee anticipates that it will be appropriate to raise the
target range for the federal funds rate when it has seen further
improvement in the labor market and is reasonably confident that
inflation will move back to its 2 percent objective over the
medium term.
The Committee also maintained its policy of reinvesting
principal payments from agency debt and agency mortgage-backed
securities in agency mortgage-backed securities and of rolling
over maturing Treasury securities at auction. This policy, by
keeping the Committee’s holdings of longer-term securities at
sizable levels, should help maintain accommodative financial
conditions. The Committee agreed to reiterate its expectation
that, even after employment and inflation are near mandate-
consistent levels, economic conditions may, for some time,
warrant keeping the target federal funds rate below levels the
Committee views as normal in the longer run.
At the conclusion of the discussion, the Committee voted to
authorize and direct the Federal Reserve Bank of New York, until
it was instructed otherwise, to execute transactions in the SOMA
in accordance with the following domestic policy directive:
“Consistent with its statutory mandate, the Federal Open Market
Committee seeks monetary and financial conditions that will
foster maximum employment and price stability. In particular,
the Committee seeks conditions in reserve markets consistent
with federal funds trading in a range from 0 to 0.25 percent.
The Committee directs the Desk to undertake open market
operations as necessary to maintain such conditions. The
Committee directs the Desk to maintain its policy of rolling
over maturing Treasury securities into new issues and its policy
of reinvesting principal payments on all agency debt and agency
mortgage-backed securities in agency mortgage-backed securities.
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 System Open Market Account manager and the
secretary will keep the Committee informed of ongoing
developments regarding the System’s balance sheet that could
affect the attainment over time of the Committee’s objectives of
maximum employment and price stability.”
The vote encompassed approval of the statement below to be
released at 2:00 p.m.:
“Information received since the Federal Open Market Committee
met in April suggests that economic activity has been expanding
moderately after having changed little during the first quarter.
The pace of job gains picked up while the unemployment rate
remained steady. On balance, a range of labor market indicators
suggests that underutilization of labor resources diminished
somewhat. Growth in household spending has been moderate and the
housing sector has shown some improvement; however, business
fixed investment and net exports stayed soft. Inflation
continued to run below the Committee’s longer-run objective,
partly reflecting earlier declines in energy prices and
decreasing prices of non-energy imports; energy prices appear to
have stabilized. Market-based measures of inflation compensation
remain low; survey-based measures of longer-term inflation
expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to
foster maximum employment and price stability. The Committee
expects that, with appropriate policy accommodation, economic
activity will expand at a moderate pace, with labor market
indicators continuing to move toward levels the Committee judges
consistent with its dual mandate. The Committee continues to see
the risks to the outlook for economic activity and the labor
market as nearly balanced. Inflation is anticipated to remain
near its recent low level in the near term, but the Committee
expects inflation to rise gradually toward 2 percent over the
medium term as the labor market improves further and the
transitory effects of earlier declines in energy and import
prices dissipate. The Committee continues to monitor inflation
developments closely.
To support continued progress toward maximum employment and
price stability, the Committee today reaffirmed its view that
the current 0 to 0.25 percent target range for the federal funds
rate remains appropriate. In determining how long to maintain
this target range, the Committee will assess progress -- both
realized and expected -- toward its objectives of maximum
employment and 2 percent inflation. 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. The Committee anticipates that it
will be appropriate to raise the target range for the federal
funds rate when it has seen further improvement in the labor
market and is reasonably confident that inflation will move back
to its 2 percent objective over the medium term.
The Committee is maintaining its existing policy of reinvesting
principal payments from its holdings of agency debt and agency
mortgage-backed securities in agency mortgage-backed securities
and of rolling over maturing Treasury securities at auction.
This policy, by keeping the Committee’s holdings of longer-term
securities at sizable levels, should help maintain accommodative
financial conditions.
When the Committee decides to begin to remove policy
accommodation, it will take a balanced approach consistent with
its longer-run goals of maximum employment and inflation of 2
percent. The Committee currently anticipates that, even after
employment and inflation are near mandate-consistent levels,
economic conditions may, for some time, warrant keeping the
target federal funds rate below levels the Committee views as
normal in the longer run.”
Voting for this action: Janet L. Yellen, William C. Dudley, Lael
Brainard, Charles L. Evans, Stanley Fischer, Jeffrey M. Lacker,
Dennis P. Lockhart, Jerome H. Powell, Daniel K. Tarullo, and
John C. Williams.
Voting against this action: None.
It was agreed that the next meeting of the Committee would be
held on Tuesday-Wednesday, July 28-29, 2015. The meeting
adjourned at 10:40 a.m. on June 17, 2015.
Notation Votes
By notation vote completed on May 19, 2015, the Committee
unanimously approved the minutes of the Committee meeting held
on April 28-29, 2015.
By notation vote completed on June 3, 2015, the Committee
unanimously approved the selection of Brian F. Madigan to serve
as secretary, effective June 4, 2015, until the selection of a
successor at the first regularly scheduled meeting of the
Committee in 2016.
SOURCE: Federal Reserve Board
To contact the reporter on this story:
Chris Middleton in Washington at +1-202-624-1993 or
cmiddleton2@bloomberg.net
To contact the editor responsible for this story:
Marco Babic at +41-44-224-4112 or mbabic@bloomberg.net
Kristy Scheuble