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104th Annual Report
2017

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

104th Annual Report
2017

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

This and other Federal Reserve Board reports and publications are available online at
www.federalreserve.gov/publications/default.htm.
To order copies of Federal Reserve Board publications offered in print,
see the Board’s Publication Order Form (www.federalreserve.gov/files/orderform.pdf)
or contact:
Printing and Fulfillment
Mail Stop K1-120
Board of Governors of the Federal Reserve System
Washington, DC 20551
(ph) 202-452-3245
(fax) 202-728-5886
(email) Publications-BOG@frb.gov

Letter of Transmittal

Board of Governors of the Federal Reserve System
Washington, D.C.
June 2018
The Speaker of the House of Representatives:
Pursuant to the requirements of section 10 of the Federal Reserve Act, I am pleased to submit the 104th annual
report of the Board of Governors of the Federal Reserve System.
This report covers operations of the Board during calendar-year 2017.
Sincerely,

Jerome H. Powell
Chairman

v

Contents

1 Overview

.............................................................................................................................. 1

About This Report ...................................................................................................................... 1
About the Federal Reserve System ............................................................................................. 2

2 Monetary Policy and Economic Developments

..................................................... 5

Monetary Policy Report February 2018 ....................................................................................... 5
Monetary Policy Report July 2017 ............................................................................................. 21

3 Financial Stability

........................................................................................................... 33
Monitoring Risks to Financial Stability ....................................................................................... 34

Financial Stability and the Supervision and Regulation of Large, Complex Financial
Institutions ....................................................................................................................... 39
Domestic and International Cooperation and Coordination ......................................................... 41

4 Supervision and Regulation ......................................................................................... 43
2017 Developments ................................................................................................................. 43
Supervision ............................................................................................................................. 45
Regulation ............................................................................................................................... 69

5 Consumer and Community Affairs ........................................................................... 75
Supervision and Examinations .................................................................................................. 75
Consumer Laws and Regulations .............................................................................................. 85
Consumer Research and Analysis of Emerging Issues and Policy ............................................... 87
Community Development ......................................................................................................... 89

6 Federal Reserve Banks ................................................................................................... 91
Federal Reserve Priced Services ............................................................................................... 91
Currency and Coin ................................................................................................................... 93
Fiscal Agency and Government Depository Services .................................................................. 96
Use of Federal Reserve Intraday Credit ..................................................................................... 99
FedLine Access to Reserve Bank Services ................................................................................ 99
Information Technology .......................................................................................................... 100
Examinations of the Federal Reserve Banks ............................................................................ 100
Income and Expenses ............................................................................................................ 101
SOMA Holdings and Loans ..................................................................................................... 102
Federal Reserve Bank Premises .............................................................................................. 103
Pro Forma Financial Statements for Federal Reserve Priced Services ....................................... 104

vi

7 Other Federal Reserve Operations ........................................................................... 109
Regulatory Developments ....................................................................................................... 109
The Board of Governors and the Government Performance and Results Act ............................. 111

8 Record of Policy Actions of the Board of Governors ...................................... 113
Rules and Regulations ............................................................................................................ 113
Policy Statements and Other Actions ...................................................................................... 116
Discount Rates for Depository Institutions in 2017 ................................................................... 118

9 Minutes of Federal Open Market Committee Meetings .................................. 121
Meeting Held on January 31–February 1, 2017 ........................................................................ 122
Meeting Held on March 14–15, 2017 ....................................................................................... 142
Meeting Held on May 2–3, 2017 .............................................................................................. 172
Meeting Held on June 13–14, 2017 ......................................................................................... 185
Meeting Held on July 25–26, 2017 .......................................................................................... 215
Meeting Held on September 19–20, 2017 ................................................................................ 226
Meeting Held on October 31–November 1, 2017 ...................................................................... 256
Meeting Held on December 12–13, 2017 ................................................................................. 267

10 Litigation .......................................................................................................................... 295
Pending ................................................................................................................................. 295
Resolved ............................................................................................................................... 295

11 Statistical Tables ............................................................................................................. 297
12 Federal Reserve System Audits

................................................................................. 327

Board of Governors Financial Statements ................................................................................ 328
Federal Reserve Banks Combined Financial Statements .......................................................... 352
Office of Inspector General Activities ....................................................................................... 400
Government Accountability Office Reviews .............................................................................. 401

13 Federal Reserve System Budgets

.............................................................................. 403

System Budgets Overview ...................................................................................................... 403
Board of Governors Budgets .................................................................................................. 406
Federal Reserve Banks Budgets ............................................................................................. 410
Currency Budget .................................................................................................................... 414

14 Federal Reserve System Organization

.................................................................... 419
Board of Governors ................................................................................................................ 419
Federal Open Market Committee ............................................................................................ 425
Board of Governors Advisory Councils .................................................................................... 427
Federal Reserve Banks and Branches ..................................................................................... 431

15 Index

.................................................................................................................................. 447

1

1

Overview

The Federal Reserve, the central bank of the United
States, is a federal system composed of a central governmental agency—the Board of Governors—and
12 regional Federal Reserve Banks.
The Board of Governors, located in Washington,
D.C., consists of seven members appointed by the
President of the United States and supported by a
2,979-person staff. Besides conducting research,
analysis, and policymaking related to domestic and
international financial and economic matters, the
Board plays a major role in the supervision and regulation of U.S. financial institutions and activities, has
broad oversight responsibility for the nation’s payments system and the operations and activities of the
Federal Reserve Banks, and plays an important role
in promoting consumer protection, fair lending, and
community development.

About This Report
This report covers Board and System operations and
activities during calendar-year 2017. The report
includes the following sections:
• Monetary policy and economic developments.
Section 2 provides adapted versions of the Board’s
semiannual monetary policy reports to Congress.
• Federal Reserve operations. Section 3 provides a
summary of Board and System activities in the
areas of financial stability policy and research;
section 4, in supervision and regulation; section 5,
in consumer and community affairs; and section 6,
in Reserve Bank operations.
• Dodd-Frank Act implementation and other requirements. Section 7 summarizes the Board’s efforts in
2017 to implement provisions of the Dodd-Frank
Wall Street Reform and Consumer Protection Act

For More Background on
Board Operations
For more information about the Federal Reserve
Board and the Federal Reserve System, visit the
Board’s website at www.federalreserve.gov/
aboutthefed/default.htm. An online version of this
annual report is available at www.federalreserve.gov/
publications/annual-report/default.htm.

as well as the Board’s compliance with the Government Performance and Results Act of 1993.
• Policy actions and litigation. Section 8 and
section 9 provide accounts of policy actions taken
by the Board in 2017, including new or amended
rules and regulations and other actions as well as
the deliberations and decisions of the Federal Open
Market Committee (FOMC); section 10 summarizes litigation involving the Board.
• Statistical tables. Section 11 includes 14 statistical
tables that provide updated historical data concerning Board and System operations and activities.
• Federal Reserve System audits. Section 12 provides
detailed information on the several levels of audit
and review conducted in regards to System operations and activities, including those provided by
outside auditors and the Board’s Office of Inspector General.
• Federal Reserve System budgets. Section 13 presents
information on the 2017 budget performance of
the Board and Reserve Banks, as well as their 2017
budgets, budgeting processes, and trends in their
expenses and employment.
• Federal Reserve System organization. Section 14
provides listings of key officials at the Board and in
the Federal Reserve System, including the Board of

2

104th Annual Report | 2017

Governors, its officers, FOMC members, several
System councils, and Federal Reserve Bank and
Branch officers and directors.

About the Federal Reserve System
The Federal Reserve System, which serves as the
nation’s central bank, was created by an act of Congress on December 23, 1913. The System consists of
a seven-member Board of Governors with headquarters in Washington, D.C., and the 12 Reserve Banks
located in major cities throughout the United States.

■ Federal Reserve Bank city
■
N Board of Governors of the Federal Reserve System, Washington, D.C.

The Federal Reserve Banks are the operating arms of
the central banking system, carrying out a variety of
System functions, including operating a nationwide
payment system; distributing the nation’s currency
and coin; under authority delegated by the Board of
Governors, supervising and regulating a variety of
financial institutions and activities; serving as fiscal
agents of the U.S. Treasury; and providing a variety
of financial services for the Treasury, other government agencies, and other fiscal principals.
The following maps identify Federal Reserve Districts by their official number, city, and letter
designation.

Overview

■ Federal Reserve Bank city
● Federal Reserve Branch city
■
N Board of Governors of the Federal Reserve System, Washington, D.C.
— Branch boundary

3

5

2

Monetary Policy and
Economic Developments

As required by section 2B of the Federal Reserve Act,
the Federal Reserve Board submits written reports to
the Congress that contain discussions of “the conduct of monetary policy and economic developments
and prospects for the future.” The Monetary Policy
Report, submitted semiannually to the Senate Committee on Banking, Housing, and Urban Affairs and
to the House Committee on Banking and Financial
Services, is delivered concurrently with testimony
from the Federal Reserve Board Chair.
The following discussion is a review of U.S. monetary
policy and economic developments in 2017, excerpted
from the Monetary Policy Report published in February 2018 and July 2017. Those complete reports
are available on the Board’s website at www
.federalreserve.gov/monetarypolicy/files/20180223_
mprfullreport.pdf (February 2018) and www
.federalreserve.gov/monetarypolicy/files/20170707_
mprfullreport.pdf (July 2017).

Monetary Policy Report
February 2018
Summary
Economic activity increased at a solid pace over the
second half of 2017, and the labor market continued
to strengthen. Measured on a 12-month basis, inflation has remained below the Federal Open Market
Committee’s (FOMC) longer-run objective of 2 percent. The FOMC raised the target range for the federal funds rate twice in the first half of 2017, resulting in a range of 1 to 1¼ percent by the end of its
June meeting. With the federal funds rate rising
toward more normal levels, at its September meeting,
the FOMC decided to initiate a program of gradually
and predictably reducing the size of its balance sheet.
At its meeting in December, the Committee judged
that current and prospective economic conditions
called for a further increase in the target range for the
federal funds rate, to 1¼ to 1½ percent.

Economic and Financial Developments
The labor market. The labor market has continued to
strengthen since the middle of last year. Payroll
employment has posted solid gains, averaging
182,000 per month in the seven months starting in
July 2017, about the same as the average pace in the
first half of 2017. Although net job creation last year
was slightly slower than in 2016, it has remained considerably faster than what is needed, on average, to
absorb new entrants into the labor force. The unemployment rate declined from 4.3 percent in June to
4.1 percent in January—somewhat below the median
of FOMC participants’ estimates of its longer-run
normal level. Other measures of labor utilization also
suggest that the labor market has tightened since last
summer. Nonetheless, wage growth has been moderate, likely held down in part by the weak pace of productivity growth in recent years.
Inflation. Consumer price inflation has remained
below the FOMC’s longer-run objective of 2 percent.
The price index for personal consumption expenditures increased 1.7 percent over the 12 months ending
in December 2017, about the same as in 2016. The
12-month measure of inflation that excludes food
and energy items (so-called core inflation), which historically has been a better indicator of where overall
inflation will be in the future than the headline figure,
was 1.5 percent in December—0.4 percentage point
lower than it had been one year earlier. However,
monthly readings on core inflation were somewhat
higher during the last few months of 2017 than earlier in the year. Measures of longer-run inflation
expectations have, on balance, been generally stable,
although some measures remain low by historical
standards.
Economic growth. Real gross domestic product
(GDP) is reported to have increased at an annual rate
of nearly 3 percent in the second half of 2017 after
rising slightly more than 2 percent in the first half.
Consumer spending expanded at a solid rate in the
second half, supported by job gains, rising household
wealth, and favorable consumer sentiment. Business

6

104th Annual Report | 2017

investment growth was robust, and indicators of
business sentiment have been strong. The housing
market has continued to improve slowly. Foreign
activity remained solid and the dollar depreciated
further in the second half, but net exports subtracted
from real U.S. GDP growth as imports of consumer
and capital goods surged late in the year.
Financial conditions. Financial conditions for businesses and households have eased on balance since
the middle of 2017 amid an improving global growth
outlook. Notwithstanding financial market developments in recent weeks, broad measures of equity
prices are higher, and spreads of yields on corporate
bonds over those of comparable-maturity Treasury
securities have narrowed. Most types of consumer
loans remained widely available, though credit was
still difficult to access in credit card and mortgage
markets for borrowers with low credit scores or
harder-to-document incomes. Longer-term nominal
Treasury yields and mortgage rates have moved up
on net. The dollar depreciated, on average, against
the currencies of our trading partners. In foreign
financial markets, equity prices generally increased in
the second half of 2017, and most of those indexes
remain higher, on net, despite recent declines. Most
longer-term yields rose noticeably.
Financial stability. Vulnerabilities in the U.S. financial
system are judged to be moderate on balance. Valuation pressures continue to be elevated across a range
of asset classes even after taking into account the
current level of Treasury yields and the expectation
that the reduction in corporate tax rates should generate an increase in after-tax earnings. Leverage in
the nonfinancial business sector has remained high,
and net issuance of risky debt has climbed in recent
months. In contrast, leverage in the household sector
has remained at a relatively low level, and household
debt in recent years has expanded only about in line
with nominal income. Moreover, U.S. banks are well
capitalized and have significant liquidity buffers.
Monetary Policy
Interest rate policy. The FOMC continued to gradually increase the target range for the federal funds
rate. After having raised it twice in the first half of
2017, the Committee raised the target range for the
federal funds rate again in December, bringing it to
the current range of 1¼ to 1½ percent. The decision
to increase the target range for the federal funds rate
reflected the solid performance of the economy. Even
with this rate increase, the stance of monetary policy
remains accommodative, thereby supporting strong

labor market conditions and a sustained return to
2 percent inflation.
The FOMC expects that, with further gradual adjustments in the stance of monetary policy, economic
activity will expand at a moderate pace and labor
market conditions will remain strong. Inflation on a
12-month basis is expected to move up this year and
to stabilize around the Committee’s 2 percent objective over the next few years. The federal funds rate is
likely to remain, for some time, below levels that are
expected to prevail in the longer run. Consistent with
this outlook, in the most recent Summary of Economic Projections (SEP), which was compiled at the
time of the December FOMC meeting, the median of
participants’ assessments for the appropriate level of
the federal funds rate through the end of 2019
remains below the median projection for its longerrun level. (The December SEP is included as Part 3 of
the February 2018 Monetary Policy Report on pages
39–54; it is also included in section 9 of this annual
report.) However, as the Committee has continued to
emphasize, the actual path of the federal funds rate
will depend on the economic outlook as informed by
incoming data. In particular, with inflation having
persistently run below the 2 percent longer-run objective, the Committee will carefully monitor actual and
expected inflation developments relative to its symmetric inflation goal.
Balance sheet policy. In the second half of 2017, the
Committee initiated the balance sheet normalization
program that is described in the Addendum to the
Policy Normalization Principles and Plans the Committee issued in June.1 Specifically, since October, the
Federal Reserve has been gradually reducing its holdings of Treasury and agency securities by decreasing
the reinvestment of principal payments it receives
from these securities.
Special Topics
How tight is the labor market? Although there is no
way to know with precision, the labor market appears
to be near or a little beyond full employment at present. The unemployment rate is somewhat below most
estimates of its longer-run normal rate, and the labor
force participation rate is relatively close to many estimates of its trend. Although employers report having
more difficulties finding qualified workers, hiring continues apace, and serious labor shortages would likely
1

The June addendum is available on the Board’s website at
https://www.federalreserve.gov/monetarypolicy/files/FOMC_
PolicyNormalization.20170613.pdf.

Monetary Policy and Economic Developments

have brought about larger wage increases than have
been evident to date. (See the box “How Tight Is the
Labor Market?” on pages 8–9 of the February 2018
Monetary Policy Report.)
Low global inflation. Inflation has generally come in
below central banks’ targets in the advanced economies for several years now. Resource slack and commodity prices—as well as, for the United States,
movements in the U.S. dollar—appear to explain
inflation’s behavior fairly well. But our understanding is imperfect, and other, possibly more persistent,
factors may be at work. Resource slack at home and
abroad might be greater than it appears to be, or
inflation expectations could be lower than suggested
by the available indicators. Moreover, some observers
have pointed to increased competition from online
retailers or international developments—such as
global economic slack or the integration of emerging
economies into the world economy—as contributing
to lower inflation. Policymakers remain attentive to
the possibility of such forces leading to continued
low inflation; they also are watchful regarding the
opposite risk of inflation moving undesirably high.
(See the box “Low Inflation in the Advanced Economies” on pages 14–15 of the February 2018 Monetary Policy Report.)
Monetary policy rules. Monetary policymakers consider a wide range of information on current economic conditions and the outlook before deciding on
a policy stance they deem most likely to foster the
FOMC’s statutory mandate of maximum employment and stable prices. They also routinely consult
monetary policy rules that connect prescriptions for
the policy interest rate with variables associated with
the dual mandate. The use of such rules requires
careful judgments about the choice and measurement
of the inputs into these rules as well as the implications of the many considerations these rules do not
take into account. (See the box “Monetary Policy Rules
and Their Role in the Federal Reserve’s Policy Process” on pages 35–38 of the February 2018 Monetary
Policy Report.)

Part 1: Recent Economic and Financial
Developments

months starting in July 2017, about the same pace as
in the first half of 2017.2 Although net job creation
last year was slightly slower than in 2016, it has
remained considerably faster than what is needed, on
average, to absorb new entrants to the labor force
and is therefore consistent with the view that the
labor market has strengthened further (figure 1). The
strength of the labor market is also evident in the
decline in the unemployment rate to 4.1 percent in
January, ¼ percentage point below its level in
June 2017 and about ½ percentage point below the
median of Federal Open Market Committee
(FOMC) participants’ estimates of its longer-run
normal level (figure 2).
Other indicators also suggest that labor market conditions have continued to tighten. The labor force
participation rate (LFPR)—that is, the share of
adults either working or actively looking for work—
was 62.7 percent in January. The LFPR is little
changed, on net, since early 2014. However, the average age of the population is continuing to increase.
In particular, the members of the baby-boom cohort
increasingly are moving into their retirement years, a
time when labor force participation typically is low.
That development implies that a sustained period in
which the demand for and supply of labor were in
balance would be associated with a downward trend
in the overall participation rate. Accordingly, the flat
2

The hurricanes that struck the United States during the second
half of last year caused substantial variation in the month-tomonth pattern of job gains, but the average performance over
the period as a whole was probably substantially unaffected.

Figure 1. Net change in payroll employment
3-month moving averages

Thousands of jobs

Private

Payroll employment has continued to post solid
gains, averaging 182,000 per month in the seven

400
200
+
0
_

Total nonfarm

200
400

Domestic Developments
The labor market strengthened further during the
second half of 2017 and early this year

7

600
800
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Source: Bureau of Labor Statistics via Haver Analytics.

8

104th Annual Report | 2017

Figure 2. Measures of labor underutilization
Percent

Monthly

18
U-6

16

U-4

14

U-5

12
10
8
6

Unemployment rate

4

2006

2008

2010

2012

2014

2016

2018

Note: Unemployment rate measures total unemployed as a percentage of the labor force. U-4 measures total unemployed plus discouraged workers, as a percentage of the
labor force plus discouraged workers. Discouraged workers are a subset of marginally attached workers who are not currently looking for work because they believe no jobs are
available for them. U-5 measures total unemployed plus all marginally attached to the labor force, as a percentage of the labor force plus persons marginally attached to the
labor force. Marginally attached workers are not in the labor force, want and are available for work, and have looked for a job in the past 12 months. U-6 measures total unemployed plus all marginally attached workers plus total employed part time for economic reasons, as a percentage of the labor force plus all marginally attached workers. The
shaded bar indicates a period of business recession as defined by the National Bureau of Economic Research.
Source: Bureau of Labor Statistics via Haver Analytics.

profile of the LFPR during the past few years is consistent with an overall picture of improving labor
market conditions. In line with this perspective, the
LFPR for individuals aged 25 to 54—which is much
less sensitive to population aging—has been rising
since 2015. The employment-to-population ratio for
individuals 16 and older—that is, the share of people
who are working—was 60.1 percent in January and
has been increasing since 2011; this gain primarily
reflects the decline in the unemployment rate. (The
box “How Tight Is the Labor Market?” on pages 8–9
of the February 2018 Monetary Policy Report
describes the available measures of labor market
slack in more detail.)
Other indicators are also consistent with continuing
strong labor demand. The number of people filing
initial claims for unemployment insurance has
remained near its lowest level in decades.3 As
reported in the Job Openings and Labor Turnover
Survey, the rate of job openings remained elevated in
the second half of 2017, while the rate of layoffs
remained low. In addition, the rate of quits stayed
3

Initial claims jumped in the fall of 2017 as a consequence of disruptions from the hurricanes and then returned to a low level.

high, an indication that workers are able to obtain a
new job when they seek one.
Unemployment rates have declined across
demographic groups, but unemployment remains
high for some groups

Unemployment rates have trended downward across
racial and ethnic groups. The decline in the unemployment rate for blacks or African Americans over
the past few years has been particularly notable. This
broad pattern is typical: The unemployment rates for
blacks and Hispanics tend to rise considerably more
than the rates for whites and Asians during recessions, and then they decline more rapidly during
expansions. Yet even with the recent narrowing, the
disparities in unemployment rates across demographic groups remain substantial and largely the
same as before the recession. The unemployment rate
for whites has averaged 3.7 percent since the middle
of 2017 and the rate for Asians has been about
3.3 percent, while the unemployment rates for Hispanics or Latinos (5.0 percent) and blacks (7.3 percent) have been substantially higher. In addition, the
labor force participation rates for blacks, Hispanics,
and Asians have generally been lower than those for
whites of the same age group. As the labor market

Monetary Policy and Economic Developments

has strengthened over the past few years, the participation rates for prime-age individuals in each of
these groups have risen.
Growth of labor compensation has been
moderate . . .

Despite the strong labor market, the available indicators generally suggest that the growth of hourly
compensation has been moderate. Growth of compensation per hour in the business sector—a broadbased measure of wages, salaries, and benefits that is
quite volatile—was 2¼ percent over the four quarters
ending in 2017:Q4, well above the low reading in
2016 but about in line with the average annual
increase from 2010 to 2015.4 The employment cost
index—which also measures both wages and the cost
to employers of providing benefits—was up about
2½ percent in the fourth quarter of 2017 relative to
its year-ago level, roughly ½ percentage point faster
than its gain a year earlier. Among measures that do
not take account of benefits, average hourly earnings
rose slightly less than 3 percent through January of
this year, a gain that was somewhat faster than the
average increase in the preceding few years. Similarly,
the measure of wage growth computed by the Federal Reserve Bank of Atlanta that tracks median
12-month wage growth of individuals reporting to
the Current Population Survey showed an increase of
about 3 percent in January, similar to its readings
from the past three years and above the average
increase in the preceding few years.5
. . . and likely was restrained by slow growth of
labor productivity

These moderate rates of compensation gain likely
reflect the offsetting influences of a tightening labor
market and persistently weak productivity growth.
Since 2008, labor productivity has increased only a
little more than 1 percent per year, on average, well
below the average pace from 1996 through 2007 and
also below the gains in the 1974–95 period. Considerable debate remains about the reasons for the general
slowdown in productivity growth and whether it will
persist. The slowdown may be partly attributable to
the sharp pullback in capital investment during the
most recent recession and the relatively long period
4

5

The compensation per hour measure of wages and salaries
declined at the end of 2016, possibly reflecting the shifting of
bonuses or other types of income into 2017 in anticipation of a
possible cut in personal income tax rates.
The Atlanta Fed’s measure differs from others in that it measures the wage growth only of workers who were employed both
in the current survey month and 12 months earlier.

9

of modest growth in investment that followed, but a
reduced pace of capital deepening can explain only a
portion of the step-down. Beyond that, some economists think that more recent technological advances,
such as information technology, have been less revolutionary than earlier general-purpose technologies,
such as electricity and internal combustion. Others
have pointed to a slowdown in the speed at which
capital and labor are reallocated toward their most
productive uses, which is reflected in fewer business
start-ups and a reduced pace of hiring and investment by the most innovative firms. Still others argue
that there have been important innovations in many
fields in recent years, from energy to medicine, often
underpinned by ongoing advances in information
technology, which augurs well for productivity
growth going forward. However, those economists
note that such productivity gains may appear only
slowly as new firms emerge to exploit the new technologies and as incumbent firms invest in new vintages of capital and restructure their businesses.
Price inflation remains below 2 percent, but the
monthly readings picked up toward the end
of 2017

Consumer price inflation, as measured by the
12-month change in the price index for personal consumption expenditures (PCE), remained below the
FOMC’s longer-run objective of 2 percent during
most of 2017. The PCE price index increased 1.7 percent over the 12 months ending in December 2017,
about the same as in 2016 (figure 3). Core inflation,
which typically provides a better indication than the
headline measure of where overall inflation will be in
the future, was 1.5 percent over the 12 months ending
in December 2017—0.4 percentage point lower than
it had been one year earlier.
Both measures of inflation reflected some weak readings in the spring and summer of 2017. A portion of
those weak readings seemed attributable to idiosyncratic events, such as a steep 1-month decline in the
price index for wireless telephone services. However,
the monthly readings on core inflation were somewhat higher during the last few months of 2017, in
contrast to the more typical pattern that has prevailed in recent years in which readings around the
end of the year have tended to be slightly below average. Moreover, the 12-month change in the trimmed
mean PCE price index—an alternative indicator of
underlying inflation produced by the Federal Reserve
Bank of Dallas that may be less sensitive to idiosyncratic price movements—was 1.7 percent in Decem-

10

104th Annual Report | 2017

Figure 4. Brent spot and futures prices

Figure 3. Change in the price index for personal
consumption expenditures

Weekly
Monthly

Dollars per barrel

12-month percent change

130
120
110
100
90
80
70
60
50
40
30
20

Spot price

Total

3.0
Trimmed mean
Excluding food
and energy

2.5
24-month-ahead
futures contracts

2.0
1.5
1.0
.5
+
0
_
2014

2011

2012

2013

2014

2015

2016

2017

Note: The data extend through December 2017; changes are from one year
earlier.

2015

2016

2017

2018

Note: The data are weekly averages of daily data and extend through February 21,
2018.
Source: ICE Brent Futures via Bloomberg.

Source: For trimmed mean, Federal Reserve Bank of Dallas; for all else, Bureau of
Economic Analysis; all via Haver Analytics.

ber 2017 and has slowed by less than core PCE price
inflation over the past 12 months.6 (For more discussion of inflation both in the United States and
abroad, see the box “Low Inflation in the Advanced
Economies” on pages 14–15 of the February 2018
Monetary Policy Report.)
Oil and metals prices increased notably

Headline inflation was a little higher than core inflation last year, which reflected a rise in consumer
energy prices. The price of crude oil rose from $48 per
barrel at the end of June to a peak of about $70 per
barrel early in the year and, even after recent declines,
remains more than 30 percent above its mid-2017 level
(figure 4). The upswing in oil prices appears to have
been driven primarily by strengthening global
demand as well as OPEC’s decision to further extend
its November 2016 production cuts through the end
of 2018. The higher oil prices fed through to moderate increases in the cost of gasoline and heating oil.
Inflation momentum was also supported by nonfuel
import prices, which rose throughout 2017 in part
because of dollar depreciation. That development
marked a turn from the past several years, during
which nonfuel import prices declined or held flat. In
addition to the decline in the dollar, nonfuel import
prices were driven higher by a substantial increase in
6

The trimmed mean index excludes whatever prices showed the
largest increases or decreases in a given month; for example, the
sharp decline in prices for wireless telephone services in
March 2017 was excluded from this index.

the price of industrial metals. Despite recent volatility, metals prices remain higher, on net, boosted primarily by improved prospects for global demand and
also by government policies that restrained production in China.
In contrast, headline inflation has been held down by
consumer food prices, which increased only about
½ percent in 2017 after having declined in 2016.
Food prices have been restrained by softness in the
prices of farm commodities, which in turn has
reflected robust supply in the United States and
abroad. Although the harvests for many crops in the
United States declined in 2017, they were larger than
had been expected earlier in the year.
Survey-based measures of inflation expectations
have been generally stable . . .

Expectations of inflation likely influence actual inflation by affecting wage- and price-setting decisions.
Survey-based measures of inflation expectations at
medium- and longer-term horizons have remained
generally stable. In the Survey of Professional Forecasters conducted by the Federal Reserve Bank of
Philadelphia, the median expectation for the annual
rate of increase in the PCE price index over the next
10 years has been around 2 percent for the past several years (figure 5). In the University of Michigan
Surveys of Consumers, the median value for inflation
expectations over the next 5 to 10 years—which had
drifted downward starting in 2014—has held about
flat since the end of 2016 at a level that is a few
tenths lower than had prevailed through 2014.

Monetary Policy and Economic Developments

Figure 5. Median inflation expectations
Percent

Michigan survey expectations
for next 5 to 10 years

4

11

than 2¼ percent and 2½ percent, respectively, with
both measures below the ranges that persisted for
most of the 10 years before the start of the notable
declines in mid-2014.
Real gross domestic product growth picked up in
the second half of 2017

3

2
SPF expectations
for next 10 years
1

2006

2008

2010

2012

2014

2016

2018

Note: The Michigan survey data are monthly and extend through February; the
February data are preliminary. The SPF data for inflation expectations for personal
consumption expenditures are quarterly and extend from 2007:Q1 through
2018:Q1.
Source: University of Michigan Surveys of Consumers; Federal Reserve Bank of
Philadelphia, Survey of Professional Forecasters (SPF).

. . . and market-based measures of inflation
compensation have increased in recent months
but remain relatively low

Inflation expectations can also be gauged by marketbased measures of inflation compensation, though
the inference is not straightforward because marketbased measures can be importantly affected by
changes in premiums that provide compensation for
bearing inflation and liquidity risks. Measures of
longer-term inflation compensation—derived either
from differences between yields on nominal Treasury
securities and those on comparable Treasury
Inflation-Protected Securities (TIPS) or from inflation swaps—have increased since June, returning to
levels seen in early 2017, but nevertheless remain relatively low.7 The TIPS-based measure of 5-to-10-yearforward inflation compensation and the analogous
measure of inflation swaps are now slightly lower

Real gross domestic product (GDP) is reported to
have risen at an annual rate of nearly 3 percent in the
second half of 2017 after increasing slightly more
than 2 percent in the first half of 2017 (figure 6).
Much of that faster growth reflects the stabilization
of inventory investment, which had slowed considerably in the first half of last year. Private domestic
final purchases—that is, final purchases by U.S.
households and businesses, which tend to provide a
better indication of future GDP growth than most
other components of overall spending—rose at a
solid annual rate of about 3½ percent in the second
half of the year, similar to the first-half pace.
The economic expansion continues to be supported by
steady job gains, rising household wealth, favorable
consumer sentiment, strong economic growth abroad,
and accommodative financial conditions, including the
still low cost of borrowing and easy access to credit for
many households and businesses. In addition to these
factors, very upbeat business sentiment appears to
have supported solid growth over the past year.

Figure 6. Change in real gross domestic product and gross
domestic income
Percent, annual rate

Gross domestic product
Gross domestic income

5
4

7

Inflation compensation implied by the TIPS breakeven inflation
rate is based on the difference, at comparable maturities,
between yields on nominal Treasury securities and yields on
TIPS, which are indexed to the headline consumer price index
(CPI). Inflation swaps are contracts in which one party makes
payments of certain fixed nominal amounts in exchange for cash
flows that are indexed to cumulative CPI inflation over some
horizon. Focusing on inflation compensation 5 to 10 years
ahead is useful, particularly for monetary policy, because such
forward measures encompass market participants’ views about
where inflation will settle in the long term after developments
influencing inflation in the short term have run their course.

H1

H2*

3
2
1

2011

2012

2013

2014

2015

2016

*Gross domestic income is not yet available for 2017:H2.
Source: Bureau of Economic Analysis via Haver Analytics.

2017

12

104th Annual Report | 2017

Ongoing improvement in the labor market and
gains in wealth continue to support consumer
spending . . .

Supported by ongoing improvement in the labor
market, real consumer spending rose at a solid annual
rate of 3 percent in the second half of 2017, a somewhat faster pace than in the first half. Real disposable
personal income—that is, income after taxes and
adjusted for price changes—increased at a modest
average rate of 1 percent in 2016 and 2017, as real
wages changed little over this period (figure 7). With
spending growth estimated to have outpaced income
growth, the personal saving rate has declined considerably since the end of 2015.
Consumer spending has also been supported by further increases in household net wealth. Broad measures of U.S. equity prices rose robustly last year,
though markets have been volatile in recent weeks;
house prices have also continued to climb, strengthening the wealth of homeowners. As a result of the
increases in home and equity prices, aggregate household net worth rose appreciably in 2017. In fact, at
the end of the third quarter of 2017, household net
worth was 6.7 times the value of disposable income,
the highest-ever reading for that ratio, which dates
back to 1947.
. . . borrowing conditions for consumers remain
generally favorable . . .

Consumer credit expanded in 2017 at about the same
pace as in 2016. Financing conditions for most types
of consumer loans are generally favorable. However,
banks have continued to tighten standards on credit
Figure 7. Change in real personal consumption
expenditures and disposable personal income

card and auto loans for borrowers with low credit
scores, possibly in response to some upward drift in
delinquency rates for those borrowers. Mortgage
credit has remained readily available for households
with solid credit profiles, but it was still difficult to
access for households with low credit scores or
harder-to-document incomes.
Although household borrowing continued to increase
last year, the household debt service burden—the
ratio of required principal and interest payments on
outstanding household debt to disposable income,
measured for the household sector as a whole—remained low by historical standards.
. . . and consumer confidence is strong

Consumers have remained optimistic about their economic situation. As measured by the Michigan survey, consumer sentiment was solid throughout 2017,
likely reflecting rising income, job gains, and low
inflation. Furthermore, the share of households
expecting real income to rise over the next year or
two has continued to strengthen and now exceeds its
pre-recession level.
Activity in the housing sector has improved
modestly

Real residential investment spending increased
around 2 percent in 2017, about the same modest
gain that was seen in 2016. Housing activity was soft
in the spring and summer, possibly reflecting the rise
in mortgage interest rates early in the year, and then
picked up toward the end of the year. For the year as
a whole, sales of new and existing homes gained, and
single-family housing starts increased (figure 8). In
Figure 8. Private housing starts and permits

Percent, annual rate

Personal consumption expenditures
Disposable personal income

Millions of units, annual rate

Monthly

6
5
H1 H2

2.0
Single-family starts

4

1.6

3
1.2

2
Single-family permits

1
+
0
_
1

.8
.4

2

Multifamily starts

0

3
2011

2012

2013

2014

2015

2016

Source: Bureau of Economic Analysis via Haver Analytics.

2017

2006

2008

2010

2012

2014

Source: U.S. Census Bureau via Haver Analytics.

2016

2018

Monetary Policy and Economic Developments

contrast, multifamily housing starts continued to
edge down from the solid pace seen in 2016. Going
forward, lean inventories are likely to support further
gains in homebuilding activity, as the months’ supply
of homes for sale has remained near low levels.
Business investment has continued to
rebound . . .

Real outlays for business investment—that is, private
nonresidential fixed investment—rose at an annual
rate of about 6 percent in the second half of 2017, a
bit below the gain in the first half but still notably
faster than the unusually weak pace recorded in 2016
(figure 9). Business spending on equipment and
intangibles (such as research and development)
advanced at a solid pace in the second half of the
year, and forward-looking indicators of business
spending are generally favorable: Orders and shipments of capital goods have posted net gains in
recent months, and indicators of business sentiment
and activity remain very upbeat. That said, business
outlays on structures turned down in the second half
of 2017, as investment growth in drilling and mining
structures retreated from a very rapid pace in the first
half and investment in other nonresidential structures
declined.
. . . while corporate financing conditions have
remained accommodative

Aggregate flows of credit to large nonfinancial firms
remained solid through the third quarter, supported
in part by continued low interest rates. The gross
issuance of corporate bonds stayed robust during the
second half of 2017, and yields on both investment-

Percent, annual rate

15
H1
H2

grade and high-yield corporate bonds remained low
by historical standards.
Despite solid growth in business investment, outstanding commercial and industrial (C&I) loans on
banks’ books continued to rise only modestly in the
third quarter of 2017. Respondents to the Senior
Loan Officer Opinion Survey on Bank Lending Practices, or SLOOS, reported that demand for C&I loans
declined in the third quarter and was little changed in
the fourth quarter even as lending standards and
terms on such loans eased.8 Respondents attributed
this decline in demand in part to firms drawing on
internally generated funds or using alternative
sources of financing. Financing conditions for small
businesses appear to have remained favorable, and
although credit growth has remained sluggish, survey
data suggest this sluggishness is largely due to continued weak demand for credit by small businesses.
Net exports subtracted from GDP growth in the
fourth quarter after providing a modest addition
during the rest of the year

U.S. real exports expanded at a moderate pace in the
second half of last year after having increased more
rapidly in the first half, supported by solid foreign
growth (figure 10). At the same time, real imports
surged in the fourth quarter following a slight contraction in the third quarter. As a result, real net
exports moved from modestly lifting U.S. real GDP
growth during the first three quarters of 2017 to subtracting more than 1 percentage point in the fourth
quarter. Although the nominal trade and current
account deficits narrowed in the third quarter of
2017, the trade deficit widened in the fourth quarter.
Federal fiscal policy actions had a roughly neutral
effect on economic growth in 2017 . . .

Figure 9. Change in real private nonresidential fixed
investment

Structures
Equipment and intangible capital

13

10
5

Federal government purchases rose 1 percent in 2017,
and policy actions had little effect on federal taxes or
transfers (figure 11). Under currently enacted legislation, which includes the Tax Cuts and Jobs Act
(TCJA) and the Bipartisan Budget Act, federal fiscal
policy will likely provide a moderate boost to GDP
growth this year.9

+
0
_
5
8

10
9

2010

2011

2012

2013

2014

2015

Source: Bureau of Economic Analysis via Haver Analytics.

2016

2017

The SLOOS is available on the Board’s website at https://www
.federalreserve.gov/data/sloos/sloos.htm.
The Joint Committee on Taxation estimates that the TCJA will
reduce average annual tax revenue by a little more than 1 percent
of GDP over the next few years. This revenue estimate does not
account for the potential macroeconomic effects of the
legislation.

14

104th Annual Report | 2017

Figure 10. Change in real imports and exports of goods and
services
Percent, annual rate

Imports
Exports

Q4

15
12
9

H1

3
+
0
_
3

2015

2016

2017

Source: Bureau of Economic Analysis via Haver Analytics.

The federal unified deficit continued to widen in fiscal
year 2017, reaching 3½ percent of nominal GDP.
Although expenditures as a share of GDP were relatively stable at a little under 21 percent, receipts moved
lower in 2017 to roughly 17 percent of GDP. The ratio
of federal debt held by the public to nominal GDP was
75¼ percent at the end of fiscal year 2017 and remains
quite elevated relative to historical norms.
. . . and the fiscal position of most state and local
governments is stable

The fiscal position of most state and local governments is stable, although there is a range of
experiences across these governments. Many state

Figure 11. Change in real government expenditures on
consumption and investment
Percent, annual rate

Federal
State and local

H1

The path of the expected federal funds rate implied
by market quotes on interest rate derivatives has
moved up on net since the middle of last year amid
an improving global growth outlook. Part of the
upward shift occurred around FOMC communications in the fall that were interpreted as implying a
somewhat quicker pace of policy rate increases than
had been previously anticipated. The expected policy
path also moved higher around the time when the
U.S. tax legislation was finalized.
Survey-based measures of the expected path of the
policy rate have been generally little changed on net,
suggesting that part of the rise in the market-implied
path reflected higher term premiums. In the Federal
Reserve Bank of New York’s Survey of Primary
Dealers and Survey of Market Participants, which
were conducted just before the January 2018 FOMC
meeting, the median respondents expected three
25 basis point increases in the FOMC’s target range
for the federal funds rate as the most likely outcome
for this year, unchanged from what they had expected
in surveys conducted before the June FOMC meeting. Market-based measures of uncertainty about the
policy rate approximately one to two years ahead
have, on balance, edged up from their levels in the
middle of 2017.
The nominal Treasury yield curve has shifted up

4

The nominal Treasury yield curve has shifted up on
net since the middle of 2017, owing to greater optimism about the global growth outlook and investors’
perceptions of higher odds for the removal of monetary policy accommodation (figure 12). Yields on
shorter-term nominal Treasury securities increased
relatively more than those on longer-term nominal
Treasury securities, thus resulting in some flattening
of the yield curve. According to market participants,
among the factors contributing to this outcome has
been the Treasury Department’s stated intention to
increase its reliance on issuance of short-dated secu-

2
+
0
_
2
4
6
8

2009 2010 2011 2012 2013 2014 2015 2016 2017

The expected path of the federal funds rate has
moved up

6
H2

Source: Bureau of Economic Analysis via Haver Analytics.

Financial Developments

6
Q3

2014

governments are experiencing lackluster revenue
growth, as income tax collections have only edged up,
on average, in recent quarters. In contrast, house
price gains have continued to push up property tax
revenues at the local level. Employment in the state
and local government sector only inched up in 2017,
while outlays for construction by these governments
continued to decline on net.

Monetary Policy and Economic Developments

Figure 13. Equity prices

Figure 12. Yields on nominal Treasury securities
Daily

Percent

Daily

December 31, 1999 = 100

7
10-year

15

6

200
Dow Jones bank index

175

30-year
5

S&P 500 index

150

4

125

3

100

2

75

1

50

0

25

5-year

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
Note: The Treasury ceased publication of the 30-year constant maturity series on
February 18, 2002, and resumed that series on February 9, 2006.

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
Source: Standard & Poor's Dow Jones Indices via Bloomberg. (For Dow Jones
Indices licensing information, see the note on the Contents page.)

Source: Department of the Treasury.

rities, as discussed in the two most recent releases of
the Treasury’s quarterly financing statement.
Consistent with the changes in Treasury yields, yields
on 30-year agency mortgage-backed securities
(MBS)—an important determinant of mortgage
interest rates—increased but remain quite low by historical standards.
Broad equity price indexes have increased
further . . .

Broad U.S. equity indexes, despite some declines seen
in recent weeks, have, on balance, increased further
since June 2017, with most of the net gains occurring
during the final quarter of last year (figure 13).
Equity prices were reportedly supported in part by an
increase in investors’ confidence that changes to the
federal tax law will boost corporate earnings. Stock
prices generally increased across industries outside
utilities and real estate, two sectors for which the
increases in interest rates described earlier are likely
to have weighed more heavily on stock prices; stock
prices of banks rose more than the broader market.
Implied volatility for the S&P 500 index, as calculated from options prices, increased notably in early
February, ending the period close to the median of
its historical distribution.
. . . while risk spreads on corporate bonds have
continued to decrease

Spreads on both high-yield and investment-grade
corporate bond yields over comparable-maturity
Treasury yields have decreased further since the

middle of last year, with spreads for high-yield bonds
moving closer to the bottom of their historical
ranges. The narrowing of the spreads since the
middle of 2017 appears to reflect both an anticipation that the losses from defaults on these bonds will
be smaller and a lower compensation being charged
for bearing the risk of such losses. (For a discussion
of financial stability issues, see the box “Developments
Related to Financial Stability” on pages 24–26 of the
February 2018 Monetary Policy Report.)
Markets for Treasury securities,
mortgage-backed securities, municipal bonds,
and short-term funding have functioned well

Available indicators of Treasury market functioning
have generally remained stable over the second half
of 2017 and early 2018, with a variety of liquidity
metrics—including bid-ask spreads, bid sizes, and
estimates of transaction costs—mostly unchanged
over the period. Liquidity conditions in the agency
MBS market have also been generally stable. In
recent months, the functioning of Treasury and
agency MBS markets has not been notably affected
by the implementation of the Federal Reserve’s balance sheet normalization program and the resulting
reduction in reinvestment of principal payments from
the Federal Reserve’s securities holdings. In early
February, amid financial market volatility, liquidity
conditions in the Treasury market deteriorated but
have recovered somewhat since. Credit conditions in
municipal bond markets have also remained generally
stable since June 2017. Over that period, yield
spreads on 20-year general obligation municipal
bonds over comparable-maturity Treasury securities

16

104th Annual Report | 2017

have narrowed on balance. Nevertheless, significant
financial strains were still evident for some issuers. In
particular, prices for Puerto Rico general obligation
bonds fell notably after Hurricane Maria hit the
island and its economic outlook deteriorated even
further. However, these developments left little
imprint in broader municipal bond markets. Conditions in domestic short-term funding markets have
remained stable since the middle of last year.
Bank credit continued to expand and bank
profitability remained stable

Aggregate credit provided by commercial banks continued to expand in the second half of 2017 at a pace
similar to the one seen earlier in the year but more
slowly than in 2016. Its pace was also slower than
that of nominal GDP, thus leaving the ratio of total
commercial bank credit to current-dollar GDP
slightly lower than earlier in 2017 (figure 14). Measures of bank profitability were little changed at levels
below their historical averages.
International Developments
Economic activity in most foreign economies
continued at a healthy pace in the second half
of 2017

Foreign real GDP appears to have expanded notably
in the second half of 2017, extending the period since
mid-2016 when the pace of economic growth picked
up broadly around the world.

Growth in advanced foreign economies was
solid, and unemployment fell to multidecade
lows . . .

In the advanced foreign economies (AFEs), the economic recovery has continued to firm. Real GDP in
the euro area and the United Kingdom expanded at a
solid pace in the second half of the year. Economic
activity also continued to expand in Japan, though
real GDP growth slowed sharply in the fourth quarter. In Canada, data through November indicate that
economic growth moderated somewhat in the second
half following a very rapid expansion earlier in the
year. Unemployment declined further as well, reaching 40-year lows in Canada and the United Kingdom, while growth in labor compensation ticked up
only modestly.
. . . but inflation remained subdued . . .

Consumer price inflation rose somewhat in most
AFEs, boosted by the rise in commodity prices.
However, headline and especially core inflation
remained below the central banks’ targets in the euro
area and Japan. In contrast, U.K. inflation rose further above the Bank of England’s (BOE) 2 percent
target as the substantial sterling depreciation
observed since the June 2016 Brexit referendum continued to provide some uplift to import prices. (For
more discussion of inflation both in the United
States and abroad, see the box “Low Inflation in the
Advanced Economies” on pages 14–15 of the February 2018 Monetary Policy Report.)
. . . leading AFE central banks to maintain
accommodative monetary policies

Figure 14. Ratio of total bank credit to nominal gross
domestic product
Quarterly

Percent

75
70

The Bank of Japan kept its policy rates at historically
low levels, with the target for 10-year government
bond yields around zero. In October, the European
Central Bank extended its asset purchase program
until September 2018, albeit at a reduced pace. The
Bank of Canada and the BOE both raised their
policy rates but also indicated that they intend to
proceed gradually with further removal of policy
accommodation.

65

In emerging Asia, growth remained solid . . .
60
55

2001 2003 2005 2007 2009 2011 2013 2015 2017
Source: Federal Reserve Board, Statistical Release H.8, "Assets and Liabilities of
Commercial Banks in the United States"; Bureau of Economic Analysis via Haver
Analytics.

Economic growth in China remained relatively strong
in the second half of 2017 even as the authorities
enacted policies to limit production in heavily polluting industries, tighten financial regulations, and curb
house price growth. Most other emerging Asian
economies registered very strong growth in the third
quarter of 2017, fueled by solid external demand, but
slowed in the fourth quarter.

Monetary Policy and Economic Developments

. . . while the largest Latin American economies
continued to struggle

In Mexico, real GDP declined in the third quarter as
two major earthquakes and a hurricane significantly
disrupted economic activity, but rebounded in the
fourth quarter. Following a prolonged period of contraction, the Brazilian economy continues to recover,
but only at a weak pace. Private investment has
remained sluggish amid corporate deleveraging and
continued uncertainty about government policies,
although it turned positive in the third quarter for the
first time in nearly four years.

Figure 15. 10-year nominal benchmark yields in selected
advanced economies
Weekly

Percent

3.0
United States

2.5
2.0

Canada

1.5
Germany

1.0

United Kingdom

.5
+
0
_

Foreign equity prices rose further on net . . .

Solid macroeconomic data and robust corporate earnings helped broad AFE and emerging market economies (EMEs) equity indexes extend their 2016 gains
through the start of this year. Declines since the end of
January have erased some of these gains, and volatility
in foreign stock markets increased. On balance, most
AFE stock prices are higher, and EME equity markets
significantly outperformed those of AFEs. Capital
flows into emerging market mutual funds generally
remained robust as higher commodity prices added to
optimism about the economic outlook.

. . . and government bond yields increased

Longer-term government bond yields in most AFEs
were noticeably higher than their mid-2017 levels,
reflecting strengthening growth and mounting prospects for the normalization of monetary policies
(figure 15). In Canada, where the central bank has
raised its policy interest rate 75 basis points since
June, the rise in longer-term yields was particularly
notable. On balance, spreads of dollar-denominated
emerging market sovereign bonds over U.S. Treasury
securities were stable around the levels observed in
mid-2017.

17

.5
2014

2015

2016

2017

2018

Note: The data are weekly averages of daily benchmark yields and extend through
February 21, 2018.
Source: Bloomberg.

weighed on the British pound at times during the second half of 2017, but progress regarding the terms of
the U.K. separation from the European Union
boosted the currency later in the year. In contrast,
the dollar appreciated against the Mexican peso, on
net, amid uncertainty around North American Free
Trade Agreement negotiations.

Figure 16. U.S. dollar exchange rate indexes
Weekly

Week ending January 8, 2014 = 100

Dollar appreciation

170
160

Mexican peso

150
140
130
Euro

The dollar depreciated on net

The broad dollar index––a measure of the tradeweighted value of the dollar against foreign
currencies––fell roughly 5 percent in the first half of
2017. Notwithstanding some appreciation in early
February, the currency has depreciated further since
the end of June, partially reversing substantial appreciation realized over the period from 2014 to 2016
(figure 16). The weakness in the dollar mostly reflects
a broad-based improvement in the outlook for foreign economic growth. Brexit-related headlines

120
Broad dollar

110
100

British pound

90
2014

2015

2016

2017

2018

Note: The data, which are in foreign currency units per dollar, are weekly averages
of daily data and extend through February 21, 2018. As indicated by the arrow,
increases in the data represent U.S. dollar appreciation, and decreases represent
U.S. dollar depreciation.
Source: Federal Reserve Board, Statistical Release H.10, “Foreign Exchange
Rates.”

18

104th Annual Report | 2017

Part 2: Monetary Policy

Monetary policy continues to support economic
growth

The Federal Open Market Committee raised the
federal funds rate target range in December

Even with the gradual increases in the federal funds
rate to date, the Committee judges that the stance of
monetary policy remains accommodative, thereby
supporting strong labor market conditions and a sustained return to 2 percent inflation. The federal funds
rate remains somewhat below most estimates of its
neutral rate—that is, the level of the federal funds
rate that is neither expansionary nor contractionary.

For more than two years, the Federal Open Market
Committee (FOMC) has been gradually increasing
its target range for the federal funds rate as the labor
market strengthened and headwinds in the aftermath
of the recession continued to abate. After having
raised the target range for the federal funds rate twice
in the first half of 2017, the Committee raised it
again in December, bringing the target range to
1¼ to 1½ percent (figure 17).10 As on previous occasions, the decision to increase the federal funds rate
in December reflected realized and expected labor
market conditions and inflation relative to the
FOMC’s objectives. Information available at that
time indicated that economic activity had been rising
at a solid rate and the labor market had continued to
strengthen. In addition, although inflation had continued to run below the FOMC’s 2 percent longerrun objective, the Committee expected that it would
stabilize around that target over the medium term. At
its most recent meeting, which concluded on January 31, the Committee kept the target range for the
federal funds rate unchanged.11
10

11

See Board of Governors of the Federal Reserve System (2017),
“Federal Reserve Issues FOMC Statement,” press release,
December 13, https://www.federalreserve.gov/newsevents/
pressreleases/monetary20171213a.htm.
See Board of Governors of the Federal Reserve System (2018),
“Federal Reserve Issues FOMC Statement,” press release, January 31, https://www.federalreserve.gov/newsevents/pressreleases/
monetary20180131a.htm.

In evaluating the stance of monetary policy, policymakers routinely consult prescriptions from a variety
of policy rules, which can serve as useful benchmarks. However, the use and interpretation of such
prescriptions require careful judgments about the
choice and measurement of the inputs to these rules
as well as the implications of the many considerations these rules do not take into account. (See the
box “Monetary Policy Rules and Their Role in the
Federal Reserve’s Policy Process” on pages 35–38 of
the February 2018 Monetary Policy Report.)
Future changes in the federal funds rate will
depend on the economic outlook as informed by
incoming data

The Committee has continued to emphasize that, in
determining the timing and size of future adjustments to the target range for the federal funds rate, it
will assess realized and expected economic conditions
relative to 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

Figure 17. Selected interest rates
Daily

Percent

5
10-year Treasury rate

4
3
2

2-year Treasury rate

1
0
Target range for the federal funds rate
2008

2009

2010

2011

2012

2013

2014

2015

Note: The 2-year and 10-year Treasury rates are the constant-maturity yields based on the most actively traded securities.
Source: Department of the Treasury; Federal Reserve Board.

2016

2017

2018

Monetary Policy and Economic Developments

inflation pressures and inflation expectations, and
readings on financial and international developments.
The FOMC has emphasized that it will carefully
monitor actual and expected inflation developments
relative to its symmetric inflation goal, as inflation
has been running persistently below the 2 percent
longer-run objective.
The Committee expects that the ongoing strength in
the economy will warrant further gradual increases in
the federal funds rate, and that the federal funds rate
will likely remain, for some time, below the levels that
the Committee expects to prevail in the longer run.
Consistent with this outlook, in the most recent Summary of Economic Projections, which was compiled
at the time of the December FOMC meeting, the
median of participants’ assessments for the appropriate level of the midpoint of the target range for the
federal funds rate at year-end rises gradually over the
period from 2018 to 2020, remaining below the
median projection for its longer-run level through the
end of 2019.12
The size of the Federal Reserve’s balance sheet
has begun to decrease

The Committee had communicated for some time
that it intended to reduce the size of the Federal
Reserve’s balance sheet once normalization of the
level of the federal funds rate was well under way. At
its meeting in September, the FOMC decided to initiate the balance sheet normalization program
described in the June 2017 Addendum to the Policy
Normalization Principles and Plans. This program is
gradually and predictably reducing the Federal
Reserve’s securities holdings by decreasing the reinvestment of the principal payments it receives from
securities held in the System Open Market Account
(SOMA). Since October, such payments have been
reinvested only to the extent that they exceeded
gradually rising caps.
In the fourth quarter, the Open Market Desk at the
Federal Reserve Bank of New York, as directed by
the Committee, reinvested principal payments from
the Federal Reserve’s holdings of Treasury securities
maturing during each calendar month in excess of
$6 billion. The Desk also reinvested in agency
mortgage-backed securities (MBS) the amount of
principal payments from the Federal Reserve’s holdings of agency debt and agency MBS received during
12

See the December Summary of Economic Projections, which
appeared as an addendum to the minutes of the December 12–
13, 2017, meeting of the FOMC and is included as Part 3 of the
February 2018 Monetary Policy Report.

19

each calendar month in excess of $4 billion. Since
January, payments of principal from maturing Treasury securities and from the Federal Reserve’s holdings of agency debt and agency MBS have been
reinvested to the extent that they have exceeded
$12 billion and $8 billion, respectively. The Committee has indicated that the cap for Treasury securities
will continue to increase in steps of $6 billion at
three-month intervals until it reaches $30 billion per
month, and that the cap for agency debt and agency
MBS will continue to increase in steps of $4 billion at
three-month intervals until it reaches $20 billion per
month. These caps will remain in place until the
Committee judges that the Federal Reserve is holding
no more securities than necessary to implement monetary policy efficiently and effectively.
The initiation of the balance sheet normalization
program was widely anticipated and therefore did
not elicit a notable reaction in financial markets. Subsequently, the implementation of the program has
proceeded smoothly without materially affecting
Treasury and MBS markets. With the caps having
been set thus far at relatively low levels, the reduction
in SOMA securities has represented a small fraction
of the SOMA securities holdings. Consequently, the
Federal Reserve’s total assets have declined somewhat
to about $4.4 trillion, with holdings of Treasury securities at approximately $2.4 trillion and holdings of
agency debt and agency MBS at approximately
$1.8 trillion (figure 18).
Interest income on the SOMA portfolio has continued to support substantial remittances to the U.S.
Treasury. Preliminary financial statement results indicate that the Federal Reserve remitted about
$80.2 billion of its estimated 2017 net income to the
Treasury.
The Federal Reserve’s implementation of
monetary policy has continued smoothly

In December 2017, the Federal Reserve raised the
effective federal funds rate by increasing the interest
rate paid on reserve balances along with the interest
rate offered on overnight reverse repurchase agreements (ON RRPs). Specifically, the Federal Reserve
increased the interest rate paid on required and
excess reserve balances to 1½ percent and the ON
RRP offering rate to 1¼ percent. In addition, the
Board of Governors approved an increase in the
discount rate (the so-called primary credit rate) to
2 percent. Yields on a broad set of money market
instruments moved higher in response to the
FOMC’s policy action in December. The effective

20

104th Annual Report | 2017

Figure 18. Federal Reserve assets and liabilities
Weekly

Trillions of dollars

Assets

5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
.5
0
.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0

Other assets
Agency debt and mortgage-backed securities holdings
Credit and liquidity
facilities

Treasury securities held outright
Federal Reserve notes in circulation
Deposits of depository institutions

Capital and other liabilities

Liabilities and capital
2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Note: “Credit and liquidity facilities” consists of primary, secondary, and seasonal credit; term auction credit; central bank liquidity swaps; support for Maiden Lane, Bear
Stearns, and AIG; and other credit facilities, including the Primary Dealer Credit Facility, the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the
Commercial Paper Funding Facility, and the Term Asset-Backed Securities Loan Facility. “Other assets” includes unamortized premiums and discounts on securities held outright. “Capital and other liabilities” includes reverse repurchase agreements, the U.S. Treasury General Account, and the U.S. Treasury Supplementary Financing Account. The
data extend through February 14, 2018.
Source: Federal Reserve Board, Statistical Release H.4.1, “Factors Affecting Reserve Balances.”

federal funds rate rose in line with the increase in the
FOMC’s target range and generally traded near the
middle of the new target range amid orderly trading
conditions in money markets. Usage of the ON RRP
facility has declined on net since the middle of 2017,
reflecting relatively attractive yields on alternative
investments.
Although the normalization of the monetary policy
stance has proceeded smoothly, the Federal Reserve

has continued to test the operational readiness of
other policy tools as part of prudent planning. Two
operations of the Term Deposit Facility were conducted in the second half of 2017; seven-day deposits
were offered at both operations with a floating rate of
1 basis point over the interest rate on excess reserves.
In addition, the Desk conducted several small-value
exercises solely for the purpose of maintaining operational readiness.

Monetary Policy and Economic Developments

Monetary Policy Report July 2017
Summary
Economic activity increased at a moderate pace over
the first half of the year, and the jobs market continued to strengthen. Measured on a 12-month basis,
inflation has softened some in the past few months.
The Federal Open Market Committee (FOMC)
judged that, on balance, current and prospective economic conditions called for a further gradual removal
of policy accommodation. At its most recent meeting
in June, the Committee boosted the target range for
the federal funds rate to 1 to 1¼ percent. The Committee also issued additional information regarding
its plans for reducing the size of its balance sheet in a
gradual and predictable manner.

21

Economic growth. Real gross domestic product
(GDP) is reported to have risen at an annual rate of
about 1½ percent in the first quarter of 2017, but
more recent data suggest growth stepped back up in
the second quarter. Consumer spending was sluggish
in the early part of the year but appears to have
rebounded recently, supported by job gains, rising
household wealth, and favorable consumer sentiment. Business investment has turned up this year
after having been weak for much of 2016, and indicators of business sentiment have been strong. The
housing market continues its gradual recovery. Economic growth has also been supported by recent
strength in foreign activity.

Economic and Financial Developments
Labor markets. The labor market has strengthened
further so far this year. Over the first five months of
2017, payroll employment increased 162,000 per
month, on average, somewhat slower than the average monthly increase for 2016 but still more than
enough to absorb new entrants into the labor force.
The unemployment rate fell from 4.7 percent in
December to 4.3 percent in May—modestly below
the median of FOMC participants’ estimates of its
longer-run normal level. Other measures of labor utilization are also consistent with a relatively tight
labor market. However, despite the broad-based
strength in measures of employment, wage growth
has been only modest, possibly held down by the
weak pace of productivity growth in recent years.

Financial conditions. On balance, domestic financial
conditions for businesses and households have continued to support economic growth. Long-term
nominal Treasury yields and mortgage rates have
decreased so far in 2017, although yields remain
somewhat above levels that prevailed last summer.
Broad measures of equity prices increased further
during the first half of the year. Spreads of yields on
corporate bonds over comparable-maturity Treasury
securities decreased. Most types of consumer loans
remained widely available, while mortgage credit
stayed readily available for households with solid
credit profiles but was still difficult to access for
households with low credit scores or harder-todocument incomes. In foreign financial markets,
equity prices increased and risk spreads decreased
amid generally firming economic growth and robust
corporate earnings. The broad U.S. dollar index
depreciated modestly against foreign currencies.

Inflation. Consumer price inflation, as measured by
the 12-month change in the price index for personal
consumption expenditures, briefly reached the
FOMC’s 2 percent objective earlier this year, but it
more recently has softened. The latest reading, for
May, was 1.4 percent—still up from a year earlier
when falling energy prices restrained overall consumer prices. The 12-month measure of inflation that
excludes food and energy items (so-called core inflation), which historically has been a better indicator
than the headline figure of where overall inflation
will be in the future, was also 1.4 percent over the
year ending in May; this reading was a bit lower than
it had been one year earlier. Measures of longer-run
inflation expectations have been relatively stable, on
balance, though some measures remain low by historical standards.

Financial stability. Vulnerabilities in the U.S. financial
system remained, on balance, moderate. Contributing
to the financial system’s improved resilience, U.S.
banks have substantial amounts of capital and
liquidity. Valuation pressures across a range of assets
and several indicators of investor risk appetite have
increased further since mid-February. However, these
developments in asset markets have not been accompanied by increased leverage in the financial sector,
according to available metrics, or increased borrowing in the nonfinancial sector. Household debt as a
share of GDP continues to be subdued, and debt
owed by nonfinancial businesses, although elevated,
has been either flat or falling in the past two years.
(See the box “Developments Related to Financial
Stability” on pages 24 –25 of the July 2017 Monetary
Policy Report.)

22

104th Annual Report | 2017

Monetary Policy
Interest rate policy. Over the first half of 2017, the
FOMC continued to gradually reduce the amount of
monetary policy accommodation. Specifically, the
Committee decided to raise the target range for the
federal funds rate in March and in June, bringing it
to the current range of 1 to 1¼ percent. Even with
these rate increases, the stance of monetary policy
remains accommodative, supporting some further
strengthening in labor market conditions and a sustained return to 2 percent inflation.
The FOMC continues to expect that, with gradual
adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and
labor market conditions will strengthen somewhat
further. Inflation on a 12-month basis is expected to
remain somewhat below 2 percent in the near term
but to stabilize around the Committee’s 2 percent
objective over the medium term. The federal funds
rate is likely to remain, for some time, below levels
that are expected to prevail in the longer run. Consistent with this outlook, in the most recent Summary
of Economic Projections (SEP), compiled at the time
of the June FOMC meeting, most participants projected that the appropriate level of the federal funds
rate would be below its longer-run level through
2018. (The June SEP is presented in Part 3 on pages
41–57 of the July 2017 Monetary Policy Report; it is
also included in section 9 of this report.) However, as
the Committee has continued to emphasize, monetary policy is not on a preset course; the actual path
of the federal funds rate will depend on the evolution
of the economic outlook as informed by incoming
data. In particular, the Committee is monitoring
inflation developments closely.
Balance sheet policy. To help maintain accommodative financial conditions, the Committee has
continued its existing policy of reinvesting principal
payments from its holdings of agency debt and
agency mortgage-backed securities in agency
mortgage-backed securities and rolling over maturing
Treasury securities at auction. In June, the FOMC
issued an Addendum to the Policy Normalization
Principles and Plans that provides additional details
regarding the approach the FOMC intends to follow
to reduce the Federal Reserve’s holdings of Treasury
and agency securities in a gradual and predictable
manner. The Committee currently expects to begin
implementing the balance sheet normalization pro-

gram this year provided that the economy evolves
broadly as anticipated. (See the box “Addendum to
the Policy Normalization Principles and Plans” on
page 40 of the July 2017 Monetary Policy Report.)
Special Topics
Education and climbing the economic ladder. Education, particularly a college degree, is often seen as a
path to improved economic opportunities. However,
despite the fact that young blacks and Hispanics have
increased their educational attainment over the past
quarter-century, their representation in the top
25 percent of the income distribution for young
people has not materially increased. In part, this outcome has occurred because educational attainment
has increased for young non-Hispanic whites and
Asians as well. While education continues to be an
important determinant of whether one can climb the
economic ladder, sizable differences in economic outcomes across race and ethnicity remain even after
controlling for educational attainment. (See the box
“Does Education Determine Who Climbs the Economic
Ladder?” on pages 8–9 of the July 2017 Monetary
Policy Report.)
The global productivity slowdown. Over the past
decade, labor productivity growth both in the United
States and in other advanced economies has slowed
markedly. This slowdown may reflect a waning of the
effects from advances in information technology in
the 1990s and early 2000s. Productivity growth may
also be low because of the severity of the Global
Financial Crisis, in part because spending for
research and development was muted. Some of the
factors restraining productivity growth may eventually fade, but it is difficult to ascertain whether the
recent subdued performance of productivity represents a new normal. (See the box “Productivity
Developments in the Advanced Economies” on pages
12–13 of the July 2017 Monetary Policy Report.)
Liquidity in the corporate bond market. A series of
changes, including regulatory reforms, since the
Global Financial Crisis have likely altered financial
institutions’ incentives to provide liquidity. Many
market participants are particularly concerned with
liquidity in markets for corporate bonds. However,
the available evidence suggests that financial markets
have performed well in recent years, with minimal
impairment in liquidity, either in the market for corporate bonds or in markets for other assets. (See the

Monetary Policy and Economic Developments

23

box “Recent Developments in Corporate Bond Market Liquidity” on pages 26–28 of the July 2017 Monetary Policy Report.)

60 percent in May and has been increasing for the
past couple of years, reflecting the combination of
the declining unemployment rate and the flat LFPR.

Monetary policy rules. Monetary policymakers consider a wide range of information on current economic conditions and the outlook before deciding on
a policy stance they deem most likely to foster the
FOMC’s statutory mandate of maximum employment and stable prices. They also routinely consult
monetary policy rules that connect prescriptions for
the policy interest rate with variables associated with
the dual mandate. The use of such rules requires
careful judgments about the choice and measurement
of the inputs into these rules as well as the implications of the many considerations these rules do not
take into account. (See the box “Monetary Policy Rules
and Their Role in the Federal Reserve’s Policy Process” on pages 36–39 of the July 2017 Monetary
Policy Report.)

The strengthening condition of the labor market is
evident in other measures as well. The number of
people filing initial claims for unemployment insurance has fallen to the lowest level in decades. In addition, as reported in the Job Openings and Labor
Turnover Survey, the rate of job openings remained
elevated in the first part of the year, while the rate of
layoffs remained low; both are signs that firms’
demand for labor is still solid. In addition, the rate of
quits stayed high, an indication that workers are confident in their ability to obtain a new job. Another
measure, the share of workers who are working part
time but would prefer to be employed full time—
which is part of the U-6 measure of underutilization
from the Bureau of Labor Statistics—fell noticeably
further in the first five months of 2017.

Part 1: Recent Economic and Financial
Developments

. . . though unemployment rates remain elevated
for some demographic groups

Domestic Developments
The labor market tightened further during the
first half of the year . . .

Labor market conditions continued to strengthen in
the first five months of this year. On average, payrolls
expanded 162,000 per month between January and
May, a little slower than the average monthly
employment gain in 2016 but still more than enough
to absorb new entrants to the labor force and therefore consistent with a further tightening of the labor
market. The unemployment rate has declined 0.4 percentage point since December 2016, and in May it
stood at 4.3 percent, its lowest level since late 2000
and modestly below the median of Federal Open
Market Committee (FOMC) participants’ estimates
of its longer-run normal level.
The labor force participation rate (LFPR)—that is,
the share of adults either working or actively looking
for work—was 62.7 percent in May and is little
changed, on net, since early 2014. Along with other
factors, the aging of the population implies a downward trend in participation, so the flattening out of
the LFPR during the past few years is consistent with
an overall picture of improving labor market conditions. The employment-to-population ratio—that is,
the share of the population that is working—was

Although the aggregate unemployment rate was at a
16-year low in May, there are substantial disparities
across demographic groups. Notably, the unemployment rate for whites averaged 4 percent during the
first five months of the year, and the rate for Asians
was about 3½ percent. However, the unemployment
rates for Hispanics (5.4 percent) and African Americans (7.8 percent) were substantially higher. The differences in the unemployment rates across racial and
ethnic groups are long-standing, and they also vary
over the business cycle. Indeed, the unemployment
rates for blacks and Hispanics both rose considerably
more than the rates for whites and Asians during the
Great Recession, and their subsequent declines have
been more rapid. On balance, however, the differences in unemployment rates across the groups have
not narrowed relative to the pre-recession period.
(For additional discussion on differences in economic
outcomes by race and ethnicity, see the box “Does
Education Determine Who Climbs the Economic Ladder?” on pages 8–9 of the July 2017 Monetary Policy Report.)
Growth of labor compensation has been
modest . . .

Indicators of hourly compensation suggest that wage
growth has remained modest. Growth of compensation per hour in the business sector—a broad-based
measure of wages, salaries, and benefits—has slowed

24

104th Annual Report | 2017

in recent quarters and was 2¼ percent over the
four quarters ending in 2017:Q1.13 This measure
can be quite volatile even at annual frequencies
(and a smoothed version is shown in figure 5 for that
reason). The employment cost index—which also
measures both wages and the cost to employers of
providing benefits—also was up 2¼ percent in the
first quarter relative to its year-ago level, about
½ percentage point faster than its gain of a year earlier. Among measures limited to wages, average
hourly earnings growth—at 2½ percent through
May—was little changed from a year ago, and a compensation measure computed by the Federal Reserve
Bank of Atlanta that tracks median 12-month wage
growth of individuals reporting to the Current Population Survey was about 3½ percent in May, also
similar to its reading from a year earlier.
. . . and likely restrained by slow growth of labor
productivity

These modest rates of compensation gain likely
reflect the offsetting influences of a tightening labor
market and persistently weak productivity growth.
Since 2008, labor productivity has increased only
about 1 percent per year, on average, well below the
average pace from 1996 through 2007 and also below
the gains in the 1974–95 period. For most of the
period since 2011, labor productivity growth has
been particularly weak, although it has turned up in
recent quarters. The longer-term softness in productivity growth may be partly attributable to the sharp
pullback in capital investment during the most recent
recession and the relatively modest rebound that followed. But there may be other explanations, too, and
considerable debate remains about the reasons for the
general slowdown in productivity growth. (For a
more comprehensive discussion of productivity, see
the box “Productivity Developments in the Advanced
Economies” on pages 12 –13 of the July 2017 Monetary Policy Report.)

price index for personal consumption expenditures
(PCE), continued its climb from the very low levels
that prevailed in 2015 and early 2016 when it was
held down by falling oil and import prices. Indeed,
consumer price inflation briefly reached the FOMC’s
2 percent objective earlier this year before falling
back to 1.4 percent in May. Core inflation, which
typically provides a better indication than the headline measure of where overall inflation will be in the
future, also was 1.4 percent over the 12 months ending in May, a slightly slower rate than a year earlier.
As is the case with headline inflation, the 12-month
measure of core inflation had been higher earlier this
year, reaching 1.8 percent. Both measures of inflation
have recently been held down by steep and likely idiosyncratic price declines for a few specific categories,
including wireless telephone services and prescription
drugs, which do not appear to be related to the overall trends in consumer prices. The 12-month change
in the trimmed mean PCE price index—an alternative indicator of underlying inflation produced by the
Federal Reserve Bank of Dallas—slowed by less than
overall or core PCE price inflation over the past several months.
Oil prices declined somewhat but remain well
above their early 2016 lows . . .

After rebounding from their early 2016 lows, oil
prices leveled off early this year. Since then they have
declined somewhat, despite OPEC’s decision in late
May to renew its November 2016 agreement to
reduce its oil production, thereby extending the
November production cuts through early 2018.
Reflecting lower crude oil prices as well as smaller
retail margins, seasonally adjusted retail gasoline
prices have also declined since the beginning of the
year. Nevertheless, prices of both crude oil and retail
gasoline remain above their early 2016 lows, and
futures prices suggest that market participants expect
oil prices to rise gradually in coming years.

Price inflation moved up but softened in the
spring and remains below 2 percent

. . . while prices of imports other than energy
have been bolstered by higher commodity prices

In the early months of 2017, consumer price inflation, as measured by the 12-month change in the

Throughout 2015, nonfuel import prices declined
because of appreciation of the dollar and declines in
nonfuel commodity prices. Nonfuel import prices
stabilized last year and have risen since then, as the
dollar stopped appreciating and supply disruptions
boosted world prices of some nonfuel commodities,
especially industrial supplies and metals. In recent
months, depreciation of the dollar has further

13

The recent data on compensation per hour reflect a decline in
wages and salaries at the end of 2016, which might be the result
of a shifting of bonuses or other types of income into 2017 in
anticipation of a possible cut in personal income tax rates. If
that is the case, the current estimate of compensation growth in
the first quarter might be revised up once full data become available later this summer.

Monetary Policy and Economic Developments

pushed up non-oil import prices, which are now
slightly higher than in mid-2016.
Survey-based measures of inflation expectations
are little changed this year . . .

Expectations of inflation likely influence actual inflation by affecting wage- and price-setting decisions.
Survey-based measures of inflation expectations at
medium- and longer-term horizons have remained
relatively stable so far in 2017. In the second-quarter
Survey of Professional Forecasters conducted by the
Federal Reserve Bank of Philadelphia, the median
expectation for the annual rate of increase in the PCE
price index over the next 10 years was 2.1 percent, the
same as in the first quarter and little changed from
the readings during 2016. In the University of Michigan Surveys of Consumers, the median value for
inflation expectations over the next 5 to 10 years—
which has been drifting downward for the past few
years—has held about flat at a low level since late
last year.
. . . while market-based measures of inflation
compensation fell back somewhat

Inflation expectations can also be gauged by marketbased measures of inflation compensation, though
the inference is not straightforward because inflation
compensation can be importantly affected by
changes in premiums associated with risk and liquidity. Measures of longer-term inflation compensation—derived either from differences between yields
on nominal Treasury securities and those on comparable Treasury Inflation-Protected Securities (TIPS)
or from inflation swaps—have fallen back somewhat
this year after having moved up in late 2016.14 The
TIPS-based measure of 5-to-10-year-forward inflation compensation is now 1¾ percent, and the
analogous measure of inflation swaps is now about
2 percent. Both measures are well below the 2½ to
3 percent range that persisted for most of the
10 years before 2014.

14

Inflation compensation implied by the TIPS breakeven inflation
rate is based on the difference, at comparable maturities,
between yields on nominal Treasury securities and yields on
TIPS, which are indexed to the headline consumer price index
(CPI). Inflation swaps are contracts in which one party makes
payments of certain fixed nominal amounts in exchange for cash
flows that are indexed to cumulative CPI inflation over some
horizon. Focusing on inflation compensation 5 to 10 years
ahead is useful, particularly for monetary policy, because such
forward measures encompass market participants’ views about
where inflation will settle in the long term after developments
influencing inflation in the short term have run their course.

25

Real gross domestic product growth slowed in
the first quarter, but spending by households and
businesses appears to have picked up in recent
months

After having moved up at an annual rate of 2¾ percent in the second half of 2016, real gross domestic
product (GDP) is reported to have increased about
1½ percent in the first quarter of this year.15 The
step-down in first-quarter growth was largely attributable to soft inventory investment and a lull in the
growth of consumer spending; in contrast, net
exports increased a bit, residential investment grew
robustly, and spending by businesses surged. Indeed,
business investment was strong enough that overall
private domestic final purchases—that is, final purchases by U.S. households and businesses, which tend
to carry more signal for future GDP growth than
most other components of overall spending—moved
up at an annual rate of about 3 percent in the first
quarter. For more recent months, indicators of
spending by consumers and businesses have been
strong and suggest that growth of economic activity
rebounded in the second quarter; thus, overall activity appears to have expanded moderately, on average,
over the first half of the year.
The economic expansion continues to be supported
by accommodative financial conditions, including the
low cost of borrowing and easy access to credit for
many households and businesses, continuing job
gains, rising household wealth, and favorable consumer and business sentiment.
Gains in income and wealth continue to support
consumer spending . . .

After increasing strongly in the second half of 2016,
consumer spending in the first quarter of this year
was tepid. Unseasonably warm weather depressed
spending on energy services, and purchases of motor
vehicles slowed from an unusually high pace late last
year. However, household spending seems to have
picked up in more recent months, as purchases of
energy services returned to seasonal norms and retail
sales firmed. All told, consumer spending increased
at an annual rate of 2 percent over the first five
months of this year, only a bit slower than in the past
couple of years.

15

Real gross domestic income (GDI), which is conceptually the
same as GDP but is constructed from different source data, had
been rising at roughly the same rate as real GDP for most of
2016. However, real GDI was held down by the very weak reading for personal income in the fourth quarter of last year, which
may prove to have been transitory.

26

104th Annual Report | 2017

Beyond spending, other indicators of consumers’
economic well-being have been strong in the aggregate. The ongoing improvement in the labor market
has supported further gains in real disposable personal income (DPI), a measure of income after
accounting for taxes and adjusting for inflation. Real
DPI increased at a solid annual rate of 3 percent over
the first five months of this year.
Gains in the stock market and in house prices over
the first half of the year have boosted household net
wealth. Broad measures of U.S. equity prices have
continued to increase in recent months after moving
up considerably late last year and in the first quarter.
House prices have also continued to climb, adding to
the balance sheet strength of homeowners. Indeed,
nominal house price indexes are close to their peaks
of the mid-2000s. However, while the ratio of house
prices to rents has edged higher, it remains well below
its previous peak. As a result of the increases in home
and equity prices, aggregate household net worth has
risen appreciably. In fact, at the end of the first quarter of 2017, household net worth was more than six
times the value of disposable income, the highest-ever
reading for that ratio.
Consumer spending has also been supported by low
burdens from debt service payments. The household
debt service burden—the ratio of required principal
and interest payments on outstanding household
debt to disposable income, measured for the household sector as a whole—has remained at a very low
level by historical standards. As interest rates rise, the
debt burden will move up only gradually, as most
household debt is in fixed-interest products.
. . . as does credit availability

Consumer credit has continued to expand this year
but more moderately than in 2016. Financing conditions are generally favorable, with auto and student
loans remaining widely available and outstanding
balances continuing to expand at a robust, albeit
somewhat reduced, pace. Even though delinquency
rates on most types of consumer debt have remained
low by historical standards, credit card and auto loan
delinquencies among subprime borrowers have
drifted up some. Possibly in response to this deteriorating credit performance, banks have tightened standards for credit cards and auto lending. Mortgage
credit has remained readily available for households
with solid credit profiles, but it was still difficult to
access for households with low credit scores or
harder-to-document incomes.

Consumer confidence is strong

Consumers have remained optimistic about their
financial situation. As measured by the Michigan
survey, consumer sentiment was solid through most
of 2016, likely reflecting rising income and job
gains. Sentiment moved up appreciably after the
presidential election last November and has remained
at a high level so far this year. Furthermore, the
share of households expecting real income to rise
over the next year or two has gone up markedly in
the past few months and is now in line with its prerecession level.
Activity in the housing sector has improved
modestly

Several indicators of housing activity have continued
to strengthen gradually this year. Sales of existing
homes have gained, on net, while house prices have
continued to rise and mortgage rates have remained
low, even though they are up from last year. In addition, single-family housing starts registered a slight
increase, on average, in the first five months of the
year, although multifamily housing starts have
slipped. Despite the modest increase in construction
activity, the months’ supply of homes for sale has
remained near the low levels seen in 2016, and the
aggregate vacancy rate has fallen back to levels
observed in the mid-2000s. Lean inventories are likely
to support further gains in homebuilding activity
going forward.
Business investment has turned up after a period
of weakness . . .

Led by a surge in spending on drilling and mining
structures, real outlays for business investment—that
is, private nonresidential fixed investment—rose
robustly at the beginning of the year after having
been about flat for 2016 as a whole. The sharp gains
in drilling and mining in the first quarter mark a
turnaround for the sector; energy-sector investment
had declined noticeably following the drop in oil
prices that began in mid-2014 and ran through early
2016. More recently, rapid increases in the number of
drilling rigs in operation suggest that investment in
this area remained strong in the second quarter of
this year.
Moreover, business spending on equipment and
intangibles (such as research and development)
advanced solidly at the beginning of the year after
having been roughly flat in 2016. Furthermore, indicators of business spending are generally upbeat:
Orders and shipments of capital goods have posted

Monetary Policy and Economic Developments

27

net gains in recent months, and indexes of business
sentiment and activity remain elevated after having
improved significantly late last year.

added a touch to U.S. real GDP growth and that the
nominal trade deficit widened slightly relative
to GDP.

. . . while corporate financing conditions have
remained accommodative

Federal fiscal policy had a roughly neutral effect
on economic growth . . .

Aggregate flows of credit to large nonfinancial firms
have remained solid, supported in part by continued
low interest rates. The gross issuance of corporate
bonds was robust during the first half of 2017, and
yields on both speculative- and investment-grade corporate bonds remained low by historical standards.
Gross equity issuance by nonfinancial firms stayed
solid, on average, as seasoned equity offerings continued at a robust pace and the pace of initial public
offerings picked up from the low levels seen in 2016.

Federal purchases moved sideways in 2016, and
policy actions had little effect on federal taxes or
transfers. Under currently enacted legislation, federal
fiscal policy will likely again have a roughly neutral
influence on the growth in real GDP this year.

Despite the pickup in business investment, demand
for business loans was subdued early this year, and
outstanding commercial and industrial (C&I) loans
on banks’ books contracted in the first quarter. In
the April Senior Loan Officer Opinion Survey on
Bank Lending Practices (SLOOS), banks reported a
broad-based decline in demand for C&I loans during
the first quarter of 2017 even as lending standards on
such loans were reported to be basically
unchanged.16 Banks also reported weaker demand
for commercial real estate loans as well as a continued tightening of standards on such loans. However,
lending to large nonfinancial firms appeared to be
strengthening somewhat during the second quarter.
Meanwhile, measures of small business credit
demand remained weak amid stable supply.
U.S. exports grew at a faster pace

In the first quarter of 2017, U.S. real exports
increased briskly and broadly following moderate
growth in the second half of last year that was driven
by a surge in agricultural exports. At the same time,
real import growth declined somewhat from its
strong pace in the second half of last year. As a
result, real net exports contributed slightly to U.S.
real GDP growth in the first quarter. Available trade
data through May suggest that the growth of real
exports slowed to a modest pace in the second quarter. Nevertheless, the average pace of export growth
appears to have stepped up in the first half of 2017
compared with last year, partly reflecting stronger
growth abroad and a diminishing drag from earlier
dollar appreciation. All told, the available data for
the first half of this year suggest that net exports
16

The SLOOS is available on the Board’s website at https://www
.federalreserve.gov/data/sloos/sloos.htm.

After narrowing significantly for several years, the
federal unified deficit has widened from about
2½ percent of GDP in fiscal year 2015 to 3¼ percent
currently. Although expenditures as a share of GDP
have been relatively stable over this period at a little
under 21 percent, receipts moved lower in 2016 and
have edged down further so far this year to roughly
17½ percent of GDP. The ratio of federal debt held
by the public to nominal GDP is quite elevated relative to historical norms. Nevertheless, the deficit
remains small enough to roughly stabilize this ratio in
the neighborhood of 75 percent.
. . . and the fiscal position of most state and local
governments is stable

The fiscal position of most state and local governments is stable, although there is a range of experiences
across these governments. Many state governments
are experiencing lackluster revenue growth, as income
tax collections have been only edging up, on average,
in recent quarters. In contrast, house price gains have
continued to push up property tax revenues at the
local level. Employment growth in the state and local
government sector has been anemic so far this year
following a pace of hiring in 2016 that was the strongest since 2008. Outlays for construction by these
governments have been declining.
Financial Developments
The expected path for the federal funds rate
flattened

The path for the expected federal funds rate implied
by market quotes on interest rate derivatives has flattened, on net, since the end of December, moving
higher for 2017 but slightly lower further out. The
expected policy path moved up at the beginning of
the year, reportedly reflecting investor perceptions
that expansionary fiscal policy would likely be forthcoming over the near term, but subsequently fell
amid some waning of these expectations as well as
FOMC communications that were interpreted as sig-

28

104th Annual Report | 2017

naling a somewhat slower pace of policy rate
increases than had been anticipated.
Survey-based measures of the expected path of
policy also moved up for 2017. Most of the respondents to the Federal Reserve Bank of New York’s
Survey of Primary Dealers and Survey of Market
Participants—which were conducted just before the
June FOMC meeting—projected an additional
25 basis point increase in the FOMC’s target range
for the federal funds rate, relative to what they projected in surveys conducted before the December
FOMC meeting, as the most likely outcome for this
year. Expectations for the number of rate hikes in
2018 were about unchanged. Market-based measures
of uncertainty about the policy rate approximately
one to two years ahead decreased slightly, on balance,
from their year-end levels.
Longer-term nominal Treasury yields remain low

After rising significantly during the second half of
2016, yields on medium- and longer-term nominal
Treasury securities have decreased 5 to 25 basis
points, on net, so far in 2017. The decrease in longerterm nominal yields since the beginning of the year
largely reflects declines in inflation compensation due
in part to soft incoming data on inflation, with real
yields little changed on net. Consistent with the
changes in Treasury yields, yields on 30-year agency
mortgage-backed securities (MBS)—an important
determinant of mortgage interest rates—decreased
slightly over the first half of the year. Treasury and
MBS yields picked up somewhat in late June, driven
in part by increases in government yields overseas.
However, yields remain quite low by historical
standards.
Broad equity price indexes increased further . . .

Broad U.S. equity indexes continued to increase during the period. Equity prices were reportedly supported by lower interest rates and increased optimism
that corporate earnings will continue to strengthen
this year. Stock prices of companies in the technology sector increased notably on net. After rising significantly toward the end of last year, stock prices of
banks performed about in line with the broader market during the first half of 2017. The implied volatility of the S&P 500 index one month ahead—the
VIX—decreased, on net, ending the period close to
the bottom of its historical range. (For a discussion
of financial stability issues, see the box “Developments
Related to Financial Stability” on pages 24–25 of the
July 2017 Monetary Policy Report.)

. . . and risk spreads on corporate bonds
decreased

Bond spreads for investment- and speculative-grade
firms decreased, and spreads for speculative-grade
firms now stand near the bottom of their historical
ranges.
Treasury and mortgage securities markets have
functioned well

Available indicators of Treasury market functioning
remained stable over the first half of 2017. A variety
of liquidity metrics—including bid-ask spreads, bid
sizes, and estimates of transaction costs—either
improved or remained unchanged over the period,
displaying no notable signs of liquidity pressures.
The agency MBS market also continued to function
well. (For a detailed discussion of corporate bond
market functioning, see the box “Recent Developments
in Corporate Bond Market Liquidity” on pages
26–28 of the July 2017 Monetary Policy Report.)
Money market rates have moved up in line with
increases in the FOMC’s target range

Conditions in domestic short-term funding markets
have remained stable so far in 2017. Yields on a
broad set of money market instruments moved
higher in response to the FOMC’s policy actions in
March and June. The effective federal funds rate generally traded near the middle of the target range and
was closely tracked by the overnight Eurodollar rate.
The spread between the three-month LIBOR (London interbank offered rate) and the OIS (overnight
index swap) rate has returned to historical norms
over the first half of 2017, declining from the
elevated levels that prevailed at the end of last year
around the implementation of the Securities and
Exchange Commission money market fund reform.
Bank credit continued to expand, though at a
slower pace than in 2016, and bank profitability
improved

Aggregate credit provided by commercial banks continued to increase through the first quarter of 2017,
though at a slower pace than in 2016, leaving the
ratio of total commercial bank credit to nominal
GDP slightly lower. The expansion of core loans
slowed during 2017, consistent with banks’ reports in
the April SLOOS of weakened demand for most loan
categories and tighter lending standards for commercial real estate loans. However, the growth of core
loans appeared to be picking up somewhat during the
second quarter. Measures of bank profitability have

Monetary Policy and Economic Developments

continued to improve so far this year but remained
below their historical averages.
Credit conditions in municipal bond markets
have generally been stable

Credit conditions in municipal bond markets have
generally remained stable since year-end. Over that
period, yield spreads on 20-year general obligation
municipal bonds over comparable-maturity Treasury
securities were little changed on balance. Puerto Rico
filed to enter a court-supervised process to restructure its debt after it failed to reach an agreement with
bondholders, and several credit rating agencies downgraded the bond ratings of the state of Illinois. However, these events have had no noticeable effect on
broader municipal bond markets.
International Developments
Foreign financial market conditions eased

Financial market conditions in both the advanced
foreign economies (AFEs) and the emerging market
economies (EMEs) have generally eased since January. Better-than-expected data releases, robust corporate earnings, and the passage of risk events—such as
national elections in some European countries—
boosted investor confidence. Broad equity indexes in
advanced and emerging foreign economies rose further. In addition, spreads of emerging market sovereign bonds over U.S. Treasury securities narrowed,
and capital flows into emerging market mutual funds
picked up. Government bond yields in the AFEs generally remained very low, partly reflecting investor
expectations that substantial monetary policy accommodation would be required for some time. In the
United Kingdom, softer macroeconomic data and
uncertainty about future policies and growth as the
country begins the process of exiting the European
Union also weighed on yields. However, AFE government bond yields picked up somewhat in late June,
partly reflecting investors’ focus on remarks by officials from some AFE central banks suggesting possible shifts toward less accommodative policy stances.
In the euro area, bank supervisors intervened to prevent the disorderly failure of a few small to mediumsized lenders in Italy and Spain; business disruptions
were minimal, and spillovers to other European
banks were limited.
The dollar depreciated somewhat

Since the start of the year, the broad dollar index—a
measure of the trade-weighted value of the dollar
against foreign currencies—has depreciated about
5 percent, on balance, after rising more than 20 per-

29

cent between mid-2014 and late 2016. The weakening
since the start of the year partly reflected growing
uncertainty about prospects for more expansionary
U.S. fiscal policy as well as mounting confidence in
the foreign economic outlook. The euro rose against
the dollar following the French presidential election,
and the Mexican peso appreciated substantially as
the Mexican central bank tightened monetary policy
and as investor concerns about the potential for substantial disruptions of U.S.–Mexico trade appeared
to ease.
Economic activity in the AFEs grew at a solid
pace

In the first quarter, real GDP grew at a solid pace in
Canada, the euro area, and Japan, partly reflecting
robust growth in fixed investment in all three economies. In contrast, economic growth slowed to a tepid
pace in the United Kingdom, reflecting weaker consumption growth and a decline in exports. In most
AFEs, economic survey indicators, such as purchasing manager surveys, generally remained consistent
with continued economic growth at a solid pace during the second quarter.
Inflation leveled off in most AFEs...

In late 2016, consumer price inflation (measured as a
12-month percent change) rose substantially in most
AFEs, partly reflecting increases in energy prices.
Since then, inflation has leveled off in Japan and
declined somewhat in the euro area as upward pressure from energy prices eased, core inflation stayed
low, and wage growth was subdued even as unemployment rates declined further in both economies. In
contrast, in the United Kingdom, headline inflation
rose well above the Bank of England’s (BOE) 2 percent target, largely reflecting upward pressure from
the substantial sterling depreciation since the Brexit
referendum in June 2016.
. . . and AFE central banks maintained highly
accommodative monetary policies

AFE central banks kept their policy rates at historically low levels, and the Bank of Japan kept its target
range for 10-year government bond yields near zero.
The European Central Bank (ECB) maintained its
asset purchase program, though it slightly reduced
the pace of purchases, and the BOE completed the
bond purchase program it announced last August.
However, the Bank of Canada, BOE, and ECB have
recently suggested that if growth continues to reduce
resource slack, some policy accommodation could be
withdrawn. The ECB remarked that the forces holding down inflation could be temporary. The BOE

30

104th Annual Report | 2017

indicated that some monetary accommodation might
need to be removed if the tradeoff between supporting employment and expediting the return of inflation to its target is reduced.

March and in June, bringing it to 1 to 1¼ percent.17
The FOMC’s decisions reflected the progress the
economy has made, and is expected to make, toward
the Committee’s objectives.

In EMEs, Asian growth was solid . . .

When the Committee met in March, it decided to
raise the target range for the federal funds rate to
¾ to 1 percent. Available information suggested that
the labor market had continued to strengthen even as
growth in economic activity slowed during the first
quarter. Inflation measured on a 12-month basis had
moved up appreciably and was close to the Committee’s 2 percent longer-run objective. Core inflation,
which excludes volatile energy and food prices, continued to run somewhat below 2 percent.

Chinese economic activity was robust in the first
quarter of 2017 as a result of solid domestic and
external demand. More recent indicators suggest that
growth moderated in the second quarter as Chinese
authorities tightened financial conditions and as
export growth slowed. In some other emerging Asian
economies, growth picked up in early 2017 as a result
of stronger external demand and manufacturing
activity. However, growth of the region’s exports,
especially to China, slowed so far in the second
quarter.
. . . and many Latin American economies
continue their tepid recovery

In Mexico, growth decelerated a touch in the first
quarter of 2017, partly reflecting a slowdown in private consumption following sharp hikes in domestic
fuel prices. These price hikes, together with the effects
of earlier peso depreciation on import prices, contributed to a sharp rise in Mexican inflation, which
prompted the Bank of Mexico to further tighten
monetary policy. Following a prolonged period of
contraction, the Brazilian economy posted solid
growth in the first quarter of 2017, partly reflecting a
surge in exports and a strong harvest. However,
domestic demand has remained very weak amid high
unemployment and heightened political tensions, and
indicators of economic activity have stepped down
recently. In Brazil and some other South American
economies, declining inflation has led central banks
to reduce their policy interest rates.

The data available at the time of the June FOMC
meeting suggested a rebound in economic activity in
the second quarter, leaving the projected average pace
of growth over the first half of the year at a moderate level. The labor market had continued to
strengthen, with the unemployment rate falling
nearly ½ percentage point since the beginning of the
year to 4.3 percent in May, a low level by historical
standards and modestly below the median of FOMC
participants’ estimates of its longer-run normal level.
Inflation measured on a 12-month basis had declined
over the previous few months but was still up significantly since last summer. Like the headline inflation
measure, core inflation was running somewhat below
2 percent. With employment expected to remain near
its maximum sustainable level, the Committee continued to expect that inflation would move up and
stabilize around 2 percent over the next couple of
years, in line with the Committee’s longer-run objective. In view of realized and expected labor market
conditions and inflation, the Committee decided to
raise the target another ¼ percentage point to a
range of 1 to 1¼ percent.

Part 2: Monetary Policy
The Federal Open Market Committee raised
the federal funds rate target range in March
and June

Over the past year and a half, the Federal Open Market Committee (FOMC) has been gradually increasing its target range for the federal funds rate as the
economy continued to make progress toward the
Committee’s objectives of maximum employment
and price stability. After having raised the target
range for the federal funds rate last December, the
Committee decided to raise the target range again in

Monetary policy continues to support economic
growth

Even with the gradual reductions in the amount of
policy accommodation to date, the Committee judges
that the stance of monetary policy remains accom17

See Board of Governors of the Federal Reserve System (2017),
“Federal Reserve Issues FOMC Statement,” press release,
March 15, https://www.federalreserve.gov/newsevents/
pressreleases/monetary20170315a.htm; and Board of Governors
of the Federal Reserve System (2017), “Federal Reserve Issues
FOMC Statement,” press release, June 14, https://www
.federalreserve.gov/newsevents/pressreleases/monetary20170614a
.htm.

Monetary Policy and Economic Developments

modative, thereby supporting some further strengthening in labor market conditions and a sustained
return to 2 percent inflation. In particular, the federal
funds rate appears to remain somewhat below its
neutral level—that is, the level of the federal funds
rate that is neither expansionary nor contractionary.
In evaluating the stance of monetary policy, policymakers routinely consult prescriptions from a variety
of policy rules, which can serve as useful benchmarks. However, the use and interpretation of such
prescriptions require careful judgments about the
choice and measurement of the inputs to these rules
as well as the implications of the many considerations these rules do not take into account. (See the
box “Monetary Policy Rules and Their Role in the
Federal Reserve’s Policy Process” on pages 36–39 of
the July 2017 Monetary Policy Report.)
Future changes in the federal funds rate will
depend on the economic outlook as informed by
incoming data

The FOMC has continued to emphasize that, in
determining the timing and size of future adjustments to the target range for the federal funds rate, it
will assess realized and expected economic conditions
relative to 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 will carefully monitor actual and
expected inflation developments relative to its symmetric inflation goal.
The Committee currently expects that the ongoing
strength in the economy will warrant gradual
increases in the federal funds rate, and that the federal funds rate will likely remain, for some time,
below the levels that the Committee expects to prevail
in the longer run. Consistent with this outlook, in the
most recent Summary of Economic Projections,
which was compiled at the time of the June FOMC
meeting, most FOMC participants projected that the
appropriate level of the federal funds rate would be
below its longer-run level through 2018.18

The size of the Federal Reserve’s balance sheet
has remained stable so far this year

To help maintain accommodative financial conditions, the Committee has continued its existing policy
of reinvesting principal payments from its holdings of
agency debt and agency mortgage-backed securities
in agency mortgage-backed securities and rolling
over maturing Treasury securities at auction. Consequently, the Federal Reserve’s total assets have held
steady at around $4.5 trillion, with holdings of U.S.
Treasury securities at $2.5 trillion and holdings of
agency debt and agency mortgage-backed securities
at approximately $1.8 trillion. Total liabilities on the
Federal Reserve’s balance sheet were also mostly
unchanged over the first half of 2017.
The Committee intends to implement a balance
sheet normalization program

In June, policymakers augmented the Committee’s
Policy Normalization Principles and Plans issued in
September 2014 by providing additional details
regarding the approach the FOMC intends to use to
reduce the Federal Reserve’s holdings of Treasury
and agency securities once normalization of the federal funds rate is well under way.19 The Committee
intends to gradually reduce the Federal Reserve’s
securities holdings by decreasing its reinvestment of
the principal payments it receives from the securities
held in the System Open Market Account. Specifically, such payments will be reinvested only to the
extent that they exceed gradually rising caps. Initially,
these caps will be set at relatively low levels to limit
the volume of securities that private investors will
have to absorb. The Committee currently expects
that, provided the economy evolves broadly as anticipated, it would likely begin to implement the program this year. In addition, the Committee affirmed
that changing the target range for the federal funds
rate remains its primary means of adjusting the
stance of monetary policy. (See the box “Addendum
to the Policy Normalization Principles and Plans” on
page 40 of the July 2017 Monetary Policy Report.)
The Federal Reserve’s implementation of
monetary policy has continued smoothly

The Federal Reserve successfully raised the effective
federal funds rate in March and June of 2017 by
increasing the interest rate paid on reserve balances
along with the interest rate offered on overnight
19

18

See the June 2017 Summary of Economic Projections, which
appeared as an addendum to the minutes of the June 13–14,
2017, meeting of the Federal Open Market Committee and is
included as Part 3 of the July 2017 Monetary Policy Report.

31

See Board of Governors of the Federal Reserve System (2017),
“FOMC Issues Addendum to the Policy Normalization Principles and Plans,” press release, June 14, https://www
.federalreserve.gov/newsevents/pressreleases/monetary20170614c
.htm.

32

104th Annual Report | 2017

reverse repurchase agreements (ON RRPs). Specifically, the Federal Reserve increased the interest rate
paid on required and excess reserve balances to
1.00 percent in March and 1.25 percent in June while
increasing the ON RRP offering rate to 0.75 percent
in March and 1.00 percent in June. In addition, the
Board of Governors approved ¼ percentage point
increases in the discount rate (the primary credit rate)
in March and June. In both March and June, the
effective federal funds rate rose near the middle of its

new target range amid orderly trading conditions in
money markets, closely tracked by most other overnight money market rates.
Usage of the ON RRP facility, which had increased
late last year as a result of higher demand by government money market funds in the wake of last October’s money fund reform, has declined some, on
average, in recent months. However, usage has
remained somewhat above its levels of one year ago.

33

3

Financial Stability

A stable financial system promotes economic welfare
through many channels: It facilitates household savings to purchase a home, finance a college education,
and smooth consumption in response to job loss and
other adverse developments; it promotes responsible
risk-taking and economic growth by channeling savings to firms to start new businesses and expand
existing businesses; and it spreads risk across
investors.
A financial system is considered stable when financial
institutions—banks, savings and loans, and other
financial product and service providers—and financial markets are able to provide households, communities, and businesses with the resources, services, and
products they need to invest, grow, and participate in
a well-functioning economy. Disruptions to these
activities of the financial system have arisen during,
and contributed to, stressed macroeconomic environments, and financial stability in its most basic form
could be thought of as a condition in which financial
institutions and markets are able to support consumers, communities, and businesses during such stressed
conditions. Accordingly, the Federal Reserve’s objective to promote financial stability strongly complements the goals of price stability and full employment. In pursuit of continued financial stability, the
Federal Reserve monitors the potential buildup of
risks to financial stability; uses such analyses to
inform Federal Reserve responses, including the
design of stress-test scenarios and decisions regarding
other policy tools such as the countercyclical capital
buffer (CCyB); works with other domestic agencies
directly and through the Financial Stability Oversight
Council (FSOC); and engages with the global community in monitoring, supervision, and regulation
that mitigate the risks and consequences of financial
instability domestically and abroad.
Moreover, the Federal Reserve promotes financial
stability through its supervision and regulation of
financial institutions. A central tenet of the Federal
Reserve’s efforts in promoting financial stability is the
adoption of an approach to supervision and regula-

tion that accounts for the stability of the financial
system as a whole, in addition to a traditional, microprudential approach, which focuses on the safety and
soundness of individual institutions. In particular, the
first approach informs the supervision of systemically
important financial institutions (SIFIs), including
large bank holding companies (BHCs), the U.S.
operations of certain foreign banking organizations,
and financial market utilities (FMUs). In addition,
the Federal Reserve serves as a “consolidated supervisor” of nonbank financial companies designated by
the FSOC as institutions whose distress or failure
could pose a threat to the stability of the U.S. financial system as a whole (see “Financial Stability Oversight Council Activities” later in this section).
Enhanced standards for the largest, most systemic
firms promote the safety of the overall system and
minimize the regulatory burden on smaller, less systemic institutions.
This section discusses key financial stability activities
undertaken by the Federal Reserve over 2017, which
include monitoring risks to financial stability; promoting a perspective on the supervision and regulation of large, complex financial institutions that
accounts for the potential spillovers from distress at
such institutions to the financial system and broader
economy; and engaging in domestic and international
cooperation and coordination. Each of these activities is informed by research into financial stability
issues (see box 1 for a summary of some recent
research by Federal Reserve Board staff on financial
stability topics).
Some of these activities are also discussed elsewhere
in this annual report. A broader set of economic and
financial developments are discussed in section 2,
“Monetary Policy and Economic Developments,”
with the discussion that follows concerning surveillance of economic and financial developments
focused on financial stability. The full range of activities associated with supervision of SIFIs, designated
nonbank companies, and designated FMUs is discussed in section 4, “Supervision and Regulation.”

34

104th Annual Report | 2017

Box 1. 2017 Research on Financial Stability
The Federal Reserve’s approach to promoting financial stability builds on a substantial and growing body
of research on the factors that create vulnerabilities in
the financial system and how prudential policies can
mitigate such vulnerabilities.
Understanding of the array of factors affecting financial stability is incomplete and evolving. Consequently, Federal Reserve staff participate actively in
research on financial stability and related issues. This
research engages the broader research community in
policy issues and often involves collaboration with
academia and researchers at other domestic and
international institutions.
The research efforts by Federal Reserve staff reflect
their attempts to identify and address the topics of
concern to the Federal Reserve, and the views
expressed are those of the individual authors and not
those of the Federal Reserve. Examples of staff
research on financial stability in 2017 include the
following:

—A working paper studies optimal regulation in
primary credit markets and secondary over-thecounter markets.2

• The financial sector and the macroeconomy

See Anil K. Kashyap, Dimitrios P. Tsomocos, and Alexandros P.
Vardoulakis (2017), “Optimal Bank Regulation in the Presence of
Credit and Run Risk,” Finance and Economics Discussion Series
2017-097 (Washington: Board of Governors of the Federal
Reserve System, September), https://dx.doi.org/10.17016/FEDS
.2017.097.

Financial institutions are linked together through a
complex set of relationships, and their condition
depends on the economic condition of the nonfinancial sector. In turn, the condition of the nonfinancial
sector hinges on the strength of financial institutions’
balance sheets, as the nonfinancial sector obtains
funding through the financial sector. Monitoring
risks to financial stability is aimed at better understanding these complex linkages and has been an
important part of Federal Reserve efforts in pursuit
of overall economic stability.
In order to understand the interaction between the
financial and nonfinancial sectors and develop

• Financial mark

—A working paper provides a macro model incorporating bank runs and panics.4

—A published
of high-frequ

—A published paper documents the importance of
occasionally binding financial frictions in understanding the nonlinear behavior of macroeconomic aggregates.5

—An essay dis
(emerging fin
nections with

2

3

5

See David M. Arseneau, David E. Rappoport, and Alexandros P.
Vardoulakis (2017), “Private and Public Liquidity Provision in
Over-the-Counter Markets,” Finance and Economics Discussion
Series 2017-033 (Washington: Board of Governors of the Federal
Reserve System, March), https://dx.doi.org/10.17016/FEDS
.2017.033.
See Bora Durdu, Rochelle Edge, and Daniel Schwindt (2017),
“Measuring the Severity of Stress-Test Scenarios,” FEDS Notes
(Washington: Board of Governors of the Federal Reserve
System, May 5), https://dx.doi.org/10.17016/2380-7172.1970.
See Mark Gertler, Nobuhiro Kiyotaki, and Andrea Prestipino
(2017), “A Macroeconomic Model with Financial Panics,” International Finance Discussion Papers 1219 (Washington: Board of
Governors of the Federal Reserve System, December),
https://dx.doi.org/10.17016/IFDP.2017.1219.
See Luca Guerrieri and Matteo Iacoviello (2017), “Collateral Constraints and Macroeconomic Asymmetries,” Journal of Monetary
Economics, vol. 90 (October), pp. 28–49.

(continued on next page)

Monitoring Risks to Financial
Stability

—A published
default swap
ment decisio

—A working pa
financial inte
lens.10
6

4

1

—A published
monetary an

—A note presents an empirical framework to
evaluate stress-test scenarios.3

• Theoretical and empirical studies on financial
regulation design
—A working paper analyzes optimal bank regulation in the presence of credit and run risk.1

Box 1. 2017

appropriate policy responses, the Federal Reserve
maintains a flexible, forward-looking financial stability monitoring program to help inform policymakers
of the financial system’s vulnerabilities to a wide
range of potential adverse shocks. Such a monitoring
program is a critical part of a broader program in the
Federal Reserve System to assess and address vulnerabilities in the U.S. financial system.
Each quarter, Federal Reserve Board staff assess a set
of vulnerabilities relevant for financial stability,
including but not limited to asset valuations and risk
appetite, leverage in the financial system, liquidity
risks and maturity transformation by the financial
system, and borrowing by the nonfinancial sector
(households and nonfinancial businesses). These
monitoring efforts inform internal discussions con-

7

8

9

10

See Bianca De Pa
ing Monetary and
Credit and Banking
See Matthew Dars
Default Swaps in G
Credit Spread Spil
See Evangelos Be
Filip Zikes (2017),
Journal of Financia
pp. 1375–1402.
See John Schindle
Drivers and Depth
2017-081 (Washin
Reserve System, A
.2017.081.
See Amir Akbari, F
(2017), “Reversals
Liquidity,” Internat
ington: Board of G
March), https://dx.

Financial Stability

Box 1. 2017 Research on Financial Stability—continued

l regulation in
ondary over-the-

—A published paper discusses the coordination of
monetary and macroprudential policymaking.6
—A published paper examines the effects of credit
default swaps on firm debt issuance and investment decisions.7

mework to

croeconomy

• Financial markets and financial stability

—A working paper studies the effect of the Fed’s
Treasury portfolio composition on Treasury
yields.11
• Bank lending behavior
—A working paper analyzes the effects of quantitative easing on bank lending standards.12

cro model incor-

—A published paper analyzes the trading activities
of high-frequency traders.8

—A working paper uses a macro model to analyze
the risk channel of monetary policy.13

he importance of
ctions in underof macroeco-

—An essay discusses the advent of fintech
(emerging financial technologies) and its connections with financial stability.9

—A working paper documents that banks more
exposed to regions with high house-price-toincome ratios before the Great Recession had
higher mortgage delinquency and charge-off
rates during the recession.14

rt, and Alexandros P.
idity Provision in
conomics Discussion
vernors of the Federal
/10.17016/FEDS

Schwindt (2017),
narios,” FEDS Notes
deral Reserve
6/2380-7172.1970.
ndrea Prestipino
ncial Panics,” InterWashington: Board of
December),
9.
017), “Collateral Con” Journal of Monetary

35

—A working paper looks at reversals in global
financial integration through the funding liquidity
lens.10

11
6

7

8

9

10

See Bianca De Paoli and Matthias Paustian (2017), “Coordinating Monetary and Macroprudential Policies,” Journal of Money,
Credit and Banking, vol. 49 (March–April), pp. 319–49.
See Matthew Darst and Ehraz Refayet (forthcoming), “Credit
Default Swaps in General Equilibrium: Endogenous Default and
Credit Spread Spillovers,” Journal of Money, Credit and Banking.
See Evangelos Benos, James Brugler, Erik Hjalmarsson, and
Filip Zikes (2017), “Interactions among High-Frequency Traders,”
Journal of Financial and Quantitative Analysis, vol. 52 (August),
pp. 1375–1402.
See John Schindler (2017), “FinTech and Financial Innovation:
Drivers and Depth,” Finance and Economics Discussion Series
2017-081 (Washington: Board of Governors of the Federal
Reserve System, August), https://dx.doi.org/10.17016/FEDS
.2017.081.
See Amir Akbari, Francesca Carrieri, and Aytek Malkhozov
(2017), “Reversals in Global Market Integration and Funding
Liquidity,” International Finance Discussion Papers 1202 (Washington: Board of Governors of the Federal Reserve System,
March), https://dx.doi.org/10.17016/IFDP.2017.1202.

12

13

14

See Jeffrey Huther, Jane Ihrig, and Elizabeth Klee (2017), “The
Federal Reserve’s Portfolio and Its Effect on Interest Rates,”
Finance and Economics Discussion Series 2017-075 (Washington: Board of Governors of the Federal Reserve System, July),
https://dx.doi.org/10.17016/FEDS.2017.075.
See Robert Kurtzman, Stephan Luck, and Tom Zimmermann
(2017), “Did QE Lead Banks to Relax Their Lending Standards?
Evidence from the Federal Reserve’s LSAPs,” Finance and Economics Discussion Series 2017-093 (Washington: Board of Governors of the Federal Reserve System, September), https://dx
.doi.org/10.17016/FEDS.2017.093.
See Elena Afanasyeva and Jochen Güntner (2018), “Bank Market Power and the Risk Channel of Monetary Policy,” Finance
and Economics Discussion Series 2018-006 (Washington: Board
of Governors of the Federal Reserve System, January), https://
www.federalreserve.gov/econres/feds/files/2018006pap.pdf.
See Gazi I. Kara and Cindy M. Vojtech (2017), “Bank Failures,
Capital Buffers, and Exposure to the Housing Market Bubble,”
Finance and Economics Discussion Series 2017-115 (Washington: Board of Governors of the Federal Reserve System, November), https://dx.doi.org/10.17016/FEDS.2017.115.

ed on next page)

cerning policies to promote financial stability, such as
supervision and regulatory policies as well as monetary policy. They also inform Federal Reserve interactions with broader monitoring efforts, such as
those by the FSOC and the Financial Stability Board
(FSB).

result, analysis typically includes a broad range of
possible valuation metrics and tracks developments
in areas in which asset prices are rising particularly
rapidly, into which investor flows have been considerable, or where volatility has been at unusually low or
high levels.

Asset Valuations and Risk Appetite

Across markets, valuation pressures remained
elevated and continued to edge up. In equity markets,
the forward price-to-earnings ratio increased noticeably, in particular for large firms (figure 1). At the
same time, estimates of the equity risk premium—for
example, the gap between the expected return on
equity and the long-term Treasury yield—declined,
and such measures suggest that investors demanded a
relatively low premium to bear the risk of holding
equities. Moreover, both realized and expected volatility in equity markets declined over 2017 to very low

Overvalued assets are a fundamental source of vulnerability because the unwinding of high prices can
be destabilizing, especially if the assets are widely
held and the values are supported by excessive leverage, maturity transformation, or risk opacity. Moreover, stretched asset valuations are likely to be an
indicator of a broader buildup in risk-taking. Nonetheless, it is very difficult to judge whether an asset
price is overvalued relative to fundamentals. As a

36

104th Annual Report | 2017

Figure 1. Forward price-to-earnings ratio, 1983–2017
Ratio (log scale)
Monthly

Dec.

Figure 2. S&P 500 volatility, 2000–17
Percent (log scale)

40
35
30

Monthly average
S&P 500 volatility
index (VIX)
Realized volatility

25

100

50

20

Historical median

20

15
Historical median

10

10
S&P 500 firms
Small-cap 2000 firms

Dec.
5
5

1987

1997

2007

2002

2017

2005

2008

2011

2014

2017

Note: The data extend through December 2017. For realized volatility, five-minute
returns used in an exponentially weighted moving average, with 75 percent of the
weight distributed over the last 20 days.

Note: The data extend through December 2017. The data for small-cap 2000 firms
start in October 1984. Based on expected earnings for 12 months ahead.
Source: Staff calculations using data from Thomson Reuters IBES.

Source: Bloomberg.

levels by historical standards, although realized volatility picked up late in the year (figure 2).

lite” loans. Such loans continue to account for a high
fraction of market volume (figure 4).

Throughout 2017, yields on Treasury securities
remained below historical averages; however, they
were higher than in 2016. In the corporate bond market, spreads of high-yield and investment-grade
bonds relative to comparable-maturity Treasury
yields, a gauge of the compensation that investors
demand for exposure to corporate credit risk, narrowed over the year (figure 3). Strong demand for
exposure to corporate credit risk was also apparent in
the further increase in leveraged lending with limited
degrees of investor protection—termed “covenant

An area of ongoing valuation pressures over the past
year was commercial real estate (CRE), with prices
increasing faster than the historical trend and, for
industrial and multifamily properties, with net operating income relative to property prices (capitalization rates) continuing to decline from already low levels. Residential home prices also continued to rise in
2017, although price increases nationally in that year
were not outsized relative to improvements in fundamentals. For example, house prices relative to rents—
one measure of valuations—rose moderately in 2017,

Figure 3. Corporate bond spreads to similar-maturity Treasury securities, 1998–2017
Percent
Monthly average
10-year high-yield yield
10-year triple-B yield
10-year Treasury yield

20

15

10

5
Dec.
0

1999

2002

2005

2008

2011

2014

2017

Note: The data extend through December 2017.
Source: Staff estimates based on corporate bond data from ICE Data Indices LLC: BofAML Bond Indices (used with permission), computed using Nelson-Siegel yield curve
model; semiannually compounded 10-year Treasury yield (par) estimated by Svensson term structure model.

Financial Stability

Figure 4. Volume of covenant-lite loans and share of such
loans in the leveraged lending market, 2004–17
80
70

Percent

Billions of dollars (annualized)
Market share (left scale)
Volume (right scale)

400

300

50

250

40

200

30

150

20

100

10

50

0

0
2008

2011

Figure 5. Nonfinancial-sector credit-to-GDP ratio,
1981–2017
Ratio
Quarterly

2.0

350

60

2005

37

2014

Q4
1.5

1.0

Business

0.5
Household

2017

Note: The data extend through 2017.
Source: S&P Global, Leveraged Commentary and Data.

with an increase similar to annual changes over the
previous five years.

Borrowing by the Nonfinancial Sector
Excessive borrowing by the private nonfinancial sector has been an important contributor to past financial crises. Highly indebted households and nonfinancial businesses may be vulnerable to negative shocks
to incomes or asset values and may be forced to curtail spending, which could amplify the effects of
financial shocks. In turn, losses among households
and businesses can lead to mounting losses at financial institutions, creating an adverse feedback loop in
which weakness among households, nonfinancial
businesses, and financial institutions causes further
declines in income and accelerated financial losses,
potentially leading to financial instability and a sharp
contraction in economic activity.
Vulnerabilities associated with nonfinancial-sector
leverage remained moderate overall in 2017. Nominal
private nonfinancial-sector credit grew a bit less than
5 percent over 2017 and a shade faster than nominal
gross domestic product (GDP), leaving the private
nonfinancial-sector credit-to-GDP ratio elevated but
stable at approximately 150 percent, a level similar to
that in the mid-2000s (figure 5).

0.0

1981

1987

1993

1999

2005

2011

2017

Note: The data extend through 2017:Q4. The shaded bars indicate periods of business recession as defined by the National Bureau of Economic Research. GDP is
gross domestic product.
Source: Federal Reserve Board, Statistical Release Z.1, “Financial Accounts of the
United States”; Bureau of Economic Analysis, national income and product
accounts; Board staff calculations.

expected default based on accounting and stock
return data, especially outside the oil sector. Nonetheless, high leverage could leave some parts of the
corporate sector vulnerable to difficulties should
adverse shocks materialize.
Gross issuance of high-yield corporate bonds was
strong throughout 2017, and gross issuance of leveraged loans was the strongest over the past decade
(figure 7). A sizable fraction of leveraged loan issuance, however, was used for refinancing purposes.
Figure 6. Gross leverage for speculative-grade and
investment-grade firms, 2000–17
Percent of assets
Quarterly
Speculative-grade
Investment-grade

50
45
40

Q4

35
30
25

While borrowing by the total nonfinancial private
sector remained moderate, leverage among riskier
corporate borrowers has stayed at or near multidecade highs, particularly for speculative-grade and
unrated firms (figure 6). Despite high leverage, interest expense ratios were low by historical standards,
even among higher-risk firms, as were measures of

20
15
2002

2005

2008

2011

2014

2017

Note: The data extend through 2017:Q4. Gross leverage is the ratio of the book
value of total debt to the book value of total assets.
Source: S&P Global, Compustat.

38

104th Annual Report | 2017

Figure 7. Leveraged loan and high-yield bond issuance,
2005–17
35

Four-quarter percent change

Billions of dollars (annualized)
Total outstanding (left scale)
High-yield bonds (right scale)
Leveraged loans (right scale)

30
25

1600
1400
1200

20

1000

15

800

10

600

5

400

0

200

-5

0
2005

2008

2011

2014

Household debt growth continued to be modest over
the past year, and the debt-to-income ratio for households continued to inch down. Aggregate borrowing
relative to income in the household sector declined
significantly from its peak, and recent borrowing
remained skewed toward low-risk households.

2017

Note: Total outstanding is quarterly data, starting in 2005:Q1. It includes bonds
and loans to financial and nonfinancial companies, as well as unrated bonds and
loans.
Source: S&P Global, Leveraged Commentary and Data; Mergent Corporate Fixed
Income.

The four-quarter percent change in net issuance of
risky debt increased throughout the year.
CRE loan growth remained strong over the past year
(figure 8). CRE-related loan growth at banks also
continued to be strong but began to decline from its
peak in 2016. This decline in bank loan growth rates
was likely due to a tightening of CRE lending standards. Issuance of commercial mortgage-backed
securities, however, remained robust through the
fourth quarter.

Leverage in the Financial System
Vulnerabilities related to financial-sector leverage
appear low. The financial strength of the banking
sector continued to improve in 2017, and stronger
capital positions at domestic banking organizations
contributed to the improved resilience of the U.S.
financial system. Regulatory capital remained at historically high levels for most large domestic banks.
The ratio of Tier 1 common equity to risk-weighted
assets stayed near 12 percent, on average, for BHCs
in 2017 (figure 9). Moreover, the leverage ratio, which
looks at common equity relative to total assets without adjusting for risk, also remained at levels substantially above pre-crisis norms. Finally, all 34 firms
participating in the Federal Reserve’s supervisory
stress tests for 2017 were able to maintain capital
ratios above required minimums to absorb losses
from a severe macroeconomic shock.1
1

The 2017 supervisory stress-test methodology and results are
available on the Board’s website at https://www.federalreserve.gov/
publications/2017-june-dodd-frank-act-stress-test-preface.htm.

Figure 9. Regulatory capital ratios, all BHCs, 1998–2017
Figure 8. Total holdings of CRE debt, by holder, 1981–2017

Percent
Quarterly, s.a.

Four-quarter percent change

20
35
30

Traditional banks
Total

25

Total (Tier 1 + Tier 2)
Common equity Tier 1 ratio
Leverage ratio

18
16
14

20
15
Q4

Q4

10

5

8
6

-5
-10
-15
1987

1993

1999

2005

2011

12

10
0

1981

22

2017

Note: The data extend through 2017:Q4. Total consists of insurance companies,
asset-backed securities issuers, real estate investment trusts, governmentsponsored enterprises, finance companies, pension funds, and the rest of the
world (all entities not residing in the United States that engage in transactions
with U.S. residents). The shaded bars indicate periods of business recession as
defined by the National Bureau of Economic Research.
Source: Federal Reserve Board, Statistical Release Z.1, “Financial Accounts of the
United States”; Bureau of Economic Analysis, national income and product
accounts.

4
1999

2002

2005

2008

2011

2014

2017

Note: The data extend through 2017:Q4. Prior to 2014:Q1, the numerator of the
common equity Tier 1 ratio is Tier 1 common capital. Beginning in 2014:Q1 for
advanced-approaches bank holding companies (BHCs) and in 2015:Q1 for all
other BHCs, the numerator is common equity Tier 1 capital. The data for the common equity Tier 1 ratio start in 2001:Q1. An advanced-approaches BHC is defined
as a large internationally active banking organization, generally with at least
$250 billion in total consolidated assets or at least $10 billion in total on-balancesheet foreign exposure. The shaded bars indicate periods of business recession as
defined by the National Bureau of Economic Research.
Source: Federal Reserve Board, Form FR Y-9C, Consolidated Financial Statements
for Holding Companies.

Financial Stability

Overall, leverage at nonbank financial firms remains
significant. While, in the aggregate, dealers continue
to shrink their on-balance-sheet leverage to levels far
below those seen leading up to and during the financial crisis, there are signs that nonbank financial
leverage has been increasing in some areas. For
example, the provision of margin credit to equity
investors such as hedge funds has risen substantially.
Insurance companies’ capital levels are robust, and
overall risk exposures are generally lower than those
typical of commercial banks.

Liquidity Risks and Maturity
Transformation by the Financial System
Vulnerabilities associated with liquidity risks and maturity transformation remained low in 2017, partly reflecting regulations introduced since the 2008 financial crisis.
In the banking sector, the largest banks hold high levels
of high-quality liquid assets (figure 10). The reliance of
global systemically important banks (G-SIBs) on
short-term wholesale funding is near post-crisis lows.
At the same time, the share of core deposits in total
liabilities for G-SIBs is historically high.
In the nonbanking sector, the amount of assets managed by money market mutual funds (also referred to
as money market funds, or MMFs) increased marginally throughout 2017, with little change to portfolio composition. More than one year after the MMF
reform, assets under management at prime MMFs
Figure 10. High-quality liquid assets, by BHC type, 2010–17
Percent of assets
Quarterly

26
24

Standard LCR
Modified LCR
Other

22
20
18

39

edged up only modestly.2 The weighted-average
maturity of assets held by government and agency
MMFs declined noticeably throughout 2017, resulting in lower maturity transformation.
Overall issuance of securitized products remained
below pre-crisis levels for most asset classes, although
the issuance of asset-backed securities (ABS) was
strong. ABS issuance partly reflected the securitization of assets that were not typically securitized in
previous years, including aircraft leases and mobile
phone contracts. Currently, securitized products
incorporate less maturity transformation than before
the financial crisis, with volumes of asset-backed
commercial paper being particularly low. Nontraditional liabilities of insurance companies, including
funding-agreement-backed securities, grew significantly in 2017 even if outstanding amounts remained
relatively small.
Liquidity transformation at open-end funds that hold
less-liquid assets continues to pose a moderate amplification risk, because investors can typically redeem
shares daily while the underlying assets may trade in
less-liquid markets. Liquidity-transformation risk is
also pronounced at exchange-traded funds that invest
in certain asset classes, including bank loans, and
that provide leveraged and inverse payoffs relative to
benchmark indexes. While the limited size of these
products suggests that their behavior may not have
long-lasting effects on asset prices, their leverage and
reliance on markets in which liquidity may be limited
during stress periods entail that such products could
amplify price swings across markets for short periods.

Financial Stability and the
Supervision and Regulation of Large,
Complex Financial Institutions

16
14
12
10
Q4

8
6
4

2011

2013

2015

Large, complex financial institutions interact with
financial markets and the broader economy in a
manner that may—during times of stress and in the
absence of an appropriate regulatory framework and
effective supervision—lead to financial instability.3

2017

Note: The data extend through 2017:Q4. High-quality liquid assets (HQLA) are estimated by adding excess reserves to an estimate of securities that qualify for
HQLA. Securities are estimated from Form FR Y-9C. Haircuts and Level 2 asset
limitations are incorporated into the estimate (Level 2 assets can represent only a
limited share of the HQLA stock). LCR is liquidity coverage ratio; BHC is bank holding company. Other is defined as BHCs not subject to the LCR.
Source: Federal Reserve Board, Form FR Y-9C, Consolidated Financial Statements
for Holding Companies, and Form FR 2900, Report of Transaction Accounts, Other
Deposits, and Vault Cash.

2

3

For additional information, see Securities and Exchange Commission (2014), “Money Market Fund Reform; Amendments to
Form PF,” final rule (Release No. 33-9616), July 23, https://www
.sec.gov/rules/final/2014/33-9616.pdf.
For more on the Federal Reserve’s supervision and regulation of
large institutions, especially related to the integration of the
microprudential objective of safety and soundness of individual
institutions with the macroprudential efforts outlined later in
this section, see section 4, “Supervision and Regulation.”

40

104th Annual Report | 2017

Key Supervisory Activities

Key Regulatory Activities

One essential element of enhanced supervision of
large banking organizations is the stress-testing process, which includes the stress tests mandated by the
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) and the Comprehensive Capital Analysis and Review (CCAR). In
addition to fostering the safety and soundness of the
participating institutions, stress tests embed elements
focused on the stability of the financial system as a
whole by incorporating the following:

Over the course of 2017, the Federal Reserve took a
number of steps to continue improving the resilience
of financial institutions and the overall financial
system. This section summarizes steps that bear most
directly on financial stability.

• Examining the loss-absorbing capacity of institutions under a common macroeconomic scenario
that has features similar to the strains experienced
in a severe recession and which includes, as appropriate, identified salient risks
• Conducting a simultaneous exercise across large
institutions to understand the potential for correlated exposures
• Considering the effects of counterparty distress on
the largest, most interconnected firms
The results from the 2017 supervisory stress tests
conducted as part of the Dodd-Frank Act stress tests
(DFAST) and CCAR were released in June 2017.4
Thirteen of the largest and most complex banks were
required, for the first time, to meet the minimum
supplementary leverage ratio of 3 percent as part of
the quantitative assessment. The DFAST and CCAR
results suggest that all of the firms evaluated have
sufficient capital to remain above minimum requirements through a severely adverse macroeconomic
scenario. The severely adverse scenario featured a
severe global recession that was accompanied by a
period of heightened stress in corporate loan and
CRE markets. The level of severity reflected the
Board’s scenario design framework for stress testing,
which includes countercyclical elements. The international part of the scenario featured severe recessions
in the euro area, the United Kingdom, and Japan
and a marked growth slowdown in developing Asia.

4

For additional information on DFAST, see Board of Governors
of the Federal Reserve System (2017), “Federal Reserve Board
Releases Results of Supervisory Bank Stress Tests,” press
release, June 22, https://www.federalreserve.gov/newsevents/
pressreleases/bcreg20170622a.htm. For more details on CCAR,
see Board of Governors of the Federal Reserve System (2017),
“Federal Reserve Releases Results of Comprehensive Capital
Analysis and Review (CCAR),” press release, June 28, https://
www.federalreserve.gov/newsevents/pressreleases/
bcreg20170628a.htm.

In December 2017, the Federal Reserve Board voted
to reaffirm the CCyB at the current level of 0 percent.5 The CCyB is a tool that the Board can use to
increase the resilience of the financial system by raising capital requirements on internationally active
banking organizations when there is an elevated risk
of above-normal losses in the future. In evaluating
the appropriate size of the U.S. CCyB, the Board
monitors a wide range of financial and economic
indicators and considers their implications for financial system vulnerabilities, including but not limited
to asset valuation pressures, risk appetite, leverage in
the financial and nonfinancial sectors, and maturity
and liquidity transformation in the financial sector.
The Board also issued a final rule that improved the
resolvability and resilience of systemically important
U.S. banking organizations and systemically important foreign banking organizations. Covered entities
would be subject to restrictions related to the terms
of their noncleared qualified financial contracts.
In order to increase the transparency of its stresstesting program while maintaining its ability to test
the resilience of the nation’s largest and most complex banking organizations, the Board requested
comments on a set of proposals that relate to the disclosure of details about supervisory stress-test models; to the Board’s approach to model development,
validation, and use; and to the framework for the
design of the annual hypothetical economic
scenarios.
The proposals on which the Board requested comments included expanding the descriptions of supervisory models and communicating the loss rates that
supervisory models assign to subgroups of loans.6 In
5

6

See Board of Governors of the Federal Reserve System (2017),
“Federal Reserve Board Announces It Has Voted to Affirm
Countercyclical Capital Buffer (CCyB) at Current Level of
0 Percent,” press release, December 1, https://www.federalreserve
.gov/newsevents/pressreleases/bcreg20171201a.htm.
For the notice of enhanced model disclosure, see Board of Governors of the Federal Reserve System (2017), “Enhanced Disclosure of the Models Used in the Federal Reserve’s Supervisory
Stress Test,” notification with request for public comment
(Docket No. OP-1586), Federal Register, vol. 82 (December 15),

Financial Stability

addition, the Board built on previous disclosures and
detailed the principles and policies that underpin the
development of its stress-testing models.7 Finally, the
Board proposed to enhance the transparency of the
stress-testing economic scenarios by providing a
quantitative discussion of the hypothetical path of
house prices and by providing notice that the Board
is considering incorporating variables related to funding risks into the hypothetical scenarios.

Box 2. Regular Reporting on
Financial Stability Oversight Council
Activities
The Federal Reserve cooperated and coordinated
with domestic agencies in 2017 to promote financial stability, including through the activities of the
Financial Stability Oversight Council (FSOC).
Meeting minutes. In 2017, the FSOC met eight
times, including at least once a quarter. The minutes for each meeting are available on the U.S.
Treasury website (https://www.treasury.gov/
initiatives/fsoc/council-meetings/Pages/
meeting-minutes.aspx).

For more information on the Board’s regulatory
activities, see section 4, “Supervision and
Regulation.”

FSOC annual report. On December 14, 2017, the
FSOC released its seventh annual report (https://
www.treasury.gov/initiatives/fsoc/studies-reports/
Documents/FSOC_2017_Annual_Report.pdf), which
includes a review of key developments in 2017 and
a set of recommended actions that could be taken
to ensure financial stability and to mitigate systemic
risks that affect the economy.

Domestic and International
Cooperation and Coordination
The Federal Reserve cooperated and coordinated
with both domestic and international institutions in
2017 to promote financial stability.

For more on the FSOC, see https://www.treasury
.gov/initiatives/fsoc/Pages/home.aspx.

Financial Stability Oversight Council
Activities

April 18, 2016, that provided an update on the
FSOC’s review of potential risks to U.S. financial
stability that may arise from asset management
products and activities, the FSOC continued its
work to assess the potential for financial stability
risks to arise from certain asset management products and activities.8 The FSOC’s discussion on
liquidity and redemption risks resulted in several
suggestions being passed to the Securities and
Exchange Commission (SEC) for consideration on
the risk-management and disclosure practices of
mutual funds. The council further conducted analysis on the use of leverage in investment vehicles;
specifically, the analysis focused on the potential
vulnerability of assets purchased with borrowed
short-term funds to selling pressures in stress conditions, as well as the exposures to other market
participants created by leverage.

As mandated by the Dodd-Frank Act, the FSOC was
created in 2010 and is chaired by the Treasury Secretary (box 2). It establishes an institutional framework
for identifying and responding to sources of systemic
risk. The Federal Reserve Chairman is a member of
the FSOC. Through collaborative participation in the
FSOC, U.S. financial regulators monitor not only
institutions, but also the financial system as a whole.
The Federal Reserve, in conjunction with other participants, assists in monitoring financial risks, analyzes the implications of those risks for financial stability, and identifies steps that can be taken to mitigate those risks. In addition, when an institution is
designated by the FSOC as systemically important,
the Federal Reserve assumes responsibility for supervising that institution.
In 2017, the Federal Reserve worked, in conjunction
with other FSOC participants, on the following
major initiatives:
• Review of asset management products and activities.
Following the release of a public statement on

7

pp. 59547-55, https://www.gpo.gov/fdsys/pkg/FR-2017-12-15/
pdf/2017-26856.pdf.
For the proposed statement of stress-testing policy, see Board of
Governors of the Federal Reserve System (2017), “Stress Testing
Policy Statement,” proposed rule (Docket No. OP-1587), Federal Register, vol. 82 (December 15), pp. 59528-33, https://www
.gpo.gov/fdsys/pkg/FR-2017-12-15/pdf/2017-26857.pdf.

41

• Nonbank designations process. On September 29,
2017, the FSOC voted to rescind its determination
that material financial distress at American International Group, Inc. (AIG), could pose a threat to
U.S. financial stability, and that the company
should be subject to supervision by the Federal
8

For more details, see U.S. Department of the Treasury (2016),
“Financial Stability Oversight Council Releases Statement on
Review of Asset Management Products and Activities,” press
release, April 18, https://www.treasury.gov/press-center/pressreleases/Pages/jl0431.aspx.

42

104th Annual Report | 2017

Reserve and enhanced prudential standards.9 The
FSOC made the decision that AIG’s potential to
pose material financial distress to U.S. financial stability was substantially reduced after the company
had decreased its overall exposures to capital markets, and the FSOC reevaluated the potential for
the liquidation of certain products to disrupt market functioning since its determination in
June 2013.

Financial Stability Board Activities
The Federal Reserve participates in international
bodies, such as the FSB, given the interconnected
global financial system and the global activities of
large U.S. financial institutions. The FSB is an international body that monitors the global financial
9

See U.S. Department of the Treasury (2017), “Financial Stability Oversight Council Announces Rescission of Nonbank
Financial Company Designation,” press release, September 29,
https://home.treasury.gov/news/press-releases/sm0169.

system and promotes financial stability through the
adoption of sound policies across countries. The
Federal Reserve participates in the FSB, along with
the SEC and the U.S. Treasury.
In 2017, the Federal Reserve continued its active participation in the FSB. The FSB is engaged in several
issues, including monitoring of shadow banking
activities, coordination of regulatory standards for
global systemically important financial institutions,
asset management, fintech (emerging financial technologies), evaluating the effects of reforms, and
development of effective resolution regimes for large
financial institutions. In January, the FSB released
for consultation proposed guidance for central counterparty resolution and resolution planning.10
10

See Financial Stability Board (2017), “FSB Consults on Guidance for CCP Resolution and Resolution Planning,” press
release, February 1, www.fsb.org/2017/02/fsb-consults-onguidance-for-ccp-resolution-and-resolution-planning.

43

4

Supervision and
Regulation

The Federal Reserve has supervisory and regulatory
authority over a variety of financial institutions and
activities with the goal of promoting a safe, sound,
and efficient financial system that supports the
growth and stability of the U.S. economy. As
described in this report, the Federal Reserve carries
out its supervisory and regulatory responsibilities and
supporting functions primarily by
• promoting the safety and soundness of individual
financial institutions supervised by the Federal
Reserve;
• taking a macroprudential approach to the supervision of the largest, most systemically important
financial institutions (SIFIs);1
• developing supervisory policy (rulemakings, supervision and regulation letters (SR letters), policy
statements, and guidance);
• identifying requirements and setting priorities for
supervisory information technology initiatives;
• ensuring ongoing staff development to meet evolving supervisory responsibilities;
• regulating the U.S. banking and financial structure
by acting on a variety of proposals; and
• enforcing other laws and regulations.

2017 Developments
During 2017, the U.S. banking system and financial
markets continued to improve following their recovery from the financial crisis that started in mid-2007.
Performance of bank holding companies. Bank holding company (BHC) earnings declined in 2017,
largely due to the one-time effect of the 2017 Tax
Cuts and Jobs Act, which resulted in certain BHCs
paying taxes on overseas profits and writing down
the value of deferred tax assets. U.S. BHCs, in aggre1

For a detailed discussion of macroprudential supervision and
regulation, refer to section 3, “Financial Stability.”

gate, reported net income of $140 billion for 2017,
down from $162 billion for the year ending December 31, 2016. The proportion of unprofitable BHCs
was 2.7 percent, up slightly from 2.3 percent in 2016.
Assets from unprofitable BHCs increased to 12.3 percent in 2017, up from 3.1 percent in 2016. Provisions
were 0.26 percent of average assets, unchanged from
2016 and near historic lows. Nonperforming assets
continued to decline, falling to 2.0 percent of loans
and foreclosed assets from 2.4 percent as of year-end
2016. (See “Bank Holding Companies” later in this
section.)
Performance of state member banks. The performance of state member banks improved from 2016 to
2017. In aggregate, state member banks reported
profits of $27.5 billion for 2017, up 12.7 percent from
$24.4 billion in 2016. Return-on-assets and returnon-equity both improved year-over-year, but both
measures continue to lag pre-crisis levels. The percentage of unprofitable state member banks
remained flat, as 2.7 percent of firms reported a loss
for the year. Problem loans declined in 2017 to
1.3 percent, but problem loans increased in state
member bank commercial and industrial and agricultural loan portfolios. Provisions as a share of average
loans were unchanged at 0.28 percent. The total riskbased capital ratio for state members decreased
slightly from 14.5 percent in 2016 to 14.4 percent in
2017. In 2017, one state member bank, with
$34.4 million in assets, failed. (See “State Member
Banks” later in this section.)
Enhanced prudential standards. The Dodd-Frank
Wall Street Reform and Consumer Protection Act of
2010 (Dodd-Frank Act) directs the Board, in part, to
establish prudential standards in order to prevent or
mitigate risks to U.S. financial stability that could
arise from the material financial distress or failure, or
ongoing activities of, large, interconnected financial
institutions. In January 2017, the Board issued a final
rule that modified its capital plan and stress testing
rules for the 2017 capital planning cycle, which
reduces significant burden on large and noncomplex

44

104th Annual Report | 2017

firms by eliminating the qualitative element of the
Comprehensive Capital Analysis and Review
(CCAR) of such firms. In addition, while the Federal
Reserve publicly discloses a significant amount of
information regarding its supervisory stress tests, in
December 2017, the Board requested comment on a
package that would increase the transparency of its
stress testing program while maintaining the Board’s
ability to test the resilience of the nation’s largest and
most complex banking organizations. (See
“Enhanced Prudential Standards” later in this section and see box 1 for details.)
Tailoring of supervision and regulation. The Federal
Reserve seeks to tailor its regulations, guidance, and
supervisory programs to an institution’s size, risk,
and complexity. The Federal Reserve took a number
of steps in 2017 to tailor regulation and supervision

across community, regional, and large banking organizations, including continuing to apply the most
stringent requirements to the most systemically
important firms, implementing a new risk-focused
supervisory program for certain smaller institutions,
tailoring capital planning and stress testing requirements, and reducing regulatory reporting requirements for smaller financial institutions. (See box 2 for
more information on tailoring.)
Completion of the Basel III Post-Crisis Reforms. In
2017, the Federal Reserve contributed to the finalization of the international Basel III reform package,
which establishes a framework that increases the
robustness and reliability of the regulatory capital
requirements for banking organizations. This reform
package is intended to improve risk sensitivity,
reduce regulatory capital variability, and level the

Box 1. Transparency of the Supervisory Stress Test
Through the Dodd-Frank Act supervisory stress test
exercise, among other supervisory programs, the
Federal Reserve promotes soundness and stability in
the financial system and the U.S. economy. Regular,
public disclosure of the supervisory stress test models, methodologies, and results enhances the credibility of the stress test. In addition, more transparency around the results and processes can lead to
improvements in the Federal Reserve’s approaches
and provide information to the public that furthers the
goal of maintaining market and public confidence in
the financial system. For these reasons, the Federal
Reserve publishes detailed information about its
stress tests every year. Those disclosures include the
Federal Reserve’s projections of revenue, expenses,
losses, pre-tax net income, and capital ratios estimated to result under two sets of adverse economic
conditions, as well as details about the supervisory
models used to make those projections.
The annual disclosures of the stress test results and
description of supervisory models represent a significant increase in the public transparency of large bank
supervision in the United States as compared to the
pre-crisis period. In addition to those public disclosures, the Federal Reserve has also published information about its scenario design framework and
annual letters detailing material model changes, and
hosts an annual symposium in which supervisors and
financial industry practitioners share best practices in
modeling, model risk management, and governance.
The Federal Reserve is committed to finding additional ways to increase the transparency of its stress
test to help the public better understand the workings of the stress test and thereby increase the credibility of the stress testing process and output. In

December 2017, the Federal Reserve Board invited
comment on a proposal designed to increase the
transparency of the supervisory stress test while
maintaining the Federal Reserve's ability to test the
resilience of the nation's largest and most complex
banks.1
The proposal has three elements. First, the proposed
enhanced model disclosure would include the
release of more detailed information about supervisory models, including the publication of portfolios of
hypothetical loans and loss rates for those portfolios.
Second, a proposed Stress Testing Policy Statement
describes the Board’s approach to the development,
implementation, use, and validation of the supervisory stress test models and methodologies. Third,
proposed amendments to the Scenario Design Policy
Statement (originally published in November 2013)
would increase countercyclicality in scenario design,
clarify the Board’s approach to setting the path of the
unemployment rate and house prices in the macroeconomic scenario, and provide notice that the Federal Reserve is exploring the possibility of incorporating stress to the cost of wholesale funding in the
supervisory stress test scenarios. Together, these
three elements of the proposal represent a notable
increase in the transparency of the Federal Reserve’s
stress test.
The Board received comments on the proposal in the
first quarter of 2018, and is currently reviewing comments and considering ways to amend the proposals
to be responsive to those comments.

1

See www.federalreserve.gov/newsevents/pressreleases/
bcreg20171207a.htm.

Supervision and Regulation

45

Box 2. Tailoring of Supervision
Building upon its risk-focused approach to supervision, the Federal Reserve continues its ongoing work
to tailor its regulations, supervisory guidance, and
supervisory programs to an institution’s asset size,
risk profile, and complexity. Further tailoring to size,
risk, and complexity was done in 2017 in the Federal
Reserve’s examination programs, capital planning
and stress testing, and regulatory reporting
requirements.
Tailoring of Examination Programs
The Federal Reserve approach to supervising smaller,
less-complex banks is distinct from that for large
banks. The largest, most systemically important firms
are supervised through the Federal Reserve’s Large
Institution Supervision Coordinating Committee
(LISCC) program and are subject to the most stringent supervisory expectations. Bank holding companies and foreign banking organizations with assets of
$50 billion or more are supervised through the Federal Reserve’s large and foreign banking organization
program. These firms are held to supervisory expectations that are higher than those applied to community and regional banking organizations, but examinations are more targeted and less frequent than those
applied to LISCC firms.
For community and regional state member banks
that are smaller and less complex, the Federal
Reserve makes a particular effort to tailor its
approach.1 The Federal Reserve has implemented a
new risk-focused supervisory program—the Bank
Exams Tailored to Risk (BETR) program. BETR aims
to (1) identify low-risk activities within state member
banks and apply appropriately streamlined examination work programs to these activities, and (2) target
high-risk activities within state member banks for
prompt supervisory attention. This enhanced tailoring
of supervision minimizes regulatory burden for the
many community and regional banks that are wellmanaged and directs supervisory resources to
1

For supervisory purposes, the Federal Reserve generally defines
community banking organizations as those with $10 billion or less
in total assets, and regional banking organizations as those with
total assets between $10 billion and $50 billion.

playing field among internationally active banks. (See
box 3 for more information on the Basel III postcrisis reforms.)

Supervision
The Federal Reserve is the federal supervisor and
regulator of all U.S. BHCs, including financial holding companies (FHCs), savings and loan holding

higher-risk activities where they are most needed in
order to contain the risks that can result from aggressive banking strategies.
Tailoring of Capital Planning and Stress Testing
In 2017, the Federal Reserve significantly tailored its
capital planning and stress testing requirements.2
Large firms that are noncomplex were exempted
from the qualitative assessment of their capital plans
through the Comprehensive Capital Analysis and
Review (CCAR) program, reducing significant burden
on these firms. This subset of firms undergo instead
a narrower-scope horizontal review of specific capital
planning areas, referred to as the Horizontal Capital
Review program. As a result of this tailoring, the
number of firms fully subject to CCAR in 2017 fell
from 33 to 13.
For firms with consolidated assets between $10 billion and $50 billion, the Federal Reserve has reduced
to once every three years the frequency of full-scope
assessments of these firms’ Dodd-Frank Act
Company-Run Stress Test submissions, with only
limited-scope assessments in the intervening years.
Tailoring of Regulatory Reporting Requirements
Continuing efforts to reduce data reporting and other
burdens for small financial institutions, the Federal
Reserve discontinued the collection of the Liquidity
Monitoring Report (FR 2052b) for firms with consolidated assets between $10 billion and $50 billion
effective December 18, 2017. In addition, the Federal
Reserve, in conjunction with the other banking agencies represented on the Federal Financial Institutions
Examination Council, implemented a new and
streamlined Call Report for small financial institutions. Specifically, for firms with less than $1 billion in
total assets (which represents approximately 90 percent of all institutions required to file Call Reports),
the Call Report was reduced from 85 to 61 pages
due to the removal of approximately 40 percent of
the nearly 2,400 data items.
2

See www.gpo.gov/fdsys/pkg/FR-2017-02-03/pdf/2017-02257
.pdf.

companies (SLHCs), and state-chartered commercial
banks that are members of the Federal Reserve
System. The Federal Reserve also has responsibility
for supervising the operations of all Edge Act and
agreement corporations, the international operations
of state member banks and U.S. BHCs, and the U.S.
operations of foreign banking organizations. Furthermore, through the Dodd-Frank Act, the Federal
Reserve has been assigned responsibilities for non-

46

104th Annual Report | 2017

Box 3. Completion of the Basel III Post-Crisis Reforms
In 2010, the Basel Committee on Banking Supervision (BCBS) issued the first set of reforms to the
global prudential framework in response to the global
financial crisis. Its suite of post-crisis reforms were
completed in December 2017. The Federal Reserve
Board is a member of the BCBS, a standard-setting
body for internationally active banks that includes
supervisors and central bankers from 27 countries.

at ensuring that banks have sufficient liquidity to fund
themselves during a 30-day stress period. The goal
of the second liquidity measure, the net stable funding ratio (NSFR), which was proposed in the United
States in May 2016 but has not yet been finalized, is
for banks to have a balance sheet that is soundly
structured to provide adequate liquidity for their
activities over a one-year horizon.

The earliest post-crisis reforms were focused on raising the level and quality of capital that banks hold.
Capital positions of banks across the world, including
in the United States, have strengthened meaningfully
in the interim, making the global financial system significantly more resilient. The introduction of a leverage capital ratio into the global capital framework has
provided a credible backstop to the risk-based capital regime. A global systemically important bank
(G-SIB) is now subject to a risk-based capital surcharge based on its systemic risk profile. As of yearend 2017, there were 30 G-SIBs, including eight U.S.
banks, which are subject to risk-based capital surcharges ranging from 100 to 250 basis points,
depending on the degree of the G-SIB’s measured
systemic footprint.1 Under the final Basel III reforms,
these banks also will be subject to a leverage capital
ratio surcharge.

The final package of Basel III reforms that was completed in 2017 is intended to improve risk sensitivity,
reduce excessive variability of risk-weighted assets
(RWAs), and level the playing field among internationally active banks. Studies by the BCBS have identified wide variability across banks that use internal
models rather than a standardized approach to measuring RWAs. In the final Basel III package, limits
were placed on inputs used in internal models, as
well as on the scope of portfolios that could be modeled. The standardized approach to credit RWAs was
revised to introduce greater risk sensitivity. In addition, the internal models approach to measuring
operational risk was eliminated and replaced with a
new standardized approach. Further, banks that use
internal models to measure credit or market risk
RWAs will be subject to a standardized floor on its
RWAs.

An important innovation of the Basel III reforms was
the introduction of a standard for bank liquidity. One
measure, the liquidity coverage ratio (LCR), is aimed

The Federal Reserve and the other U.S. banking
agencies will consider how to appropriately apply the
final package of Basel III reforms in the United
States. Any proposed changes will be made through
the standard notice-and-comment rulemaking
process.

1

The list of G-SIBs is available at www.fsb.org/wp-content/
uploads/P211117-1.pdf.

bank financial firms and financial market utilities
(FMUs) designated by the Financial Stability Oversight Council (FSOC) as systemically important.

sary. The Federal Reserve also provides training and
technical assistance to foreign supervisors and
minority-owned and de novo depository institutions.

In overseeing the institutions under its authority, the
Federal Reserve seeks primarily to promote safety,
soundness, and efficiency, including compliance with
laws and regulations.

Examinations and Inspections
The Federal Reserve conducts examinations of state
member banks, FMUs, the U.S. branches and agencies of foreign banks, and Edge Act and agreement
corporations. In a process distinct from examinations, it conducts inspections of holding companies
and their nonbank subsidiaries. Whether an examination or an inspection is being conducted, the
review of financial performance and operations
entails

Safety and Soundness
The Federal Reserve uses a range of supervisory
activities to promote the safety and soundness of
financial institutions and maintain a comprehensive
understanding and assessment of each firm. These
activities include horizontal reviews, firm-specific
examinations and inspections, continuous monitoring and surveillance activities, and implementation of
enforcement or other supervisory actions as neces-

• an evaluation of the adequacy of governance provided by the board and senior management,
including an assessment of internal policies, procedures, risk limits, and controls;

Supervision and Regulation

• an assessment of the risk-management and internal
control processes in place to identify, measure,
monitor, and control risks;
• analysis of the key financial factors of capital, asset
quality, earnings, and liquidity; and
• a review for compliance with applicable laws and
regulations.
Table 1 provides information on examinations and
inspections conducted by the Federal Reserve during
the past five years.
Consolidated Supervision
Consolidated supervision, a method of supervision
that encompasses the parent company and its subsidiaries, allows the Federal Reserve to understand the
organization’s structure, activities, resources, risks,
and financial and operational resilience. Working
with other relevant supervisors and regulators, the
Federal Reserve seeks to ensure that financial, operational, or other deficiencies are addressed before they

pose a danger to the consolidated organization, its
banking offices, or to the broader economy.2
Large financial institutions increasingly operate and
manage their integrated businesses across corporate
boundaries. Financial trouble in one part of a financial institution can spread rapidly to other parts of
the institution. Risks that cross legal entities or that
are managed on a consolidated basis cannot be
monitored properly through supervision that is
directed at only one of the legal entity subsidiaries
within the overall organization.
To strengthen its supervision of the largest, most
complex financial institutions, the Federal Reserve
created a centralized, multidisciplinary body called
the Large Institution Supervision Coordinating
Committee (LISCC). The LISCC coordinates the
Federal Reserve’s supervision of domestic bank hold2

“Banking offices” are defined as U.S. depository institution subsidiaries as well as the U.S. branches and agencies of foreign
banking organizations.

Table 1. State member banks and bank holding companies, 2013–17
Entity/item
State member banks
Total number
Total assets (billions of dollars)
Number of examinations
By Federal Reserve System
By state banking agency
Top-tier bank holding companies
Large (assets of more than $1 billion)
Total number
Total assets (billions of dollars)
Number of inspections
By Federal Reserve System11
On site
Off site
By state banking agency
Small (assets of $1 billion or less)
Total number
Total assets (billions of dollars)
Number of inspections
By Federal Reserve System
On site
Off site
By state banking agency
Financial holding companies
Domestic
Foreign
1

47

2017

2016

2015

2014

2013

815
2,729
643
354
289

829
2,577
663
406
257

839
2,356
698
392
306

858
2,233
723
438
285

850
2,060
745
459
286

583
18,762
597
574
394
180
23

569
17,593
659
646
438
208
13

547
16,961
709
669
458
211
40

522
16,642
738
706
501
205
32

505
16,269
716
695
509
186
21

3,448
931
2,318
2,252
101
2,151
66

3,682
914
2,597
2,525
126
2,399
72

3,719
938
2,783
2,709
123
2,586
74

3,902
953
2,824
2,737
142
2,595
87

4,036
953
3,131
2,962
148
2,814
169

492
42

473
42

442
40

426
40

420
39

For large bank holding companies subject to continuous, risk-focused supervision, includes multiple targeted reviews.

48

104th Annual Report | 2017

ing companies and foreign banking organizations
that pose elevated risk to U.S. financial stability as
well as other nonbank financial institutions designated as systemically important by the FSOC.
The framework for the consolidated supervision of
LISCC firms and other large financial institutions
was issued in December 2012.3 This framework
strengthens traditional microprudential supervision
and regulation to enhance the safety and soundness
of individual firms and incorporates macroprudential
considerations to reduce potential threats to the stability of the financial system. The framework has two
primary objectives:
1. Enhancing resiliency of a firm to lower the probability of its failure or inability to serve as a financial intermediary. Each firm is expected to ensure
that the consolidated organization (or the combined U.S. operations in the case of foreign banking organizations) and its core business lines can
survive under a broad range of internal or external stresses. This requires financial resilience by
maintaining sufficient capital and liquidity, and
operational resilience by maintaining effective
corporate governance, risk management, and
recovery planning.
2. Reducing the impact on the financial system and
the broader economy in the event of a firm’s failure
or material weakness. Each firm is expected to
ensure the sustainability of its critical operations
and banking offices under a broad range of internal or external stresses. This requires, among
other things, effective resolution planning that
addresses the complexity and the interconnectivity of the firm’s operations.
The framework is designed to support a tailored
supervisory approach that accounts for the unique
risk characteristics of each firm, including the nature
and degree of potential systemic risk inherent in a
firm’s activities and operations, and is being implemented in a multi-stage approach.
The Federal Reserve uses a range of supervisory
activities to maintain a comprehensive understanding
and assessment of each large financial institution:
• Coordinated horizontal reviews. These reviews
involve examining several institutions simultaneously and encompass firm-specific supervision and
3

For more information about the supervisory framework, see the
Board’s press release and SR letter 12-17/CA 12-14 at www
.federalreserve.gov/newsevents/press/bcreg/20121217a.htm.

the development of cross-firm perspectives. In
addition, the Federal Reserve uses a multidisciplinary approach to draw on a wide range of perspectives, including those from supervisors, examiners, economists, financial experts, payments systems analysts, and other specialists. Examples
include analysis of capital adequacy and planning
through CCAR as well as horizontal evaluations of
resolution plans and incentive compensation
practices.
• Firm-specific examinations and/or inspections and
continuous monitoring activities. These activities are
designed to maintain an understanding and assessment across the core areas of supervisory focus.
These activities include review and assessment of
changes in strategy, inherent risks, control processes, and key personnel, and follow-up on previously identified concerns (for example, areas subject to enforcement actions) or emerging
vulnerabilities.
• Interagency information sharing and coordination.
In developing and executing a detailed supervisory
plan for each firm, the Federal Reserve generally
relies to the fullest extent possible on the information and assessments provided by other relevant
supervisors and functional regulators. The Federal
Reserve actively participates in interagency information sharing and coordination, consistent with
applicable laws, to promote comprehensive and
effective supervision and limit unnecessary duplication of information requests. Supervisory agencies
continue to enhance formal and informal discussions to jointly identify and address key vulnerabilities and to coordinate supervisory strategies
for large financial institutions.
• Internal audit and control functions. In certain
instances, supervisors may be able to rely on a
firm’s internal audit or internal control functions in
developing a comprehensive understanding and
assessment.
The Federal Reserve uses a risk-focused approach to
supervision, with activities directed toward identifying the areas of greatest risk to financial institutions
and assessing the ability of institutions’ management
processes to identify, measure, monitor, and control
those risks. For medium- and small-sized financial
institutions, the risk-focused, consolidated supervision program provides that examination and inspection procedures are tailored to each organization’s
size, complexity, risk profile, and condition. The
supervisory program for an institution, regardless of
its asset size, entails both off-site and on-site work,

Supervision and Regulation

including development of supervisory plans, preexamination visits, detailed documentation of the
examination process, and preparation of examination
reports tailored to the scope and findings of the
review.
Capital Planning and Stress Tests

Since the financial crisis, the Board has led a series of
initiatives to strengthen the capital positions of the
largest banking organizations. Two related initiatives
are the CCAR and the Dodd-Frank Act stress tests
(DFAST).
CCAR is a supervisory exercise to evaluate capital
adequacy, internal capital planning processes, and
planned capital distributions simultaneously at all
large and complex BHCs. In CCAR, the Federal
Reserve assesses whether these BHCs have sufficient
capital to withstand highly stressful operating environments and be able to continue operations, maintain ready access to funding, meet obligations to
creditors and counterparties, and serve as credit
intermediaries. Capital is central to a BHC’s ability
to absorb losses and continue to lend to creditworthy
businesses and consumers. Through CCAR, a BHC’s
capital adequacy is evaluated on a forward-looking,
post-stress basis as the BHC is required to demonstrate in its capital plan how it will maintain,
throughout a very stressful period, capital above
minimum regulatory capital requirements. From a
microprudential perspective, CCAR provides a structured means for supervisors to assess not only
whether these BHCs hold enough capital, but also
whether they are able to rapidly and accurately determine their risk exposures, including how those might
evolve under stress, which is an essential element of
effective risk management. From a macroprudential
perspective, the use of a common scenario allows the
Federal Reserve to assess not just individual institutions, but also how a particular risk or combination
of risks might affect the banking system as a whole
under stressful conditions. The 2017 CCAR results
are available at www.federalreserve.gov/publications/
files/2017-ccar-assessment-framework-results20170628.pdf.
DFAST is a supervisory stress test conducted by the
Federal Reserve to evaluate whether large BHCs have
sufficient capital to absorb losses resulting from
stressful economic and financial market conditions.
The Dodd-Frank Act also requires BHCs and other
financial companies supervised by the Federal
Reserve to conduct their own stress tests. Together,
the Dodd-Frank Act supervisory stress tests and the
company-run stress tests are intended to provide

49

company management and boards of directors, the
public, and supervisors with forward-looking information to help gauge the potential effect of stressful
conditions on the capital adequacy of these large
banking organizations. The 2017 DFAST results are
available at www.federalreserve.gov/publications/files/
2017-dfast-methodology-results-20170622.pdf.
State Member Banks

At the end of 2017, a total of 1,688 banks (excluding
nondepository trust companies and private banks)
were members of the Federal Reserve System, of
which 815 were state chartered. Federal Reserve
System member banks operated 54,344 branches, and
accounted for 34 percent of all commercial banks in
the United States and for 70 percent of all commercial banking offices. State-chartered commercial
banks that are members of the Federal Reserve, commonly referred to as state member banks, represented
approximately 16 percent of all insured U.S. commercial banks and held approximately 17 percent of all
insured commercial bank assets in the United States.
Under section 10 of the Federal Deposit Insurance
Act, as amended by section 111 of the Federal
Deposit Insurance Corporation Improvement Act of
1991 and by the Riegle Community Development
and Regulatory Improvement Act of 1994, the Federal Reserve must conduct a full-scope, on-site examination of state member banks at least once a year.4
However, qualifying well-capitalized, well-managed
state member banks with less than $1 billion in total
assets are eligible for an 18-month examination
cycle.5 The Federal Reserve conducted 354 examinations of state member banks in 2017.
Bank Holding Companies

At year-end 2017, a total of 4,470 U.S. BHCs were in
operation, of which 3,984 were top-tier BHCs. These
organizations controlled 4,223 insured commercial
banks and held approximately 97 percent of all
insured commercial bank assets in the United States.
Federal Reserve guidelines call for annual inspections
of large BHCs and complex smaller companies. In
judging the financial condition of the subsidiary
banks owned by holding companies, Federal Reserve
examiners consult examination reports prepared by
the federal and state banking authorities that have
4

5

The Office of the Comptroller of the Currency examines nationally chartered banks, and the Federal Deposit Insurance Corporation examines state-chartered banks that are not members of
the Federal Reserve.
81 Fed. Reg. 90,949 (December 16, 2016).

50

104th Annual Report | 2017

primary responsibility for the supervision of those
banks, thereby minimizing duplication of effort and
reducing the supervisory burden on banking
organizations.
Inspections of BHCs, including FHCs, are built
around a rating system introduced in 2005. The
system reflects the shift in supervisory practices away
from a historical analysis of financial condition
toward a more dynamic, forward-looking assessment
of risk-management practices and financial factors.
Under the system, known as RFI but more fully
termed RFI/C(D), holding companies are assigned a
composite rating (C) that is based on assessments of
three components: Risk Management (R), Financial
Condition (F), and the potential Impact (I) of the
parent company and its nondepository subsidiaries
on the subsidiary depository institution. The fourth
component, Depository Institution (D), is intended
to mirror the primary supervisor’s rating of the subsidiary depository institution.6 Noncomplex BHCs
with consolidated assets of $1 billion or less are subject to a special supervisory program that permits a
more flexible approach.7 See the “Other Rulemakings” section for proposed changes to the rating
system for firms with $50 billion or more in total
assets. In 2017, the Federal Reserve conducted 574
inspections of large BHCs and 2,252 inspections of
small, noncomplex BHCs.
Financial Holding Companies

Under the Gramm-Leach-Bliley Act, BHCs that
meet certain capital, managerial, and other requirements may elect to become FHCs and thereby engage
in a wider range of financial activities, including fullscope securities underwriting, merchant banking,
and insurance underwriting and sales. As of year-end
2017, a total of 492 domestic BHCs and 42 foreign
banking organizations had FHC status. Of the
domestic FHCs, 27 had consolidated assets of
$50 billion or more; 44, between $10 billion and
$50 billion; 149, between $1 billion and $10 billion;
and 272, less than $1 billion.

6

7

Each of the first two components has four subcomponents:
Risk Management—(1) Board and Senior Management Oversight; (2) Policies, Procedures, and Limits; (3) Risk Monitoring
and Management Information Systems; and (4) Internal Controls. Financial Condition—(1) Capital, (2) Asset Quality,
(3) Earnings, and (4) Liquidity.
The special supervisory program was implemented in 1997, most
recently modified in 2013. See SR letter 13-21 for a discussion of
the factors considered in determining whether a BHC is complex or noncomplex (www.federalreserve.gov/bankinforeg/
srletters/sr1321.htm).

Savings and Loan Holding Companies

The Dodd-Frank Act transferred responsibility for
supervision and regulation of SLHCs from the former Office of Thrift Supervision to the Federal
Reserve in July 2011. At year-end 2017, a total of 414
SLHCs were in operation, of which 223 were top-tier
SLHCs. These SLHCs control 227 thrift institutions
and include 18 companies engaged primarily in nonbanking activities, such as insurance underwriting (11
SLHCs), securities brokerage (3 SLHCs), and commercial activities (4 SLHCs). The 25 largest SLHCs
accounted for more than $1.5 trillion of total combined assets. Approximately 90 percent of SLHCs
engage primarily in depository activities. These firms
hold approximately 14 percent ($251 billion) of the
total combined assets of all SLHCs. The Office of
the Comptroller of the Currency (OCC) is the primary regulator for most of the subsidiary savings
associations of the firms engaged primarily in
depository activities. Table 2 provides information on
examinations of SLHCs for the past five years.
Several complex policy issues continue to be
addressed by the Board, including those related to
consolidated capital requirements for insurance
SLHCs, issues pertaining to intermediate holding
companies for commercial SLHCs, and the adoption
of formal rating systems.8 A request for public comment on the adoption of the formal rating system for
certain SLHCs closed on February 13, 2017. The
proposal would not apply the formal rating system to
SLHCs engaged in significant insurance or commercial activities.
Savings and loan holding companies primarily engaged
in insurance underwriting activities. The Federal
Reserve supervises 11 insurance SLHCs (ISLHCs),
with $1.04 trillion in estimated total combined assets,
and $151 billion in thrift assets. Of the eleven, four
firms have total assets greater than $50 billion, three
firms have total assets between $10 billion and
$50 billion, and four firms have total assets less than
$10 billion. With the exception of one ISLHC, which
owns a thrift subsidiary that comprises more than
half of the firm’s total assets, thrift subsidiary assets
for most ISLHCs represent less than 25 percent of
total assets.
As the consolidated supervisor of ISLHCs, the Federal Reserve evaluates the organization’s risk8

A request for comment on consolidated capital requirements for
Insurance Savings and Loan Holding Companies (ISLHCs)
closed on September 16, 2016.

Supervision and Regulation

management practices, the financial condition of the
overall organization, and the impact of the nonbank
activities on the depository institution. The Federal
Reserve focuses supervisory attention on legal entities
and activities that are not directly supervised or regulated by state insurance regulators, including intercompany transactions between the depository institution and its affiliates. The Federal Reserve relies to
the fullest extent possible on the work of state insurance regulators as part of the overall supervisory
assessment of ISLHCs. The Federal Reserve has been
active in engaging with the state departments of
insurance and the National Association of Insurance
Commissioners (NAIC) on general insurance supervision matters.
Financial Market Utilities

FMUs manage or operate multilateral systems for
the purpose of transferring, clearing, or settling payments, securities, or other financial transactions
among financial institutions or between financial
institutions and the FMU. Under the Federal
Reserve Act, the Federal Reserve supervises FMUs
that are chartered as member banks or Edge Act corporations and coordinates with other federal banking
supervisors to supervise FMUs considered bank service providers under the Bank Service Company Act.
In July 2012, the FSOC voted to designate eight
FMUs as systemically important under title VIII of
the Dodd-Frank Act. As a result of these designations, the Board assumed an expanded set of responsibilities related to these designated FMUs that
include promoting uniform risk-management standards, playing an enhanced role in the supervision of
designated FMUs, reducing systemic risk, and sup-

porting the stability of the broader financial system.
For certain designated FMUs, the Board established
risk-management standards and expectations that are
articulated in the Board’s Regulation HH. In addition to setting minimum risk-management standards,
Regulation HH establishes requirements for the
advance notice of proposed material changes to the
rules, procedures, or operations of a designated
FMU for which the Board is the supervisory agency
under title VIII. Finally, Regulation HH also establishes minimum conditions and requirements for a
Federal Reserve Bank to establish and maintain an
account for, and provide services to, a designated
FMU.9
The Federal Reserve’s risk-based supervision program for FMUs is administered by the FMU Supervision Committee (FMU-SC). The FMU-SC is a
multidisciplinary committee of senior supervision,
payment policy, and legal staff at the Board of Governors and Reserve Banks who are responsible for,
and knowledgeable about, supervisory issues for
FMUs. The FMU-SC’s primary objective is to provide senior-level oversight, consistency, and direction
to the Federal Reserve’s supervisory process for
FMUs. The FMU-SC coordinates with the LISCC
on issues related to the roles of LISCC firms in
FMUs as well as the payment, clearing, and settlement activities of LISCC firms and the FMU activities and implications for financial institutions in the
LISCC portfolio.

9

The Federal Reserve Banks maintain accounts for and provide
services to several designated FMUs.

Table 2. Savings and loan holding companies, 2013–17
Entity/item
Top-tier savings and loan holding companies
Large (assets of more than $1 billion)
Total number
Total assets (billions of dollars)
Number of inspections
By Federal Reserve System
On site
Off site
Small (assets of $1 billion or less)
Total number
Total assets (billions of dollars)
Number of inspections
By Federal Reserve System
On site
Off site

51

2017

2016

2015

2014

2013

59
1,696
46
52
31
21

67
1,664
54
54
34
20

67
1,525
58
57
31
26

76
1,493
83
82
45
37

81
1,500
72
71
58
13

164
47
165
165
9
156

171
50
181
181
9
172

194
55
187
187
13
174

221
65
212
212
10
202

251
76
258
258
21
237

52

104th Annual Report | 2017

Designated Nonbank Financial Companies

member banks, Edge Act and agreement corporations, and BHCs, the Federal Reserve generally conducts its examinations or inspections at the U.S. head
offices of these organizations, where the ultimate
responsibility for the foreign offices resides. Examiners also visit the overseas offices of U.S. banking
organizations to obtain financial and operating information and, in some instances, to test their adherence
to safe and sound banking practices and compliance
with rules and regulations. Examinations abroad are
conducted with the cooperation of the supervisory
authorities of the countries in which they take place;
for national banks, the examinations are coordinated
with the OCC.

The Federal Reserve’s supervisory approach for designated companies is tailored to account for different
material characteristics of a firm. The Dodd-Frank
Act requires the Board to apply enhanced prudential
standards to the nonbank financial companies designated by the FSOC for supervision by the Board.
The act authorizes the Board to tailor the application
of these standards and requirements to different
companies on an individual basis or by category.

At the end of 2017, a total of 31 member banks were
operating 329 branches in foreign countries and overseas areas of the United States; 16 national banks
were operating 278 of these branches, and 15 state
member banks were operating the remaining 51. In
addition, 7 nonmember banks were operating 15
branches in foreign countries and overseas areas of
the United States.

In an effort to promote greater financial market stability and mitigate systemic risk, the Board works
closely with the Securities and Exchange Commission
(SEC) and the Commodity Futures Trading Commission (CFTC), both of which also have supervisory
authority for certain FMUs. The Federal Reserve’s
work with these agencies under title VIII, including
the sharing of appropriate information and participation in designated FMU examinations, aims to
improve consistency in FMU supervision, promote
robust FMU risk management, and improve regulators’ ability to monitor and mitigate systemic risks.

In June 2016, the Board issued an advance notice of
proposed rulemaking (ANPR) inviting comment on
conceptual frameworks for capital standards that
could apply to companies with significant insurance
activities.10 The Board also issued a proposed rule to
apply enhanced prudential standards relating to corporate governance, risk management, and liquidity
risk-management standards to such companies.
Additionally, the Federal Reserve monitors developments of a designated nonbank financial company
and exercises its supervisory authority to foster safe
and sound practices and to promote financial stability. Currently only Prudential Financial, Inc., is subject to Federal Reserve supervision.
International Activities

The Federal Reserve supervises the foreign branches
and overseas investments of state member banks,
Edge Act and agreement corporations, and BHCs
(including the investments by BHCs in export trading
companies). In addition, it supervises the activities
that foreign banking organizations conduct through
entities in the United States, including branches,
agencies, representative offices, and subsidiaries.
Foreign operations of U.S. banking organizations. In
supervising the international operations of state
10

The ANPR is available at www.gpo.gov/fdsys/pkg/FR-2016-0614/pdf/2016-14004.pdf.

Edge Act and agreement corporations. Edge Act corporations are international banking organizations
chartered by the Board to provide all segments of the
U.S. economy with a means of financing international business, especially exports. Agreement corporations are similar organizations, state or federally
chartered, that enter into agreements with the Board
to refrain from exercising any power that is not permissible for an Edge Act corporation. Sections 25
and 25A of the Federal Reserve Act grant Edge Act
and agreement corporations permission to engage in
international banking and foreign financial transactions. These corporations, most of which are subsidiaries of member banks, may (1) conduct a deposit
and loan business in states other than that of the parent, provided that the business is strictly related to
international transactions, and (2) make foreign
investments that are broader than those permissible
for member banks.
At year-end 2017, out of 36 banking organizations
chartered as Edge Act or agreement corporations,
3 operated 7 Edge Act and agreement branches.
These corporations are examined annually.
U.S. activities of foreign banks. Foreign banks continue to be significant participants in the U.S. banking system. As of year-end 2017, a total of 144 foreign banks from 48 countries operated 157 statelicensed branches and agencies, of which 6 were

Supervision and Regulation

insured by the FDIC, and 57 OCC-licensed branches
and agencies, of which 4 were insured by the FDIC.
These foreign banks also owned 7 Edge Act and
agreement corporations. In addition, they held a controlling interest in 42 U.S. commercial banks. Altogether, the U.S. offices of these foreign banks controlled approximately 21 percent of U.S. commercial
banking assets. These 144 foreign banks also operated 86 representative offices; an additional 37 foreign banks operated in the United States through a
representative office. The Federal Reserve—in coordination with appropriate state regulatory authorities—examines state-licensed, non-FDIC-insured
branches and agencies of foreign banks on-site at
least once every 18 months.11 In most cases, on-site
examinations are conducted at least once every
12 months, but the period may be extended to
18 months if the branch or agency meets certain criteria. As part of the supervisory process, a review of
the financial and operational profile of each organization is conducted to assess the organization’s ability to support its U.S. operations and to determine
what risks, if any, the organization poses to the banking system through its U.S. operations. The Federal
Reserve conducted or participated with state and federal regulatory authorities in 590 examinations of
foreign banks in 2017.

53

and maintain certain records that are useful in criminal, tax, or regulatory proceedings. The BSA and
separate Board regulations require banking organizations supervised by the Board to file reports on suspicious activity related to possible violations of federal
law, including money laundering, terrorism financing, and other financial crimes. In addition, BSA and
Board regulations require that banks develop written
BSA compliance programs and that the programs be
formally approved by bank boards of directors. The
Federal Reserve is responsible for examining institutions for compliance with applicable AML laws and
regulations and conducts such examinations in accordance with the Federal Financial Institutions Examination Council’s (FFIEC’s) Bank Secrecy Act/AntiMoney Laundering Examination Manual.13
Specialized Examinations
The Federal Reserve conducts specialized examinations of supervised financial institutions in the areas
of information technology, fiduciary activities, transfer agent activities, and government and municipal
securities dealing and brokering. The Federal Reserve
also conducts specialized examinations of certain
nonbank entities that extend credit subject to the
Board’s margin regulations.
Information Technology Activities

Compliance with Regulatory Requirements
The Federal Reserve examines institutions for compliance with a broad range of legal requirements,
including anti-money-laundering (AML) and consumer protection laws and regulations, and other
laws pertaining to certain banking and financial
activities. Most compliance supervision is conducted
under the oversight of the Board’s Division of
Supervision and Regulation (S&R), but consumer
compliance supervision is conducted under the oversight of the Division of Consumer and Community
Affairs (DCCA).12 The two divisions coordinate their
efforts with each other and also with the Board’s
Legal Division to ensure consistent and comprehensive Federal Reserve supervision for compliance with
legal requirements.
Anti-Money-Laundering Examinations

The Treasury regulations implementing the Bank
Secrecy Act (BSA) generally require banks and other
types of financial institutions to file certain reports
11

12

The OCC examines federally licensed branches and agencies,
and the FDIC examines state-licensed FDIC-insured branches
in coordination with the appropriate state regulatory authority.
For a detailed discussion of consumer compliance supervision,
refer to section 5, “Consumer and Community Affairs.”

As part of its role in ensuring the safe and sound
operations of financial institutions, the Federal
Reserve conducted reviews of the information technology activities of supervised financial institutions
and their technology service providers (TSPs). In
February 2017, the Federal Reserve released the
Information Technology Risk Examination Program
(InTREx). In general, InTREx applies to state member and non-member banks with less than $50 billion
in total consolidated assets. The Federal Reserve also
applies InTREx to foreign banking organizations’
U.S. branches and agencies with less than $50 billion
in assets as well as certain BHCs and SLHCs with
less than $50 billion in total consolidated assets.
InTREx was developed in collaboration with the
FDIC and state banking agencies, and provides Federal Reserve examiners risk-focused and tailored
examination procedures for conducting information
13

The FFIEC is an interagency body of financial regulatory agencies established to prescribe uniform principles, standards, and
report forms and to promote uniformity in the supervision of
financial institutions. The council has six voting members: the
Board of Governors of the Federal Reserve System, the FDIC,
the National Credit Union Administration, the OCC, the Consumer Financial Protection Bureau, and the chair of the State
Liaison Committee.

54

104th Annual Report | 2017

technology reviews and assessing information technology risks at supervised institutions.
The Federal Reserve also contributed to FFIEC
information technology supervisory matters, emerging technology issues, and updates to the FFIEC’s IT
Examination Handbook. The Federal Reserve
chaired the FFIEC’s IT Subcommittee, the primary
interagency group responsible for coordination
across member agencies on information technology
activities. The IT Subcommittee conducted a conference for IT examiners from all of the FFIEC member
agencies, which highlighted current and emerging
technology issues affecting supervised institutions
and their service providers. Additionally, the Federal
Reserve contributed to handbook updates to incorporate a more enterprise-wide risk-management
approach to the assessment of information technology risks at supervised institutions.
In July 2017, the IT Subcommittee and Cybersecurity
and Critical Infrastructure Working Group
(CCIWG) hosted an FFIEC Industry Outreach webinar to provide information on the update to the
handbook and the Cybersecurity Assessment Tool.
The webinar also provided financial institutions the
opportunity to ask clarifying questions about other
information technology-related matters. In addition,
the FFIEC hosted an Examiner Exchange webinar to
provide supervisory staff the opportunity to address
specific questions on emerging issues in a peer-topeer learning environment.
Fiduciary Activities

The Federal Reserve has supervisory responsibility
for state member banks and state member nondepository trust companies, which hold assets in various fiduciary and custodial capacities. On-site examinations of fiduciary and custodial activities are riskfocused and entail the review of an organization’s
compliance with laws, regulations, and general fiduciary principles, including effective management of
conflicts of interest; management of legal, operational, and compliance risk exposures; the quality
and level of earnings; the management of fiduciary
assets; and audit and control procedures. In 2017,
Federal Reserve examiners conducted 115 fiduciary
examinations—excluding transfer agent examinations—of state member banks.
Transfer Agents

As directed by the Securities Exchange Act of 1934,
the Federal Reserve conducts specialized examinations of those state member banks and BHCs that

are registered with the Board as transfer agents.
Among other things, transfer agents countersign and
monitor the issuance of securities, register the transfer of securities, and exchange or convert securities.
On-site examinations focus on the effectiveness of an
organization’s operations and its compliance with
relevant securities regulations. During 2017, the Federal Reserve conducted transfer agent examinations
at four state member banks that were registered as
transfer agents.
Government and Municipal Securities Dealers
and Brokers

The Federal Reserve is responsible for examining
state member banks and foreign banks for compliance with the Government Securities Act of 1986
and with the Treasury regulations governing dealing
and brokering in government securities. Fourteen
state member banks and six state branches of foreign
banks have notified the Board that they are government securities dealers or brokers not exempt from
the Treasury’s regulations. During 2017, the Federal
Reserve conducted four examinations of brokerdealer activities in government securities at these
organizations. These examinations are generally conducted concurrently with the Federal Reserve’s
examination of the state member bank or branch.
The Federal Reserve is also responsible for ensuring
that state member banks and BHCs that act as
municipal securities dealers comply with the Securities Act Amendments of 1975. Municipal securities
dealers are examined, pursuant to the Municipal
Securities Rulemaking Board’s rule G-16, at least
once every two calendar years. Three entities supervised by the Federal Reserve that dealt in municipal
securities were examined during 2017.
Securities Credit Lenders

Under the Securities Exchange Act of 1934, the
Board is responsible for regulating credit in certain
transactions involving the purchasing or carrying of
securities. As part of its general examination program, the Federal Reserve examines the banks under
its jurisdiction for compliance with the Board’s
Regulation U. In addition, the Federal Reserve maintains a registry of persons other than banks, brokers,
and dealers who extend credit subject to Regulation U. The Federal Reserve may conduct specialized
examinations of these lenders if they are not already
subject to supervision by the Farm Credit Administration (FCA) or the National Credit Union Administration (NCUA).

Supervision and Regulation

Cybersecurity and Critical Infrastructure

The Federal Reserve collaborated with other financial regulators, the U.S. Treasury, private industry,
and international partners to promote appropriate
and cost-effective safeguards against cyber threats to
the financial services sector and to bolster the sector’s cyber resiliency. Federal Reserve examiners continued to conduct targeted cybersecurity assessments
of the largest, most systemically important financial
institutions, FMUs, and TSPs. The Federal Reserve
worked with the OCC and FDIC to develop and
implement common examination procedures for the
cybersecurity assessments of TSPs. Federal Reserve
examiners also continued to conduct cybersecurity
assessments at community and regional banking
organizations that were tailored to their specific risk
profiles. As part of these efforts, the Federal Reserve
coordinated with other financial regulators to
align supervisory expectations and examination
approaches with the National Institute for Standards
and Technology’s Cybersecurity Framework and
other best practices in the financial sector.
In 2017, the Federal Reserve contributed to interagency groups such as the FFIEC’s CCIWG, the
Financial and Banking Information Infrastructure
Committee (FBIIC), and the Cybersecurity Forum
for Independent and Executive Branch Regulators to
share information and collaborate on cybersecurity
and critical infrastructure issues impacting the financial sector. In coordination with FBIIC members, the
Federal Reserve collaborated with government and
industry partners to plan and execute sector-wide
and regional tabletop exercises focused on identifying
areas where sector resiliency, information sharing,
and public-private collaboration can be enhanced
with respect to potential cybersecurity incidents. The
exercises focused on tactical, strategic, operational,
and financial stability considerations that tested both
government and private sector processes and capabilities for addressing cyber incidents across the
financial services sector.
The Federal Reserve also contributed to key cybersecurity areas that were identified during the FFIEC’s
2014 pilot assessment of cybersecurity readiness,
including risk management and oversight, threat
intelligence and collaboration, cybersecurity controls,
external dependency management, and cyber incident management and resilience. Through participation in the CCIWG, the Federal Reserve also contributed to a May 2017 update of the Cybersecurity
Assessment Tool. The update addressed changes to

55

the FFIEC IT Examination Handbook by providing
a revised mapping to the updated Information Security and Management booklets. The updated tool
also provided additional response options, allowing
financial institution management to include supplementary or complementary behaviors, practices, and
processes that represent current practices of an institution in supporting its cybersecurity activity assessment (www.ffiec.gov/press/pr053117.htm). In October 2017, the Federal Reserve participated in an
FFIEC Examiner Exchange webinar to provide
examiners an opportunity to collaborate with industry professionals on cyber-related risks.
In addition, the Federal Reserve was actively involved
in international policy coordination on approaches to
address cyber-related risks and efforts to bolster
cyber resiliency. The Federal Reserve supported the
Group of Seven (G-7) Fundamental Elements of
Cybersecurity for the Financial Sector and other
activities to enhance international coordination and
knowledge sharing. The Federal Reserve also supported the Financial Stability Board’s (FSB’s) stocktake of regulations, guidance, and supervisory activities in order to explore the degree of uniformity and
gaps that exist across jurisdictions (www.fsb.org/
2017/10/fsb-publishes-stocktake-on-cybersecurityregulatory-and-supervisory-practices/).
Enforcement Actions
The Federal Reserve has enforcement authority over
the financial institutions it supervises and their affiliated parties. Enforcement actions may be taken to
address unsafe and unsound practices or violations
of any law or regulation. Formal enforcement actions
include cease and desist orders, written agreements,
prompt corrective action directives, removal and prohibition orders, and civil money penalties. In 2017,
the Federal Reserve completed 83 formal enforcement actions. Civil money penalties totaling
$690,320,000 were assessed. As directed by statute, all
civil money penalties are remitted to either the Treasury or the Federal Emergency Management Agency.
Enforcement orders and prompt corrective action
directives, which are issued by the Board, and written
agreements, which are executed by the Reserve
Banks, are made public and are posted on the
Board’s website (www.federalreserve.gov/apps/
enforcementactions/search.aspx).
In 2017, the Reserve Banks completed 89 informal
enforcement actions. Informal enforcement actions

56

104th Annual Report | 2017

include memoranda of understanding (MOU), commitment letters, and board of directors’ resolutions.
Surveillance and Off-Site Monitoring
The Federal Reserve uses automated screening systems to monitor the financial condition and performance of state member banks and BHCs in the
period between on-site examinations. Such monitoring and analysis helps direct examination resources to
institutions that have higher risk profiles. Screening
systems also assist in the planning of examinations
by identifying companies that are engaging in new or
complex activities.
The primary off-site monitoring tool used by the
Federal Reserve is the Supervision and Regulation Statistical Assessment of Bank Risk (SR-SABR)
model. Drawing mainly on the financial data that
banks report on their Reports of Condition and
Income (Call Reports), SR-SABR uses econometric
techniques to identify banks that report financial
characteristics weaker than those of other banks
assigned similar supervisory ratings. To supplement
the SR-SABR screening, the Federal Reserve also
monitors various market data, including equity
prices, debt spreads, agency ratings, and measures of
expected default frequency, to gauge market perceptions of the risk in banking organizations. In addition, the Federal Reserve prepares quarterly Bank
Holding Company Performance Reports (BHCPRs)
for use in monitoring and inspecting supervised
banking organizations. The BHCPRs, which are
compiled from data provided by large BHCs in quarterly regulatory reports (FR Y-9C and FR Y-9LP),
contain, for individual companies, financial statistics
and comparisons with peer companies. BHCPRs are
made available to the public on the National Information Center (NIC) website, which can be accessed
at www.ffiec.gov.
Federal Reserve analysts use Performance Report
Information and Surveillance Monitoring (PRISM),
a querying tool, to access and display financial, surveillance, and examination data. In the analytical
module, users can customize the presentation of
institutional financial information drawn from Call
Reports, Uniform Bank Performance Reports, FR Y-9
statements, BHCPRs, and other regulatory reports.
In the surveillance module, users can generate reports
summarizing the results of surveillance screening for
banks and BHCs. During 2017, one major and five
minor upgrades to the web-based PRISM application
were completed to enhance the user’s experience and
provide the latest technology.

The Federal Reserve works through the FFIEC Task
Force on Surveillance Systems to coordinate surveillance activities with the other federal banking
agencies.
Training and Technical Assistance
The Federal Reserve provides training and technical
assistance to foreign supervisors and minority-owned
depository institutions.
International Training and Technical Assistance

In 2017, the Federal Reserve continued to provide
training and technical assistance on supervisory matters to foreign central banks and supervisory authorities. Technical assistance involves visits by Federal
Reserve staff members to foreign authorities as well
as consultations with foreign supervisors who visit
the Board of Governors or the Reserve Banks.
The Federal Reserve offered a number of training
programs for the benefit of foreign supervisory
authorities, which were held both in the United
States and in many foreign jurisdictions. Federal
Reserve staff took part in technical assistance and
training assignments led by the International Monetary Fund, the World Bank, and the Financial Stability Institute. The Federal Reserve also contributed
to the regional training provided under the AsiaPacific Economic Cooperation Financial Regulators
Training Initiative. Other training partners that collaborated with the Federal Reserve during 2017 to
organize regional training programs included the
South East Asian Central Banks Research and Training Centre, the Caribbean Group of Banking Supervisors, the Banque de France, the Reserve Bank of
India, the Central Bank of the United Arab Emirates, and the Association of Supervisors of Banks of
the Americas.
Efforts to Support Minority-Owned
Depository Institutions

The Federal Reserve System implements its responsibilities under section 367 of the Dodd-Frank Act primarily through its Partnership for Progress (PFP)
program. Established in 2008, this program promotes
the viability of minority depository institutions
(MDIs) by facilitating activities designed to
strengthen their business strategies, maximize their
resources, and increase their awareness and understanding of supervisory expectations. In addition, the
Federal Reserve continues to maintain the PFP website, which supports MDIs by providing them with
technical information and links to useful resources
(www.fedpartnership.gov). Representatives from each

Supervision and Regulation

of the 12 Federal Reserve Districts, along with staff
from the S&R and DCCA divisions at the Board of
Governors, continue to offer technical assistance tailored to MDIs by providing targeted supervisory
guidance, identifying additional resources, and fostering mutually beneficial partnerships between MDIs
and community organizations. As of year-end 2017,
the Federal Reserve’s MDI portfolio included
16 state member banks.
Throughout 2017, the Federal Reserve System continued to support MDIs through the following
activities:
• Co-organized the biannual Interagency Minority
Depository Institutions and Community Development Financial Institutions (CDFI) Bank Conference that took place April 5-6, 2017, in Los Angeles, California. The meeting was hosted at the Los
Angeles branch of the Federal Reserve Bank of
San Francisco, and all planning was done in conjunction with staff from the OCC and FDIC. The
theme of the conference was “Expanding the
Impact: Increasing Capacity & Influence,” and
attendance included over 175 people, mostly consisting of MDI bank leadership.
• Co-organized a post-conference workshop with the
CDFI Fund to educate non-CDFI MDIs about the
benefits of and application process for CDFI
certification.
• Strengthened the partnership between the Board’s
DCCA and S&R divisions to share management of
the PFP program and diversify the resources and
programing available to MDIs. The Federal
Reserve System also worked to encourage partnership between examination and community development staff at the Federal Reserve Banks to bring
additional resources to MDIs around the country.
• Attended the annual National Bankers Association
meeting in Washington, D.C., and hosted an
exhibit table.

57

knowledge and professional development and was
held in September 2017 in Kansas City, Missouri.
• Facilitated in-person meetings between Federal
Reserve and MDI leaders to better understand the
challenges and opportunities facing Federal
Reserve-regulated MDIs.
• Presented Federal Reserve-commissioned research
on MDIs at the biannual interagency conference in
Los Angeles (see above). The Federal Reserve has
commissioned additional studies for 2018 to
broaden the body of research material available to
MDIs.

Supervisory Policy
The Federal Reserve’s supervisory policy function,
carried out by the Board, is responsible for developing regulations and guidance for financial institutions
under the Federal Reserve’s supervision as well as
guidance for examiners. The Board, often in concert
with the OCC and the FDIC (together, the federal
banking agencies), issues rulemakings, public SR letters, and other policy statements and guidance in
order to carry out its supervisory policies. Federal
Reserve staff also take part in supervisory and regulatory forums, provide support for the work of the
FFIEC, and participate in international policymaking forums, including the Basel Committee on Banking Supervision (BCBS), the Financial Stability
Board (FSB), the Committee on Payments and Market Infrastructures (CPMI), and the International
Association of Insurance Supervisors (IAIS).
Consistent with the Federal Reserve’s risk-focused
approach to supervision and as provided by law, the
Federal Reserve tailors supervisory rules and guidance in a way that applies the most stringent requirements to the largest, most complex banking organizations that pose the greatest risk to the financial
system.

• Provided technical assistance to MDIs on a wide
variety of topics, including improving regulatory
ratings, navigating the regulatory applications process, understanding changes to the Community
Reinvestment Act, and refining capital planning
practices.

Enhanced Prudential Standards
The Board, sometimes in conjunction with other federal agencies, is responsible for issuing a number of
rules and guidance statements under the DoddFrank Act. Listed below are the initiatives undertaken by the Board in 2017.

• Co-sponsored the “Forum for Minority Bankers”
with the Federal Reserve Banks of Kansas City
(lead sponsor), Atlanta, Richmond, Philadelphia,
and St. Louis. The forum is a national program
that provides minority bank leaders with industry

• In January, the Board issued a final rule that modified its capital plan and stress testing rules for the
2017 capital planning cycle. Among other changes,
the final rule removed large and noncomplex firms
from the qualitative component of the Federal

58

104th Annual Report | 2017

Reserve’s CCAR assessment, reducing significant
burden on these firms. The final rule defines large
and noncomplex firms as firms that have total consolidated assets of at least $50 billion but less than
$250 billion, have total consolidated nonbank
assets of less than $75 billion, and are not identified as global systemically important banks
(G-SIBs). These firms continue to be subject to the
quantitative requirements of CCAR as well as normal supervision by the Federal Reserve regarding
their capital planning. The final rule also reduces
certain reporting requirements for these firms. The
final rule is available at www.gpo.gov/fdsys/pkg/
FR-2017-02-03/pdf/2017-02257.pdf.
• In September, the Board issued a final rule that
improved the resolvability and resilience of systemically important U.S. banking organizations
and systemically important foreign banking organizations. Under the final rule, any U.S. top-tier BHC
identified by the Board as a G-SIB, the subsidiaries
of any U.S. G-SIB (other than national banks, federal savings associations, state nonmember banks,
and state savings associations), and the U.S. operations of any foreign G-SIB (other than national
banks, federal savings associations, state nonmember banks, and state savings associations) would be
subject to restrictions regarding the terms of their
non-cleared qualified financial contracts (QFCs).
The final rule also amends certain definitions in the
Board’s capital and liquidity rules; these amendments are intended to ensure that the regulatory
capital and liquidity treatment of QFCs to which a
covered entity is party is not affected by the final
rule’s restrictions on such QFCs. The final rule is
available at www.gpo.gov/fdsys/pkg/FR-2017-0912/pdf/2017-19053.pdf.
• In December, the Board requested comment on a
package that would increase the transparency of its
stress testing program while maintaining the
Board’s ability to test the resilience of the nation’s
largest and most complex banking organizations.
The package includes the following three elements:
—A notice of enhanced model disclosure that
describes three proposals to disclose additional
detail about supervisory stress test models and
how they function. The Board proposed to
expand and standardize descriptions of supervisory models; to publish loss rates assigned by
supervisory models to subgroups of loans and
summary statistics associated with the loans in
each subgroup; and to publish portfolios of
hypothetical loans along with estimated loss

rates assigned to these hypothetical portfolios.
The notice of enhanced model disclosure
includes an example of these proposals for the
corporate loan supervisory model. The notice of
enhanced model disclosure is available at www
.gpo.gov/fdsys/pkg/FR-2017-12-15/pdf/201726856.pdf.
—A proposed Stress Testing Policy Statement
describing the Board’s approach to model development, implementation, use, and validation.
This statement elaborates on prior disclosures
and provides details on the principles and policies that guide the Board’s development of its
stress testing models. The proposed statement is
available at www.gpo.gov/fdsys/pkg/FR-2017-1215/pdf/2017-26857.pdf.
—A proposal to modify the Board’s framework for
the design of the annual hypothetical economic
scenarios. The modifications aim to enhance
transparency and to further promote the resilience of the banking system throughout the economic cycle. In particular, the revisions include a
quantitative guide for the hypothetical path of
house prices, as well as notice that the Board is
exploring the addition of variables to test for
funding risks in the hypothetical scenarios. The
proposal is available at www.gpo.gov/fdsys/pkg/
FR-2017-12-15/pdf/2017-26858.pdf.
Other Rulemakings
In 2017, the Board issued several other rulemakings
and guidance documents related to liquidity and
regulatory capital, as listed below.
• In July, the federal banking agencies issued a proposed rule that would raise the threshold for
commercial real estate transactions requiring an
appraisal from $250,000 to $400,000. Instead of
an appraisal, the proposal would require that a
commercial real estate transaction at or below the
threshold receive an evaluation that provides a
market value estimate of the real estate pledged
as collateral, which is less detailed than an
appraisal and does not require completion by a
state licensed or certified appraiser. The proposal
is available at www.gpo.gov/fdsys/pkg/FR-201707-31/pdf/2017-15748.pdf.
• In August, the Board issued proposed guidance
that addresses supervisory expectations of
boards of directors at institutions that are regulated by the Board. The proposal would refocus
the Board’s supervisory expectations for the larg-

Supervision and Regulation

est firms’ boards of directors on their core
responsibilities, which include overseeing the
types and levels of risk a firm may take and
aligning the firm’s business strategy with decisions on how to address such risk. Additionally,
the proposal would reduce unnecessary burden
for the boards of smaller institutions. The proposed guidance is available at www.gpo.gov/
fdsys/pkg/FR-2017-08-09/pdf/2017-16735.pdf.
• In August, the Board issued a proposed rule to
better align the Board’s rating system for large
financial institutions with the post-crisis supervisory program for these firms. The proposed
changes to the rating system would incorporate
recent changes related to capital and liquidity
requirements, and to expectations regarding the
effectiveness of governance and controls, including firms’ compliance with laws and regulations.
The proposed rating system would only apply to
large financial institutions, such as domestic
BHCs and SLHCs with $50 billion or more in
total consolidated assets as well as intermediate
holding companies of foreign banking organizations. The proposed rule is available at www.gpo
.gov/fdsys/pkg/FR-2017-08-17/pdf/2017-16736
.pdf.
• In September, the federal banking agencies proposed a rule intended to reduce regulatory burden by simplifying several requirements in the
agencies’ regulatory capital rule. Specifically, the
proposed rule would simplify the capital treatment for certain acquisition, development, and
construction loans; mortgage servicing assets;
certain deferred tax assets; investments in the
capital of unconsolidated financial institutions;
and minority interest. The proposed rule is consistent with the Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA)
report issued by the agencies in 2017 whereby the
federal banking agencies committed to meaningfully reduce regulatory burden, especially on
community banking organizations, while at the
same time maintaining safety and soundness and
the quality and quantity of regulatory capital in
the banking system. The proposed rule is available at www.federalreserve.gov/newsevents/
pressreleases/files/bcreg20170927a1.pdf.
• In October, the federal banking agencies issued
guidance regarding frequently asked questions
(FAQs) on implementation of the liquidity coverage ratio (LCR) and modified LCR rules, published by the Board in SR letter 17-11, “Inter-

59

agency Frequently Asked Questions on Implementation of the Liquidity Coverage Ratio
Rule.” The purpose of the FAQs is to clarify certain aspects of the existing LCR and modified
LCR rules based on questions received since the
rules were published. The FAQs do not represent
new rules or regulations, nor do they amend any
of the existing requirements of the rules. The
FAQs are available at www.federalreserve.gov/
supervisionreg/srletters/sr1711.htm.
• In November, the federal banking agencies issued
a final rule that extended for certain banking
organizations the transitional capital requirements applicable during 2017 for certain items
(e.g., mortgage servicing assets, certain deferred
tax assets, and minority interest). The final rule
prevents certain requirements from taking full
effect for these items while the agencies consider
broader simplifications of the capital rules. The
final rule is available at www.gpo.gov/fdsys/pkg/
FR-2017-11-21/pdf/2017-25172.pdf.
International Coordination on
Supervisory Policies
As a member of several international financial
standard-setting bodies, the Federal Reserve
actively participates in efforts to advance sound
supervisory policies for internationally active financial organizations and to enhance the strength and
stability of the international financial system.
Basel Committee on Banking Supervision

During 2017, the Federal Reserve contributed to
supervisory policy recommendations, reports, and
papers issued for consultative purposes or finalized
by the BCBS that are designed to improve the
supervision of banking organizations’ practices
and to address specific issues that emerged during
the financial crisis. Of note, the Federal Reserve
contributed to the finalization of the Basel III
reform package—a central element of the BCBS’s
response to the financial crisis—which establishes a
framework that increases the robustness and reliability of the regulatory capital requirements for
banking organizations. The Federal Reserve also
participated in ongoing international initiatives to
track the progress of implementation of the BCBS
framework in member countries.
Final BCBS documents issued in 2017 include
• Frequently asked questions on market risk capital
requirements (issued in January and available at
www.bis.org/bcbs/publ/d395.pdf).

60

104th Annual Report | 2017

• Basel III — The Net Stable Funding Ratio: frequently asked questions (issued in February and
available at www.bis.org/bcbs/publ/d396.pdf).
• Pillar 3 disclosure requirements — consolidated
and enhanced framework (issued in March and
available at www.bis.org/bcbs/publ/d400.pdf).
• Regulatory treatment of accounting provisions—
interim approach and transitional arrangements
(issued in March and available at www.bis.org/
bcbs/publ/d401.pdf).
• Basel III — The Liquidity Coverage Ratio framework: frequently asked questions (issued in June
and available at www.bis.org/bcbs/publ/d406
.pdf).
• Implementation of Basel standards (issued in July
and available at www.bis.org/bcbs/publ/d412
.pdf).
• Basel III definition of capital — Frequently asked
questions (issued in September and available at
www.bis.org/bcbs/publ/d417.pdf).

• Stress testing principles (issued in December and
available at www.bis.org/bcbs/publ/d428.pdf).
Financial Stability Board

In 2017, the Federal Reserve continued its participation in the activities of the FSB, an international
group that helps coordinate the work of national
financial authorities and international standardsetting bodies, and develops and promotes the
implementation of financial sector policies in the
interest of financial stability.
FSB publications issued in 2017 include
• Guidance on Central Counterparty Resolution and
Resolution Planning (issued in July and available
at www.fsb.org/wp-content/uploads/P050717-1
.pdf).
• Analysis of Central Clearing Interdependencies
(issued in July jointly with the BCBS, CPMI, and
IOSCO and available at www.fsb.org/wp-content/
uploads/P050717-2.pdf).

• Basel III: Finalizing post-crisis reforms (issued in
December and available at www.bis.org/bcbs/
publ/d424.pdf).

• Guiding Principles on the Internal Total Lossabsorbing Capacity of G-SIBs (“Internal
TLAC”) (issued in July and available at www.fsb
.org/wp-content/uploads/P060717-1.pdf).

• Supervisory and bank stress testing: range of practices (issued in December and available at www
.bis.org/bcbs/publ/d427.pdf).

Committee on Payments and Market
Infrastructures

Consultative BCBS documents issued in 2017
include
• Global systemically important banks — revised
assessment framework (issued in March and available at www.bis.org/bcbs/publ/d402.pdf).
• Simplified alternative to the standardised approach
to market risk capital requirements (issued in June
and available at www.bis.org/bcbs/publ/d408
.pdf).
• Capital treatment for simple, transparent and comparable short-term securitisations (issued in July
and available at www.bis.org/bcbs/publ/d413
.pdf).
• Sound Practices: Implications of fintech developments for banks and bank supervisors (issued in
August and available at www.bis.org/bcbs/publ/
d415.pdf).
• The regulatory treatment of sovereign exposures
(issued in December and available at www.bis
.org/bcbs/publ/d425.pdf).

In 2017, the Federal Reserve continued its active
participation in the activities of the CPMI, a forum
in which central banks promote the safety and efficiency of payment, clearing, settlement, and related
arrangements. In conducting its work on financial
market infrastructures and market-related reforms,
the CPMI often coordinates with the International
Organization of Securities Commissions (IOSCO).
Over the course of 2017, CPMI-IOSCO continued
to monitor implementation of the Principles for
Financial Market Infrastructures and published further guidance on these principles to enhance the
resilience of central counterparties and strengthen
recovery arrangements for financial market infrastructures. Additionally, CPMI-IOSCO produced a
consultative framework for supervisory stress testing of central counterparties. This framework is
designed to support supervisory stress tests that
examine the potential macro-level impact of a common stress event affecting multiple central counterparties. The CPMI also produced a consultative
note in 2017 outlining a strategy to help focus
industry efforts in addressing the increasing threat
of wholesale payments fraud related to endpoint

Supervision and Regulation

security. Additional information is available at
www.bis.org.
International Association of Insurance
Supervisors

The Federal Reserve continued its participation in
2017 in the development of international supervisory standards and guidance to ensure that they
are appropriate for the U.S. insurance market. The
Federal Reserve continues to participate actively in
standard setting at the IAIS in consultation and
collaboration with state insurance regulators, the
NAIC, and the Federal Insurance Office to present
a coordinated U.S. voice in these processes. The
Federal Reserve’s participation focuses on those
aspects most relevant to the supervision of FSOCdesignated insurance firms and in research and
analysis related to capital frameworks and financial
stability topics.
In 2017, the IAIS issued for public consultation the
revised text of 14 Insurance Core Principles (ICPs)
as well as certain associated standards and guidance specific to the supervision of internationally
active insurance groups.14
The IAIS also issued a version of its developing
Insurance Capital Standard for extended field testing in August 2017. In addition, the IAIS issued
several final and consultative reports as well as
research reports in 2017.15
Final papers and reports:
• FinTech Developments in the Insurance Industry
(issued in March and available at www.iaisweb
.org/page/news/other-papers-and-reports/file/
65625/report-on-fintech-developments-in-theinsurance-industry).
• Application Paper on the Regulation and Supervision of Mutuals, Cooperatives and CommunityBased Organizations in Increasing Access to
Insurance Markets (issued in September and
available at www.iaisweb.org/page/supervisorymaterial/application-papers/file/68822/
application-paper-on-mutuals-cooperatives-andcommunity-based-organisations-september2017).
• Application Paper on Group Corporate Governance (issued in November and available at www
14

15

In this revision, two additional ICPs were removed after their
subject matter was integrated into other ICPs.
Additional information is available at www.iaisweb.org.

61

.iaisweb.org/page/supervisory-material/
application-papers/file/69940/application-paperon-group-corporate-governance).
• Application Paper on Product Oversight in Inclusive Insurance (issued in November and available
at www.iaisweb.org/page/supervisory-material/
application-papers/file/70163/application-paperon-product-oversight-in-inclusive-insurance).
Consultative papers:
• Issues Paper on Index Based Insurances (issued in
December and available at www.iaisweb.org/page/
consultations/closed-consultations/2018/draftissues-paper-on-index-based-insurances).
• Activities-Based Approach to Systemic Risk
(issued in December and available at https://www
.iaisweb.org/page/consultations/closedconsultations/2018/activities-based-approach-tosystemic-risk/file/70440/interim-aba-cp-final-forlaunch).
Accounting Policy
The Federal Reserve supports sound corporate
governance and effective accounting and auditing
practices for all regulated financial institutions.
Accordingly, the Federal Reserve’s accounting
policy function is responsible for providing expertise in policy development and implementation
efforts, both within and outside the Federal
Reserve System, on issues affecting the banking
and insurance industries in the areas of accounting, auditing, internal controls over financial
reporting, financial disclosure, and supervisory
financial reporting.
Federal Reserve staff regularly consult with key
constituents in the accounting and auditing professions, including domestic and international
standard-setters, accounting firms, accounting and
financial sector trade groups, and other financial
sector regulators to facilitate the Board’s understanding of domestic and international practices;
proposed accounting, auditing, and regulatory
standards; and the interactions between accounting
standards and regulatory reform efforts. The Federal Reserve also participates in various accounting, auditing, and regulatory forums in order to
both formulate and communicate its views.
The Financial Accounting Standards Board
(FASB) issued an accounting standard in 2016 that
overhauls the accounting for credit losses with a
new impairment model based on “expected credit

62

104th Annual Report | 2017

losses methodology” (CECL). CECL’s implementation will affect a broad range of supervisory
activities, including regulatory reports, examinations, and examiner training. During 2017, the
Federal Reserve together with the other federal
banking agencies continued to monitor the industry’s implementation efforts, and provided comments on significant interpretations as observers of
the FASB’s Transition Resource Group and
through outreach and routine discussions with
standard setters and other stakeholders, as
described above. In September, the Federal Reserve
issued the third supervisory guidance related to
CECL, SR letter 17-8, “Frequently Asked Questions on the Current Expected Credit Losses Methodology (CECL),” on an interagency basis to further aid institutions in their implementation of
CECL.16
During 2017, the Federal Reserve together with the
federal banking agencies issued comment letters on
the Public Accounting Oversight Board’s proposed
amendments to auditing standards for auditor’s
use of the work of specialists and on proposed
auditing standard on auditing accounting estimates
were issued during the past year.
Federal Reserve staff continued to participate in
meetings of the BCBS Accounting Experts Group
and the IAIS Accounting and Auditing Working
Group. These groups represent their respective
organizations at international meetings on accounting, auditing, and disclosure issues affecting global
banking and insurance organizations. Working
with international bank supervisors, Federal
Reserve staff contributed to the development of
publications that were issued by the BCBS, including guidelines on identification and management of
step-in risk and frequently asked questions on
changes to lease accounting. In collaboration with
international insurance supervisors, Federal
Reserve staff also made contributions to work
related to enhancing IAIS standards on valuation,
disclosures, and expectations for external auditrelated matters.

16

of banks as well as various regulatory capitalrelated issues.
Credit-Risk Management
The Federal Reserve works with the other federal
banking agencies to develop guidance on the management of credit risk; to coordinate the assessment of regulated institutions’ credit-risk management practices; and to ensure that institutions
properly identify, measure, and manage credit risk.
Real Estate Appraisals

In May 2017, the federal banking agencies and the
NCUA issued joint guidance concerning real estate
appraisals in response to concerns raised by institutions in rural areas about appraiser availability.
“The Interagency Advisory on the Availability of
Appraisers” highlighted two existing options that
could help insured depository institutions experiencing appraiser shortages by increasing the universe of individuals eligible to prepare appraisals
and facilitating the timely consideration of loan
applications. The advisory discusses temporary
practice permits, which are issued by state
appraiser regulatory agencies and allow states to
recognize appraiser credentials issued by another
state on a temporary basis for federally related
transactions. Institutions may also request temporary waivers, which can set aside certain or all
requirements relating to the certification or licensing of individuals to perform appraisals under title
XI of the Financial Institutions Reform, Recovery,
and Enforcement Act of 1989 in states or geographic or political subdivisions where certain conditions are met. The advisory can be found at www
.federalreserve.gov/supervisionreg/srletters/sr1704
.htm.
Shared National Credit Program

Additionally, Federal Reserve staff provided their
accounting and business expertise through participation in other supervisory activities during the
past year. These activities included supporting
Dodd-Frank Act initiatives related to stress testing

The Shared National Credit (SNC) program is a
key supervisory program employed by the Federal
Reserve and the other federal banking agencies to
ensure the safety and soundness of the financial
system. SNC is a long-standing program used to
assess credit risk and trends as well as underwriting
and risk-management practices associated with the
largest and most complex loans shared by multiple
regulated financial institutions. The program also
provides for uniform treatment and increased efficiency in shared credit risk analysis and
classification.

The guidance is available at www.federalreserve.gov/
supervisionreg/srletters/sr1708.htm.

A SNC is any loan or formal loan commitment—
and any asset, such as other real estate, stocks,

Supervision and Regulation

notes, bonds, and debentures taken as debts previously contracted—extended to borrowers by a
supervised institution, its subsidiaries, and affiliates, which has the following characteristics: an
original loan amount that aggregates to $20 million
or more17 and either (1) is shared by three or more
unaffiliated supervised institutions under a formal
lending agreement, or (2) a portion of which is sold
to two or more unaffiliated supervised institutions
with the purchasing institutions assuming their pro
rata share of the credit risk.
At the 2017 first quarter examination, the SNC
portfolio totaled $4.3 trillion, with 11,350 credit
facilities to 6,902 borrowers. Summary examination
findings showed the percentages of non-pass
(aggregate special mention and classified) assets
decreased slightly from 2016.18 Despite the
improvement in the percentage of non-pass commitments, the overall level of criticized assets
remained elevated and continued to be higher than
observed in previous periods of economic expansion, such that losses could rise considerably in the
event of an economic downturn. The high level of
credit risk in the portfolio stemmed primarily from
distressed borrowers in the oil and gas sector and
other industry sector borrowers exhibiting excessive leverage. During prior cycles, non-investmentgrade borrowers relied more heavily on the highyield bond market to finance operations. Today,
those borrowers, especially when controlled by
financial sponsors, tend to favor the syndicated
loan market for their financing needs. As a result,
the current portfolio reflects a larger volume of
riskier paper in aggregate.
Leveraged lending accounts for a substantial portion of the SNC portfolio and remains a key focus
in the agencies’ broader effort to evaluate overall
safety and soundness of bank underwriting and
risk-management practices. As observed in the first
2017 examination, agent bank underwriting and
risk-management processes to reduce and manage
the risk of leveraged lending exposures continued
to improve. In particular, most agent banks were
better equipped to project future cash flows to
17

18

In December 2017, the agencies issued a press release and
amended the SNC definition to raise the qualifying threshold
from $20 million to $100 million from 2018 onwards. See www
.federalreserve.gov/newsevents/pressreleases/bcreg20171221c
.htm.
Results discussed here are based on examinations conducted in
the third quarter of 2016 and first quarter of 2017, and reflect
data submitted by all reporting banks as of September 30, 2016.

63

assess borrower repayment capacity and enterprise
valuations, resulting in better alignment with basic
safety and soundness principles. Despite this progress, the frequent use of incremental debt facility
provisions in loan agreements, which rarely limit
use of proceeds, often resulted in increased credit
risk when utilized for non-cash generating purposes such as dividends. Leveraged loan transactions typically exhibited limited financial flexibility
due to a combination of elevated financial risk and
weak loan structure regardless of risk rating. Any
downturn in the economy could result in a significant increase in the already considerable adversely
rated leveraged lending exposures.
The severe and prolonged decline in energy prices
since 2014 caused financial stress to many energy
companies, particularly non-investment-grade and
unrated exploration and production (E&P) and
energy service companies. Increasing credit risk
from reduced revenue was exacerbated by the high
leverage of some E&P companies, primarily resulting from debt-funded acquisitions during recent
drilling expansion activity, and corresponding
reductions in liquidity. Many energy companies
responded by taking actions to reduce operating
costs and overhead, while preserving liquidity
through asset sales, issuance of additional debt and
equity instruments, and drawing on remaining
senior bank commitments. The U.S. oil and gas
industry experienced a slow, albeit volatile, recovery
in late 2016 and into the first quarter of 2017. U.S.
E&P companies increased capital spending for
2017, a reversal of the production declines in 2016.
The industry also reduced operating costs and
experienced increased merger and acquisition activity, as companies continued to rationalize and optimize their operations. Risk in the energy portfolio
is concentrated in non-investment-grade and
unrated E&P and energy service companies and is
predominantly held by regulated entities, though
banks are primarily in a senior secured position
with the lowest risk of loss.
For more information on the 2017 SNC review,
visit the Board’s website at www.federalreserve.gov/
newsevents/pressreleases/bcreg20170802a.htm.
Compliance Risk Management
The Federal Reserve works with international and
domestic supervisors to develop guidance that promotes compliance with Bank Secrecy Act and antimoney-laundering compliance (BSA/AML) and
counter-terrorism (CFT) laws.

64

104th Annual Report | 2017

Bank Secrecy Act and Anti-Money-Laundering
Compliance

In 2017, the Federal Reserve continued to actively
promote the development and maintenance of
effective BSA/AML compliance risk-management
programs, including developing supervisory strategies and providing guidance to the industry on
trends in BSA/AML compliance. For example, the
Federal Reserve supervisory staff participated in a
number of industry conferences to continue to
communicate regulatory expectations and policy
interpretations for financial institutions.
The Federal Reserve is a member of the Treasuryled BSA Advisory Group, which includes representatives of regulatory agencies, law enforcement,
and the financial services industry and covers all
aspects of the BSA. The Federal Reserve also participated in Treasury-led private/public sector dialogues with financial institutions, regulators, and
supervisors from Mexico, the United Kingdom,
and the People’s Republic of China. These dialogues were designed to promote information sharing and understanding of BSA/AML issues
between U.S. and country-specific financial sectors.
In addition, the Federal Reserve participated in
meetings during the year to discuss BSA/AML
issues with delegations from Estonia, Singapore,
and the Seychelles.
The Federal Reserve also participates in the FFIEC
BSA/AML working group, a monthly forum for
the discussion of pending BSA policy and regulatory matters. In addition to the FFIEC agencies,
the BSA/AML working group includes the Financial Crimes Enforcement Network (FinCEN) and,
on a quarterly basis, the SEC, the CFTC, the Internal Revenue Service, and the Office of Foreign
Assets Control (OFAC). The FFIEC BSA/AML
working group is responsible for updating the
FFIEC Bank Secrecy Act/Anti-Money Laundering
Examination Manual. The FFIEC developed this
manual as part of its ongoing commitment to provide current and consistent interagency guidance
on risk-based policies, procedures, and processes
for financial institutions to comply with the BSA
and safeguard their operations from money laundering and terrorist financing.
Throughout 2017, the Federal Reserve continued
to regularly share examination findings and
enforcement proceedings with FinCEN as well as
with OFAC under the interagency MOUs finalized
in 2004 and 2006.

International Coordination on Sanctions,
Anti-Money-Laundering, and
Counter-Terrorism Financing

The Federal Reserve participates in a number of
international coordination initiatives related to
sanctions, money laundering, and terrorism financing. The Federal Reserve has a long-standing role
in the U.S. delegation to the intergovernmental
Financial Action Task Force (FATF) and its working groups, contributing a banking supervisory perspective to the formulation of international standards. The Federal Reserve participated in the
development of FATF Guidance on Private Sector
Information Sharing issued in November 2017. In
addition, the Federal Reserve participated in the
development of FATF Guidance on Customer Due
Diligence and Financial Inclusion issued in
November 2017, as a supplement to the 2013
FATF Guidance on AML/CFT Measures and
Financial Inclusion.
The Federal Reserve also continues to participate
in committees and subcommittees through the
Bank for International Settlements. Specifically, the
Federal Reserve actively participates in the AML
Experts Group under the BCBS that focuses on
AML and CFT issues, as well as the CPMI. With
respect to the AML Experts Group, the Federal
Reserve contributed to updating the Correspondent
Banking annex issued in June 2017, which supplements previous guidance on the sound management of risks related to money laundering and
financing of terrorism.
Incentive Compensation
To foster improved incentive compensation practices in the financial industry, the Federal Reserve
along with the other federal banking agencies
adopted interagency guidance oriented to the risktaking incentives created by incentive compensation arrangements in June 2010. The guidance is
based on the principles that incentive compensation arrangements at a banking organization
should provide employees incentives that appropriately balance risk and financial results; be compatible with effective controls and risk management;
and be supported by strong corporate governance.
The guidance recognizes that the methods used to
achieve appropriately risk-sensitive compensation
arrangements likely will differ significantly across
and within firms.
To implement the guidance, the Board developed a
robust supervisory program focusing on the largest

Supervision and Regulation

banking organizations because they are significant
users of incentive compensation. Based in part on
our supervisory efforts, these institutions have
made progress in developing programs and policies
and procedures that incorporate these three core
principles.
Section 956 of the Dodd-Frank Act requires the
Board, OCC, FDIC, SEC, NCUA, and FHFA to
jointly develop regulations or guidelines implementing disclosures and prohibitions concerning
incentive-based compensation at covered financial
institutions with at least $1 billion in assets. The
agencies published a revised proposed rule in
June 2016. The agencies received over 100 comments on the 2016 proposed rule and are considering the comments.
Other Policymaking Initiatives
• In July, the Board, along with four other financial regulatory agencies, issued a policy statement
announcing that they are coordinating their
respective reviews of the treatment of certain foreign funds under section 619 of the Dodd-Frank
Act, commonly known as the Volcker rule, and
the agencies’ implementing regulations. These
foreign funds are investment funds organized and
offered outside of the United States and generally are not subject to the Volcker rule (“foreign
excluded funds”). However, complexities in the
Volcker rule and the implementing regulations
may result in certain foreign excluded funds
becoming subject to regulation. The federal
banking agencies, which generally oversee foreign
banks, would not take action under the Volcker
rule for qualifying foreign excluded funds, subject
to certain conditions, for a period of one year.
The statement is available at www.federalreserve
.gov/newsevents/pressreleases/files/
bcreg20170721a1.pdf.
• In July, the Board issued SR letter 17-5, “Procedures for a Banking Entity to Request an Extension of the One-Year Seeding Period for a Covered Fund,” which provides guidance on how
banking entities may seek an extension to conform an investment to the Volcker rule. Under
the Volcker rule, a banking entity is permitted to
acquire and retain an ownership interest in a covered fund in connection with organizing and
offering the covered fund as long as certain
requirements are met. The Volcker rule also
requires a banking entity to actively seek unaffiliated investors to reduce within one year its

65

investment in the covered fund to an amount that
is not more than 3 percent of the total outstanding ownership interests in the fund (referred to as
the “per-fund limitation”). A banking entity may
request the Board’s approval for an extension of
time beyond the one-year period, for up to two
additional years, to conform an investment to the
per-fund limitation. The supervisory guidance is
available at www.federalreserve.gov/
supervisionreg/srletters/sr1705.htm.
• In August, the Board and the other federal banking agencies issued guidance on the regulatory
capital treatment of certain centrally cleared
derivative contracts in light of changes to the
rulebooks of certain central counterparties. Specifically, the agencies provided guidance on the
treatment of cleared settled-to-market contracts
under the federal banking agencies’ regulatory
capital rules. The supervisory guidance is available at www.federalreserve.gov/supervisionreg/
srletters/sr1707.htm.
• In September, the Board, along with the other
federal banking agencies and the NCUA, issued
“Frequently Asked Questions on the Current
Expected Credit Loss Methodology (CECL),”
which provides guidance to institutions as they
implement the new accounting standard for
credit losses recently issued by the FASB. These
FAQs expand upon the agencies’ June 2016 Joint
Statement on the New Accounting Standard on
Financial Instruments—Credit Losses. The letter
also announces that the agencies plan to issue a
series of FAQs until the implementation date of
the new standard to address questions on the
implementation of CECL. The supervisory guidance is available at www.federalreserve.gov/
supervisionreg/srletters/sr1708.htm.
Regulatory Reports
The Federal Reserve and the other U.S. federal
banking agencies have the authority to require
banks and holding companies to submit information, on both a solo and a consolidated basis, on
their financial condition, performance, and risks, at
regular intervals. The Federal Reserve’s data collections, reporting, and governance function is
responsible for developing, coordinating, and
implementing regulatory reporting requirements
for various financial reporting forms filed by
domestic and foreign financial institutions subject
to Federal Reserve supervision. Federal Reserve
staff members interact with other federal agencies,
state supervisors, and, as needed, foreign bank

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104th Annual Report | 2017

supervisors, to recommend and implement appropriate and timely revisions to the reporting forms
and the attendant instructions.

and to eliminate two schedules from the FR
Y-14A to reduce reporting burden.
FFIEC Regulatory Reports

Holding Company Regulatory Reports

The Federal Reserve requires that U.S. holding
companies (HCs) periodically submit reports that
provide information about their financial condition
and structure.19 This information is essential to formulating and conducting financial institution regulation and supervision. It is also used to respond to
information requests by Congress and the public
about HCs and their nonbank subsidiaries. Foreign
banking organizations also are required to periodically submit reports to the Federal Reserve. For
more information on the various reporting forms,
see www.federalreserve.gov/apps/reportforms/
default.aspx.
During 2017, the following reporting forms were
revised:
• FR Y-9C—to implement a number of revisions,
which were consistent with changes to the
FFIEC Call Reports. The revisions, effective
March 2017, included deleting certain existing
data items, increasing the existing reporting
threshold for time deposits, and clarifying the
reporting of certain data items.
• FR Y-9LP—to add a new line item, effective
March 2017, for total nonbank assets of a holding company subject to the Federal Reserve
Board’s capital plan rule for purposes of identifying large and noncomplex firms. This new line
item was related to amendments to the capital
plan and stress test rules (Regulations Y and YY)
published in February 2017.
• FR Y-14—to modify the scope of the global market shock component of the Federal Reserve’s
stress tests in a manner that would include certain U.S. IHCs of foreign banking organizations,
which are subject to the same capital and stress
testing standards that apply to domestic BHCs.
U.S. IHCs that will become subject to the global
market shock in CCAR 2019 as a result of the
modified threshold will be subject to an interim
market risk component in CCAR 2018. Also, the
Federal Reserve modified report forms and
instructions to clarify certain data definitions
and improve alignment with certain data items
reported on other report schedules or reports,
19

HCs are defined as BHCs, intermediate holding companies
(IHCs), SLHCs, and securities holding companies.

The law establishing the FFIEC and defining its
functions requires the FFIEC to develop uniform
reporting systems for federally supervised financial
institutions. The Federal Reserve, along with the
other member FFIEC agencies, requires financial
institutions to submit various uniform regulatory
reports. This information is essential to formulating
and conducting supervision and regulation and for
the ongoing assessment of the overall soundness of
the nation’s financial system. During 2017, the following FFIEC reporting forms were implemented
or revised:
• FFIEC 101—to remove two credit valuation
adjustment items.
• FFIEC 031, 041, and 051—to implement a new
streamlined version of the Call Report (FFIEC
051) for eligible small institutions and to make
certain burden-reducing revisions to the FFIEC
031 and FFIEC 041 Call Reports (filed by larger
institutions). See section below on the Call
Report Burden Reduction Initiative for more
details.
Call Report Burden Reduction Initiative for
Community Institutions

In September 2015, the FFIEC announced detailed
steps regulators are taking to streamline and simplify regulatory reporting requirements for community banks and reduce their reporting burden. The
objectives of the community bank burdenreduction initiative are consistent with feedback the
FFIEC received as part of the regulatory review
conducted as required by the EGRPRA of 1996.
Progress made during 2017 by the FFIEC on this
multiyear initiative included implementing a new
and streamlined Call Report for small financial
institutions (FFIEC 051) effective March 2017.
Financial institutions with domestic offices only
and less than $1 billion in total assets, which represent approximately 90 percent of all institutions
required to file Call Reports, qualify for this new
report. The streamlined Call Report reduced the
existing FFIEC 041 Call Report form from 85 to
61 pages, resulting from the removal of approximately 40 percent of the nearly 2,400 data items in
the Call Report. In addition, the frequency of
reporting was reduced for over 4 percent of the
remaining data items. Table 3 summarizes the over-

Supervision and Regulation

67

Table 3. Data items revised as of March 30, 2018
Finalized Call Report revisions
Items removed, net
Change in item frequency to semiannual
Change in item frequency to annual
Items with a new or increased reporting threshold

FFIEC 051

FFIEC 041

FFIEC 031

967
96
10

60

68

7

13

* “Items Removed, Net” reflects the effects of consolidating existing items, adding control totals, and, for the FFIEC 051, relocating individual items from other schedules to a
new supplemental schedule. In addition, included in this number for the FFIEC 051, approximately 300 items were items that institutions with less than $1 billion in total assets
were exempt from reporting due to existing reporting thresholds in the FFIEC 041.

all number of changes finalized and implemented
by Call Report form.
Other Burden Reduction Initiatives

To reduce burden, the Federal Reserve discontinued the Liquidity Monitoring Report (FR 2052b),
with the final data collection as of the September 30, 2017, report date. The FR 2052b report was
filed by HCs with total consolidated assets of
greater than $10 billion, excluding firms designated
as G-SIBs and affiliates of foreign banking organizations with less than $50 billion in total consolidated assets. The report collected quantitative
information on selected assets, liabilities, funding
activities, and contingent liabilities on a consolidated basis and by material subsidiary entity. This
data was used to monitor the overall liquidity profile of certain institutions supervised by the Federal
Reserve. In place of the FR 2052b, the Federal
Reserve will monitor and assess liquidity risks of
previous FR 2052b filers using the recently implemented Liquidity Focus Report (LFR). The LFR
provides a consistent method for benchmarking
liquidity risk for individual regional banks based
on information derived from the Call Report. As
mentioned above, there were also burden reducing
changes to the FR Y-14 report in 2017.

Supervisory Information Technology
The Federal Reserve’s supervisory information
technology (SIT) function, under the governance of
the Subcommittee for Data and Technology, works
to deliver information technology solutions within
the supervision and regulation function. Working
collaboratively with the Federal Reserve System
supervision and regulation business sponsors, SIT
provides services to the business lines as well as
information technology project management support to several critical national business applications supporting supervision and regulation.

Supervisory and support tools. To support examiners and other supervisory staff, SIT deployed tools
to support the collection, use, and storage of
supervisory data. SIT integrated supervisory planning and collection tools with a task and resource
management program allowing management to
better track and align resources. SIT deployed
advanced quantitative analysis and data visualization software to allow supervisory analysts to glean
insights from supervisory data.
Streamlined data access and improved security. SIT
streamlined data access for the supervision function while enhancing overall information security.
SIT provides access to data through a central
access management tool to support data, applications, and research access-related responsibilities,
and establishes effective prevention and detection
controls to limit information security threats. In
addition to data access provisioning, the tool supports information security measures through routine procedures to verify users’ access to data and
information to confirm whether there is a continued need for this access.
National Information Center
The National Information Center (NIC) is the Federal Reserve’s authoritative source for supervisory,
financial, and banking structure data as well as
supervisory documents. The NIC includes (1) data
on banking structure throughout the United States
and foreign banking concerns, (2) national applications supporting the various supervisory programs
and the data they capture, (3) data collection processes, and (4) a platform for sharing of the information with external agencies.
Information sharing and external collaboration. The
NIC oversees the implementation of approved
regulatory interagency information exchanges,
including a continually increasing number of new

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104th Annual Report | 2017

ing of the regulatory process, as well as overall status reporting.

requests. The NIC represents the Federal Reserve
on the FFIEC Task Force on Information Sharing,
and leads a subgroup, The Path Forward, focusing
on improving collaboration, examination file
exchange, and big data sharing between the regulatory agencies. Efforts continue to work with the
business areas to increase capabilities for collaboration between the agencies.

Staff Development
The Federal Reserve’s staff development program
supports the ongoing development of nearly 3,000
professional supervisory staff, ensuring that they
have the requisite skills necessary to meet their
evolving supervisory responsibilities. The Federal
Reserve also provides course offerings to staff at
state banking agencies. Training activities in 2017
are summarized in table 4.

Document management. A high priority for the
NIC was to improve document tracking, storage,
and access through the implementation of document management software. The software eliminates point-to-point interfaces between document
management systems and systems uploading or referencing documents. The software also moves and
tracks documents between management systems as
the documents progress through their life cycle.

Examiner Commissioning Program
An overview of the Federal Reserve System’s
Examiner Commissioning Program for assistant
examiners is set forth in SR letter 17-6, “Overview
of the Federal Reserve’s Supervisory Education
Programs.”20

Data quality and usability. Efforts continue to meet
the demands resulting from the increasing amount
of data being collected and shared. Much of the
data is collected under revised supervisory programs. Similar data between programs cannot
always be matched and requires alignment for
cross-portfolio purposes. The NIC continues to
ensure that the underlying data is consistent, readily available, and easily accessible for authorized
use. The NIC also works to ensure that all NIC
data is easily understood by the various stakeholders and integrated in a flexible manner.

Examiners choose from one of three specialty
tracks: (1) safety and soundness, (2) consumer
compliance, or (3) large financial institutions. On
average, individuals move through a combination
of classroom offerings, self-paced learning, virtual
instruction, and on-the-job training over a period
of two to three years. Achievement is measured by
completing the required course content, demonstrating adequate on-the-job knowledge, and passing a professionally validated proficiency examination. In 2017, 59 examiners passed the proficiency
examination (16 in safety and soundness and 43 in
consumer compliance).

Data collections. The NIC coordinates budgetary
activities and ensures that information technology
solutions for data collections meet architectural
standards. Increased emphasis on data governance,
security, and awareness prompted the build-out of
a data collection management system that provides
intake on data requests, a playbook for and track-

In 2017, the Board released a new enhanced proficiency examination containing application-based
20

SR letter 17-6 is available at www.federalreserve.gov/
supervisionreg/srletters/sr1706.htm.

Table 4. Training for banking supervision and regulation, 2017
Number of enrollments
Course sponsor or type

Federal Reserve System
FFIEC
Rapid Response2
1
2

Federal Reserve
personnel

State and federal
banking agency
personnel

1,062
961
14,159

157
581
1,591

Instructional time
(approximate training
days)1

Number of course
offerings

515
420
7

103
105
61

Training days are approximate. System courses were calculated using five days as an average, with FFIEC courses calculated using four days as an average.
Rapid Response is a virtual program created by the Federal Reserve System as a means of providing information on emerging topics to Federal Reserve and state bank
examiners.

Supervision and Regulation

bank firms. In 2017, the Federal Reserve acted on
1,259 applications filed under the six statutes.

questions designed to measure performance reflecting the level of knowledge and skills needed to
effectively perform in an examiner-in-charge role.
In addition, further learning units were released for
the Large Financial Institutions Examiner Commissioning Program, which will continue to be
developed and deployed in 2018.

In 2017, the Federal Reserve published its Semiannual Report on Banking Applications Activity,
which provides aggregate information on proposals
filed by banking organizations and reviewed by the
Federal Reserve. The report includes statistics on
the number of proposals that have been approved,
denied, withdrawn, mooted, or returned as well as
general information about the length of time taken
to process proposals and common reasons for proposals to be withdrawn from consideration. The
reports are available at www.federalreserve.gov/
bankinforeg/semiannual-reports-bankingapplications-activity.htm.

Continuing Professional Development
Throughout 2017, the Federal Reserve System continued to enhance its continuing professional development program. Learning bundles, which organize various types of learning into a cohesive, easily accessible format that often includes reference
materials and application opportunities, were a new
product designed to meet the need of training on
specific risks or common supervisory topics, such
as cybersecurity.

Bank Holding Company Act Applications
Under the BHC Act, a corporation or similar legal
entity must obtain the Federal Reserve’s approval
before forming a BHC through the acquisition of
one or more banks in the United States. Once
formed, a BHC must receive Federal Reserve
approval before acquiring or establishing additional
banks. Also, BHCs generally may engage in only
those nonbanking activities that the Board has previously determined to be closely related to banking
under section 4(c)(8) of the BHC Act. Depending
on the circumstances, these activities may or may
not require Federal Reserve approval in advance of
their commencement.21

Regulation
The Federal Reserve exercises important regulatory
influence over entry into the U.S. banking system
structure through its administration of several federal statutes. The Federal Reserve is also responsible for imposing margin requirements on securities transactions. In carrying out its responsibilities,
the Federal Reserve coordinates supervisory activities with the other federal banking agencies, state
agencies, functional regulators (that is, regulators
for insurance, securities, and commodities firms),
and foreign bank regulatory agencies.

When reviewing a BHC application or notice that
requires approval, the Federal Reserve considers
the financial and managerial resources of the applicant, the future prospects of both the applicant
and the firm to be acquired, financial stability factors, the convenience and needs of the community
to be served, the potential public benefits, the competitive effects of the proposal, the applicant’s
compliance with laws and regulations, and the
applicant’s ability to make available to the Federal
Reserve information deemed necessary to ensure
compliance with applicable law. The Federal
Reserve also must consider the views of the DOJ
regarding the competitive aspects of any proposed
BHC acquisition involving unaffiliated insured

Regulation of the U.S. Banking Structure
The Federal Reserve administers six federal statutes
that apply to BHCs, FHCs, member banks,
SLHCs, and foreign banking organizations: the
BHC Act, the Bank Merger Act, the Change in
Bank Control Act, the Federal Reserve Act, section 10 of the Home Owners’ Loan Act (HOLA),
and the International Banking Act.
In administering these statutes, the Federal Reserve
acts on a variety of applications and notices that
directly or indirectly affect the structure of the U.S.
banking system at the local, regional, and national
levels; the international operations of domestic
banking organizations; or the U.S. banking operations of foreign banks. The applications and
notices concern BHC and SLHC formations and
acquisitions, bank mergers, and other transactions
involving banks and savings associations or non-

69

21

Since 1996, the BHC Act has provided an expedited prior notice
procedure for certain permissible nonbank activities and for
acquisitions of small banks and nonbank entities. Since that
time, the BHC Act has also permitted well-run BHCs that satisfy certain criteria to commence certain other nonbank activities on a de novo basis without first obtaining Federal Reserve
approval.

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104th Annual Report | 2017

depository institutions. In the case of a foreign
banking organization seeking to acquire control of
a U.S. bank, the Federal Reserve also considers
whether the foreign bank is subject to comprehensive supervision or regulation on a consolidated
basis by its home-country supervisor. In 2017, the
Federal Reserve acted on 264 applications and
notices filed by BHCs to acquire a bank or a nonbank firm, or to otherwise expand their activities.
A BHC may repurchase its own shares from its
shareholders. Certain stock redemptions require
prior Federal Reserve approval. The Federal
Reserve may object to stock repurchases by holding companies that fail to meet certain standards,
including the Board’s capital adequacy guidelines.
In 2017, the Federal Reserve acted on five stock
repurchase applications by BHCs.
The Federal Reserve also reviews elections submitted by BHCs seeking FHC status under the authority granted by the Gramm-Leach-Bliley Act. BHCs
seeking FHC status must file a written declaration
with the Federal Reserve. In 2017, 36 domestic
FHC declarations and one foreign FHC declaration were received.
Bank Merger Act Applications

The Bank Merger Act requires that all applications
involving the merger of insured depository institutions be acted on by the relevant federal banking
agency. The Federal Reserve has primary jurisdiction if the institution surviving the merger is a state
member bank. In acting on a merger application,
the Federal Reserve considers the financial and
managerial resources of the applicant, the future
prospects of the existing and combined organizations, financial stability factors, the convenience
and needs of the communities to be served, and the
competitive effects of the proposed merger. The
Federal Reserve also must consider the views of the
U.S. Department of Justice regarding the competitive aspects of any proposed bank merger involving
unaffiliated insured depository institutions. In
2017, the Federal Reserve approved 63 merger
applications under the Bank Merger Act.
Change in Bank Control Act Applications
The Change in Bank Control Act requires individuals and certain other parties that seek control
of a U.S. bank, BHC, or SLHC to obtain approval
from the relevant federal banking agency before

completing the transaction. The Federal Reserve is
responsible for reviewing changes in the control of
state member banks, BHCs, and SLHCs. In its
review, the Federal Reserve considers the financial
position, competence, experience, and integrity of
the acquiring person; the effect of the proposed
change on the financial condition of the bank,
BHC, or SLHC being acquired; the future prospects of the institution to be acquired; the effect of
the proposed change on competition in any relevant market; the completeness of the information
submitted by the acquiring person; and whether
the proposed change would have an adverse effect
on the Deposit Insurance Fund. A proposed transaction should not jeopardize the stability of the
institution or the interests of depositors. During its
review of a proposed transaction, the Federal
Reserve also may contact other regulatory or law
enforcement agencies for information about relevant individuals. In 2017, the Federal Reserve
approved 134 change in control notices.
Federal Reserve Act Applications
Under the Federal Reserve Act, a bank must seek
Federal Reserve approval to become a member
bank. A member bank may be required to seek
Federal Reserve approval before expanding its
operations domestically or internationally. State
member banks must obtain Federal Reserve
approval to establish domestic branches, and all
member banks (including national banks) must
obtain Federal Reserve approval to establish foreign branches. When reviewing applications for
membership, the Federal Reserve considers, among
other things, the bank’s financial condition and its
record of compliance with banking laws and regulations. When reviewing applications to establish
domestic branches, the Federal Reserve considers,
among other things, the scope and nature of the
banking activities to be conducted. When reviewing
applications for foreign branches, the Federal
Reserve considers, among other things, the condition of the bank and the bank’s experience in international banking. In 2017, the Federal Reserve
acted on 19 membership applications, 686 new and
merger-related domestic branch applications, and
two foreign branch application.
State member banks also must obtain Federal
Reserve approval to establish financial subsidiaries.
These subsidiaries may engage in activities that are
financial in nature or incidental to financial activi-

Supervision and Regulation

ties, including limited securities-related and insurance agency-related activities. In 2017, no financial
subsidiary applications were approved.
Home Owners’ Loan Act Applications
Under HOLA, a corporation or similar legal entity
must obtain the Federal Reserve’s approval before
forming an SLHC through the acquisition of one
or more savings associations in the United States.
Once formed, an SLHC must receive Federal
Reserve approval before acquiring or establishing
additional savings associations. Also, SLHCs generally may engage in only those nonbanking activities that are specifically enumerated in HOLA or
that the Board has previously determined to be
closely related to banking under section 4(c)(8) of
the BHC Act. Depending on the circumstances,
these activities may or may not require Federal
Reserve approval in advance of their commencement. In 2017, the Federal Reserve acted on 15
applications filed by SLHCs to acquire a savings
association or a nonbank firm, or to otherwise
expand their activities.
Under HOLA, a mutual savings association reorganizing to a mutual holding company (MHC)
structure must receive Federal Reserve approval
prior to its reorganization. In addition, an MHC
must receive Federal Reserve approval before converting to stock form, and MHCs must receive
Federal Reserve approval before waiving dividends
declared by the MHC’s subsidiary. In 2017, the
Federal Reserve acted on five MHC reorganization
applications and eight applications to waive dividends. There were no applications approved for
MHCs to convert to stock form.
When reviewing an SLHC application or notice
that requires approval, the Federal Reserve considers the financial and managerial resources of the
applicant, the future prospects of both the applicant and the firm to be acquired, the convenience
and needs of the community to be served, the
potential public benefits, the competitive effects of
the proposal, and the applicant’s ability to make
available to the Federal Reserve information
deemed necessary to ensure compliance with applicable law. The Federal Reserve also must consider
the views of the DOJ regarding the competitive
aspects of any SLHC proposal involving the acquisition or merger of unaffiliated insured depository
institutions.

71

The Federal Reserve also reviews elections submitted by SLHCs seeking status as FHCs under the
authority granted by the Dodd-Frank Act. SLHCs
seeking FHC status must file a written declaration
with the Federal Reserve. In 2017, no SLHC FHC
declarations were received.
Overseas Investment Applications by
U.S. Banking Organizations
U.S. banking organizations may engage in a broad
range of activities overseas. Many of the activities
are conducted indirectly through Edge Act and
agreement corporation subsidiaries. Although most
foreign investments are made under general consent procedures that involve only after-the-fact
notification to the Federal Reserve, large and other
significant investments require prior approval. In
2017, the Federal Reserve approved 18 applications
and notices for overseas investments by U.S. banking organizations, many of which represented
investments through an Edge Act or agreement
corporation.
International Banking Act Applications
The International Banking Act, as amended by the
Foreign Bank Supervision Enhancement Act of
1991, requires foreign banks to obtain Federal
Reserve approval before establishing branches,
agencies, commercial lending company subsidiaries,
or representative offices in the United States.
In reviewing applications, the Federal Reserve generally considers whether the foreign bank is subject
to comprehensive supervision or regulation on a
consolidated basis by its home-country supervisor.
It also considers whether the home-country supervisor has consented to the establishment of the
U.S. office; the financial condition and resources of
the foreign bank and its existing U.S. operations;
the managerial resources of the foreign bank;
whether the home-country supervisor shares information regarding the operations of the foreign
bank with other supervisory authorities; whether
the foreign bank has provided adequate assurances
that information concerning its operations and
activities will be made available to the Federal
Reserve, if deemed necessary to determine and
enforce compliance with applicable law; whether
the foreign bank has adopted and implemented
procedures to combat money laundering and
whether the home country of the foreign bank is
developing a legal regime to address money laun-

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104th Annual Report | 2017

dering or is participating in multilateral efforts to
combat money laundering; and the record of the
foreign bank with respect to compliance with U.S.
law. In 2017, the Federal Reserve approved three
applications by foreign banks to establish branches,
agencies, or representative offices in the United
States.
Public Notice of Federal Reserve Decisions
and Filings Received
Certain decisions by the Federal Reserve that
involve a BHC, SLHC, a bank merger, a change in
control, or the establishment of a new U.S. banking presence by a foreign bank are made known to
the public by an order or an announcement. Orders
state the decision, the essential facts of the application or notice, and the basis for the decision;
announcements state only the decision. All orders
are made public immediately and are subsequently
reported in the Board’s weekly H.2 statistical
release. The H.2 release also contains announcements of applications and notices received by the
Federal Reserve upon which action has not yet
been taken. For each pending application and
notice, the related H.2A release gives the deadline
for comments. The Board’s website provides information on orders and announcements (www
.federalreserve.gov/newsevents/press/orders/
2017orders.htm) as well as a guide for U.S. and foreign banking organizations that wish to submit
applications (www.federalreserve.gov/bankinforeg/
afi/afi.htm).

Enforcement of Other Laws and
Regulations
The Federal Reserve’s enforcement responsibilities
also extend to the disclosure of financial information by state member banks and the use of credit to
purchase and carry securities.
Financial Disclosures by State Member
Banks
Under the Securities Exchange Act of 1934 and the
Federal Reserve’s Regulation H, certain state member banks are required to make financial disclosures to the Federal Reserve using the same reporting forms (such as Form 10K—annual report and
Schedule 14A—proxy statement) that are normally
used by publicly held entities to submit information
to the SEC.22 As most of the publicly held banking
22

Under section 12(g) of the Securities Exchange Act, certain
companies that have issued securities are subject to SEC regis-

organizations are BHCs and the reporting threshold was recently raised, only two state member
banks were required to submit data to the Federal
Reserve in 2017. The information submitted by
these two small state member banks is available to
the public upon request and is primarily used for
disclosure to the bank’s shareholders and public
investors.
Assessments for Supervision and Regulation
The Dodd-Frank Act directs the Board to collect
assessments, fees, or other charges equal to the
total expenses the Board estimates are necessary or
appropriate to carry out the supervisory and regulatory responsibilities of the Board for BHCs and
SLHCs with total consolidated assets of $50 billion
or more and nonbank financial companies designated for Board supervision by the FSOC. As a
collecting entity, the Board does not recognize the
supervision and regulation assessments as revenue
nor does the Board use the collections to fund
Board expenses; the funds are transferred to the
Treasury. The Board collected and transferred
$507,914,174 in 2017 for the 2016 supervision and
regulation assessment.
Securities Credit
Under the Securities Exchange Act of 1934, the
Board is responsible for regulating credit in certain
transactions involving the purchasing or carrying
of securities. The Board’s Regulation T limits the
amount of credit that may be provided by securities brokers and dealers when the credit is used to
purchase debt and equity securities. The Board’s
Regulation U limits the amount of credit that may
be provided by lenders other than brokers and
dealers when the credit is used to purchase or carry
publicly held equity securities if the loan is secured
by those or other publicly held equity securities.
The Board’s Regulation X applies these credit limitations, or margin requirements, to certain borrowers and to certain credit extensions, such as credit
obtained from foreign lenders by U.S. citizens.
Several regulatory agencies enforce the Board’s
securities credit regulations. The SEC, the Finantration and filing requirements that are similar to those imposed
on public companies. Per section 12(i) of the Securities
Exchange Act, the powers of the SEC over banking entities that
fall under section 12(g) are vested with the appropriate banking
regulator. Specifically, state member banks with 2,000 or more
shareholders and more than $10 million in total assets are
required to register with, and submit data to, the Federal
Reserve. These thresholds reflect the recent amendments by the
Jumpstart Our Business Startups Act (JOBS Act).

Supervision and Regulation

cial Industry Regulatory Authority, and the Chicago Board Options Exchange examine brokers
and dealers for compliance with Regulation T.
With respect to compliance with Regulation U, the
federal banking agencies examine banks under

their respective jurisdictions; the FCA and the
NCUA examine lenders under their respective
jurisdictions; and the Federal Reserve examines
other Regulation U lenders.

73

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5

Consumer and
Community Affairs

The Division of Consumer and Community Affairs
(DCCA) has primary responsibility for carrying out
the Board of Governors’ core activity of consumer
protection and community development to promote
fair and transparent financial service markets, protect
consumers’ rights, and ensure that its policies and
research take into account consumer and community
perspectives. This charge includes assessing and taking corrective actions to address consumer risks
among financial institutions it supervises while also
fostering proven programs in consumer compliance
and community investment.
Throughout 2017, the division engaged in numerous
consumer and community-related functions and
policy activities in the following areas:
• Formulating consumer-focused supervision and
examination policy to ensure that financial institutions for which the Federal Reserve has authority
comply with consumer protection laws and regulations and meet requirements of community reinvestment laws and regulations. The division provided
oversight for the Reserve Bank consumer compliance supervision and examination of state member
banks and bank holding companies (BHCs)
through its policy development, examiner training,
and supervision oversight programs. This includes
policy setting and oversight of state member
banks’ performance under the Community Reinvestment Act (CRA); conducting oversight of and
providing guidance to Reserve Bank staff on consumer compliance in BHC matters; assessment of
compliance with and enforcement of a wide range
of consumer protection laws and regulations,
including those related to fair lending, unfair or
deceptive acts or practices (UDAP), and flood
insurance; analysis of bank and BHC applications
in regard to consumer protection, convenience and
needs, and the CRA; and processing of consumer
complaints.
• Conducting research, analysis, and data collection to
inform Federal Reserve and other policymakers

about consumer protection risks and community economic development issues and opportunities. The
division analyzed ongoing and emerging consumer
financial services and community risks, practices,
issues, and opportunities to understand and act on
their implications for supervisory policy as well as
to gain insight into consumer decisionmaking
related to financial services and access to credit for
small businesses.
• Engaging and convening key stakeholders to identify
emerging issues and advance what works in community reinvestment and consumer protection. The division continued to promote fair and informed access
to financial markets for all consumers, particularly
underserved populations, by engaging lenders, government officials, and community leaders. Throughout
the year, DCCA convened programs to share information on the financial and economic needs in
low- and moderate-income (LMI) communities,
research on effective community development policies and strategies, and best practices in the management and control of consumer compliance risks.
• Writing and reviewing regulations that effectively
implement consumer protection and community reinvestment laws. The division manages the Board’s
regulatory responsibilities with respect to certain
entities and specific statutory provisions of the
consumer financial services and fair lending laws.
In 2017, DCCA participated in drafting interagency regulations and compliance guidance for
the industry and the Reserve Banks.

Supervision and Examinations
DCCA develops supervisory policy and examination
procedures for consumer protection laws and regulations, as well as for the CRA, as part of its supervision of the organizations for which the Board has
authority, including bank and financial holding companies, state member banks, foreign banking organizations, Edge Act corporations, and agreement cor-

76

104th Annual Report | 2017

porations.1 The division also administers the Federal
Reserve System’s risk-focused program for assessing
consumer compliance risk at the largest banks and
financial holding companies in the System, with division staff ensuring that consumer compliance risk is
effectively integrated into the consolidated supervision of the holding company. DCCA staff monitor
trends in consumer products to inform the risk-based
supervisory planning process. Quantitative risk metrics and screening systems use data to assess market
activity, consumer complaints, and supervisory findings to assist with the determination of risk levels at
firms.
The division oversees the efforts of the 12 Reserve
Banks to ensure that the Federal Reserve’s consumer
compliance supervisory program reflects its commitment to promoting financial inclusion and compliance with applicable federal consumer protection
laws and regulations in the 815 state member banks it
supervises. Division staff coordinate with the prudential regulators and the Consumer Financial Protection Bureau (CFPB) as part of the supervisory coordination requirements under the Dodd-Frank Wall
Street Reform and Consumer Protection Act (DoddFrank Act), and ensure that consumer compliance
risk is appropriately incorporated into the consolidated risk-management program of the approximately 135 bank and financial holding companies
with assets over $10 billion. Division staff provide
guidance and expertise to the Reserve Banks on consumer protection laws and regulations, bank and
1

The Federal Reserve has examination and enforcement authority for federal consumer financial laws and regulations for
insured depository institutions with assets of $10 billion or less
that are state member banks and not affiliates of covered institutions, as well as for conducting CRA examinations for all state
member banks regardless of size. The Federal Reserve Board
also has examination and enforcement authority for certain federal consumer financial laws and regulations for insured depository institutions that are state member banks with over $10 billion in assets, while the Consumer Financial Protection Bureau
has examination and enforcement authority for many federal
consumer financial laws and regulations for insured depository
institutions with over $10 billion in assets and their affiliates
(covered institutions), as mandated by the Dodd-Frank Act.
Agency and branch offices of foreign banking organizations,
Edge Act corporations, and agreement corporations fall under
the Federal Reserve’s purview for consumer compliance activities. An agreement corporation is a type of bank chartered by a
state to engage in international banking. The bank agrees with
the Federal Reserve Board to limit its activities to those allowed
by an Edge Act corporation. An Edge Act corporation is a
banking institution with a special charter from the Federal
Reserve to conduct international banking operations and certain
other forms of business without complying with state-by-state
banking laws. By setting up or investing in Edge Act corporations, U.S. banks are able to gain portfolio exposure to financial
investing operations not available under standard banking laws.

BHC application analysis and processing, examination and enforcement techniques and policy matters,
examiner training, and emerging issues. Finally, staff
members participate in interagency activities that
promote consistency in examination principles, standards, and processes.
Examinations are the Federal Reserve’s primary
method of ensuring compliance with consumer protection laws and assessing the adequacy of consumer
compliance risk-management systems within regulated entities. During 2017, the Reserve Banks completed 225 consumer compliance examinations of
state member banks, 193 CRA examinations of state
member banks, 52 examinations of foreign banking
organizations, 4 examinations of Edge Act corporations, and no examinations of agreement
corporations.

Mortgage Servicing and Foreclosure
Payment Agreement Status
Throughout 2017, Board staff continued to oversee
and implement the enforcement actions that were
issued by the Federal Reserve and the Office of the
Comptroller of the Currency (OCC) against 16 mortgage loan servicers between April 2011 and
April 2012. At the time of the enforcement actions,
along with other requirements, the two regulators
directed servicers to retain independent consultants
to conduct comprehensive reviews of foreclosure
activity to determine whether eligible2 borrowers
suffered financial injury because of servicer errors,
misrepresentations, or other deficiencies. The file
review initiated by the independent consultants, combined with a significant borrower outreach process,
was referred to as the Independent Foreclosure
Review (IFR).
In 2013, the regulators entered into agreements with
15 of the mortgage loan servicers to replace the IFR
with direct cash payments to all eligible borrowers
and other assistance (the Payment Agreement).3 The
participating servicers agreed to pay an estimated
$3.9 billion to 4.4 million borrowers whose primary
residence was in a foreclosure process in 2009 or
2010. The Payment Agreement also required the servicers to contribute an additional $5.8 billion in other
2

3

Borrowers were eligible if their primary residence was in a foreclosure action with one of the sixteen mortgage loan servicers at
any time in 2009 or 2010.
One OCC-regulated servicer elected to complete the Independent Foreclosure Review, and did not, therefore, enter into the
Payment Agreement.

Consumer and Community Affairs

foreclosure prevention assistance, such as loan modifications and forgiveness of deficiency judgments.
For the participating servicers, fulfillment of the
agreement satisfied the foreclosure review requirements of the enforcement actions issued by the regulators in 2011 and 2012. The Payment Agreement did
not affect the servicers’ continuing obligations under
the enforcement actions to address deficiencies in
their mortgage servicing and foreclosure policies and
procedures.
A paying agent, Rust Consulting, Inc. (Rust), was
retained to administer payments to borrowers on
behalf of the participating servicers. Beginning in
April 2013, a letter with an enclosed check was sent
to borrowers who had a foreclosure action initiated,
pending, or completed in 2009 or 2010 with any of
the participating servicers. Letters with checks were
mailed to eligible borrowers through 2016. For
checks that had not been cashed or were returned
undeliverable, the agencies directed Rust to expand
its efforts to locate more-current address information
for the unpaid borrowers. For nearly all borrowers, at
least two, and in most cases, three attempts were
made to reach each borrower.
More than $3.5 billion was distributed to eligible
borrowers through 3.9 million checks, representing
nearly 91 percent of the total value of the funds.
Receiving a payment under the agreement did not
prevent borrowers from taking any action they may
wish to pursue related to their foreclosure. Servicers
were not permitted to ask borrowers to sign a waiver
of any legal claims they may have against their servicer in connection with receiving payment.4
At the direction of the Federal Reserve, in
August 2016, Rust redistributed any funds remaining
after all outstanding initial checks expired, to eligible
borrowers of Federal Reserve-supervised servicers
who had cashed or deposited their initial checks. This
direction applied only to funds related to mortgage
servicers supervised by the Federal Reserve and was
consistent with the Federal Reserve’s intention to distribute the maximum amount of funds to borrowers
potentially affected by deficient servicing and foreclosure practices. The redistribution of approximately
$80 million in remaining funds resulted in nearly
$59 million being cashed or deposited by borrowers
of servicers supervised by the Federal Reserve. The
borrower payment process concluded at the end of
4

For more information, see www.federalreserve.gov/
consumerinfo/independent-foreclosure-review-paymentagreement.htm.

77

2016. Once the audit of the final reconciliation of the
payment funds has been completed, any funds
remaining that were provided by servicers supervised
by the Federal Reserve as part of the Payment Agreement will be remitted to the U.S. Treasury.
Foreclosure Prevention Actions
The Payment Agreement also required servicers to
undertake well-structured loss-mitigation efforts
focused on foreclosure prevention, with preference
given to activities designed to keep borrowers in their
homes through affordable, sustainable, and meaningful home preservation actions within two years from
the date the agreement in principle was reached. The
foreclosure prevention actions were expected to provide significant and meaningful relief or assistance to
qualified borrowers and, as stated in the agreement,
“should not disfavor a specific geography within or
among states, nor disfavor low and/or moderate
income borrowers, and not discriminate against any
protected class.”
All servicers were required to submit reports detailing the consumer-relief actions they had taken to satisfy these requirements. The foreclosure prevention
assistance actions reported included loan modifications, short sales, deeds-in-lieu of foreclosure, debt
cancellation, and lien extinguishment. In order to
receive credit toward the servicer’s total foreclosure
prevention obligation, the actions submitted must be
validated by the regulators. A third party completed
this validation to ensure that the foreclosure prevention assistance amounts met the requirements of the
amendments to the enforcement actions. As stated
in the Independent Foreclosure Review Report
(July 2014),5 the Federal Reserve expects to publish
data in 2018 regarding the final status of the cash
payments and the foreclosure prevention assistance
focused primarily on servicers regulated by the
Federal Reserve.
Servicer Efforts to Address Deficiencies
In addition to the foreclosure review requirements,
the enforcement actions required mortgage servicers
to submit acceptable written plans to address various
mortgage loan servicing and foreclosure processing
deficiencies. In the time since the enforcement actions
were issued, the banking organizations have been
implementing the action plans, including enhanced
controls, and improving systems and processes. The
supervisory review of the mortgage servicers’ action
5

For the report, see www.federalreserve.gov/publications/otherreports/files/independent-foreclosure-review-2014.pdf.

78

104th Annual Report | 2017

plans has shown that the banking organizations
under the enforcement actions have implemented significant corrective actions with regard to their mortgage servicing and foreclosure processes, and for
most servicers, those corrective actions appear to be
sustainable. As a result, the majority of the enforcement actions were terminated on January 12, 2018.6
For the remaining servicers, Federal Reserve supervisory teams continue to monitor and evaluate the servicers’ progress on implementing the action plans to
address unsafe and unsound mortgage servicing and
foreclosure practices as required by the enforcement
actions.

Supervisory Matters
Enforcement Activities
Fair Lending and UDAP Enforcement

Through its supervision and enforcement teams,
DCCA is committed to ensuring that the institutions
it supervises comply fully with the federal fair lending
laws—the Equal Credit Opportunity Act (ECOA)
and the Fair Housing Act (FHA). The ECOA prohibits creditors from discriminating against any
applicant, in any aspect of a credit transaction, on
the basis of race, color, religion, national origin, sex,
marital status, or age. In addition, creditors may not
discriminate against an applicant because the applicant receives income from a public assistance program or has exercised, in good faith, any right under
the Consumer Credit Protection Act. The FHA prohibits discrimination in residential real-estate-related
transactions—including the making and purchasing
of mortgage loans—on the basis of race, color, religion, sex, handicap, familial status, or national
origin.
The Board supervises all state member banks for
compliance with the FHA. The Board and the CFPB
both have supervisory authority for compliance with
the ECOA. For state member banks with assets of
$10 billion or less, the Board has the authority to
enforce the ECOA. For state member banks with
assets over $10 billion, the CFPB has this authority.
With respect to the Federal Trade Commission Act
(FTC Act), which prohibits unfair or deceptive acts
or practices, the Board has supervisory and enforcement authority over all state member banks, regardless of asset size. The Board is committed to ensuring
6

For the press release, see www.federalreserve.gov/newsevents/
pressreleases/enforcement20180112a.htm.

that the institutions it supervises comply fully with
the prohibition on unfair or deceptive acts or practices as outlined in the FTC Act. An act or practice
may be found to be unfair if it causes or is likely to
cause substantial injury to consumers that is not reasonably avoidable by consumers and not outweighed
by countervailing benefits to consumers or to competition. A representation, omission, or practice is
deceptive if it is likely to mislead a consumer acting
reasonably under the circumstances and is likely to
affect a consumer’s conduct or decision regarding a
product or service.
Fair lending and UDAP reviews are conducted regularly within the supervisory cycle. Additionally,
examiners may conduct fair lending and UDAP
reviews outside of the usual supervisory cycle, if warranted by fair lending and UDAP risk. When examiners find evidence of potential discrimination or
potential UDAP violations, they work closely with
DCCA’s Fair Lending and UDAP Enforcement sections, which provide additional legal and statistical
expertise and ensure that fair lending and UDAP
laws are enforced consistently and rigorously
throughout the Federal Reserve System.
With respect to fair lending, pursuant to the ECOA,
if the Board has reason to believe that a creditor has
engaged in a pattern or practice of discrimination in
violation of the ECOA, the matter must be referred
to the Department of Justice (DOJ). The DOJ
reviews the referral and determines whether further
investigation is warranted. A DOJ investigation may
result in a public civil enforcement action. Alternatively, the DOJ may decide to return the matter to the
Board for administrative enforcement. When a matter is returned to the Board, staff ensure that the
institution takes all appropriate corrective action.
During 2017, the Federal Reserve referred to the
DOJ three matters that involved discrimination on
the basis of marital status, in violation of the ECOA.
The banks improperly required spousal signatures on
commercial and consumer loans, in violation of
Regulation B.
If there is a fair lending violation that does not constitute a pattern or practice under the ECOA or a
UDAP violation, the Federal Reserve takes action to
ensure that the violation is remedied by the bank.
Most lenders readily agree to correct fair lending and
UDAP violations, often taking corrective action as
soon as they become aware of a problem. Thus, the
Federal Reserve frequently uses informal supervisory

Consumer and Community Affairs

tools (such as memoranda of understanding between
banks’ boards of directors and the Reserve Banks, or
board resolutions) to ensure that violations are corrected. When necessary, the Board can bring public
enforcement actions.
The Board brought two public enforcement actions
for UDAP violations in 2017. In October, the Board
issued a consent order against a bank for deceptive
practices related to balance transfer credit cards
issued to consumers through third parties. The order
required the bank to pay approximately $5 million in
restitution to nearly 21,000 consumers and take other
corrective actions.7 In November, the Board issued
another consent order against a bank for deceptive
residential mortgage origination practices. The institution told certain borrowers that they were paying
an additional amount for discount points that would
lower the borrowers’ interest rate. However, many
borrowers did not receive a reduced rate. The
enforcement action required the bank to pay approximately $2.8 million into an account to provide restitution to these borrowers.8
Given the complexity of this area of supervision, the
Federal Reserve seeks to provide transparency on its
perspectives and processes to the industry and the
public. Fair Lending and UDAP Enforcement staff
meet regularly with consumer advocates, supervised
institutions, and industry representatives to discuss
fair lending and UDAP issues and receive feedback.
Through this outreach, the Board is able to address
emerging fair lending and UDAP issues and promote
sound fair lending and UDAP compliance. For
example, in 2017, the Board sponsored a free interagency webinar on fair lending supervision through
Compliance Outlook Live, which had approximately
6,000 registrants, most of which were community
banks.9 In addition, DCCA staff participate in
numerous meetings, conferences, and trainings sponsored by consumer advocates, industry representatives, and interagency groups.
Flood Insurance

The National Flood Insurance Act imposes certain
requirements on loans secured by buildings or mobile
homes located in, or to be located in, areas deter7

8

9

For more information, see www.federalreserve.gov/newsevents/
pressreleases/enforcement20171026a.htm.
For more information, see www.federalreserve.gov/newsevents/
pressreleases/enforcement20171128a.htm.
For more information and to obtain the webcast, see www
.consumercomplianceoutlook.org/outlook-live/2017/
interagency-fair-lending-hot-topics/.

79

mined to have special flood hazards. Under the Federal Reserve’s Regulation H, which implements the
act, state member banks are generally prohibited
from making, extending, increasing, or renewing any
such loan unless the building or mobile home, as well
as any personal property securing the loan, are covered by flood insurance for the term of the loan. The
law requires the Board and other federal financial
institution regulatory agencies to impose civil money
penalties when they find a pattern or practice of violations of the regulation.
In 2017, the Federal Reserve issued seven formal consent orders and assessed more than $1.6 million in
civil money penalties against state member banks to
address violations of the flood regulations. An action
against one bank accounted for the majority of the
civil money penalties issued.10 These statutorily mandated penalties were forwarded to the National Flood
Mitigation Fund held by the Department of the
Treasury for the benefit of the Federal Emergency
Management Agency.
Community Reinvestment Act
The CRA requires that the Federal Reserve and other
federal banking regulatory agencies encourage financial institutions to help meet the credit needs of the
local communities in which they do business, consistent with safe and sound operations. To carry out this
mandate, the Federal Reserve
• examines state member banks to assess their performance under the CRA;
• considers banks’ CRA performance in context with
other supervisory information when analyzing
applications for mergers and acquisitions; and
• disseminates information about community development techniques to bankers and the public
through Community Development offices at the
Reserve Banks.11
The Federal Reserve assesses and rates the CRA
performance of state member banks in the course of
examinations conducted by staff at the 12 Reserve
Banks. During the 2017 reporting period, the Reserve
Banks completed 193 CRA examinations of state
member banks. Of those banks examined, 22 were
rated “Outstanding,” 165 were rated “Satisfactory,”
10

11

For more information, see www.federalreserve.gov/newsevents/
pressreleases/enforcement20170525b.htm.
For more information on various community development
activities of the Federal Reserve System, see www
.fedcommunities.org.

80

104th Annual Report | 2017

6 were rated “Needs to Improve,” and none were
rated “Substantial Non-Compliance.”
During the 2017 review period, the Board, the Federal Deposit Insurance Corporation (FDIC), and the
OCC published in the Federal Register a final rule
amending their respective CRA regulations primarily
to conform to changes made by the CFPB to Regulation C, which implements HMDA. Since 1995, certain definitions in the CRA regulations have conformed to the scope of loans reported under Regulation C, and the three agencies believe that continuing
to do so results in a less burdensome CRA performance evaluation process. In addition to these conforming changes, the final rule contained technical
corrections and removed obsolete references to the
Neighborhood Stabilization Program.12 The three
agencies are also working on a long-term project to
evaluate the interagency examination procedures to
determine where meaningful updates and guidance
can be incorporated.
Mergers and Acquisitions
The Federal Reserve analyzes expansionary applications by banks or BHCs, taking into account the
likely effects of the acquisition on competition, the
convenience and needs of the communities to be
served, the financial and managerial resources and
future prospects of the companies and banks
involved, and the effectiveness of the company’s policies to combat money laundering. As part of this
process, DCCA evaluates whether the institutions are
currently meeting the convenience and needs of their
communities and the effectiveness of existing managerial resources, as well as the institutions’ ability to
meet the convenience and needs of their communities
and the adequacy of their managerial resources after
the proposed transaction.
The depository institution’s CRA record is a critical
component of this analysis. The CRA requires the
Federal Reserve to consider a bank’s record of helping to meet the credit needs of its local communities
in evaluating applications for mergers, acquisitions,
and branches. An institution’s most recent CRA performance evaluation is a particularly important, and
often controlling, consideration in the applications
process because it represents a detailed on-site evaluation of the institution’s performance under the
CRA by its federal supervisor.

12

See www.federalreserve.gov/newsevents/pressreleases/
bcreg20171120a.htm.

As part of the analysis of managerial resources, the
Federal Reserve reviews the institution’s record of
compliance with consumer protection laws and regulations. The institution’s most recent consumer compliance rating is central to this review because, like
the CRA performance evaluation, it represents the
detailed findings of the institution’s supervisory
agency.
Less-than-satisfactory CRA or consumer compliance
ratings or other significant consumer compliance
issues can pose an impediment to the processing and
approval of the application. Federal Reserve staff
gather additional information about CRA and
consumer compliance performance in many circumstances, such as when the financial institution(s) involved in an application has less-thansatisfactory CRA or compliance ratings or recently
identified consumer compliance issues, or when the
Federal Reserve receives comments from interested
parties that raise CRA or consumer compliance
issues. To further enhance transparency about this
process, the Board issued guidance to the public in
2014 describing the Federal Reserve’s approach to
applications and notices, highlighting those that may
not satisfy statutory requirements for approval of a
proposal or that otherwise raise supervisory or regulatory concerns.13
Because these applications are of interest to the public, they often generate comments that raise various
issues for Board staff to consider in their analyses of
the supervisory and lending records of the applicants. With respect to consumer compliance and
community reinvestment, one of the more common
allegations is that either or both the target and the
acquirer fail to make credit available to certain
minority groups and to LMI individuals and communities. Commenters also often express concerns about
branch closures or the banks’ record of lending to
small businesses in LMI geographies.
In evaluating the applications and the merits of public comments, the Board considers information provided by applicants and analyzes supervisory information, including examination reports with evaluations of compliance with fair lending and other
consumer protection laws and regulations, and confers with other regulators, as appropriate, for their
supervisory views. If warranted, the Federal Reserve
will also conduct pre-membership exams for a trans13

For more information, see www.federalreserve.gov/
supervisionreg/srletters/sr1402.htm.

Consumer and Community Affairs

action in which an insured depository institution will
become a state member bank or in which the surviving entity of a merger would be a state member
bank.14
The Board provides information on its actions associated with these merger and acquisition transactions,
issuing press releases and Board Orders for each.15
The Federal Reserve also publishes semiannual
reports that provide pertinent information on applications and notices filed with the Federal Reserve.16
The reports include statistics on the number of proposals that had been approved, denied, and withdrawn as well as general information about the length
of time taken to process proposals. Additionally, the
reports discuss common reasons that proposals have
been withdrawn from consideration.
During 2017, the Board considered over 100 applications, with topics ranging from change in control
notices, to branching requests, to mergers and acquisitions. DCCA staff analyzed 23 notices and applications for transactions involving bank mergers and
branching that involved adverse public comments on
CRA issues or consumer compliance issues, such as
fair lending, which the Board considered and
approved.17
Coordination with the Consumer Financial
Protection Bureau
During 2017, staff continued to coordinate on supervisory matters with the CFPB in accordance with the
Interagency Memorandum of Understanding on
Supervision Coordination with the CFPB. The agreement is intended to establish arrangements for coordination and cooperation among the CFPB and the
OCC, the FDIC, the National Credit Union Association, and the Board of Governors. The agreement
strives to minimize unnecessary regulatory burden
and to avoid unnecessary duplication of effort and

81

conflicting supervisory directives amongst the prudential regulators. The regulators work cooperatively
to share exam schedules for covered institutions and
covered activities to plan simultaneous exams, provide final drafts of examination reports for comment,
and share supervisory information.
Coordination with Other Federal Banking
Agencies
The Board regularly coordinates with other federal
banking agencies, including through the development
of interagency guidance, in order to clearly communicate supervisory expectations. The Federal Reserve
also works with the other member agencies of the
Federal Financial Institutions Examination Council
(FFIEC) to develop consistent examination principles, standards, procedures, and report formats.18
In 2017, the banking agencies continued to work
together on various initiatives.
Updating Examination Procedures

In August, the FFIEC developed HMDA Examiner
Transaction Testing Guidelines that include sampling, verification, and resubmission procedures for
use in connection with HMDA data collected beginning on January 1, 2018, pursuant to the CFPB’s
amendments to Regulation C. The guidelines
describe how to validate the accuracy of such
HMDA data and the circumstances in which examiners may direct institutions to correct and resubmit data.
In October, the Board, the FDIC, and the OCC
developed a revised list of HMDA key data fields for
examiners to use in connection with validating the
accuracy of HMDA data collected beginning on
January 1, 2018, pursuant to the CFPB’s amendments to Regulation C. These HMDA key fields are
those that the Federal Reserve, the FDIC, and the
OCC collectively determined to be most critical to
the integrity of analyses of overall HMDA data.
Coordinating Transfer of HMDA Data Operations

14

15

16

17

In October 2015, the Federal Reserve issued guidance providing
further explanation on its criteria for waiving or conducting
such pre-merger or pre-membership examinations. For more
information, see www.federalreserve.gov/supervisionreg/
srletters/SR1511.htm.
To access the Board’s Orders on Banking Applications, see www
.federalreserve.gov/newsevents/pressreleases.htm.
For these reports, see www.federalreserve.gov/supervisionreg/
semiannual-reports-banking-applications-activity.htm.
Another application on which adverse public comments were
received was withdrawn by the applicant. Related notices and
applications for which a single Board Order was issued were
counted as a single notice or application in this total.

Also in 2017, the FFIEC continued to implement its
plan for the transfer of HMDA data operations to
the CFPB in January 2018. The Board collected and
processed submissions of HMDA data through
December 2017 and will administer the legacy
HMDA data operations system, including collecting
and processing any resubmissions of HMDA data
that were originally submitted prior to January 2018.

18

For more information, see www.ffiec.gov.

82

104th Annual Report | 2017

Uniform Interagency Consumer Compliance
Ratings System

In November 2016, the FFIEC announced the issuance of an updated Uniform Interagency Consumer
Compliance Rating System (CC Rating System).19
The CC Rating System is a supervisory policy for
evaluating financial institutions’ adherence to consumer compliance requirements. The CC Rating
System provides a general framework for assessing
risks during the supervisory process using certain
compliance factors and assigning an overall consumer compliance rating to each federally regulated
financial institution.
Federal Reserve examiners began applying the
updated rating system to consumer compliance
examinations of state member banks that started on
or after March 31, 2017. To ensure that examiners
were prepared to consistently apply the new rating
system, consumer compliance examiners attended a
mandatory web-based training session, followed by
in-person case study training. Additionally, the Federal Reserve published an article entitled “Implementing the New Uniform Interagency Consumer
Compliance Rating System” in the first 2017 issue of
its Consumer Compliance Outlook newsletter.20 To
assist financial institution management teams in
understanding the new rating system, this article
highlighted the foundational principles of the CC
Rating System, discussed the framework on which
the CC Rating System is based, and explained how
examiners will apply the CC Rating System in evaluating a financial institution’s consumer compliance
management system.
Supporting Financial Institutions and Borrowers
Affected by Hurricanes Harvey and Irma

The Federal Reserve, along with the OCC, FDIC,
and state bank regulators recognized the serious
impact of Hurricanes Harvey and Irma on the customers and operations of many financial institutions
on August 26 and September 6, 2017, respectively.21
The agencies issued the statements on supervisory
practices regarding institutions and borrowers
affected by the hurricanes. The agencies offered to
provide regulatory assistance to affected institutions
19

20

21

For more information, see www.federalreserve.gov/bankinforeg/
caletters/caltr1608.htm.
See https://consumercomplianceoutlook.org/2017/first-issue/
implementing-the-new-uniform-interagency-consumercompliance-rating-system/.
For more information, see www.federalreserve.gov/newsevents/
pressreleases/bcreg20170826a.htm and www.federalreserve.gov/
newsevents/pressreleases/bcreg20170906a.htm.

subject to their supervision and issued a statement
encouraging institutions in the affected areas to meet
the financial services needs of their communities. The
agencies’ statements included guidance on the following areas.
• Lending. Bankers should work constructively with
borrowers in communities affected by Hurricanes
Harvey and Irma. Understanding the transitory
nature of the circumstances, the agencies indicated
they would consider the unusual circumstances
they face and recognized that efforts to work with
borrowers in communities under stress can be consistent with safe-and-sound banking practices as
well as in the public interest.
• Community Reinvestment Act. Financial institutions may receive CRA consideration for community development loans, investments, or services
that revitalize or stabilize federally designated
disaster areas in their assessment areas or in the
states or regions that include their assessment areas.
• Investments. Bankers should monitor municipal
securities and loans affected by the hurricanes, as
the agencies realize local government projects may
be negatively affected.
Examiner Training
Ensuring that financial institutions comply with laws
that protect consumers and encourage community
reinvestment is a fundamental aspect of the bank
examination and supervision process. As the complexity of both consumer financial transactions and
the regulatory landscape has increased, timely and
responsive training for consumer compliance examiners is vitally important. The examiner staff development function is responsible for the ongoing development of the professional consumer compliance supervisory staff, from an initial introduction to the
Federal Reserve System through the development of
proficiency in consumer compliance topics sufficient
to earn an examiner’s commission. DCCA’s role is to
ensure that examiners have the skills necessary to meet
their supervisory responsibilities now and in the future.
Consumer Compliance Examiner Training
Curriculum

The consumer compliance examiner training curriculum has historically consisted of five courses focused
on consumer protection laws, regulations, and examining concepts. In 2017, these courses were offered in
10 sessions, and training was delivered to a total of
94 Federal Reserve consumer compliance examiners
and staff members and 11 state banking agency

Consumer and Community Affairs

examiners. These courses have been conducted principally by traditional classroom delivery method.
Board and Reserve Bank staff have played an active
role in regularly reviewing the core curriculum,
updating subject matter, and adding new elements as
appropriate.
While the examiner training program has consistently
exhibited strengths, the Federal Reserve began efforts
in 2015 to institute elements of curriculum modernization. Other business lines within Supervision
Learning had completed, or were in the process of,
converting their curriculum into self-directed, online,
and blended delivery methods. These modernized
features offered learners and Reserve Banks an ability to customize and to meet training demands more
individually and cost effectively. This flexibility significantly enhances the Consumer Compliance training program.
Following the establishment of a dedicated modernization program in early 2016, the project has continued throughout 2017 and is slated for completion in
late 2020. Throughout 2016 and 2017, DCCA continued its partnership with Reserve Bank personnel,
both subject-matter experts and professional instructional designers, who together are assessing and
excerpting the critical elements from the existing curriculum and adapting the material for incorporation
into the modernized format.
During calendar-year 2017, the development team
focused its efforts on the components of the first
regulation-based course in the traditional curriculum,
Introduction to Consumer Compliance (CA I). The
team completed its analysis of the examination tasks
to be captured, sub-dividing the first week of the
two-week course into three broad areas: Examination
Overview, Deposits, and the Basics of Operations.
For the section Examination Overview, the team
developed design documents; drafted narrative storyboards; beta-tested; and during the fourth quarter of
2017, launched the section as an independent “learning unit” available to potential learners through the
Banking Supervision Learning Center. The two
remaining components are slated to be launched in
early 2018. The team will next turn its attention to
the broad regulatory area of lending and creditrelated regulations that, together, will replace the
remaining portion of the CA I course and the Real
Estate Lending Examination Techniques course.

83

Ongoing Training Opportunities

In addition to providing core examiner training, the
examiner staff development function emphasizes the
importance of continuing, lifelong learning. Opportunities for continuing learning include special projects and assignments, self-study programs, rotational
assignments, the opportunity to instruct at System
schools, mentoring programs, and a consumer compliance examiner forum held every 18 months, most
recently in September 2017, where senior consumer
compliance examiners receive information on emerging compliance issues and are able to share best practices from across the System. To accommodate those
individuals unable to attend the forum in-person, a
live-stream option is also offered.
In 2017, the System continued to offer Rapid
Response sessions. Introduced in 2008, Rapid
Response sessions offer examiners webinars on
emerging issues or urgent training needs that result
from the implementation of new laws, regulations, or
supervisory guidance as well as case studies. Six consumer compliance Rapid Response sessions were
designed, developed, and presented to System staff
during 2017. In addition, examiner training is also
developed and presented through the FFIEC Examiner Exchange program, a partnership with the Federal Reserve Bank of St. Louis to provide FFIECsponsored interagency webinars and calls through its
Center for Learning Innovation.
Outreach and Training to Agency and
Industry Stakeholders

During 2017, the Federal Reserve System collaborated with its supervisory agency partners to offer an
Outlook Live session entitled “2017 Interagency Fair
Lending Topics.”22 These specialty sessions are
focused on delivering timely, relevant compliance
information to the banking industry as well as to
experienced examiners and other regulatory
personnel.
Additionally, in 2017 two volumes of Consumer
Compliance Outlook were issued. Consumer Compliance Outlook discusses consumer compliance issues
of interest to compliance professionals. This publication, managed by the Federal Reserve Bank of Philadelphia, is distributed to state member banks and
22

For more information, see www.consumercomplianceoutlook
.org/.

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104th Annual Report | 2017

bank and savings and loan holding companies supervised by the Federal Reserve.
Responding to Consumer Complaints
and Inquiries
The Federal Reserve investigates complaints against
state member banks and selected nonbank subsidiaries of BHCs (Federal Reserve regulated entities), and
forwards complaints against other creditors and businesses to the appropriate enforcement agency. Each
Reserve Bank investigates complaints against Federal
Reserve regulated entities in its District. The Federal
Reserve also responds to consumer inquiries on a
broad range of banking topics, including consumer
protection questions.
The Federal Reserve Consumer Help (FRCH) centralizes the processing of consumer complaints and
inquiries that come to the Federal Reserve. In 2017,
FRCH processed 30,180 cases. Of these cases, 20,153
were inquiries and the remainder (10,027) were complaints, with most cases received directly from consumers. Approximately 8 percent of cases were
referred to the Federal Reserve from other federal
and state agencies.
While consumers can contact FRCH by a variety of
different channels, most FRCH consumer contacts
occurred by telephone (63 percent). Nevertheless,
33 percent (10,104) of complaint and inquiry submissions were made electronically (via email, online submissions, and fax), and the online form page received
17,019 visits during the year.
Consumer Complaints

Complaints against Federal Reserve regulated entities
totaled 2,624 in 2017. Approximately 2 percent
(49) of these complaints were closed without investigation, pending the receipt of additional information
from consumers. One percent of the total complaints
were still under investigation in December 2017.
Fifty-two percent (1,376) involved unregulated practices, and 47 percent (1,229) involved regulated practices. (Table 1 shows the breakdown of complaints
about regulated practices by regulation or act; table 2
shows complaints by product type.)
Complaints about Regulated Practices
The majority of regulated practices complaints concerned credit card accounts (53.2 percent), checking
accounts (19.8 percent), and real estate (6 percent).23
23

Real estate loans include adjustable-rate mortgages, residential
construction loans, open-end home equity lines of credit, home

Table 1. Complaints against state member banks and
selected nonbank subsidiaries of bank holding companies
about regulated practices, by regulation/act, 2017
Regulation/act
Regulation AA (Unfair or Deceptive Acts or Practices)
Regulation B (Equal Credit Opportunity)
Regulation BB (Community Reinvestment)
Regulation CC (Expedited Funds Availability)
Regulation D (Reserve Requirements)
Regulation DD (Truth in Savings)
Regulation E (Electronic Funds Transfers)
Regulation H (National Flood Insurance Act/Insurance Sales)
Regulation M (Consumer Leasing Provisions of TILA)
Regulation P (Privacy of Consumer Financial Information)
Regulation V (Fair and Accurate Credit Transactions)
Regulation Z (Truth in Lending)
Garnishment Rule
Fair Credit Reporting Act
Fair Debt Collection Practices Act
Fair Housing Act
Real Estate Settlement Procedures Act
Servicemembers Civil Relief Act (SCRA)
Total

Number
40
23
2
78
1
75
141
7
1
30
114
152
3
472
47
21
20
2
1,229

The most common credit card complaints related to
inaccurate credit reporting (57 percent), forgery/
fraud (9 percent), payment errors/delays (6 percent),
and billing error resolution (5 percent). The most
common checking account complaints related to
funds availability not as expected (26 percent),
deposit error resolution (17 percent), insufficient
funds/overdraft charges and procedures (11 percent),
and disputed withdrawal of funds (9 percent). The
most common real estate complaints by problem
code related to escrow problems (18 percent), inaccurate credit reporting (16 percent), debt collection/
foreclosure concerns (12 percent), and payment
errors/delays (12 percent).
Twenty-three regulated practices complaints alleging
credit discrimination on the basis of prohibited borrower traits or rights were received in 2017. Thirteen
discrimination complaints were related to the race,
color, national origin, or ethnicity of the applicant or
borrower. Eight discrimination complaints were
related to either the age, handicap, familial status, or
religion of the applicant or borrower. Of the closed
complaints alleging credit discrimination based on a
prohibited basis in 2017, there were no violations
related to illegal credit discrimination.

improvement loans, home purchase loans, home refinance/
closed-end loans, and reverse mortgages.

Consumer and Community Affairs

85

Table 2. Complaints against state member banks and selected nonbank subsidiaries of bank holding companies about
regulated practices, by product type, 2017
All complaints

Complaints involving violations

Subject of complaint/product type
Number
Total
Discrimination alleged
Real estate loans
Credit cards
Other loans
Nondiscrimination complaints
Checking accounts
Real estate loans
Credit cards
Other

In 77 percent of investigated complaints against Federal Reserve regulated entities, evidence revealed that
institutions correctly handled the situation. Of the
remaining 23 percent of investigated complaints,
4 percent were identified errors that were corrected
by the bank, 2 percent were deemed violations of law,
and the remainder included matters involving litigation or factual disputes, withdrawn complaints, internally referred complaints, or information was provided to the consumer.
Complaints about Unregulated Practices
The Board continued to monitor complaints about
banking practices not subject to existing regulations.
In 2017, the Board received 1,376 complaints against
Federal Reserve regulated entities that involved these
unregulated practices. The majority of the complaints were related to electronic transactions/prepaid
products (33 percent), checking account activity
(21 percent), credit cards (17 percent), and real estate
loans (3 percent).
Complaint Referrals
In 2017, the Federal Reserve forwarded 7,290 complaints to other regulatory agencies and government
offices for investigation. To minimize the time
required to re-route complaints to these agencies,
referrals were transmitted electronically.
The Federal Reserve forwarded 19 complaints to the
Department of Housing and Urban Development
(HUD) that alleged violations of the Fair Housing
Act24 and were closed in 2017. The Federal Reserve’s

24

A memorandum of understanding between HUD and the federal bank regulatory agencies requires that complaints alleging a
violation of the Fair Housing Act be forwarded to HUD.

1,229

Percent
100

Number

Percent

30

2.4

18
1
7

1.4
0.1
0.6

2
0
0

0.2
0.0
0.0

243
74
654
232

19.8
6.0
53.2
18.9

12
5
3
8

0.9
0.4
0.2
0.7

investigation of these complaints revealed no
instances of illegal credit discrimination.
Consumer Inquiries

The Federal Reserve received 20,153 consumer inquiries in 2017 covering a wide range of topics. Consumers were typically directed to other resources, including other federal agencies or written materials, to
address their inquiries.

Consumer Laws and Regulations
Throughout 2017, DCCA continued to administer
the Board’s regulatory responsibilities with respect to
certain entities and specific statutory provisions of
the consumer financial services and fair lending laws.
This included drafting regulations and issuing compliance guidance for the industry and the Reserve
Banks and fulfilling the division’s role in consulting
with the CFPB on consumer financial services and
fair lending regulations for which it has rulemaking
responsibility.

Conforming CRA Regulations to
HMDA Regulation
In December, the federal bank regulatory agencies
amended their respective CRA regulations primarily
to conform to changes made by the CFPB to Regulation C, which implements the Home Mortgage Disclosure Act.
In addition, the final rule contains technical corrections and removed obsolete references to the Neighborhood Stabilization Program.

86

104th Annual Report | 2017

The agencies’ CRA regulations specify the type of
lending and other activities that examiners evaluate
to assess a financial institution’s CRA performance.
The regulations provide several categories of loans
that may be evaluated to determine an institution’s
performance under the retail lending test, one of
which is home mortgage loans.
Since 1995, the Board, the FDIC, and the OCC have
conformed certain definitions in their respective
CRA regulations to the scope of loans reported
under the HMDA rules. The agencies believe that
continuing to do so produces a less burdensome
CRA performance evaluation process. Accordingly,
based on changes the CFPB recently made to the
HMDA rules, the agencies amended their CRA regulations to revise the definitions of “home mortgage
loan” and “consumer loan” as well as the public file
content requirements.25 These revisions maintain
consistency between the agencies’ CRA regulations
and the CFPB’s amendments that become effective
on January 1, 2018.
Previously, the CRA regulations defined a “home
mortgage loan” to mean a “home improvement
loan,” “home purchase loan,” or a “refinancing” as
those terms are currently defined in the HMDA regulation. The CFPB’s revisions to Regulation C revise
the scope of loans reportable under HMDA. In some
cases, the revised scope of loans reported under
Regulation C is broader, and in other cases more limited. For example, the revised HMDA rules now
require covered financial institutions to report applications for, and originations and purchases of, an
open-end line of credit secured by a dwelling. However, home improvement loans that are not secured
by a dwelling, which were previously required to be
reported under HMDA, are no longer reportable
transactions under the revised Regulation C.
To conform the CRA definition of “home mortgage
loan” to the revisions in Regulation C that became
effective on January 1, 2018, the agencies revised the
current definition of “home mortgage loan” in their
CRA regulations to mean a “closed-end mortgage
loan” or an “open-end line of credit,” as those terms
are defined under the new HMDA regulation. As a
result of the revisions to the “home mortgage loan”
definition, the manner in which some loan transactions are considered under CRA will be affected.

Annual Indexing of Exempt Consumer
Credit and Lease Transactions
In November 2017, the Board and the CFPB
announced the revised dollar thresholds in Regulation Z (Truth in Lending) and Regulation M (Consumer Leasing) that will apply in 2018 for determining exempt consumer credit and lease transactions.
These thresholds are set pursuant to statutory
changes enacted by the Dodd-Frank Wall Street
Reform and Consumer Protection Act that require
adjusting these thresholds annually based on the
annual percentage increase in the Consumer Price
Index for Urban Wage Earners and Clerical Workers
(CPI-W). Transactions at or below the thresholds are
subject to the protections of the regulations.26

Threshold for Small Loan Exemption from
Appraisal Requirements for Higher-Priced
Mortgage Loans
In November, the Board, the CFPB, and the OCC
announced that the threshold for exempting loans
from special appraisal requirements for higher-priced
mortgage loans would increase for 2018.27 The
Dodd-Frank Act amended the Truth in Lending Act
to add special appraisal requirements for higherpriced mortgage loans, including a requirement that
creditors obtain a written appraisal based on a physical visit to the home’s interior before making a
higher-priced mortgage loan. The rules implementing
these requirements contain an exemption for loans of
$25,000 or less and also provide that the exemption
threshold will be adjusted annually to reflect
increases in the CPI-W.

Annual Adjustment to CRA Asset-Size
Threshold for Small and Intermediate
Small Institutions
In addition, in December the Board and other federal
bank regulatory agencies announced the annual
adjustment to the asset-size thresholds used to define
small bank, small savings association, intermediate
small bank, and intermediate small savings association under the CRA regulations.28

26

27

25

For more information, see www.federalreserve.gov/newsevents/
pressreleases/bcreg20171120a.htm.

28

For more information, see www.federalreserve.gov/newsevents/
pressreleases/bcreg20171108a.htm.
For more information, see www.federalreserve.gov/newsevents/
pressreleases/bcreg20171120b.htm.
For more information , see www.federalreserve.gov/newsevents/
pressreleases/bcreg20171221a.htm.

Consumer and Community Affairs

Financial institutions are evaluated under different
CRA examination procedures based upon their assetsize classification. Those meeting the small and intermediate small institution asset-size thresholds are not
subject to the reporting requirements applicable to
large banks and savings associations unless they
choose to be evaluated as a large institution.
Annual adjustments to these asset-size thresholds are
based on the change in the average of the CPI-W, not
seasonally adjusted, for each 12-month period ending
in November, with rounding to the nearest million.
As a result of the 2.11 percent increase in the CPI-W
for the period ending in November 2017, the definitions of small and intermediate small institutions for
CRA examinations were changed as follows:
• “Small bank” or “small savings association” means
an institution that, as of December 31 of either of
the prior two calendar years, had assets of less than
$1.252 billion.
• “Intermediate small bank” or “intermediate small
savings association” means a small institution with
assets of at least $313 million as of December 31 of
both of the prior two calendar years and less than
$1.252 billion as of December 31 of either of the
prior two calendar years.
These asset-size threshold adjustments took effect
January 1, 2018.

Updates to Consumer Compliance
Regulations
In December, the Board announced the repeal of one
regulation and the revision of a second to reflect the
transfer of certain consumer protection rulemaking
authority to the CFPB.29
With the CFPB issuing final rules to implement the
Home Mortgage Disclosure Act, the Board published a final rule to repeal its Regulation C. In addition, the Board published a proposal to revise its
Regulation M, which implements the Consumer
Leasing Act (CLA), to reflect changes in the coverage
of the Board’s rule under the Dodd-Frank Act.
Prior to enactment of the Dodd-Frank Act, the CLA
was implemented solely by the Board’s Regulation M, which applied to all types of lessors. Rulemaking authority for the CLA currently rests with
29

For more information, see www.federalreserve.gov/newsevents/
pressreleases/bcreg20171218a.htm.

87

the CFPB, with the exception of rules applicable to
certain motor vehicle dealers. The proposed amendments to the Board’s Regulation M would clarify the
scope of the Board’s rule, which applies only to lessors that are excluded under the Dodd-Frank Act
from coverage by the CFPB’s leasing regulation.

Consumer Research and Analysis of
Emerging Issues and Policy
Throughout 2017, DCCA analyzed emerging issues
in consumer financial services policies and practices
in order to understand their implications for the
market-risk surveillance and supervisory policies that
are core to the Federal Reserve’s functions as well as
to gain insight into consumer financial
decisionmaking.

Researching Issues Affecting Consumers
and Communities
In 2017, DCCA explored various issues related to
consumers and communities by convening experts,
conducting original research, and fielding surveys.
The information gleaned from these undertakings
provided insights into the factors affecting consumers
and households.
Household Economics and Decisionmaking
In order to better understand consumer decisionmaking in the rapidly evolving financial services sector, DCCA periodically conducts internet panel surveys to gather data on consumers’ experiences and
perspectives on various issues of interest.
Results of DCCA’s Survey of Household Economics
and Decisionmaking (SHED) were published in the
Report on the Economic Well-Being of U.S. Households in 2016, released in May 2017.30 DCCA
launched the survey to better understand consumer
decisionmaking in the wake of the Great Recession,
with the aim to capture a snapshot of the financial
and economic well-being of U.S. households. In
doing so, the SHED collects information on households that is not readily available from other sources
or is not available in combination with other variables of interest. It also oversamples LMI households
in order to obtain additional precision regarding
findings among these populations.

30

For more information, see www.federalreserve.gov/
consumerscommunities/shed.htm.

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104th Annual Report | 2017

The survey also asked respondents about specific
aspects of their financial lives, including the following areas:
• employment and informal work
• income and savings
• economic preparedness

staff as well as external researchers. The presentations and discussion examined disparities in unemployment, earnings, and other labor market outcomes by race/ethnicity, gender, culture, and geography and provided insights on factors contributing to
these gaps.

Analysis of Emerging Issues

• banking and credit
• housing and living arrangements
• education and human capital
• education debt and student loans
• retirement
Among its key findings, the survey found that overall
in 2016, individuals and their families continued to
express modest improvements in their overall wellbeing relative to that seen in recent years. However,
those with more education appear to have driven
most of the observed gains in well-being relative to
the previous year. Seventy percent of adults reported
that they were either “living comfortably” or “doing
okay,” compared to 69 percent in 2015 and 62 percent in 2013. However, approximately 73 million
adults in 2016 were either “finding it difficult to get
by” or are “just getting by financially.” Income volatility remains a concern for individuals, especially
those with less education and among racial and ethnic minorities. Forty-four percent of adults said they
could not cover an emergency expense costing $400,
or would cover it by selling something or borrowing
money. This metric has continued to improve from
the 50 percent who were ill-prepared for this magnitude of expense when first asked in 2013.
Understanding Disparities in the Labor Market
Labor market outcomes vary widely across demographic groups, including those defined by race/
ethnicity, gender, and geography. Accordingly, economic analyses that focus exclusively on aggregate
outcomes may overlook important disparities in how
various groups experience the labor market. In September 2017, the Board hosted a conference that
brought together diverse networks of researchers and
policy analysts to examine the causes of these disparities, to explore the implications for aggregate economic performance, and to brainstorm new directions for research and policy.31 The papers presented
included research from both Federal Reserve System
31

For more information, see www.federalreserve.gov/conferences/
disparities-in-the-labor-market-about-2017.htm. For remarks
provided by Federal Reserve Board Governor Lael Brainard, see

The Policy Analysis function of DCCA provides key
insights, information, and analysis on emerging
financial services issues that affect the well-being of
consumers and communities. To this end, staff analyze and anticipate trends, form working groups, and
organize expert roundtables to identify emerging consumer risks and inform supervision, research, and
policy.
In 2017, staff developed analyses on a broad range of
issues in financial services markets that potentially
pose risks to consumers.
• Auto lending. Staff have continued explorations of
developments in the auto finance market and their
impact on consumers, especially subprime auto
borrowers. Topics of particular focus in 2017
included trends in loan terms, such as loan-to-value
ratios and loan maturities, and their relationship to
loan performance among various categories of
borrowers.
• Gender wealth gap. DCCA’s ongoing efforts to better understand household financial stresses and
well-being was augmented in 2017 through the
exploration of gender wealth disparities with
researchers and practitioners in the field. This
work, which will continue in the coming year, aims
to shed light on economic factors contributing to
gaps in income and wealth levels by gender.
• Retail banking. Policy Analysis team members have
been collaborating with colleagues throughout the
division to monitor trends in retail banking, such
as rising numbers of branch closures and increasing adoption of online and mobile technologies by
consumers for their banking needs. As part of an
ongoing effort, over the past year, the team has
organized listening sessions with consumer groups
to better understand how branch closures are
affecting consumers and communities.
• Small business lending. Smaller firms’ access to
affordable credit is of particular interest to DCCA
because the finances of these businesses and their
www.federalreserve.gov/newsevents/speech/brainard20170927a
.htm.

Consumer and Community Affairs

owners frequently are intertwined. They often lack
both the financing options available to larger firms
and in-house financial expertise to guide their
credit decisions. DCCA has been exploring how
changes in the small business credit landscape
affect these smaller firms. Issues analyzed by the
team range from trends in commercial credit provided by large and small banks, to new online
credit products offered by nonbanks, and to financial challenges facing certain segments of potential
borrowers, including minority- and women-owned
small businesses. The team also conducts extensive
outreach with banks, online lenders, and borrower
advocates to stay abreast of developments and
emerging issues in both traditional and online small
business small-dollar credit.
• Student lending. In 2017, the team collaborated
with the Trellis Company (formerly Texas Student
Loan Guarantee Corporation) and the National
Association of Student Financial Aid Administrators to conduct an in-depth survey of and report
about financial aid administrators’ experiences
with student loan counseling and the challenges
they encounter.32 This work expanded on findings
from a 2016 report based on focus groups conducted with financial aid counselors.33 Key findings from both reports include that counselors generally perceive low levels of financial literacy
among the majority of their students; that aid
administrators overwhelmingly rely on the U.S.
Department of Education’s online counseling tool
to provide mandatory entrance and exit loan counseling; and that better-resourced financial aid
offices are more likely to proactively reach out to
targeted groups of students that they believe are at
highest risk of struggling to repay their student
loans.

Community Development
The Federal Reserve System’s Community Development function promotes economic growth and financial stability—particularly for underserved house32

33

Jeff Webster, Chris Fernandez, Carla Fletcher, and Kasey
Klepfer, Engaging Student Borrowers: Results of a Survey of
Financial Aid Professionals (Round Rock, TX: Trellis Company,
October 2017), www.trelliscompany.org/wp-content/uploads/
2017/11/Engaging-Student-Borrowers.pdf.
Board of Governors of the Federal Reserve System, Student
Loan Counseling Challenges and Opportunities: Findings from
Focus Groups with Financial Aid Counselors (Washington: Board
of Governors, November 2016), www.federalreserve.gov/
consumerscommunities/files/student-loan-counselingchallenges-and-opportunities-2016.pdf.

89

holds and communities—by informing research,
policy, and action. As a decentralized function,
the Community Affairs Officers at each of the
12 Reserve Banks design activities to respond to the
specific needs of the communities they serve. Board
staff provide oversight for alignment with Board
objectives and coordinate System priorities. The
System’s Community Development functions routinely collaborate to leverage expertise and resources
to support research and best practices that advance
community economic development—most notably,
the biennial research conference. For more information, see box 1.

Exploring Opportunities for Economic
Growth through Regional Food Systems
Investments
Building on its efforts to better understand the economic and financial conditions in rural communities,
Community Development staff across the Federal
Reserve explored the connection between the
strength of regional food systems and a community’s
economic, social, and physical vitality. In partnership
with the U.S. Department of Agriculture, the Federal
Reserve published Harvesting Opportunity: The
Power of Regional Food System Investments to Transform Communities. The book highlights ways in
which regionally focused food systems promote economic opportunity and security as well as how capital providers and other partners are working together
to invest in the sector. Additionally, the Federal
Reserve collaborated with stakeholders from across
the country to further conversations in their communities about how the findings in Harvesting Opportunity can advance local efforts to promote regional
food systems.
Community Development staff will continue to
convene national thought leaders to frame future
research and policy considerations that would facilitate the flow of capital and economic investment in
rural communities in 2018.

Supporting Rising Community Leaders
A key purpose of the Community Development
function at the Federal Reserve is to ensure that the
voices and concerns of consumers and communities
are represented at the U.S. central bank. An important part of achieving the function’s mission is ensuring that the Federal Reserve hears the perspectives of
representatives from both new and well-established
organizations. To that end, the Community Develop-

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104th Annual Report | 2017

Box 1. Supporting Strong Foundations for Kids and Communities
Every two years, the Board and the 12 Federal
Reserve Banks collaborate to host the Federal
Reserve System Community Development Research
Conference. The goal of this multidisciplinary event
is to advance research that explores important
socioeconomic issues. These conferences convene
researchers, policymakers, and practitioners across
sectors to consider important issues that low- to
moderate-income people and communities face,
exploring the latest research to inform effective strategies to advance opportunity for economically vulnerable households and areas.
In 2017, the System hosted the 10th conference of
this biennial event, “Strong Foundations: The Economic Futures of Kids and Communities,” which was
based on evidence that shows kids with strong cognitive and social foundations are better-equipped to
succeed in life and contribute to society at large.1
Recognizing that not all children have the same
opportunities to grow and develop, the conference
organizers sought to create a forum to spark a dialogue among researchers, policymakers, and community practitioners on how to set young people on
a strong course.2
1

2

For more information, including agenda, research papers, and
media coverage, see https://minneapolisfed.org/community/tenthbiennial-federal-reserve-system-community-developmentresearch-conference.
See www.federalreserve.gov/newsevents/pressreleases/
other20170321a.htm.

ment units at the Board and the 12 Reserve Banks
have hosted nearly 100 rising community leaders
since 2013 as part of the Community Leaders Forum
(CLF). The goals of the forum are to (1) strengthen
the community development field through peer-topeer learning that promotes applied research and
innovative community strategies and (2) from those
directly involved, improve the Federal Reserve’s
understanding of and response to emerging trends
and their impact on consumers and communities,
particularly those that are traditionally underserved.
In November 2017, the Board and the Federal
Reserve Bank of Dallas hosted a CLF meeting that

The event explored the interplay between the development of kids and their communities, with an
understanding that factors such as safe, affordable
housing; community facilities; and job opportunities
profoundly affect key economic and social aspects
of kids’ lives and their future economic success. In
dialogue with policymakers and community practitioners, researchers from around the country presented their work on early childhood development
and community conditions that influence social and
economic outcomes later in life, including educational and workforce outcomes. Discussions delved
into the relationship between the development of
children and community conditions and the effect of
investments in early childhood education and other
key community development areas on the economy.
The research shared expanded the base of studies
intending to inform questions about key drivers to
success, differences across subpopulations, scalable intervention strategies, and policy
considerations.
Featured speakers included Federal Reserve Chair
Janet Yellen,3 Federal Reserve Bank of Minneapolis
President Neel Kashkari, Federal Reserve Bank of
Chicago President Charles Evans, and Harlem Children’s Zone founder Geoffrey Canada.

3

See www.federalreserve.gov/newsevents/speech/
yellen20170323a.htm.

reunited the six cohorts of community leaders from
all 12 Reserve Banks. The main goal of the meeting
was to support CLF members to increase their influence and impact in local communities. For example,
the Federal Reserve Bank of Dallas hosted a workshop entitled “Casting a Vision and Aligning Your
Priorities.” Though most of the participants had not
met prior to Dallas, by the end of two days together,
they set in motion a virtual network that intends to
collectively address complex community problems
across Reserve Bank districts.

91

6

Federal Reserve Banks

The Federal Reserve Banks provide payment services
to depository and certain other institutions, distribute
the nation’s currency and coin to depository institutions, and serve as fiscal agents and depositories for
the U.S. government and other entities. The Reserve
Banks also contribute to setting national monetary
policy and supervision of banks and other financial
entities operating in the United States (discussed in
sections 2 through 4 of this annual report).

Federal Reserve Priced Services
Reserve Banks provide a range of payment and
related services to depository and certain other institutions; these “priced services” include collecting
checks, operating an automated clearinghouse
(ACH) service, transferring funds and securities, and
providing a multilateral settlement service.1
The Reserve Banks have been engaged in a number
of multiyear technology initiatives that will modernize their priced-services processing platforms. These
investments are expected to enhance efficiency, the
overall quality of operations, and the Reserve Banks’
ability to offer additional services, consistent with the
longstanding principles of fostering efficiency and
safety, to depository institutions. The Reserve Banks
continued to enhance the resiliency and information
security posture of the Fedwire Funds, National
Settlement Service, and Fedwire Securities Service
through the Fedwire Resiliency Program, a multiyear
initiative to respond to environmental threats and
cyberthreats. The Reserve Banks are also developing
and planning to implement a new FedACHprocessing platform to improve the efficiency and
reliability of their current FedACH operations. In
September 2017, the Reserve Banks implemented the
second of three phases of the SameDay ACH service
in support of a National Automated Clearing House
Association (NACHA) operating rule change; the
1

The ACH enables depository institutions and their customers to
process large volumes of payments through electronic batch
processes.

new SameDay ACH service enhances the existing
Reserve Bank SameDay ACH product by enabling
time-critical payments via the ACH network and
improving the availability of funds to end users. The
most recent phase enabled same-day ACH debits for
payments such as mortgage and utility payments.2

Cost Recovery
The Monetary Control Act of 1980 requires that the
Federal Reserve establish fees for priced services to
recover, over the long run, all direct and indirect costs
actually incurred as well as the imputed costs that
would have been incurred—including financing costs,
taxes, and certain other expenses—and the return on
equity (profit) that would have been earned if a private business firm had provided the services.3 The
imputed costs and imputed profit are collectively
referred to as the private-sector adjustment factor
(PSAF). From 2008 through 2017, the Reserve Banks
recovered 101.9 percent of the total priced services
costs, including the PSAF (see table 1).4
In 2017, Reserve Banks recovered 104.1 percent of
the total priced services costs, including the PSAF.5

2

3

4

5

The first phase of same-day ACH was implemented in September 2016 and enabled same-day ACH credits for payments, such
as direct deposit of payroll, social security benefits, and tax
refunds.
Depository Institutions Deregulation and Monetary Control
Act, Pub. L. No. 96-221, 94 Stat. 132 (1980). Financial data
reported throughout this section—including revenue, other
income, costs, income before taxes, and net income—will reference the “Pro Forma Financial Statements for Federal Reserve
Priced Services” at the end of this section.
According to the Accounting Standards Codification (ASC)
Topic 715 (ASC 715), Compensation–Retirement Benefits, the
Reserve Banks recognized a $628.1 million reduction in equity
related to the priced services’ benefit plans through 2017.
Including this reduction in equity, which represents a decline in
economic value, results in cost recovery of 94.7 percent for the
10-year period. For details on how implementing ASC 715
affected the pro forma financial statements, refer to note 3 to the
pro forma financial statements at the end of this section.
Total cost is the sum of operating expenses, imputed costs
(income taxes, interest on debt, interest on float, and sales
taxes), and the targeted return on equity.

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104th Annual Report | 2017

Table 1. Priced services cost recovery, 2008–17
Millions of dollars, except as noted
Year
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2008–17

Revenue from services1

Operating expenses and
imputed costs2

Targeted return on equity3

Total costs

Cost recovery (percent)4

873.8
675.4
574.7
478.6
449.8
441.3
433.1
429.1
434.1
441.6
5,231.6

820.4
707.5
532.8
444.4
423.0
409.3
418.7
397.8
410.5
419.4
4,983.9

66.5
19.9
13.1
16.8
8.9
4.2
5.5
5.6
4.1
4.6
149.2

886.9
727.5
545.9
461.2
432.0
413.5
424.1
403.4
414.7
424.0
5,133.2

98.5
92.8
105.3
103.8
104.1
106.7
102.1
106.4
104.7
104.1
101.9

Note: Here and elsewhere in this section, components may not sum to totals or yield percentages shown because of rounding.
1
For the 10-year period, includes revenue from services of $5,108.6 million and other income and expense (net) of $123.0 million.
2
For the 10-year period, includes operating expenses of $4,831.7 million, imputed costs of $43.8 million, and imputed income taxes of $108.4 million.
3
From 2009 to 2012, the PSAF was adjusted to reflect the actual clearing balance levels maintained; previously, the PSAF had been calculated based on a projection of
clearing balance levels.
4
Revenue from services divided by total costs. For the 10-year period, cost recovery is 94.7 percent, including the effect of accumulated other comprehensive income (AOCI)
reported by the priced services under ASC 715. For details on changes to the estimation of priced services AOCI and their effect on the pro forma financial statements, refer
to note 3 to the “Pro Forma Financial Statements for Federal Reserve Priced Services” at the end of this section.

The Reserve Banks’ operating expenses and imputed
costs totaled $419.4 million. Revenue from operations totaled $441.6 million, resulting in net income
from priced services of $22.2 million. The commercial check-collection service, the Fedwire Funds and
National Settlement Services, and the Fedwire Securities Service achieved full cost recovery; however, the
FedACH Service did not achieve full cost recovery
because of investment costs associated with the
multiyear technology initiative to modernize its processing platform.

Commercial Check-Collection Service
The commercial check-collection service provides a
suite of electronic and paper processing options for
forward and return collections. In 2017, the Reserve
Banks recovered 107.0 percent of the total costs of
their commercial check-collection service, including
the related PSAF. Revenue from operations totaled
$142.0 million, resulting in net income of $10.7 million. The Reserve Banks’ operating expenses and
imputed costs totaled $131.3 million. Reserve Banks
handled 5.2 billion checks in 2017, a decrease of
1.7 percent from 2016 (see table 2). The average daily
value of checks collected by the Reserve Banks in
2017 was approximately $33.8 billion, a decrease of
5.0 percent from the previous year.

Commercial Automated Clearinghouse
Service
The commercial ACH service provides domestic and
cross-border batched payment options for same-day
and next-day settlement. In 2017, the Reserve Banks
recovered 99.8 percent of the total costs of their commercial ACH services, including the related PSAF.
Revenue from operations totaled $141.3 million,
resulting in a net income of $1.3 million. The Reserve
Banks’ operating expenses and imputed costs totaled
$140.0 million. The Reserve Banks processed
13.7 billion commercial ACH transactions in 2017,
an increase of 6.1 percent from 2016 (see table 2).
The average daily value of FedACH transfers in 2017
was approximately $93.6 billion, an increase of
8.0 percent from the previous year.

Fedwire Funds and National Settlement
Services
In 2017, the Reserve Banks recovered 106.2 percent
of the costs of their Fedwire Funds and National
Settlement Services, including the related PSAF. Revenue from operations totaled $129.7 million, resulting
in a net income of $8.9 million. The Reserve Banks’
operating expenses and imputed costs totaled
$120.8 million in 2017.

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93

Table 2. Activity in Federal Reserve priced services, 2015–17
Thousands of items, except as noted
Percent change
Service

Commercial check
Commercial ACH
Fedwire funds transfer
National settlement
Fedwire securities

2017

5,152,521
13,749,249
156,788
517
3,465

2016

2015

5,241,286
12,960,346
151,899
501
3,881

5,452,369
12,298,307
146,006
508
4,218

2016 to 2017

2015 to 2016

-1.7
6.1
3.1
3.3
-10.7

-3.9
5.4
4
-1.4
-8

Note: Activity in commercial check is the total number of commercial checks collected, including processed and fine-sort items; in commercial ACH, the total number of
commercial items processed; in Fedwire funds transfer and securities transfer, the number of transactions originated online and offline; and in national settlement, the number
of settlement entries processed.

Fedwire Funds Service
The Fedwire Funds Service allows its participants to
send or receive domestic time-critical payments using
their balances at Reserve Banks to transfer funds in
real time. From 2016 to 2017, the number of Fedwire
funds transfers originated by depository institutions
increased 3.1 percent, to approximately 157 million
(see table 2). The average daily value of Fedwire
funds transfers in 2017 was $2.9 trillion, a decrease of
3.5 percent from the previous year.
National Settlement Service
The National Settlement Service is a multilateral
settlement system that allows participants in privatesector clearing arrangements to settle transactions
using their balances at Reserve Banks. In 2017, the
service processed settlement files for 12 local and
national private-sector arrangements. The Reserve
Banks processed 8,243 files that contained about
517,000 settlement entries for these arrangements in
2017 (see table 2). Settlement file activity in 2017
decreased 1.0 percent, and settlement entries
increased 3.3 percent.

Fedwire Securities Service
The Fedwire Securities Service allows its participants
to transfer electronically to other service participants
certain securities issued by the U.S. Treasury Department, federal government agencies, governmentsponsored enterprises, and certain international organizations.6 In 2017, the Reserve Banks recovered
103.6 percent of the costs of their Fedwire Securities
6

The expenses, revenues, volumes, and fees reported here are for
transfers of securities issued by federal government agencies,
government-sponsored enterprises, and certain international
organizations. Reserve Banks provide Treasury securities services in their role as Treasury’s fiscal agent. These services are

Service, including the related PSAF. Revenue from
operations totaled $28.6 million, resulting in a net
income of $1.3 million. The Reserve Banks’ operating expenses and imputed costs totaled $27.3 million
in 2017. In 2017, the number of non-Treasury securities transfers processed via the service decreased
10.7 percent from 2016, to approximately 3.5 million
(see table 2). The average daily value of Fedwire
Securities transfers in 2017 was approximately
$1.2 trillion, an increase of 4.4 percent from the previous year.

Float
In 2017, the Reserve Banks had daily average credit
float of $379.3 million, compared with daily average
credit float of $334.4 million in 2016.7

Currency and Coin
The Federal Reserve Board issues the nation’s currency (in the form of Federal Reserve notes) to
28 Federal Reserve Bank offices. The Reserve Banks,
in turn, distribute Federal Reserve notes to depository institutions in response to public demand. The
Reserve Banks also distribute coin to depository
institutions on behalf of the U.S. Department of the
Treasury’s Mint.8 Together, the Board and Reserve

7

8

not considered priced services. For details, see “Treasury Securities Services” later in this section.
Credit float occurs when the Reserve Banks debit the paying
bank for checks and other items prior to providing credit to the
depositing bank.
The Federal Reserve Board is the issuing authority for Federal
Reserve notes, whereas the United States Mint, a bureau of the
U.S. Department of the Treasury, is the issuing authority for
coin.

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104th Annual Report | 2017

Box 1. Improving the U.S. Payment System
The Federal Reserve plays many roles in the payment system, including payment system operator,
supervisor of financial institutions and systemically
important financial market utilities, regulator,
researcher, and catalyst for improvement. Acting primarily in its catalyst role, the Federal Reserve
encouraged payment stakeholders to join together
to improve the payment system in the United States
in its Strategies for Improving the U.S. Payment
System (Strategies) paper, issued in January 2015.
The strategies outlined in the paper included the
creation of a task force focused on faster payments
and another on payment security, both of which provided forums for a diverse group of industry participants to collaborate.
The strategies and tactics included in the Strategies
paper represented the first steps in the payment
improvement journey. Many are substantially under
way or nearing completion, and some have been
completed. In 2017, the Faster Payments Task
Force (FPTF) released a two-part final report outlining recommended industry actions to support the
goal of all end users’ being able to receive faster
payments by 2020. The report also provides an
overview of 16 proposals developed by FPTF members for implementing faster payments in the United
States, including the results of an independent
assessment of those proposals. Over the course of
the year, the Secure Payments Task Force continued to address the industry’s most pressing payment system security issues: identity management,
data protection, and fraud and risk information
sharing.
Following up on the work of the task forces and
other efforts outlined in the Strategies paper, the
Federal Reserve published a paper in September 2017 that presented refreshed strategies and

Banks work to maintain the integrity of and confidence in Federal Reserve notes. In 2017, the Board
paid Treasury’s Bureau of Engraving and Printing
(BEP) $673.9 million for costs associated with the
production of 6.6 billion Federal Reserve notes.
The volume of Federal Reserve notes in circulation at
year-end 2017 totaled 41.6 billion pieces, a 4.7 percent increase from 2016. More than half of this
growth was attributable to growth in demand for
$100 notes, and an additional 34 percent was attributable to growth in demand for $1 and $20 notes. In
2017, the Reserve Banks distributed 37.0 billion Federal Reserve notes into circulation, a 2.0 percent
increase from 2016, and received 35.2 billion Federal

tactics for improving the speed, safety, and efficiency of the U.S. payment system in collaboration
with payment system stakeholders. Many of these
refreshed strategies are currently being implemented. Consistent with the FPTF’s recommendations, the industry’s faster payments Governance
Framework Formation Team was established in the
summer of 2017, with Federal Reserve support. At
the end of 2017, the Federal Reserve initiated a
strategic assessment of its settlement services for
the long-term benefit of the U.S. payment system.
As part of this assessment, the Federal Reserve is
exploring options to support interbank settlement of
real-time retail payments, including 24x7x365 realtime settlement functionality. The Federal Reserve
has also begun to explore and assess the need, if
any, for Federal Reserve engagement as a service
provider, beyond providing settlement services, in
the faster payment ecosystem. With respect to payment security, the Federal Reserve took initial steps
toward conducting a study that is designed to inform
industry security-improvement efforts.1
The Federal Reserve’s FedPayments Improvement
website (https://fedpaymentsimprovement.org/) hosts
a FedPayments Improvement Community that
enables interested parties to stay informed and to
engage in an exchange of information pertaining to
the Federal Reserve’s efforts to improve the U.S.
payment system.
1

The Federal Reserve announced plans in early 2018 to transition its industry engagement from the task force model to an
approach that will provide greater flexibility for stakeholders to
engage in the ongoing payment security initiatives. As part of
this transition, the Secure Payments Task Force concluded its
efforts in March 2018, following publication of its final deliverables. Later in 2018, the Federal Reserve expects to initiate new
collaborative industry work groups, informed by its planned
security study.

Reserve notes from circulation, a 1.4 percent increase
from 2016.
The value of Federal Reserve notes in circulation at
year-end 2017 totaled $1,571 billion, a 7.4 percent
increase from 2016. The year-over-year increase is
attributable largely to increased demand for $100
notes. The Board estimates that at least one-half of
the value of Federal Reserve notes in circulation is
held abroad, mainly as a store of value.
In addition, the Reserve Banks distributed 73.4 billion coins into circulation and received 58.2 billion
coins from circulation, which is relatively unchanged
from 2016.

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95

U.S. Currency Education Program

Other Improvements and Efforts

The U.S. Currency Education Program (CEP) is an
interagency program managed by the Board in partnership with the United States Secret Service and the
BEP. The CEP is responsible for providing users of
U.S. currency around the world with access to education, training, and information about all designs of
Federal Reserve notes.

During 2017, the Reserve Banks completed implementation of a new cash automation platform (CashForward) to replace legacy software applications,
automate business concepts and processes, and
employ technologies to meet the cash business’s current and future needs more cost effectively. The new
cash platform will facilitate business continuity and
contingency planning and enhance the support provided to Reserve Bank customers. The Federal
Reserve also has initiated a program to replace the
aging high-speed currency processing equipment at
all Reserve Banks by 2026. In 2017, the Federal
Reserve engaged with two vendors to build prototype
machines by 2020, at which point one vendor will be
selected for the development and implementation of
the new production machine.

In 2017, the CEP introduced three new educational
materials in hard copy and added two new animated
videos and one podcast series to the resources available to the global public on uscurrency.gov. The CEP
also carried out training and outreach programs in
the United States, Vietnam, and Malaysia, helping to
educate cash handlers on how to authenticate genuine U.S. currency and how to report suspected counterfeit notes.

The Board and the BEP continued to build on the
improved quality assurance processes established to

Box 2. Developments in Financial Technology
As part of its core objective to foster the safety and
efficiency of the payment system and to promote
financial stability, the Federal Reserve has a public
policy interest in understanding and monitoring the
development of innovations that could affect the
structural design and functioning of financial markets. In general, the Federal Reserve views developments in financial technology through the lens of
our long-standing public policy goals of (1) safety
and soundness of financial institutions, (2) safety
and efficiency for the payment system, (3) financial
stability and monetary policy more broadly, and
(4) an innovative financial system that provides
widely shared benefits to the public over time.
Over the past several years, Federal Reserve staff
has worked to fulfill these public policy goals by
monitoring technological developments and conducting research and communicating with the industry in
an effort to understand better the technologies
behind the innovations, potential use cases, benefits, and relevant risks. In 2017, the Federal
Reserve engaged with the industry and other central
banks on developments in financial technology,
such as distributed ledger and digital currencies.
Specifically, Federal Reserve staff participated in
international efforts to understand the implications of
distributed ledger technology in payments, clearing,
and settlement. In February 2017, the Committee on
Payments and Market Infrastructures issued a report

on distributed ledger technology that provides an
analytical framework for central banks as they
review and analyze the use of distributed ledger
technology for payment, clearing, and settlement.1
In addition, Board members have spoken repeatedly
and publicly on innovation in the payment system
and the ways the financial industry may use distributed ledger technology and digital currencies,
among other technologies. They also discussed the
hurdles to broad adoption of new financial technologies and emphasized the importance of maintaining
confidence in the payment system during a period of
rapid change.2
Overall, the Federal Reserve’s work over the past
year highlighted the importance of being open to
innovative technologies and, where appropriate, fostering their development while at the same time
remaining focused on the Board’s traditional public
policy objectives with respect to the payment
system.
1

2

Committee on Payments and Market Infrastructures, “Distributed
ledger technology in payment, clearing and settlement,” Bank for
International Settlements, February 2017, available at: https://
www.bis.org/cpmi/publ/d157.pdf.
See, for example: https://www.federalreserve.gov/newsevents/
speech/powell20170303a.htm, https://www.federalreserve.gov/
newsevents/speech/powell20171018a.htm, https://www
.federalreserve.gov/newsevents/speech/brainard20171116a.htm,
https://www.federalreserve.gov/newsevents/speech/
quarles20171130a.htm.

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104th Annual Report | 2017

date at the BEP. The BEP continued to reclaim $100
notes using single-note inspection equipment and
also began to reclaim $20 notes.9 In addition, the
Board and BEP continued to implement a long-term
capital equipment replacement strategy to modernize
and replace aging production equipment at the BEP
that has exceeded its useful life, and thus to improve
production efficiency and reduce spoilage. As part of
this plan, the BEP purchased six new intaglio printing presses and three finishing presses, which it
expects will be installed and operational in 2018 and
2019, respectively.
The Board also engaged in a range of work to support its role as issuing authority. This included
research and development to improve potential new
security features and optical inspection for Federal
Reserve notes. The Board also began efforts to conduct cognitive and perception studies to better understand how users authenticate and handle notes and
built an in-house laboratory to facilitate adversarial
analysis to better understand counterfeiting threats.
In addition, the Board worked with the BEP and
design consultants to accelerate the next family of
Federal Reserve notes.

Fiscal Agency and Government
Depository Services
As fiscal agents and depositories for the federal government, the Reserve Banks auction Treasury securities, process electronic and check payments for Treasury, collect funds owed to the federal government,
maintain Treasury’s bank account, and develop,
operate, and maintain a number of automated systems to support Treasury’s mission. The Reserve
Banks also provide certain fiscal agency and depository services to other entities; these services are primarily related to book-entry securities. Treasury and
other entities fully reimburse the Reserve Banks for
the expense of providing fiscal agency and depository
services.
In 2017, fiscal agency expenses increased to
$698.3 million (see table 3), primarily as a result of
requests from Treasury’s Bureau of the Fiscal Service. Support for Treasury programs accounted for
95.0 percent of expenses, and support for other entities accounted for 5.0 percent.
9

The reclamation program uses single-note inspection equipment, which recovers good notes from bad sheets and results in
reduced spoilage, cost savings, and more-consistent quality of
notes delivered to the Board.

In April 2014, as part of the federal government’s
effort to increase operational efficiency and effectiveness, Treasury announced the consolidation of the
fiscal agency services provided by the Reserve Banks.
Although Treasury expects long-term savings by
reducing the number of Reserve Banks that provide
fiscal agency services, the Reserve Banks are experiencing an increase in expenses during the consolidation process, which will continue over the next several
years. In 2017, total consolidation expenses
amounted to $12.2 million as a result of the two
Reserve Bank business lines that transitioned and
preparations for the two remaining business line transitions. Consolidation expenses are included in the
line items for Payment, Collection, and Cashmanagement services in table 3.

Treasury Securities Services
The Reserve Banks work closely with Treasury’s Fiscal Service in support of the borrowing needs of the
federal government. The Reserve Banks auction,
issue, maintain, and redeem securities; provide customer service; and operate the automated systems
supporting U.S. savings bonds and marketable Treasury securities (bills, notes, and bonds). Treasury securities services consist of retail securities programs,
which primarily serve individual investors, and
wholesale securities programs, which serve institutional customers.

Retail Securities Programs
Reserve Bank operating expenses for the retail securities program, which provides services to noninstitutional holders of Treasury and related securities, decreased to $44.0 million in 2017, largely
because of Treasury’s decision to phase out the
myRA retirement savings program. Program expense
drivers included the Reserve Banks’ operation of a
virtual case-file system and a virtual contact center to
support retail securities services as well as increased
staffing to manage the savings-bond processing
workload.

Wholesale Securities Programs
The Reserve Banks support wholesale securities programs through the sale, issuance, safekeeping, and
transfer of marketable Treasury securities for institutional investors. The Reserve Banks conducted
277 Treasury securities auctions in 2017. Of the
277 auctions, 12 auctions were for Floating Rate
Notes.

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97

Table 3. Expenses of the Federal Reserve Banks for fiscal agency and depository services, 2015–17
Thousands of dollars
Agency and service
Department of the Treasury
Treasury securities services
Treasury retail securities
Treasury auction
Treasury securities safekeeping and transfer
Technology infrastructure development and support1
Other services
Total
Payment, collection, and cash-management services
Payment services
Collection services
Cash-management services
Technology infrastructure development and support*
Other services
Total
Other Treasury services
Total
Total, Treasury
Other entities
Total, other entities
Pension Costs2
Total, Treasury and other entities
Total reimbursable expenses
1
2

2017

2016

2015

46,244
43,709
25,171
7,442
1,406
123,973

50,203
42,472
22,890
6,909
3,213
125,687

52,945
35,701
21,254
6,371
2,194
118,465

177,127
68,550
73,514
116,931
10,817
446,938

159,296
66,425
82,165
96,931
10,358
415,175

161,681
59,513
79,161
89,069
10,998
400,422

41,943
612,854

39,293
580,155

41,971
560,857

34,580

37,333

35,140

50,837
698,271

59,493
676,981

54,586
650,583

Labeled “Computer infrastructure development and support” in 2015.
Board policy requires the Reserve Banks to seek reimbursement for the costs to provide fiscal agency services. Historically, the Reserve Banks did not seek reimbursement
for pension benefits to Reserve Bank employees who support fiscal agency services. The Reserve Banks began to seek reimbursement for the one-time pension costs that
resulted from consolidation activities in 2014 and to seek full reimbursement for all fiscal agency–related pension costs beginning in 2015. Pension costs are shown in the
aggregate across programs in table 3 rather than by each program.

In 2017, Reserve Bank operating expenses to support
Treasury securities auctions increased to $43.7 million. Operating expenses were driven by upgrades to
the auction application, which receives and processes
bids submitted primarily by wholesale securities auction participants, and by modernization of the application infrastructure.
Operating expenses associated with Treasury securities safekeeping and transfer activities increased to
$25.2 million in 2017 as a result of the Reserve
Banks’ effort to migrate the securities services from a
mainframe system to a distributed computing
environment.

Payment Services
The Reserve Banks work closely with Treasury’s Fiscal Service and other government agencies to process
payments to individuals and companies. The Reserve
Banks process federal payroll payments, Social Security and veterans’ benefits, income tax refunds, vendor payments, and other types of payments.

Reserve Bank operating expenses for paymentsrelated activity increased to $177.1 million in 2017,
primarily because of increased expenses for the
Stored Value Card (SVC) program, the Invoice Processing Platform (IPP), the U.S. Electronic Payment
Solution Center, and the Post Payment System (PPS).
These increases were partially offset by decreased
program expenses for International Treasury Services
(ITS) and Automated Standard Application for Payments (ASAP).
The SVC program comprises three military cashmanagement programs: EagleCash, EZPay, and
Navy Cash. These programs provide electronic payment methods for goods and services on military
bases and Navy ships, both domestic and overseas.
The Reserve Banks, as fiscal agent, have operated
EagleCash and EZpay and assumed responsibility for
Navy Cash in 2017. In 2017, Reserve Bank operating
expenses for Treasury’s SVC business increased to
$36.0 million, including $2.6 million associated with
the upcoming transition of the overall SVC program
as part of the fiscal agent consolidation.

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104th Annual Report | 2017

The IPP is part of Treasury’s all-electronic initiative—an electronic invoicing and payment information system that allows vendors to enter invoice data
electronically, through either a web-based portal or
electronic submission. The IPP accepts, processes,
and presents data from supplier systems related to
various stages of a payment transaction, such as the
purchase order and invoice. In 2017, the Reserve
Banks’ IPP expenses increased to $27.8 million,
including $7.2 million associated with the recently
completed IPP transition in support of
consolidation.
The U.S. Treasury Electronic Payment Solution Support Center provides broad support for Treasury initiatives aimed at eliminating paper check payments
and increasing electronic payments to individuals. As
of November 2017, 98.4 percent of all federal benefit
recipients received their payments electronically. In
2017, expenses for the U.S. Treasury Electronic Payment Solution Support Center increased 17.8 percent, to $17.9 million, because of increased staffing
and increased support costs.
The Reserve Banks continued work on the PPS initiative, a multiyear effort to modernize several of
Treasury’s legacy post-payment processing systems
into a single application to enhance operations,
reduce expenses, improve data analytics capabilities,
and provide a centralized and standardized set of
payment data. In 2017, program expenses for PPS
increased to $20.7 million, including $1.9 million
associated with system development expenses.
The Reserve Banks operate the ITS application,
which provides cross-border payment and collection
services as well as cash-management functions on
behalf of Treasury. U.S. government agencies use ITS
to issue international benefit, payroll, and vendor
payments in 100 currencies to recipients in established and emerging markets. ITS expenses in 2017
decreased to $12.6 million primarily because of
decreased staffing costs and location-based cost savings following the consolidation.
The ASAP application enables federal agencies to
electronically disburse funds to recipient organizations. Expenses for ASAP decreased 19.8 percent
from 2016, to $7.3 million in 2017, because of the
completion of consolidation activities.

to the federal government. In 2017, Reserve Bank
operating expenses related to collection services
increased to $68.6 million, largely because of greater
operating expenses for Pay.gov and the Collections
Information Repository (CIR).
The Reserve Banks operate Pay.gov, an application
that allows the public to use the Internet to authorize
and initiate payments to federal agencies. During the
year, the Pay.gov program expanded to include more
than 168 new agency programs and processed more
than 189 million online payments totaling nearly
$155 billion. Pay.gov expenses increased to $21.5 million in 2017, primarily because of increased staffing
and software amortization expenses.
The CIR application enables the Fiscal Service to
standardize the availability of financial information,
furthering transparency goals and enabling federal
agencies to improve cash-management decisions and
performance. In 2017, CIR expenses increased
19.6 percent to $9.2 million, primarily because of
software amortization costs.

Treasury Cash-Management Services
The Reserve Banks maintain Treasury’s operating
cash account and provide collateral-management and
collateral-monitoring services for those Treasury programs that have collateral requirements. The Reserve
Banks also support Treasury’s efforts to modernize
its financial management processes by developing
software and operating help desks.
In 2017, Reserve Bank operating expenses related to
Treasury cash-management services decreased
10.5 percent, to $73.5 million. The decrease was primarily due to completion of the Straight-Through
Processing initiative, which resulted in decreased
development costs for the Direct Voucher System and
the decommissioning of FRB CA$HLINK. Additionally, the Bank Management System had lower
development costs in 2017. The Bank Management
System application reports and compensates commercial banks for providing depository services to
Treasury.

Services Provided to Other Entities

Collection Services
The Reserve Banks also work closely with the Fiscal
Service to collect funds—including various taxes, fees
for goods and services, and delinquent debts—owed

When permitted by federal statute or when required
by the Secretary of the Treasury, the Reserve Banks
provide fiscal agency and depository services to other
domestic and international entities.

Federal Reserve Banks

Reserve Bank operating expenses for services provided to other entities decreased to $34.6 million in
2017. Debt servicing activities account for a significant amount of the work performed for other entities, with the majority performed for the Federal
Home Loan Mortgage Association (Freddie Mac),
the Federal National Mortgage Association (Fannie
Mae), and the Government National Mortgage
Association (Ginnie Mae).

Use of Federal Reserve Intraday
Credit
The Board’s Payment System Risk policy governs the
use of Federal Reserve Bank intraday credit, also
known as daylight overdrafts. A daylight overdraft
occurs when an institution’s account activity creates
a negative balance in the institution’s Federal Reserve
account at any time in the operating day. Daylight
overdrafts enable an institution to send payments
more freely throughout the day than if it were limited
strictly by its available intraday funds balance,
increasing efficiency and reducing payment system
risk. The Payment System Risk policy recognizes
explicitly the role of the central bank in providing
intraday balances and credit to healthy institutions;
under the policy, the Reserve Banks provide collateralized intraday credit at no cost.
Before the 2007–09 financial crisis, overnight balances were much lower and daylight overdrafts significantly higher than levels observed since late 2008.
The use of daylight overdrafts spiked amid the market turmoil near the end of 2008 but dropped sharply
as various liquidity programs initiated by the Federal
Reserve, all since terminated, took effect. During this
period, the Federal Reserve also began paying interest on balances held at the Reserve Banks, increased
its lending under the Term Auction Facility, and
began purchasing government-sponsored enterprise
mortgage-backed securities. These measures tended
to increase balances institutions held at the Banks,
which decreased the demand for intraday credit. In
2007, for example, institutions held, on average, less
than $20 billion in overnight balances, and total average daylight overdrafts were around $60 billion. In
contrast, institutions held historically high levels of
overnight balances at the Reserve Banks in 2017,
while daylight overdrafts remained historically low,
as shown in figure 1.
Daylight overdraft fees are also at historically low
levels. In 2017, institutions paid about $73,796 in

99

daylight overdraft fees; in contrast, fees totaled more
than $50 million in 2008. The decrease in fees is
largely attributable to the elevated level of reserve
balances that began to accumulate in late 2008 and to
the 2011 policy revision that eliminated fees for daylight overdrafts that are collateralized.

FedLine Access to Reserve Bank
Services
The Reserve Banks’ FedLine access solutions provide
financial institutions with a variety of alternatives for
electronically accessing the Banks’ payment and
information services. For priced services, the Reserve
Banks charge fees for these electronic connections
and allocate the associated costs and revenue to the
various services. There are currently six FedLine
channels through which customers can access the
Reserve Banks’ priced services: FedMail, FedLine
Web, FedLine Exchange, FedLine Advantage, FedLine Command, and FedLine Direct. These FedLine
channels are designed to meet the individual connectivity, security, and contingency requirements of
depository institution customers.
Between 2008 and 2017, Reserve Bank priced FedLine connections and number of depository institutions in the United States continued to decline,
though the number of depository institution employees with FedLine credentials increased 11 percent. As
of December 2017, more than 54,000 individuals had

Figure 1. Aggregate daylight overdrafts, 2007–17
200

Billions of dollars
Peak daylight overdrafts
Average daylight overdrafts

150

100

50

0

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

100

104th Annual Report | 2017

access to value-added services (Accounting Management Information, FedTransaction Analyzer, and
ACH Risk Services) and more than 52,000 individuals had access to central bank applications for regulatory reporting purposes.
The Reserve Banks continue to advance the safety
and security of the FedLine network with key infrastructure upgrades, proactive monitoring of an evolving threat environment, strengthened endpoint security policies, and dedicated customer communication
and education programs.

Information Technology
The Federal Reserve Banks continued to improve the
efficiency, effectiveness, and security of information
technology (IT) services and operations in 2017. Led
by the Federal Reserve’s National IT organization,
the System made significant progress in addressing
the challenges outlined in its IT Strategic Plan. Elements of the plan focus on IT productivity, simplicity, accountability, and stewardship across the
System. Several specific initiatives under the plan also
strengthened information security. National IT continues to guide the plan’s implementation and tracks
progress toward the plan’s goals. This effort is scheduled to be completed in 2020.
Under the direction of the Office of the Chief Information Security Officer, the Reserve Banks remained
vigilant about their cybersecurity posture, investing
in risk-mitigation initiatives and programs and continuously monitoring and safeguarding their operations against cybersecurity risks. The Federal Reserve
implemented several cybersecurity initiatives that
strengthen identity access management, enhance its
abilities to detect and respond to cyber incidents,
reduce the risk of insider threats, and continue to
improve its continuous monitoring capabilities for
critical assets.

Examinations of the Federal Reserve
Banks
The combined financial statements of the Reserve
Banks as well as the financial statements of each of
the 12 Reserve Banks are audited annually by an
independent public accounting firm retained by the
Board of Governors.10 In addition, the Reserve
10

See “Federal Reserve Banks Combined Financial Statements” in
section 12 of this report.

Banks are subject to oversight by the Board of Governors, which performs its own reviews.
The Reserve Banks use the 2013 framework established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) to assess
their internal controls over financial reporting,
including the safeguarding of assets. Within this
framework, the management of each Reserve Bank
annually provides an assertion letter to its board of
directors that confirms adherence to COSO
standards.
The Federal Reserve Board engaged KPMG LLP
(KPMG) to audit the 2017 combined and individual
financial statements of the Reserve Banks.11
In 2017, KPMG also conducted audits of the internal controls associated with financial reporting for
each of the Reserve Banks. Fees for KPMG’s services
totaled $6.8 million. To ensure auditor independence,
the Board requires that KPMG be independent in all
matters relating to the audits. Specifically, KPMG
may not perform services for the Reserve Banks or
others that would place it in a position of auditing its
own work, making management decisions on behalf
of the Reserve Banks, or in any other way impairing
its audit independence. In 2017, the Reserve Banks
did not engage KPMG for significant non-audit
services.
The Board’s reviews of the Reserve Banks include a
wide range of off-site and on-site oversight activities,
conducted primarily by its Division of Reserve Bank
Operations and Payment Systems. Division personnel
monitor on an ongoing basis the activities of each
Reserve Bank, National IT, and the System’s Office
of Employee Benefits (OEB). They conduct a comprehensive on-site review of each Reserve Bank and
OEB at least once every three years and review
National IT, the System Open Market Account
(SOMA), and Fedwire annually.
The comprehensive on-site reviews include an assessment of the internal audit function’s effectiveness
and its conformance to the Institute of Internal
Auditors’ (IIA) International Standards for the Pro-

11

In addition, KPMG audited the Office of Employee Benefits of
the Federal Reserve System (OEB), the Retirement Plan for
Employees of the Federal Reserve System (System Plan), and
the Thrift Plan for Employees of the Federal Reserve System
(Thrift Plan). The System Plan and the Thrift Plan provide
retirement benefits to employees of the Board, the Federal
Reserve Banks, the OEB, and the Consumer Financial Protection Bureau.

Federal Reserve Banks

101

fessional Practice of Internal Auditing, applicable
policies and guidance, and the IIA’s code of ethics.

The FOMC is provided with the external audit
reports and a report on the Board review.

The Board also reviews SOMA and foreign currency
holdings to

Income and Expenses

• determine whether the New York Reserve Bank,
while conducting the related transactions and associated controls, complies with the policies established by the Federal Open Market Committee
(FOMC); and

Table 4 summarizes the income, expenses, and distributions of net earnings of the Reserve Banks for
2017 and 2016. Income in 2017 was $114.2 billion,
compared with $111.7 billion in 2016.

• assess SOMA-related IT project management and
application development, vendor management, and
system resiliency and contingency plans.

Expenses totaled $35,435 million:

In addition, KPMG audits the year-end schedule of
participated asset and liability accounts and the
related schedule of participated income accounts.

• $25,862 million in interest paid to depository institutions on reserve balances and term deposits;
• $4,337 million in Reserve Bank operating expenses;
• $3,365 million in interest expense on securities sold
under agreements to repurchase;

Table 4. Income, expenses, and distribution of net earnings of the Federal Reserve Banks, 2017 and 2016
Millions of dollars
Item
Current income
Loan interest income
SOMA interest income
Other current income1
Net expenses
Operating expenses
Reimbursements
Net periodic pension expense
Interest paid on depository institutions deposits and term deposits
Interest expense on securities sold under agreements to repurchase
Other expenses
Current net income
Net additions to (deductions from) current net income
Treasury securities gains (losses)
Federal agency and government-sponsored enterprise mortgage-backed securities
Foreign currency translation gains (losses)
Net income (loss) from consolidated VIE
Other deductions
Assessments by the Board of Governors
For Board expenditures
For currency costs
For Consumer Financial Protection Bureau costs2
Net income before providing for remittances to the Treasury
Earnings remittances to the Treasury
Net income after providing for remittances to the Treasury
Other comprehensive gain (loss)
Comprehensive income (loss)
Total distribution of net income
Dividends on capital stock
Transfer to surplus and change in accumulated other comprehensive income
Earnings remittances to the Treasury
1
2

2017

2016

114,194
1
113,592
601
33,398
4,337
-698
525
25,862
3,365
7
80,796
1,933
28
8
1,894
4
-1
2,037
740
724
573
80,692
80,559
133
651
784
81,343
784
0
80,559

111,744
1
111,105
638
17,263
4,205
-677
565
12,044
1,122
4
94,481
-114
-15
19
-103
-12
-3
2,006
709
701
596
92,361
91,467
894
-183
711
92,178
711
0
91,467

Includes income from priced services, compensation received for services provided, and securities lending fees.
The Board of Governors assesses the Reserve Banks to fund the operations of the Consumer Financial Protection Bureau.

102

104th Annual Report | 2017

• $525 million in net periodic pension expense;
• $740 million in assessments for Board of Governors expenditures;
• $724 million for the cost of producing, issuing, and
retiring currency;
• $573 million for Consumer Financial Protection
Bureau costs; and
• $7 million in other costs.
The expenses were reduced by $698 million in reimbursements for services provided to government
agencies. Net additions to current net income totaled
$1,933 million, which includes $1,894 million in unrealized gains on foreign currency denominated investments revalued to reflect current market exchange
rates, $28 million in realized gains on Treasury securities, and $8 million in realized gains on federal
agency and government-sponsored enterprise
mortgage-backed securities (GSE MBS).
Net income before remittances to Treasury totaled
$81,343 million in 2017 (net income of $80,692 million, increased by other comprehensive gain of
$651 million). Dividends paid to member banks for
2017 totaled $784 million. Earnings remittances to
the Treasury totaled $80,559 million in 2017. The
Reserve Banks reported comprehensive income of
$784 million in 2017 after providing for remittances
to Treasury.
Section 11 of this report, “Statistical Tables,” provides more detailed information on the Reserve
Banks. Table 9 is a statement of condition for each
Reserve Bank; table 10 details the income and
expenses of each Reserve Bank for 2017; table 11
shows a condensed statement for each Reserve Bank
for the years 1914 through 2017; and table 13 gives
the number and annual salaries of officers and
employees for each Reserve Bank. A detailed account
of the assessments and expenditures of the Board of
Governors appears in the Board of Governors
Financial Statements (see section 12, “Federal
Reserve System Audits”).

SOMA Holdings and Loans

SOMA Securities Holdings
The average daily holdings of Treasury securities
decreased by $9 billion, to an average daily amount
of $2,561 billion. The average daily holdings of GSE
debt securities decreased by $15 billion, to an average
daily amount of $10 billion. The average daily holdings of federal agency and GSE MBS increased by
$20 billion, to an average daily amount of $1,823 billion.
Through September 2017, FRBNY continued to
reinvest all principal payments from SOMA holdings
of GSE debt securities and federal agency and GSE
MBS into federal agency and GSE MBS and to roll
over maturing Treasury securities at auction. Beginning in October 2017, the FOMC initiated a balance
sheet normalization program intended to reduce
gradually the SOMA holdings by decreasing the reinvestment of principal payments received from securities held in the SOMA through the implementation
of monthly caps. Such principal payments will be
reinvested only to the extent that they exceed gradually rising caps.
There were no significant holdings of securities purchased under agreements to resell in 2017 or 2016.
Average daily holdings of foreign currency denominated investments in 2017 were $20,673 million, compared with $20,713 million in 2016. The average daily
balance of central bank liquidity swap drawings was
$858 million in 2017 and $933 million in 2016. The
average daily balance of securities sold under agreements to repurchase was $387,540 million, an
increase of $40,044 million from 2016.
The average rates of interest earned on the Reserve
Banks’ holdings of Treasury securities increased to
2.51 percent, and the average rates on GSE debt securities increased to 4.19 percent in 2017. The average
rate of interest earned on federal agency and GSE
MBS increased to 2.68 percent in 2017. The average
interest rates paid for securities sold under agreements to repurchase increased to 0.87 percent in
2017. The average rate of interest earned on foreign
currency denominated investments decreased to
-0.08 percent, while the average rate of interest
earned on central bank liquidity swaps increased to
1.63 percent in 2017.

Lending
The Reserve Banks’ average net daily SOMA holdings during 2017 amounted to $4,026 billion, a
decrease of $45 billion from 2016 (see table 5).

In 2017, the average daily primary, secondary, and
seasonal credit extended by the Reserve Banks to

Federal Reserve Banks

103

Table 5. System Open Market Account (SOMA) holdings of the Federal Reserve Banks, 2017 and 2016
Millions of dollars, except as noted
Average daily assets (+)/liabilities (–)

Current income (+)/expense (–)*

Average interest rate (percent)

Item

U.S. Treasury securities1
Government-sponsored enterprise debt (GSE) securities1
Federal agency and GSE mortgage-backed securities2
Foreign currency denominated investments3
Central bank liquidity swaps4
Other SOMA assets5
Total SOMA assets
Securities sold under agreements to repurchase: Primary
dealers and expanded counterparties
Securities sold under agreements to repurchase: Foreign
official and international accounts
Total securities sold under agreements to repurchase
Other SOMA liabilities6
Total SOMA liabilities
Total SOMA holdings

2017

2016

2017

2016

2017

2016

2,560,796
9,932
1,822,543
20,673
858
12
4,414,814

2,570,106
25,298
1,802,439
20,713
933
13
4,419,502

64,267
416
48,912
-17
14
*
113,592

63,845
959
46,299
-7
9
*
111,105

2.51
4.19
2.68
-0.08
1.63
0.68
2.57

2.48
3.79
2.57
-0.03
0.96
0.16
2.51

-145,959

-105,648

-1,224

-303

0.84

0.29

-241,581
-387,540
-878
-338,418
4,026,396

-241,848
-347,496
-1,010
-348,506
4,070,996

-2,141
-3,365
n/a
-3,365
110,227

-819
-1,122
n/a
-1,122
109,983

0.89
0.87
n/a
0.87
2.74

0.34
0.32
n/a
0.32
2.70

1

Face value, net of unamortized premiums and discounts.
Face value, which is the remaining principal balance of the securities, net of unamortized premiums and discounts. Does not include unsettled transactions.
3
Foreign currency denominated assets are revalued daily at market exchange rates.
4
Dollar value of foreign currency held under these agreements valued at the exchange rate to be used when the foreign currency is returned to the foreign central bank. This
exchange rate equals the market exchange rate used when the foreign currency was acquired from the foreign central bank.
5
Cash and short-term investments related to the federal agency and government-sponsored enterprise mortgage-backed securities (GSE MBS) portfolio.
6
Represents the obligation to return cash margin posted by counterparties as collateral under commitments to purchase and sell federal agency and GSE MBS, as well as
obligations that arise from the failure of a seller to deliver securities on the settlement date.
n/a Not applicable.
* Less than $500,000.
2

depository institutions increased by $2 million, to
$103 million. The average rate of interest earned on
primary, secondary, and seasonal credit increased to
1.16 percent in 2017, from 0.62 percent in 2016.
Maiden Lane LLC (ML) is a lending facility established in 2008 under authority of FRA section 13(3) in response to the 2007–09 financial crisis.
Net portfolio assets of ML decreased from
$1,742 million in 2016 to $1,722 million in 2017, and
liabilities decreased from $33 million to $9 million.
ML net income of $4 million in 2017 comprised
interest income of $15 million, loss on investments of
$9 million, and operating expenses of $2 million.

Federal Reserve Bank Premises
Several Reserve Banks initiated or continued in 2017
significant renovation programs for their physical

facilities. Multiyear renovation programs at the New
York, Richmond, Kansas City, and San Francisco
Reserve Banks’ headquarters and Los Angeles
Branch building continued. All Reserve Banks continued to implement projects to maintain building
systems to ensure efficient and reliable operations.
The New York Reserve Bank continued repairs and
renovations to the 33 Maiden Lane building and the
Philadelphia Bank initiated the design of improvements to its building’s infrastructure systems.
For more information on the acquisition costs and
net book value of the Reserve Banks and Branches,
see table 14 in section 11 (“Statistical Tables”) of this
annual report.

104

104th Annual Report | 2017

Pro Forma Financial Statements for
Federal Reserve Priced Services
Table 6. Pro forma balance sheet for Federal Reserve priced services, December 31, 2017 and 2016
Millions of dollars
Item
Short-term assets (note 1)
Imputed investments
Receivables
Materials and supplies
Prepaid expenses
Items in process of collection
Total short-term assets
Long-term assets (note 2)
Premises
Furniture and equipment
Leases, leasehold improvements, and long-term prepayments
Deferred tax asset
Total long-term assets
Total assets
Short-term liabilities
Deferred-availability items
Short-term debt
Short-term payables
Total short-term liabilities
Long-term liabilities
Long-term debt
Accrued benefit costs
Total long-term liabilities
Total liabilities
Equity (including accumulated other comprehensive loss of $628.1 million
and $670.4 million at December 31, 2017 and 2016, respectively)
Total liabilities and equity (note 3)

2017

2016

920.1
36.4
0.6
12.4
80.8

812.2
36.6
0.5
11.5
117.7
1,050.3

139.3
39.4
105.2
184.4

978.4
120.4
36.9
112.2
184.7

468.4
1,518.7
1,000.9
23.3
26.1

454.1
1,432.5
921.5
0
20.8

1,050.3
44.7
347.7

942.3

418.6
392.4
1,442.8

418.6
1,360.9

75.9
1,518.7

71.6
1,432.5

Note: Components may not sum to totals because of rounding. The accompanying notes are an integral part of these pro forma priced services financial statements.

Federal Reserve Banks

105

Table 7. Pro forma income statement for Federal Reserve priced services, 2017 and 2016
Millions of dollars
Item

2017

Revenue from services provided to depository institutions (note 4)
Operating expenses (note 5)
Income from operations
Imputed costs (note 6)
Interest on debt
Interest on float
Sales taxes
Income from operations after imputed costs
Other income and expenses (note 7)
Investment income
Income before income taxes
Imputed income taxes (note 6)
Net income
Memo: Targeted return on equity (note 6)

2016
441.6
410.7
30.9

-3.8
2.0
4.0

434.1
401.5
32.5
-1.4
0.1
3.8

2.2
28.7

2.5
30

0.2
28.7
6.5
22.2
4.6

30.2
6.5
23.7
4.1

Note: Components may not sum to totals because of rounding. The accompanying notes are an integral part of these pro forma priced services financial statements.

Table 8. Pro forma income statement for Federal Reserve priced services, by service, 2017
Millions of dollars
Item
Revenue from services (note 4)
Operating expenses (note 5)1
Income from operations
Imputed costs (note 6)
Income from operations after imputed costs
Other income and expenses, net (note 8)
Income before income taxes
Imputed income taxes (note 6)
Net income
Memo: Targeted return on equity (note 6)
Cost recovery (percent) (note 7)

Total

Commercial check
collection

Commercial ACH

Fedwire funds

Fedwire securities

441.6
410.7
30.9
2.2
28.7
0.0
28.7
6.5
22.2
4.6
104.1

142.0
126.3
15.7
1.9
13.8
0.0
13.8
3.1
10.7
1.4
107.0

141.3
141.3
0.0
-1.7
1.7
0.0
1.7
0.4
1.3
1.6
99.8

129.7
116.5
13.2
1.7
11.5
0.0
11.5
2.6
8.9
1.3
106.2

28.6
26.5
2.1
0.4
1.7
0.0
1.7
0.4
1.3
0.3
103.6

Note: Components may not sum to totals because of rounding. The accompanying notes are an integral part of these pro forma priced services financial statements.
1
Operating expenses include pension costs, Board expenses, and reimbursements for certain nonpriced services.

106

104th Annual Report | 2017

Notes to Pro Forma Financial Statements for Priced Services
(1) Short-Term Assets
Receivables are composed of fees due the Reserve Banks for providing priced services and the share of suspense- and difference-account balances related to priced
services.
Items in process of collection are gross Federal Reserve cash items in process of
collection (CIPC), stated on a basis comparable to that of a commercial bank.
They reflect adjustments for intra-Reserve Bank items that would otherwise be
double-counted on the combined Federal Reserve balance sheet and adjustments
for items associated with nonpriced items (such as those collected for government
agencies). Among the costs to be recovered under the Monetary Control Act is the
cost of float, or net CIPC during the period (the difference between gross CIPC
and deferred-availability items, which is the portion of gross CIPC that involves a
financing cost), valued at the federal funds rate. Investments of excess financing
derived from credit float are assumed to be invested in federal funds.
(2) Long-Term Assets
Long-term assets consist of long-term assets used solely in priced services and the
priced-service portion of long-term assets shared with nonpriced services, including a deferred tax asset related to the priced services pension and postretirement
benefits obligation. The tax rates associated with the deferred tax asset were
22.7 percent and 21.6 percent for 2017 and 2016, respectively.
Long-term assets also consist of an estimate of the assets of the Board of Governors used in the development of priced services.
(3) Liabilities and Equity
Under the matched-book capital structure for assets, short-term assets are
financed with short-term payables and imputed short-term debt, if needed. Longterm assets are financed with long-term liabilities, imputed long-term debt, and
imputed equity, if needed. To meet the Federal Deposit Insurance Corporation
requirements for a well-capitalized institution, in 2017 equity is imputed at 5.0 percent of total assets and 11.0 percent of risk-weighted assets, and 2016 equity is
imputed at 5.0 percent of total assets and 10.9 percent of risk-weighted assets.
In 2014, the Board approved revisions to the Payment System Risk policy to
reflect the new international standards for financial market infrastructures developed by the Committee on Payment and Settlement Systems and the Technical
Committee of the International Organization of Securities Commissions in the
Principles for Financial Market Infrastructures. The policy retains the expectation
that the Fedwire Services will meet or exceed the applicable risk-management standards. The Reserve Banks’ priced services will hold six months of the Fedwire
Funds Service’s current operating expenses as liquid net financial assets and equity
on the pro forma balance sheet and, if necessary, impute additional assets and
equity to meet the requirement. The imputed assets held as liquid net financial
assets are cash items in process of collection, which are assumed to be invested in
federal funds. In 2017, there was sufficient assets and equity such that additional
imputed balances were not required.
In accordance with Accounting Standards Codification (ASC) Topic 715 (ASC
715), Compensation–Retirement Benefits, the Reserve Banks record the funded

Federal Reserve Banks

status of pension and other benefit plans on their balance sheets. To reflect the
funded status of their benefit plans, the Reserve Banks recognize the deferred
items related to these plans, which include prior service costs and actuarial gains or
losses, on the balance sheet. This results in an adjustment to the pension and other
benefit plan liabilities related to priced services and the recognition of an associated deferred tax asset with an offsetting adjustment, net of tax, to accumulated
other comprehensive income (AOCI), which is included in equity. The Reserve
Bank priced services recognized a pension asset, which is a component of accrued
benefit costs, of $32.0 million in 2017 and a pension liability of $33.2 million in
2016. The change in the funded status of the pension and other benefit plans
resulted in a corresponding decrease in accumulated other comprehensive loss of
$42.2 million in 2017.
(4) Revenue
Revenue represents fees charged to depository institutions for priced services and
is realized from each institution through direct charges to an institution’s account.
(5) Operating Expenses
Operating expenses consist of the direct, indirect, and other general administrative
expenses of the Reserve Banks for priced services and the expenses of the Board
related to the development of priced services. Board expenses were $5.4 million in
2017 and $5.0 million in 2016.
In accordance with ASC 715, the Reserve Bank priced services recognized qualified pension-plan operating expenses of $31.9 million in 2017 and $34.4 million in
2016. Operating expenses also include the nonqualified net pension expense of
$3.3 million in 2017 and $4.9 million in 2016. The adoption of ASC 715 does not
change the systematic approach required by generally accepted accounting principles to recognize the expenses associated with the Reserve Banks’ benefit plans in
the income statement. As a result, these expenses do not include amounts related
to changes in the funded status of the Reserve Banks’ benefit plans, which are
reflected in AOCI.
The income statement by service reflects revenue, operating expenses, imputed
costs, other income and expenses, and cost recovery. The tax rates associated with
imputed taxes were 22.7 percent and 21.6 percent for 2017 and 2016, respectively.
(6) Imputed Costs
Imputed costs consist of income taxes, return on equity, interest on debt, sales
taxes, and interest on float. Many imputed costs are derived from the PSAF
model. The 2017 cost of short-term debt imputed in the PSAF model is based on
nonfinancial commercial paper rates; the cost of imputed long-term debt is based
on Merrill Lynch Corporate and High Yield Index returns; and the effective tax
rate is derived from U.S. publicly traded firm data, which serve as the proxy for the
financial data of a representative private-sector firm. The after-tax rate of return
on equity is based on the returns of the equity market as a whole.12
Interest is imputed on the debt assumed necessary to finance priced-service assets.
These imputed costs are allocated among priced services according to the ratio of

12

See Federal Reserve Bank Services Private-Sector Adjustment Factor, 77 Fed. Reg. 67,007 (November 8, 2012), www.gpo.gov/fdsys/pkg/FR-2012-11-08/pdf/2012-26918.pdf, for details regarding the
PSAF methodology change.

107

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104th Annual Report | 2017

operating expenses, less shipping expenses, for each service to the total expenses,
less the total shipping expenses, for all services.
Interest on float is derived from the value of float to be recovered for the check
and ACH services, Fedwire Funds Service, and Fedwire Securities Services,
through per-item fees during the period. Float income or cost is based on the
actual float incurred for each priced service.
The following shows the daily average recovery of actual float by the Reserve
Banks for 2017, in millions of dollars:
Total float
Float not related to priced services1
Float subject to recovery through per-item fees
1

-379.3
-0.3
-379.0

Float not related to priced services includes float generated by services to government agencies and by other central bank
services.

Float that is created by account adjustments due to transaction errors and the
observance of nonstandard holidays by some depository institutions was recovered from the depository institutions through charging institutions directly. Float
subject to recovery is valued at the federal funds rate. Certain ACH funding
requirements and check products generate credit float; this float has been subtracted from the cost base subject to recovery in 2017 and 2016.
(7) Other Income and Expenses
Other income consists of income on imputed investments. Excess financing resulting from additional equity imputed to meet the FDIC well-capitalized requirements is assumed to be invested and earning interest at the 3-month Treasury bill
rate.
(8) Cost Recovery
Annual cost recovery is the ratio of revenue, including other income, to the sum of
operating expenses, imputed costs, imputed income taxes, and after-tax targeted
return on equity.

109

7

Other Federal Reserve
Operations

Regulatory Developments
Dodd-Frank Implementation
Throughout 2017, the Federal Reserve continued to
implement the Dodd-Frank Wall Street Reform and
Consumer Protection Act (Dodd-Frank Act) (Pub.
L. No. 111-203), which gives the Federal Reserve
important responsibilities to issue rules and supervise
financial companies to enhance financial stability
and preserve the safety and soundness of the banking
system. The Board also continued to implement
other regulatory reforms to increase the resiliency of
banking organizations and help to ensure that they
are operating in a safe and sound manner.
The following is a summary of the key regulatory initiatives that were completed during 2017.
Capital Planning and Stress Testing
Requirements (Regulations Y and YY)
In January 2017, the Board adopted a final rule
amending its capital plan and stress testing rules;1 the
changes took effect for purposes of the 2017 Comprehensive Capital Analysis and Review (CCAR)
cycle. The final rule removed large and noncomplex
firms from the qualitative assessment and qualitative
objection criteria in the Board’s capital plan rule in
order to reduce burden on these firms and focus the
qualitative review in CCAR on the largest and most
complex financial institutions.
Through CCAR, the Federal Reserve evaluates the
capital planning processes and capital adequacy of
large financial institutions through quantitative and
qualitative assessments.2 The qualitative assessment
1
2

82 Fed. Reg. 9308 (February 3, 2017).
Large institutions subject to the Board’s capital plan and stress
testing rules include (1) bank holding companies with total consolidated assets of $50 billion or more, (2) any nonbank financial company supervised by the Board that becomes subject to
the capital planning and stress test requirements pursuant to a
rule or order of the Board, and (3) U.S. intermediate holding
companies of foreign banking organizations in accordance with

evaluates the strength of each firm’s capital planning
process, whereas the quantitative assessment evaluates each firm’s capital adequacy based on hypothetical scenarios of severe economic and financial market stress. Under the previous capital plan rule, the
Board could object to the annual capital plan of any
CCAR firm based on the quantitative or qualitative
findings of the CCAR exercise.
Under the final rule, a large and noncomplex firm is
defined as a financial institution (1) with total consolidated assets between $50 billion and $250 billion,
(2) with total consolidated nonbank assets of less
than $75 billion, and (3) that has not been identified
as a global systemically important bank (G-SIB)
under the Board’s capital rules. Large and noncomplex firms will be required to continue meeting capital requirements under stress as part of CCAR’s
quantitative assessment, and the Federal Reserve will
examine the capital planning processes of large and
noncomplex firms through regular supervisory
assessments outside of the CCAR exercise. Under
the final rule, the Board may object to the capital
plans of large and noncomplex firms on quantitative
grounds, and may object to the capital plans of the
largest and most complex firms on both qualitative
and quantitative grounds.
Restrictions on Qualified Financial Contracts
(Regulations Q, WW, and YY)
In September 2017, the Board adopted a final rule to
support U.S. financial stability by enhancing the
resolvability of very large and complex financial
firms.3 The rule requires global systemically important bank holding companies and the U.S. operations

3

the transition provisions under the capital plan rule and subpart
O of the Board’s Regulation YY (12 CFR part 252). Currently,
no nonbank financial companies supervised by the Board are
subject to the capital planning or stress test requirements. A
U.S. intermediate holding company that was required to be
established by July 1, 2016, and that was not previously subject
to the Board’s capital plan rule was required to submit its first
capital plan in 2017 and will become subject to the Board’s
stress test rules beginning in 2018.
82 Fed. Reg. 42,882 (September 12, 2017).

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104th Annual Report | 2017

of foreign G-SIBs (collectively, covered entities) to
amend their derivative, securities financing, and
other qualified financial contracts (QFCs) to prevent
the disorderly unwind of the contracts if the parent
or another entity within the firm enters bankruptcy
or a resolution process. Given the large volume of
QFCs to which these entities are a party, the exercise
of default rights en masse as a result of the failure of
one of the firms could lead to a disorderly resolution.
The final rule requires covered entities to make clear
in their QFCs that both of the U.S. resolution
regimes for financial companies and institutions (i.e.,
title II of the Dodd-Frank Act and the Federal
Deposit Insurance Act) apply to the contracts. This
requirement should reduce the risk of a foreign court
disregarding provisions of title II of the Dodd-Frank
Act and the Federal Deposit Insurance Act that temporarily stay the termination of QFCs. The rule also
requires covered entities to ensure that their QFCs
restrict the ability of their counterparties to terminate the contract, liquidate collateral, or exercise
other default rights based on the resolution or liquidation of an affiliate of the G-SIB in bankruptcy or
in a resolution. The rule identifies protocols, including the International Swaps and Derivatives Association 2015 Universal Resolution Stay Protocol, that
comply with the rule. The final rule also makes technical, conforming amendments to the Board’s capital
and liquidity rules.

Key Regulatory Initiatives Proposed
in 2017
The following is a summary of additional regulatory
initiatives that the Board proposed in 2017.
Stress Testing Transparency (Regulation YY)
In December 2017, the Board requested comment on
a package of proposals that would increase the transparency of its stress testing program through
enhanced model disclosures regarding the Federal
Reserve’s supervisory stress testing,4 a Stress Testing

Policy Statement,5 and amendments to the Board’s
Policy Statement on the Scenario Design Framework
for Stress Testing6 (together, the transparency
proposals).
The proposed enhanced model disclosures would
provide greater information about the models the
Federal Reserve uses to estimate the hypothetical
losses in the Board’s supervisory stress tests. In particular, the following information would be made
public for the first time: a range of loss rates, estimated using the Board’s models, for loans held by
CCAR firms; portfolios of hypothetical loans with
loss rates estimated by the Board’s models; and more
detailed descriptions of the Board’s models, such as
certain equations and key variables that influence the
results of those models.
The Stress Testing Policy Statement would describe
the Board’s approach to model development, implementation, use, and validation. The Stress Testing
Policy Statement would elaborate on prior disclosures and would provide details on the principles and
policies that guide the Board’s development of its
stress testing models.
The amendments to the Scenario Design Policy
Statement would modify the Board’s framework for
the design of the annual hypothetical economic scenarios used in the supervisory and company-run
stress tests required under the Dodd-Frank Act. The
modifications aim to enhance transparency and to
further promote the resilience of the banking system
throughout the economic cycle. In particular, the
revisions would include more information on the
hypothetical path of house prices and provide notice
that the Board is exploring the addition of variables
to test for funding risks in the hypothetical scenarios.
The comment period for the transparency proposals
ended on January 22, 2018.

5
4

82 Fed. Reg. 59,547 (December 15, 2017).

6

82 Fed. Reg. 59,528 (December 15, 2017).
82 Fed. Reg. 59,533 (December 15, 2017).

Other Federal Reserve Operations

The Board of Governors and the
Government Performance and
Results Act
Overview
The Government Performance and Results Act
(GPRA) of 1993 requires federal agencies to prepare
a strategic plan covering a multiyear period and
requires each agency to submit an annual performance plan and an annual performance report.
Although the Board is not covered by GPRA, the
Board follows the spirit of the act and, like other federal agencies, prepares an annual performance plan
and an annual performance report.

Strategic Plan, Performance Plan, and
Performance Report
On July 7, 2015, the Board approved the Strategic
Plan 2016–19, which identifies and frames the strate-

111

gic priorities of the Board. In addition to investing in
ongoing operations, the Board identified and prioritized investments and dedicated sufficient resources
to six pillars over the 2016–19 period, which will
allow the Board to advance its mission and respond
to continuing and evolving challenges.
The annual performance plan outlines the planned
initiatives and activities that support the framework’s
long-term objectives and resources necessary to
achieve those objectives. The annual performance
report summarizes the Board’s accomplishments that
contributed toward achieving the strategic goals and
objectives identified in the annual plan.
The strategic plan, performance plan, and performance report are available on the Federal Reserve
Board’s website at www.federalreserve.gov/
publications/gpra.htm.

113

8

Record of Policy Actions
of the Board of Governors

Policy actions of the Board of Governors are presented pursuant to section 10 of the Federal Reserve
Act. That section provides that the Board shall keep
a record of all questions of policy determined by the
Board and shall include in its annual report to Congress a full account of such actions. This section provides a summary of policy actions in 2017, as implemented through (1) rules and regulations, (2) policy
statements and other actions, and (3) discount rates
for depository institutions. Policy actions were
approved by all Board members in office, unless indicated otherwise.1 More information on the actions is
available from the relevant Federal Register notices or
other documents (see links in footnotes) or on
request from the Board’s Freedom of Information
Office.

rate on secondary credit increased by formula as a
result of the primary credit rate change. The Regulation D action reflects an increase to ¾ percent, effective December 15, 2016, in the rates of interest paid
on balances maintained to satisfy reserve balance
requirements and on excess balances maintained at
the Federal Reserve Banks by or on behalf of eligible
institutions.2 (Note: Similar amendments to Regulations A and D were approved by the Board on
March 15,3 June 14,4 and December 13, 2017,5 to
implement the Board’s interest rate actions taken on
those dates in conjunction with the FOMC’s actions
taken on those same dates to increase the target
range for the federal funds rate. See “Interest on
Reserves” and “Discount Rates for Depository Institutions in 2017” later in this section for more information, including the Board votes for each action.)

For information on the Federal Open Market Committee’s policy actions relating to open market operations, see section 9, “Minutes of Federal Open Market Committee Meetings.”

Rules and Regulations
Regulations A (Extensions of Credit by
Federal Reserve Banks) and D (Reserve
Requirements of Depository Institutions)
On January 3, 2017, the Board approved amendments to Regulations A and D (Docket Nos. R-1558
and R-1559) to implement its interest rate actions on
December 14, 2016, in conjunction with the action by
the Federal Open Market Committee (FOMC) on
the same date to increase the target range for the federal funds rate by 25 basis points, to a range of
½ percent to ¾ percent. The Regulation A action
reflects the Board’s approval of an increase in the
interest rate charged by the Federal Reserve Banks on
primary credit from 1 percent to 1¼ percent, with the
1

Governor Tarullo resigned on April 5, and Randal Quarles
joined the Board as a member and as Vice Chairman for Supervision on October 13, 2017. Vice Chairman Fischer resigned on
October 16, 2017.

Voting for the January 3, 2017, actions: Chair
Yellen, Vice Chairman Fischer, and Governors
Tarullo, Powell, and Brainard.

Regulation C (Home Mortgage Disclosure)
On December 13, 2017, the Board approved a final
rule (Docket No. R-1590) repealing the Board’s
Regulation C, which was superseded by the interim
final rule from the Consumer Financial Protection
Bureau (CFPB) to implement the Home Mortgage
Disclosure Act pursuant to the transfer of rulemaking authority to the CFPB under the Dodd-Frank
Wall Street Reform and Consumer Protection Act

2

3

4

5

See Federal Register notices at www.gpo.gov/fdsys/pkg/FR2017-01-23/html/2017-00612.htm and www.gpo.gov/fdsys/pkg/
FR-2017-01-23/html/2017-00613.htm.
See Federal Register notices at www.gpo.gov/fdsys/pkg/FR2017-04-18/html/2017-07742.htm and www.gpo.gov/fdsys/pkg/
FR-2017-04-18/html/2017-07743.htm.
See Federal Register notices at www.gpo.gov/fdsys/pkg/FR2017-06-26/html/2017-13106.htm and www.gpo.gov/fdsys/pkg/
FR-2017-06-26/html/2017-13107.htm.
See Federal Register notices at www.gpo.gov/fdsys/pkg/FR2017-12-20/html/2017-27392.htm and www.gpo.gov/fdsys/pkg/
FR-2017-12-20/html/2017-27393.htm.

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104th Annual Report | 2017

(Dodd-Frank Act).6 The CFPB issued a revised final
rule in April 2016. The Board’s final rule repealing its
Regulation C is effective January 22, 2018.
Voting for this action: Chair Yellen, Vice Chairman for Supervision Quarles, and Governors
Powell and Brainard.

Regulation I (Issue and Cancellation of
Federal Reserve Bank Capital Stock)
On January 5, 2017, the Board approved a final rule
(Docket No. R-1560) to apply an inflation adjustment to the asset threshold at which member banks
are subject to a different dividend rate on their Federal Reserve Bank stock.7 In January 2016, the Fixing
America’s Surface Transportation Act set the dividend rate that member banks with more than $10 billion in total consolidated assets earn on their Federal
Reserve Bank stock at the lesser of 6 percent or the
most recent 10-year Treasury auction rate prior to
the dividend payment. (Member banks below the
asset threshold will continue to earn a dividend of
6 percent on their Reserve Bank stock.) The act also
requires the Board to adjust the $10 billion threshold
annually for inflation. Based on this adjustment,
the total consolidated asset threshold will be
$10,122,000,000 through December 31, 2017. The
final rule is effective March 27, 2017. (Note: On
November 13, 2017, the Board published a final rule
to establish a total consolidated asset threshold, as
adjusted for inflation, of $10,283,000,000 through
December 31, 2018.8)
Voting for this action: Chair Yellen, Vice Chairman Fischer, and Governors Tarullo, Powell,
and Brainard.

Regulation Q (Capital Adequacy of Bank
Holding Companies, Savings and Loan
Holding Companies, and State Member
Banks)
On November 9, 2017, the Board approved a final
rule (Docket No. R-1571), published jointly with the
Federal Deposit Insurance Corporation (FDIC) and
Office of the Comptroller of the Currency (OCC), to
extend the existing regulatory capital treatment for
6

7

8

See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-201712-22/html/2017-27491.htm.
See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-201702-24/html/2017-03568.htm.
See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-201711-13/html/2017-24553.htm.

mortgage-servicing assets and certain other items in
order to prevent different rules from taking effect
while all three agencies consider a broader simplification of the capital rules.9 The final rule applies only
to banking organizations not subject to the agencies’
“advanced approaches” capital rules, generally firms
that have less than $250 billion in total consolidated
assets and less than $10 billion in total foreign exposure. The final rule is effective January 1, 2018.
Voting for this action: Chair Yellen, Vice Chairman for Supervision Quarles, and Governors
Powell and Brainard.

Regulations Q (Capital Adequacy of Bank
Holding Companies, Savings and Loan
Holding Companies, and State Member
Banks), WW (Liquidity Risk Measurement
Standards), and YY (Enhanced Prudential
Standards)
On September 1, 2017, the Board approved a final
rule (Docket No. R-1538) to enhance financial stability by establishing restrictions on qualified financial
contracts (QFCs) of global systemically important
banking organizations (G-SIBs).10 The final rule,
issued under section 165 of the Dodd-Frank Act,
would require U.S. G-SIBs and the U.S. operations of
foreign G-SIBs to amend the terms of QFCs to prevent the immediate termination of these contracts if
a firm enters bankruptcy or another resolution process. QFCs include derivatives and securities financing transactions, such as repurchase agreements and
securities lending transactions. Because G-SIBs conduct a large volume of transactions through QFCs,
the mass termination of these contracts as a result of
a G-SIB resolution might lead to the disorderly failure of the G-SIB, generate asset fire sales, and transmit financial risk across the U.S. financial system.
The final rule contains two key requirements:
(1) QFCs of G-SIBs, including those with foreign
counterparties, are required to clarify that U.S. resolution laws providing for a temporary stay to prevent
mass terminations apply to the contracts, and
(2) QFCs of G-SIBs are prohibited from allowing the
exercise of default rights that could spread the bankruptcy of one G-SIB entity to its solvent affiliates.
The final rule also amends certain definitions in the
Board’s capital and liquidity rules to ensure that the
9

10

See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-201711-21/html/2017-25172.htm.
See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-201709-12/html/2017-19053.htm.

Record of Policy Actions of the Board of Governors

regulatory capital and liquidity treatment of QFCs to
which a covered entity is a party is not affected by the
final rule’s restrictions on such QFCs. The final rule
is effective on November 13, 2017, with phased-in
compliance beginning on January 1, 2019.
Voting for this action: Chair Yellen, Vice
Chairman Fischer, and Governors Powell and
Brainard.

Regulations Y (Bank Holding Companies
and Change in Bank Control) and YY
(Enhanced Prudential Standards)
On January 23, 2017, the Board approved a final rule
(Docket No. R-1548) that revises the capital plan and
stress test rules, effective for the 2017 Comprehensive
Capital and Analysis Review (CCAR) cycle.11 The
final rule provides that large and noncomplex firms
will no longer be subject to the qualitative component of the CCAR assessment or the provisions of
the capital plan rule whereby the Board may object to
the firm’s capital plan on the basis of qualitative deficiencies in the firm’s capital planning process. Under
the final rule, large and noncomplex firms are bank
holding companies and U.S. intermediate holding
companies of foreign banking organizations that
(1) have total consolidated assets of at least $50 billion but less than $250 billion, (2) have nonbank
assets of less than $75 billion, and (3) are not identified as global systemically important banks. The final
rule also modifies certain reporting requirements,
simplifies the initial applicability provisions of both
the capital plan and stress test rules, reduces the
amount of additional capital distributions such firms
may make during a capital plan cycle without seeking
the Board’s prior approval, and extends the range of
potential as-of dates the Board may use for the trading and counterparty scenario component used in the
stress test rules. The final rule is effective March 6,
2017.
Voting for this action: Chair Yellen, Vice Chairman Fischer, and Governors Tarullo, Powell,
and Brainard.

Regulation BB (Community Reinvestment)
On November 8, 2017, the Board approved a final
rule (Docket No. R-1574), issued jointly with the
FDIC and OCC, to conform certain definitions and
11

See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-201702-03/html/2017-02257.htm.

115

other provisions in its Community Reinvestment Act
regulation to recent revisions the CFPB made to its
Regulation C.12 In particular, the final rule revised
the definitions of “home mortgage loan” and “consumer loan,” as well as the public-file content
requirements. The final rule, which also removed
obsolete references to the Neighborhood Stabilization Program, is effective January 1, 2018.
Voting for this action: Chair Yellen, Vice Chairman for Supervision Quarles, and Governors
Powell and Brainard.

Regulation CC (Availability of Funds and
Collection of Checks)
On May 16, 2017, the Board approved a final rule
(Docket No. R-1409) to create a default framework
for electronic check collection and return, reflecting
the evolution of the U.S. check collection system
from a paper-based to virtually all-electronic
system.13 Among other provisions, the final rule
amends existing check-return requirements to create
incentives for banks still using paper to accept electronic presentment and return, creates legal protections for electronic checks to ensure that a bank
receives similar protections regardless of whether a
check is in paper or electronic form, creates protections for banks that receive electronic items that are
not checks but are cleared through the check collection system, and retains the existing same-day settlement rule for paper checks. The final rule is effective
July 1, 2018.
Voting for this action: Chair Yellen, Vice
Chairman Fischer, and Governors Powell and
Brainard.

Rules of Organization and Rules
Regarding Delegation of Authority
On October 25, 2017, the Board approved an amendment (Docket No. OP-1578) to the definition of a
quorum of the Board in the Rules of Organization to
facilitate the Board’s ability to function efficiently
during periods of substantial vacancies on the
Board.14 The amendment provides that four Board
members constitute a quorum, unless there are three
12

13

14

See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-201712-27/html/2017-27813.htm.
See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-201706-15/html/2017-11379.htm.
See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-201711-22/html/2017-25122.htm.

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104th Annual Report | 2017

or fewer Board members in office, in which case a
quorum would be all Board members in office. The
amendment does not alter the definition of a quorum
in normal operating conditions (that is, when five or
more members are in office, four members would still
constitute a quorum). In addition, the amendment
provides that (1) recused or disqualified Board members are excluded from calculations of the quorum
requirement and (2) in exigent circumstances, a quorum would be defined as a majority of Board members in office. In connection with the Rules of Organization amendment, the Board also approved a final
rule (Docket No. R-1578) amending its Rules
Regarding Delegation of Authority to provide for a
modified quorum procedure during exigent circumstances.15 The Rules of Organization amendment is
effective October 25, and the delegation of authority
final rule is effective November 22, 2017.
Voting for these actions: Chair Yellen, Vice
Chairman for Supervision Quarles, and Governors Powell and Brainard.

account for inflation, as required by the Federal Civil
Penalties Inflation Adjustment Act Improvements
Act of 2015.17 The final rule is effective January 10,
2018.
Voting for this action: Chair Yellen, Vice Chairman for Supervision Quarles, and Governors
Powell and Brainard.

Rules Regarding Availability of Information
On October 19, 2017, the Board approved a final rule
(Docket No. R-1556) to amend its regulations for
processing requests under the Freedom of Information Act (FOIA), pursuant to the FOIA Improvement Act of 2016.18 The amendments clarify and
update procedures for the disclosure of records to the
public, extend the deadline for administrative
appeals, and add information on dispute resolution
services. The final rule, effective November 24, 2017,
finalizes an interim final rule published in December 2016.
Voting for this action: Chair Yellen, Vice Chairman for Supervision Quarles, and Governors
Powell and Brainard.

Rules of Practice for Hearings
On January 6, 2017, the Board approved a final rule
(Docket No. R-1543) amending its rules of practice
and procedure to implement an annual adjustment to
its maximum civil money penalty (CMP) amounts to
account for inflation, as required by the Federal Civil
Penalties Inflation Adjustment Act Improvements
Act of 2015.16 The act required this adjustment to be
made annually rather than every four years, prescribed the formula for inflation adjustment, and
directed federal agencies to make a “catch-up”
adjustment (the first inflation adjustment after enactment of the law). An interim final rule issued by the
Board in July 2016 incorporated the catch-up adjustment in the CMP levels. The final rule, effective January 15, 2017, set the CMP levels pursuant to the
required annual adjustment for 2017.
Voting for this action: Chair Yellen, Vice Chairman Fischer, and Governors Tarullo, Powell,
and Brainard.
On December 26, 2017, the Board approved a final
rule (Docket No. R-1595) amending its rules of practice and procedure to implement an annual adjustment for 2018 to its maximum CMP amounts to
15

16

See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-201711-22/html/2017-24052.htm.
See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-201701-25/html/2017-00595.htm.

Policy Statements and Other Actions
Covered Fund Seeding-Period Extensions
On July 17, 2017, the Board approved an order delegating authority to the Federal Reserve Banks, in
consultation with Board staff, to approve (but not
deny) an application by a banking entity for an
extension of time to conform certain “seeding”
investments in hedge funds or private equity funds
(covered funds) to the requirements of section 165 of
the Dodd-Frank Act, commonly known as the
Volcker rule.19 “Seeding” refers to the period of time
during which a banking entity provides a new fund
with initial equity to permit the fund to attract investors. The Volcker rule requires that a banking entity
actively seek unaffiliated investors to reduce its
investment in the covered fund, no later than one
year after the date of establishment of the fund, to
an amount that is not more than 3 percent of the
17

18

19

See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-201801-10/html/2018-00227.htm.
See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-201710-25/html/2017-23095.htm.
See press release at www.federalreserve.gov/newsevents/
pressreleases/bcreg20170724a.htm.

Record of Policy Actions of the Board of Governors

total outstanding ownership interests in the fund. A
banking entity may request the Board’s approval for
an extension of time for up to two additional years to
conform its investment. Under the order, a Federal
Reserve Bank may approve a banking entity’s request
for an extension of the seeding period, provided certain criteria are met. The order is effective July 24,
2017.
Voting for this action: Chair Yellen, Vice
Chairman Fischer, and Governors Powell and
Brainard.

Joint Accounts at Reserve Banks
On August 3, 2017, the Board approved final guidelines (Docket No. OP-1557) for evaluating requests
for joint accounts at Federal Reserve Banks to facilitate settlement between and among depository institutions participating in private-sector payment systems.20 While the Reserve Banks routinely open and
maintain accounts for eligible depository institutions,
joint accounts, in which the rights and liabilities are
shared among multiple depository institution
account holders, have not generally been available.
The guidelines broadly outline factors that will be
considered, but all requests for joint accounts will be
evaluated on a case-by-case basis. The final guidelines
are effective September 5, 2017.
Voting for this action: Chair Yellen, Vice
Chairman Fischer, and Governors Powell and
Brainard.

Voting for this action: Chair Yellen, Vice
Chairman Fischer, and Governors Brainard and
Powell.

Disaster-Related Appraisal Exceptions
On October 10, 2017, the Board approved a statement and order (Docket No. OP-1577), published
jointly with the FDIC, National Credit Union
Administration, and OCC, granting temporary
exceptions to the regulatory appraisal requirements
for federally related transactions in designated disaster areas of Florida, Georgia, Puerto Rico, Texas,
and the U.S. Virgin Islands, provided the transactions
meet certain criteria.22 The exceptions were intended
to facilitate disaster recovery from Hurricanes Harvey, Irma, and Maria and will expire three years after
the date of the disaster declaration for each area.
Voting for this action: Chair Yellen, Vice
Chairman Fischer, and Governors Brainard and
Powell.

Interest on Reserves
On March 15, 2017, the Board approved raising the
interest rate paid on required and excess reserve balances from ¾ percent to 1 percent, effective
March 16, 2017.23 This action was taken to support
the FOMC’s decision on March 15 to raise the target
range for the federal funds rate by 25 basis points, to
a range of ¾ percent to 1 percent.
Voting for this action: Chair Yellen, Vice Chairman Fischer, and Governors Tarullo, Powell,
and Brainard.

Payment System Improvement Strategies
On August 29, 2017, the Board approved the publication of Strategies for Improving the U.S. Payments
System: Federal Reserve Next Steps in the Payments
Improvement Journey.21 The paper, published jointly
with the Federal Reserve Banks, follows up on the
strategic vision articulated in the Federal Reserve’s
January 2015 paper on payment system improvement. The new paper puts forward a series of
refreshed strategies and new tactics to achieve the
desired outcomes of speed, security, efficiency, international payments, and industry collaboration.

On June 14, 2017, the Board approved raising the
interest rate paid on required and excess reserve balances from 1 percent to 1¼ percent, effective June 15,
2017.24 This action was taken to support the
FOMC’s decision on June 14 to raise the target range
for the federal funds rate by 25 basis points, to a
range of 1 percent to 1¼ percent.
Voting for this action: Chair Yellen, Vice
Chairman Fischer, and Governors Powell and
Brainard.
22

20

21

See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-201709-05/html/2017-18705.htm.
See press release at www.federalreserve.gov/newsevents/
pressreleases/other20170906a.htm.

117

23

24

See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-201710-24/html/2017-22957.htm.
See press release at www.federalreserve.gov/newsevents/
pressreleases/monetary20170315a1.htm.
See press release at www.federalreserve.gov/newsevents/
pressreleases/monetary20170614a1.htm.

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104th Annual Report | 2017

On December 13, 2017, the Board approved raising
the interest rate paid on required and excess reserve
balances from 1¼ percent to 1½ percent, effective
December 14, 2017.25 This action was taken to support the FOMC’s decision on December 13 to raise
the target range for the federal funds rate by 25 basis
points, to a range of 1¼ percent to 1½ percent.
Voting for this action: Chair Yellen, Vice Chairman for Supervision Quarles, and Governors
Powell and Brainard.

Discount Rates for Depository
Institutions in 2017
Under the Federal Reserve Act, the boards of directors of the Federal Reserve Banks must establish
rates on discount window loans to depository institutions at least every 14 days, subject to review and
determination by the Board of Governors. Periodically, the Board considers proposals by the 12
Reserve Banks to establish the primary credit rate
and approves proposals to maintain the formulas for
computing the secondary and seasonal credit rates.

Primary, Secondary, and Seasonal Credit
Primary credit, the Federal Reserve’s main lending
program for depository institutions, is extended at
the primary credit rate, which is set above the usual
level of short-term market interest rates. It is made
available, with minimal administration and for very
short terms, as a backup source of liquidity to
depository institutions that, in the judgment of the
lending Federal Reserve Bank, are in generally sound
financial condition. During 2017, the Board
approved three increases in the primary credit rate,
bringing the rate from 1¼ percent to 2 percent. The
Board reached these determinations on the primary
credit rate recommendations of the Reserve Bank
boards of directors. The Board’s actions were taken
in conjunction with the FOMC’s decisions to raise
the target range for the federal funds rate by 75 basis
points, to 1¼ percent to 1½ percent. Monetary policy
developments are reviewed more fully in other parts
of this report (see section 2, “Monetary Policy and
Economic Developments”).

for primary credit. The secondary credit rate is set at
a spread above the primary credit rate. Throughout
2017, the spread was set at 50 basis points. At yearend, the secondary credit rate was 2½ percent.
Seasonal credit is available to smaller depository
institutions to meet liquidity needs that arise from
regular swings in their loans and deposits. The rate
on seasonal credit is calculated every two weeks as an
average of selected money market yields, typically
resulting in a rate close to the target range for the
federal funds rate. At year-end, the seasonal credit
rate was 1.40 percent.26

Votes on Changes to Discount Rates for
Depository Institutions
Details on the three actions by the Board to approve
increases in the primary credit rate are provided
below.
March 15, 2017. Effective March 16, 2017, the Board
approved actions taken by the boards of directors of
the Federal Reserve Banks of Boston, New York,
Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Kansas City, Dallas, and San Francisco to increase the primary credit rate from 1¼ percent to 1½ percent. On March 16, 2017, the Board
approved an identical action subsequently taken by
the board of directors of the Federal Reserve Bank
of Minneapolis, effective immediately.
Voting for this action: Chair Yellen, Vice Chairman Fischer, and Governors Tarullo, Powell,
and Brainard.
June 14, 2017. Effective June 15, 2017, the Board
approved actions taken by the boards of directors of
the Federal Reserve Banks of Boston, Philadelphia,
Cleveland, Richmond, Atlanta, Chicago, Kansas
City, Dallas, and San Francisco to increase the primary credit rate from 1½ percent to 1¾ percent. On
June 15, 2017, the Board approved identical actions
subsequently taken by the boards of directors of the
Federal Reserve Banks of New York, St. Louis, and
Minneapolis, effective immediately.
Voting for this action: Chair Yellen, Vice
Chairman Fischer, and Governors Powell and
Brainard.

Secondary credit is available in appropriate circumstances to depository institutions that do not qualify
25

See press release at www.federalreserve.gov/newsevents/
pressreleases/monetary20171213a1.htm.

26

For current and historical discount rates, see www
.frbdiscountwindow.org/.

Record of Policy Actions of the Board of Governors

December 13, 2017. Effective December 14, 2017, the
Board approved actions taken by the boards of directors of the Federal Reserve Banks of Boston, New
York, Philadelphia, Cleveland, Richmond, Atlanta,
Kansas City, Dallas, and San Francisco to increase
the primary credit rate from 1¾ percent to 2 percent.
On December 14, 2017, the Board approved identical

119

actions subsequently taken by the boards of directors
of the Federal Reserve Banks of Chicago, St. Louis,
and Minneapolis, effective immediately.
Voting for this action: Chair Yellen, Vice Chairman for Supervision Quarles, and Governors
Powell and Brainard.

121

9

Minutes of
Federal Open Market
Committee Meetings

The policy actions of the Federal Open Market Committee, recorded in the minutes of its meetings, are
presented in the Annual Report of the Board of Governors pursuant to the requirements of section 10 of
the Federal Reserve Act. That section provides that
the Board shall keep a complete record of the actions
taken by the Board and by the Federal Open Market
Committee on all questions of policy relating to open
market operations, that it shall record therein the
votes taken in connection with the determination of
open market policies and the reasons underlying each
policy action, and that it shall include in its annual
report to Congress a full account of such actions.
The minutes of the meetings contain the votes on the
policy decisions made at those meetings, as well as a
summary of the information and discussions that led
to the decisions. In addition, four times a year, a
Summary of Economic Projections is published as an
addendum to the minutes. The descriptions of economic and financial conditions in the minutes and the
Summary of Economic Projections are based solely
on the information that was available to the Committee at the time of the meetings.
Members of the Committee voting for a particular
action may differ among themselves as to the reasons
for their votes; in such cases, the range of their views
is noted in the minutes. When members dissent from

a decision, they are identified in the minutes and a
summary of the reasons for their dissent is provided.
Policy directives of the Federal Open Market Committee are issued to the Federal Reserve Bank of New
York as the Bank selected by the Committee to
execute transactions for the System Open Market
Account. In the area of domestic open market operations, the Federal Reserve Bank of New York operates under instructions from the Federal Open Market Committee that take the form of an Authorization for Domestic Open Market Operations and a
Domestic Policy Directive. (A new Domestic Policy
Directive is adopted at each regularly scheduled
meeting.) In the foreign currency area, the Federal
Reserve Bank of New York operates under an Authorization for Foreign Currency Operations and a Foreign Currency Directive. Changes in the instruments
during the year are reported in the minutes for the
individual meetings.1
1

As of January 1, 2017, the Federal Reserve Bank of New York
was operating under the Domestic Policy Directive approved at
the December 13–14, 2016, Committee meeting. The Authorization for Domestic Open Market Operations in effect as of January 1, 2017, was approved at the January 26–27, 2016, meeting.
The other policy instruments (the Authorization for Foreign
Currency Operations and the Foreign Currency Directive) in
effect as of January 1, 2017, were approved at the September 20–21, 2016, meeting.

122

104th Annual Report | 2017

Meeting Held
on January 31–February 1, 2017
A joint meeting of the Federal Open Market Committee and the Board of Governors was held in the
offices of the Board of Governors of the Federal
Reserve System in Washington, D.C., on Tuesday,
January 31, 2017, at 1:00 p.m. and continued on
Wednesday, February 1, 2017, at 9:00 a.m.1

Present
Janet L. Yellen
Chair
William C. Dudley
Vice Chairman
Lael Brainard
Charles L. Evans
Stanley Fischer
Patrick Harker
Robert S. Kaplan
Neel Kashkari
Jerome H. Powell
Daniel K. Tarullo
Marie Gooding, Jeffrey M. Lacker, Loretta J. Mester,
Michael Strine,2 and John C. Williams
Alternate Members of the Federal Open Market
Committee
James Bullard, Esther L. George, and Eric Rosengren
Presidents of the Federal Reserve Banks of St. Louis,
Kansas City, and Boston, 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
1

2

The Federal Open Market Committee is referenced as the
“FOMC” and the “Committee” in these minutes.
Attended Tuesday session only.

Michael Held
Deputy General Counsel
Steven B. Kamin
Economist
Thomas Laubach
Economist
David W. Wilcox
Economist
James A. Clouse, Thomas A. Connors,
Michael Dotsey, Eric M. Engen, Evan F. Koenig,
Jonathan P. McCarthy, Daniel G. Sullivan,
William Wascher, and Beth Anne Wilson
Associate Economists
Simon Potter
Manager, System Open Market Account
Lorie K. Logan
Deputy Manager, System Open Market Account
Robert deV. Frierson
Secretary, Office of the Secretary,
Board of Governors
Matthew J. Eichner3
Director, Division of Reserve Bank Operations and
Payment Systems, Board of Governors
Michael S. Gibson4
Director, Division of Supervision and Regulation,
Board of Governors
Andreas Lehnert
Director, Division of Financial Stability,
Board of Governors
Michael T. Kiley
Deputy Director, Division of Financial Stability,
Board of Governors
Stephen A. Meyer
Deputy Director, Division of Monetary Affairs,
Board of Governors
Trevor A. Reeve
Senior Special Adviser to the Chair, Office of Board
Members, Board of Governors
Andrew Figura, Joseph W. Gruber, Ann McKeehan,
and David Reifschneider
Special Advisers to the Board, Office of Board
Members, Board of Governors
3

4

Attended through the discussion of financial developments and
open market operations.
Attended Wednesday session only.

Minutes of Federal Open Market Committee Meetings | January–February

123

Linda Robertson
Assistant to the Board, Office of Board Members,
Board of Governors

Anna Orlik
Senior Economist, Division of Monetary Affairs,
Board of Governors

Antulio N. Bomfim, Ellen E. Meade,
and Joyce K. Zickler
Senior Advisers, Division of Monetary Affairs,
Board of Governors

Kenneth C. Montgomery
First Vice President, Federal Reserve Bank of Boston

Jeremy B. Rudd
Senior Adviser, Division of Research and Statistics,
Board of Governors
Shaghil Ahmed2
Associate Director, Division of International Finance,
Board of Governors
Jane E. Ihrig
Associate Director, Division of Monetary Affairs,
Board of Governors
Min Wei
Deputy Associate Director, Division of Monetary
Affairs, Board of Governors
Glenn Follette, John M. Roberts, and Paul A. Smith2
Assistant Directors, Division of Research and
Statistics, Board of Governors
Eric C. Engstrom
Adviser, Division of Monetary Affairs,
and
Adviser, Division of Research and Statistics,
Board of Governors
Penelope A. Beattie2
Assistant to the Secretary, Office of the Secretary,
Board of Governors
Dana L. Burnett
Section Chief, Division of Monetary Affairs,
Board of Governors
David H. Small
Project Manager, Division of Monetary Affairs,
Board of Governors
Laurie DeMarco
Principal Economist, Division of International
Finance, Board of Governors
Naomi Feldman
Principal Economist, Division of Research and
Statistics, Board of Governors
Yuriy Kitsul and Zeynep Senyuz
Principal Economists, Division of Monetary Affairs,
Board of Governors

David Altig, Ron Feldman, and Christopher J. Waller
Executive Vice Presidents, Federal Reserve Banks of
Atlanta, Minneapolis, and St. Louis, respectively
Troy Davig and John A. Weinberg
Senior Vice Presidents, Federal Reserve Banks of
Kansas City and Richmond, respectively
Bruce Fallick, Giovanni Olivei, and Robert G. Valletta
Vice Presidents, Federal Reserve Banks of Cleveland,
Boston, and San Francisco, respectively

Annual Organization Matters5
In the agenda for this meeting, it was reported that
advices of the election of the following members and
alternate members of the Federal Open Market Committee for a term beginning January 31, 2017, had
been received and that these individuals had executed
their oaths of office.
The elected members and alternate members were as
follows:
William C. Dudley
President of the Federal Reserve Bank of New York,
with
Michael Strine
First Vice President of the Federal Reserve Bank of
New York, as alternate.
Patrick Harker
President of the Federal Reserve Bank of
Philadelphia, with
Jeffrey M. Lacker
President of the Federal Reserve Bank of Richmond,
as alternate.
Charles L. Evans
President of the Federal Reserve Bank of Chicago,
with
Loretta J. Mester
President of the Federal Reserve Bank of Cleveland,
as alternate.
5

Committee organizational documents are available at www
.federalreserve.gov/monetarypolicy/rules_authorizations.htm.

124

104th Annual Report | 2017

Robert S. Kaplan
President of the Federal Reserve Bank of Dallas,
with
Marie Gooding
First Vice President of the Federal Reserve Bank of
Atlanta, as alternate.
Neel Kashkari
President of the Federal Reserve Bank of
Minneapolis, with
John C. Williams
President of the Federal Reserve Bank of
San Francisco, as alternate.
By unanimous vote, the following officers of the
Committee were selected to serve until the selection
of their successors at the first regularly scheduled
meeting of the Committee in 2018:
Janet L. Yellen
Chairman
William C. Dudley
Vice Chairman
Brian F. Madigan
Secretary
Matthew M. Luecke
Deputy Secretary
David W. Skidmore
Assistant Secretary
Michelle A. Smith
Assistant Secretary
Scott G. Alvarez
General Counsel
Michael Held
Deputy General Counsel
Richard M. Ashton
Assistant General Counsel
Steven B. Kamin
Economist
Thomas Laubach
Economist
David W. Wilcox
Economist
James A. Clouse
Thomas A. Connors
Michael Dotsey
Eric M. Engen
Evan F. Koenig

Jonathan P. McCarthy
Daniel G. Sullivan
William Wascher
Beth Anne Wilson
Associate Economists
Secretary’s note: It was noted that President
Kashkari intends to nominate an associate economist from the Federal Reserve Bank of Minneapolis when the recently named research director
officially joins that Bank.
By unanimous vote, the Federal Reserve Bank of
New York was selected to execute transactions for
the System Open Market Account (SOMA).
By unanimous vote, the Committee selected Simon
Potter and Lorie K. Logan to serve at the pleasure of
the Committee as manager and deputy manager of
the SOMA, respectively, on the understanding that
these selections were subject to their being satisfactory to the Federal Reserve Bank of New York.
Secretary’s note: Advice subsequently was
received that the manager and deputy manager
selections indicated above were satisfactory to the
Federal Reserve Bank of New York.
By unanimous vote, the Committee voted to reaffirm
without change the Authorization for Domestic
Open Market Operations, the Authorization for Foreign Currency Operations, and the Foreign Currency
Directive as shown below. The Guidelines for the
Conduct of System Open Market Operations in
Federal-Agency Issues remained suspended.
Authorization for Domestic Open Market
Operations (As Reaffirmed Effective
January 31, 2017)
1. The Federal Open Market Committee (the “Committee”) authorizes and directs the Federal
Reserve Bank selected by the Committee to
execute open market transactions (the “Selected
Bank”), to the extent necessary to carry out the
most recent domestic policy directive adopted by
the Committee:
A. To buy or sell in the open market securities
that are direct obligations of, or fully guaranteed as to principal and interest by, the
United States, and securities that are direct
obligations of, or fully guaranteed as to prin-

Minutes of Federal Open Market Committee Meetings | January–February

cipal and interest by, any agency of the
United States, that are eligible for purchase
or sale under Section 14(b) of the Federal
Reserve Act (“Eligible Securities”) for the
System Open Market Account (“SOMA”):
i. As an outright operation with securities
dealers and foreign and international
accounts maintained at the Selected
Bank: on a same-day or deferred delivery
basis (including such transactions as are
commonly referred to as dollar rolls and
coupon swaps) at market prices; or
ii. As a temporary operation: on a same-day
or deferred delivery basis, to purchase
such Eligible Securities subject to an
agreement to resell (“repo transactions”)
or to sell such Eligible Securities subject
to an agreement to repurchase (“reverse
repo transactions”) for a term of 65 business days or less, at rates that, unless otherwise authorized by the Committee, are
determined by competitive bidding, after
applying reasonable limitations on the
volume of agreements with individual
counterparties;
B. To allow Eligible Securities in the SOMA to
mature without replacement;
C. To exchange, at market prices, in connection
with a Treasury auction, maturing Eligible
Securities in the SOMA with the Treasury, in
the case of Eligible Securities that are direct
obligations of the United States or that are
fully guaranteed as to principal and interest
by the United States; and
D. To exchange, at market prices, maturing Eligible Securities in the SOMA with an agency
of the United States, in the case of Eligible
Securities that are direct obligations of that
agency or that are fully guaranteed as to
principal and interest by that agency.
2. The Committee authorizes the Selected Bank to
undertake transactions of the type described in
paragraph 1 from time to time for the purpose of
testing operational readiness, subject to the following limitations:
A. All transactions authorized in this paragraph
2 shall be conducted with prior notice to the
Committee;

125

B. The aggregate par value of the transactions
authorized in this paragraph 2 that are of the
type described in paragraph 1.A.i shall not
exceed $5 billion per calendar year; and
C. The outstanding amount of the transactions
described in paragraph 1.A.ii shall not exceed
$5 billion at any given time.
3. In order to ensure the effective conduct of open
market operations, the Committee authorizes the
Selected Bank to operate a program to lend Eligible Securities held in the SOMA to dealers on
an overnight basis (except that the Selected Bank
may lend Eligible Securities for longer than an
overnight term to accommodate weekend, holiday, and similar trading conventions).
A. Such securities lending must be:
i. At rates determined by competitive
bidding;
ii. At a minimum lending fee consistent with
the objectives of the program;
iii. Subject to reasonable limitations on the
total amount of a specific issue of Eligible Securities that may be auctioned; and
iv. Subject to reasonable limitations on the
amount of Eligible Securities that each
borrower may borrow.
B. The Selected Bank may:
i. Reject bids that, as determined in its sole
discretion, could facilitate a bidder’s ability to control a single issue;
ii. Accept Treasury securities or cash as collateral for any loan of securities authorized in this paragraph 3; and
iii. Accept agency securities as collateral only
for a loan of agency securities authorized
in this paragraph 3.
4. In order to ensure the effective conduct of open
market operations, while assisting in the provision
of short-term investments or other authorized
services for foreign central bank and international
accounts maintained at a Federal Reserve Bank
(the “Foreign Accounts”) and accounts maintained at a Federal Reserve Bank as fiscal agent
of the United States pursuant to section 15 of the

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104th Annual Report | 2017

Federal Reserve Act (together with the Foreign
Accounts, the “Customer Accounts”), the Committee authorizes the following when undertaken
on terms comparable to those available in the
open market:
A. The Selected Bank, for the SOMA, to undertake reverse repo transactions in Eligible
Securities held in the SOMA with the Customer Accounts for a term of 65 business
days or less; and
B. Any Federal Reserve Bank that maintains
Customer Accounts, for any such Customer
Account, when appropriate and subject to all
other necessary authorization and approvals, to:
i. Undertake repo transactions in Eligible
Securities with dealers with a corresponding reverse repo transaction in such Eligible Securities with the Customer
Accounts; and
ii. Undertake intra-day repo transactions in
Eligible Securities with Foreign Accounts.
Transactions undertaken with Customer
Accounts under the provisions of this paragraph
4 may provide for a service fee when appropriate.
Transactions undertaken with Customer
Accounts are also subject to the authorization or
approval of other entities, including the Board of
Governors of the Federal Reserve System and,
when involving accounts maintained at a Federal
Reserve Bank as fiscal agent of the United States,
the United States Department of the Treasury.
5. The Committee authorizes the Chairman of the
Committee, in fostering the Committee’s objectives during any period between meetings of the
Committee, to instruct the Selected Bank to act
on behalf of the Committee to:
A. Adjust somewhat in exceptional circumstances the stance of monetary policy and to
take actions that may result in material
changes in the composition and size of the
assets in the SOMA; or
B. Undertake transactions with respect to Eligible Securities in order to appropriately
address temporary disruptions of an operational or highly unusual nature in U.S. dollar
funding markets.

Any such adjustment described in subparagraph
A of this paragraph 5 shall be made in the context of the Committee’s discussion and decision
about the stance of policy at its most recent meeting and the Committee’s long-run objectives to
foster maximum employment and price stability,
and shall be based on economic, financial, and
monetary developments since the most recent
meeting of the Committee. The Chairman,
whenever feasible, will consult with the Committee before making any instruction under this
paragraph 5.
Authorization for Foreign Currency Operations
(As Reaffirmed Effective January 31, 2017)
In General
1. The Federal Open Market Committee (the “Committee”) authorizes the Federal Reserve Bank
selected by the Committee (the “Selected Bank”)
to execute open market transactions for the
System Open Market Account as provided in this
Authorization, to the extent necessary to carry
out any foreign currency directive of the
Committee:
A. To purchase and sell foreign currencies (also
known as cable transfers) at home and
abroad in the open market, including with
the United States Treasury, with foreign monetary authorities, with the Bank for International Settlements, and with other entities in
the open market. This authorization to purchase and sell foreign currencies encompasses
purchases and sales through standalone spot
or forward transactions and through foreign
exchange swap transactions. For purposes of
this Authorization, foreign exchange swap
transactions are: swap transactions with the
United States Treasury (also known as warehousing transactions), swap transactions with
other central banks under reciprocal currency
arrangements, swap transactions with other
central banks under standing dollar liquidity
and foreign currency liquidity swap arrangements, and swap transactions with other entities in the open market.
B. To hold balances of, and to have outstanding
forward contracts to receive or to deliver, foreign currencies.

Minutes of Federal Open Market Committee Meetings | January–February

2. All transactions in foreign currencies undertaken
pursuant to paragraph 1 above shall, unless otherwise authorized by the Committee, be conducted:
A. In a manner consistent with the obligations
regarding exchange arrangements under
Article IV of the Articles of Agreement of
the International Monetary Fund (IMF).6
B. In close and continuous cooperation and
consultation, as appropriate, with the United
States Treasury.
C. In consultation, as appropriate, with foreign
monetary authorities, foreign central banks,
and international monetary institutions.
D. At prevailing market rates.
Standalone Spot and Forward Transactions
3. For any operation that involves standalone spot
or forward transactions in foreign currencies:
A. Approval of such operation is required as
follows:
i. The Committee must direct the Selected
Bank in advance to execute the operation
if it would result in the overall volume of
standalone spot and forward transactions
in foreign currencies, as defined in paragraph 3.C of this Authorization, exceeding $5 billion since the close of the most
recent regular meeting of the Committee.
The Foreign Currency Subcommittee (the
“Subcommittee”) must direct the Selected
Bank in advance to execute the operation
if the Subcommittee believes that consultation with the Committee is not feasible
in the time available.
ii. The Committee authorizes the Subcommittee to direct the Selected Bank in advance to
execute the operation if it would result in
6

In general, as specified in Article IV, each member of the IMF
undertakes to collaborate with the IMF and other members to
assure orderly exchange arrangements and to promote a stable
system of exchange rates. These obligations include seeking to
direct the member’s economic and financial policies toward the
objective of fostering orderly economic growth with reasonable
price stability. These obligations also include avoiding manipulating exchange rates or the international monetary system in
such a way that would impede effective balance of payments
adjustment or to give an unfair competitive advantage over
other members.

127

the overall volume of standalone spot and
forward transactions in foreign currencies,
as defined in paragraph 3.C of this Authorization, totaling $5 billion or less since the
close of the most recent regular meeting of
the Committee.
B. Such an operation also shall be:
i. Generally directed at countering disorderly market conditions; or
ii. Undertaken to adjust System balances in
light of probable future needs for currencies; or
iii. Conducted for such other purposes as
may be determined by the Committee.
C. For purposes of this Authorization, the overall volume of standalone spot and forward
transactions in foreign currencies is defined
as the sum (disregarding signs) of the dollar
values of individual foreign currencies purchased and sold, valued at the time of the
transaction.
Warehousing
4. The Committee authorizes the Selected Bank,
with the prior approval of the Subcommittee and
at the request of the United States Treasury, to
conduct swap transactions with the United States
Exchange Stabilization Fund established by section 10 of the Gold Reserve Act of 1934 under
agreements in which the Selected Bank purchases
foreign currencies from the Exchange Stabilization Fund and the Exchange Stabilization Fund
repurchases the foreign currencies from the
Selected Bank at a later date (such purchases and
sales also known as warehousing).
Reciprocal Currency Arrangements, and
Standing Dollar and Foreign Currency
Liquidity Swaps
5. The Committee authorizes the Selected Bank to
maintain reciprocal currency arrangements established under the North American Framework
Agreement, standing dollar liquidity swap
arrangements, and standing foreign currency
liquidity swap arrangements as provided in this
Authorization and to the extent necessary to
carry out any foreign currency directive of the
Committee.

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104th Annual Report | 2017

A. For reciprocal currency arrangements all
drawings must be approved in advance by the
Committee (or by the Subcommittee, if the
Subcommittee believes that consultation with
the Committee is not feasible in the time
available).
B. For standing dollar liquidity swap arrangements all drawings must be approved in
advance by the Chairman. The Chairman
may approve a schedule of potential drawings, and may delegate to the manager,
System Open Market Account, the authority
to approve individual drawings that occur
according to the schedule approved by the
Chairman.
C. For standing foreign currency liquidity swap
arrangements all drawings must be approved
in advance by the Committee (or by the Subcommittee, if the Subcommittee believes that
consultation with the Committee is not feasible in the time available).
D. Operations involving standing dollar liquidity swap arrangements and standing foreign
currency liquidity swap arrangements shall
generally be directed at countering strains in
financial markets in the United States or
abroad, or reducing the risk that they could
emerge, so as to mitigate their effects on economic and financial conditions in the United
States.
E. For reciprocal currency arrangements, standing dollar liquidity swap arrangements, and
standing foreign currency liquidity swap
arrangements:
i. All arrangements are subject to annual
review and approval by the Committee;
ii. Any new arrangements must be approved
by the Committee; and
iii. Any changes in the terms of existing
arrangements must be approved in
advance by the Chairman. The Chairman
shall keep the Committee informed of any
changes in terms, and the terms shall be
consistent with principles discussed with
and guidance provided by the Committee.

Other Operations in Foreign Currencies
6. Any other operations in foreign currencies for
which governance is not otherwise specified in
this Authorization (such as foreign exchange swap
transactions with private-sector counterparties)
must be authorized and directed in advance by
the Committee.
Foreign Currency Holdings
7. The Committee authorizes the Selected Bank to
hold foreign currencies for the System Open Market Account in accounts maintained at foreign
central banks, the Bank for International Settlements, and such other foreign institutions as
approved by the Board of Governors under Section 214.5 of Regulation N, to the extent necessary to carry out any foreign currency directive of
the Committee.
A. The Selected Bank shall manage all holdings
of foreign currencies for the System Open
Market Account:
i. Primarily, to ensure sufficient liquidity to
enable the Selected Bank to conduct foreign currency operations as directed by
the Committee;
ii. Secondarily, to maintain a high degree of
safety;
iii. Subject to paragraphs 7.A.i and 7.A.ii, to
provide the highest rate of return possible
in each currency; and
iv. To achieve such other objectives as may
be authorized by the Committee.
B. The Selected Bank may manage such foreign
currency holdings by:
i. Purchasing and selling obligations of, or
fully guaranteed as to principal and interest by, a foreign government or agency
thereof (“Permitted Foreign Securities”)
through outright purchases and sales;
ii. Purchasing Permitted Foreign Securities
under agreements for repurchase of such
Permitted Foreign Securities and selling

Minutes of Federal Open Market Committee Meetings | January–February

such securities under agreements for the
resale of such securities; and
iii. Managing balances in various time and
other deposit accounts at foreign institutions approved by the Board of Governors under Regulation N.
C. The Subcommittee, in consultation with the
Committee, may provide additional instructions to the Selected Bank regarding holdings
of foreign currencies.
Additional Matters

129

10. All Federal Reserve banks shall participate in the
foreign currency operations for System Open
Market Account in accordance with paragraph
3G(1) of the Board of Governors’ Statement of
Procedure with Respect to Foreign Relationships
of Federal Reserve Banks dated January 1, 1944.
11. Any authority of the Subcommittee pursuant to
this Authorization may be exercised by the Chairman if the Chairman believes that consultation
with the Subcommittee is not feasible in the time
available. The Chairman shall promptly report to
the Subcommittee any action approved by the
Chairman pursuant to this paragraph.

8. The Committee authorizes the Chairman:
A. With the prior approval of the Committee, to
enter into any needed agreement or understanding with the Secretary of the United
States Treasury about the division of responsibility for foreign currency operations
between the System and the United States
Treasury;
B. To advise the Secretary of the United States
Treasury concerning System foreign currency
operations, and to consult with the Secretary
on policy matters relating to foreign currency
operations;
C. To designate Federal Reserve System persons
authorized to communicate with the United
States Treasury concerning System Open
Market Account foreign currency operations; and
D. From time to time, to transmit appropriate
reports and information to the National
Advisory Council on International Monetary
and Financial Policies.
9. The Committee authorizes the Selected Bank to
undertake transactions of the type described in
this Authorization, and foreign exchange and
investment transactions that it may be otherwise
authorized to undertake, from time to time for
the purpose of testing operational readiness. The
aggregate amount of such transactions shall not
exceed $2.5 billion per calendar year. These transactions shall be conducted with prior notice to
the Committee.

12. The Committee authorizes the Chairman, in
exceptional circumstances where it would not be
feasible to convene the Committee, to foster the
Committee’s objectives by instructing the
Selected Bank to engage in foreign currency
operations not otherwise authorized pursuant to
this Authorization. Any such action shall be made
in the context of the Committee’s discussion and
decisions regarding foreign currency operations.
The Chairman, whenever feasible, will consult
with the Committee before making any instruction under this paragraph.
Foreign Currency Directive (As Reaffirmed
Effective January 31, 2017)
1. The Committee directs the Federal Reserve Bank
selected by the Committee (the “Selected Bank”)
to execute open market transactions, for the
System Open Market Account, in accordance
with the provisions of the Authorization for Foreign Currency Operations (the “Authorization”)
and subject to the limits in this Directive.
2. The Committee directs the Selected Bank to
execute warehousing transactions, if so requested
by the United States Treasury and if approved by
the Foreign Currency Subcommittee (the “Subcommittee”), subject to the limitation that the
outstanding balance of United States dollars provided to the United States Treasury as a result of
these transactions not at any time exceed $5 billion.
3. The Committee directs the Selected Bank to
maintain, for the System Open Market Account:

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A. Reciprocal currency arrangements with the
following foreign central banks:
Foreign central bank

Maximum amount
(millions of dollars or equivalent)

Bank of Canada
Bank of Mexico

2,000
3,000

B. Standing dollar liquidity swap arrangements
with the following foreign central banks:
Bank of Canada
Bank of England
Bank of Japan
European Central Bank
Swiss National Bank
C. Standing foreign currency liquidity swap
arrangements with the following foreign central banks:
Bank of Canada
Bank of England
Bank of Japan
European Central Bank
Swiss National Bank
4. The Committee directs the Selected Bank to hold
and to invest foreign currencies in the portfolio in
accordance with the provisions of paragraph 7 of
the Authorization.
5. The Committee directs the Selected Bank to
report to the Committee, at each regular meeting
of the Committee, on transactions undertaken
pursuant to paragraphs 1 and 6 of the Authorization. The Selected Bank is also directed to provide
quarterly reports to the Committee regarding the
management of the foreign currency holdings
pursuant to paragraph 7 of the Authorization.
6. The Committee directs the Selected Bank to conduct testing of transactions for the purpose of
operational readiness in accordance with the provisions of paragraph 9 of the Authorization.
By unanimous vote, the Committee amended its Program for Security of FOMC Information (Program)
with (1) minor changes that provide some additional
flexibility in the classification of FOMC information
and (2) the removal of language concerning communication with the Treasury Department regarding
SOMA foreign currency operations that was no longer necessary in the Program because similar lan-

guage was inserted into the Authorization for Foreign Currency Operations in September 2016.
In the Committee’s annual reconsideration of the
Statement on Longer-Run Goals and Monetary
Policy Strategy, participants agreed that only a minor
revision was required at this meeting, which was to
update the reference to participants’ estimates of the
longer-run normal rate of unemployment from
4.9 percent to 4.8 percent. All participants supported
the statement with the revision, and the Committee
voted unanimously to approve the updated
statement.
Statement on Longer-Run Goals and Monetary
Policy Strategy (As Amended Effective
January 31, 2017)
“The Federal Open Market Committee (FOMC) is
firmly committed to fulfilling its statutory mandate
from the Congress of promoting maximum employment, stable prices, and moderate long-term interest
rates. The Committee seeks to explain its monetary
policy decisions to the public as clearly as possible.
Such clarity facilitates well-informed decisionmaking
by households and businesses, reduces economic and
financial uncertainty, increases the effectiveness of
monetary policy, and enhances transparency and
accountability, which are essential in a democratic
society.
Inflation, employment, and long-term interest rates
fluctuate over time in response to economic and
financial disturbances. Moreover, monetary policy
actions tend to influence economic activity and
prices with a lag. Therefore, the Committee’s policy
decisions reflect its longer-run goals, its medium-term
outlook, and its assessments of the balance of risks,
including risks to the financial system that could
impede the attainment of the Committee’s goals.
The inflation rate over the longer run is primarily
determined by monetary policy, and hence the Committee has the ability to specify a longer-run goal for
inflation. The Committee reaffirms its judgment that
inflation at the rate of 2 percent, as measured by the
annual change in the price index for personal consumption expenditures, is most consistent over the
longer run with the Federal Reserve’s statutory mandate. The Committee would be concerned if inflation
were running persistently above or below this objective. Communicating this symmetric inflation goal
clearly to the public helps keep longer-term inflation
expectations firmly anchored, thereby fostering price
stability and moderate long-term interest rates and

Minutes of Federal Open Market Committee Meetings | January–February

enhancing the Committee’s ability to promote maximum employment in the face of significant economic
disturbances. The maximum level of employment is
largely determined by nonmonetary factors that
affect the structure and dynamics of the labor market. These factors may change over time and may not
be directly measurable. Consequently, it would not be
appropriate to specify a fixed goal for employment;
rather, the Committee’s policy decisions must be
informed by assessments of the maximum level of
employment, recognizing that such assessments are
necessarily uncertain and subject to revision. The
Committee considers a wide range of indicators in
making these assessments. Information about Committee participants’ estimates of the longer-run normal rates of output growth and unemployment is
published four times per year in the FOMC’s Summary of Economic Projections. For example, in the
most recent projections, the median of FOMC participants’ estimates of the longer-run normal rate of
unemployment was 4.8 percent.
In setting monetary policy, the Committee seeks to
mitigate deviations of inflation from its longer-run
goal and deviations of employment from the Committee’s assessments of its maximum level. These
objectives are generally complementary. However,
under circumstances in which the Committee judges
that the objectives are not complementary, it follows
a balanced approach in promoting them, taking into
account the magnitude of the deviations and the
potentially different time horizons over which
employment and inflation are projected to return to
levels judged consistent with its mandate.
The Committee intends to reaffirm these principles
and to make adjustments as appropriate at its annual
organizational meeting each January.”
The Committee considered amendments to its Policy
on External Communications of Committee Participants and its Policy on External Communications of
Federal Reserve System Staff. The amendments consisted of (1) starting the communication blackout
earlier (the second Saturday before Committee meetings); (2) revising the treatment of staff presentations
during the blackout period; (3) revising provisions
regarding regularly published System releases of
data, survey results, statistical indexes, and model
results during the blackout period; (4) explicitly recognizing the need for ongoing communications with
the public by staff members during the blackout
period for operational or information-gathering pur-

131

poses; and (5) making several miscellaneous changes,
generally to improve clarity.
All participants supported the revisions, and the
Committee voted unanimously to approve the revised
policies.

Illustration of Uncertainty in the Summary
of Economic Projections
Participants considered a revised proposal from the
subcommittee on communications to add to the
Summary of Economic Projections (SEP) a number
of charts (sometimes called fan charts) that would
illustrate the uncertainty that attends participants’
macroeconomic projections. The revised proposal
was based on further analysis and consultations following Committee discussion of a proposal at the
January 2016 meeting. Participants generally supported the revised approach and agreed that fan
charts would be incorporated in the SEP to be
released with the minutes of the March 14–15, 2017,
FOMC meeting. The Chair noted that a staff paper
on measures of forecast uncertainty in the SEP,
including those that would be used as the basis for
fan charts in the SEP, would be made available to the
public soon after the minutes of the current meeting
were published, and that examples of the new charts
using previously published data would be released in
advance of the March meeting.

Developments in Financial Markets and
Open Market Operations
The SOMA manager reported on developments in
U.S. and global financial markets during the period
since the Committee met on December 13–14, 2016.
Financial asset prices were little changed since the
December meeting. Market participants continued to
report substantial uncertainty about potential
changes in fiscal, regulatory, and other government
policies. Nonetheless, measures of implied volatility
of various asset prices remained low. Emerging market currencies were generally resilient in recent weeks,
reportedly benefiting from investors’ anticipation of
stronger global economic growth, after depreciating
significantly against the dollar during the previous
intermeeting period. Market expectations for the
path of the federal funds rate were little changed over
the intermeeting period.
The deputy manager followed with a briefing on
developments in money markets, market expectations

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for the System’s balance sheet, and open market
operations. In money markets, interest rates
smoothly shifted higher following the Committee’s
decision at its December meeting to increase the target range for the federal funds rate by 25 basis points,
and federal funds subsequently traded near the center
of the new range except on yearend. Although yearend pressures in U.S. money markets were similar to
past quarter-ends, some notable, albeit temporary,
strains appeared over the turn of the year in foreign
exchange swap markets and European markets for
repurchase agreements. The Open Market Desk’s
surveys of dealers and market participants pointed to
some change in expectations for FOMC reinvestment
policy, with more respondents than in previous surveys anticipating a change in policy when the federal
funds rate reaches 1 to 1½ percent. The higher level
of take-up at the System’s overnight reverse repurchase agreement facility that developed following the
implementation of money market fund reform last
fall generally persisted. The staff also briefed the
Committee on plans for small-value tests of various
System operations and facilities during 2017 and for
quarterly tests of the Term Deposit Facility.
By unanimous vote, the Committee ratified the
Desk’s domestic transactions over the intermeeting
period. There were no intervention operations in foreign currencies for the System’s account during the
intermeeting period.

Staff Review of the Economic Situation
The information reviewed for the January 31–
February 1 meeting indicated that real gross domestic
product (GDP) expanded at a moderate rate in the
fourth quarter of last year and that labor market
conditions continued to strengthen. Consumer price
inflation rose further above the slow pace seen during
the first half of last year, but it was still running
below the Committee’s longer-run objective of
2 percent.
Recent indicators generally showed that labor market
conditions continued to improve in late 2016. Total
nonfarm payroll employment increased at a solid
pace in December. The unemployment rate edged up
to 4.7 percent but remained near its recent low, while
the labor force participation rate rose slightly. The
share of workers employed part time for economic
reasons decreased further. The rates of private-sector
job openings and of hiring were unchanged in
November, while the rate of quits edged up. The
four-week moving average of initial claims for unem-

ployment insurance benefits was still low in December and early January. Measures of labor compensation continued to rise at a moderate rate. The
employment cost index for private industry workers
rose 2¼ percent over the 12 months ending in
December, and average hourly earnings for all
employees increased almost 3 percent over the same
12-month period. The unemployment rates for African Americans, for Hispanics, and for whites were
close to the levels seen just before the most recent
recession, but the unemployment rates for African
Americans and for Hispanics remained above the
rate for whites.
Total industrial production edged down in the fourth
quarter as a whole. Mining output expanded markedly, but manufacturing production advanced only
modestly. The output of utilities declined, as the
weather was unseasonably warm, on average, during
the fourth quarter. Automakers’ assembly schedules
suggested that motor vehicle production would be a
little lower early this year, but broader indicators of
manufacturing production, such as the new orders
indexes from national and regional manufacturing
surveys, were consistent with modest gains in factory
output in the near term.
Real personal consumption expenditures (PCE) rose
at a moderate pace in the fourth quarter. Consumer
expenditures for durable goods, particularly motor
vehicles, increased considerably. However, consumer
spending for energy services declined markedly,
reflecting unseasonably warm weather. Recent readings on some key factors that influence consumer
spending—including further gains in employment,
real disposable personal income, and households’ net
worth—were consistent with moderate increases in
real PCE in early 2017. In addition, consumer sentiment, as measured by the University of Michigan
Surveys of Consumers, moved up to an elevated level
in December and January.
Real residential investment spending rose at a brisk
pace in the fourth quarter after decreasing in the previous two quarters. Building permit issuance for new
single-family homes—which tends to be a reliable
indicator of the underlying trend in construction—
advanced solidly. Sales of existing homes increased
modestly in the fourth quarter, although new home
sales declined.
Real private expenditures for business equipment and
intellectual property (E&I) expanded at a moderate
pace in the fourth quarter after declining, on net,

Minutes of Federal Open Market Committee Meetings | January–February

over the preceding three quarters. Recent increases in
nominal new orders of nondefense capital goods
excluding aircraft, along with improvements in indicators of business sentiment, pointed to further moderate increases in real E&I spending in the near term.
Real business expenditures for nonresidential structures declined in the fourth quarter after rising in the
previous quarter. The number of crude oil and natural gas rigs in operation, an indicator of spending for
structures in the drilling and mining sector, continued
to increase through late January. The change in real
inventory investment was estimated to have made an
appreciable positive contribution to real GDP growth
in the fourth quarter.
Real total government purchases rose somewhat in
the fourth quarter. Federal government purchases for
defense decreased while nondefense expenditures
increased. State and local government purchases
increased modestly, as the payrolls of these governments expanded slightly and their construction
spending advanced somewhat.
The U.S. international trade deficit widened in
November for the second consecutive month. After
declining in October, nominal exports fell again in
November as decreases in exports of capital goods
more than offset increases in exports of industrial
supplies. Nominal imports in November rose to their
highest level of the year, led by imports of industrial
supplies and materials. The Census Bureau’s advance
trade estimates for December suggested a narrowing
of the trade deficit in goods, as imports increased less
than exports. Altogether, the change in real net
exports was estimated to have made a substantial
negative contribution to real GDP growth in the
fourth quarter.
Total U.S. consumer prices, as measured by the PCE
price index, increased a little more than 1½ percent
over the 12 months ending in December, partly
restrained by decreases in consumer food prices last
year. Core PCE price inflation, which excludes
changes in food and energy prices, was 1¾ percent
over those same 12 months, held down in part by
decreases in the prices of non-energy imports over
part of this period. Over the same 12-month period,
total consumer prices as measured by the consumer
price index (CPI) rose a bit more than 2 percent,
while core CPI inflation was 2¼ percent. Surveybased measures of median longer-run inflation
expectations—such as those from the Michigan survey and from the Desk’s Survey of Primary Dealers

133

and Survey of Market Participants—were
unchanged, on net, over December and January.
Foreign real GDP growth appeared to slow somewhat in the fourth quarter from its relatively strong
third-quarter pace. Nevertheless, recent data on foreign industrial production and trade seemed to be
stronger than private analysts had anticipated and
were consistent with moderate economic growth
abroad. Economic growth in both the euro area and
the United Kingdom continued at relatively solid
rates. In the emerging market economies (EMEs),
GDP growth remained robust in China but slowed
elsewhere in the Asian EMEs and in Mexico, while
the pace of economic contraction appeared to lessen
in South America. Inflation in the advanced foreign
economies (AFEs) continued to rise, largely reflecting
the pass-through of earlier increases in crude oil
prices into retail energy prices. Inflation also rose in
many EMEs, in part because of rising food and fuel
prices; however, inflation fell notably in much of
South America.

Staff Review of the Financial Situation
Domestic financial conditions were mostly little
changed, on balance, since the December FOMC
meeting. Broad equity price indexes fluctuated in a
relatively narrow range and ended the intermeeting
period about unchanged. Nominal Treasury yields
moved up across most maturities in the days following the December FOMC meeting but subsequently
reversed and ended the period little changed on net.
Measures of inflation compensation based on Treasury Inflation-Protected Securities (TIPS) rose somewhat on balance. Amid notable volatility, the broad
dollar index declined slightly on net. Meanwhile,
financing conditions for nonfinancial businesses and
households remained generally accommodative.
Although the FOMC’s decision to raise the target
range for the federal funds rate to ½ to ¾ percent at
the December meeting was widely anticipated in
financial markets, contacts generally characterized
some of the communications associated with the
FOMC meeting as less accommodative than
expected. In particular, market commentaries highlighted the upward revision of 25 basis points to the
median projection for the federal funds rate at the
end of 2017 in the SEP. Nonetheless, the expected
path of the federal funds rate implied by futures
quotes was little changed, on net, since the December
meeting. Market-based estimates indicated that

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investors saw the probability of an increase in the target range for the federal funds rate at the January 31–
February 1 FOMC meeting as very low, and the estimated probability of an increase in the target range
at or before the March meeting was about 25 percent.
Consistent with readings based on market quotes,
results from the Desk’s January Survey of Primary
Dealers and Survey of Market Participants indicated
that the median respondent assigned a probability of
about 25 percent to the next increase in the target
range occurring at or before the March FOMC meeting. Market-based estimates of the probability of an
increase in the target range at or before the June
meeting were about 70 percent.
Yields on nominal Treasury securities increased
across most maturities following the December
FOMC meeting, but they fell, on balance, over the
remainder of the intermeeting period. While market
commentary suggested that a number of factors contributed to the decline, a clear catalyst was difficult to
identify. Treasury yields ended the period about
unchanged and remained significantly higher than
just before the U.S. elections in November. TIPSbased measures of inflation compensation edged up
over the intermeeting period.
Broad U.S. equity price indexes fluctuated in a relatively narrow range and were little changed, on net,
over the intermeeting period. However, equity prices
remained notably higher than just before the November elections, apparently reflecting investors’ expectations that fiscal and other policy changes would boost
corporate profits and economic activity in the medium
term. Implied volatility on the S&P 500 index edged
down since the December meeting and remained relatively low. Corporate bond spreads for both
investment- and speculative-grade firms continued to
narrow over the intermeeting period and were near the
bottom of their ranges of the past several years.

bond issuance by nonfinancial firms rebounded in
December to about its robust average pace of the
past few years, and issuance of syndicated leveraged
loans was strong. Gross equity issuance was solid in
November and December. Meanwhile, after a slowdown in the third quarter, the growth of commercial
and industrial (C&I) loans on banks’ books picked
up in the fourth quarter, although the pace remained
slower than earlier in the year. The January Senior
Loan Officer Opinion Survey on Bank Lending Practices (SLOOS) indicated that banks left C&I lending
standards for large and middle-market firms and for
small firms unchanged, on balance, in the fourth
quarter. On net, banks expected to ease their standards for C&I loans somewhat in 2017.
Credit continued to be broadly available in the commercial real estate (CRE) sector, although results
from the January SLOOS indicated that banks continued to tighten their lending standards in the fourth
quarter and expected to tighten them somewhat further in 2017. CRE loans on banks’ balance sheets
continued to grow in the fourth quarter, although at a
somewhat slower rate than earlier in the year, while
issuance of commercial mortgage-backed securities
(CMBS) was solid over the period, in part because
issuers tried to complete deals before the implementation of new risk retention rules in late December.
The delinquency rate on CMBS moved up further in
November and December; the increase largely
reflected delinquencies on loans originated before the
financial crisis.

Money market rates responded as expected to the
change in the target range for the federal funds rate.
The effective federal funds rate was 66 basis points—
25 basis points higher than previously—every day
following the change, except at year-end. Conditions
in other domestic short-term funding markets were
generally stable over the intermeeting period. Assets
under management by money market funds changed
little, with government funds experiencing modest net
outflows and prime fund assets remaining about flat.

Credit conditions for residential mortgages were little
changed, on net, over the intermeeting period. Mortgage credit was broadly available to households with
average to high credit scores, while credit remained
tight for borrowers with low credit scores, hard-todocument income, or high debt-to-income ratios.
According to the January SLOOS, banks reportedly
left lending standards unchanged, on net, on most categories of home-purchase loans. The interest rate on
30-year fixed-rate mortgages moved about in line with
rates on comparable-maturity Treasury securities, rising notably after the November elections but retracing
part of that increase since mid-December. The pace of
purchase originations was little changed in recent
months despite higher mortgage rates, while refinance
originations fell sharply. Bank lending for residential
mortgages was solid in the fourth quarter, and the
issuance of mortgage-backed securities was robust.

Financing conditions for nonfinancial businesses
continued to be accommodative overall. Corporate

Financing conditions in consumer credit markets
remained generally accommodative, although lending

Minutes of Federal Open Market Committee Meetings | January–February

135

standards for credit cards continued to be tight for
subprime borrowers. Respondents to the January
SLOOS indicated that, over the previous three
months, they had tightened standards and terms on
auto and credit card loans, and that they expected to
tighten standards further in 2017. Consumer loan
balances increased at a robust rate through November, with credit card loans, student loans, and auto
loans all expanding at a similar pace. Measures of
consumer credit quality were little changed, on net, in
the fourth quarter.

growth in the first half of this year was projected to
be essentially the same as in the fourth quarter. The
staff’s forecast for real GDP growth over the next
several years was little changed. The staff continued
to project that real GDP would expand at a modestly
faster pace than potential output in 2017 through
2019. The unemployment rate was forecast to edge
down gradually through the end of 2019 and to run
below the staff’s estimate of its longer-run natural
rate; the path for the unemployment rate was little
changed from the previous projection.

Foreign economic data that were better than
expected and perceptions of an ebbing of some
potential downside risks in Europe appeared to contribute to an improvement in investor sentiment in
global financial markets. Importantly, a large euroarea bank reached a settlement with the U.S. Department of Justice on issues related to mortgage-backed
securities, and the Italian government approved a
funding package and other measures to support
struggling banks. Reflecting the improved sentiment
and positive economic news, global equity prices and
longer-term sovereign yields in most AFEs increased
moderately over the period. Yield spreads on EME
sovereign bonds narrowed somewhat, and flows into
EME mutual funds turned positive. The broad dollar
index increased immediately after the December
FOMC meeting but subsequently retraced its gains
and ended the period slightly lower. In contrast, the
dollar strengthened further against the Mexican peso
over the intermeeting period.

The staff’s forecast for consumer price inflation was
unchanged on balance. The staff continued to project
that inflation would increase over the next several
years, as food and energy prices, along with the prices
of non-energy imports, were expected to begin
steadily rising either this year or next. However, inflation was projected to be marginally below the Committee’s longer-run objective of 2 percent in 2019.

The staff provided its latest report on potential risks
to financial stability, indicating that it continued to
judge the vulnerabilities of the U.S. financial system
as moderate on balance. The staff’s assessment took
into account the increase in asset valuation pressures
since the November elections, the overall low level of
financial leverage, the strong capital positions at
banks, and the subdued growth of debt among
households and businesses. In addition, with money
market fund reforms in place, the vulnerabilities from
maturity and liquidity transformation were viewed as
being somewhat below their longer-run average.

The staff viewed the uncertainty around its projections for real GDP growth, the unemployment rate,
and inflation as similar to the average of the past
20 years. The risks to the forecast for real GDP were
seen as tilted to the downside, primarily reflecting the
staff’s assessment that monetary policy appeared to
be better positioned to offset large positive shocks
than substantial adverse ones. However, the staff
viewed the risks to the forecast from developments
abroad as less pronounced than in the recent past.
Consistent with the downside risks to aggregate
demand, the staff viewed the risks to its outlook for
the unemployment rate as tilted to the upside. The
risks to the projection for inflation were seen as
roughly balanced. The downside risks from the possibility that longer-term inflation expectations may
have edged down or that the dollar could appreciate
substantially further were seen as roughly counterbalanced by the upside risk that inflation could increase
more than expected in an economy that was projected to continue operating above its longer-run
potential.

Participants’ Views on Current Conditions
and the Economic Outlook

Staff Economic Outlook
In the U.S. economic projection prepared by the staff
for this FOMC meeting, the near-term forecast was
little changed from the December meeting. Real
GDP growth in the fourth quarter of last year was
estimated to have been a little faster than the staff
had expected in December, and the pace of economic

In their discussion of the economic situation and the
outlook, meeting participants agreed that information received over the intermeeting period indicated
that the labor market had continued to strengthen
and that economic activity had continued to expand
at a moderate pace. Job gains had remained solid,
and the unemployment rate had stayed near its recent

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104th Annual Report | 2017

low. Household spending had continued to rise moderately, while business fixed investment had remained
soft. Measures of consumer and business sentiment
had improved of late. Inflation had increased in
recent quarters but was still below the Committee’s
2 percent longer-run objective. Market-based measures of inflation compensation remained low; most
survey-based measures of inflation compensation
were little changed on balance.
Participants generally indicated that their economic
forecasts had changed little since the December
FOMC meeting. They continued to anticipate that,
with gradual adjustments in the stance of monetary
policy, economic activity would expand at a moderate pace, labor market conditions would strengthen
somewhat further, and inflation would rise to 2 percent over the medium term. They also judged that
near-term risks to the economic outlook appeared
roughly balanced. Participants again emphasized
their considerable uncertainty about the prospects for
changes in fiscal and other government policies as
well as about the timing and magnitude of the net
effects of such changes on economic activity. In discussing the risks to the economic outlook, participants continued to view the possibility of more
expansionary fiscal policy as having increased the
upside risks to their economic forecasts, although
some noted that several potential changes in government policies could pose downside risks. In addition,
several viewed the downside risks from weaker economic activity abroad as having diminished somewhat. But several indicated that they continued to be
concerned about the downside risks to economic
activity associated with the possibility of additional
appreciation of the foreign exchange value of the dollar or financial vulnerabilities in some foreign economies, together with the proximity of the federal funds
rate to the effective lower bound. Regarding the outlook for inflation, some participants continued to be
concerned that faster-than-expected economic
growth or a substantial undershooting of the longerrun normal unemployment rate posed upside risks to
inflation. However, several others continued to see
downside risks to the inflation outlook, citing stilllow measures of inflation compensation and inflation
expectations or the possibility of further appreciation
of the dollar. Participants generally agreed that the
Committee should continue to closely monitor inflation indicators and global economic and financial
developments.
Regarding the household sector, consumer spending
posted a moderate increase in the fourth quarter, and

participants generally anticipated that further gains
in consumer spending would contribute importantly
to economic growth in 2017. They expected that,
although interest rates had moved higher, household
spending would continue to be supported by rising
employment and income as well as high levels of
household wealth. The recent improvement in consumer sentiment was also viewed as a potentially
positive factor in the outlook for spending, although
several participants cautioned that an elevated level
of sentiment, even if it was sustained, was likely to
make only a small contribution to household spending beyond those from income, wealth, and credit
conditions.
Recent indicators of activity in the housing sector
were generally positive. Starts and permits for singlefamily housing and sales of existing homes rose moderately in the fourth quarter, and real residential
investment bounced back after two quarterly
declines. A couple of participants commented that
supply constraints might be holding back new homebuilding. In addition, a few participants noted that
prospects for residential investment would also
depend on whether household formation picked up
and how housing market activity responded to the
recent rise in mortgage interest rates.
The outlook for the business sector improved further
over the intermeeting period. Business investment in
E&I, which had been contracting earlier in 2016,
increased at a moderate rate in the fourth quarter. In
addition, new orders for nondefense capital goods
posted widespread gains in recent months. The available reports from District surveys of activity and revenues in the manufacturing and services industries
were very positive. Moreover, a number of national
surveys of sentiment among corporate executives and
small business owners as well as information from
participants’ District contacts indicated a high level
of optimism about the economic outlook. Many participants indicated that their business contacts attributed the improvement in business sentiment to the
expectation that firms would benefit from possible
changes in federal spending, tax, and regulatory policies. A few participants indicated that some of their
contacts had already increased their planned capital
expenditures. However, participants’ contacts in
some Districts, while optimistic, intended to wait for
more clarity about federal policy initiatives before
adjusting their capital spending and hiring. In addition, contacts in some industries remained concerned
that their businesses might be adversely affected by
some of the government policy changes being consid-

Minutes of Federal Open Market Committee Meetings | January–February

ered. Activity in the energy sector continued to
improve, with District contacts reporting an increase
in capital spending, better access to credit, and a
pickup in hiring. However, reports from a couple of
Districts indicated that the agricultural sector was
still weak, with low commodity prices continuing to
put financial pressure on farm-related businesses.
The labor market continued to strengthen in recent
months. Monthly gains in nonfarm payroll employment averaged 165,000 over the period from October
to December, a pace that, if it continued, would be
expected to increase labor utilization over time. At
4.7 percent in December, the unemployment rate
remained close to levels that most participants judged
to be consistent with the Committee’s maximumemployment objective. Some participants cited other
indicators confirming the strengthening in the labor
market, such as a decline in the broader measures of
labor underutilization that include workers marginally attached to the labor force, the rise in the quits
rate, and faster increases in some measures of labor
compensation. Moreover, several participants’ business contacts reported shortages of workers in some
occupations or the need for training programs to
expand the supply of skilled workers. Several other
participants thought that some margins of labor
underutilization remained, citing the still-high rate of
prime-age workers outside the labor force, the
elevated share of workers who were employed part
time for economic reasons, or the potential for further firming in labor force participation. However, a
couple of participants pointed out that the uncertainty attending estimates of longer-run trends in
part-time employment and labor force participation
made it difficult to assess the scope for additional
increases in labor utilization. Most participants still
expected that if economic growth remained moderate, labor markets would continue to tighten gradually, with the unemployment rate running only modestly below their estimates of the longer-run normal
rate. However, several participants projected a more
substantial undershooting.
Information on inflation received over the intermeeting period was broadly in line with participants’
expectations and was consistent with a view that PCE
inflation was moving closer to the Committee’s 2 percent objective. The 12-month change in headline
PCE prices increased further, to 1.6 percent in
December, as the effects of the earlier declines in
consumer energy prices waned. The 12-month
change in core PCE prices stayed near 1.7 percent for
a fifth consecutive month. A few participants noted

137

that other measures provided additional evidence
that inflation was approaching the Committee’s
objective; for example, the 12-month changes in the
headline and core CPI, the median CPI, and the
trimmed mean PCE price index had also moved up
from year-earlier levels. The available information on
pricing from District business contacts varied, with a
couple of participants reporting that firms were
experiencing rising cost pressures from input costs or
had been able to raise their prices, while a few other
participants said that firms in their Districts were not
experiencing price pressures or that the appreciation
of the dollar was continuing to hold down import
prices. Most survey-based measures of longer-term
inflation expectations had been little changed in
recent months. The median response to the Michigan
survey of longer-run inflation expectations moved
back up to 2.6 percent in January, in line with the
average of readings during 2016, and the measure at
the three-year horizon from the Federal Reserve
Bank of New York’s survey rose slightly in December; the measures calculated by the Federal Reserve
Bank of Cleveland had been stable over the preceding three months. Some market-based measures of
inflation compensation had turned up noticeably in
late 2016, but a number of participants noted that
they remained relatively low. Most participants continued to expect that inflation would rise to the Committee’s 2 percent objective over the medium term.
Some saw a risk that inflationary pressures might
develop more rapidly than currently anticipated as
resource utilization tightened, while several others
thought that progress in achieving the Committee’s
inflation objective might lag if further appreciation
of the dollar continued to depress non-energy commodity prices or if inflation was slow to respond to
tighter resource utilization.
Financial conditions appeared to have changed little,
on net, in recent months: Equity prices had risen and
credit spreads had narrowed, but longer-term interest
rates had increased and the dollar had appreciated
further. In their discussion, participants considered
how recent developments had affected their assessment of the stability of the U.S. financial system.
Overall, valuation pressures appeared to have risen
for some types of assets, while financial-sector leverage remained low and risks associated with maturity
and liquidity transformation had declined. A few
participants commented that the recent increase in
equity prices might in part reflect investors’ anticipation of a boost to earnings from a cut in corporate
taxes or more expansionary fiscal policy, which might
not materialize. They also expressed concern that the

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104th Annual Report | 2017

low level of implied volatility in equity markets
appeared inconsistent with the considerable uncertainty attending the outlook for such policy
initiatives.

is neither expansionary nor contractionary when the
economy is operating at or near its potential—was
currently quite low and was likely to rise only slowly
over time.

Recent reforms had diminished the risk of runs on or
by prime money market funds. However, it was noted
that other risks to financial stability might arise as
the structure of funding markets evolved or if real
estate asset values declined sharply. More broadly, it
was pointed out that an environment of low interest
rates and a relatively flat yield curve, if it persisted,
had the potential to boost incentives to take on leverage and risk. Several participants emphasized that
the increased resilience of the financial system since
the financial crisis had importantly been the result of
the key safety and soundness reforms put in place in
recent years. However, having additional macroprudential tools could prove useful in addressing problems that could arise in real estate financing or in the
shadow banking sector.

Participants emphasized that the Committee might
need to change its communications regarding the
anticipated path for the policy rate if economic conditions evolved differently than the Committee
expected or if the economic outlook changed. They
pointed to a number of risks that, if realized, might
call for a different policy trajectory than they currently thought most likely to be appropriate. These
included upside risks such as appreciably more
expansionary fiscal policy or a more rapid buildup of
inflationary pressures, as well as downside risks associated with a possible further appreciation of the dollar or financial vulnerabilities in some foreign economies, together with the proximity of the federal funds
rate to the effective lower bound. Moreover, most
participants continued to see heightened uncertainty
regarding the size, composition, and timing of possible changes to fiscal and other government policies,
and about their net effects on the economy and inflation over the medium term, and they thought some
time would likely be required for the outlook to
become clearer. A couple of participants argued that
such uncertainty should not deter the Committee
from taking further steps in the near term to remove
monetary policy accommodation, because fiscal and
other policies were only some of the many factors
that were likely to influence progress toward the
Committee’s dual-mandate objectives and thus the
appropriate course of monetary policy. However,
other participants cautioned against adjusting monetary policy in anticipation of policy proposals that
might not be enacted or that, if enacted, might turn
out to have different consequences for economic
activity and inflation than currently anticipated.

Participants discussed whether their current assessments of economic conditions and the medium-term
outlook warranted altering their earlier views of the
appropriate path for the target range for the federal
funds rate. Participants generally characterized their
economic forecasts and their judgments about monetary policy as little changed since the December
meeting. Against this backdrop, they thought it
appropriate to maintain the target range for the federal funds rate at ½ to ¾ percent at this meeting.
Most participants continued to judge that, while the
outlook was subject to considerable uncertainty, a
gradual pace of rate increases over time was likely to
be appropriate to promote the Committee’s objectives of maximum employment and 2 percent inflation. Some participants viewed a gradual pace as
likely to be warranted because inflation was still running below the Committee’s objective or because the
proximity of the federal funds rate to the effective
lower bound placed constraints on the ability of
monetary policy to respond to adverse shocks to the
aggregate demand for goods and services. In addition, it was noted that the downward pressure on
longer-term interest rates exerted by the Federal
Reserve’s asset holdings was expected to diminish in
the years ahead in light of an anticipated gradual
reduction in the size and duration of the Federal
Reserve’s balance sheet. Finally, the view that gradual
increases in the federal funds rate were likely to be
appropriate also reflected the assessment that the
neutral real rate—defined as the real interest rate that

In discussing the outlook for monetary policy over
the period ahead, many participants expressed the
view that it might be appropriate to raise the federal
funds rate again fairly soon if incoming information
on the labor market and inflation was in line with or
stronger than their current expectations or if the
risks of overshooting the Committee’s maximumemployment and inflation objectives increased. A few
participants noted that continuing to remove policy
accommodation in a timely manner, potentially at an
upcoming meeting, would allow the Committee
greater flexibility in responding to subsequent
changes in economic conditions. Several judged that
the risk of a sizable undershooting of the longer-run

Minutes of Federal Open Market Committee Meetings | January–February

normal unemployment rate was high, particularly if
economic growth was faster than currently expected.
If that situation developed, the Committee might
need to raise the federal funds rate more quickly than
most participants currently anticipated to limit the
buildup of inflationary pressures. However, with
inflation still short of the Committee’s objective and
inflation expectations remaining low, a few others
continued to see downside risks to inflation or anticipated only a gradual return of inflation to the 2 percent objective as the labor market strengthened further. A couple of participants expressed concern that
the Committee’s communications about a gradual
pace of policy firming might be misunderstood as a
commitment to only one or two rate hikes per year
and stressed the importance of communicating that
policy will respond to the evolving economic outlook
as appropriate to achieve the Committee’s objectives.
Participants also generally agreed that the Committee
should begin discussions at upcoming meetings about
the economic conditions that could warrant changes
in the existing policy of reinvesting proceeds from
maturing Treasury securities and principal payments
from agency debt and mortgage-backed securities, as
well as how those changes would be implemented
and communicated.

Committee Policy Action
In their discussion of monetary policy for the period
ahead, members judged that the information received
since the Committee met in December indicated that
the labor market had continued to strengthen and
that economic activity had continued to expand at a
moderate pace. Job gains had remained solid, and the
unemployment rate had stayed near its recent low.
Household spending had continued to rise moderately, while business fixed investment had remained
soft. Measures of consumer and business sentiment
had improved of late. Inflation had increased in
recent quarters but was still below the Committee’s
2 percent longer-run objective. Market-based measures of inflation compensation remained low; most
survey-based measures of longer-term inflation
expectations were little changed on balance.
With respect to the economic outlook and its implications for monetary policy, members continued to
expect that, with gradual adjustments in the stance of
monetary policy, economic activity would expand at
a moderate pace and labor market conditions would
strengthen somewhat further. Members agreed that
there was heightened uncertainty about the effects of
possible changes in fiscal and other government policies, but that near-term risks to the economic out-

139

look appeared roughly balanced. Many members
continued to see only a modest risk of a scenario in
which the unemployment rate would substantially
undershoot its longer-run normal level and inflation
pressures would increase significantly. These members expressed the view that inflation was likely to
rise toward 2 percent gradually, and that policymakers would likely have ample time to respond if signs
of rising inflationary pressures did begin to emerge.
Other members indicated that if the labor market
appeared to be tightening significantly more than
anticipated or if inflation pressures appeared to be
developing more rapidly than expected as resource
utilization tightened, it might become necessary to
adjust the Committee’s communications about the
expected path of the federal funds rate. One member
noted that, even if incoming data on the economy
and inflation were consistent with expectations, taking the next step in reducing policy accommodation
relatively soon would give the Committee greater
flexibility in calibrating policy to evolving economic
conditions.
At this meeting, members continued to expect that,
with gradual adjustments in the stance of monetary
policy, inflation would rise to the Committee’s 2 percent objective over the medium term. This view was
reinforced by the rise in inflation and increases in
inflation compensation in recent months. Against
this backdrop and in light of the current shortfall in
inflation from 2 percent, members agreed that they
would continue to closely monitor actual and
expected progress toward the Committee’s inflation
goal.
After assessing current conditions and the outlook
for economic activity, the labor market, and inflation,
members agreed to maintain the target range for the
federal funds rate at ½ to ¾ percent. They judged
that the stance of monetary policy remained accommodative, thereby supporting some further strengthening in labor market conditions and a return to
2 percent inflation.
The Committee agreed that, in determining the timing and size of future adjustments to the target range
for the federal funds rate, it would assess realized and
expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment would take into account a wide
range of information, including measures of labor
market conditions, indicators of inflation pressures
and inflation expectations, and readings on financial
and international developments. The Committee

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104th Annual Report | 2017

expected that economic conditions would evolve in a
manner that would warrant only gradual increases in
the federal funds rate and that the federal funds rate
was likely to remain, for some time, below levels
expected to prevail in the longer run. However, members emphasized that the actual path of the federal
funds rate would depend on the evolution of the economic outlook as informed by incoming data.
The Committee also decided to maintain its existing
policy of reinvesting principal payments from its
holdings of agency debt and agency mortgagebacked securities in agency mortgage-backed securities and of rolling over maturing Treasury securities
at auction, and it anticipated doing so until normalization of the level of the federal funds rate is well
under way. Members noted that this policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
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, to be
released at 2:00 p.m.:
“Effective February 2, 2017, the Federal Open
Market Committee directs the Desk to undertake open market operations as necessary to
maintain the federal funds rate in a target range
of ½ to ¾ percent, including overnight reverse
repurchase operations (and reverse repurchase
operations with maturities of more than one day
when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 0.50 percent, in amounts limited only
by the value of Treasury securities held outright
in the System Open Market Account that are
available for such operations and by a percounterparty limit of $30 billion per day.
The Committee directs the Desk to continue
rolling over maturing Treasury securities at auction and to continue reinvesting principal payments on all agency debt and agency mortgagebacked 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 vote also encompassed approval of the statement
below to be released at 2:00 p.m.:
“Information received since the Federal Open
Market Committee met in December indicates
that the labor market has continued to
strengthen and that economic activity has continued to expand at a moderate pace. Job gains
remained solid and the unemployment rate
stayed near its recent low. Household spending
has continued to rise moderately while business
fixed investment has remained soft. Measures of
consumer and business sentiment have improved
of late. Inflation increased in recent quarters but
is still below the Committee’s 2 percent longerrun objective. Market-based measures of inflation compensation remain low; most surveybased measures of longer-term inflation expectations are little changed, on balance.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment
and price stability. The Committee expects that,
with gradual adjustments in the stance of monetary policy, economic activity will expand at a
moderate pace, labor market conditions will
strengthen somewhat further, and inflation will
rise to 2 percent over the medium term. Nearterm risks to the economic outlook appear
roughly balanced. The Committee continues to
closely monitor inflation indicators and global
economic and financial developments.
In view of realized and expected labor market
conditions and inflation, the Committee decided
to maintain the target range for the federal funds
rate at ½ to ¾ percent. The stance of monetary
policy remains accommodative, thereby supporting some further strengthening in labor market
conditions and a return to 2 percent inflation.
In determining the timing and size of future
adjustments to the target range for the federal
funds rate, the Committee will assess realized
and expected economic conditions relative to its
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. In light of the current shortfall of
inflation from 2 percent, the Committee will

Minutes of Federal Open Market Committee Meetings | January–February

carefully monitor actual and expected progress
toward its inflation goal. The Committee expects
that economic conditions will evolve in a manner that will warrant only gradual increases in
the federal funds rate; the federal funds rate is
likely to remain, for some time, below levels that
are expected to prevail in the longer run. However, the actual path of the federal funds rate will
depend on the economic outlook as informed by
incoming data.
The Committee is maintaining its existing policy
of reinvesting principal payments from its holdings of agency debt and agency mortgagebacked securities in agency mortgage-backed
securities and of rolling over maturing Treasury
securities at auction, and it anticipates doing so
until normalization of the level of the federal
funds rate is well under way. This policy, by
keeping the Committee’s holdings of longerterm securities at sizable levels, should help
maintain accommodative financial conditions.”
Voting for this action: Janet L. Yellen, William C.
Dudley, Lael Brainard, Charles L. Evans, Stanley
Fischer, Patrick Harker, Robert S. Kaplan, Neel
Kashkari, Jerome H. Powell, and Daniel K. Tarullo.

141

Voting against this action: None.
Consistent with the Committee’s decision to leave the
target range for the federal funds rate unchanged, the
Board of Governors voted unanimously to leave the
interest rates on required and excess reserve balances
unchanged at 0.75 percent and voted unanimously to
approve establishment of the primary credit rate (discount rate) at the existing level of 1.25 percent.7
It was agreed that the next meeting of the Committee
would be held on Tuesday–Wednesday, March 14–15,
2017. The meeting adjourned at 10:05 a.m. on February 1, 2017.

Notation Vote
By notation vote completed on January 3, 2017, the
Committee unanimously approved the minutes of the
Committee meeting held on December 13–14, 2016.
Brian F. Madigan
Secretary
7

The second vote of the Board also encompassed approval of the
establishment of the interest rates for secondary and seasonal
credit under the existing formulas for computing such rates.

142

104th Annual Report | 2017

Meeting Held on March 14–15, 2017

Steven B. Kamin
Economist

A joint meeting of the Federal Open Market Committee and the Board of Governors was held in the
offices of the Board of Governors of the Federal
Reserve System in Washington, D.C., on Tuesday,
March 14, 2017, at 10:00 a.m. and continued on
Wednesday, March 15, 2017, at 9:00 a.m.1

Thomas Laubach
Economist
David W. Wilcox
Economist

Present

James A. Clouse, Michael Dotsey, Evan F. Koenig,
Daniel G. Sullivan, and William Wascher
Associate Economists

Janet L. Yellen
Chair

Simon Potter
Manager, System Open Market Account

William C. Dudley
Vice Chairman

Lorie K. Logan
Deputy Manager, System Open Market Account

Lael Brainard

Robert deV. Frierson
Secretary, Office of the Secretary,
Board of Governors

Charles L. Evans
Stanley Fischer
Patrick Harker
Robert S. Kaplan
Neel Kashkari
Jerome H. Powell
Daniel K. Tarullo
Marie Gooding, Jeffrey M. Lacker, Loretta J. Mester,
and John C. Williams
Alternate Members of the Federal Open Market
Committee
James Bullard, Esther L. George, and Eric Rosengren
Presidents of the Federal Reserve Banks of St. Louis,
Kansas City, and Boston, 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
Michael Held2
Deputy General Counsel
1

2

The Federal Open Market Committee is referenced as the
“FOMC” and the “Committee” in these minutes.
Attended Tuesday session only.

Matthew J. Eichner3
Director, Division of Reserve Bank Operations and
Payment Systems, Board of Governors
Michael S. Gibson
Director, Division of Supervision and Regulation,
Board of Governors
Andreas Lehnert
Director, Division of Financial Stability,
Board of Governors
Daniel M. Covitz
Deputy Director, Division of Research and Statistics,
Board of Governors
Michael T. Kiley
Deputy Director, Division of Financial Stability,
Board of Governors
Stephen A. Meyer
Deputy Director, Division of Monetary Affairs,
Board of Governors
Trevor A. Reeve
Senior Special Adviser to the Chair, Office of Board
Members, Board of Governors
David Bowman, Andrew Figura, Joseph W. Gruber,
and David Reifschneider
Special Advisers to the Board, Office of Board
Members, Board of Governors
Linda Robertson
Assistant to the Board, Office of Board Members,
Board of Governors
3

Attended through the discussion of System Open Market
Account reinvestment policy.

Minutes of Federal Open Market Committee Meetings | March

David E. Lebow and Michael G. Palumbo
Senior Associate Directors, Division of Research and
Statistics, Board of Governors
Antulio N. Bomfim and Ellen E. Meade
Senior Advisers, Division of Monetary Affairs,
Board of Governors

Paolo A. Pesenti, Julie Ann Remache,
and Ellis W. Tallman
Senior Vice Presidents, Federal Reserve Banks of
New York, New York, and Cleveland, respectively
George A. Kahn
Vice President, Federal Reserve Bank of Kansas City

Brian M. Doyle
Associate Director, Division of International Finance,
Board of Governors

William Dupor
Assistant Vice President, Federal Reserve Bank of
St. Louis

Jane E. Ihrig and David López-Salido
Associate Directors, Division of Monetary Affairs,
Board of Governors

Roy H. Webb
Senior Economist, Federal Reserve Bank of
Richmond

Stacey Tevlin
Associate Director, Division of Research and
Statistics, Board of Governors

Developments in Financial Markets and
Open Market Operations

Min Wei
Deputy Associate Director, Division of Monetary
Affairs, Board of Governors
Christopher J. Gust and Jason Wu
Assistant Directors, Division of Monetary Affairs,
Board of Governors
Paul R. Wood
Assistant Director, Division of International Finance,
Board of Governors
Penelope A. Beattie3
Assistant to the Secretary, Office of the Secretary,
Board of Governors
Michele Cavallo and Jeffrey Huther
Section Chiefs, Division of Monetary Affairs,
Board of Governors
David H. Small
Project Manager, Division of Monetary Affairs,
Board of Governors
Andrea Ajello
Principal Economist, Division of Monetary Affairs,
Board of Governors
Randall A. Williams
Information Manager, Division of Monetary Affairs,
Board of Governors
James M. Lyon and Mark L. Mullinix
First Vice Presidents, Federal Reserve Banks of
Minneapolis and Richmond, respectively
David Altig, Jeff Fuhrer, and Glenn D. Rudebusch
Executive Vice Presidents, Federal Reserve Banks of
Atlanta, Boston, and San Francisco, respectively

143

The manager of the System Open Market Account
(SOMA) reported on developments in U.S. and
global financial markets during the period since the
Committee met on January 31 and February 1, 2017.
Global equity prices generally increased further,
credit spreads on corporate debt and emerging market bonds narrowed, and yields on Treasury securities
rose somewhat. In survey responses, market participants again reported elevated uncertainty about the
outlook for U.S. economic policies and about financial asset prices, but various measures of implied
volatility nonetheless declined further. The monetary
policies of other advanced-economy central banks
remained quite accommodative, and some signs of
progress on central banks’ inflation mandates were
evident. Late in the intermeeting period, market participants came to interpret U.S. monetary policy
communications as implying high odds of a firming
of monetary policy at this meeting, and changes in
market prices suggested a slightly steeper path for the
federal funds rate over the next few years than was
previously anticipated. Survey results indicated that
market participants saw a change in the FOMC’s
policy of reinvesting principal payments on its securities holdings as most likely to be announced in late
2017 or the first half of 2018. Most market participants anticipated that, once a change to reinvestment
policy was announced, reinvestments would most
likely be phased out rather than stopped all at once.
The deputy manager followed with a briefing on
developments in money markets and open market
operations. Over the intermeeting period, federal
funds continued to trade near the center of the Committee’s ½ to ¾ percent target range except on

144

104th Annual Report | 2017

month-ends. Spreads of rates on market repurchase
agreements (repos) over the rate at the System’s overnight reverse repurchase agreement (ON RRP) facility remained relatively low. Market participants
attributed some of the recent decline in market repo
rates to a reduction in the supply of Treasury bills in
advance of the reinstatement of the statutory debt
limit on March 16. The lower market repo rates had
led to moderately higher take-up at the ON RRP
facility in recent weeks.
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
during the intermeeting period.

System Open Market Account
Reinvestment Policy
The staff provided several briefings that summarized
issues related to potential changes to the Committee’s
policy of reinvesting principal payments from securities held in the SOMA. These briefings discussed the
macroeconomic implications of alternative strategies
the Committee could employ with respect to reinvestments, including making the timing of an end to reinvestments either date dependent or dependent on
economic conditions. The briefings also considered
the advantages and disadvantages of phasing out
reinvestments or ending them all at once as well as
whether using the same approach would be appropriate for both Treasury securities and agency
mortgage-backed securities (MBS).
In their discussion, policymakers reaffirmed the
approach to balance sheet normalization articulated
in the Committee’s Policy Normalization Principles
and Plans announced in September 2014. In particular, participants agreed that reductions in the Federal
Reserve’s securities holdings should be gradual and
predictable, and accomplished primarily by phasing
out reinvestments of principal received from those
holdings. Most participants expressed the view that
changes in the target range for the federal funds rate
should be the primary means for adjusting the stance
of monetary policy when the federal funds rate was
above its effective lower bound. A number of participants indicated that the Committee should resume
asset purchases only if substantially adverse economic circumstances warranted greater monetary
policy accommodation than could be provided by
lowering the federal funds rate to the effective lower
bound. Moreover, it was noted that the Committee’s

policy of maintaining reinvestments until normalization of the level of the federal funds rate was well
under way had supported the smooth and effective
conduct of monetary policy and had helped maintain
accommodative financial conditions.
Consistent with the Policy Normalization Principles
and Plans, nearly all participants preferred that the
timing of a change in reinvestment policy depend on
an assessment of economic and financial conditions.
Several participants indicated that the timing should
be based on a quantitative threshold or trigger tied to
the target range for the federal funds rate. Some other
participants expressed the view that the timing
should depend on a qualitative judgment about economic and financial conditions. Such a judgment
would importantly encompass an assessment by the
Committee of the risks to the outlook, including the
degree of confidence that evolving circumstances
would not soon require a reversal in the direction of
policy. Taking these considerations into account,
policymakers discussed the likely level of the federal
funds rate when a change in the Committee’s reinvestment policy would be appropriate. Provided that
the economy continued to perform about as
expected, most participants anticipated that gradual
increases in the federal funds rate would continue
and judged that a change to the Committee’s reinvestment policy would likely be appropriate later this
year. Many participants emphasized that reducing
the size of the balance sheet should be conducted in a
passive and predictable manner. Some participants
expressed the view that it might be appropriate for
the Committee to restart reinvestments if the
economy encountered significant adverse shocks that
required a reduction in the target range for the federal funds rate.
When the time comes to implement a change to reinvestment policy, participants generally preferred to
phase out or cease reinvestments of both Treasury
securities and agency MBS. Policymakers also discussed the potential benefits and costs of approaches
that would either phase out or cease all at once reinvestments of principal from these securities. An
approach that phased out reinvestments was seen as
reducing the risks of triggering financial market volatility or of potentially sending misleading signals
about the Committee’s policy intentions while only
modestly slowing reductions in the Committee’s
securities holdings. An approach that ended reinvestments all at once, however, was generally viewed as
easier to communicate while allowing for somewhat
swifter normalization of the size of the balance sheet.

Minutes of Federal Open Market Committee Meetings | March

To promote rapid normalization of the size and composition of the balance sheet, one participant preferred to set a minimum pace for reductions in MBS
holdings and, if and when necessary, to sell MBS to
maintain such a pace.
Nearly all participants agreed that the Committee’s
intentions regarding reinvestment policy should be
communicated to the public well in advance of an
actual change. It was noted that the Committee
would continue its deliberations on reinvestment
policy during upcoming meetings and would release
additional information as it becomes available. In
that context, several participants indicated that, when
the Committee announces its plans for a change to
its reinvestment policy, it would be desirable to also
provide more information to the public about the
Committee’s expectations for the size and composition of the Federal Reserve’s assets and liabilities in
the longer run.

145

Americans, for Hispanics, and for whites were close
to the levels seen just before the most recent recession, but the unemployment rates for African Americans and for Hispanics remained above the rate for
whites. Over the past year or so, the jobless rate for
African Americans moved lower, while the rates for
Hispanics and for whites moved roughly sideways.
Total industrial production declined in January, as
unseasonably warm weather reduced the demand for
heating, which held down the output of utilities.
Mining output expanded further following a large
gain in the fourth quarter, and manufacturing production continued to rise at a modest pace. Automakers’ assembly schedules suggested that motor
vehicle production would remain near its January
pace, on average, over the next few months, while
broader indicators of manufacturing production,
such as the new orders indexes from national and
regional manufacturing surveys, pointed to further
modest gains in factory output over the near term.

Staff Review of the Economic Situation
The information reviewed for the March 14–15 meeting suggested that the labor market strengthened further in January and February and that real gross
domestic product (GDP) was continuing to expand
in the first quarter, albeit at a slower pace than in the
fourth quarter, with some of the slowing likely
reflecting transitory factors. The 12-month change in
consumer prices moved up in recent months and was
close to the Committee’s longer-run objective of
2 percent; excluding food and energy prices, inflation
was little changed and continued to run somewhat
below 2 percent.
Total nonfarm payroll employment increased at a
brisk pace in January and February. The unemployment rate edged back down to 4.7 percent in February, and the labor force participation rate rose over
the first two months of the year. The share of workers employed part time for economic reasons was
little changed on net. The rate of private-sector job
openings was unchanged at a high level in December,
while the rate of hiring edged up and the rate of quits
edged down. The four-week moving average of initial
claims for unemployment insurance benefits was at a
very low level in early March. Measures of labor
compensation continued to rise at a moderate rate.
Compensation per hour in the nonfarm business sector increased 3¼ percent over the four quarters of
2016, and average hourly earnings for all employees
increased 2¾ percent over the 12 months ending in
February. The unemployment rates for African

Real personal consumption expenditures (PCE)
appeared to be rising at a slower pace in the first
quarter than in the fourth quarter. Motor vehicle
sales stepped down in January and February from
their brisk year-end pace, and unseasonably warm
weather prompted a further decline in consumer
spending for energy services. Taken together, the
components of the nominal retail sales data used by
the Bureau of Economic Analysis to construct its
estimate of PCE were unchanged in February after a
robust gain in January. Recent readings on some key
factors that influence consumer spending—including
further gains in employment, real disposable personal
income, and households’ net worth—were consistent
with moderate increases in real PCE in early 2017. In
addition, consumer sentiment, as measured by the
University of Michigan Surveys of Consumers,
remained at an elevated level in February.
Recent information on housing activity suggested
that residential investment increased at a solid pace
early in the year. Starts for both new single-family
homes and multifamily units strengthened in the
fourth quarter and remained near those levels in
January. Issuance of building permits for new singlefamily homes—which tends to be a reliable indicator
of the underlying trend in construction—also moved
up in the fourth quarter and remained near that level
in January. Sales of existing homes rose in January,
while new home sales maintained their fourth-quarter
pace.

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Real private expenditures for business equipment and
intellectual property appeared to be rising in the first
quarter after a moderate gain in the fourth quarter.
Nominal new orders of nondefense capital goods
excluding aircraft recorded a solid net gain over the
three months ending in January, and indicators of
business sentiment were upbeat. Firms’ nominal
spending for nonresidential structures excluding drilling and mining was fairly flat in recent months, but
the number of crude oil and natural gas rigs in operation, an indicator of spending for structures in the
drilling and mining sector, continued to increase
through early March. The limited available data suggested that inventory investment was likely to make a
smaller contribution to real GDP growth in the early
part of the year than it did in the fourth quarter.
Total real government purchases appeared to be moving sideways in the first quarter after having been
little changed in the fourth quarter. Nominal outlays
for defense in January and February pointed to an
increase in real federal purchases. Although state and
local government payrolls expanded in January and
February, nominal construction spending by these
governments fell sharply in January.
Net exports exerted a significant drag on real GDP
growth in the fourth quarter of 2016, and the January trade data suggested that net exports would continue to weigh on growth in the first quarter of this
year. The U.S. international trade deficit widened in
January in nominal terms, with imports—led by consumer goods—rising more than exports. Over the
past six months, nominal imports grew at a much
faster pace than nominal exports.
Total U.S. consumer prices, as measured by the PCE
price index, increased a little less than 2 percent over
the 12 months ending in January. Core PCE price
inflation, which excludes changes in food and energy
prices, was 1¾ percent over those same 12 months,
held down in part by decreases in the prices of nonenergy imports over part of this period. Over the
12 months ending in February, total consumer prices
as measured by the consumer price index (CPI) rose
2¾ percent, while core CPI inflation was 2¼ percent.
The medians of survey-based measures of longer-run
inflation expectations—such as those from the
Michigan survey, the Survey of Professional Forecasters, and the Desk’s Survey of Primary Dealers
and Survey of Market Participants—were little
changed, on balance, in recent months.

Foreign real GDP growth slowed a bit in the fourth
quarter from a relatively strong rate in the third quarter, but it was still somewhat higher than its average
pace over the past two years. In much of the world,
including Europe, Japan, and most of emerging Asia,
economic activity continued to grow at a moderate
pace. In Canada and Mexico—two important trading partners of the United States—growth stepped
down from unusually strong third-quarter rates to a
still-solid pace in the fourth quarter, and Brazil’s
recession deepened. Recently released purchasing
managers indexes and confidence indicators from
abroad were generally upbeat and pointed to continued moderate foreign growth in early 2017, although
indicators from Mexico suggested a further slowing.
Inflation in the advanced foreign economies (AFEs)
continued to rise, largely reflecting increases in retail
energy prices and currency depreciation. Among the
emerging market economies (EMEs), inflation rose in
Mexico, in part reflecting a substantial hike in fuel
prices, but fell in China and parts of South America.

Staff Review of the Financial Situation
Financial markets were generally quiet over the intermeeting period. The Committee’s decision to keep
the target range for the federal funds rate unchanged
at the January–February FOMC meeting was well
anticipated. Broad equity price indexes rose further,
leaving some standard measures of valuations above
historical norms. Treasury yields rose late in the intermeeting period, following monetary policy communications by several Federal Reserve officials. The
broad dollar index was about unchanged. Financing
conditions for nonfinancial businesses, households,
and state and local governments remained generally
accommodative in recent months. Federal Reserve
communications over the intermeeting period contributed to increased expectations of a decision to
raise the target range for the federal funds rate at the
March meeting. The Chair’s semiannual monetary
policy testimony reportedly led market participants
to price in a slightly higher probability of a monetary
policy firming in the near term. Subsequently, investors took note of the mention in the minutes of the
January–February FOMC meeting that many participants expressed the view that it might be appropriate
to raise the federal funds rate again fairly soon if
incoming information on the labor market and inflation was in line with or stronger than their current
expectations or if the risks of overshooting the Committee’s maximum-employment and inflation objec-

Minutes of Federal Open Market Committee Meetings | March

tives increased. Late in the period, communications
from several Federal Reserve officials led to an
increase in market-based measures of the probability
that the target range for the federal funds rate would
rise at the March meeting.
Nominal Treasury yields increased over the intermeeting period, particularly for shorter maturities.
Treasury yields reacted only modestly over most of
the period to domestic economic data releases that
were reportedly seen as a little stronger than expected
on balance. Yields on longer-dated Treasury securities rose late in the period following comments by
Federal Reserve officials. Measures of inflation compensation based on Treasury Inflation-Protected
Securities were little changed, on net, since the February FOMC meeting.
Broad U.S. equity price indexes increased over the
intermeeting period, and some measures of valuations, such as price-to-earnings ratios, rose further
above historical norms. A standard measure of the
equity risk premium edged lower, declining into the
lower quartile of its historical distribution of the previous three decades. Stock prices rose across most
industries, and equity prices for financial firms outperformed broader indexes. Meanwhile, spreads of
yields on bonds issued by nonfinancial corporations
over those on comparable-maturity Treasury securities were little changed.
Since the previous FOMC meeting, better-thanexpected economic data and earnings releases abroad
also supported risk sentiment: Foreign equity prices
increased, flows to emerging market mutual funds
picked up, and emerging market bond spreads narrowed. Consistent with improved sentiment toward
the EMEs, the dollar depreciated against EME currencies. The Mexican peso appreciated substantially
against the dollar, although it remained weaker than
just before the U.S. elections. In contrast, the dollar
appreciated against the AFE currencies, reflecting
continued divergence in monetary policy expectations for the United States and AFEs as well as
political uncertainty in Europe. The broad dollar
index was little changed over the period. Sovereign
yields in AFEs generally increased slightly. In the
United Kingdom, however, gilt yields declined and
the pound weakened against the dollar in response to
weaker-than-expected inflation data and to an
upward revision by the Bank of England, at its early
February policy meeting, of its assessment of the

147

degree of slack in the labor market. As expected by
market participants, the European Central Bank, at
its meeting in early March, kept its policy rate and
the pace of its asset purchases unchanged.
In U.S. financial markets, credit flows to large firms
remained solid in recent months, with strong bond
issuance by investment-grade corporations and brisk
originations of leveraged loans. Bank loans continued to be largely available for small businesses,
although small business credit demand reportedly
remained subdued.
In the municipal bond market, issuance was strong in
January but decreased somewhat in February. Yields
increased a little, about in line with the rise in Treasury yields. The number of ratings upgrades notably
outpaced the number of downgrades in January and
February.
Commercial real estate loans on banks’ books continued to grow in January and February. Spreads on
highly rated commercial mortgage-backed securities
(CMBS) over Treasury securities were little changed.
However, the volumes of CMBS issuance and of
deals in the pipeline were lower in the first two
months of the year than in each of the previous two
years. Market commentators attributed some of the
slowdown to the response of issuers to risk retention
rules that took effect in late 2016. The delinquency
rate on loans in CMBS pools had risen since the
spring of 2016, reflecting increased delinquencies on
loans originated before the financial crisis.
Mortgage credit continued to be readily available for
households with strong credit scores and documented
incomes. Despite the increase in Treasury yields, the
interest rate on 30-year fixed-rate mortgages was
little changed over the intermeeting period. Closedend residential mortgage loans on banks’ books were
about flat in January and February, while banks’
holdings of home equity lines of credit continued
their long contraction. Financing conditions in the
market for asset-backed securities remained favorable. Consumer credit continued to increase at a
steady pace, with similar growth rates across credit
card, automobile, and student loans. The growth of
consumer lending at banks continued in January and
February, albeit at a slower pace than in the fourth
quarter of 2016. Financing conditions for consumers
remained accommodative except in the market for
subprime credit card loans.

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104th Annual Report | 2017

Staff Economic Outlook
In the U.S. economic projection prepared by the staff
for the March FOMC meeting, the near-term forecast for real GDP growth was a little weaker, on net,
than in the previous projection. Real GDP was
expected to expand at a slower rate in the first quarter than in the fourth quarter, reflecting some data
for January that were judged to be transitorily weak,
but growth was projected to move back up in the second quarter. The staff maintained its assumption—
provisionally included starting with the December 2016 forecast—of a more expansionary fiscal
policy in the coming years, but it pushed back the
timing of when those policy changes were anticipated
to take effect. The negative effect of this timing
change on projected real GDP growth through 2019
was offset by a higher assumed path for equity prices
and by a lower assumed path for the exchange value
of the dollar. All told, the staff’s forecast for the level
of real GDP at the end of 2019 was essentially unrevised from the previous forecast, and the staff continued to project that real GDP would expand at a
modestly faster pace than potential output in 2017
through 2019. The unemployment rate was forecast
to edge down gradually through the end of 2019 and
to run below the staff’s estimate of its longer-run
natural rate; the path for the unemployment rate was
little changed from the previous projection.
The staff’s forecast for consumer price inflation, as
measured by changes in the PCE price index, was
unchanged for 2017 as a whole and over the next
couple of years. The staff continued to project that
inflation would increase gradually over this period, as
food and energy prices, along with the prices of nonenergy imports, were expected to begin steadily rising
this year. However, inflation was projected to be
slightly below the Committee’s longer-run objective
of 2 percent in 2019.
The staff viewed the uncertainty around its projections for real GDP growth, the unemployment rate,
and inflation as similar to the average of the past
20 years. The risks to the forecast for real GDP were
seen as tilted to the downside, primarily reflecting the
staff’s assessment that monetary policy appeared to
be better positioned to respond to large positive
shocks to the economic outlook than substantial
adverse ones. However, the staff viewed the risks to
the forecast as less pronounced than in the recent
past, reflecting both somewhat diminished risks to
the foreign outlook and an increase in U.S. consumer
and business confidence over recent months. Consis-

tent with the downside risks to aggregate demand,
the staff viewed the risks to its outlook for the unemployment rate as tilted to the upside. The risks to the
projection for inflation were seen as roughly balanced. The downside risks from the possibility that
longer-term inflation expectations may have edged
down or that the dollar could appreciate substantially
further were seen as roughly counterbalanced by the
upside risk that inflation could increase more than
expected in an economy that was projected to continue operating above its longer-run potential.

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 output growth, the
unemployment rate, and inflation for each year from
2017 through 2019 and over the longer run, based on
their individual assessments of the appropriate path
for the federal funds rate.4 The longer-run projections
represented 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.5
These projections and policy assessments are
described in the Summary of Economic Projections
(SEP), which is an addendum to these minutes.
In their discussion of the economic situation and the
outlook, meeting participants agreed that information received over the intermeeting period indicated
that the labor market had continued to strengthen
and that economic activity had continued to expand
at a moderate pace. Job gains had remained solid and
the unemployment rate was little changed in recent
months. Household spending had continued to rise
moderately while business fixed investment appeared
to have firmed somewhat. Inflation had increased in
recent quarters and moved close to the Committee’s
2 percent longer-run objective; excluding energy and
food prices, inflation was little changed and had continued to run somewhat below 2 percent. Marketbased measures of inflation compensation had
4

5

The office of the president of the Federal Reserve Bank of
Atlanta was vacant at the time of this FOMC meeting; the
incoming president of the Federal Reserve Bank of Atlanta is
scheduled to assume office on June 5, 2017. Marie Gooding,
First Vice President of the Federal Reserve Bank of Atlanta,
submitted economic projections.
One participant did not submit longer-run projections for real
output growth, the unemployment rate, or the federal funds
rate.

Minutes of Federal Open Market Committee Meetings | March

remained low; survey-based measures of inflation
compensation were little changed on balance.
Participants generally saw the incoming economic
information as consistent, overall, with their expectations and indicated that their views about the economic outlook had changed little since the January–
February FOMC meeting. Although GDP appeared
to be expanding relatively slowly in the current quarter, that development seemed primarily to reflect temporary factors, possibly including residual seasonality. Participants continued to anticipate that, with
gradual adjustments in the stance of monetary
policy, economic activity would expand at a moderate pace, labor market conditions would strengthen
somewhat further, and inflation would stabilize
around 2 percent over the medium term.
Participants generally judged that risks to the economic outlook remained roughly balanced overall,
although they saw some of the considerations underlying that assessment as having changed modestly.
Participants continued to underscore the considerable uncertainty about the timing and nature of
potential changes to fiscal policies as well as the size
of the effects of such changes on economic activity.
However, several participants now anticipated that
meaningful fiscal stimulus would likely not begin
until 2018. In view of the substantial uncertainty,
about half of the participants did not incorporate
explicit assumptions about fiscal policy in their projections. Nonetheless, most participants continued to
view the prospect of more expansionary fiscal policies as an upside risk to their economic forecasts. At
the same time, some participants and their business
contacts saw downside risks to labor force and economic growth from possible changes to other government policies, such as those affecting immigration
and trade. Participants generally viewed the downside
risks associated with the global economic outlook,
particularly those related to the economic situation in
China and Europe, as having diminished over recent
months. At the same time, several participants cautioned that upcoming elections in EU countries
posed both near-term and longer-term risks.
Regarding the outlook for inflation, several participants noted that the apparently modest response of
inflation to measures of resource slack in recent
years, along with inflation expectations that appeared
to have remained well anchored, limited the risk of a
marked pickup in inflation as the labor market tight-

149

ened further. In contrast, some other participants
continued to express concern that a substantial
undershooting of the longer-run normal rate of
unemployment, if it was to occur, posed a significant
upside risk to inflation, in part because of the possibility that the behavior of inflation could differ from
that in recent decades. Participants generally agreed
that it would be appropriate to continue to closely
monitor inflation indicators and global economic
and financial developments.
In their discussion of developments in the household
sector, participants agreed that consumer spending
was likely to contribute significantly to economic
growth this year. Although motor vehicle sales had
fallen early in the year and some other components
of PCE had also declined, many participants suggested that the slowdown in consumer spending in
January would likely be temporary. The slowing
appeared to mainly reflect transitory factors like
lower energy consumption induced by warm weather
or delays in processing income tax refunds. In addition, conditions conducive to growth in consumer
spending, such as a strong labor market or higher
levels of household wealth, were expected to persist.
A number of participants also cited buoyant consumer confidence as potentially supporting household expenditures, although some also mentioned
that improved sentiment did not appear to have
appreciably altered the trajectory of consumer spending so far. In the housing market, access to mortgage
credit that was still restricted for some borrowers,
constraints on buildable land in some regions, and
rising interest rates were cited as having continued to
restrain the recovery in housing.
Participants generally agreed that recent momentum
in the business sector had been sustained over the
intermeeting period. Many reported that manufacturing activity in their Districts had strengthened further, and reports from the service sector were positive. Business optimism remained elevated in a number of Districts. A few participants reported
increased capital expenditures by businesses in their
Districts, but business contacts in several other Districts said they were waiting for more clarity about
government policy initiatives before implementing
capital expansion plans. Investment in oil drilling,
and particularly extraction from shale, was described
as increasing in a couple of Districts, and demand for
related production inputs was also said to be expanding. Nonetheless, slower economic growth, ample

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existing capacity, and modest returns in the energy
sector were noted as factors that were continuing to
restrain overall capital spending.
Labor market conditions had continued to improve.
Monthly increases in nonfarm payroll employment
averaged nearly 210,000 over the three months ending in February, the unemployment rate edged down,
and the labor force participation rate ticked up. Some
participants cited anecdotal evidence of a tightening
of labor markets. Business contacts in many Districts
reported difficulty recruiting qualified workers and
indicated that they had to either offer higher wages
or hire workers with lower qualifications than
desired. A couple of participants reported that the
ongoing mismatch between the skill requirements of
available jobs and the qualifications of job applicants
was a factor boosting the number of unfilled positions. Tight labor markets were said to increasingly
be a factor in businesses’ planning. More employers
reportedly were addressing the scarcity of labor by
expanding vocational programs, but contacts emphasized that, to be effective, such efforts needed to be
complemented by other programs such as assistance
with child care and transportation. Shortages of production crews were said to have restricted oil drilling
in a couple of Districts. In contrast, several other
participants cited evidence that some slack remained
in the labor market, such as still-modest aggregate
wage growth and the unevenness of wage gains
across industries, an elevated share of employees
working part time for economic reasons, or other
broad measures of labor underutilization. Participants noted the continued stability of the labor force
participation rate in the face of its demographically
driven downward trend. A few participants interpreted that development as suggesting that slack in
the labor market was minimal. A few others saw it as
an indication that labor force participation could
increase a bit more relative to trend and thus that
some further reduction in labor market slack could
occur. Most participants still expected that if economic growth stayed moderate, as they projected, the
unemployment rate would remain only modestly
below their estimates of the longer-run normal rate
of unemployment over the next few years. Some
other participants, however, anticipated a more substantial undershoot.
Participants generally viewed the information
received over the intermeeting period as reinforcing
their expectation that inflation would stabilize
around the Committee’s 2 percent objective over the

medium term. The 12-month change in headline
PCE prices increased from 1.7 percent in December
to 1.9 percent in January, as the effects of firmer consumer energy prices were registered. Core PCE prices
rose at a relatively quick pace of 0.3 percent for the
month of January, although it was noted that
residual seasonality might have exaggerated the
increase. The Federal Reserve Bank of Dallas’s
12-month trimmed mean PCE inflation rate had
gradually increased over the past couple of years,
reaching 1.9 percent in January. Although marketbased measures of inflation compensation had
remained low, they were somewhat above the levels
seen last year. In addition, longer-term inflation
expectations in the Michigan survey had been relatively stable since the beginning of the year, while
other survey measures of inflation expectations, such
as the three-year-ahead measure from the Federal
Reserve Bank of New York’s Survey of Consumer
Expectations, had increased in recent months. Notwithstanding these developments, some participants
cautioned that progress toward the Committee’s
inflation objective should not be overstated; they
noted that inflation had been persistently below
2 percent during the current economic expansion and
that core inflation on a 12-month basis was little
changed in recent months at a level below 2 percent.
In contrast, a few other participants commented that
recent inflation data were stronger than they had
expected and that they anticipated that inflation
would reach the Committee’s objective of 2 percent
this year.
In their discussion of recent developments in financial markets, participants noted that financial conditions remained accommodative despite the rise in
longer-term interest rates in recent months and continued to support the expansion of economic activity.
Many participants discussed the implications of the
rise in equity prices over the past few months, with
several of them citing it as contributing to an easing
of financial conditions. A few participants attributed
the recent equity price appreciation to expectations
for corporate tax cuts or to increased risk tolerance
among investors rather than to expectations of
stronger economic growth. Some participants viewed
equity prices as quite high relative to standard valuation measures. It was observed that prices of other
risk assets, such as emerging market stocks, highyield corporate bonds, and commercial real estate,
had also risen significantly in recent months. In contrast, prices of farmland reportedly had edged lower,
in part because low commodity prices continued to

Minutes of Federal Open Market Committee Meetings | March

weigh on farm income. Still, farmland valuations
were said to remain quite high as gauged by standard
benchmarks such as rent-to-price ratios.
In their consideration of monetary policy, participants generally agreed that the data over the intermeeting period were broadly in line with their expectations, providing evidence of further strengthening
of labor market conditions and ongoing progress
toward the Committee’s objective of 2 percent inflation. Participants noted that their views of the economic outlook were essentially unchanged from
those of the past couple of meetings. Almost all participants saw the incoming data as consistent with an
increase of 25 basis points in the target range for the
federal funds rate at this meeting. They judged that,
even after an increase in the target range, the stance
of monetary policy would remain accommodative,
supporting some additional strengthening in labor
market conditions and a sustained return to 2 percent inflation.
With their views of the outlook for the economy little
changed, participants generally continued to judge
that a gradual pace of rate increases was likely to be
appropriate to promote the Committee’s objectives
of maximum employment and 2 percent inflation.
Participants pointed to several reasons for their
assessment that a gradual removal of policy accommodation likely would be appropriate. A few noted
that it could take some time for inflation to rise to
2 percent on a sustained basis, and thus monetary
policy would likely need to remain accommodative
for a while longer in order to support the economic
conditions that would foster such an increase. Several
participants remarked that risk-management considerations still argued for a gradual removal of accommodation because the proximity of the federal funds
rate to the effective lower bound placed constraints
on the ability of monetary policy to respond to
adverse shocks. Moreover, the neutral real rate—defined as the real interest rate that is neither expansionary nor contractionary when the economy is
operating at or near its potential—still appeared to
be low by historical standards. Furthermore, uncertainty about current and prospective values of the
neutral real rate reinforced the argument for a
gradual approach to removing monetary policy
accommodation over the next few years.
Participants emphasized that they stood ready to
change their assessments of, and communications
about, the appropriate path for the federal funds rate
in response to unanticipated developments. They

151

pointed to several risks that, if realized, could lead
them to reassess their views of the appropriate policy
path. These risks included the possibility of stronger
spending by businesses and households as a result of
improved sentiment, appreciably more expansionary
fiscal policy, or a more rapid buildup of inflationary
pressures than anticipated. In addition, a number of
participants remarked that recent and prospective
changes in financial conditions posed upside risks to
their economic projections, to the extent that financial developments provided greater stimulus to spending than currently anticipated, as well as downside
risks to their economic projections if, for example,
financial markets were to experience a significant
correction. Participants also mentioned potential
developments abroad that could have adverse implications for the U.S. economy.
Nearly all participants judged that the U.S. economy
was operating at or near maximum employment. In
contrast, participants held different views regarding
prospects for the attainment of the Committee’s
inflation goal. A number of participants noted that
core inflation was a useful indicator of future headline inflation, and the latest reading on 12-month
core inflation suggested that it could still be some
time before headline inflation reached 2 percent on a
sustained basis. Moreover, several participants
remarked that even though inflation was currently
not that far below the Committee’s 2 percent objective, it was important for the Committee to remove
accommodation gradually to help ensure that inflation would stabilize around that objective over the
medium term. These participants emphasized that a
sustained return to 2 percent inflation was particularly important in light of the persistent shortfall of
inflation from its objective over the past several years.
However, several other participants judged that—
with the headline PCE price index rising nearly 2 percent and the core PCE index increasing close to
1¾ percent over the 12-month period ending in January—the Committee essentially had met its inflation
goal or was poised to meet it later this year. In the
view of these participants, such circumstances could
warrant a faster pace of scaling back accommodation than implied by the medians of participants’
assessments in the SEP.

Committee Policy Action
In their discussion of monetary policy for the period
ahead, members judged that the information received
since the Committee’s previous meeting indicated
that the labor market had continued to strengthen

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104th Annual Report | 2017

and that economic activity had continued to expand
at a moderate pace. Job gains had remained solid,
and the unemployment rate had changed little in
recent months. Household spending had continued to
rise moderately, while business fixed investment
appeared to have firmed somewhat.
Inflation had increased in recent quarters, with the
12-month change in the headline PCE price index rising to nearly 2 percent in January, close to the Committee’s longer-run objective. However, nearly all
members judged that the Committee had not yet
achieved its objective for headline inflation on a sustained basis. Members generally viewed it as important to highlight that core inflation—which excludes
volatile energy and food prices and historically has
tended to be a good indicator of future headline
inflation—was little changed and continued to run
somewhat below 2 percent. Moreover, market-based
measures of inflation compensation had
remained low.
With respect to the economic outlook and its implications for monetary policy, members continued to
expect that, with gradual adjustments in the stance of
monetary policy, economic activity would expand at
a moderate pace and labor market conditions would
strengthen somewhat further. It was noted that recent
increases in consumer energy prices could cause
inflation to temporarily reach or even rise a bit above
2 percent in the near term. Members anticipated that
inflation would stabilize around 2 percent over the
medium term and commented that transitory deviations above and below 2 percent were to be expected.
Members continued to judge that there was significant uncertainty about the effects of possible changes
in fiscal and other government policies but that nearterm risks to the economic outlook appeared roughly
balanced. A few members noted that domestic upside
risks may have increased somewhat in recent months,
partly reflecting potential changes in fiscal policy,
while some downside risks from abroad appeared to
have diminished. Members agreed that they would
continue to closely monitor inflation indicators and
global economic and financial developments.
After assessing current conditions and the outlook
for economic activity, the labor market, and inflation,
all but one member agreed to raise the target range
for the federal funds rate to ¾ to 1 percent. This
increase was viewed as appropriate in light of the further progress that had been made toward the Committee’s objectives of maximum employment and
2 percent inflation. Members generally noted that the

increase in the target range did not reflect changes in
their assessments of the economic outlook or the
appropriate path of the federal funds rate, adding
that the increase was consistent with the gradual pace
of removal of accommodation that was anticipated
in December, when the Committee last raised the target range.
In the view of one member, it was premature to raise
the target range for the federal funds rate at this
meeting. That member preferred to await additional
information on the amount of slack remaining in the
labor market and increased evidence that inflation
would stabilize at the Committee’s objective before
taking another step to remove monetary policy
accommodation.
Members agreed that, in determining the timing and
size of future adjustments to the target range for the
federal funds rate, the Committee would assess realized and expected economic conditions relative to its
objectives of maximum employment and 2 percent
inflation. This assessment would take into account a
wide range of information, including measures of
labor market conditions, indicators of inflation pressures and inflation expectations, and readings on
financial and international developments. Partly in
light of the likelihood that the recent higher readings
on headline inflation had mostly reflected the temporary effect of increases in consumer energy prices,
members agreed that the Committee would continue
to carefully monitor actual and expected inflation
developments relative to its inflation goal. A few
members expressed the view that the Committee
should avoid policy actions or communications that
might be interpreted as suggesting that the Committee’s 2 percent inflation objective was actually a ceiling. Several members observed that an explicit recognition in the statement that the Committee’s inflation
goal was symmetric could help support inflation
expectations at a level consistent with that goal, and
it was noted that a symmetric inflation objective
implied that the Committee would adjust the stance
of monetary policy in response to inflation that was
either persistently above or persistently below 2 percent. Members also reiterated that they expected that
economic conditions would evolve in a manner that
would warrant gradual increases in the federal funds
rate. They agreed that the federal funds rate was
likely to remain, for some time, below levels expected
to prevail in the longer run. However, they noted that
the actual path of the federal funds rate would
depend on the economic outlook as informed by
incoming data.

Minutes of Federal Open Market Committee Meetings | March

The Committee decided to maintain its existing
policy of reinvesting principal payments from its
holdings of agency debt and agency mortgagebacked securities in agency mortgage-backed securities and of rolling over maturing Treasury securities
at auction. Members anticipated doing so until normalization of the level of the federal funds rate was
well under way. They noted that this policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
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, to be
released at 2:00 p.m.:
“Effective March 16, 2017, the Federal Open
Market Committee directs the Desk to undertake open market operations as necessary to
maintain the federal funds rate in a target range
of ¾ to 1 percent, including overnight reverse
repurchase operations (and reverse repurchase
operations with maturities of more than one day
when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 0.75 percent, in amounts limited only
by the value of Treasury securities held outright
in the System Open Market Account that are
available for such operations and by a percounterparty limit of $30 billion per day.
The Committee directs the Desk to continue
rolling over maturing Treasury securities at auction and to continue reinvesting principal payments on all agency debt and agency mortgagebacked 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 vote also encompassed approval of the statement
below to be released at 2:00 p.m.:
“Information received since the Federal Open
Market Committee met in February indicates
that the labor market has continued to
strengthen and that economic activity has continued to expand at a moderate pace. Job gains
remained solid and the unemployment rate was

153

little changed in recent months. Household
spending has continued to rise moderately while
business fixed investment appears to have firmed
somewhat. Inflation has increased in recent
quarters, moving close to the Committee’s 2 percent longer-run objective; excluding energy and
food prices, inflation was little changed and continued to run somewhat below 2 percent.
Market-based measures of inflation compensation remain low; survey-based measures of
longer-term inflation expectations are little
changed, on balance.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment
and price stability. The Committee expects that,
with gradual adjustments in the stance of monetary policy, economic activity will expand at a
moderate pace, labor market conditions will
strengthen somewhat further, and inflation will
stabilize around 2 percent over the medium
term. Near-term risks to the economic outlook
appear roughly balanced. The Committee continues to closely monitor inflation indicators and
global economic and financial developments.
In view of realized and expected labor market
conditions and inflation, the Committee decided
to raise the target range for the federal funds
rate to ¾ to 1 percent. The stance of monetary
policy remains accommodative, thereby supporting some further strengthening in labor market
conditions and a sustained return to 2 percent
inflation.
In determining the timing and size of future
adjustments to the target range for the federal
funds rate, the Committee will assess realized
and expected economic conditions relative to its
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 will carefully
monitor actual and expected inflation developments relative to its symmetric inflation goal.
The Committee expects that economic conditions will evolve in a manner that will warrant
gradual increases in the federal funds rate; the
federal funds rate is likely to remain, for some
time, below levels that are expected to prevail in
the longer run. However, the actual path of the

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104th Annual Report | 2017

federal funds rate will depend on the economic
outlook as informed by incoming data.
The Committee is maintaining its existing policy
of reinvesting principal payments from its holdings of agency debt and agency mortgagebacked securities in agency mortgage-backed
securities and of rolling over maturing Treasury
securities at auction, and it anticipates doing so
until normalization of the level of the federal
funds rate is well under way. This policy, by
keeping the Committee’s holdings of longerterm securities at sizable levels, should help
maintain accommodative financial conditions.”
Voting for this action: Janet L. Yellen, William C.
Dudley, Lael Brainard, Charles L. Evans, Stanley
Fischer, Patrick Harker, Robert S. Kaplan, Jerome H.
Powell, and Daniel K. Tarullo.
Voting against this action: Neel Kashkari.
Mr. Kashkari dissented because he preferred to
maintain the existing target range for the federal
funds rate at this meeting. In his view, recent data
had not pointed to further progress on the Committee’s dual objectives and thus had not provided a
compelling case to firm monetary policy at this meeting. He preferred to await additional information on
the amount of slack remaining in the labor market
and increased evidence that inflation would stabilize
at the Committee’s symmetric 2 percent inflation
objective before taking another step to remove monetary policy accommodation. Mr. Kashkari also preferred that when data do support a removal of monetary policy accommodation, the FOMC first publish a detailed plan to normalize its balance sheet
before proceeding with further increases in the federal funds rate.

To support the Committee’s decision to raise the target range for the federal funds rate, the Board of
Governors voted unanimously to raise the interest
rates on required and excess reserve balances ¼ percentage point, to 1 percent, effective March 16, 2017.
The Board of Governors also voted unanimously to
approve a ¼ percentage point increase in the primary
credit rate (discount rate) to 1½ percent, effective
March 16, 2017.6
It was agreed that the next meeting of the Committee
would be held on Tuesday–Wednesday, May 2–3,
2017. The meeting adjourned at 10:40 a.m. on
March 15, 2017.

Notation Vote
By notation vote completed on February 21, 2017,
the Committee unanimously approved the minutes of
the Committee meeting held on January 31–
February 1, 2017.
Brian F. Madigan
Secretary

6

In taking this action, the Board approved requests submitted by
the boards of directors of the Federal Reserve Banks of Boston,
Philadelphia, Cleveland, Richmond, Atlanta, Chicago, Kansas
City, Dallas, and San Francisco. This vote also encompassed
approval by the Board of Governors of the establishment of a
1½ percent primary credit rate by the remaining Federal
Reserve Banks, effective on the later of March 16, 2017, and the
date such Reserve Banks informed the Secretary of the Board
of such a request. (Secretary’s note: Subsequently, the Federal
Reserve Banks of New York, St. Louis, and Minneapolis were
informed by the Secretary of the Board of the Board’s approval
of their establishment of a primary credit rate of 1½ percent,
effective March 16, 2017.) The second vote of the Board also
encompassed approval of the establishment of the interest rates
for secondary and seasonal credit under the existing formulas
for computing such rates.

Minutes of Federal Open Market Committee Meetings | March

155

Addendum:
Summary of Economic Projections

nomic projections were generally quite similar to
those submitted in December. Table 1 and figure 1
provide summary statistics for the projections.

In conjunction with the Federal Open Market Committee (FOMC) meeting held on March 14–15, 2017,
meeting participants submitted their projections of
the most likely outcomes for real output growth, the
unemployment rate, and inflation for each year from
2017 to 2019 and over the longer run.7 Each participant’s projection was based on information available
at the time of the meeting, together with his or her
assessment of appropriate monetary policy, including
a path for the federal funds rate and its longer-run
value, and assumptions about other factors likely to
affect economic outcomes. The longer-run projections represent each participant’s assessment of the
value 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.8 “Appropriate monetary policy” is defined
as the future path of policy that each participant
deems most likely to foster outcomes for economic
activity and inflation that best satisfy his or her individual interpretation of the Federal Reserve’s objectives of maximum employment and stable prices.

As shown in figure 2, all but one participant expected
that the evolution of economic conditions would
likely warrant gradual increases in the federal funds
rate to achieve and sustain maximum employment
and 2 percent inflation. The medians of projections
for the federal funds rate in 2017, 2018, and 2019
were essentially the same as those in the December
Summary of Economic Projections (SEP). The
median for 2019 was equal to the median of the
longer-run projections. However, the economic outlook is uncertain, and participants noted that their
economic projections and assessments of appropriate
monetary policy could change in response to incoming information.

Most FOMC participants expected that, under
appropriate monetary policy, growth in real gross
domestic product (GDP) would run somewhat above
their individual estimates of its longer-run rate this
year and in 2018, while about half of the participants
projected that economic growth would slow in 2019
and run at or slightly below their individual longerrun estimates. A substantial majority of participants
projected that the unemployment rate would run
below their estimates of its longer-run normal level in
2017 and remain below that level through 2019. A
large majority of participants projected that inflation, as measured by the four-quarter percentage
change in the price index for personal consumption
expenditures (PCE), would increase over the next two
years; a majority of participants projected that inflation would be at the Committee’s 2 percent objective
in 2019, and all participants projected that inflation
would be within a couple of tenths of a percentage
point of the objective in that year. Participants’ eco7

8

The office of the president of the Federal Reserve Bank of
Atlanta was vacant at the time of this FOMC meeting; the
incoming president is scheduled to assume office on June 5,
2017. Marie Gooding, First Vice President of the Federal
Reserve Bank of Atlanta, submitted economic projections.
One participant did not submit longer-run projections for real
output growth, the unemployment rate, or the federal funds
rate.

Most participants viewed the uncertainty attached to
their projections as broadly similar to the average of
the past 20 years, although some participants saw the
uncertainty associated with their forecasts as higher
than average. Most participants also judged the risks
around their projections for economic growth, the
unemployment rate, and inflation as broadly balanced, while several participants saw the risks to their
forecasts of real GDP growth and inflation as
weighted to the upside and several participants
viewed the risks to their unemployment rate forecasts
as tilted to the downside.
Figures 4.A, 4.B, and 4.C for real GDP growth, the
unemployment rate, and inflation, respectively, present for the first time “fan charts” as well as charts of
participants’ current qualitative assessments of the
uncertainty and risks surrounding their economic
projections. The fan charts (the panels at the top of
these three figures) show the medians of participants’
projections surrounded by confidence intervals that
are computed from the forecast errors of various private and government projections made over the past
20 years. The width of the confidence interval for
each variable at a given point provides a measure of
forecast uncertainty at that horizon. For all three
macroeconomic variables, these charts illustrate that
forecast uncertainty is substantial and generally
increases as the forecast horizon lengthens. Reflecting
in part the uncertainty about the future evolution of
GDP growth, the unemployment rate, and inflation,
participants’ assessments of appropriate monetary
policy are also subject to considerable uncertainty. To
illustrate the uncertainty regarding the appropriate
path for monetary policy, figure 5 shows a compa-

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104th Annual Report | 2017

Table 1. Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents, under their individual
assessments of projected appropriate monetary policy, March 2017
Percent
Median1

Central tendency2

Variable
2017

2018

2019

Change in real GDP
December projection
Unemployment rate
December projection
PCE inflation
December projection
Core PCE inflation4
December projection

2.1
2.1
4.5
4.5
1.9
1.9
1.9
1.8

2.1
2.0
4.5
4.5
2.0
2.0
2.0
2.0

1.9
1.9
4.5
4.5
2.0
2.0
2.0
2.0

Memo: Projected
appropriate
policy path
Federal funds rate
December projection

1.4
1.4

2.1
2.1

3.0
2.9

Longer
run

2017

2018

2019

1.8
1.8
4.7
4.8
2.0
2.0

2.0–2.2
1.9–2.3
4.5–4.6
4.5–4.6
1.8–2.0
1.7–2.0
1.8–1.9
1.8–1.9

1.8–2.3
1.8–2.2
4.3–4.6
4.3–4.7
1.9–2.0
1.9–2.0
1.9–2.0
1.9–2.0

1.8–2.0
1.8–2.0
4.3–4.7
4.3–4.8
2.0–2.1
2.0–2.1
2.0–2.1
2.0

3.0
3.0

1.4–1.6
1.1–1.6

2.1–2.9
1.9–2.6

2.6–3.3
2.4–3.3

Range3
Longer
run

Longer
run

2017

2018

2019

1.8–2.0
1.8–2.0
4.7–5.0
4.7–5.0
2.0
2.0

1.7–2.3
1.7–2.4
4.4–4.7
4.4–4.7
1.7–2.1
1.7–2.0
1.7–2.0
1.7–2.0

1.7–2.4
1.7–2.3
4.2–4.7
4.2–4.7
1.8–2.1
1.8–2.2
1.8–2.1
1.8–2.2

1.5–2.2
1.5–2.2
4.1–4.8
4.1–4.8
1.8–2.2
1.8–2.2
1.8–2.2
1.8–2.2

1.6–2.2
1.6–2.2
4.5–5.0
4.5–5.0
2.0
2.0

2.8–3.0
2.8–3.0

0.9–2.1
0.9–2.1

0.9–3.4
0.9–3.4

0.9–3.9
0.9–3.9

2.5–3.8
2.5–3.8

Note: Projections of change in real gross domestic product (GDP) and projections for both measures of inflation are percent changes from the fourth quarter of the previous year
to the fourth quarter of the year indicated. PCE inflation and core PCE inflation are the percentage rates of change in, respectively, the price index for personal consumption
expenditures (PCE) and the price index for PCE excluding food and energy. Projections for the unemployment rate are for the average civilian unemployment rate in the fourth
quarter of the year indicated. Each participant’s projections are based on his or her assessment of appropriate monetary policy. Longer-run projections represent each
participant’s assessment of the rate to which each variable would be expected to converge under appropriate monetary policy and in the absence of further shocks to the
economy. The projections for the federal funds rate are the value of the midpoint of the projected appropriate target range for the federal funds rate or the projected appropriate
target level for the federal funds rate at the end of the specified calendar year or over the longer run. The December projections were made in conjunction with the meeting of
the Federal Open Market Committee on December 13–14, 2016. One participant did not submit longer-run projections for the change in real GDP, the unemployment rate, or the
federal funds rate in conjunction with the December 13–14, 2016, meeting, and one participant did not submit such projections in conjunction with the March 14–15, 2017,
meeting.
1
For each period, the median is the middle projection when the projections are arranged from lowest to highest. When the number of projections is even, the median is the
average of the two middle projections.
2
The central tendency excludes the three highest and three lowest projections for each variable in each year.
3
The range for a variable in a given year includes all participants’ projections, from lowest to highest, for that variable in that year.
4
Longer-run projections for core PCE inflation are not collected.

Minutes of Federal Open Market Committee Meetings | March

157

Figure 1. Medians, central tendencies, and ranges of economic projections, 2017–19 and over the longer run
Percent

Change in real GDP
Median of projections
Central tendency of projections
Range of projections

3

2

1

Actual

2012

2013

2014

2015

2016

2017

2018

2019

Longer
run
Percent

Unemployment rate
8
7
6
5
4

2012

2013

2014

2015

2016

2017

2018

2019

Longer
run
Percent

PCE inflation
3

2

1

2012

2013

2014

2015

2016

2017

2018

2019

Longer
run
Percent

Core PCE inflation
3

2

1

2012

2013

2014

2015

2016

2017

2018

2019

Note: Definitions of variables and other explanations are in the notes to table 1. The data for the actual values of the variables are annual.

Longer
run

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104th Annual Report | 2017

Figure 2. FOMC participants’ assessments of appropriate monetary policy: Midpoint of target range or target level for the
federal funds rate
Percent
5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

2017

2018

2019

Longer run

Note: Each shaded circle indicates the value (rounded to the nearest ⅛ percentage point) of an individual participant’s judgment of the midpoint of the appropriate target range
for the federal funds rate or the appropriate target level for the federal funds rate at the end of the specified calendar year or over the longer run. One participant did not submit
longer-run projections for the federal funds rate.

Minutes of Federal Open Market Committee Meetings | March

rable fan chart around the medians of participants’
assessments for the federal funds rate.9 As with the
macroeconomic variables, forecast uncertainty for
short-term interest rates is substantial and increases
as the horizon lengthens.

The Outlook for Economic Activity
The median of participants’ projections for the
growth rate of real GDP, conditional on their individual assumptions about appropriate monetary
policy, was 2.1 percent in 2017 and 2018 and 1.9 percent in 2019; the median of projections for the
longer-run normal rate of real GDP growth was
1.8 percent. Compared with the December SEP, the
medians of the forecasts for real GDP growth over
the period from 2017 to 2019, as well as the median
assessment of the longer-run growth rate, were
mostly unchanged. As in December, about half of
the participants incorporated expectations of fiscal
stimulus into their projections; almost all in this
group projected slightly higher real GDP growth next
year relative to their December projections.

159

The Outlook for Inflation
The medians of projections for headline PCE price
inflation were 1.9 percent in 2017 and 2.0 percent in
2018 and 2019; these medians were unchanged from
December. Only a few participants saw inflation continuing to run below 2 percent in 2019, while several
participants projected that inflation would run modestly above the Committee’s objective in that year.
The medians of projections for core inflation were
1.9 percent in 2017 and 2.0 percent in 2018 and 2019,
very similar to the contour in December.
Figures 3.C and 3.D provide information on the distributions of participants’ views about the outlook
for inflation. The distributions of projections for
headline PCE price inflation were largely unchanged
from December, while the distributions for core PCE
price inflation shifted up slightly. Some participants
attributed the upward shift in their projections for
core inflation to recent data that were somewhat
above expectations.

Appropriate Monetary Policy
The median of projections for the unemployment
rate in the fourth quarter of 2017 was 4.5 percent,
unchanged from December and 0.2 percentage point
below the median assessment of its longer-run normal level. Almost all participants projected that the
unemployment rate would not change much over the
subsequent two years. Based on the median projections, the anticipated path of the unemployment rate
for coming years was also unchanged from the previous forecast. The median estimate of the longer-run
normal rate of unemployment was 4.7 percent,
slightly lower than in December.
Figures 3.A and 3.B show the distributions of participants’ projections for real GDP growth and the
unemployment rate from 2017 to 2019 and in the longer run. The distribution of individual projections of
real GDP growth for this year was less dispersed relative to the distribution of the December projections,
while the distribution for 2018 shifted up slightly. The
distributions of projections for the unemployment
rate were unchanged for 2017 and 2018, while they
shifted slightly lower for 2019 and for the longer-run
normal rate.
9

The fan chart for the federal funds rate provides a depiction of
the uncertainty around the median assessment of the future
path of appropriate monetary policy and is closely connected
with the uncertainty about the future value of economic variables. In contrast, the dot plot shown in figure 2 displays the
dispersion of views across individual participants about the
appropriate level of the federal funds rate.

Figure 3.E provides the distribution of participants’
judgments regarding the appropriate target or midpoint of the target range for the federal funds rate at
the end of each year from 2017 to 2019 and over the
longer run.10 The distributions for 2017 through 2019
shifted up modestly. The median projections of the
federal funds rate continued to show gradual
increases, with the median assessment for 2017 standing at 1.38 percent, consistent with three 25 basis
point rate increases this year. Thereafter, the medians
of the projections were 2.13 percent at the end of
2018 and 3.00 percent at the end of 2019; the median
of the longer-run projections of the federal funds
rate was 3.00 percent. Compared with the December
SEP, the median of the projections for the federal
funds rate rose only for 2019, and in that case just
slightly.
In discussing their March forecasts, many participants continued to express the view that the appropriate upward trajectory of the federal funds rate
10

One participant’s projections for the federal funds rate, real
GDP growth, the unemployment rate, and inflation were
informed by the view that there are multiple possible mediumterm regimes for the U.S. economy, that these regimes are persistent, and that the economy shifts between regimes in a way
that cannot be forecast. Under this view, the economy currently
is in a regime characterized by expansion of economic activity
with low productivity growth and a low short-term real interest
rate, but longer-term outcomes for variables other than inflation
cannot be usefully projected.

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104th Annual Report | 2017

Figure 3.A. Distribution of participants’ projections for the change in real GDP, 2017–19 and over the longer run
Number of participants

2017
18
16
14
12
10
8
6
4
2

March projections
December projections

1.4 –
1.5

1.6 –
1.7

1.8 –
1.9

2.0 –
2.1

2.2 –
2.3

2.4 –
2.5

Percent range
Number of participants

2018
18
16
14
12
10
8
6
4
2
1.4 –
1.5

1.6 –
1.7

1.8 –
1.9

2.0 –
2.1

2.2 –
2.3

2.4 –
2.5

Percent range
Number of participants

2019
18
16
14
12
10
8
6
4
2
1.4 –
1.5

1.6 –
1.7

1.8 –
1.9

2.0 –
2.1

2.2 –
2.3

2.4 –
2.5

Percent range
Number of participants

Longer run
18
16
14
12
10
8
6
4
2
1.4 –
1.5

1.6 –
1.7

1.8 –
1.9

2.0 –
2.1

Percent range
Note: Definitions of variables and other explanations are in the notes to table 1.

2.2 –
2.3

2.4 –
2.5

Minutes of Federal Open Market Committee Meetings | March

161

Figure 3.B. Distribution of participants’ projections for the unemployment rate, 2017–19 and over the longer run
Number of participants

2017
March projections
December projections

4.0 –
4.1

18
16
14
12
10
8
6
4
2
4.2 –
4.3

4.4 –
4.5

4.6 –
4.7

4.8 –
4.9

5.0 –
5.1

Percent range
Number of participants

2018
18
16
14
12
10
8
6
4
2
4.0 –
4.1

4.2 –
4.3

4.4 –
4.5

4.6 –
4.7

4.8 –
4.9

5.0 –
5.1

Percent range
Number of participants

2019
18
16
14
12
10
8
6
4
2
4.0 –
4.1

4.2 –
4.3

4.4 –
4.5

4.6 –
4.7

4.8 –
4.9

5.0 –
5.1

Percent range
Number of participants

Longer run
18
16
14
12
10
8
6
4
2
4.0 –
4.1

4.2 –
4.3

4.4 –
4.5

4.6 –
4.7

Percent range
Note: Definitions of variables and other explanations are in the notes to table 1.

4.8 –
4.9

5.0 –
5.1

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104th Annual Report | 2017

Figure 3.C. Distribution of participants’ projections for PCE inflation, 2017–19 and over the longer run
Number of participants

2017
18
16
14
12
10
8
6
4
2

March projections
December projections

1.7–
1.8

1.9 –
2.0

2.1–
2.2

Percent range
Number of participants

2018
18
16
14
12
10
8
6
4
2
1.7–
1.8

1.9 –
2.0

2.1–
2.2

Percent range
Number of participants

2019
18
16
14
12
10
8
6
4
2
1.7–
1.8

1.9 –
2.0

2.1–
2.2

Percent range
Number of participants

Longer run
18
16
14
12
10
8
6
4
2
1.7–
1.8

1.9 –
2.0

Percent range
Note: Definitions of variables and other explanations are in the notes to table 1.

2.1–
2.2

Minutes of Federal Open Market Committee Meetings | March

163

Figure 3.D. Distribution of participants’ projections for core PCE inflation, 2017–19
Number of participants
2017
March projections
December projections

18
16
14
12
10
8
6
4
2

1.7–
1.8

1.9–
2.0

2.1–
2.2

Percent range
Number of participants
2018
18
16
14
12
10
8
6
4
2
1.7–
1.8

1.9–
2.0

2.1–
2.2

Percent range
Number of participants
2019
18
16
14
12
10
8
6
4
2
1.7–
1.8

1.9–
2.0

Percent range
Note: Definitions of variables and other explanations are in the notes to table 1.

2.1–
2.2

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104th Annual Report | 2017

Figure 3.E. Distribution of participants’ judgments of the midpoint of the appropriate target range for the federal funds rate or
the appropriate target level for the federal funds rate, 2017–19 and over the longer run
Number of participants

2017
18
16
14
12
10
8
6
4
2

March projections
December projections

0.88–
1.12

1.13–
1.37

1.38–
1.62

1.63–
1.87

1.88–
2.12

2.13–
2.37

2.38–
2.62

2.63–
2.87

2.88–
3.12

3.13–
3.37

3.38–
3.62

3.63–
3.87

3.88–
4.12

Percent range
Number of participants

2018
18
16
14
12
10
8
6
4
2
0.88–
1.12

1.13–
1.37

1.38–
1.62

1.63–
1.87

1.88–
2.12

2.13–
2.37

2.38–
2.62

2.63–
2.87

2.88–
3.12

3.13–
3.37

3.38–
3.62

3.63–
3.87

3.88–
4.12

Percent range
Number of participants

2019
18
16
14
12
10
8
6
4
2
0.88–
1.12

1.13–
1.37

1.38–
1.62

1.63–
1.87

1.88–
2.12

2.13–
2.37

2.38–
2.62

2.63–
2.87

2.88–
3.12

3.13–
3.37

3.38–
3.62

3.63–
3.87

3.88–
4.12

Percent range
Number of participants

Longer run
18
16
14
12
10
8
6
4
2
0.88–
1.12

1.13–
1.37

1.38–
1.62

1.63–
1.87

1.88–
2.12

2.13–
2.37

2.38–
2.62

Percent range
Note: Definitions of variables and other explanations are in the notes to table 1.

2.63–
2.87

2.88–
3.12

3.13–
3.37

3.38–
3.62

3.63–
3.87

3.88–
4.12

Minutes of Federal Open Market Committee Meetings | March

Table 2. Average historical projection error ranges
Percentage points
Variable
Change in real GDP1
Unemployment rate1
Total consumer prices2
Short-term interest rates3

2017

2018

2019

±1.6
±0.5
±0.9
±0.9

±2.1
±1.3
±1.1
±2.0

±2.1
±1.8
±1.1
±2.4

Note: Error ranges shown are measured as plus or minus the root mean squared
error of projections for 1997 through 2016 that were released in the spring by
various private and government forecasters. As described in the box “Forecast
Uncertainty,” under certain assumptions, there is about a 70 percent probability
that actual outcomes for real GDP, unemployment, consumer prices, and the
federal funds rate will be in ranges implied by the average size of projection
errors made in the past. For more information, see David Reifschneider and Peter
Tulip (2017), “Gauging the Uncertainty of the Economic Outlook Using Historical
Forecasting Errors: The Federal Reserve’s Approach,” Finance and Economics
Discussion Series 2017-020 (Washington: Board of Governors of the Federal
Reserve System, February), available at www.federalreserve.gov/econresdata/
feds/2017/files/2017020pap.pdf.
1
Definitions of variables are in the general note to table 1.
2
Measure is the overall consumer price index, the price measure that has been
most widely used in government and private economic forecasts. Projection
is percent change, fourth quarter of the previous year to the fourth quarter of
the year indicated.
3
For Federal Reserve staff forecasts, measure is the federal funds rate. For other
forecasts, measure is the rate on 3-month Treasury bills. Historical projections
are the average level, in percent, in the fourth quarter of the year indicated.

over the next few years would likely be gradual. That
anticipated pace reflected a few factors, such as a
short-term neutral real interest rate that was currently
low and was expected to move up only slowly as well
as a gradual return of inflation to the Committee’s
2 percent objective. A few participants indicated that
positive news on inflation and the continued
strengthening of labor market conditions in recent
months had increased their confidence that inflation
would move toward or to the 2 percent objective.
Some participants judged that a slightly firmer path
of monetary policy than in their previous projections
would likely be appropriate. Most of the participants
who commented on the Committee’s reinvestment
policy anticipated that a change in that policy would
be appropriate before the end of this year if the economic outlook evolved as projected.

Uncertainty and Risks
The economic projections of FOMC participants are
generally subject to considerable uncertainty and
risks, and, in assessing the path of appropriate monetary policy, FOMC participants take account of the
range of possible outcomes, the likelihood of their
occurring, and the potential benefits and costs to the
economy should they occur. Table 2 provides one
measure of the forecast uncertainty for the change in
real GDP, the unemployment rate, and total consumer price inflation—the root mean squared error

165

(RMSE) for forecasts made over the past 20 years.
This measure of forecast uncertainty is incorporated
graphically in the top panels of figures 4.A, 4.B, and
4.C, which display fan charts plotting the medians of
participants’ projections for real GDP growth, the
unemployment rate, and PCE price inflation surrounded by symmetric confidence intervals derived
from the RMSEs presented in table 2. If the degree
of uncertainty attending these projections is similar
to the typical magnitude of past forecast errors and if
the risks around the projections are broadly balanced, then future outcomes of these variables would
have about a 70 percent probability of occurring
within these confidence intervals. For all three variables, this measure of forecast uncertainty is substantial and generally increases as the forecast horizon
lengthens.
FOMC participants may judge that the widths of the
confidence intervals in the historical fan charts
shown in figures 4.A through 4.C do not adequately
capture their current assessments of the degree of
uncertainty that surrounds their economic projections. Participants’ assessments of the current level of
uncertainty surrounding their economic projections
are shown in the bottom-left panels of figures 4.A,
4.B, and 4.C. Most participants continued to view
the uncertainty attached to their economic projections as broadly similar to the average of the past
20 years, with one fewer participant than in December seeing uncertainty about GDP growth, the unemployment rate, and headline inflation as higher than
its historical average.11 In their discussion of the
uncertainty attached to their current projections relative to levels of uncertainty over the past 20 years,
as in December, about half of the participants
expressed the view that, at this point, uncertainty surrounding prospective changes in fiscal and other policies is very large or that there is not yet enough information to make reasonable assumptions about the
timing, nature, and magnitude of the changes.
The fan charts—which are symmetric around the
median projections by assumption—also do not necessarily reflect participants’ assessments of the balance of risks to their economic projections. Participants’ assessments of the balance of risks to their
economic projections are shown in the bottom-right
panels of figures 4.A, 4.B, and 4.C. As in December,
most participants judged the risks to their projections
11

At the end of this summary, the box “Forecast Uncertainty”
discusses the sources and interpretation of uncertainty in the
economic forecasts and explains the approach used to assess the
uncertainty and risks attending the participants’ projections.

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104th Annual Report | 2017

Figure 4.A. Uncertainty and risks in projections of GDP growth

Median projection and confidence interval based on histrorical forecast errors

Percent

Change in real GDP
Median of projections
70% confidence interval

4

3

2

1

Actual

0

2012

2013

2014

2015

2016

2017

2018

2019

FOMC participants’ assessments of uncertainty and risks around their economic projections
Number of participants
Uncertainty about GDP growth
March projections
December projections

Lower

18
16
14
12
10
8
6
4
2
Broadly
similar

Higher

Number of participants
Risks to GDP growth
March projections
December projections

Weighted to
downside

18
16
14
12
10
8
6
4
2
Broadly
balanced

Weighted to
upside

Note: The blue and red lines in the top panel show actual values and median projected values, respectively, of the percent change in real gross domestic product (GDP) from the
fourth quarter of the previous year to the fourth quarter of the year indicated. The confidence interval around the median projected values is assumed to be symmetric and is
based on root mean squared errors of various private and government forecasts made over the previous 20 years; more information about these data is available in table 2.
Because current conditions may differ from those that prevailed, on average, over the previous 20 years, the width and shape of the confidence interval estimated on the basis
of the historical forecast errors may not reflect FOMC participants’ current assessments of the uncertainty and risks around their projections; these current assessments are
summarized in the lower panels. Generally speaking, participants who judge the uncertainty about their projections as “broadly similar” to the average levels of the past
20 years would view the width of the confidence interval shown in the historical fan chart as largely consistent with their assessments of the uncertainty about their projections.
Likewise, participants who judge the risks to their projections as “broadly balanced” would view the confidence interval around their projections as approximately symmetric.
For definitions of uncertainty and risks in economic projections, see the box “Forecast Uncertainty.”

Minutes of Federal Open Market Committee Meetings | March

167

Figure 4.B. Uncertainty and risks in projections of the unemployment rate

Median projection and confidence interval based on historical forecast errors

Percent

Unemployment rate

10

Median of projections
70% confidence interval

9
8
7
6

Actual

5
4
3
2
1
2012

2013

2014

2015

2016

2017

2018

2019

FOMC participants’ assessments of uncertainty and risks around their economic projections
Number of participants

Uncertainty about the unemployment rate

Risks to the unemployment rate

March projections
December projections

Lower

18
16
14
12
10
8
6
4
2

Broadly
similar

Number of participants

Higher

March projections
December projections

Weighted to
downside

Broadly
balanced

18
16
14
12
10
8
6
4
2

Weighted to
upside

Note: The blue and red lines in the top panel show actual values and median projected values, respectively, of the average civilian unemployment rate in the fourth quarter of
the year indicated. The confidence interval around the median projected values is assumed to be symmetric and is based on root mean squared errors of various private and
government forecasts made over the previous 20 years; more information about these data is available in table 2. Because current conditions may differ from those that prevailed, on average, over the previous 20 years, the width and shape of the confidence interval estimated on the basis of the historical forecast errors may not reflect FOMC participants’ current assessments of the uncertainty and risks around their projections; these current assessments are summarized in the lower panels. Generally speaking, participants who judge the uncertainty about their projections as “broadly similar” to the average levels of the past 20 years would view the width of the confidence interval shown in
the historical fan chart as largely consistent with their assessments of the uncertainty about their projections. Likewise, participants who judge the risks to their projections as
“broadly balanced” would view the confidence interval around their projections as approximately symmetric. For definitions of uncertainty and risks in economic projections, see
the box “Forecast Uncertainty.”

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104th Annual Report | 2017

Figure 4.C. Uncertainty and risks in projections of PCE inflation

Median projection and confidence interval based on historical forecast errors

Percent

PCE inflation
Median of projections
70% Confidence interval
3

2

1
Actual
0

2012

2013

2014

2015

2016

2017

2018

2019

FOMC participants’ assessments of uncertainty and risks around their economic projections
Number of participants
Uncertainty about PCE inflation
March projections
December projections

Lower

18
16
14
12
10
8
6
4
2
Broadly
similar

Higher

Number of participants
Risks to PCE inflation
March projections
December projections

Weighted to
downside

18
16
14
12
10
8
6
4
2
Broadly
balanced

Number of participants
Uncertainty about core PCE inflation
March projections
December projections

Lower

Broadly
similar

18
16
14
12
10
8
6
4
2
Higher

Weighted to
upside

Number of participants
Risks to core PCE inflation
March projections
December projections

Weighted to
downside

18
16
14
12
10
8
6
4
2
Broadly
balanced

Weighted to
upside

Note: The blue and red lines in the top panel show actual values and median projected values, respectively, of the percent change in the price index for personal consumption
expenditures (PCE) from the fourth quarter of the previous year to the fourth quarter of the year indicated. The confidence interval around the median projected values is
assumed to be symmetric and is based on root mean squared errors of various private and government forecasts made over the previous 20 years; more information about
these data is available in table 2. Because current conditions may differ from those that prevailed, on average, over the previous 20 years, the width and shape of the confidence interval estimated on the basis of the historical forecast errors may not reflect FOMC participants’ current assessments of the uncertainty and risks around their projections; these current assessments are summarized in the lower panels. Generally speaking, participants who judge the uncertainty about their projections as “broadly similar” to
the average levels of the past 20 years would view the width of the confidence interval shown in the historical fan chart as largely consistent with their assessments of the
uncertainty about their projections. Likewise, participants who judge the risks to their projections as “broadly balanced” would view the confidence interval around their projections as approximately symmetric. For definitions of uncertainty and risks in economic projections, see the box “Forecast Uncertainty.”

Minutes of Federal Open Market Committee Meetings | March

of real GDP growth, the unemployment rate, headline inflation, and core inflation as broadly balanced—in other words, as broadly consistent with a
symmetric fan chart. One more participant saw the
risks to unemployment as weighted to the downside
than in December (the bottom-right panel of figure 4.B). The balance of risks to the inflation projection shifted up slightly relative to December, as one
fewer participant judged the risks to both headline
and core inflation as weighted to the downside and
one more participant viewed the risks as weighted to
the upside (the lower-right panels of figure 4.C). In
discussing the balance of risks around their projections, some participants mentioned improvements in
recent readings of household and business confidence as well as somewhat reduced risks from
abroad. Moreover, a number of participants noted
that the possibility of a more expansionary U.S. fiscal policy might present upside risks to real GDP
growth and inflation and downside risks to
unemployment.
Participants’ assessments of the future path of the
federal funds rate consistent with appropriate policy
are generally subject to considerable uncertainty,
reflecting in part uncertainty about the evolution of
GDP growth, the unemployment rate, and inflation
over time. The final line in table 2 shows the RMSEs
for forecasts of short-term interest rates. These
RMSEs are not strictly consistent with participants’

169

projections of the federal funds rate, in part because
these assessments are not forecasts of the likeliest
outcomes but rather reflect each participant’s individual judgment of appropriate monetary policy.
However, the associated confidence intervals may
provide a sense of the likely uncertainty around the
future path of the federal funds rate generated by the
uncertainty about the macroeconomic variables as
well as additional adjustments to monetary policy
that may be appropriate to offset the effects of
shocks to the economy.
Figure 5 shows a fan chart plotting the medians of
participants’ assessments of the appropriate path of
the federal funds rate surrounded by confidence
intervals derived from the results presented in table 2.
As with the macroeconomic variables, forecast uncertainty is substantial and increases at longer horizons.
If at some point in the future the confidence interval
around the federal funds rate were to extend below
zero, it would be truncated at zero for purposes of
the chart shown in figure 5; zero is the bottom of the
lowest target range for the federal funds rate that has
been adopted by the Committee in the past. This
approach to the construction of the federal funds
rate fan chart would be merely a convention and
would not have any implication for possible future
policy decisions regarding the use of negative interest
rates to provide additional monetary policy accommodation if doing so were appropriate.

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104th Annual Report | 2017

Figure 5. Uncertainty in projections of the federal funds rate

Median projection and confidence interval based on historical forecast errors

Percent

Federal funds rate
Midpoint of target range
Median of projections
70% confidence interval*

6
5
4
3
2
1

Actual

0

2012

2013

2014

2015

2016

2017

2018

2019

Note: The blue and red lines are based on actual values and median projected values, respectively, of the Committee’s target for the federal funds rate at the end of the year
indicated. The actual values are the midpoint of the target range; the median projected values are based on either the midpoint of the target range or the target level. The confidence interval around the median projected values is based on root mean squared errors of various private and government forecasts made over the previous 20 years. The
confidence interval is not strictly consistent with the projections for the federal funds rate, primarily because these projections are not forecasts of the likeliest outcomes for the
federal funds rate, but rather projections of participants’ individual assessments of appropriate monetary policy. Still, historical forecast errors provide a broad sense of the
uncertainty around the future path of the federal funds rate generated by the uncertainty about the macroeconomic variables as well as additional adjustments to monetary
policy that may be appropriate to offset the effects of shocks to the economy.
The confidence interval is assumed to be symmetric except when it is truncated at zero—the bottom of the lowest target range for the federal funds rate that has been adopted
in the past by the Committee. This truncation would not be intended to indicate the likelihood of the use of negative interest rates to provide additional monetary policy accommodation if doing so was judged appropriate. In such situations, the Committee could also employ other tools, including forward guidance and large-scale asset purchases, to
provide additional accommodation. Because current conditions may differ from those that prevailed, on average, over the previous 20 years, the width and shape of the confidence interval estimated on the basis of the historical forecast errors may not reflect FOMC participants’ current assessments of the uncertainty and risks around their
projections.
* The confidence interval is derived from forecasts of the average level of short-term interest rates in the fourth quarter of the year indicated; more information about these data
is available in table 2. The shaded area encompasses less than a 70 percent confidence interval if the confidence interval has been truncated at zero.

Minutes of Federal Open Market Committee Meetings | March

171

Forecast Uncertainty
The economic projections provided by the members
of the Board of Governors and the presidents of the
Federal Reserve Banks inform discussions of monetary policy among policymakers and can aid public
understanding of the basis for policy actions. Considerable uncertainty attends these projections, however. The economic and statistical models and relationships used to help produce economic forecasts
are necessarily imperfect descriptions of the real
world, and the future path of the economy can be
affected by myriad unforeseen developments and
events. Thus, in setting the stance of monetary
policy, participants consider not only what appears to
be the most likely economic outcome as embodied in
their projections, but also the range of alternative
possibilities, the likelihood of their occurring, and the
potential costs to the economy should they occur.
Table 2 summarizes the average historical accuracy
of a range of forecasts, including those reported in
past Monetary Policy Reports and those prepared by
the Federal Reserve Board’s staff in advance of
meetings of the Federal Open Market Committee
(FOMC). The projection error ranges shown in the
table illustrate the considerable uncertainty associated with economic forecasts. For example, suppose
a participant projects that real gross domestic product (GDP) and total consumer prices will rise steadily
at annual rates of, respectively, 3 percent and 2 percent. If the uncertainty attending those projections is
similar to that experienced in the past and the risks
around the projections are broadly balanced, the
numbers reported in table 2 would imply a probability
of about 70 percent that actual GDP would expand
within a range of 1.4 to 4.6 percent in the current
year, and 0.9 to 5.1 percent in the second and third
years. The corresponding 70 percent confidence
intervals for overall inflation would be 1.1 to 2.9 percent in the current year, and 0.9 to 3.1 percent in the
second and third years. Figures 4.A through 4.C illustrate these confidence bounds in “fan charts” that
are symmetric and centered on the medians of
FOMC participants’ projections for GDP growth, the
unemployment rate, and inflation. However, in some
instances, the risks around the projections may not
be symmetric. In particular, the unemployment rate
cannot be negative; furthermore, the risks around a
particular projection might be tilted to either the
upside or the downside, in which case the corresponding fan chart would be asymmetrically positioned around the median projection.
Because current conditions may differ from those
that prevailed, on average, over history, participants
provide judgments as to whether the uncertainty
attached to their projections of each economic variable is greater than, smaller than, or broadly similar
to typical levels of forecast uncertainty seen in the
past 20 years, as presented in table 2 and reflected
in the widths of the confidence intervals shown in the
top panels of figures 4.A through 4.C. Participants’
current assessments of the uncertainty surrounding
their projections are summarized in the bottom-left

panels of those figures. Participants also provide
judgments as to whether the risks to their projections
are weighted to the upside, are weighted to the
downside, or are broadly balanced. That is, while the
symmetric historical fan charts shown in the top panels of figures 4.A through 4.C imply that the risks to
participants’ projections are balanced, participants
may judge that there is a greater risk that a given
variable will be above rather than below their projections. These judgments are summarized in the lowerright panels of figures 4.A through 4.C.
As with real activity and inflation, the outlook for the
future path of the federal funds rate is subject to considerable uncertainty. This uncertainty arises primarily
because each participant’s assessment of the appropriate stance of monetary policy depends importantly
on the evolution of real activity and inflation over
time. If economic conditions evolve in an unexpected
manner, then assessments of the appropriate setting
of the federal funds rate would change from that
point forward. The final line in table 2 shows the error
ranges for forecasts of short-term interest rates. They
suggest that the historical confidence intervals associated with projections of the federal funds rate are
quite wide. It should be noted, however, that these
confidence intervals are not strictly consistent with
the projections for the federal funds rate, as these
projections are not forecasts of the most likely quarterly outcomes but rather are projections of participants’ individual assessments of appropriate monetary policy and are on an end-of-year basis. However, the forecast errors should provide a sense of
the uncertainty around the future path of the federal
funds rate generated by the uncertainty about the
macroeconomic variables as well as additional
adjustments to monetary policy that would be appropriate to offset the effects of shocks to the economy.
If at some point in the future the confidence interval
around the federal funds rate were to extend below
zero, it would be truncated at zero for purposes of
the fan chart shown in figure 5; zero is the bottom of
the lowest target range for the federal funds rate that
has been adopted by the Committee in the past. This
approach to the construction of the federal funds rate
fan chart would be merely a convention; it would not
have any implications for possible future policy decisions regarding the use of negative interest rates to
provide additional monetary policy accommodation if
doing so were appropriate. In such situations, the
Committee could also employ other tools, including
forward guidance and asset purchases, to provide
additional accommodation.
While figures 4.A through 4.C provide information on
the uncertainty around the economic projections, figure 1 provides information on the range of views
across FOMC participants. A comparison of figure 1
with figures 4.A through 4.C shows that the dispersion of the projections across participants is much
smaller than the average forecast errors over the past
20 years.

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104th Annual Report | 2017

Meeting Held
on May 2–3, 2017
A joint meeting of the Federal Open Market Committee and the Board of Governors was held in the
offices of the Board of Governors of the Federal
Reserve System in Washington, D.C., on Tuesday,
May 2, 2017, at 1:00 p.m. and continued on Wednesday, May 3, 2017, at 9:00 a.m.1

Steven B. Kamin
Economist
Thomas Laubach
Economist
David W. Wilcox
Economist

Present

James A. Clouse, Thomas A. Connors,
Michael Dotsey, Evan F. Koenig, Daniel G. Sullivan,
William Wascher, and Beth Anne Wilson
Associate Economists

Janet L. Yellen
Chair

Simon Potter
Manager, System Open Market Account

William C. Dudley
Vice Chairman

Lorie K. Logan
Deputy Manager, System Open Market Account

Lael Brainard

Ann E. Misback
Secretary, Office of the Secretary,
Board of Governors

Charles L. Evans
Stanley Fischer
Patrick Harker
Robert S. Kaplan
Neel Kashkari
Jerome H. Powell
Marie Gooding, Loretta J. Mester, Mark L. Mullinix,
Michael Strine, and John C. Williams
Alternate Members of the Federal Open Market
Committee
James Bullard, Esther L. George, and Eric Rosengren
Presidents of the Federal Reserve Banks of St. Louis,
Kansas City, and Boston, 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
2

Michael Held
Deputy General Counsel
1

2

The Federal Open Market Committee is referenced as the
“FOMC” and the “Committee” in these minutes.
Attended Tuesday session only.

Matthew J. Eichner3
Director, Division of Reserve Bank Operations and
Payment Systems, Board of Governors
Michael S. Gibson
Director, Division of Supervision and Regulation,
Board of Governors
Andreas Lehnert
Director, Division of Financial Stability, Board of
Governors
Stephen A. Meyer
Deputy Director, Division of Monetary Affairs,
Board of Governors
Trevor A. Reeve
Senior Special Adviser to the Chair, Office of Board
Members, Board of Governors
Joseph W. Gruber, David Reifschneider,
and John M. Roberts
Special Advisers to the Board, Office of Board
Members, Board of Governors
Linda Robertson
Assistant to the Board, Office of Board Members,
Board of Governors
Christopher J. Erceg
Senior Associate Director, Division of International
Finance, Board of Governors

3

Attended the discussions on developments in financial markets
and System Open Market Account reinvestment policy.

Minutes of Federal Open Market Committee Meetings | May

Diana Hancock and David E. Lebow
Senior Associate Directors, Division of Research and
Statistics, Board of Governors
Gretchen C. Weinbach
Senior Associate Director, Division of Monetary
Affairs, Board of Governors
Antulio N. Bomfim, Ellen E. Meade, Edward Nelson,
and Joyce K. Zickler
Senior Advisers, Division of Monetary Affairs,
Board of Governors
Rochelle M. Edge
Associate Director, Division of Financial Stability,
Board of Governors
Jane E. Ihrig4 and David López-Salido
Associate Directors, Division of Monetary Affairs,
Board of Governors
John J. Stevens
Associate Director, Division of Research and
Statistics, Board of Governors
Glenn Follette
Assistant Director, Division of Research and
Statistics, Board of Governors
Patrick E. McCabe
Adviser, Division of Research and Statistics,
Board of Governors
Penelope A. Beattie2
Assistant to the Secretary, Office of the Secretary,
Board of Governors
Dana L. Burnett, Michele Cavallo,5 and Dan Li
Section Chiefs, Division of Monetary Affairs,
Board of Governors
Benjamin K. Johannsen
Senior Economist, Division of Monetary Affairs,
Board of Governors
Arsenios Skaperdas5
Economist, Division of Monetary Affairs,
Board of Governors
Ellen J. Bromagen
First Vice President, Federal Reserve Bank of
Chicago

4

5

Attended the discussions on monetary policy and System Open
Market Account reinvestment policy.
Attended the discussion on System Open Market Account reinvestment policy.

173

David Altig, Kartik B. Athreya, Geoffrey Tootell,
and Christopher J. Waller
Executive Vice Presidents, Federal Reserve Banks of
Atlanta, Richmond, Boston, and St. Louis,
respectively
Troy Davig, Julie Ann Remache,4
and Nathaniel Wuerffel5
Senior Vice Presidents, Federal Reserve Banks of
Kansas City, New York, and New York, respectively
Todd E. Clark, Terry Fitzgerald, and Òscar Jordà
Vice Presidents, Federal Reserve Banks of Cleveland,
Minneapolis, and San Francisco, respectively
Rania Perry5
Assistant Vice President, Federal Reserve Bank of
New York
David Lucca
Research Officer, Federal Reserve Bank of New York

Developments in Financial Markets and
Open Market Operations
The manager of the System Open Market Account
(SOMA) reported on developments in domestic and
foreign financial markets over the period since the
March FOMC meeting. Yields on U.S. Treasury
securities declined, and the broad index of the foreign exchange value of the dollar fell modestly. These
changes reportedly reflected revisions to investors’
expectations for fiscal and other economic policies;
some increase in geopolitical tensions; economic and
inflation indicators that, on balance, were weaker
than anticipated; and monetary policy communications. In response to political developments abroad,
spreads on some European sovereign debt securities
narrowed noticeably. Measures of implied volatility
in equity markets declined, on net, to levels that were
historically very low. Market pricing and survey evidence indicated that investors anticipated no change
in the target range for the federal funds rate at this
meeting but saw a substantial probability of an
increase at the June FOMC meeting; market expectations for the path of the federal funds rate further
ahead fell somewhat. Federal funds continued to
trade well within the FOMC’s target range. Reinvestment of principal payments from Treasury and
mortgage-backed securities held in the SOMA proceeded smoothly. The manager updated the Committee on various small-value tests of System operations.
The manager also briefed the Committee on developments regarding certain reference interest rates.
Changes in the practices of some domestic and for-

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104th Annual Report | 2017

eign banks for booking certain types of liabilities, as
well as the effects of recent changes in the regulation
of money market funds, had resulted in a reduction
in the volume of Eurodollar transactions reported on
the Federal Reserve’s Report of Selected Money
Market Rates (FR 2420). The staff was in the process
of analyzing possible revisions to the report that
would guard against a further erosion of reported
transactions and support the robustness of the overnight bank funding rate calculated by the Federal
Reserve Bank of New York. Such revisions might be
implemented in conjunction with the periodic
renewal of authorization for the report, which is
expected to be completed by the third quarter of
2018. The manager also noted that aspects of plans
to publish reference interest rates for market repurchase agreements (repos) were being modified to
incorporate a newly available source of data on
cleared bilateral repo transactions; the modifications
were expected to extend the time frame for publication of the new rates by several months.
The Committee voted unanimously to renew the
reciprocal currency arrangements with the Bank of
Canada and the Bank of Mexico; these arrangements
are associated with the Federal Reserve’s participation in the North American Framework Agreement
of 1994. In addition, the Committee voted unanimously to renew the dollar and foreign currency
liquidity swap arrangements with the Bank of
Canada, the Bank of England, the Bank of Japan,
the European Central Bank, and the Swiss National
Bank. The votes to renew the Federal Reserve’s participation in these standing arrangements are taken
annually at the April or May FOMC meeting.
By unanimous vote, the Committee ratified the
Desk’s domestic transactions over the intermeeting
period. There were no intervention operations in foreign currencies for the System’s account during the
intermeeting period.

Staff Review of the Economic Situation
The information reviewed for the May 2–3 meeting
indicated that the labor market strengthened further
in March but that growth of real gross domestic
product (GDP) slowed in the first quarter, with the
slowing likely reflecting transitory factors. The
12-month change in overall consumer prices was
close to the Committee’s longer-run objective of
2 percent in recent months; excluding food and
energy, consumer prices declined in March, and the
12-month change in core consumer prices remained

somewhat below 2 percent. Survey-based measures of
inflation expectations were little changed on balance.
Total nonfarm payroll employment rose in March,
but the gain was smaller than in recent months, likely
reflecting both warmer-than-usual temperatures in
February that probably caused some hiring to be
moved forward and a major winter storm in the
Northeast in March that probably held down hiring
somewhat; nevertheless, the increase in employment
for the first quarter as a whole was solid. The unemployment rate decreased to 4.5 percent in March, and
the labor force participation rate was unchanged. The
share of workers employed part time for economic
reasons declined. The rates of private-sector job
openings, hiring, and quits were all little changed in
January and February. The four-week moving average of initial claims for unemployment insurance
benefits remained at a very low level through midApril. Measures of labor compensation accelerated
modestly. The employment cost index for private
workers increased 2¼ percent over the 12 months
ending in March, and average hourly earnings for all
employees increased 2¾ percent over the same
period; both increases were somewhat larger than
those over the 12 months ending in March 2016.
The average unemployment rate for whites in the first
quarter of this year was ½ percentage point lower
than its annual average for 2015, while the unemployment rates for Hispanics and for African Americans
were about 1 percentage point and 1¾ percentage
points lower, respectively. The larger improvements in
the rates for Hispanics and for African Americans
mirrored the larger increases in those rates during the
most recent recession. As of the first quarter, the
unemployment rates for African Americans and for
Hispanics remained above the rate for whites both
overall and for people with similar educational backgrounds. Unemployment rates for Asians remained
below those for whites.
Total industrial production rose in February and
March, primarily reflecting a further expansion of
mining output as well as a net increase in the output
of utilities. Manufacturing production declined in
March after advancing in each of the previous six
months; about half of the decline in March was due
to a decrease in the output of motor vehicles and
parts. Automakers’ assembly schedules suggested that
motor vehicle production would increase in the second quarter despite somewhat elevated levels of
vehicle inventories. Broader indicators of manufacturing production, such as the new orders indexes

Minutes of Federal Open Market Committee Meetings | May

from national and regional manufacturing surveys,
pointed to modest gains in factory output over the
near term.
Real personal consumption expenditures (PCE) rose
only modestly in the first quarter, although monthly
data indicated some improvement late in the quarter.
Indeed, after declining in January and February, real
PCE increased in March, partly reflecting a rebound
in spending on energy services, which had been held
down by unseasonably warm weather through February, as well as an increase in outlays for a variety of
consumer goods. Motor vehicle sales picked up in
April after declining in March, although sales
remained somewhat below their average pace in the
first quarter and noticeably below the high levels seen
in the fourth quarter. Recent readings on key factors
that influence consumer spending pointed to solid
growth in real PCE in coming quarters, including further gains in employment, real disposable personal
income, and households’ net worth. Moreover, consumer sentiment, as measured by the University of
Michigan Surveys of Consumers, remained upbeat in
March and April.
Residential investment increased at a brisk pace in
the first quarter. Starts for both new single-family
homes and multifamily units moved up, and issuance
of building permits for new single-family homes—
which tends to be a reliable indicator of the underlying trend in residential construction—also rose. Sales
of both new and existing homes in the first quarter
were above their levels in the previous quarter.
Real private expenditures for business equipment and
intellectual property increased at a solid pace in the
first quarter after a moderate gain in the fourth quarter. Nominal shipments and new orders of nondefense capital goods excluding aircraft both rose over
the three months ending in March, and the level of
new orders remained higher than that of shipments,
pointing to further near-term gains in shipments. In
addition, indicators of business sentiment were
upbeat in recent months. Real business expenditures
for nonresidential structures increased briskly in the
first quarter, and the number of oil and gas rigs in
operation, an indicator of spending for structures in
the drilling and mining sector, continued to rise
through mid-April. Business inventory investment
slowed sharply last quarter and held down real GDP
growth significantly.
Real federal purchases declined in the first quarter, as
defense expenditures decreased and nondefense

175

spending rose at a slower pace than in the final quarter of 2016. Real state and local government purchases also declined in the first quarter, with a sharp
decrease in real construction spending by these governments more than offsetting a modest expansion in
state and local government payrolls.
The U.S. international trade deficit narrowed in February. Exports rose and imports fell sharply, with
imports of automotive products and consumer goods
declining after robust increases in January. Preliminary data on trade in goods suggested that the trade
deficit was about unchanged in March. The Bureau
of Economic Analysis estimated that real net exports
added slightly to growth of real GDP in the first
quarter.
Total U.S. consumer prices, as measured by the PCE
price index, increased 1¾ percent over the 12 months
ending in March. Core PCE price inflation, which
excludes changes in food and energy prices, was
about 1½ percent over those same 12 months. Over
the 12 months ending in March, total consumer
prices as measured by the consumer price index
(CPI) rose 2½ percent, while core CPI inflation was
2 percent. On a month-over-month basis, both the
PCE price index and the CPI decreased in March,
partly reflecting declines in some categories of prices
that appeared unlikely to be repeated. The median of
longer-run inflation expectations from the Michigan
survey edged down a bit, on balance, in recent
months, while the medians from the Desk’s Survey of
Primary Dealers and Survey of Market Participants
were little changed.
Foreign real GDP growth appeared to have strengthened in the first quarter after slowing somewhat in
the fourth quarter. In the advanced foreign economies (AFEs), indicators for the first quarter pointed
to faster economic growth in Canada and solid
growth in the euro area and Japan. By contrast, real
GDP growth in the United Kingdom slowed significantly. More recent indicators were consistent with
moderate economic growth in most AFEs. In the
emerging market economies (EMEs), growth picked
up in China and some Asian economies in the first
quarter but slowed moderately in Mexico. Recent
data also suggested that economic activity improved
in parts of South America, most notably in Brazil
where positive growth likely resumed in the first
quarter. Inflation in the AFEs continued to rise,
largely because of the pass-through of earlier
increases in crude oil prices into retail energy prices.
In the EMEs, inflation fell in China in the first quar-

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ter, reflecting a sharp drop in food prices, but was
pushed up in Mexico by fuel price hikes and passthrough from past currency depreciation.

Staff Review of the Financial Situation
Domestic financial market conditions remained generally accommodative over the intermeeting period.
Prices of risky assets increased a bit on net, Treasury
yields declined, and the dollar depreciated. The
decline in Treasury yields reportedly was driven in
part by investor expectations of a somewhat slower
pace of policy rate increases following FOMC communications after the March meeting and some waning of investor optimism about prospects for more
expansionary fiscal policies.
FOMC communications over the intermeeting
period reportedly were interpreted as indicating a
somewhat slower pace of policy rate increases than
previously expected but an earlier change to the
Committee’s reinvestment policy. Although the Committee’s decision to raise the target range for the federal funds rate at the March meeting was widely
anticipated, some of the accompanying communications were viewed as more accommodative than
expected. Investors reportedly also took note of the
discussion in the March FOMC minutes of the Committee’s reinvestment policy as well as statements
from some FOMC participants and appeared to pull
forward their expectations for when the FOMC will
either announce or start to implement a change to
that policy. Overall, however, the market reaction to
news related to potential changes in reinvestment
policy appeared to be fairly limited. Quotes on overnight index swap (OIS) rates pointed to a flattening
of the expected path of the federal funds rate
through 2020, but a staff model suggested that a
reduction in term premiums accounted for about half
the decline in OIS rates.
Yields on intermediate- and longer-term nominal
Treasury securities decreased 20 to 35 basis points
over the intermeeting period. Investors’ interpretations of FOMC communications, market perceptions
of a reduced likelihood of domestic fiscal and regulatory policy changes, weaker-than-expected domestic
economic data releases, and geopolitical factors and
foreign political developments all reportedly placed
downward pressure on yields. A staff term structure
model attributed about one-third of the decline in the
10-year Treasury yield to a decrease in the average
expected future short-term rate and the remaining

two-thirds to a lower term premium. While inflation
compensation based on Treasury Inflation-Protected
Securities decreased at near-term horizons, partly
reflecting the lower-than-expected March CPI
release, far-term inflation compensation was little
changed on net.
Broad U.S. equity price indexes increased slightly, on
net, since the March FOMC meeting. One-monthahead option-implied volatility on the S&P 500
index—the VIX—rose appreciably in mid-April,
reflecting in part increased investor concerns about
geopolitical factors and foreign political developments, but ended the period slightly lower, as investor
concerns appeared to ease after the first round of the
French presidential election. Over the intermeeting
period, spreads of yields on investment- and
speculative-grade nonfinancial corporate bonds over
comparable-maturity Treasury securities narrowed a
bit on net. Private-sector analysts continued to project robust profit growth for S&P 500 firms over 2017
even as first-quarter earnings, on a seasonally
adjusted basis, were estimated to be a bit lower than
in the fourth quarter.
Conditions in short-term funding markets were
stable over the intermeeting period. Reflecting the
FOMC’s policy action in March, yields on a broad
set of money market instruments moved higher.
Treasury bills outstanding, which had declined before
the reimposition of the federal debt ceiling on
March 15, moved higher thereafter, partly in connection with the Treasury’s steps to rebuild its cash balance. Take-up at the System’s overnight reverse
repurchase agreement facility, which had risen ahead
of the debt ceiling date, remained high through
March and then fell to relatively low levels after
quarter-end.
Financing conditions for large nonfinancial firms
stayed accommodative. Gross issuance of corporate
bonds and leveraged loans remained strong in
March, with a large share of lower-rated debt issued
for refinancing purposes. Net debt financing by nonfinancial businesses increased in the first quarter but
remained noticeably below the pace of the same time
last year. According to the April Senior Loan Officer
Opinion Survey on Bank Lending Practices
(SLOOS), a modest share of domestic banks
reported weaker demand for commercial and industrial (C&I) loans, on net, in the first quarter, mainly
citing several factors that pertained to customers’
reduced needs for financing. C&I lending continued
to be soft early in the second quarter.

Minutes of Federal Open Market Committee Meetings | May

Financing conditions for commercial real estate
(CRE) were broadly unchanged on net. Spreads on
commercial mortgage-backed securities (CMBS) widened slightly over the period since the March FOMC
meeting but remained near the lower end of the
range seen since the financial crisis. CMBS issuance
picked up in March, reportedly reflecting a return to
a more normal pace after the adoption of a credit
risk retention rule in late December caused some
issuance to be shifted from January and February
into the fourth quarter. Growth of CRE loans on
banks’ books slowed in the first quarter but continued to be robust overall. Domestic respondents to the
April SLOOS generally reported tightening their
lending standards and experiencing weaker loan
demand across all major CRE loan categories during
the first quarter.
Financing conditions in the residential mortgage
market were little changed over the intermeeting
period. Credit availability continued to be relatively
tight for households with low credit scores or harderto-document incomes but relatively accommodative
for other households. Mortgage rates declined in line
with yields on longer-term Treasury securities and
mortgage-backed securities, but they remained
elevated compared with the very low levels of the
third quarter of 2016. Consistent with these developments, refinance originations slowed considerably
since the third quarter. In the April SLOOS, banks
reported roughly unchanged standards on residential
real estate (RRE) loans on average. Banks also
reported that demand for some categories of RRE
loans weakened during the first quarter, including
those insured or guaranteed by government agencies.
In line with lower reported demand, growth in RRE
loans on banks’ balance sheets declined.

177

Over the intermeeting period, movements in foreign
financial markets were driven by central bank communications in the United States and abroad, geopolitical risks, and changes in investors’ perceptions
about future U.S. fiscal and other government policies. Concerns about the outcome of the French
presidential election and tensions in the Korean peninsula pushed down 10-year sovereign yields in the
advanced economies for several weeks. Sentiment
improved following the outcome of the first round of
the French presidential election on April 23, which
led to a partial retracement in yields. At their meetings on April 27, the European Central Bank and the
Bank of Japan each left their policy stance
unchanged. On net, foreign yields declined somewhat
less than U.S. yields, contributing to a modest depreciation of the dollar against both the AFE and EME
currencies. Equity indexes in most advanced and
emerging economies rose. Flows to emerging market
mutual funds remained strong, and spreads on
emerging market debt were little changed.
The staff provided its latest report on the potential
risks to financial stability; it continued to characterize the financial vulnerabilities of the U.S. financial
system as moderate on balance. This overall assessment reflected the staff’s judgment that leverage as
well as vulnerabilities from maturity and liquidity
transformation in the financial sector were low, that
leverage in the nonfinancial sector was moderate, and
that asset valuation pressures in some markets were
notable. Although these assessments were unchanged
from January’s assessment, vulnerabilities appeared
to have increased for asset valuation pressures,
though not by enough to warrant raising the assessment of these vulnerabilities to elevated.

Staff Economic Outlook
Financing conditions in consumer credit markets
remained accommodative, on balance, in early 2017.
Consumer credit appeared to be broadly available
even as interest rates charged on credit card balances
and new auto loans drifted up in line with their
benchmark shorter-term interest rates. Growth in
consumer loan balances moderated a bit further from
the relatively strong pace seen during the past few
years, although year-over-year growth in credit card
balances, student loans, and auto loans stayed in the
6 to 7 percent range through February. In the April
SLOOS, banks reported tightening standards on
auto loans and easing standards on credit card loans;
banks also reported facing weaker demand for both
auto and credit card loans.

In the U.S. economic forecast prepared by the staff for
the May FOMC meeting, real GDP growth was projected to bounce back in the second quarter from its
weak first-quarter reading. The staff judged that the
weakness in first-quarter real GDP was probably not
attributable to residual seasonality and that it instead
reflected transitorily soft consumer expenditures and
inventory investment. Importantly, PCE growth was
expected to pick up to a stronger pace in the spring,
which would be more consistent with ongoing gains in
employment, real disposable personal income, and
households’ net worth. In addition, the sharp decrease
in the contribution to GDP growth from the change in
inventory investment in the first quarter was not

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104th Annual Report | 2017

expected to be repeated. Beyond the near term, the
forecast for real GDP growth was a little stronger, on
net, than in the previous projection, mostly due to the
effect of a somewhat lower assumed path for the
exchange value of the dollar. The staff continued to
project that real GDP would expand at a modestly
faster pace than potential output in 2017 through
2019, supported in part by the staff’s maintained
assumption that fiscal policy would become more
expansionary in the coming years. The unemployment
rate was projected to decline gradually over the next
couple of years and to run somewhat below the staff’s
estimate of its longer-run natural rate over this period;
the staff’s estimate of the natural rate was revised
down slightly in this forecast.
The staff’s forecast for consumer price inflation, as
measured by changes in the PCE price index, was
revised down marginally for 2017 as a whole after
incorporating the soft data on consumer prices for
March, but it was essentially unrevised thereafter.
Inflation was still expected to be somewhat higher
this year than last year, reflecting an upturn in the
prices for food and non-energy imports as well as a
slightly faster increase in energy prices. The staff
continued to project that inflation would increase
gradually in 2018 and 2019 and that it would be marginally below the Committee’s longer-run objective
of 2 percent in 2019.
The staff viewed the uncertainty around its projections for real GDP growth, the unemployment rate,
and inflation as similar to the average of the past
20 years. The risks to the forecast for real GDP were
seen as tilted to the downside, primarily reflecting the
staff’s assessment that monetary policy appeared to
be better positioned to respond to large positive
shocks to the economic outlook than to substantial
adverse ones. However, the staff viewed the risks to
the forecast as less pronounced than late last year,
with both somewhat diminished risks to the foreign
outlook and an increase in U.S. consumer and business confidence. Consistent with the downside risks
to aggregate demand, the staff viewed the risks to its
outlook for the unemployment rate as tilted to the
upside. The risks to the projection for inflation were
judged to be roughly balanced. The downside risks
from the possibility that longer-term inflation expectations may have edged down or that the dollar could
appreciate substantially were seen as roughly counterbalanced by the upside risk that inflation could
increase more than expected in an economy that was
projected to continue operating above its longer-run
potential.

Participants’ Views on Current Conditions
and the Economic Outlook
In their discussion of the economic situation and the
outlook, meeting participants agreed that the information received over the intermeeting period indicated that the labor market had continued to
strengthen even as growth in economic activity
slowed in the first quarter. Job gains remained solid,
on average, in recent months, and the unemployment
rate declined. Household spending rose only modestly, but the fundamentals underpinning the continued growth of consumption remained solid. Business
fixed investment firmed in the first quarter after
increasing only slowly over the previous two years.
Inflation measured on a 12-month basis recently had
been running close to the Committee’s 2 percent
longer-run objective; consumer prices, both including
and excluding prices of energy and food items,
declined in March, and core inflation continued to
run somewhat below 2 percent. Market-based measures of inflation compensation remained low; surveybased measures of longer-term inflation expectations
were little changed on balance.
Although the incoming data showed that aggregate
spending in the first quarter had been weaker than
participants had expected, they viewed the slowing as
likely to be transitory. They continued to expect that,
with further gradual adjustments in the stance of
monetary policy, economic activity would expand at
a moderate pace, labor market conditions would
strengthen somewhat further, and inflation would
stabilize around 2 percent over the medium term.
Participants generally indicated that their assessments of the medium-term economic outlook had
changed little since the March meeting, and they discussed various reasons why the softness in consumer
spending in the first quarter was likely to be transitory. Some participants judged that the low reading
on GDP growth also could partly reflect residual seasonality and so would likely be followed by stronger
GDP growth in subsequent quarters, repeating a pattern evidenced in recent years. A few emphasized the
uncertainty with regard to the reasons for the unexpected weakness in consumer spending but considered it too early to judge the implications for the outlook. Many pointed to the recent firming of the
housing market and business fixed investment as welcome developments.
Overall, participants continued to see the near-term
risks to the economic outlook as roughly balanced.

Minutes of Federal Open Market Committee Meetings | May

179

Many participants saw the risks stemming from
global economic and financial developments as having receded further over the intermeeting period.
They pointed to the encouraging tone of recent data
on economic growth abroad, which suggested some
upside risks to foreign economic activity. However,
several noted that downside risks to the global outlook remained, either because of geopolitical developments and foreign political factors or because
monetary policy normalization in the United States
could lead to financial strains in EMEs. Many participants continued to view the possibility of expansionary fiscal policy changes in the United States as
posing upside risks to their forecasts for U.S. economic growth, although they also noted that prospects for enactment of a more expansionary fiscal
program, as well as its size, composition, and timing,
remained highly uncertain. Regarding the outlook
for inflation, a couple of participants expressed concern that a substantial undershooting of the longerrun normal rate of unemployment could pose an
appreciable upside risk to inflation. However, several
others continued to see downside risks to the inflation outlook, particularly given the low readings on
inflation over the intermeeting period and the stilllow measures of inflation compensation and inflation
expectations. Participants agreed that the Committee
should continue to closely monitor inflation indicators and global economic and financial
developments.

Several participants discussed the pickup in residential investment in the first quarter. Starts and permits
for single-family housing continued to post moderate
increases, while sales of new homes rose strongly
from their level in the fourth quarter of 2016. Business contacts in some Districts reported that residential construction activity had not kept pace with
demand, resulting in shortages in housing supply and
upward pressure on prices.

While recent data suggested a significant slowdown
of growth in consumption spending early in the year,
participants expected to see a rebound in consumer
spending in coming months in light of the solid fundamentals underpinning household spending, including ongoing job gains, rising household income and
wealth, improved household balance sheets, and
buoyant consumer sentiment. It was noted that much
of the recent slowing likely reflected transitory factors, such as low consumer spending for energy services induced by an unusually mild winter and a
decline in motor vehicle sales from an unsustainably
high fourth-quarter pace. Nevertheless, contacts
expected that demand for motor vehicles would be
well maintained. District reports on the service sector
were generally positive, although one District’s contacts in the tourism industry reported a falloff in
international visitors. One participant noted that
retail contacts reported upbeat projections for online
sales and associated package delivery services, in part
reflecting structural shifts in the retail industry.

Labor market conditions strengthened further in
recent months. At 4.5 percent, the unemployment
rate had reached or fallen below levels that participants judged likely to be normal over the longer run.
Increases in nonfarm payroll employment averaged
almost 180,000 per month during the first quarter, a
pace that, if maintained, would be expected to result
in further increases in labor utilization over time.
Labor market conditions in many Districts were
reported to have continued to improve. Contacts in
several Districts reported a pickup in wage increases,
shortages of workers in selected occupations, or pressures to train workers for hard-to-fill jobs. Even so,
several other participants suggested some margins
may remain along which labor market utilization
could increase further without giving rise to inflationary pressures. In that regard, they noted that the
recent rise in the labor force participation rate in the
face of a downward trend from demographic factors
was a positive development. However, a couple of
participants pointed out that uncertainty about both

Business fixed investment increased at a solid pace in
the first quarter, led by a rebound in drilling for oil
and natural gas. Several participants noted that rising
orders for capital goods suggested further gains in
business equipment investment over coming quarters.
Business contacts reported increases in activity in the
manufacturing and energy sectors. Contacts in many
Districts were said to be generally optimistic about
business prospects. Several participants noted that
surveys of business conditions in their Districts continued to indicate expanding activity. A few participants commented that firms engaged in international
trade were benefiting from improvements in global
demand conditions. Several participants reported
that firms in their Districts planned to increase capital expenditures, although in another District, uncertainty about changes in trade and regulatory policies
was said to be weighing on capital spending. Conditions in the agricultural sector remained weak, partly
as a result of low commodity prices.

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104th Annual Report | 2017

the longer-run normal rate of unemployment and
labor force trends made it difficult to assess the scope
for additional sustainable increases in labor utilization. Generally, participants continued to expect that
if economic growth stayed moderate, as they projected, the unemployment rate would remain, for the
next few years, below their estimates of its longer-run
normal level. A few participants continued to anticipate a substantial undershooting of the longer-run
normal level of the unemployment rate.
Readings on headline and core PCE price inflation in
March had come in lower than expected. On a
12-month basis, headline PCE price inflation had
edged above the Committee’s 2 percent objective in
February, but this measure dropped back to 1.8 percent in March, in part reflecting the effects of lower
energy prices on the headline index. Core PCE price
inflation, which historically has been a good predictor of future headline inflation, moved down to
1.6 percent over the 12 months ending in March.
However, it was noted that some of this slowing
reflected idiosyncratic factors such as a large drop in
the measure of quality-adjusted prices for wireless
telephone services. Several participants emphasized
that inflation measured on a 12-month basis had
been running very close to the Committee’s 2 percent
target. Overall, most participants viewed the recent
softer inflation data as primarily reflecting transitory
factors, but a few expressed concern that progress
toward the Committee’s objective may have slowed.
Market-based measures of longer-term inflation
compensation remained low, with five-year, five-yearforward CPI inflation compensation a bit below
2 percent—unchanged from the time of the March
FOMC meeting but somewhat above levels registered
last year. In addition, the median measure of inflation expectations over the next 5 to 10 years in the
Michigan survey edged down from 2.5 percent in
February to 2.4 percent in March and April. The
three-year-ahead measure of inflation expectations
from the Federal Reserve Bank of New York’s Survey of Consumer Expectations decreased from
3.0 percent to 2.7 percent in March and rose to
2.9 percent in April.
In light of these developments, participants generally
continued to expect that inflation would stabilize
around the Committee’s 2 percent objective over the
medium run as the effects of transitory factors
waned and conditions in the labor market and the
overall economy improved further. Participants noted
that import prices had begun to increase, supporting
their expectation that inflation would gradually rise.

A few participants, however, expressed uncertainty
about the reasons for the recent unexpected weakness
in inflation measures and about its implications for
the inflation outlook.
In their discussion of recent developments in financial markets, some participants commented on
changes in financial conditions in the wake of the
Committee’s decision to increase the target range for
the federal funds rate in March. They noted variously
that the decline in longer-term interest rates and the
modest depreciation of the dollar over the intermeeting period would provide some stimulus to aggregate
demand, that the Committee’s recent policy actions
had not resulted in a tightening of financial conditions, or that some of the decline in longer-term
yields reflected investors’ perceptions of diminished
odds of significant fiscal stimulus and an increase in
some geopolitical and foreign political risks.
With regard to financial stability, several participants
emphasized that higher requirements for capital and
liquidity in the banking system and other prudential
standards had contributed to increased resilience in
the financial system since the financial crisis. However, they expressed concerns that a possible easing of
regulatory standards could increase risks to financial
stability. In addition, it was noted that real estate values were elevated in some sectors of the CRE market,
that a sharp decline in such valuations could pose
risks to financial stability, and that potential reforms
in the housing finance sector could have implications
for such valuations.
In their consideration of monetary policy, participants judged that it was appropriate to leave the target range for the federal funds rate unchanged at this
meeting. Although the data on aggregate spending
and inflation received over the intermeeting period
were, on balance, weaker than participants expected,
they generally saw the outlook for the economy and
inflation as little changed and judged that a continued gradual removal of monetary policy accommodation remained appropriate. A couple of participants indicated that increasing the target range for
the federal funds rate at the current meeting would be
warranted by their economic outlook, but they also
noted that maintaining the current stance of policy
for now would be consistent with the Committee’s
gradual approach or that the Committee’s recent
communications had not pointed to an increase at
this meeting. Most participants judged that if economic information came in about in line with their
expectations, it would soon be appropriate for the

Minutes of Federal Open Market Committee Meetings | May

Committee to take another step in removing some
policy accommodation. A number of participants
pointed out that clarification of prospective fiscal
and other policy changes would remove one source
of uncertainty for the economic outlook. Participants generally agreed that the current stance of
monetary policy remained accommodative, supporting some additional strengthening in labor market
conditions and a sustained return to 2 percent
inflation.
Participants generally reiterated their support for a
continued gradual approach to raising the federal
funds rate. Some participants noted that core PCE
price inflation had been running below the Committee’s objective for overall inflation for the past eight
years and that it was important to return inflation to
2 percent, or that the public’s longer-term inflation
expectations may have fallen somewhat, and that a
gradual approach to tightening could help return
expectations and inflation to 2 percent. One participant cited results of a District survey of businesses
indicating that more than one-third of respondents
saw the Federal Reserve as more likely to accept
inflation below its 2 percent objective than above;
that participant interpreted the survey results as suggesting that the Committee’s communications about
the symmetry of its inflation objective had not completely taken hold, a concern also mentioned by a
couple of other participants. Another participant
observed that a gradual approach was appropriate
because the neutral rate of interest had declined and
considerable uncertainty prevailed about its longerrun level. Several participants, however, pointed to
conditions under which the Committee might need to
consider a somewhat more rapid removal of monetary accommodation—for instance, if the unemployment rate fell appreciably further than currently
projected, if wages increased more rapidly than
expected, or if highly stimulative fiscal policy
changes were to be enacted. In contrast, a couple of
others judged that the Committee could withdraw
monetary accommodation even more gradually than
reflected in the medians of forecasts in the March
Summary of Economic Projections, noting that slack
might remain in the labor market or that inflation
was not very sensitive to declines in the unemployment rate below its estimated longer-run normal
level.

Committee Policy Action
In their discussion of monetary policy for the period
ahead, members judged that information received

181

since the Committee met in March indicated that the
labor market had continued to strengthen even as
growth in economic activity had slowed. Job gains
had remained solid, on average, in recent months,
and the unemployment rate had declined. Household
spending had risen only modestly, but the fundamentals underpinning the continued growth of consumption remained solid, while business fixed investment
had firmed.
Inflation, measured as the 12-month change in the
headline PCE price index, had been running close to
the Committee’s 2 percent longer-run objective. Core
inflation continued to run somewhat below 2 percent.
Both headline and core consumer price indexes fell in
March. Market-based measures of inflation compensation had remained low, while survey-based measures of longer-term inflation expectations had
changed little on balance.
With respect to the economic outlook and its implications for monetary policy, members agreed that the
slowing in growth during the first quarter was likely
to be transitory and continued to expect that, with
gradual adjustments in the stance of monetary
policy, economic activity would expand at a moderate pace, labor market conditions would strengthen
somewhat further, and inflation would stabilize
around 2 percent over the medium term. Members
continued to judge that there was significant uncertainty about the effects of possible changes in fiscal
and other government policies but that near-term
risks to the economic outlook appeared roughly balanced. A couple of members noted that the outlook
for global growth appeared to have brightened and
that downside risks from abroad had waned. Members agreed that they would continue to closely monitor inflation indicators and global economic and
financial developments.
After assessing current conditions and the outlook
for economic activity, the labor market, and inflation,
members agreed to maintain the target range for the
federal funds rate at ¾ to 1 percent. They noted that
the stance of monetary policy remained accommodative, thereby supporting some further strengthening
in labor market conditions and a sustained return to
2 percent inflation.
Members generally judged that it would be prudent
to await additional evidence indicating that the recent
slowing in the pace of economic activity had been
transitory before taking another step in removing
accommodation. Members agreed that, in determin-

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ing the timing and size of future adjustments to the
target range for the federal funds rate, the Committee
would assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment would
take into account a wide range of information,
including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international
developments. Members also agreed to continue to
carefully monitor actual and expected inflation developments relative to the Committee’s symmetric inflation goal, with one member viewing further progress
of inflation toward the 2 percent objective as necessary before taking another step to remove policy
accommodation. Members expected that economic
conditions would evolve in a manner that would warrant gradual increases in the federal funds rate. Members agreed that the federal funds rate was likely to
remain, for some time, below levels that they
expected to prevail in the longer run. However, they
noted that the actual path of the federal funds rate
would depend on the economic outlook as informed
by incoming data.
The Committee also decided to maintain its existing
policy of reinvesting all principal payments from its
holdings of agency debt and agency mortgagebacked securities in agency mortgage-backed securities and of rolling over maturing Treasury securities
at auction. Members anticipated doing so until normalization of the level of the federal funds rate was
well under way, and they noted that this policy, by
keeping the Committee’s holdings of longer-term
securities at sizable levels, should help maintain
accommodative financial conditions.
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, to be
released at 2:00 p.m.:
“Effective May 4, 2017, the Federal Open Market Committee directs the Desk to undertake
open market operations as necessary to maintain the federal funds rate in a target range of ¾
to 1 percent, including overnight reverse repurchase operations (and reverse repurchase operations with maturities of more than one day when
necessary to accommodate weekend, holiday, or
similar trading conventions) at an offering rate

of 0.75 percent, in amounts limited only by the
value of Treasury securities held outright in the
System Open Market Account that are available
for such operations and by a per-counterparty
limit of $30 billion per day.
The Committee directs the Desk to continue
rolling over maturing Treasury securities at auction and to continue reinvesting principal payments on all agency debt and agency mortgagebacked 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 vote also encompassed approval of the statement
below to be released at 2:00 p.m.:
“Information received since the Federal Open
Market Committee met in March indicates that
the labor market has continued to strengthen
even as growth in economic activity slowed. Job
gains were solid, on average, in recent months,
and the unemployment rate declined. Household
spending rose only modestly, but the fundamentals underpinning the continued growth of consumption remained solid. Business fixed investment firmed. Inflation measured on a 12-month
basis recently has been running close to the
Committee’s 2 percent longer-run objective.
Excluding energy and food, consumer prices
declined in March and inflation continued to
run somewhat below 2 percent. Market-based
measures of inflation compensation remain low;
survey-based measures of longer-term inflation
expectations are little changed, on balance.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment
and price stability. The Committee views the
slowing in growth during the first quarter as
likely to be transitory and continues to expect
that, with gradual adjustments in the stance of
monetary policy, economic activity will expand
at a moderate pace, labor market conditions will
strengthen somewhat further, and inflation will
stabilize around 2 percent over the medium
term. Near-term risks to the economic outlook
appear roughly balanced. The Committee continues to closely monitor inflation indicators and
global economic and financial developments.

Minutes of Federal Open Market Committee Meetings | May

In view of realized and expected labor market
conditions and inflation, the Committee decided
to maintain the target range for the federal funds
rate at ¾ to 1 percent. The stance of monetary
policy remains accommodative, thereby supporting some further strengthening in labor market
conditions and a sustained return to 2 percent
inflation.
In determining the timing and size of future
adjustments to the target range for the federal
funds rate, the Committee will assess realized
and expected economic conditions relative to its
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 will carefully
monitor actual and expected inflation developments relative to its symmetric inflation goal.
The Committee expects that economic conditions will evolve in a manner that will warrant
gradual increases in the federal funds rate; the
federal funds rate is likely to remain, for some
time, below levels that are expected to prevail in
the longer run. However, the actual path of the
federal funds rate will depend on the economic
outlook as informed by incoming data.
The Committee is maintaining its existing policy
of reinvesting principal payments from its holdings of agency debt and agency mortgagebacked securities in agency mortgage-backed
securities and of rolling over maturing Treasury
securities at auction, and it anticipates doing so
until normalization of the level of the federal
funds rate is well under way. This policy, by
keeping the Committee’s holdings of longerterm securities at sizable levels, should help
maintain accommodative financial conditions.”
Voting for this action: Janet L. Yellen, William C.
Dudley, Lael Brainard, Charles L. Evans, Stanley
Fischer, Patrick Harker, Robert S. Kaplan, Neel
Kashkari, and Jerome H. Powell.
Voting against this action: None.
Consistent with the Committee’s decision to leave the
target range for the federal funds rate unchanged, the
Board of Governors voted unanimously to leave the
interest rates on required and excess reserve balances

183

unchanged at 1 percent and voted unanimously to
approve establishment of the primary credit rate (discount rate) at the existing level of 1½ percent.6

System Open Market Account
Reinvestment Policy
Participants continued their discussion of issues
related to potential changes to the Committee’s
policy of reinvesting principal payments from securities held in the SOMA. The staff provided a briefing
that summarized a possible operational approach to
reducing the System’s securities holdings in a gradual
and predictable manner. Under the proposed
approach, the Committee would announce a set of
gradually increasing caps, or limits, on the dollar
amounts of Treasury and agency securities that
would be allowed to run off each month, and only
the amounts of securities repayments that exceeded
the caps would be reinvested each month. As the caps
increased, reinvestments would decline, and the
monthly reductions in the Federal Reserve’s securities
holdings would become larger. The caps would initially be set at low levels and then be raised every
three months, over a set period of time, to their fully
phased-in levels. The final values of the caps would
then be maintained until the size of the balance sheet
was normalized.
Nearly all policymakers expressed a favorable view of
this general approach. Policymakers noted that preannouncing a schedule of gradually increasing caps
to limit the amounts of securities that could run off
in any given month was consistent with the Committee’s intention to reduce the Federal Reserve’s securities holdings in a gradual and predictable manner as
stated in the Committee’s Policy Normalization Principles and Plans. Limiting the magnitude of the
monthly reductions in the Federal Reserve’s securities
holdings on an ongoing basis could help mitigate the
risk of adverse effects on market functioning or outsized effects on interest rates. The approach would
also likely be fairly straightforward to communicate.
Moreover, under this approach, the process of reducing the Federal Reserve’s securities holdings, once
begun, could likely proceed without a need for the
Committee to make adjustments as long as there was
no material deterioration in the economic outlook.
Policymakers agreed that the Committee’s Policy
Normalization Principles and Plans should be aug6

The second vote of the Board also encompassed approval of the
establishment of the interest rates for secondary and seasonal
credit under the existing formulas for computing such rates.

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104th Annual Report | 2017

mented soon to provide additional details about the
operational plan to reduce the Federal Reserve’s
securities holdings over time. Nearly all policymakers
indicated that as long as the economy and the path of
the federal funds rate evolved as currently expected, it
likely would be appropriate to begin reducing the
Federal Reserve’s securities holdings this year. Policymakers agreed to continue in June their discussion of
plans for a change to the Committee’s reinvestment
policy.
It was agreed that the next meeting of the Committee
would be held on Tuesday–Wednesday, June 13–14,

2017. The meeting adjourned at 11:45 a.m. on
May 3, 2017.

Notation Vote
By notation vote completed on April 4, 2017, the
Committee unanimously approved the minutes of the
Committee meeting held on March 14–15, 2017.
Brian F. Madigan
Secretary

Minutes of Federal Open Market Committee Meetings | June

Meeting Held on June 13–14, 2017

Thomas Laubach
Economist

A joint meeting of the Federal Open Market Committee and the Board of Governors was held in the
offices of the Board of Governors of the Federal
Reserve System in Washington, D.C., on Tuesday,
June 13, 2017, at 1:00 p.m. and continued on
Wednesday, June 14, 2017, at 9:00 a.m.1

David W. Wilcox
Economist

Present

Beth Anne Wilson, James A. Clouse,
Thomas A. Connors, Eric M. Engen,
Evan F. Koenig, Jonathan P. McCarthy,
William Wascher, and Mark L. J. Wright
Associate Economists

Janet L. Yellen
Chair

Simon Potter
Manager, System Open Market Account

William C. Dudley
Vice Chairman

Lorie K. Logan
Deputy Manager, System Open Market Account

Lael Brainard

Ann E. Misback
Secretary, Office of the Secretary,
Board of Governors

Charles L. Evans
Stanley Fischer
Patrick Harker
Robert S. Kaplan
Neel Kashkari
Jerome H. Powell
Raphael W. Bostic, Loretta J. Mester,
Mark L. Mullinix, Michael Strine,
and John C. Williams
Alternate Members of the Federal Open Market
Committee
James Bullard, Esther L. George, and Eric Rosengren
Presidents of the Federal Reserve Banks of St. Louis,
Kansas City, and Boston, 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
Michael Held
Deputy General Counsel

185

Matthew J. Eichner2
Director, Division of Reserve Bank Operations and
Payment Systems, Board of Governors
Michael S. Gibson
Director, Division of Supervision and Regulation,
Board of Governors
Michael T. Kiley
Deputy Director, Division of Financial Stability,
Board of Governors
Stephen A. Meyer
Deputy Director, Division of Monetary Affairs,
Board of Governors
William B. English
Senior Special Adviser to the Board, Office of Board
Members, Board of Governors
Trevor A. Reeve
Senior Special Adviser to the Chair, Office of Board
Members, Board of Governors
David Bowman, Joseph W. Gruber,
David Reifschneider, and John M. Roberts
Special Advisers to the Board, Office of Board
Members, Board of Governors
Linda Robertson
Assistant to the Board, Office of Board Members,
Board of Governors

Steven B. Kamin
Economist

Christopher J. Erceg
Senior Associate Director, Division of International
Finance, Board of Governors

1

2

The Federal Open Market Committee is referenced as the
“FOMC” and the “Committee” in these minutes.

Attended through the discussion of System Open Market
Account reinvestment policy.

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104th Annual Report | 2017

Joshua Gallin
Senior Associate Director, Division of Research and
Statistics, Board of Governors

Stephen Lin
Principal Economist, Division of International
Finance, Board of Governors

Gretchen C. Weinbach2
Senior Associate Director, Division of Monetary
Affairs, Board of Governors

Lubomir Petrasek
Principal Economist, Division of Monetary Affairs,
Board of Governors

Antulio N. Bomfim, Ellen E. Meade,
and Edward Nelson
Senior Advisers, Division of Monetary Affairs,
Board of Governors

Achilles Sangster II
Information Management Analyst, Division of
Monetary Affairs, Board of Governors

Jeremy B. Rudd
Senior Adviser, Division of Research and Statistics,
Board of Governors

Marie Gooding
First Vice President, Federal Reserve Bank of Atlanta

Rochelle M. Edge
Associate Director, Division of Financial Stability,
Board of Governors

David Altig, Kartik B. Athreya, Mary Daly,
Jeff Fuhrer, and Christopher J. Waller
Executive Vice Presidents, Federal Reserve Banks of
Atlanta, Richmond, San Francisco, Boston, and
St. Louis, respectively

Jane E. Ihrig
Associate Director, Division of Monetary Affairs,
Board of Governors

Spencer Krane and Ellis W. Tallman
Senior Vice Presidents, Federal Reserve Banks of
Chicago and Cleveland, respectively

Stacey Tevlin
Associate Director, Division of Research and
Statistics, Board of Governors

Roc Armenter and Kathryn B. Chen3
Vice Presidents, Federal Reserve Banks of
Philadelphia and New York, respectively

Min Wei
Deputy Associate Director, Division of Monetary
Affairs, Board of Governors

Andrew T. Foerster
Senior Economist, Federal Reserve Bank of
Kansas City

Christopher J. Gust
Assistant Director, Division of Monetary Affairs,
Board of Governors

Selection of Committee Officer

Norman J. Morin and Karen M. Pence
Assistant Directors, Division of Research and
Statistics, Board of Governors

By unanimous vote, the Committee selected Mark L.
J. Wright to serve as Associate Economist, effective
June 13, 2017, until the selection of his successor at
the first regularly scheduled meeting of the Committee in 2018.

Don Kim
Adviser, Division of Monetary Affairs,
Board of Governors

Developments in Financial Markets and
Open Market Operations

Penelope A. Beattie
Assistant to the Secretary, Office of the Secretary,
Board of Governors
Giovanni Favara and Rebecca Zarutskie
Section Chiefs, Division of Monetary Affairs,
Board of Governors
David H. Small
Project Manager, Division of Monetary Affairs,
Board of Governors
Kimberly Bayard
Group Manager, Division of Research and Statistics,
Board of Governors

The manager of the System Open Market Account
(SOMA) reported on developments in domestic and
foreign financial markets over the period since the
May FOMC meeting. Yields on Treasury securities
and the foreign exchange value of the dollar had
declined modestly, while equity prices had continued
to rise, contributing to a further easing of financial
conditions according to some measures. Moreover,
realized and implied volatility in financial markets
remained low. Meanwhile, inflation compensation
edged lower. Survey results and market pricing sug3

Attended through the staff report on the economic and financial situation.

Minutes of Federal Open Market Committee Meetings | June

gested that market participants saw a high probability of an increase in the FOMC’s target range for the
federal funds rate at this meeting.
The deputy manager reviewed survey results on market expectations for SOMA reinvestment policy and
for the evolution of the System’s balance sheet over
coming years. The deputy manager also commented
on money market developments. Over the intermeeting period, the federal funds rate remained well
within the FOMC’s target range, and take-up at the
System’s overnight reverse repurchase agreement
facility was little changed from the previous period.
The spread between the three-month London interbank offered rate and the overnight index swap (OIS)
rate had narrowed markedly in recent months after
rising noticeably in advance of the implementation of
money market fund reform in the fall of 2016. The
deputy manager also summarized details of the
operational approach that the Open Market Desk
planned to follow if the Committee adopted the proposal for SOMA reinvestment policy to be considered at this meeting.

through the Committee’s postmeeting statement.
Participants unanimously supported the proposal.
Policy Normalization Principles and Plans
(Addendum Adopted June 13, 2017)
All participants agreed to augment the Committee’s
Policy Normalization Principles and Plans by providing the following additional details regarding the
approach the FOMC intends to use to reduce the
Federal Reserve’s holdings of Treasury and agency
securities once normalization of the level of the federal funds rate is well under way.4
• The Committee intends to gradually reduce the
Federal Reserve’s securities holdings by decreasing
its reinvestment of the principal payments it
receives from securities held in the System Open
Market Account. Specifically, such payments will
be reinvested only to the extent that they exceed
gradually rising caps.
—For payments of principal that the Federal
Reserve receives from maturing Treasury securities, the Committee anticipates that the cap will
be $6 billion per month initially and will increase
in steps of $6 billion at three-month intervals
over 12 months until it reaches $30 billion per
month.

By unanimous vote, the Committee ratified the
Desk’s domestic transactions over the intermeeting
period. There were no intervention operations in foreign currencies for the System’s account during the
intermeeting period.

—For payments of principal that the Federal
Reserve receives from its holdings of agency debt
and mortgage-backed securities, the Committee
anticipates that the cap will be $4 billion per
month initially and will increase in steps of
$4 billion at three-month intervals over
12 months until it reaches $20 billion per month.

System Open Market Account
Reinvestment Policy
The Chair observed that, starting with the
March 2017 FOMC meeting, Committee participants had been discussing approaches to reducing the
Federal Reserve’s securities holdings in a gradual and
predictable manner. She noted that participants
appeared to have reached a consensus on an
approach that involved specifying caps on the
monthly amount of principal payments from securities holdings that would not be reinvested; these caps
would rise over the period of a year, after which they
would remain constant. Given this consensus, the
Chair proposed that participants approve the plan
and that it be published as an addendum to the Committee’s Policy Normalization Principles and Plans;
the addendum would be released at the conclusion of
this meeting so as to inform the public well in
advance of implementing the reinvestment policy. It
was anticipated that when the Committee determined
that economic conditions warranted implementation
of the program, that step would be communicated

187

—The Committee also anticipates that the caps will
remain in place once they reach their respective
maximums so that the Federal Reserve’s securities holdings will continue to decline in a gradual
and predictable manner until the Committee
judges that the Federal Reserve is holding no
more securities than necessary to implement
monetary policy efficiently and effectively.
• Gradually reducing the Federal Reserve’s securities holdings will result in a declining supply of
reserve balances. The Committee currently antici4

The Committee’s Policy Normalization Principles and Plans
were adopted on September 16, 2014, and are available at www
.federalreserve.gov/monetarypolicy/files/FOMC_
PolicyNormalization.pdf. On March 18, 2015, the Committee
adopted an addendum to the Policy Normalization Principles
and Plans, which is available at www.federalreserve.gov/
monetarypolicy/files/FOMC_PolicyNormalization.20150318
.pdf.

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104th Annual Report | 2017

pates reducing the quantity of reserve balances,
over time, to a level appreciably below that seen
in recent years but larger than before the financial crisis; the level will reflect the banking
system’s demand for reserve balances and the
Committee’s decisions about how to implement
monetary policy most efficiently and effectively
in the future. The Committee expects to learn
more about the underlying demand for reserves
during the process of balance sheet
normalization.
• The Committee affirms that changing the target
range for the federal funds rate is its primary
means of adjusting the stance of monetary
policy. However, the Committee would be prepared to resume reinvestment of principal payments received on securities held by the Federal
Reserve if a material deterioration in the economic outlook were to warrant a sizable reduction in the Committee’s target for the federal
funds rate. Moreover, the Committee would be
prepared to use its full range of tools, including
altering the size and composition of its balance
sheet, if future economic conditions were to warrant a more accommodative monetary policy
than can be achieved solely by reducing the federal funds rate.

Staff Review of the Economic Situation
The information reviewed for the June 13–14 meeting
showed that labor market conditions continued to
strengthen in recent months and suggested that real
gross domestic product (GDP) was expanding at a
faster pace in the second quarter than in the first
quarter. The 12-month change in overall consumer
prices, as measured by the price index for personal
consumption expenditures (PCE), slowed a bit further in April; total consumer price inflation and core
inflation, which excludes consumer food and energy
prices, were both running somewhat below 2 percent.
Survey-based measures of longer-run inflation expectations were little changed on balance.
Total nonfarm payroll employment expanded further
in April and May, and the average pace of job gains
over the first five months of the year was solid. The
unemployment rate moved down to 4.3 percent in
May; the unemployment rates for African Americans
and for Hispanics stepped down but remained above
the unemployment rates for Asians and for whites.
The overall labor force participation rate declined
somewhat, and the share of workers employed part

time for economic reasons decreased a little. The rate
of private-sector job openings increased in March
and April, while the quits rate was little changed and
the hiring rate moved down. The four-week moving
average of initial claims for unemployment insurance
benefits remained at a very low level through early
June. Measures of labor compensation continued to
rise at moderate rates. Compensation per hour in the
nonfarm business sector increased 2¼ percent over
the four quarters ending in the first quarter, a bit
slower than over the same period a year earlier. Average hourly earnings for all employees increased
2½ percent over the 12 months ending in May, about
the same as over the comparable period a year
earlier.
Total industrial production rose considerably in
April, reflecting gains in manufacturing, mining, and
utilities output. Automakers’ assembly schedules suggested that motor vehicle production would slow in
subsequent months, but broader indicators of manufacturing production, such as the new orders indexes
from national and regional manufacturing surveys,
pointed to modest gains in factory output over the
near term.
Real PCE rose solidly in April after increasing only
modestly in the first quarter. Light motor vehicle
sales picked up in April but then moved down somewhat in May. The components of the nominal retail
sales data used by the Bureau of Economic Analysis
to construct its estimate of PCE were flat in May, but
estimated increases in these components of sales for
the previous two months were revised up. In addition, recent readings on key factors that influence
consumer spending pointed to further solid growth in
total real PCE in the near term, including continued
gains in employment, real disposable personal
income, and households’ net worth. Moreover, consumer sentiment, as measured by the University of
Michigan Surveys of Consumers, remained upbeat
in May.
Residential investment appeared to be slowing after
increasing briskly in the first quarter. The firstquarter strength may have reflected housing activity
shifting earlier in response to unseasonably warm
weather last quarter, to an anticipation of higher
future interest rates, or to both. Starts of new singlefamily homes edged up in April, but the issuance of
building permits for these homes declined somewhat.
Meanwhile, starts of multifamily units fell. Moreover,
sales of both new and existing homes decreased in
April.

Minutes of Federal Open Market Committee Meetings | June

Real private expenditures for business equipment and
intellectual property seemed to be increasing further
after rising at a solid pace in the first quarter. Both
nominal shipments and new orders of nondefense
capital goods excluding aircraft rose in April, and
new orders continued to exceed shipments, pointing
to further gains in shipments in the near term. In
addition, indicators of business sentiment were
upbeat in recent months. Although firms’ nominal
spending for nonresidential structures excluding drilling and mining declined in April, the number of oil
and gas rigs in operation, an indicator of spending
for structures in the drilling and mining sector, continued to rise through early June.
Nominal federal government spending data for April
and May pointed to essentially flat real federal purchases in the second quarter. Real state and local government purchases appeared to be moving down, as
state and local government payrolls declined, on net,
in April and May, and nominal construction expenditures by these governments decreased in April.
The nominal U.S. international trade deficit widened
slightly in March, with a small decline in exports and a
small increase in imports. The March data, together
with revised estimates for earlier months, indicated
that real exports grew briskly in the first quarter and at
a faster pace than in the second half of 2016. Real
imports also increased in the first quarter but at a
slower pace than in the second half of 2016. In April,
the nominal trade deficit widened, as imports picked
up while exports declined slightly. Net exports were
estimated to have made a small positive contribution
to real GDP growth in the first quarter. However, the
April trade data suggested that net exports might be a
slight drag on real GDP growth in the second quarter.
Total U.S. consumer prices, as measured by the PCE
price index, increased 1¾ percent over the 12 months
ending in April. Core PCE price inflation was
1½ percent over those same 12 months. Over the
12 months ending in May, the consumer price index
(CPI) rose a little less than 2 percent, while core CPI
inflation was 1¾ percent. The median of inflation
expectations over the next 5 to 10 years from the
Michigan survey was unchanged in May, and the
median expectation for PCE price inflation over the
next 10 years from the Survey of Professional Forecasters also held steady in the second quarter. Likewise, the medians of longer-run inflation expectations from the Desk’s Survey of Primary Dealers and
Survey of Market Participants were essentially
unchanged in June.

189

The economic expansions in Canada and the euro
area as well as in China and many other emerging
market economies (EMEs) continued to firm in the
first quarter. In contrast, economic growth in the
United Kingdom slowed sharply. Recent indicators
suggested that real GDP growth in most foreign
economies remained solid in the second quarter.
Headline inflation across the advanced foreign
economies (AFEs) generally appeared to moderate
from the pace registered over the first quarter, as the
effects of earlier increases in energy prices started to
fade; core inflation continued to be subdued in many
AFEs. Among the EMEs, inflation in China rose
while inflation in Latin America fell. In Mexico, the
effects of fuel price hikes in January and the passthrough from earlier currency depreciation to prices
started to wane, but inflation remained above the
central bank’s target.

Staff Review of the Financial Situation
Domestic financial market conditions remained generally accommodative over the intermeeting period.
U.S. equity prices increased over the period, longerterm Treasury yields declined, and the dollar depreciated. A decline in the perceived likelihood of a significant fiscal expansion and the below-expectations
reading on the April CPI reportedly contributed to
lower yields on longer-tenor Treasury securities. Market participants’ perceptions of an improved global
economic outlook appeared to provide some support
to prices of risk assets.
FOMC communications over the intermeeting
period were viewed as broadly in line with investors’
expectations that the Committee would continue to
remove policy accommodation at a gradual pace.
Market participants interpreted the May FOMC
statement and the meeting minutes as indicating that
the Committee had not materially changed its economic outlook. In response to the discussion of
SOMA reinvestment policy in the minutes, a number
of market participants reportedly pulled forward
their expectations for the most likely timing of a
change to the Committee’s reinvestment policy, a
shift that was evident in the responses to the Desk’s
Survey of Primary Dealers and Survey of Market
Participants. However, investors also reportedly
viewed the Committee’s planning as mitigating the
risk that the process of reducing the size of the Federal Reserve’s balance sheet would lead to outsized
movements in interest rates or have adverse effects on
market functioning.

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104th Annual Report | 2017

The probability of an increase in the target range for
the federal funds rate occurring at the June meeting,
as implied by quotes on federal funds futures contracts, rose to a high level. However, the expected federal funds rate from late 2018 to the end of 2020
implied by OIS quotes declined slightly. Immediately
following the May FOMC meeting, nominal Treasury yields rose at short and intermediate maturities,
reportedly reflecting the response of investors to a
passage in the postmeeting statement indicating the
Committee’s view that the slowing in real GDP
growth during the first quarter was likely to be transitory. Later in the intermeeting period, yields
declined in reaction to the release of weaker-thanexpected April CPI data and the somewhat disappointing May employment report. On balance, the
Treasury yield curve flattened, with short-term yields
rising modestly and the 10-year yield declining. Both
5-year and 5-to-10-year-forward TIPS-based inflation compensation declined, in part reflecting the
below-expectations inflation data.
Broad U.S. equity price indexes increased. Onemonth-ahead option-implied volatility on the S&P
500 index—the VIX—was little changed, on net, and
remained near the lower end of its historical range.
Conditions in short-term funding markets were
stable over the intermeeting period. Yields on a
broad set of money market instruments remained in
the ranges observed since the FOMC increased the
target range for the federal funds rate in March.
Term OIS rates rose as expectations firmed for an
increase in the federal funds rate target at this
meeting.
Financing conditions for nonfinancial businesses
continued to be accommodative. Commercial and
industrial loans outstanding increased in April and
May after being weak in the first quarter, although
the growth of these loans remained well below the
pace seen a year ago. Issuance of both corporate debt
and equity was strong. Gross issuance of institutional leveraged loans was solid in April and May,
although it receded from the near-record levels seen
over the previous two months.
Commercial real estate (CRE) loans on banks’ books
grew robustly in April and May, with nonfarm nonresidential loans leading the expansion. However,
recent CRE loan growth was a bit slower than that
during the first quarter, in part reflecting a slowdown
in lending for both construction and multifamily
units. Issuance of commercial mortgage-backed secu-

rities (CMBS) through the first five months of this
year was similar to the issuance over the same period
a year earlier. While delinquency rates on CRE loans
held by banks edged down further in the first quarter,
the delinquency rates on loans in CMBS pools continued to increase. The rise in CMBS delinquency
rates was mostly confined to loans that were originated during the period of weak underwriting before
the financial crisis. The increase in those delinquencies had generally been expected by market participants and was not anticipated to have a material
effect on credit availability or market conditions.
Residential mortgage rates declined slightly, in line
with yields on longer-term Treasury and mortgagebacked securities, but remained elevated relative to
the third quarter of 2016. Despite the higher level of
mortgage rates, growth in mortgage lending for home
purchases remained near the upper end of its recent
range during the first quarter. Delinquency rates on
residential mortgage loans continued to edge down
amid robust house price growth and still-tight lending standards for households with low credit scores
and hard-to-document incomes.
Financing conditions in consumer credit markets
remained generally accommodative, although some
indicators pointed to modest reductions in credit
availability in recent months. Tighter conditions for
credit card borrowing were especially apparent within
the subprime segment, where there had been some
further deterioration of credit performance. On a
year-over-year basis, overall credit card balances continued to grow in April at a robust rate, although the
pace had moderated a bit from that of 2016.
Growth in auto loans remained solid through the
first quarter. Overall delinquency rates on auto loans
continued to be relatively low, but the delinquency
rate among subprime borrowers remained elevated,
reflecting easier lending standards in 2015 and 2016.
Recent evidence suggested that these lending standards had tightened; the credit rating of the average
borrower had trended higher, and new extensions of
subprime auto loans had declined.
Over the period since the May FOMC meeting, foreign financial markets were influenced by incoming
economic data and by political developments both
abroad and in the United States. Most AFE and
EME equity indexes edged higher, supported by
robust first-quarter earnings reports and generally
positive data releases overseas. The broad U.S. dollar
depreciated about 1¾ percent over the intermeeting

Minutes of Federal Open Market Committee Meetings | June

period, weakening against both AFE and EME currencies. In particular, the dollar depreciated against
the Canadian dollar following communications by
the Bank of Canada suggesting that the removal of
policy accommodation could occur sooner than previously expected by market participants. The dollar
also depreciated against the euro, which was supported by the results of the French presidential election and by stronger-than-expected macroeconomic
releases. Those data releases prompted the European
Central Bank at its June 8 meeting to change its
assessment of risks to the economic outlook from
“tilted to the downside” to “balanced.” U.S. developments, including mixed economic data reports, also
weighed on the dollar. In contrast, the dollar
strengthened against sterling following the U.K. parliamentary election. Changes in longer-dated AFE
sovereign bond yields were mixed, while shorterdated yields moved slightly higher. EME sovereign
spreads were little changed, while flows into EME
mutual funds remained robust. However, Brazilian
sovereign spreads widened and the Brazilian real
depreciated notably amid increased political
uncertainty.

Staff Economic Outlook
In the U.S. economic projection prepared by the staff
for the June FOMC meeting, real GDP growth was
forecast to step up to a solid pace in the second quarter following its weak reading in the first quarter, primarily reflecting faster real PCE growth. On balance,
the incoming data on aggregate spending were a little
stronger than the staff had expected, and the forecast
of real GDP growth for the current year was a bit
higher than in the previous projection. Beyond this
year, the projection for real GDP growth was essentially unchanged. The staff continued to project that
real GDP would expand at a modestly faster pace
than potential output in 2017 through 2019, supported in part by the staff’s maintained assumption
that fiscal policy would become more expansionary
in the coming years. The unemployment rate was
projected to decline gradually over the next couple of
years and to continue running below the staff’s estimate of its longer-run natural rate over this period.
The staff’s forecast for consumer price inflation, as
measured by the change in the PCE price index, was
revised down slightly for 2017 because of the weakerthan-expected incoming data for inflation. However,
the projection was little changed thereafter, as the
recent weakness in inflation was viewed as transitory.
Inflation was still expected to be somewhat higher

191

this year than last year, largely reflecting an upturn in
the prices for food and non-energy imports. The staff
projected that inflation would increase further in the
next couple of years, and that it would be close to the
Committee’s longer-run objective in 2018 and at
2 percent in 2019.
The staff viewed the uncertainty around its projections for real GDP growth, the unemployment rate,
and inflation as similar to the average of the past
20 years. Many financial market indicators of uncertainty were subdued, and the uncertainty associated
with the foreign outlook appeared to have subsided
further, on balance, since late last year; these developments were judged as counterweights to elevated
measures of economic policy uncertainty. The staff
saw the risks to the forecasts for real GDP and the
unemployment rate as balanced; the staff’s assessment was that the downside risks associated with
monetary policy not being well positioned to respond
to adverse shocks had diminished since its previous
forecast. The risks to the projection for inflation also
were seen as roughly balanced. The downside risks
from the possibility that longer-term inflation expectations may have edged down or that the dollar could
appreciate substantially were seen as essentially counterbalanced by the upside risk that inflation could
increase more than expected in an economy that was
projected to continue operating above its longer-run
potential.

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 output growth, the
unemployment rate, and inflation for each year from
2017 through 2019 and over the longer run, based on
their individual assessments of the appropriate path
for the federal funds rate.5 The longer-run projections
represented 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.6
5

6

Four members of the Board of Governors, one fewer than in
March 2017, were in office at the time of the June 2017 meeting
and submitted economic projections. The office of the president
of the Federal Reserve Bank of Richmond was vacant at the
time of this FOMC meeting; First Vice President Mark L.
Mullinix submitted economic projections.
One participant did not submit longer-run projections for real
output growth, the unemployment rate, or the federal funds
rate.

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104th Annual Report | 2017

These projections and policy assessments are
described in the Summary of Economic Projections
(SEP), which is an addendum to these minutes.
In their discussion of the economic situation and the
outlook, meeting participants agreed that the information received over the intermeeting period indicated that the labor market had continued to
strengthen and that economic activity had been rising
moderately, on average, so far this year. Job gains had
moderated since the beginning of the year but had
remained solid, on average, and the unemployment
rate had declined. Household spending had picked
up in recent months, and business fixed investment
had continued to expand. Inflation measured on a
12-month basis had declined recently and, like the
measure excluding food and energy prices, had been
running somewhat below 2 percent. Market-based
measures of inflation compensation remained low;
survey-based measures of longer-term inflation
expectations were little changed on balance.
Participants generally saw the incoming information
on spending and labor market indicators as consistent, overall, with their expectations and indicated
that their views of the outlook for economic growth
and the labor market had changed only slightly since
the May FOMC meeting. As anticipated, growth in
consumer spending seemed to have bounced back
from a weak first quarter, and participants continued
to expect that, with further gradual adjustments in
the stance of monetary policy, economic activity
would expand at a moderate pace and labor market
conditions would strengthen somewhat further. In
light of surprisingly low recent readings on inflation,
participants expected that inflation on a 12-month
basis would remain somewhat below 2 percent in the
near term. However, participants judged that inflation would stabilize around the Committee’s 2 percent objective over the medium term.
Growth in consumer spending appeared to be
rebounding after slowing in the first quarter of this
year. Participants generally continued to expect that
ongoing job gains, rising household income and
wealth, and improved household balance sheets
would support moderate growth in household spending over the medium term. However, District contacts reported that automobile sales had slowed
recently; some contacts expected sales to slow further,
while others believed that sales were leveling out.
Participants generally agreed that business fixed
investment had continued to expand in recent

months, supported in particular by a rebound in the
energy sector. District contacts suggested that an
expansion in oil production capacity was likely to
continue in the near term, though the longer-term
outlook was more uncertain. Conditions in the
manufacturing sector in several Districts were reportedly strong, but activity in a couple of them had
slowed in recent months from a high level, and some
contacts in the automobile industry reported declines
in production that they expected to continue in the
near term. District reports regarding the service sector were generally positive. In contrast, contacts in a
couple of Districts indicated that conditions in the
agricultural sector remained weak. Contacts in many
Districts remained optimistic about business prospects, which were supported in part by improving
global conditions. However, this optimism appeared
to have recently abated somewhat, partly because
contacts viewed the likelihood of significant fiscal
stimulus as having diminished. Contacts at some
large firms indicated that they had curtailed their
capital spending, in part because of uncertainty
about changes in fiscal and other government policies; some contacts at smaller firms, however, indicated that their capital spending plans had not been
appreciably affected by news about government
policy. Reports regarding housing construction from
District contacts were mixed.
Labor market conditions continued to strengthen in
recent months. The unemployment rate fell from
4.5 percent in March to 4.3 percent in May and was
below levels that participants judged likely to be normal over the longer run. Monthly increases in nonfarm payrolls averaged 160,000 since the beginning of
the year, down from 187,000 per month in 2016 but
still well above estimates of the pace necessary to
absorb new entrants in the labor force. A few participants interpreted this slowing in payroll growth as an
expected development that reflected a tight labor
market. Other labor market indicators, such as the
number of job openings and broader measures of
unemployment, were also seen as consistent with
labor market conditions having strengthened in
recent months. Moreover, contacts in several Districts
reported shortages of workers in selected occupations
and in some cases indicated that firms were significantly increasing salaries and benefits in order to
attract or keep workers. However, other contacts
reported only modest wage gains, and participants
observed that measures of labor compensation for
the overall economy continued to rise only moderately despite strengthening labor market conditions.
A couple of participants saw the restrained increases

Minutes of Federal Open Market Committee Meetings | June

in labor compensation as consistent with the low productivity growth and moderate inflation experienced
in recent years. In light of the recent behavior of
labor compensation and consumer prices as well as
demographic trends, a number of participants lowered their estimate of the longer-run normal level of
the unemployment rate.
Recent readings on headline and core PCE price
inflation had come in lower than participants had
expected. On a 12-month basis, headline PCE price
inflation was running somewhat below the Committee’s 2 percent objective in April, partly because of
factors that appeared to be transitory. Core PCE
price inflation—which historically has been a more
useful predictor of future inflation, although it, too,
can be affected by transitory factors—moved down
from 1.8 percent in March to 1.5 percent in April. In
addition, CPI inflation in May came in lower than
expected. Most participants viewed the recent softness in these price data as largely reflecting idiosyncratic factors, including sharp declines in prices of
wireless telephone services and prescription drugs,
and expected these developments to have little bearing on inflation over the medium run. Participants
continued to expect that, as the effects of transitory
factors waned and labor market conditions strengthened further, inflation would stabilize around the
Committee’s 2 percent objective over the medium
term. Several participants suggested that recent
increases in import prices were consistent with this
expectation. However, several participants expressed
concern that progress toward the Committee’s 2 percent longer-run inflation objective might have slowed
and that the recent softness in inflation might persist.
Such persistence might occur in part because upward
pressure on inflation from resource utilization may
be limited, as the relationship between these two variables appeared to be weaker than in previous
decades. However, a couple of other participants
raised the concern that a tighter relationship between
inflation and resource utilization could reemerge if
the unemployment rate ran significantly below its
longer-run normal level, which could result in inflation running persistently above the Committee’s
2 percent objective.
Overall, participants continued to see the near-term
risks to the economic outlook as roughly balanced.
Participants again noted the uncertainty regarding
the possible enactment, timing, and nature of
changes to fiscal and other government policies and
saw both upside and downside risks to the economic
outlook associated with such changes. A number of

193

participants, pointing to improved prospects for foreign economic growth, viewed the downside risks to
the U.S. economic outlook stemming from international developments as having receded further over
the intermeeting period. With regard to the outlook
for inflation, some participants emphasized downside
risks, particularly in light of the recent low readings
on inflation along with measures of inflation compensation and some survey measures of inflation
expectations that were still low. However, a couple of
participants expressed concern that a substantial
undershooting of the longer-run normal rate of
unemployment could pose an appreciable upside risk
to inflation or give rise to macroeconomic or financial imbalances that eventually could lead to a significant economic downturn. Participants agreed that
the Committee should continue to monitor inflation
developments closely.
In their discussion of recent developments in financial markets, participants observed that, over the
intermeeting period, equity prices rose, longer-term
interest rates declined, and volatility in financial markets was generally low. They also noted that, according to some measures, financial conditions had eased
even as the Committee reduced policy accommodation and market participants continued to expect further steps to tighten monetary policy. Participants
discussed possible reasons why financial conditions
had not tightened. Corporate earnings growth had
been robust; nevertheless, in the assessment of a few
participants, equity prices were high when judged
against standard valuation measures. Longer-term
Treasury yields had declined since earlier in the year
and remained low. Participants offered various explanations for low bond yields, including the prospect of
sluggish longer-term economic growth as well as the
elevated level of the Federal Reserve’s longer-term
asset holdings. Some participants suggested that
increased risk tolerance among investors might be
contributing to elevated asset prices more broadly; a
few participants expressed concern that subdued
market volatility, coupled with a low equity premium, could lead to a buildup of risks to financial
stability.
In their discussion of monetary policy, participants
generally saw the outlook for economic activity and
the medium-term outlook for inflation as little
changed and viewed a continued gradual removal of
monetary policy accommodation as being appropriate. Based on this assessment, almost all participants
expressed the view that it would be appropriate for
the Committee to raise the target range for the fed-

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104th Annual Report | 2017

eral funds rate 25 basis points at this meeting. These
participants agreed that, even after an increase in the
target range for the federal funds rate at this meeting,
the stance of monetary policy would remain accommodative, supporting additional strengthening in
labor market conditions and a sustained return to
2 percent inflation. A few participants also judged
that the case for a policy rate increase at this meeting
was strengthened by the easing, by some measures, in
overall financial conditions over the previous six
months. One participant did not believe it was appropriate to raise the federal funds rate target range at
this meeting; this participant suggested that the
Committee should maintain the target range for the
federal funds rate at ¾ to 1 percent until the inflation
rate was actually moving toward the Committee’s
2 percent longer-run objective.
Participants noted that, with the process of normalization of the level of the federal funds rate continuing, it would likely become appropriate this year for
the Committee to announce and implement a specific
timetable for its program of reducing reinvestment of
the Federal Reserve’s securities holdings. It was
observed that the ensuing reduction in securities
holdings would be gradual and would follow an
extended period of Committee communications on
balance sheet normalization policy, including the
information that would be released at the conclusion
of this meeting. Consequently, the effect on financial
market conditions of the eventual announcement of
the beginning of the Federal Reserve’s balance sheet
normalization was expected to be limited.
Participants expressed a range of views about the
appropriate timing of a change in reinvestment
policy. Several preferred to announce a start to the
process within a couple of months; in support of this
approach, it was noted that the Committee’s communications had helped prepare the public for such a
step. However, some others emphasized that deferring the decision until later in the year would permit
additional time to assess the outlook for economic
activity and inflation. A few of these participants
also suggested that a near-term change to reinvestment policy could be misinterpreted as signifying
that the Committee had shifted toward a less gradual
approach to overall policy normalization.
Several participants indicated that the reduction in
policy accommodation arising from the commencement of balance sheet normalization was one basis
for believing that, if economic conditions evolved
broadly as anticipated, the target range for the fed-

eral funds rate would follow a less steep path than it
otherwise would. However, some other participants
suggested that they did not see the balance sheet normalization program as a factor likely to figure heavily
in decisions about the target range for the federal
funds rate. A few of these participants judged that
the degree of additional policy firming that would
result from the balance sheet normalization program
was modest.
Participants generally reiterated their support for
continuing a gradual approach to raising the federal
funds rate. Several participants expressed confidence
that a series of further increases in the federal funds
rate in coming years, along the lines implied by the
medians of the projections for the federal funds rate
in the June SEP, would contribute to a stabilization,
over the medium term, of the inflation rate around
the Committee’s 2 percent objective, especially as this
tightening of monetary policy would affect the
economy only with a lag and would start from a
point at which policy was still accommodative. However, a few participants who supported an increase in
the target range at the present meeting indicated that
they were less comfortable with the degree of additional policy tightening through the end of 2018
implied by the June SEP median federal funds rate
projections. These participants expressed concern
that such a path of increases in the policy rate, while
gradual, might prove inconsistent with a sustained
return of inflation to 2 percent.
Several participants endorsed a policy approach,
such as that embedded in many participants’ projections, in which the unemployment rate would undershoot their current estimates of the longer-term normal rate for a sustained period. They noted that the
longer-run normal rate of unemployment is difficult
to measure and that recent evidence suggested
resource pressures generated only modest responses
of nominal wage growth and inflation. Against this
backdrop, possible benefits cited by policymakers of
a period of tight labor markets included a further rise
in nominal wage growth that would bolster inflation
expectations and help push the inflation rate closer to
the Committee’s 2 percent longer-run goal, as well as
a stimulus to labor market participation and business
fixed investment. It was also suggested that the symmetry of the Committee’s inflation goal might be
underscored if inflation modestly exceeded 2 percent
for a time, as such an outcome would follow a long
period in which inflation had undershot the 2 percent
longer-term objective. Several participants expressed
concern that a substantial and sustained unemploy-

Minutes of Federal Open Market Committee Meetings | June

ment undershooting might make the economy more
likely to experience financial instability or could lead
to a sharp rise in inflation that would require a rapid
policy tightening that, in turn, could raise the risk of
an economic downturn. However, other participants
noted that if a sharp rise in inflation or inflation
expectations did occur, the Committee could readily
respond using conventional monetary policy tools.
With regard to financial stability, one participant
emphasized the importance of remaining vigilant
about financial developments but observed that previous episodes of elevated financial imbalances and
low unemployment had limited relevance for the
present situation, as the current system of financial
regulation was likely more robust than that prevailing
before the financial crisis.

Committee Policy Action
In their discussion of monetary policy for the period
ahead, members judged that information received
since the Federal Open Market Committee met in
May indicated that the labor market had continued
to strengthen and that economic activity had been
rising moderately so far this year. Job gains had moderated but had been solid, on average, since the
beginning of the year, and the unemployment rate
had declined. Household spending had picked up in
recent months, and business fixed investment had
continued to expand.
Inflation on a 12-month basis had declined recently
and was running somewhat below 2 percent. The
measure of inflation excluding food and energy
prices was likewise running somewhat below 2 percent. Market-based measures of inflation compensation remained low; survey-based measures of longerterm inflation expectations had changed little on
balance.
With respect to the economic outlook and its implications for monetary policy, members continued to
expect that, with gradual adjustments in the stance of
monetary policy, economic activity would expand at
a moderate pace, and labor market conditions would
strengthen somewhat further. Inflation on a
12-month basis was expected to remain somewhat
below 2 percent in the near term, but almost all members expected it to stabilize around 2 percent over the
medium term, although they were monitoring inflation developments closely. Members continued to
judge that there was significant uncertainty about the
effects of possible changes in fiscal and other government policies but that near-term risks to the eco-

195

nomic outlook appeared roughly balanced, especially
as risks related to foreign economic and financial
developments had diminished.
After assessing current conditions and the outlook
for economic activity, the labor market, and inflation,
all but one member agreed to raise the target range
for the federal funds rate to 1 to 1¼ percent. They
noted that the stance of monetary policy remained
accommodative, thereby supporting some further
strengthening in labor market conditions and a sustained return to 2 percent inflation.
Members agreed that, in determining the timing and
size of future adjustments to the target range for the
federal funds rate, the Committee would assess realized and expected economic conditions relative to its
objectives of maximum employment and 2 percent
inflation. This assessment would take into account a
wide range of information, including measures of
labor market conditions, indicators of inflation pressures and inflation expectations, and readings on
financial and international developments. Members
also agreed that they would carefully monitor actual
and expected developments in inflation in relation to
the Committee’s symmetric inflation goal. They
expected that economic conditions would evolve in a
manner that would warrant gradual increases in the
federal funds rate, and they agreed that the federal
funds rate was likely to remain, for some time, below
levels that are expected to prevail in the longer run.
However, the actual path of the federal funds rate
would depend on the economic outlook as informed
by incoming data.
The Committee also decided to maintain its existing
policy of reinvesting principal payments from its
holdings of agency debt and agency mortgagebacked securities in agency mortgage-backed securities and of rolling over maturing Treasury securities
at auction. The Committee expected to begin implementing a balance sheet normalization program in
2017, provided that the economy evolves broadly as
anticipated. This program, which would gradually
reduce the Federal Reserve’s securities holdings by
decreasing reinvestment of principal payments from
those securities, was described in an addendum to the
Committee’s Policy Normalization Principles and
Plans to be released after this meeting.
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

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104th Annual Report | 2017

with the following domestic policy directive, to be
released at 2:00 p.m.:
“Effective June 15, 2017, the Federal Open Market Committee directs the Desk to undertake
open market operations as necessary to maintain the federal funds rate in a target range of
1 to 1¼ percent, including overnight reverse
repurchase operations (and reverse repurchase
operations with maturities of more than one day
when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 1.00 percent, in amounts limited only
by the value of Treasury securities held outright
in the System Open Market Account that are
available for such operations and by a percounterparty limit of $30 billion per day.
The Committee directs the Desk to continue
rolling over maturing Treasury securities at auction and to continue reinvesting principal payments on all agency debt and agency mortgagebacked 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 vote also encompassed approval of the statement
below to be released at 2:00 p.m.:
“Information received since the Federal Open
Market Committee met in May indicates that
the labor market has continued to strengthen
and that economic activity has been rising moderately so far this year. Job gains have moderated but have been solid, on average, since the
beginning of the year, and the unemployment
rate has declined. Household spending has
picked up in recent months, and business fixed
investment has continued to expand. On a
12-month basis, inflation has declined recently
and, like the measure excluding food and energy
prices, is running somewhat below 2 percent.
Market-based measures of inflation compensation remain low; survey-based measures of
longer-term inflation expectations are little
changed, on balance.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment
and price stability. The Committee continues to
expect that, with gradual adjustments in the

stance of monetary policy, economic activity
will expand at a moderate pace, and labor market conditions will strengthen somewhat further.
Inflation on a 12-month basis is expected to
remain somewhat below 2 percent in the near
term but to stabilize around the Committee’s
2 percent objective over the medium term. Nearterm risks to the economic outlook appear
roughly balanced, but the Committee is monitoring inflation developments closely.
In view of realized and expected labor market
conditions and inflation, the Committee decided
to raise the target range for the federal funds
rate to 1 to 1¼ percent. The stance of monetary
policy remains accommodative, thereby supporting some further strengthening in labor market
conditions and a sustained return to 2 percent
inflation.
In determining the timing and size of future
adjustments to the target range for the federal
funds rate, the Committee will assess realized
and expected economic conditions relative to its
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 will carefully
monitor actual and expected inflation developments relative to its symmetric inflation goal.
The Committee expects that economic conditions will evolve in a manner that will warrant
gradual increases in the federal funds rate; the
federal funds rate is likely to remain, for some
time, below levels that are expected to prevail in
the longer run. However, the actual path of the
federal funds rate will depend on the economic
outlook as informed by incoming data.
The Committee is maintaining its existing policy
of reinvesting principal payments from its holdings of agency debt and agency mortgagebacked securities in agency mortgage-backed
securities and of rolling over maturing Treasury
securities at auction. The Committee currently
expects to begin implementing a balance sheet
normalization program this year, provided that
the economy evolves broadly as anticipated.
This program, which would gradually reduce the
Federal Reserve’s securities holdings by decreasing reinvestment of principal payments from

Minutes of Federal Open Market Committee Meetings | June

those securities, is described in the accompanying addendum to the Committee’s Policy Normalization Principles and Plans.”
Voting for this action: Janet L. Yellen, William C.
Dudley, Lael Brainard, Charles L. Evans, Stanley
Fischer, Patrick Harker, Robert S. Kaplan, and
Jerome H. Powell.
Voting against this action: Neel Kashkari.

197

The Board of Governors also voted unanimously to
approve a ¼ percentage point increase in the primary
credit rate (discount rate) to 1¾ percent, effective
June 15, 2017.7
It was agreed that the next meeting of the Committee
would be held on Tuesday–Wednesday, July 25–26,
2017. The meeting adjourned at 10:35 a.m. on
June 14, 2017.

Notation Vote
Mr. Kashkari dissented because he preferred to
maintain the existing target range for the federal
funds rate at this meeting. In his view, recent data,
while suggesting that the labor market had improved
further, had increased doubts about achievement of
the Committee’s 2 percent longer-run inflation objective and thus had not provided a compelling basis on
which to firm monetary policy at this meeting. He
preferred to await additional evidence that the recent
decline in inflation was temporary and that inflation
was moving toward the Committee’s symmetric
2 percent inflation objective. He was concerned that
raising the federal funds rate target range too soon
increased the likelihood that inflation expectations
would decline and that inflation would continue to
run below 2 percent.
To support the Committee’s decision to raise the target range for the federal funds rate, the Board of
Governors voted unanimously to raise the interest
rates on required and excess reserve balances ¼ percentage point, to 1¼ percent, effective June 15, 2017.

By notation vote completed on May 23, 2017, the
Committee unanimously approved the minutes of the
Committee meeting held on May 2–3, 2017.
Brian F. Madigan
Secretary

7

In taking this action, the Board approved requests submitted by
the boards of directors of the Federal Reserve Banks of Boston,
Philadelphia, Cleveland, Richmond, Atlanta, Chicago, Kansas
City, Dallas, and San Francisco. This vote also encompassed
approval by the Board of Governors of the establishment of a
1¾ percent primary credit rate by the remaining Federal
Reserve Banks, effective on the later of June 15, 2017, and the
date such Reserve Banks informed the Secretary of the Board
of such a request. (Secretary’s note: Subsequently, the Federal
Reserve Banks of New York, St. Louis, and Minneapolis were
informed by the Secretary of the Board of the Board’s approval
of their establishment of a primary credit rate of 1¾ percent,
effective June 15, 2017.) The second vote of the Board also
encompassed approval of the establishment of the interest rates
for secondary and seasonal credit under the existing formulas
for computing such rates.

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104th Annual Report | 2017

Addendum:
Summary of Economic Projections
In conjunction with the Federal Open Market Committee (FOMC) meeting held on June 13–14, 2017,
meeting participants submitted their projections of
the most likely outcomes for real output growth, the
unemployment rate, and inflation for each year from
2017 to 2019 and over the longer run.8 Each participant’s projection was based on information available
at the time of the meeting, together with his or her
assessment of appropriate monetary policy, including
a path for the federal funds rate and its longer-run
value, and assumptions about other factors likely to
affect economic outcomes.9 The longer-run projections represent each participant’s assessment of the
value 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.10 “Appropriate monetary policy” is
defined as the future path of policy that each participant deems most likely to foster outcomes for economic activity and inflation that best satisfy his or
her individual interpretation of the Federal Reserve’s
objectives of maximum employment and stable
prices.
All participants who submitted longer-run projections expected that, under appropriate monetary
policy, growth in real gross domestic product (GDP)
this year would run somewhat above their individual
estimates of its longer-run rate. Over half of these
participants expected that economic growth would
slow a bit in 2018, and almost all of them expected
that in 2019 economic growth would run at or near
its longer-run level. All participants who submitted
longer-run projections expected that the unemployment rate would run below their estimates of its
longer-run normal level in 2017 and remain below
that level through 2019. The majority of participants
also lowered their estimates of the longer-run normal
rate of unemployment by 0.1 to 0.2 percentage point.
All participants projected that inflation, as measured
8

9

10

Four members of the Board of Governors, one fewer than in
March 2017, were in office at the time of the June 2017 meeting
and submitted economic projections. The office of the president
of the Federal Reserve Bank of Richmond was vacant at the
time of this FOMC meeting; First Vice President Mark L.
Mullinix submitted economic projections.
All participants submitted their projections in advance of the
FOMC meeting; no projections were revised following the
release of economic data on the morning of June 14.
One participant did not submit longer-run projections for real
output growth, the unemployment rate, or the federal funds
rate.

by the four-quarter percentage change in the price
index for personal consumption expenditures (PCE),
would run below 2 percent in 2017 and then step up
in the next two years; over half of them projected
that inflation would be at the Committee’s 2 percent
objective in 2019, and all judged that inflation would
be within a couple of tenths of a percentage point of
the objective in that year. Table 1 and figure 1 provide summary statistics for the projections.
As shown in figure 2, participants generally expected
that evolving economic conditions would likely warrant further gradual increases in the federal funds
rate to achieve and sustain maximum employment
and 2 percent inflation. Although some participants
raised or lowered their federal funds rate projections
since March, the median projections for the federal
funds rate in 2017 and 2018 were essentially
unchanged, and the median projection in 2019 was
slightly lower; the median projection for the longerrun federal funds rate was unchanged. However, the
economic outlook is uncertain, and participants
noted that their economic projections and assessments of appropriate monetary policy could change
in response to incoming information.
In general, participants viewed the uncertainty
attached to their projections as broadly similar to the
average of the past 20 years, although a couple of
participants saw the uncertainty associated with their
real GDP growth forecasts as higher than average.
Most participants judged the risks around their projections for economic growth, the unemployment
rate, and inflation as broadly balanced.
Figures 4.A through 4.C for real GDP growth, the
unemployment rate, and inflation, respectively, present “fan charts” as well as charts of participants’ current assessments of the uncertainty and risks surrounding the economic projections. The fan charts
(the panels at the top of these three figures) show the
median projections surrounded by confidence intervals that are computed from the forecast errors of
various private and government projections made
over the past 20 years. The width of the confidence
interval for each variable at a given point is a measure
of forecast uncertainty at that horizon. For all three
macroeconomic variables, these charts illustrate that
forecast uncertainty is substantial and generally
increases as the forecast horizon lengthens. Reflecting, in part, the uncertainty about the future evolution of GDP growth, the unemployment rate, and
inflation, participants’ assessments of appropriate
monetary policy are also subject to considerable

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199

Table 1. Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents, under their individual
assessments of projected appropriate monetary policy, June 2017
Percent
Median1

Central tendency2

Variable
2017

2018

2019

Change in real GDP
March projection
Unemployment rate
March projection
PCE inflation
March projection
Core PCE inflation4
March projection

2.2
2.1
4.3
4.5
1.6
1.9
1.7
1.9

2.1
2.1
4.2
4.5
2.0
2.0
2.0
2.0

1.9
1.9
4.2
4.5
2.0
2.0
2.0
2.0

Memo: Projected
appropriate
policy path
Federal funds rate
March projection

1.4
1.4

2.1
2.1

2.9
3.0

Longer
run

2017

2018

2019

1.8
1.8
4.6
4.7
2.0
2.0

2.1–2.2
2.0–2.2
4.2–4.3
4.5–4.6
1.6–1.7
1.8–2.0
1.6–1.7
1.8–1.9

1.8–2.2
1.8–2.3
4.0–4.3
4.3–4.6
1.8–2.0
1.9–2.0
1.8–2.0
1.9–2.0

1.8–2.0
1.8–2.0
4.1–4.4
4.3–4.7
2.0–2.1
2.0–2.1
2.0–2.1
2.0–2.1

3.0
3.0

1.1–1.6
1.4–1.6

1.9–2.6
2.1–2.9

2.6–3.1
2.6–3.3

Range3
Longer
run

Longer
run

2017

2018

2019

1.8–2.0
1.8–2.0
4.5–4.8
4.7–5.0
2.0
2.0

2.0–2.5
1.7–2.3
4.1–4.5
4.4–4.7
1.5–1.8
1.7–2.1
1.6–1.8
1.7–2.0

1.7–2.3
1.7–2.4
3.9–4.5
4.2–4.7
1.7–2.1
1.8–2.1
1.7–2.1
1.8–2.1

1.4–2.3
1.5–2.2
3.8–4.5
4.1–4.8
1.8–2.2
1.8–2.2
1.8–2.2
1.8–2.2

1.5–2.2
1.6–2.2
4.5–5.0
4.5–5.0
2.0
2.0

2.8–3.0
2.8–3.0

1.1–1.6
0.9–2.1

1.1–3.1
0.9–3.4

1.1–4.1
0.9–3.9

2.5–3.5
2.5–3.8

Note: Projections of change in real gross domestic product (GDP) and projections for both measures of inflation are percent changes from the fourth quarter of the previous year
to the fourth quarter of the year indicated. PCE inflation and core PCE inflation are the percentage rates of change in, respectively, the price index for personal consumption
expenditures (PCE) and the price index for PCE excluding food and energy. Projections for the unemployment rate are for the average civilian unemployment rate in the fourth
quarter of the year indicated. Each participant’s projections are based on his or her assessment of appropriate monetary policy. Longer-run projections represent each
participant’s assessment of the rate to which each variable would be expected to converge under appropriate monetary policy and in the absence of further shocks to the
economy. The projections for the federal funds rate are the value of the midpoint of the projected appropriate target range for the federal funds rate or the projected appropriate
target level for the federal funds rate at the end of the specified calendar year or over the longer run. The March projections were made in conjunction with the meeting of the
Federal Open Market Committee on March 14–15, 2017. One participant did not submit longer-run projections for the change in real GDP, the unemployment rate, or the federal
funds rate in conjunction with the March 14–15, 2017, meeting, and one participant did not submit such projections in conjunction with the June 13–14, 2017, meeting.
1
For each period, the median is the middle projection when the projections are arranged from lowest to highest. When the number of projections is even, the median is the
average of the two middle projections.
2
The central tendency excludes the three highest and three lowest projections for each variable in each year.
3
The range for a variable in a given year includes all participants’ projections, from lowest to highest, for that variable in that year.
4
Longer-run projections for core PCE inflation are not collected.

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Figure 1. Medians, central tendencies, and ranges of economic projections, 2017–19 and over the longer run
Percent

Change in real GDP
Median of projections
Central tendency of projections
Range of projections

3

2

1

Actual

2012

2013

2014

2015

2016

2017

2018

2019

Longer
run
Percent

Unemployment rate
8
7
6
5
4

2012

2013

2014

2015

2016

2017

2018

2019

Longer
run
Percent

PCE inflation
3

2

1

2012

2013

2014

2015

2016

2017

2018

2019

Longer
run
Percent

Core PCE inflation
3

2

1

2012

2013

2014

2015

2016

2017

2018

2019

Note: Definitions of variables and other explanations are in the notes to table 1. The data for the actual values of the variables are annual.

Longer
run

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201

Figure 2. FOMC participants’ assessments of appropriate monetary policy: Midpoint of target range or target level for the
federal funds rate
Percent

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

2017

2018

2019

Longer run

Note: Each shaded circle indicates the value (rounded to the nearest ⅛ percentage point) of an individual participant’s judgment of the midpoint of the appropriate target range
for the federal funds rate or the appropriate target level for the federal funds rate at the end of the specified calendar year or over the longer run. One participant did not submit
longer-run projections for the federal funds rate.

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104th Annual Report | 2017

uncertainty. To illustrate the uncertainty regarding
the appropriate path for monetary policy, figure 5
shows a comparable fan chart around the median
projections for the federal funds rate.11 As with the
macroeconomic variables, forecast uncertainty for the
federal funds rate is substantial and increases at longer horizons.

The Outlook for Economic Activity
The median of participants’ projections for the
growth rate of real GDP, conditional on their individual assumptions about appropriate monetary
policy, was 2.2 percent in 2017, 2.1 percent in 2018,
and 1.9 percent in 2019; the median of projections
for the longer-run normal rate of real GDP growth
was 1.8 percent. Compared with the March Summary of Economic Projections (SEP), the medians of
the forecasts for real GDP growth over the period
from 2017 to 2019, as well as the median assessment
of the longer-run growth rate, were mostly
unchanged. Fewer than half of the participants
incorporated expectations of fiscal stimulus into their
projections, and a couple indicated that they had
marked down the magnitude of expected fiscal stimulus relative to March.
All participants revised down their projections for the
unemployment rate in the fourth quarter of 2017 and
of 2018, and almost all also revised down their projections for the unemployment rate in the fourth
quarter of 2019. Many who did so cited recent lowerthan-expected readings on unemployment. The
median of the projections for the unemployment rate
was 4.3 percent in 2017 and 4.2 percent in each of
2018 and 2019, 0.2 percentage point and 0.3 percentage point lower than in the March projections,
respectively. The majority of participants also revised
down their estimates of the longer-run normal rate of
unemployment by 0.1 or 0.2 percentage point, and
the median longer-run level was 4.6 percent, down
0.1 percentage point from March.
Figures 3.A and 3.B show the distributions of participants’ projections for real GDP growth and the
unemployment rate from 2017 to 2019 and in the longer run. The distribution of individual projections for
real GDP growth for this year shifted up, with some
11

The fan chart for the federal funds rate depicts the uncertainty
about the future path of appropriate monetary policy and is
closely connected with the uncertainty about the future value of
economic variables. In contrast, the dot plot shown in figure 2
displays the dispersion of views across individual participants
about the appropriate level of the federal funds rate.

participants now expecting real GDP growth between
2.4 and 2.5 percent and none seeing it below 2 percent. The distributions of projected real GDP growth
in 2018, 2019, and in the longer run were broadly
similar to the distributions of the March projections.
The distributions of individual projections for the
unemployment rate shifted down noticeably for 2017
and 2018. Most participants projected an unemployment rate of 4.2 or 4.3 percent at the end of this year,
and the majority anticipated an unemployment rate
between 4.0 and 4.3 percent at the end of 2018. Participants’ projections also shifted down in 2019 but
were more dispersed than the distributions of their
projected unemployment rates in the two earlier
years. The distribution of projections for the longerrun normal unemployment rate shifted down
modestly.

The Outlook for Inflation
The median of projections for headline PCE price
inflation this year was 1.6 percent, down 0.3 percentage point from March. As in March, median projected inflation was 2.0 percent in 2018 and 2019.
About half of the participants anticipated that inflation would continue to run a bit below 2 percent in
2018, while only one participant expected inflation
above 2 percent in that year—and, in that case, just
modestly so. More than half projected that inflation
would be equal to the Committee’s objective in 2019.
A few participants projected that inflation would run
slightly below 2 percent in that year, while several
projected that it would run a little above 2 percent.
The median of projections for core PCE price inflation was 1.7 percent in 2017, a decline of 0.2 percentage point from March; the median projection for
2018 and 2019 was 2.0 percent, as in the March
projections.
Figures 3.C and 3.D provide information on the distributions of participants’ views about the outlook
for inflation. The distributions of projections for
headline PCE price inflation and for core PCE price
inflation in 2017 shifted down noticeably from
March, while the distributions for both measures of
inflation in 2018 shifted down slightly. Many participants cited recent surprisingly low readings on inflation as a factor contributing to the revisions in their
inflation forecasts.

Appropriate Monetary Policy
Figure 3.E provides the distribution of participants’
judgments regarding the appropriate target or mid-

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203

Figure 3.A. Distribution of participants’ projections for the change in real GDP, 2017–19 and over the longer run
Number of participants

2017
18
16
14
12
10
8
6
4
2

June projections
March projections

1.2 –
1.3

1.4 –
1.5

1.6 –
1.7

1.8 –
1.9

2.0 –
2.1

2.2 –
2.3

2.4 –
2.5

Percent range
Number of participants

2018
18
16
14
12
10
8
6
4
2
1.2 –
1.3

1.4 –
1.5

1.6 –
1.7

1.8 –
1.9

2.0 –
2.1

2.2 –
2.3

2.4 –
2.5

Percent range
Number of participants

2019
18
16
14
12
10
8
6
4
2
1.2 –
1.3

1.4 –
1.5

1.6 –
1.7

1.8 –
1.9

2.0 –
2.1

2.2 –
2.3

2.4 –
2.5

Percent range
Number of participants

Longer run
18
16
14
12
10
8
6
4
2
1.2 –
1.3

1.4 –
1.5

1.6 –
1.7

1.8 –
1.9

Percent range
Note: Definitions of variables and other explanations are in the notes to table 1.

2.0 –
2.1

2.2 –
2.3

2.4 –
2.5

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104th Annual Report | 2017

Figure 3.B. Distribution of participants’ projections for the unemployment rate, 2017–19 and over the longer run
Number of participants

2017
18
16
14
12
10
8
6
4
2

June projections
March projections

3.6 –
3.7

3.8 –
3.9

4.0 –
4.1

4.2 –
4.3

4.4 –
4.5

4.6 –
4.7

4.8 –
4.9

5.0 –
5.1

Percent range
Number of participants

2018
18
16
14
12
10
8
6
4
2
3.6 –
3.7

3.8 –
3.9

4.0 –
4.1

4.2 –
4.3

4.4 –
4.5

4.6 –
4.7

4.8 –
4.9

5.0 –
5.1

Percent range
Number of participants

2019
18
16
14
12
10
8
6
4
2
3.6 –
3.7

3.8 –
3.9

4.0 –
4.1

4.2 –
4.3

4.4 –
4.5

4.6 –
4.7

4.8 –
4.9

5.0 –
5.1

Percent range
Number of participants

Longer run
18
16
14
12
10
8
6
4
2
3.6 –
3.7

3.8 –
3.9

4.0 –
4.1

4.2 –
4.3

Percent range
Note: Definitions of variables and other explanations are in the notes to table 1.

4.4 –
4.5

4.6 –
4.7

4.8 –
4.9

5.0 –
5.1

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205

Figure 3.C. Distribution of participants’ projections for PCE inflation, 2017–19 and over the longer run
Number of participants

2017
18
16
14
12
10
8
6
4
2

June projections
March projections

1.5 –
1.6

1.7 –
1.8

1.9 –
2.0

2.1 –
2.2

Percent range
Number of participants

2018
18
16
14
12
10
8
6
4
2
1.5 –
1.6

1.7 –
1.8

1.9 –
2.0

2.1 –
2.2

Percent range
Number of participants

2019
18
16
14
12
10
8
6
4
2
1.5 –
1.6

1.7 –
1.8

1.9 –
2.0

2.1 –
2.2

Percent range
Number of participants

Longer run
18
16
14
12
10
8
6
4
2
1.5 –
1.6

1.7 –
1.8

1.9 –
2.0

Percent range
Note: Definitions of variables and other explanations are in the notes to table 1.

2.1 –
2.2

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104th Annual Report | 2017

Figure 3.D. Distribution of participants’ projections for core PCE inflation, 2017–19
Number of participants

2017
June projections
March projections

18
16
14
12
10
8
6
4
2

1.5 –
1.6

1.7 –
1.8

1.9 –
2.0

2.1 –
2.2

Percent range
Number of participants

2018
18
16
14
12
10
8
6
4
2
1.5 –
1.6

1.7 –
1.8

1.9 –
2.0

2.1 –
2.2

Percent range
Number of participants

2019
18
16
14
12
10
8
6
4
2
1.5 –
1.6

1.7 –
1.8

1.9 –
2.0

Percent range
Note: Definitions of variables and other explanations are in the notes to table 1.

2.1 –
2.2

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207

Figure 3.E. Distribution of participants’ judgments of the midpoint of the appropriate target range for the federal funds rate or
the appropriate target level for the federal funds rate, 2017–19 and over the longer run
Number of participants

2017
18
16
14
12
10
8
6
4
2

June projections
March projections

0.88 –
1.12

1.13 –
1.37

1.38 –
1.62

1.63 –
1.87

1.88 –
2.12

2.13 –
2.37

2.38 –
2.62

2.63 –
2.87

2.88 –
3.12

3.13 –
3.37

3.38 –
3.62

3.63 –
3.87

3.88 –
4.12

4.13 –
4.37

Percent range
Number of participants

2018
18
16
14
12
10
8
6
4
2
0.88 –
1.12

1.13 –
1.37

1.38 –
1.62

1.63 –
1.87

1.88 –
2.12

2.13 –
2.37

2.38 –
2.62

2.63 –
2.87

2.88 –
3.12

3.13 –
3.37

3.38 –
3.62

3.63 –
3.87

3.88 –
4.12

4.13 –
4.37

Percent range
Number of participants

2019
18
16
14
12
10
8
6
4
2
0.88 –
1.12

1.13 –
1.37

1.38 –
1.62

1.63 –
1.87

1.88 –
2.12

2.13 –
2.37

2.38 –
2.62

2.63 –
2.87

2.88 –
3.12

3.13 –
3.37

3.38 –
3.62

3.63 –
3.87

3.88 –
4.12

4.13 –
4.37

Percent range
Number of participants

Longer run
18
16
14
12
10
8
6
4
2
0.88 –
1.12

1.13 –
1.37

1.38 –
1.62

1.63 –
1.87

1.88 –
2.12

2.13 –
2.37

2.38 –
2.62

2.63 –
2.87

Percent range
Note: Definitions of variables and other explanations are in the notes to table 1.

2.88 –
3.12

3.13 –
3.37

3.38 –
3.62

3.63 –
3.87

3.88 –
4.12

4.13 –
4.37

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104th Annual Report | 2017

point of the target range for the federal funds rate at
the end of each year from 2017 to 2019 and over the
longer run.12 The distribution for 2017 was less dispersed than that in March, while the distribution for
2018 was slightly less dispersed. The distributions in
2019 and in the longer run were broadly similar to
those in March. The median projections of the federal funds rate continued to show gradual increases,
with the median assessment for 2017 standing at
1.38 percent, consistent with three 25 basis point
increases this year. Thereafter, the medians of the
projections were 2.13 percent at the end of 2018 and
2.94 percent at the end of 2019; the median of the
longer-run projections of the federal funds rate was
3.00 percent.
In discussing their June projections, many participants continued to express the view that the appropriate upward trajectory of the federal funds rate
over the next few years would likely be gradual. That
anticipated pace reflected a few factors, such as a
neutral real interest rate that was currently low and
was expected to move up only slowly as well as a
gradual return of inflation to the Committee’s 2 percent objective. Several participants judged that a
slightly more accommodative path of monetary
policy than in their previous projections would likely
be appropriate, citing an apparently slower rate of
progress toward the Committee’s 2 percent inflation
objective. In their discussions of appropriate monetary policy, half of the participants commented on
the Committee’s reinvestment policy; all of those
who did so expected a change in reinvestment policy
before the end of this year.

Uncertainty and Risks
Projections of economic variables are subject to considerable uncertainty. In assessing the path of monetary policy that, in their view, is likely to be most
appropriate, FOMC participants take account of the
range of possible outcomes, the likelihood of those
outcomes, and the potential benefits and costs to the
economy should they occur. Table 2 provides one
measure of forecast uncertainty for the change in real
12

One participant’s projections for the federal funds rate, real
GDP growth, the unemployment rate, and inflation were
informed by the view that there are multiple possible mediumterm regimes for the U.S. economy, that these regimes are persistent, and that the economy shifts between regimes in a way
that cannot be forecast. Under this view, the economy currently
is in a regime characterized by expansion of economic activity
with low productivity growth and a low short-term real interest
rate, but longer-term outcomes for variables other than inflation
cannot be usefully projected.

Table 2. Average historical projection error ranges
Percentage points
Variable
Change in real GDP1
Unemployment rate1
Total consumer prices2
Short-term interest rates3

2017

2018

2019

±1.4
±0.4
±0.8
±0.7

±2.0
±1.2
±1.0
±2.0

±2.2
±1.8
±1.0
±2.2

Note: Error ranges shown are measured as plus or minus the root mean squared
error of projections for 1997 through 2016 that were released in the summer by
various private and government forecasters. As described in the box “Forecast
Uncertainty,” under certain assumptions, there is about a 70 percent probability
that actual outcomes for real GDP, unemployment, consumer prices, and the
federal funds rate will be in ranges implied by the average size of projection
errors made in the past. For more information, see David Reifschneider and Peter
Tulip (2017), “Gauging the Uncertainty of the Economic Outlook Using Historical
Forecasting Errors: The Federal Reserve’s Approach,” Finance and Economics
Discussion Series 2017-020 (Washington: Board of Governors of the Federal
Reserve System, February), available at www.federalreserve.gov/econresdata/
feds/2017/files/2017020pap.pdf.
1
Definitions of variables are in the general note to table 1.
2
Measure is the overall consumer price index, the price measure that has been
most widely used in government and private economic forecasts. Projection
is percent change, fourth quarter of the previous year to the fourth quarter of
the year indicated.
3
For Federal Reserve staff forecasts, measure is the federal funds rate. For other
forecasts, measure is the rate on 3-month Treasury bills. Historical projections
are the average level, in percent, in the fourth quarter of the year indicated.

GDP, the unemployment rate, and total consumer
price inflation—the root mean squared error
(RMSE) for forecasts made over the past 20 years.
This measure of forecast uncertainty is incorporated
graphically in the top panels of figures 4.A, 4.B, and
4.C, which display fan charts plotting the median
SEP projections for the three variables surrounded by
symmetric confidence intervals derived from the
RMSEs presented in table 2. If the degree of uncertainty attending these projections is similar to the
typical magnitude of past forecast errors and if the
risks around the projections are broadly balanced,
future outcomes of these variables would have about
a 70 percent probability of occurring within these
confidence intervals. For all three variables, this
measure of forecast uncertainty is substantial and
generally increases as the forecast horizon lengthens.
FOMC participants may judge that the width of the
historical fan charts shown in figures 4.A through
4.C does not adequately capture their current assessments of the degree of uncertainty that surrounds
their economic projections. Participants’ assessments
of the current level of uncertainty surrounding their
economic projections are shown in the bottom-left
panels of figures 4.A, 4.B, and 4.C. All or nearly all
participants viewed the uncertainty attached to their
economic projections as broadly similar to the average of the past 20 years, with three fewer participants

Minutes of Federal Open Market Committee Meetings | June

209

Figure 4.A. Uncertainty and risks in projections of GDP growth

Median projection and confidence interval based on historical forecast errors

Percent

Change in real GDP
Median of projections
70% confidence interval

4

3

2

1

Actual

0

2012

2013

2014

2015

2016

2017

2018

2019

FOMC participants’ assessments of uncertainty and risks around their economic projections
Number of participants

Number of participants

Uncertainty about GDP growth

Risks to GDP growth

June projections
March projections

Lower

18
16
14
12
10
8
6
4
2

Broadly
similar

Higher

June projections
March projections

Weighted to
downside

18
16
14
12
10
8
6
4
2

Broadly
balanced

Weighted to
upside

Note: The blue and red lines in the top panel show actual values and median projected values, respectively, of the percent change in real gross domestic product (GDP) from the
fourth quarter of the previous year to the fourth quarter of the year indicated. The confidence interval around the median projected values is assumed to be symmetric and is
based on root mean squared errors of various private and government forecasts made over the previous 20 years; more information about these data is available in table 2.
Because current conditions may differ from those that prevailed, on average, over the previous 20 years, the width and shape of the confidence interval estimated on the basis
of the historical forecast errors may not reflect FOMC participants’ current assessments of the uncertainty and risks around their projections; these current assessments are
summarized in the lower panels. Generally speaking, participants who judge the uncertainty about their projections as “broadly similar” to the average levels of the past
20 years would view the width of the confidence interval shown in the historical fan chart as largely consistent with their assessments of the uncertainty about their projections.
Likewise, participants who judge the risks to their projections as “broadly balanced” would view the confidence interval around their projections as approximately symmetric.
For definitions of uncertainty and risks in economic projections, see the box “Forecast Uncertainty.”

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104th Annual Report | 2017

Figure 4.B. Uncertainty and risks in projections of the unemployment rate

Median projection and confidence interval based on historical forecast errors

Percent

Unemployment rate
10

Median of projections
70% confidence interval

9
8
7
6

Actual

5
4
3
2
1

2012

2013

2014

2015

2016

2017

2018

2019

FOMC participants’ assessments of uncertainty and risks around their economic projections
Number of participants

Uncertainty about the unemployment rate

Risks to the unemployment rate

June projections
March projections

Lower

18
16
14
12
10
8
6
4
2

Broadly
similar

Number of participants

Higher

June projections
March projections

Weighted to
downside

18
16
14
12
10
8
6
4
2

Broadly
balanced

Weighted to
upside

Note: The blue and red lines in the top panel show actual values and median projected values, respectively, of the average civilian unemployment rate in the fourth quarter of
the year indicated. The confidence interval around the median projected values is assumed to be symmetric and is based on root mean squared errors of various private and
government forecasts made over the previous 20 years; more information about these data is available in table 2. Because current conditions may differ from those that prevailed, on average, over the previous 20 years, the width and shape of the confidence interval estimated on the basis of the historical forecast errors may not reflect FOMC participants’ current assessments of the uncertainty and risks around their projections; these current assessments are summarized in the lower panels. Generally speaking, participants who judge the uncertainty about their projections as “broadly similar” to the average levels of the past 20 years would view the width of the confidence interval shown in
the historical fan chart as largely consistent with their assessments of the uncertainty about their projections. Likewise, participants who judge the risks to their projections as
“broadly balanced” would view the confidence interval around their projections as approximately symmetric. For definitions of uncertainty and risks in economic projections, see
the box “Forecast Uncertainty.”

Minutes of Federal Open Market Committee Meetings | June

211

Figure 4.C. Uncertainty and risks in projections of PCE inflation

Median projection and confidence interval based on historical forecast errors

Percent

PCE inflation
Median of projections
70% confidence interval

3

2

1
Actual
0

2012

2013

2014

2016

2015

2017

2018

2019

FOMC participants’ assessments of uncertainty and risks around their economic projections
Number of participants

Number of participants

Uncertainty about PCE inflation

Risks to PCE inflation

June projections
March projections

Lower

18
16
14
12
10
8
6
4
2

Broadly
similar

June projections
March projections

Weighted to
downside

Higher

18
16
14
12
10
8
6
4
2

Broadly
balanced

Number of participants

Number of participants

Uncertainty about core PCE inflation

Risks to core PCE inflation

June projections
March projections

Lower

18
16
14
12
10
8
6
4
2

Broadly
similar

Weighted to
upside

Higher

June projections
March projections

Weighted to
downside

18
16
14
12
10
8
6
4
2

Broadly
balanced

Weighted to
upside

Note: The blue and red lines in the top panel show actual values and median projected values, respectively, of the percent change in the price index for personal consumption
expenditures (PCE) from the fourth quarter of the previous year to the fourth quarter of the year indicated. The confidence interval around the median projected values is
assumed to be symmetric and is based on root mean squared errors of various private and government forecasts made over the previous 20 years; more information about
these data is available in table 2. Because current conditions may differ from those that prevailed, on average, over the previous 20 years, the width and shape of the confidence interval estimated on the basis of the historical forecast errors may not reflect FOMC participants’ current assessments of the uncertainty and risks around their projections; these current assessments are summarized in the lower panels. Generally speaking, participants who judge the uncertainty about their projections as “broadly similar” to
the average levels of the past 20 years would view the width of the confidence interval shown in the historical fan chart as largely consistent with their assessments of the
uncertainty about their projections. Likewise, participants who judge the risks to their projections as “broadly balanced” would view the confidence interval around their projections as approximately symmetric. For definitions of uncertainty and risks in economic projections, see the box “Forecast Uncertainty.”

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104th Annual Report | 2017

than in March seeing uncertainty about GDP
growth, the unemployment rate, and inflation as
higher than its historical average.13 In their discussion
of the uncertainty attached to their current projections, most participants again expressed the view
that, at this point, uncertainty surrounding prospective changes in fiscal and other government policies is
very large or that there is not yet enough information
to make reasonable assumptions about the timing,
nature, and magnitude of the changes.
The fan charts—which are constructed so as to be
symmetric around the median projections—also may
not fully reflect participants’ current assessments of
the balance of risks to their economic projections.
Participants’ assessments of the balance of risks to
their economic projections are shown in the bottomright panels of figures 4.A, 4.B, and 4.C. As in
March, most participants judged the risks to their
projections of real GDP growth, the unemployment
rate, headline inflation, and core inflation as broadly
balanced—in other words, as broadly consistent with
a symmetric fan chart. Three participants judged the
risks to the unemployment rate as weighted to the
downside, and one participant judged the risks as
weighted to the upside (as shown in the lower-right
panel of figure 4.B). In addition, the balance of risks
to participants’ inflation projections shifted down
slightly from March (shown in the lower-right panels
of figure 4.C), as two fewer participants judged the
risks to inflation to be weighted to the upside and

13

At the end of this summary, the box “Forecast Uncertainty”
discusses the sources and interpretation of uncertainty in the
economic forecasts and explains the approach used to assess the
uncertainty and risks attending the participants’ projections.

two more viewed the risks as weighted to the
downside.
Participants’ assessments of the future path of the
federal funds rate consistent with appropriate policy
are also subject to considerable uncertainty, reflecting
in part uncertainty about the evolution of GDP
growth, the unemployment rate, and inflation over
time. The final line in table 2 shows the RMSEs for
forecasts of short-term interest rates. These RMSEs
are not strictly consistent with the SEP projections
for the federal funds rate, in part because the SEP
projections are not forecasts of the likeliest outcomes
but rather reflect each participant’s individual assessment of appropriate monetary policy. However, the
associated confidence intervals provide a sense of the
likely uncertainty around the future path of the federal funds rate generated by the uncertainty about the
macroeconomic variables and additional adjustments
to monetary policy that may be appropriate to offset
the effects of shocks to the economy.
Figure 5 shows a fan chart plotting the median SEP
projections for the appropriate path of the federal
funds rate surrounded by confidence intervals
derived from the results presented in table 2. As with
the macroeconomic variables, forecast uncertainty is
substantial and increases at longer horizons.14
14

If at some point in the future the confidence interval around the
federal funds rate were to extend below zero, it would be truncated at zero for purposes of the chart shown in figure 5; zero is
the bottom of the lowest target range for the federal funds rate
that has been adopted by the Committee in the past. This
approach to the construction of the federal funds rate fan chart
would be merely a convention and would not have any implication for possible future policy decisions regarding the use of
negative interest rates to provide additional monetary policy
accommodation if doing so were appropriate.

Minutes of Federal Open Market Committee Meetings | June

213

Figure 5. Uncertainty in projections of the federal funds rate
Median projection and confidence interval based on historical forecast errors

Percent

Federal funds rate
Midpoint of target range
Median of projections
70% confidence interval*

6
5
4
3
2
1

Actual

0

2012

2013

2014

2015

2016

2017

2018

2019

Note: The blue and red lines are based on actual values and median projected values, respectively, of the Committee’s target for the federal funds rate at the end of the year
indicated. The actual values are the midpoint of the target range; the median projected values are based on either the midpoint of the target range or the target level. The confidence interval around the median projected values is based on root mean squared errors of various private and government forecasts made over the previous 20 years. The
confidence interval is not strictly consistent with the projections for the federal funds rate, primarily because these projections are not forecasts of the likeliest outcomes for the
federal funds rate, but rather projections of participants’ individual assessments of appropriate monetary policy. Still, historical forecast errors provide a broad sense of the
uncertainty around the future path of the federal funds rate generated by the uncertainty about the macroeconomic variables as well as additional adjustments to monetary
policy that may be appropriate to offset the effects of shocks to the economy.
The confidence interval is assumed to be symmetric except when it is truncated at zero—the bottom of the lowest target range for the federal funds rate that has been adopted
in the past by the Committee. This truncation would not be intended to indicate the likelihood of the use of negative interest rates to provide additional monetary policy accommodation if doing so was judged appropriate. In such situations, the Committee could also employ other tools, including forward guidance and large-scale asset purchases, to
provide additional accommodation. Because current conditions may differ from those that prevailed, on average, over the previous 20 years, the width and shape of the confidence interval estimated on the basis of the historical forecast errors may not reflect FOMC participants’ current assessments of the uncertainty and risks around their
projections.
* The confidence interval is derived from forecasts of the average level of short-term interest rates in the fourth quarter of the year indicated; more information about these data
is available in table 2. The shaded area encompasses less than a 70 percent confidence interval if the confidence interval has been truncated at zero.

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104th Annual Report | 2017

Forecast Uncertainty
The economic projections provided by the members
of the Board of Governors and the presidents of the
Federal Reserve Banks inform discussions of monetary policy among policymakers and can aid public
understanding of the basis for policy actions. Considerable uncertainty attends these projections, however. The economic and statistical models and relationships used to help produce economic forecasts
are necessarily imperfect descriptions of the real
world, and the future path of the economy can be
affected by myriad unforeseen developments and
events. Thus, in setting the stance of monetary
policy, participants consider not only what appears to
be the most likely economic outcome as embodied in
their projections, but also the range of alternative
possibilities, the likelihood of their occurring, and the
potential costs to the economy should they occur.
Table 2 summarizes the average historical accuracy
of a range of forecasts, including those reported in
past Monetary Policy Reports and those prepared by
the Federal Reserve Board’s staff in advance of
meetings of the Federal Open Market Committee
(FOMC). The projection error ranges shown in the
table illustrate the considerable uncertainty associated with economic forecasts. For example, suppose
a participant projects that real gross domestic product (GDP) and total consumer prices will rise steadily
at annual rates of, respectively, 3 percent and 2 percent. If the uncertainty attending those projections is
similar to that experienced in the past and the risks
around the projections are broadly balanced, the
numbers reported in table 2 would imply a probability
of about 70 percent that actual GDP would expand
within a range of 1.6 to 4.4 percent in the current
year, 1.0 to 5.0 percent in the second year, and 0.8 to
5.2 percent in the third year. The corresponding
70 percent confidence intervals for overall inflation
would be 1.2 to 2.8 percent in the current year, and
1.0 to 3.0 percent in the second and third years. Figures 4.A through 4.C illustrate these confidence
bounds in “fan charts” that are symmetric and centered on the medians of FOMC participants’ projections for GDP growth, the unemployment rate, and
inflation. However, in some instances, the risks
around the projections may not be symmetric. In particular, the unemployment rate cannot be negative;
furthermore, the risks around a particular projection
might be tilted to either the upside or the downside,
in which case the corresponding fan chart would be
asymmetrically positioned around the median
projection.
Because current conditions may differ from those
that prevailed, on average, over history, participants
provide judgments as to whether the uncertainty
attached to their projections of each economic variable is greater than, smaller than, or broadly similar
to typical levels of forecast uncertainty seen in the
past 20 years, as presented in table 2 and reflected
in the widths of the confidence intervals shown in the
top panels of figures 4.A through 4.C. Participants’
current assessments of the uncertainty surrounding
their projections are summarized in the bottom-left

panels of those figures. Participants also provide
judgments as to whether the risks to their projections
are weighted to the upside, are weighted to the
downside, or are broadly balanced. That is, while the
symmetric historical fan charts shown in the top panels of figures 4.A through 4.C imply that the risks to
participants’ projections are balanced, participants
may judge that there is a greater risk that a given
variable will be above rather than below their projections. These judgments are summarized in the lowerright panels of figures 4.A through 4.C.
As with real activity and inflation, the outlook for the
future path of the federal funds rate is subject to considerable uncertainty. This uncertainty arises primarily
because each participant’s assessment of the appropriate stance of monetary policy depends importantly
on the evolution of real activity and inflation over
time. If economic conditions evolve in an unexpected
manner, then assessments of the appropriate setting
of the federal funds rate would change from that
point forward. The final line in table 2 shows the error
ranges for forecasts of short-term interest rates. They
suggest that the historical confidence intervals associated with projections of the federal funds rate are
quite wide. It should be noted, however, that these
confidence intervals are not strictly consistent with
the projections for the federal funds rate, as these
projections are not forecasts of the most likely quarterly outcomes but rather are projections of participants’ individual assessments of appropriate monetary policy and are on an end-of-year basis. However, the forecast errors should provide a sense of
the uncertainty around the future path of the federal
funds rate generated by the uncertainty about the
macroeconomic variables as well as additional
adjustments to monetary policy that would be appropriate to offset the effects of shocks to the economy.
If at some point in the future the confidence interval
around the federal funds rate were to extend below
zero, it would be truncated at zero for purposes of
the fan chart shown in figure 5; zero is the bottom of
the lowest target range for the federal funds rate that
has been adopted by the Committee in the past. This
approach to the construction of the federal funds rate
fan chart would be merely a convention; it would not
have any implications for possible future policy decisions regarding the use of negative interest rates to
provide additional monetary policy accommodation if
doing so were appropriate. In such situations, the
Committee could also employ other tools, including
forward guidance and asset purchases, to provide
additional accommodation.
While figures 4.A through 4.C provide information on
the uncertainty around the economic projections, figure 1 provides information on the range of views
across FOMC participants. A comparison of figure 1
with figures 4.A through 4.C shows that the dispersion of the projections across participants is much
smaller than the average forecast errors over the past
20 years.

Minutes of Federal Open Market Committee Meetings | July

Meeting Held on July 25–26, 2017

Thomas Laubach
Economist

A joint meeting of the Federal Open Market Committee and the Board of Governors was held in the
offices of the Board of Governors of the Federal
Reserve System in Washington, D.C., on Tuesday,
July 25, 2017, at 1:00 p.m. and continued on
Wednesday, July 26, 2017, at 9:00 a.m.1

David W. Wilcox
Economist

Present

Simon Potter
Manager, System Open Market Account

Janet L. Yellen
Chair
William C. Dudley
Vice Chairman
Lael Brainard
Charles L. Evans
Stanley Fischer
Patrick Harker
Robert S. Kaplan
Neel Kashkari
Jerome H. Powell
Raphael W. Bostic, Loretta J. Mester,
Mark L. Mullinix, Michael Strine,
and John C. Williams
Alternate Members of the Federal Open Market
Committee
James Bullard, Esther L. George, and Eric Rosengren
Presidents of the Federal Reserve Banks of St. Louis,
Kansas City, and Boston, respectively
Brian F. Madigan
Secretary
Matthew M. Luecke
Deputy Secretary
David W. Skidmore
Assistant Secretary
Scott G. Alvarez
General Counsel
Michael Held
Deputy General Counsel
Steven B. Kamin
Economist

1

The Federal Open Market Committee is referenced as the
“FOMC” and the “Committee” in these minutes.

215

James A. Clouse, Thomas A. Connors,
Michael Dotsey, Eric M. Engen, Evan F. Koenig,
Beth Anne Wilson, and Mark L. J. Wright
Associate Economists

Lorie K. Logan
Deputy Manager, System Open Market Account
Ann E. Misback2
Secretary, Office of the Secretary,
Board of Governors
Michael S. Gibson
Director, Division of Supervision and Regulation,
Board of Governors
Andreas Lehnert
Director, Division of Financial Stability,
Board of Governors
Margie Shanks3
Deputy Secretary, Office of the Secretary,
Board of Governors
Stephen A. Meyer
Deputy Director, Division of Monetary Affairs,
Board of Governors
Mark E. Van Der Weide
Deputy Director, Division of Supervision and
Regulation, Board of Governors
Trevor A. Reeve
Senior Special Adviser to the Chair, Office of Board
Members, Board of Governors
Joseph W. Gruber, David Reifschneider,
and John M. Roberts
Special Advisers to the Board, Office of Board
Members, Board of Governors
Linda Robertson2
Assistant to the Board, Office of Board Members,
Board of Governors
Joshua Gallin and David E. Lebow
Senior Associate Directors, Division of Research and
Statistics, Board of Governors
2
3

Attended Tuesday session only.
Attended Wednesday session only.

216

104th Annual Report | 2017

Fabio M. Natalucci
Senior Associate Director, Division of Monetary
Affairs, Board of Governors

first regularly scheduled meeting of the Committee in
2018.

Antulio N. Bomfim, Ellen E. Meade, Edward Nelson,
Robert J. Tetlow, and Joyce K. Zickler
Senior Advisers, Division of Monetary Affairs,
Board of Governors

Developments in Financial Markets and
Open Market Operations

Jeremy B. Rudd
Senior Adviser, Division of Research and Statistics,
Board of Governors
Stephanie R. Aaronson and Glenn Follette
Assistant Directors, Division of Research and
Statistics, Board of Governors
Elizabeth Klee
Assistant Director, Division of Monetary Affairs,
Board of Governors
Penelope A. Beattie2
Assistant to the Secretary, Office of the Secretary,
Board of Governors
Dana L. Burnett
Section Chief, Division of Monetary Affairs,
Board of Governors
John Kandrac
Senior Economist, Division of Monetary Affairs,
Board of Governors
Mark Libell3
Assistant Congressional Liaison, Office of Board
Members, Board of Governors
Gregory L. Stefani
First Vice President, Federal Reserve Bank of
Cleveland
David Altig, Kartik B. Athreya, Beverly Hirtle,
Glenn D. Rudebusch, Ellis W. Tallman,
and Christopher J. Waller
Executive Vice Presidents, Federal Reserve Banks of
Atlanta, Richmond, New York, San Francisco,
Cleveland, and St. Louis, respectively
Daniel Aaronson, Joe Peek, and Jonathan L. Willis
Vice Presidents, Federal Reserve Banks of Chicago,
Boston, and Kansas City, respectively

Selection of Committee Officer
By unanimous vote, the Committee selected Mark E.
Van Der Weide to serve as general counsel, effective
at the time he becomes the Board of Governors’ general counsel, until the selection of his successor at the

The manager of the System Open Market Account
(SOMA) reported on developments in domestic and
foreign financial markets over the period since the
June FOMC meeting. The intermeeting period was
relatively uneventful. Bond yields in advanced economies increased moderately, in part reflecting evolving
market perceptions of prospects for foreign monetary
policies. U.S. bond yields rose to a smaller degree,
and the value of the dollar on foreign exchange markets decreased. Implied volatility in fixed-income
markets remained low. Equity prices rose further,
with notable advances in indexes for emerging
markets.
The increase in the FOMC’s target range for the federal funds rate at the June meeting was reflected in
other money market interest rates, and the effective
federal funds rate was near the middle of the new target range over the intermeeting period except on
quarter-end. Take-up at the System’s overnight
reverse repurchase agreement facility averaged about
$200 billion. Conditions in foreign exchange swap
markets were fairly stable, and demand at central
bank dollar auctions was relatively low. The manager
also reported on small-value tests of open market
operations, which are conducted routinely to promote operational readiness.
Market expectations for the path of the federal funds
rate were little changed. Survey evidence suggested
that most market participants now anticipated that
the FOMC would announce at its September meeting
a date for implementation of a change in reinvestment policy, although a couple of survey respondents
expressed the view that the timing could be affected
by developments regarding the federal debt ceiling.
The survey results also suggested that, while views
were somewhat dispersed, respondents typically
expected effects on bond yields and spreads on
mortgage-backed securities from the change in reinvestment policy to be modest.
By unanimous vote, the Committee ratified the Open
Market Desk’s domestic transactions over the intermeeting period. There were no intervention opera-

Minutes of Federal Open Market Committee Meetings | July

tions in foreign currencies for the System’s account
during the intermeeting period.

Staff Review of the Economic Situation
The information reviewed for the July 25–26 meeting
showed that labor market conditions continued to
strengthen in June and that real gross domestic product (GDP) likely expanded at a faster pace in the second quarter than in the first quarter. The 12-month
change in overall consumer prices, as measured by
the price index for personal consumption expenditures (PCE), slowed again in May; both total consumer price inflation and core inflation, which
excludes consumer food and energy prices, were running below 2 percent. Data from the consumer and
producer price indexes for June suggested that both
total and core PCE price inflation (on a 12-month
change basis) remained at a pace similar to that seen
in the previous month. Survey-based measures of
longer-run inflation expectations were little changed
on balance.
Total nonfarm payroll employment expanded solidly
in June, and the average monthly pace of privatesector job gains over the first half of the year was
essentially the same as last year. The unemployment
rate edged up to 4.4 percent in June; the unemployment rates for African Americans and for Hispanics
declined slightly but remained above the unemployment rates for Asians and for whites. In addition, the
median length of time that unemployed African
Americans had been out of work exceeded the comparable figures for whites and for Hispanics, a pattern that has prevailed for at least the past two
decades. The overall labor force participation rate
edged up in June, and the share of workers employed
part time for economic reasons rose a bit. The rate of
private-sector job openings decreased in May after
having risen for a couple of months, while the quits
rate and the hiring rate both increased. The fourweek moving average of initial claims for unemployment insurance benefits remained at a very low level
through mid-July. Average hourly earnings for all
employees increased 2½ percent over the 12 months
ending in June, about the same as over the comparable period a year earlier but a little slower than the
rate of increase in late 2016.
Total industrial production rose moderately, on balance, in May and June, as an increase in the output
of mines and utilities more than offset a net decline
in manufacturing production. Automakers’ assembly

217

schedules indicated that motor vehicle production
would edge down again in the third quarter, likely
reflecting a somewhat elevated level of dealers’ inventories and a slowing in the pace of vehicle sales last
quarter. However, broader indicators of manufacturing production, such as the new orders indexes from
national and regional manufacturing surveys, pointed
to moderate gains in factory output over the near
term.
Real PCE appeared to have rebounded in the second
quarter after increasing only modestly in the first
quarter. Much of the rebound looked to have been
concentrated in spending on energy services and
energy goods, which was held down by unseasonably
warm weather earlier in the year. The components of
the nominal retail sales data used by the Bureau of
Economic Analysis to construct its estimate of PCE
declined in June but rose, on net, in the second quarter. Light motor vehicle sales edged down further in
June. However, recent readings on key factors that
influence consumer spending—including continued
gains in employment, real disposable personal
income, and households’ net worth—pointed to solid
growth in total real PCE in the near term. Consumer
sentiment, as measured by the University of Michigan Surveys of Consumers, remained upbeat despite
having moved down in early July.
Residential investment seemed to have declined in the
second quarter. Starts of both new single-family
homes and multifamily units rose in June but still
decreased for the second quarter as a whole. The
issuance of building permits for both types of housing was lower in the second quarter than in the first
quarter. Sales of existing homes decreased, on net, in
May and June, and new home sales in May partly
reversed the previous month’s decline.
Real private expenditures for business equipment and
intellectual property appeared to have increased moderately in the second quarter after a solid gain in the
first quarter. Nominal shipments of nondefense capital goods excluding aircraft rose again in May, and
new orders of these goods continued to exceed shipments, pointing to further gains in shipments in the
near term. In addition, indicators of business sentiment remained upbeat. Investment in nonresidential
structures appeared to have risen at a markedly
slower pace in the second quarter than in the first.
Firms’ nominal spending for nonresidential structures excluding drilling and mining declined further
in May, and the number of oil and gas rigs in opera-

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104th Annual Report | 2017

tion, an indicator of spending for structures in the
drilling and mining sector, leveled out in recent weeks
after increasing steadily for the past year.
Nominal outlays for defense through June pointed to
an increase in real federal government purchases in
the second quarter. However, real purchases by state
and local governments appeared to have declined.
Payrolls for state and local governments expanded
during the second quarter, but nominal construction
spending by these governments decreased, on net, in
April and May.
The nominal U.S. international trade deficit narrowed in May, with an increase in exports and a small
decline in imports. Export growth was led by consumer goods, automotive products, and services. The
import decline was driven by consumer goods and
automotive products. The available data suggested
that net exports were a slight drag on real GDP
growth in the second quarter.
Total U.S. consumer prices, as measured by the PCE
price index, increased 1½ percent over the 12 months
ending in May. Core PCE price inflation was also
1½ percent over that same period. Over the
12 months ending in June, the consumer price index
(CPI) rose 1½ percent, while core CPI inflation was
1¾ percent. The median of inflation expectations
over the next 5 to 10 years from the Michigan survey
edged up both in June and in the preliminary reading
for July. Other measures of longer-run inflation
expectations were generally little changed, on balance, in recent months, although those from the
Desk’s Survey of Primary Dealers and Survey of
Market Participants had ticked down recently.
Incoming data suggested that economic growth continued to firm abroad, especially among advanced
foreign economies (AFEs). The pickup in advancedeconomy demand also contributed to relatively
strong growth in China and emerging Asia, but
growth in Latin America remained relatively weak,
partly reflecting tight monetary and fiscal policies.
Despite the stronger momentum of economic activity
in the AFEs, headline inflation declined sharply in
the second quarter, largely reflecting lower retail
energy prices, and core inflation stayed subdued in
many AFEs. Although inflation was also low in most
emerging market economies (EMEs), it remained
elevated in Mexico because of rising food inflation
and earlier peso depreciation.

Staff Review of the Financial Situation
Domestic financial market conditions remained generally accommodative over the intermeeting period.
U.S. equity prices rose, longer-term Treasury yields
increased slightly, and the dollar depreciated. The
Committee’s decision to raise the target range for the
federal funds rate to 1 to 1¼ percent at the June
meeting was widely anticipated in financial markets,
and market participants reportedly viewed FOMC
communications as largely in line with expectations.
Financing conditions for nonfinancial businesses and
households generally remained supportive of growth
in spending.
FOMC communications over the intermeeting
period were viewed as broadly in line with investors’
expectations that the Committee would continue to
remove policy accommodation at a gradual pace.
Market participants generally interpreted the information on reinvestment policy provided in June in
the Committee’s postmeeting statement and its
Addendum to the Policy Normalization Principles
and Plans as consistent with their expectation that a
change to reinvestment policy was likely to occur this
year. Market participants also took note of the summary in the June minutes of the Committee’s discussion of the progress toward the Committee’s 2 percent longer-run inflation objective and the extent to
which recent softness in price data reflected idiosyncratic factors. Overnight index swap rates pointed to
little change in the expected path of the federal funds
rate on net.
Yields on intermediate- and longer-term nominal
Treasury securities increased slightly over the intermeeting period. Although yields fell following the
publication of lower-than-expected CPI data, yields
were boosted by comments from foreign central bank
officials that investors read as pointing to less accommodative monetary policies abroad than previously
expected. Measures of inflation compensation based
on Treasury Inflation-Protected Securities ticked up
since the June FOMC meeting. Despite their intermeeting period gains, longer-term real and nominal
Treasury yields remained very low by historical standards, apparently weighed down by accommodative
monetary policies abroad and possibly by declines in
the long-term neutral real interest rate over recent
years.
Broad U.S. equity price indexes rose. One-monthahead option-implied volatility of the S&P 500

Minutes of Federal Open Market Committee Meetings | July

index—the VIX—remained at historically low levels.
Spreads of yields on investment- and speculativegrade nonfinancial corporate bonds over
comparable-maturity Treasury securities narrowed a
bit on net.
Conditions in short-term funding markets were
stable over the intermeeting period. Reflecting the
FOMC’s policy action in June, yields on a broad set
of money market instruments moved about 25 basis
points higher. However, over much of the period, the
net increase in rates on shorter-dated Treasury bills
was smaller, reportedly reflecting a reduction in
Treasury bill supply.
Financing for large nonfinancial firms remained
readily available, although debt issuance moderated.
Gross issuance of corporate bonds stepped down in
June from a strong pace in May, while issuance of
institutional leveraged loans continued to be robust.
Commercial and industrial lending by banks
remained quite weak in the second quarter.
Responses from the July Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS)
indicated that depressed demand was largely responsible, and that banks’ lending standards were little
changed in recent months. The most cited reason for
the lackluster loan demand was subdued investment
spending by nonfinancial businesses, but banks also
reported that some borrowers had shifted to other
sources of external financing or to internally generated funds.
Financing conditions for commercial real estate
(CRE) remained accommodative, although the
growth of CRE loans on banks’ books slowed somewhat. Respondents to the July SLOOS reported
tightening credit standards for these loans. SLOOS
respondents also reported that standards on CRE
loans were tight relative to their historical range, and
that, on net, demand for CRE loans weakened in
recent months. The pace of issuance of commercial
mortgage-backed securities (CMBS) through the first
half of the year was similar to that seen last year.
Delinquency rates on loans in CMBS pools originated before the financial crisis continued to increase.
Financing conditions in the residential mortgage
market were little changed, and flows of new credit
continued at a moderate pace. However, growth of
mortgage loans on banks’ books slowed somewhat in
the first half of this year. SLOOS respondents, on

219

net, reported that standards on most residential
mortgage loan categories eased slightly.
Consumer credit continued to grow on a year-overyear basis, but the expansion of credit card and auto
loan balances appeared to slow from the rapid pace
that was evident through the end of last year. In the
July SLOOS, banks reported having tightened standards and widened spreads for credit card and auto
loans on net. Standards for the subprime segments of
these loan types were particularly tight compared
with their historical ranges. Reflecting in part continued tightening of lending standards, consumer loan
growth at banks moderated further in the second
quarter; however, that weakness was partially offset
by more robust lending by credit unions.
Since the June FOMC meeting, the broad dollar
depreciated 2 percent, weakening more against AFE
currencies than against EME currencies. The dollar’s
depreciation was driven in part by policy communications from the central banks of several AFEs that
market participants viewed as less accommodative
than expected as well as by weaker-than-expected
CPI data in the United States. The Bank of Canada
raised its policy rate in July. Sovereign yields
increased notably in Canada, Germany, and the
United Kingdom. Changes in foreign equity indexes
were mixed over the intermeeting period: European
equities edged lower, Japanese equities were little
changed, and EME equities increased. European
peripheral sovereign bond spreads narrowed over the
period, reflecting in part positive sentiment related to
the outcomes of the French parliamentary election,
Greek debt negotiations, and bank resolutions in
Italy. EME sovereign spreads were little changed
on net.
The staff provided its latest report on potential risks
to financial stability, indicating that it continued to
judge the vulnerabilities of the U.S financial system
as moderate on balance. This overall assessment
incorporated the staff’s judgment that, since the
April assessment, vulnerabilities associated with asset
valuation pressures had edged up from notable to
elevated, as asset prices remained high or climbed
further, risk spreads narrowed, and expected and
actual volatility remained muted in a range of financial markets. However, the staff continued to view
vulnerabilities stemming from financial leverage as
well as maturity and liquidity transformation as low,

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and vulnerabilities from leverage in the nonfinancial
sector appeared to remain moderate.

Staff Economic Outlook
The U.S. economic projection prepared by the staff
for the July FOMC meeting was broadly similar to
the previous forecast. In particular, real GDP growth,
which was modest in the first quarter, was still
expected to have stepped up to a solid pace in the second quarter and to maintain roughly the same rate of
increase in the second half of the year. In this projection, the staff scaled back its assumptions regarding
the magnitude and duration of fiscal policy expansion in the coming years. However, the effect of this
change on the projection for real GDP over the next
couple of years was largely offset by lower assumed
paths for the exchange value of the dollar and for
longer-term interest rates. Thus, as in the June projection, the staff projected that real GDP would expand
at a modestly faster pace than potential output in
2017 through 2019. The unemployment rate was projected to decline gradually over the next couple of
years and to continue running below the staff’s estimate of its longer-run natural rate over this period.
The staff’s forecast for consumer price inflation, as
measured by the change in the PCE price index, was
revised down slightly for 2017 in response to weakerthan-expected incoming data for inflation. As a
result, inflation this year was expected to be similar
in magnitude to last year, with an upturn in the prices
for food and non-energy imports offset by a slower
increase in core PCE prices and weaker energy prices.
Beyond 2017, the forecast was little revised from the
previous projection, as the recent weakness in inflation was viewed as transitory. The staff continued to
project that inflation would increase in the next
couple of years and that it would be close to the
Committee’s longer-run objective in 2018 and at
2 percent in 2019.
The staff viewed the uncertainty around its projections for real GDP growth, the unemployment rate,
and inflation as similar to the average of the past
20 years. On the one hand, many financial market
indicators of uncertainty remained subdued, and the
uncertainty associated with the foreign outlook still
appeared to be less than late last year; on the other
hand, uncertainty about the direction of some economic policies was judged to have remained elevated.
The staff saw the risks to the forecasts for real GDP
growth and the unemployment rate as balanced. The
risks to the projection for inflation also were seen as

balanced. Downside risks included the possibilities
that longer-term inflation expectations may have
edged down, that the dollar could appreciate substantially, or that the recent run of soft inflation
readings could prove to be more persistent than the
staff expected. These downside risks were seen as
essentially counterbalanced by the upside risk that
inflation could increase more than expected in an
economy that was projected to continue operating
above its longer-run potential.

Participants’ Views on Current Conditions
and the Economic Outlook
In their discussion of the economic situation and the
outlook, meeting participants agreed that information received over the intermeeting period indicated
that the labor market had continued to strengthen
and that economic activity had been rising moderately so far this year. Job gains had been solid, on
average, since the beginning of the year, and the
unemployment rate had declined, on net, over the
same period. Household spending and business fixed
investment had continued to expand. On a 12-month
basis, both overall inflation and the measure excluding food and energy prices had declined and were
running below 2 percent. Market-based measures of
inflation compensation remained low; survey-based
measures of longer-term inflation expectations were
little changed on balance.
Participants generally saw the incoming information
on spending and labor market indicators as consistent, overall, with their expectations and indicated
that their views of the outlook for economic growth
and the labor market were little changed, on balance,
since the June FOMC meeting. Participants continued to expect that, with gradual adjustments in the
stance of monetary policy, economic activity would
expand at a moderate pace and labor market conditions would strengthen somewhat further. In light of
continued low recent readings on inflation, participants expected that inflation on a 12-month basis
would remain somewhat below 2 percent in the near
term. However, most participants judged that inflation would stabilize around the Committee’s 2 percent objective over the medium term.
Data received over the intermeeting period reinforced
earlier indications that real GDP growth had turned
up after having been slow in the first quarter of this
year. As anticipated, growth in household spending
appeared to have been stronger in the second quarter
after its first-quarter weakness. Reports from District

Minutes of Federal Open Market Committee Meetings | July

contacts on consumer spending were generally positive. However, sales of motor vehicles had softened,
and automakers were reportedly adjusting production and assessing whether the underlying demand
for automobiles had declined. Participants noted that
the fundamentals underpinning consumption growth,
including increases in payrolls, remained solid. However, the weakness in retail sales in June offered a
note of caution.
Reports from District contacts on both manufacturing and services were also generally consistent with
moderate growth in economic activity overall.
Construction-sector contacts were generally upbeat.
Reports on the energy sector indicated that activity
was continuing to expand, albeit more slowly than
previously; survey evidence suggested that oil drilling
remained profitable in some locations at current oil
prices. The agricultural sector remained weak, and
some regions were experiencing drought conditions.
A couple of participants had received indications
from contacts that business investment spending in
their Districts might strengthen.
Nevertheless, several participants noted that uncertainty about the course of federal government policy,
including in the areas of fiscal policy, trade, and
health care, was tending to weigh down firms’ spending and hiring plans. In addition, a few participants
suggested that the likelihood of near-term enactment
of a fiscal stimulus program had declined further or
that the fiscal stimulus likely would be smaller than
they previously expected. It was also observed that
the budgets of some state and local governments
were under strain, limiting growth in their expenditures. In contrast, the prospects for U.S. exports had
been boosted by a brighter international economic
outlook.
Participants noted that labor market conditions had
strengthened further over the intermeeting period.
The unemployment rate rose slightly to 4.4 percent in
June but remained low by historical standards. Payroll gains picked up substantially in June. In addition,
the employment-to-population ratio increased. Participants observed that the unemployment rate was
likely close to or below its longer-run normal rate
and could decline further if, as expected, growth in
output remained somewhat in excess of the potential
growth rate. A few participants expressed concerns
about the possibility of substantially overshooting
full employment, with one citing past difficulties in
achieving a soft landing. District contacts confirmed
tightness in the labor market but relayed little evi-

221

dence of wage pressures, although some firms were
reportedly attempting to attract workers with a variety of nonwage benefits. The absence of sizable wage
pressures also seemed to be confirmed by most
aggregate wage measures. However, a few participants suggested that, in a tight labor market, measured aggregate wage growth was being held down by
compositional changes in employment associated
with the hiring of less experienced workers at lower
wages than those of established workers. In addition,
a number of participants suggested that the rate of
increase in nominal wages was not low in relation to
the rate of productivity growth and the modest rate
of inflation.
Participants discussed the softness in inflation in
recent months. Many participants noted that much of
the recent decline in inflation had probably reflected
idiosyncratic factors. Nonetheless, PCE price inflation on a 12-month basis would likely continue to be
held down over the second half of the year by the
effects of those factors, and the monthly readings
might be depressed by possible residual seasonality in
measured PCE inflation. Still, most participants indicated that they expected inflation to pick up over the
next couple of years from its current low level and to
stabilize around the Committee’s 2 percent objective
over the medium term. Many participants, however,
saw some likelihood that inflation might remain
below 2 percent for longer than they currently
expected, and several indicated that the risks to the
inflation outlook could be tilted to the downside.
Participants agreed that a fall in longer-term inflation
expectations would be undesirable, but they differed
in their assessments of whether inflation expectations
were well anchored. One participant pointed to the
stability of a number of measures of inflation expectations in recent months, but a few others suggested
that continuing low inflation expectations may have
been a factor putting downward pressure on inflation
or that inflation expectations might need to be bolstered in order to ensure their consistency with the
Committee’s longer-term inflation objective.
A number of participants noted that much of the
analysis of inflation used in policymaking rested on a
framework in which, for a given rate of expected
inflation, the degree of upward pressures on prices
and wages rose as aggregate demand for goods and
services and employment of resources increased
above long-run sustainable levels. A few participants
cited evidence suggesting that this framework was
not particularly useful in forecasting inflation. However, most participants thought that the framework

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remained valid, notwithstanding the recent absence
of a pickup in inflation in the face of a tightening
labor market and real GDP growth in excess of their
estimates of its potential rate. Participants discussed
possible reasons for the coexistence of low inflation
and low unemployment. These included a diminished
responsiveness of prices to resource pressures, a
lower natural rate of unemployment, the possibility
that slack may be better measured by labor market
indicators other than unemployment, lags in the reaction of nominal wage growth and inflation to labor
market tightening, and restraints on pricing power
from global developments and from innovations to
business models spurred by advances in technology.
A couple of participants argued that the response of
inflation to resource utilization could become
stronger if output and employment appreciably overshot their full employment levels, although other participants pointed out that this hypothesized nonlinear
response had little empirical support.
In assessing recent developments in financial market
conditions, participants referred to the continued low
level of longer-term interest rates, in particular those
on U.S. Treasury securities. The level of such yields
appeared to reflect both low expected future shortterm interest rates and depressed term premiums.
Asset purchases by foreign central banks and the
Federal Reserve’s securities holdings were also likely
contributing to currently low term premiums,
although the exact size of these contributions was
uncertain. A number of participants pointed to
potential concerns about low longer-term interest
rates, including the possibility that inflation expectations were too low, that yields could rise abruptly, or
that low yields were inducing investors to take on
excessive risk in a search for higher returns.
Several participants noted that the further increases
in equity prices, together with continued low longerterm interest rates, had led to an easing of financial
conditions. However, different assessments were
expressed about the implications of this development
for the outlook for aggregate demand and, consequently, appropriate monetary policy. According to
one view, the easing of financial conditions meant
that the economic effects of the Committee’s actions
in gradually removing policy accommodation had
been largely offset by other factors influencing financial markets, and that a tighter monetary policy than
otherwise was warranted. According to another view,
recent rises in equity prices might be part of a broadbased adjustment of asset prices to changes in
longer-term financial conditions, importantly includ-

ing a lower neutral real interest rate, and, therefore,
the recent equity price increases might not provide
much additional impetus to aggregate spending on
goods and services.
Participants also considered equity valuations in their
discussion of financial stability. A couple of participants noted that favorable macroeconomic factors
provided backing for current equity valuations; in
addition, as recent equity price increases did not
seem to stem importantly from greater use of leverage by investors, these increases might not pose
appreciable risks to financial stability. Several participants observed that the banking system was well
capitalized and had ample liquidity, reducing the risk
of financial instability. It was noted that financial stability assessments were based on current capital levels
within the banking sector, and that such assessments
would likely be adjusted should these measures of
loss-absorbing capacity change. Participants underscored the need to monitor financial institutions for
shifts in behavior—such as an erosion of lending
standards or increased reliance on unstable sources
of funding—that could lead to subsequent problems.
In addition, participants judged that it was important
to look for signs that either declining market volatility or heavy concentration by investors in particular
assets might create financial imbalances. A couple of
participants expressed concern that smaller banks
could be assuming significant risks in efforts to
expand their CRE lending. Furthermore, a couple of
participants saw, as possible sources of financial
instability, the pace of increase in real estate prices in
the multifamily segment and the pattern of the lending and borrowing activities of certain governmentsponsored enterprises.
Participants agreed that the regulatory and supervisory tools developed since the financial crisis had
played an important role in fostering financial stability. Changes in regulation had likely helped in making
the banking system more resilient to major shocks, in
promoting more prudent balance sheet management
strategies on the part of nonbank financial institutions, and in reducing the degree to which variations
in lending to the private sector intensify cycles in output and in asset prices. Participants agreed that it
would not be desirable for the current regulatory
framework to be changed in ways that allowed a
reemergence of the types of risky practices that contributed to the crisis.
In their discussion of monetary policy, participants
reaffirmed their view that a gradual approach to

Minutes of Federal Open Market Committee Meetings | July

removing policy accommodation was likely to remain
appropriate to promote the Committee’s objectives
of maximum employment and 2 percent inflation.
Participants commented on a number of factors that
would influence their ongoing assessments of the
appropriate path for the federal funds rate. Most saw
the outlook for economic activity and the labor market as little changed from their earlier projections and
continued to anticipate that inflation would stabilize
around the Committee’s 2 percent objective over the
medium term. However, some participants expressed
concern about the recent decline in inflation, which
had occurred even as resource utilization had tightened, and noted their increased uncertainty about the
outlook for inflation. They observed that the Committee could afford to be patient under current circumstances in deciding when to increase the federal
funds rate further and argued against additional
adjustments until incoming information confirmed
that the recent low readings on inflation were not
likely to persist and that inflation was more clearly
on a path toward the Committee’s symmetric 2 percent objective over the medium term. In contrast,
some other participants were more worried about
risks arising from a labor market that had already
reached full employment and was projected to
tighten further or from the easing in financial conditions that had developed since the Committee’s
policy normalization process was initiated in December 2015. They cautioned that a delay in gradually
removing policy accommodation could result in an
overshooting of the Committee’s inflation objective
that would likely be costly to reverse, or that a delay
could lead to an intensification of financial stability
risks or to other imbalances that might prove difficult
to unwind. One participant stressed that the risks
both to the Committee’s inflation objective and to
financial stability would require careful monitoring.
This participant expressed the view that a gradual
approach to removing policy accommodation would
likely strike the appropriate balance between promoting the Committee’s inflation and full employment
objectives and mitigating financial stability concerns.
A number of participants also commented that the
appropriate pace of normalization of the federal
funds rate would depend on how financial conditions
evolved and on the implications of those developments for the pace of economic activity. Among the
considerations mentioned were the extent of current
downward pressure on longer-term yields arising
from the Federal Reserve’s asset holdings and how
this pressure would diminish over time as balance
sheet normalization proceeded, the strength and

223

degree of persistence of other domestic and global
factors that had contributed to the easing of financial
conditions and elevated asset prices, and whether and
how much the neutral rate of interest would rise as
the economy continued to expand.
Participants also discussed the appropriate time to
implement the plan for reducing the Federal
Reserve’s securities holdings that was announced in
June in the Committee’s postmeeting statement and
its Addendum to the Policy Normalization Principles
and Plans. Participants generally agreed that, in light
of their current assessment of economic conditions
and the outlook, it was appropriate to signal that
implementation of the program likely would begin
relatively soon, absent significant adverse developments in the economy or in financial markets. Many
noted that the program was expected to contribute
only modestly to the reduction in policy accommodation. Several reiterated that, once the program was
under way, further adjustments to the stance of monetary policy in response to economic developments
would be centered on changes in the target range for
the federal funds rate. Although several participants
were prepared to announce a starting date for the
program at the current meeting, most preferred to
defer that decision until an upcoming meeting while
accumulating additional information on the economic outlook and developments potentially affecting financial markets.

Committee Policy Action
In their discussion of monetary policy for the period
ahead, members judged that information received
since the Committee met in June indicated that the
labor market had continued to strengthen and that
economic activity had been rising moderately so far
this year. Job gains had been solid, on average, since
the beginning of the year, and the unemployment
rate had declined. Household spending and business
fixed investment had continued to expand.
On a 12-month basis, overall inflation and the measure excluding food and energy prices had declined
and were running below 2 percent. Market-based
measures of inflation compensation remained low;
survey-based measures of longer-term inflation
expectations were little changed on balance.
With respect to the economic outlook and its implications for monetary policy, members continued to
expect that, with gradual adjustments in the stance of
monetary policy, economic activity would expand at

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a moderate pace, and labor market conditions would
strengthen somewhat further. Inflation on a
12-month basis was expected to remain somewhat
below 2 percent in the near term but to stabilize
around the Committee’s 2 percent objective over the
medium term. Members saw the near-term risks to
the economic outlook as roughly balanced, but, in
light of their concern about the recent slowing in
inflation, they agreed to continue to monitor inflation developments closely.
After assessing current conditions and the outlook
for economic activity, the labor market, and inflation,
members decided to maintain the target range for the
federal funds rate at 1 to 1¼ percent. They noted that
the stance of monetary policy remained accommodative, thereby supporting some further strengthening
in labor market conditions and a sustained return to
2 percent inflation.
Members agreed that the timing and size of future
adjustments to the target range for the federal funds
rate would depend on their assessment of realized
and expected economic conditions relative to the
Committee’s objectives of maximum employment
and 2 percent inflation. They expected that economic
conditions would evolve in a manner that would warrant gradual increases in the federal funds rate, and
that the federal funds rate was likely to remain, for
some time, below levels that are expected to prevail in
the longer run. They also again stated that the actual
path of the federal funds rate would depend on the
economic outlook as informed by incoming data. In
particular, they reaffirmed that they would carefully
monitor actual and expected inflation developments
relative to the Committee’s symmetric inflation goal.
Some members stressed the importance of underscoring the Committee’s commitment to its inflation
objective. These members emphasized that, in considering the timing of further adjustments in the federal
funds rate, they would be evaluating incoming information to assess the likelihood that recent low readings on inflation were transitory and that inflation
was again on a trajectory consistent with achieving
the Committee’s 2 percent objective over the medium
term.
Members agreed that, at this meeting, the Committee
should further clarify the time at which it expected to
begin its program for reducing its securities holdings
in a gradual and predictable manner. They updated
the postmeeting statement to indicate that while the
Committee was, for the time being, maintaining its
existing reinvestment policy, it intended to begin

implementing the balance sheet normalization program relatively soon, provided that the economy
evolved broadly as anticipated. Several members
observed that, in part because of the Committee’s
various communications regarding the change, any
reaction in financial markets to such a change would
likely be limited.
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, to be
released at 2:00 p.m.:
“Effective July 27, 2017, the Federal Open Market Committee directs the Desk to undertake
open market operations as necessary to maintain the federal funds rate in a target range of
1 to 1¼ percent, including overnight reverse
repurchase operations (and reverse repurchase
operations with maturities of more than one day
when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 1.00 percent, in amounts limited only
by the value of Treasury securities held outright
in the System Open Market Account that are
available for such operations and by a percounterparty limit of $30 billion per day.
The Committee directs the Desk to continue
rolling over maturing Treasury securities at auction and to continue reinvesting principal payments on all agency debt and agency mortgagebacked 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 vote also encompassed approval of the statement
below to be released at 2:00 p.m.:
“Information received since the Federal Open
Market Committee met in June indicates that
the labor market has continued to strengthen
and that economic activity has been rising moderately so far this year. Job gains have been solid,
on average, since the beginning of the year, and
the unemployment rate has declined. Household
spending and business fixed investment have
continued to expand. On a 12-month basis, overall inflation and the measure excluding food and

Minutes of Federal Open Market Committee Meetings | July

federal funds rate will depend on the economic
outlook as informed by incoming data.

energy prices have declined and are running
below 2 percent. Market-based measures of
inflation compensation remain low; surveybased measures of longer-term inflation expectations are little changed, on balance.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment
and price stability. The Committee continues to
expect that, with gradual adjustments in the
stance of monetary policy, economic activity
will expand at a moderate pace, and labor market conditions will strengthen somewhat further.
Inflation on a 12-month basis is expected to
remain somewhat below 2 percent in the near
term but to stabilize around the Committee’s
2 percent objective over the medium term. Nearterm risks to the economic outlook appear
roughly balanced, but the Committee is monitoring inflation developments closely.
In view of realized and expected labor market
conditions and inflation, the Committee decided
to maintain the target range for the federal funds
rate at 1 to 1¼ percent. The stance of monetary
policy remains accommodative, thereby supporting some further strengthening in labor market
conditions and a sustained return to 2 percent
inflation.
In determining the timing and size of future
adjustments to the target range for the federal
funds rate, the Committee will assess realized
and expected economic conditions relative to its
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 will carefully
monitor actual and expected inflation developments relative to its symmetric inflation goal.
The Committee expects that economic conditions will evolve in a manner that will warrant
gradual increases in the federal funds rate; the
federal funds rate is likely to remain, for some
time, below levels that are expected to prevail in
the longer run. However, the actual path of the

225

For the time being, 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. The
Committee expects to begin implementing its
balance sheet normalization program relatively
soon, provided that the economy evolves
broadly as anticipated; this program is described
in the June 2017 Addendum to the Committee’s
Policy Normalization Principles and Plans.”
Voting for this action: Janet L. Yellen, William C.
Dudley, Lael Brainard, Charles L. Evans, Stanley
Fischer, Patrick Harker, Robert S. Kaplan, Neel
Kashkari, and Jerome H. Powell.
Voting against this action: None.
Consistent with the Committee’s decision to leave the
target range for the federal funds rate unchanged, the
Board of Governors voted unanimously to leave the
interest rates on required and excess reserve balances
unchanged at 1¼ percent and voted unanimously to
approve establishment of the primary credit rate (discount rate) at the existing level of 1¾ percent.4
It was agreed that the next meeting of the Committee
would be held on Tuesday–Wednesday, September 19–20, 2017. The meeting adjourned at
10:00 a.m. on July 26, 2017.

Notation Vote
By notation vote completed on July 3, 2017, the
Committee unanimously approved the minutes of the
Committee meeting held on June 13–14, 2017.
Brian F. Madigan
Secretary

4

The second vote of the Board also encompassed approval of the
establishment of the interest rates for secondary and seasonal
credit under the existing formulas for computing such rates.

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104th Annual Report | 2017

Meeting Held
on September 19–20, 2017
A joint meeting of the Federal Open Market Committee and the Board of Governors was held in the
offices of the Board of Governors of the Federal
Reserve System in Washington, D.C., on Tuesday,
September 19, 2017, at 1:00 p.m. and continued on
Wednesday, September 20, 2017, at 9:00 a.m.1

Steven B. Kamin
Economist
Thomas Laubach
Economist
David W. Wilcox
Economist

Present

James A. Clouse, Thomas A. Connors,
Evan F. Koenig, William Wascher,
Beth Anne Wilson, and Mark L. J. Wright
Associate Economists

Janet L. Yellen
Chair

Simon Potter
Manager, System Open Market Account

William C. Dudley
Vice Chairman

Lorie K. Logan
Deputy Manager, System Open Market Account

Lael Brainard

Ann E. Misback
Secretary, Office of the Secretary,
Board of Governors

Charles L. Evans
Stanley Fischer
Patrick Harker
Robert S. Kaplan
Neel Kashkari
Jerome H. Powell
Raphael W. Bostic, Loretta J. Mester,
Mark L. Mullinix, and John C. Williams
Alternate Members of the Federal Open Market
Committee
James Bullard, Esther L. George, and Eric Rosengren
Presidents of the Federal Reserve Banks of St. Louis,
Kansas City, and Boston, respectively
Brian F. Madigan
Secretary
Matthew M. Luecke
Deputy Secretary
David W. Skidmore
Assistant Secretary
Michelle A. Smith
Assistant Secretary
Mark E. Van Der Weide
General Counsel
Michael Held
Deputy General Counsel

Matthew J. Eichner2
Director, Division of Reserve Bank Operations and
Payment Systems, Board of Governors
Michael S. Gibson
Director, Division of Supervision and Regulation,
Board of Governors
Andreas Lehnert
Director, Division of Financial Stability,
Board of Governors
Michael T. Kiley
Deputy Director, Division of Financial Stability,
Board of Governors
Stephen A. Meyer
Deputy Director, Division of Monetary Affairs,
Board of Governors
Trevor A. Reeve
Senior Special Adviser to the Chair, Office of Board
Members, Board of Governors
David Bowman, Joseph W. Gruber,
David Reifschneider, and John M. Roberts
Special Advisers to the Board, Office of Board
Members, Board of Governors
Linda Robertson
Assistant to the Board, Office of Board Members,
Board of Governors
2

1

The Federal Open Market Committee is referenced as the
“FOMC” and the “Committee” in these minutes.

Attended the discussions of the proposed changes to Rules
Regarding Availability of Information and developments in
financial markets and open market operations.

Minutes of Federal Open Market Committee Meetings | September

227

David E. Lebow and Michael G. Palumbo
Senior Associate Directors, Division of Research and
Statistics, Board of Governors

David C. Wheelock and Jonathan L. Willis
Vice Presidents, Federal Reserve Banks of St. Louis
and Kansas City, respectively

Antulio N. Bomfim, Edward Nelson,
and Joyce K. Zickler
Senior Advisers, Division of Monetary Affairs,
Board of Governors

Stefano M. Eusepi
Assistant Vice President, Federal Reserve Bank of
New York

Jane E. Ihrig
Associate Director, Division of Monetary Affairs,
Board of Governors
John J. Stevens and Stacey Tevlin
Associate Directors, Division of Research and
Statistics, Board of Governors
Steven A. Sharpe
Deputy Associate Director, Division of Research and
Statistics, Board of Governors
Min Wei
Deputy Associate Director, Division of Monetary
Affairs, Board of Governors
Penelope A. Beattie3
Assistant to the Secretary, Office of the Secretary,
Board of Governors
Michiel De Pooter
Section Chief, Division of Monetary Affairs,
Board of Governors
David H. Small
Project Manager, Division of Monetary Affairs,
Board of Governors

Edward S. Prescott
Senior Professional Economist, Federal Reserve Bank
of Cleveland

Proposed Changes to Rules Regarding
Availability of Information
The Committee unanimously voted to further amend
its Rules Regarding Availability of Information
(Rules) in order to incorporate input received during
the public commenting process that followed the
December 2016 publication in the Federal Register of
an earlier version of the Rules.4 The amendment
approved at this meeting indicated that if, in the
course of processing a Freedom of Information Act
request, “an adverse determination is upheld on
appeal, in whole or in part,” the requester will be
informed “of the availability of dispute resolution
services from the Office of Government Information
Services as a nonexclusive alternative to litigation.”
This notice will be provided in addition to the ongoing practice of informing the requester of the right to
seek judicial review.
Secretary’s note: The amended Rules adopted at
this meeting were published in the Federal Register as a final rule on October 2, 2017, and will go
into effect 30 days following publication.

Martin Bodenstein
Principal Economist, Division of Monetary Affairs,
Board of Governors
Randall A. Williams
Information Manager, Division of Monetary Affairs,
Board of Governors
Mark A. Gould
First Vice President, Federal Reserve Bank of
San Francisco
David Altig, Kartik B. Athreya,
Glenn D. Rudebusch, and Geoffrey Tootell
Executive Vice Presidents, Federal Reserve Banks of
Atlanta, Richmond, San Francisco, and Boston,
respectively
Spencer Krane and Keith Sill
Senior Vice Presidents, Federal Reserve Banks of
Chicago and Philadelphia, respectively
3

Attended Tuesday session only.

Developments in Financial Markets and
Open Market Operations
The manager of the System Open Market Account
(SOMA) reported on developments in domestic and
foreign financial markets over the period since the
July FOMC meeting. Yields on longer-term Treasury
securities had fallen modestly, the foreign exchange
value of the dollar had declined, and broad equity
price indexes had increased. Survey responses suggested that the vast majority of market participants
expected the FOMC to announce a change in SOMA
reinvestment policy at this meeting and that nearly all
market participants anticipated that the FOMC
4

In compliance with the FOIA Improvement Act of 2016, the
earlier version of the Rules was published in the Federal Register as an interim final rule on December 27, 2016.

228

104th Annual Report | 2017

would also leave the target range for the federal funds
rate unchanged.
The deputy manager followed with a report on developments in money markets and open market operations over the intermeeting period. The effective federal funds rate remained near the center of the
FOMC’s target range except on month-ends. Take-up
at the System’s overnight reverse repurchase agreement facility averaged somewhat less than in the previous period. The deputy manager provided updates
on developments with respect to reference interest
rates and on small-value tests of open market operations, which are conducted routinely to promote
operational readiness. The deputy manager also summarized the results of the staff’s annual review of
foreign reserves investment and its recommendations
to the Foreign Currency Subcommittee for key
parameters for foreign reserves investment for the
forthcoming year, and the deputy manager noted that
the Subcommittee would welcome any input from the
Committee regarding those parameters.
Secretary’s note: On September 27, 2017, the
Foreign Currency Subcommittee provided to the
Federal Reserve Bank selected to conduct open
market operations instructions that incorporated the staff recommendations for key parameters for foreign reserves investment.
Finally, the manager reviewed details of the operational approach that the Open Market Desk planned
to follow if the Committee decided at this meeting to
initiate the proposal for SOMA reinvestment policy
described in the Committee’s June 2017 Addendum
to the Policy Normalization Principles and Plans.
By unanimous vote, the Committee ratified the
Desk’s domestic transactions over the intermeeting
period. There were no intervention operations in foreign currencies for the System’s account during the
intermeeting period.

Staff Review of the Economic Situation
The information reviewed for the September 19–20
meeting showed that labor market conditions continued to strengthen in July and August and that real
gross domestic product (GDP) appeared to be rising
at a moderate pace in the third quarter before the
landfall of Hurricanes Harvey and Irma. Only limited data pertaining to the economic effects of these
hurricanes were available at the time of the meeting,
but it appeared likely that the negative effects would

restrain national economic activity only in the near
term.5 Total consumer price inflation, as measured by
the 12-month change in the price index for personal
consumption expenditures (PCE), continued to run
below 2 percent in July and was lower than at the
start of the year. Survey-based measures of longerrun inflation expectations were little changed on
balance.
Total nonfarm payroll employment rose solidly in
July and August, with strong gains in private-sector
jobs and declines in government employment. The
unemployment rate dipped to 4.3 percent in July and
edged back up to 4.4 percent in August. The unemployment rates for African Americans, for Hispanics,
and for whites were lower, on average, in recent
months than around the start of the year, whereas
the unemployment rate for Asians was a little higher.
The overall labor force participation rate edged up in
July and was unchanged in August, and the share of
workers employed part time for economic reasons
was little changed on net. The rate of private-sector
job openings increased in June and July, the hiring
rate ticked up, and the quits rate edged down. Initial
claims for unemployment insurance benefits jumped
in early September from a very low level, and the
Department of Labor noted that Hurricane Harvey
had an effect on claims. Changes in measures of
labor compensation were mixed. Compensation per
hour rose just 1¼ percent over the four quarters ending in the second quarter of 2017 (partly reflecting a
significant downward revision to compensation per
hour in the second half of 2016), the employment
cost index for private workers increased 2½ percent
over the 12 months ending in June, and average
hourly earnings for all employees rose 2½ percent
over the 12 months ending in August.
Total industrial production (IP) increased for a sixth
consecutive month in July but then declined sharply
in August. The decrease in August largely reflected
the temporary effects of Hurricane Harvey on drilling, servicing, and extraction activity for oil and
natural gas and on output in several manufacturing
industries that are concentrated in the Gulf Coast
region, including petroleum refining, organic chemicals, and plastics materials and resins. Production disruptions from Hurricane Harvey continued into September, and the effects of Hurricane Irma were
anticipated to hold down IP in that month as well.
5

The background materials prepared by the staff for this meeting
were completed before the full effects of Hurricane Maria were
evident.

Minutes of Federal Open Market Committee Meetings | September

Even so, anecdotal reports from the hurricaneaffected regions, as well as daily data on capacity outages in selected Gulf Coast industries, indicated that
production had already started to recover. Meanwhile, automakers’ assembly schedules suggested that
motor vehicle production would move up, on balance, over the remainder of the year despite a somewhat elevated level of dealers’ inventories and a slowing in the pace of vehicle sales in recent months.
Broader indicators of manufacturing production,
such as the new orders indexes from national and
regional manufacturing surveys, continued to point
to moderate gains in factory output over the near
term.
Several pieces of information suggested that real PCE
was likely increasing at a slower rate in the third
quarter than in the second. First, the components of
the nominal retail sales data used by the Bureau of
Economic Analysis to construct its estimate of PCE
declined in August and were revised down in June
and July. Second, the pace of light motor vehicle
sales moved lower, on net, in July and August. Third,
Hurricanes Harvey and Irma appeared likely to temporarily reduce consumer spending. However, recent
readings on key factors that influence consumer
spending—including continued gains in employment,
real disposable personal income, and households’ net
worth—remained supportive of solid growth in real
PCE. Consumer sentiment, as measured by the University of Michigan Surveys of Consumers, was
upbeat through early September.

229

number of oil and gas rigs in operation, an indicator
of spending for structures in the drilling and mining
sector, leveled out in the past couple of months after
increasing steadily for the past year.
Total real government purchases looked to be
roughly flat, on balance, in the third quarter. Nominal outlays for defense in July and August pointed to
a small increase in real federal government purchases
in the third quarter. However, payrolls for state and
local governments declined in July and August, and
nominal construction spending by these governments
decreased in July.
The nominal U.S. international trade deficit narrowed substantially in June and was about
unchanged in July. After increasing in June, exports
retraced a bit of this gain in July, with lower exports
of consumer goods, automotive products, and services. Imports decreased a little in both months. The
available data suggested that net exports contributed
positively to real GDP growth in the third quarter.

Recent information on housing activity suggested
that real residential investment spending was decreasing in the third quarter after declining in the second
quarter. Starts for new single-family homes edged
down, on net, in July and August, and starts for multifamily units moved lower in both months. Building
permit issuance for new single-family homes—which
tends to be a good indicator of the underlying trend
in construction—declined in July and August. Sales
of both new and existing homes decreased in July.

Total U.S. consumer prices, as measured by the PCE
price index, increased nearly 1½ percent over the
12 months ending in July. Core PCE price inflation,
which excludes consumer food and energy prices, also
was about 1½ percent over that same period. Over
the 12 months ending in August, the consumer price
index (CPI) increased almost 2 percent, while core
CPI inflation was 1¾ percent. Retail gasoline prices
moved up sharply following the landfall of Hurricane
Harvey and appeared likely to put temporary upward
pressure on the 12-month change in total PCE prices.
The median of inflation expectations over the next
5 to 10 years from the Michigan survey edged back
up in the preliminary reading for September, and the
median expectation for PCE price inflation over the
next 10 years from the Survey of Professional Forecasters edged down. The medians of longer-run inflation expectations from the Desk’s Survey of Primary
Dealers and Survey of Market Participants were relatively little changed in September.

Real private expenditures for business equipment and
intellectual property appeared to be increasing at a
solid rate in the third quarter. Nominal orders and
shipments of nondefense capital goods excluding aircraft rose over the two months ending in July, and
readings on business sentiment remained upbeat. In
contrast, investment in nonresidential structures was
poised to decline in the third quarter. Firms’ nominal
spending for nonresidential structures excluding drilling and mining fell sharply in June and July, and the

Foreign economic activity continued to expand at a
solid pace. Economic growth picked up in the
advanced foreign economies (AFEs) in the second
quarter, especially in Canada, and incoming indicators suggested that growth slowed in the third quarter
but remained firm. Recent indicators from the emerging market economies (EMEs) also pointed to continued strong economic growth, notwithstanding
some slowing in the rate of expansion of activity in
China. Headline inflation in most AFEs remained

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104th Annual Report | 2017

subdued, held down in part by falling retail energy
prices, but data through August suggested that the
drag from energy prices was diminishing. Inflation
also remained low in most EMEs, although food
prices continued to put upward pressure on inflation
in Mexico.

Staff Review of the Financial Situation
Domestic financial market conditions remained generally accommodative over the intermeeting period.
U.S. equity prices increased, longer-term Treasury
yields declined, and the dollar depreciated. Investors’
interpretations of FOMC communications, market
perceptions of a reduced likelihood of U.S. fiscal
policy changes, and heightened geopolitical risks all
reportedly placed downward pressure on longer-term
yields. At the same time, financing conditions for
households and nonfinancial businesses continued to
provide support for growth in spending and
investment.
FOMC communications over the intermeeting
period reportedly were interpreted as indicating a
somewhat slower pace of increases in the target range
for the federal funds rate than previously expected.
Market participants were attentive to the Committee’s assessment of recent below-expectations inflation data and the acknowledgment in the July
FOMC minutes that inflation might continue to run
below the Committee’s 2 percent objective for longer
than anticipated. Investors also took note of the
Committee’s guidance in the July FOMC statement
that it expected to begin implementing its balance
sheet normalization program relatively soon. By the
end of the intermeeting period, market participants
appeared nearly certain that the Committee would
announce the implementation of its balance sheet
normalization plan at the September meeting. The
probability of an increase in the target range for the
federal funds rate occurring at either the September
or the November meeting, as implied by quotes on
federal funds futures contracts, fell to essentially zero,
while the probability of a 25 basis point increase by
the end of the year stood near 50 percent and was
little changed since the July meeting. Quotes on overnight index swaps (OIS) pointed to a slight flattening
of the expected path of the federal funds rate
through 2020, with a staff model attributing most of
the declines in OIS rates to lower expected rates.
Yields on intermediate- and longer-term nominal
Treasury securities decreased modestly over the intermeeting period. Treasury yields fell following the July

FOMC meeting, reflecting the response of investors
to the postmeeting statement, and then dropped further amid rising geopolitical tensions related to
North Korea and market perceptions of reduced
prospects for enactment of a fiscal stimulus program.
Economic data releases appeared to have little net
effect on Treasury yields over most of the period. A
staff term structure model attributed about half of
the decline in the 10-year Treasury yield to a decrease
in the average expected future short-term rate and the
remaining half to a lower term premium. Measures
of inflation compensation over the next 5 years rose
modestly, on net, partly in response to the release of
higher-than-expected CPI data for August, while
inflation compensation 5 to 10 years ahead was little
changed.
Broad U.S. equity price indexes increased over the
intermeeting period. One-month-ahead optionimplied volatility of the S&P 500 index—the VIX—
remained at historically low levels despite brief spikes
associated with increased investor concerns about
geopolitical tensions and political uncertainties. Over
the intermeeting period, spreads of yields on
investment- and speculative-grade nonfinancial corporate bonds over those on comparable-maturity
Treasury securities widened a bit.
Short-dated Treasury bill yields were elevated for a
time, reflecting concerns about potential delays in
raising the federal debt limit. However, following
news of an agreement to extend the debt ceiling by
three months, rates on Treasury bills maturing in
October retraced their entire increase from early in
the intermeeting period. Conditions in other domestic short-term funding markets were stable. Yields on
a broad set of money market instruments remained
in the ranges observed since the FOMC increased the
target range for the federal funds rate in June. Daily
take-up at the System’s overnight reverse repurchase
agreement facility ran somewhat lower than in the
previous intermeeting period.
Since the July FOMC meeting, asset price movements in global financial markets were driven by geopolitical tensions in the Korean peninsula, improving
economic prospects abroad, communications from
AFE central banks, and changes in prospects for fiscal policy legislation in the United States. The broad
index of the foreign exchange value of the dollar
decreased 1½ percent; the decline was widespread,
led by the strengthening of the euro and the Chinese
renminbi. The Canadian dollar appreciated following
a rate hike by the Bank of Canada at its September

Minutes of Federal Open Market Committee Meetings | September

meeting that came sooner than market participants
expected. Similarly, sterling appreciated after the
Bank of England signaled a potential rate hike in the
coming months. Against this backdrop, longer-term
yields rose slightly in Canada and the United Kingdom. In contrast, longer-term German yields
declined moderately, despite better-than-expected
economic data releases for the euro area, as market
expectations shifted toward a more gradual withdrawal of stimulus by the European Central Bank
(ECB) even though the ECB kept its policy stance
unchanged.
Despite generally better-than-expected earnings
releases, AFE equity prices were mixed over the
period, with bank stocks underperforming broader
indexes. Outside South Korea, most emerging market
asset prices were little affected by the recent escalation of geopolitical concerns. Net flows to emerging
market mutual funds briefly turned negative in early
August, but they quickly returned to near the high
levels seen since early this year. Yield spreads on
EME sovereign bonds edged down.
Financing conditions for U.S. nonfinancial businesses continued to be accommodative. Issuance of
corporate debt and equity was strong in July and
August. Gross issuance of institutional leveraged
loans continued its robust pace in June but slowed
notably in July, as is typical during the summer.
Meanwhile, the growth of commercial and industrial
(C&I) loans on banks’ books ticked up in July and
August compared with its pace over the first half of
the year; however, C&I loan growth from the fourth
quarter of last year through August remained significantly lower than over recent years.
Gross issuance of municipal bonds was strong in
August, and spreads of yields on municipal bonds
over those on comparable-maturity Treasury securities increased a bit over the intermeeting period. The
credit quality of state and local governments
improved overall, as the number of ratings upgrades
notably outpaced the number of downgrades in
August.
The growth of commercial real estate (CRE) loans on
banks’ books continued to moderate in July and
August, reflecting a slowdown in lending both for
nonfarm nonresidential units and for construction
and land development; nonetheless, CRE financing
appeared to remain broadly available. Issuance of
commercial mortgage-backed securities (CMBS) so
far this year was similar to that in the same period a

231

year earlier. Spreads on CMBS over Treasury securities narrowed a little over the intermeeting period
and were near the bottom of their ranges of the past
several years. Delinquency rates on loans in CMBS
pools declined slightly but remained elevated for
loans that were originated before the financial crisis.
Interest rates on 30-year fixed-rate residential mortgages moved lower over the intermeeting period, in
line with comparable-maturity Treasury yields.
Growth in mortgage lending for home purchases
picked up in July and August compared with its pace
over the second quarter. However, credit conditions
remained tight for borrowers with low credit scores
or hard-to-document incomes.
Consumer credit continued to be readily available for
most borrowers, and overall loan balances rose at a
moderate pace in the second quarter, reflecting further expansions in credit card, auto, and student loan
balances. Issuance of asset-backed securities
remained robust over the year to date and outpaced
that of the previous year, providing support for consumer lending. However, standards and terms on
auto and credit card loans were tighter for subprime
borrowers, likely in response to rising delinquencies
on such loans. Subprime auto loan balances have
declined so far this year, partly reflecting the tighter
lending standards, and the average credit score of all
borrowers who obtained an auto loan in the second
quarter remained near the upper end of its range of
the past few years.

Staff Economic Outlook
The U.S. economic projection prepared by the staff
for the September FOMC meeting was broadly similar to the previous forecast. Real GDP was expected
to rise at a solid pace, on net, in the second half of
the year, and by a little more than previously projected, reflecting data on spending that were stronger
than expected on balance. The short-term disruptions
to spending and production associated with Hurricanes Harvey and Irma were expected to reduce real
GDP growth in the third quarter and to boost it in
the fourth quarter as production returned to its prehurricane path and as a portion of the lost spending
was made up. The hurricanes were also expected to
depress payroll employment in September, with a
reversal over the next few months. Beyond 2017, the
forecast for real GDP growth was little revised. In
particular, the staff continued to project that real
GDP would expand at a modestly faster pace than
potential output through 2019. The unemployment

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104th Annual Report | 2017

rate was projected to decline gradually over the next
couple of years and to continue running below the
staff’s estimate of its longer-run natural rate over this
period. Because of continued subdued inflation readings and, given real GDP growth, a larger-thanexpected decline in the unemployment rate over
much of the past year, the staff revised down slightly
its estimate of the longer-run natural rate of unemployment in this projection.
The staff’s forecast for consumer price inflation, as
measured by the change in the PCE price index, was
revised up somewhat for 2017 in response to
hurricane-related effects on gasoline prices. The nearterm forecast for core PCE price inflation was essentially unrevised. Total PCE price inflation this year
was expected to run at the same pace as last year,
with a slower increase in core PCE prices offset by a
slightly larger increase in energy prices and an upturn
in the prices for food and non-energy imports.
Beyond 2017, the inflation forecast was little revised
from the previous projection. The staff continued to
project that inflation would edge higher in the next
couple of years and that it would reach the Committee’s longer-run objective in 2019.
The staff viewed the uncertainty around its projections for real GDP growth, the unemployment rate,
and inflation as similar to the average of the past
20 years. On the one hand, many financial market
indicators of uncertainty remained subdued, and the
uncertainty associated with the foreign outlook still
appeared to be less than last year; on the other hand,
uncertainty about the direction of some economic
policies was judged to have remained elevated. The
staff saw the risks to the forecasts for real GDP
growth and the unemployment rate as balanced. The
risks to the projection for inflation were also seen as
balanced. Downside risks included the possibilities
that longer-term inflation expectations may have
edged down or that the recent run of soft inflation
readings could prove to be more persistent than the
staff expected. These downside risks were seen as
essentially counterbalanced by the upside risk that
inflation could increase more than expected in an
economy that was projected to continue operating
above its longer-run potential.

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 output growth, the
unemployment rate, and inflation for each year from
2017 through 2020 and over the longer run, based on
their individual assessments of the appropriate path
for the federal funds rate.6 The longer-run projections
represented 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 agreed that information received over the intermeeting period indicated
that the labor market had continued to strengthen
and that economic activity had been rising moderately so far this year. Job gains had remained solid in
recent months, and the unemployment rate had
stayed low. Household spending had been expanding
at a moderate rate, and growth in business fixed
investment had picked up in recent quarters. On a
12-month basis, overall inflation and the measure
excluding food and energy prices had declined this
year and were running below 2 percent. Marketbased measures of inflation compensation remained
low; survey-based measures of longer-term inflation
expectations were little changed on balance.
Participants acknowledged that Hurricanes Harvey,
Irma, and Maria would affect economic activity in
the near term. They expected growth of real GDP in
the third quarter to be held down by the severe disruptions caused by the storms but to rebound beginning in the fourth quarter as rebuilding got under
way and economic activity in the affected areas
resumed. Similarly, employment would be temporarily depressed by the hurricanes, but, abstracting from
those effects, employment gains were anticipated to
remain solid, and the unemployment rate was
expected to decline a bit further by year-end.
Based on the estimated effects of past major hurricanes that made landfall in the United States, participants judged that the recent storms were unlikely to
materially alter the course of the national economy
6

Four members of the Board of Governors, the same number as
in June 2017, were in office at the time of the September 2017
meeting. The office of the president of the Federal Reserve
Bank of Richmond was vacant at the time of both FOMC
meetings; First Vice President Mark L. Mullinix submitted economic projections. One participant did not submit longer-run
projections for real output growth, the unemployment rate, or
the federal funds rate.

Minutes of Federal Open Market Committee Meetings | September

over the medium term. Moreover, they generally
viewed the information on spending, production, and
labor market activity that became available over the
intermeeting period, which was mostly not affected
by the hurricanes, as suggesting little change in the
outlook for economic growth and the labor market
over the medium term. Consequently, they continued
to expect that, with gradual adjustments in the stance
of monetary policy, economic activity would expand
at a moderate pace and labor market conditions
would strengthen somewhat further. In the aftermath
of the hurricanes, higher prices for gasoline and some
other items were likely to boost inflation temporarily.
Apart from that effect, inflation on a 12-month basis
was expected to remain somewhat below 2 percent in
the near term but to stabilize around the Committee’s 2 percent objective over the medium term. Nearterm risks to the economic outlook appeared roughly
balanced, but participants agreed to continue to
monitor inflation developments closely.
Consumer spending had been expanding at a moderate rate through the summer, and reports on retail
activity from participants’ contacts were generally
positive. Participants expected some fluctuations in
consumer spending to result from the hurricanes, but
they generally judged that consumption growth
would continue to be supported by still-solid fundamental determinants of household spending, including the income generated by the ongoing strength in
the labor market, improved household balance sheets,
and high levels of consumer confidence. Sales of
autos and light trucks had softened over the summer,
leading producers to slow production to address a
buildup of inventories, but a couple of participants
noted that automakers expected to see a temporary
increase in demand as households and businesses
replaced vehicles damaged during the storms.
Incoming data on business spending showed that
equipment investment had picked up during 2017
after having been weak during much of 2016. Shipments and orders of nondefense capital goods had
been on a steady uptrend over the first eight months
of 2017. A number of participants reported that their
business contacts appeared to have become more
confident about the economic outlook, and it was
noted that the National Federation of Independent
Business reported that greater optimism among small
businesses had contributed to a sharp increase in the
proportion of small firms planning increases in their
capital expenditures. A couple of participants commented that competitive pressures and tight labor
markets were increasing the incentives for businesses

233

to substitute capital for labor or to invest in information technology. In contrast, reports on the strength
of nonresidential construction were mixed. And in
energy-producing regions, the count of drilling rigs in
operation had begun to level off before the onset of
Hurricane Harvey.
Participants generally indicated that, before the
recent hurricanes, business activity in their Districts
was expanding at a moderate pace. Although industrial production in areas affected by the storms was
estimated to have declined in August, a number of
participants from other areas reported further solid
gains in manufacturing activity in their Districts. Participants from the regions affected by the hurricanes
reported that businesses in their Districts anticipated
that the disruptions to business and sales would be
relatively short lived. In the energy sector, Hurricane
Harvey had shut down drilling and refining activity,
but by the time of the meeting, these operations had
substantially resumed. And many business contacts
in the affected areas reported that they expected their
operations to return to normal before the end of the
year. Farming in some parts of the country had been
affected by drought, and income in the agricultural
sector was under downward pressure because of low
crop prices.
Overall, the available information suggested that,
although the storms would likely affect the quarterly
pattern of changes in real GDP at least through the
second half of the year, economic activity would continue to expand at a moderate rate over the medium
term, supported by further gains in consumer spending and the pickup in business investment. In addition, improving global economic conditions and the
depreciation of the dollar in recent months were
anticipated to result in a modest positive contribution to domestic economic activity from net exports.
In contrast, most participants had not assumed
enactment of a fiscal stimulus package in their economic projections or had marked down the expected
magnitude of any stimulus.
Labor market conditions strengthened further in
recent months. The increases in nonfarm payroll
employment in July and August remained well above
the pace likely to be sustainable in the longer run.
Although the unemployment rate was little changed
from March to August, it remained below participants’ estimates of its longer-run normal level. Other
indicators suggested that labor market conditions
had continued to tighten over recent quarters. The
labor force participation rate had been moving side-

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104th Annual Report | 2017

ways despite factors, such as demographic changes,
that were contributing to a declining longer-run
trend. In addition, the number of individuals working part time for economic reasons, as a share of
household employment, had moved lower. The job
openings rate, the quits rate, households’ assessments
of job availability, and the labor market conditions
index prepared by the Federal Reserve Bank of Kansas City had returned to pre-recession levels. However, some participants still saw room for further
increases in labor utilization, with a couple of them
noting that the employment-to-population ratio and
the participation rate for prime-age workers had not
fully recovered to pre-recession levels.
Against the backdrop of the continued strengthening
in labor market conditions, participants discussed
recent wage developments. Increases in most aggregate measures of hourly wages and labor compensation remained subdued, and several participants
commented that the absence of broad-based upward
wage pressures suggested that the sustainable rate of
unemployment might be lower than they currently
estimated. Other factors that may have been contributing to the subdued pace of wage increases reported
in the national data included low productivity
growth, changes in the composition of the workforce,
and competitive pressure on employers to hold down
their costs. However, reports from business contacts
in several Districts indicated that employers in labor
markets in which demand was high or in which workers in some occupations were in short supply were
raising wages noticeably to compete for workers and
limit turnover. It was noted that the expected increase
in demand for skilled construction workers for reconstruction in hurricane-affected areas would likely
exacerbate existing shortages. Most participants
expected wage increases to pick up over time as the
labor market strengthened further; a couple of participants cautioned that a broader acceleration in
wages may already have begun, consistent with
already-tight labor market conditions.
Based on the available data, PCE price inflation over
the 12 months ending in August was estimated to be
about 1½ percent, remaining below the Committee’s
longer-run objective. In their review of the recent
data and the outlook for inflation, participants discussed a number of factors that could be contributing to the low readings on consumer prices this year
and weighed the extent to which those factors might
be transitory or could prove more persistent. Many
participants continued to believe that the cyclical
pressures associated with a tightening labor market

or an economy operating above its potential were
likely to show through to higher inflation over the
medium term. In addition, many judged that at least
part of the softening in inflation this year was the
result of idiosyncratic or one-time factors, and, thus,
their effects were likely to fade over time. However,
other developments, such as the effects of earlier
changes to government health-care programs that
had been holding down health-care costs, might continue to do so for some time. Some participants discussed the possibility that secular trends, such as the
influence of technological innovations on competition and business pricing, also might have been muting inflationary pressures and could be intensifying.
It was noted that other advanced economies were
also experiencing low inflation, which might suggest
that common global factors could be contributing to
persistence of below-target inflation in the United
States and abroad. Several participants commented
on the importance of longer-run inflation expectations to the outlook for a return of inflation to 2 percent. A number of indicators of inflation expectations, including survey statistics and estimates
derived from financial market data, were generally
viewed as indicating that longer-run inflation expectations remained reasonably stable, although a few
participants saw some of these measures as low or
slipping.
Participants raised a number of important considerations about the implications of persistently low
inflation for the path of the federal funds rate over
the medium run. Several expressed concern that the
persistence of low rates of inflation might imply that
the underlying trend was running below 2 percent,
risking a decline in inflation expectations. If so, the
appropriate policy path should take into account the
need to bolster inflation expectations in order to
ensure that inflation returned to 2 percent and to prevent erosion in the credibility of the Committee’s
objective. It was also noted that the persistence of
low inflation might result in the federal funds rate
staying uncomfortably close to its effective lower
bound. However, a few others pointed out the need
to consider the lags in the response of inflation to
tightening resource utilization and, thus, increasing
upside risks to inflation as the labor market tightened
further.
On balance, participants continued to forecast that
PCE price inflation would stabilize around the Committee’s 2 percent objective over the medium term.
However, several noted that in preparing their projections for this meeting, they had taken on board the

Minutes of Federal Open Market Committee Meetings | September

likelihood that convergence to the Committee’s symmetric 2 percent inflation objective might take somewhat longer than they anticipated earlier. Participants generally agreed it would be important to
monitor inflation developments closely. Several of
them noted that interpreting the next few inflation
reports would likely be complicated by the temporary
run-up in energy costs and in the prices of other
items affected by storm-related disruptions and
rebuilding.
In financial markets, longer-term interest rates and
the foreign exchange value of the dollar declined over
the intermeeting period, and equity prices increased.
It was noted that U.S. financial conditions recently
appeared to be responding as much or more to economic and financial news from abroad as to domestic
developments. Many participants viewed accommodative financial conditions, which had prevailed even
as the Committee raised the federal funds rate, as
likely to provide support for the economic expansion.
However, a couple of those participants expressed
concern that the persistence of highly accommodative financial conditions could, over time, pose risks
to financial stability. In contrast, a few participants
cautioned that these financial market conditions
might not deliver much impetus to aggregate demand
if they instead reflected a more pessimistic assessment of prospects for longer-run economic growth
and, accordingly, a view that the longer-run neutral
rate of interest in the United States would
remain low.
In their discussion of monetary policy, all participants agreed that the economy had evolved broadly
as they had anticipated at the time of the June meeting and that the incoming data had not materially
altered the medium-term economic outlook. Consistent with those assessments, participants saw it as
appropriate, at this meeting, to announce implementation of the plan for reducing the Federal Reserve’s
securities holdings that the Committee released in
June. Many underscored that the reduction in securities holdings would be gradual and that financial
market participants appeared to have a clear understanding of the Committee’s planned approach for a
gradual normalization of the size of the Federal
Reserve’s balance sheet. Consequently, participants
generally expected that any reaction in financial markets to the start of balance sheet normalization
would likely be limited.
With the medium-term outlook little changed, inflation below 2 percent, and the neutral rate of interest

235

estimated to be quite low, all participants thought it
would be appropriate for the Committee to maintain
the current target range for the federal funds rate at
this meeting, and nearly all supported again indicating in the postmeeting statement that a gradual
approach to increasing the federal funds rate will
likely be warranted. Nevertheless, many participants
expressed concern that the low inflation readings this
year might reflect not only transitory factors, but also
the influence of developments that could prove more
persistent, and it was noted that some patience in
removing policy accommodation while assessing
trends in inflation was warranted. A few of these participants thought that no further increases in the federal funds rate were called for in the near term or that
the upward trajectory of the federal funds rate might
appropriately be quite shallow. Some other participants, however, were more worried about upside risks
to inflation arising from a labor market that had
already reached full employment and was projected
to tighten further. Their concerns were heightened by
the apparent easing in financial conditions that had
developed since the Committee’s policy normalization process was initiated in December 2015. These
participants cautioned that an unduly slow pace in
removing policy accommodation could result in an
overshoot of the Committee’s inflation objective in
the medium term that would likely be costly to
reverse or could lead to an intensification of financial
stability risks or to other imbalances that might prove
difficult to unwind.
Consistent with the expectation that a gradual rise in
the federal funds rate would be appropriate, many
participants thought that another increase in the target range later this year was likely to be warranted if
the medium-term outlook remained broadly
unchanged. Several others noted that, in light of the
uncertainty around their outlook for inflation, their
decision on whether to take such a policy action
would depend importantly on whether the economic
data in coming months increased their confidence
that inflation was moving up toward the Committee’s
objective. A few participants thought that additional
increases in the federal funds rate should be deferred
until incoming information confirmed that the low
readings on inflation this year were not likely to persist and that inflation was clearly on a path toward
the Committee’s symmetric 2 percent objective over
the medium term. All agreed that they would closely
monitor and assess incoming data before making any
further adjustment to the federal funds rate.

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104th Annual Report | 2017

Committee Policy Action
In their discussion of monetary policy for the period
ahead, members judged that information received
since the Committee met in July indicated that the
labor market had continued to strengthen and that
economic activity had been rising moderately so far
this year. Job gains had remained solid in recent
months, and the unemployment rate had stayed low.
Household spending had been expanding at a moderate rate, and growth in business fixed investment had
picked up in recent quarters. On a 12-month basis,
overall inflation and the measure excluding food and
energy prices had declined this year and were running
below 2 percent. Market-based measures of inflation
compensation remained low; survey-based measures
of longer-term inflation expectations were little
changed on balance.
Members noted that Hurricanes Harvey, Irma, and
Maria had devastated many communities, inflicting
severe hardship. Members judged that storm-related
disruptions and rebuilding would affect economic
activity in the near term, but past experience suggested that the hurricanes were unlikely to materially
alter the course of the national economy over the
medium term. Consequently, the Committee continued to expect that, with gradual adjustments in the
stance of monetary policy, economic activity would
expand at a moderate pace, and labor market conditions would strengthen somewhat further. Higher
prices for gasoline and some other items in the aftermath of the hurricanes would likely boost inflation
temporarily; apart from that effect, inflation on a
12-month basis was expected to remain somewhat
below 2 percent in the near term but to stabilize
around the Committee’s 2 percent objective over the
medium term. Members saw near-term risks to the
economic outlook as roughly balanced, but they
agreed to continue to monitor inflation developments
closely.
After assessing current conditions and the outlook
for economic activity, the labor market, and inflation,
members decided to maintain the target range for the
federal funds rate at 1 to 1¼ percent. They noted that
the stance of monetary policy remained accommodative, thereby supporting some further strengthening
in labor market conditions and a sustained return to
2 percent inflation.
Members agreed that the timing and size of future
adjustments to the target range for the federal funds

rate would depend on their assessment of realized
and expected economic conditions relative to the
Committee’s objectives of maximum employment
and 2 percent inflation. They expected that economic
conditions would evolve in a manner that would warrant gradual increases in the federal funds rate and
that the federal funds rate was likely to remain, for
some time, below levels that were expected to prevail
in the longer run. Members also again stated that the
actual path of the federal funds rate would depend
on the economic outlook as informed by incoming
data. In particular, they reaffirmed that they would
carefully monitor actual and expected inflation developments relative to the Committee’s symmetric inflation goal. Some members emphasized that, in considering the timing of further adjustments in the federal
funds rate, they would be evaluating incoming information to assess the likelihood that recent low readings on inflation were transitory and that inflation
was again on a trajectory consistent with achieving
the Committee’s 2 percent objective over the medium
term.
Members agreed that, in October, the Committee
would initiate the balance sheet normalization program described in the June 2017 Addendum to the
Policy Normalization Principles and Plans. Several
members observed that, in part because financial
market participants appeared to have a clear understanding of the Committee’s plan for gradually
reducing the Federal Reserve’s securities holdings,
any reaction in financial markets to the announcement and implementation of the program would
likely be limited.
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, to be
released at 2:00 p.m.:
“Effective September 21, 2017, the Federal Open
Market Committee directs the Desk to undertake open market operations as necessary to
maintain the federal funds rate in a target range
of 1 to 1¼ percent, including overnight reverse
repurchase operations (and reverse repurchase
operations with maturities of more than one day
when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 1.00 percent, in amounts limited only
by the value of Treasury securities held outright

Minutes of Federal Open Market Committee Meetings | September

in the System Open Market Account that are
available for such operations and by a percounterparty limit of $30 billion per day.
The Committee directs the Desk to continue
rolling over at auction Treasury securities maturing during September, and to continue reinvesting in agency mortgage-backed securities the
principal payments received through September
from the Federal Reserve’s holdings of agency
debt and agency mortgage-backed securities.
Effective in October 2017, the Committee directs
the Desk to roll over at auction the amount of
principal payments from the Federal Reserve’s
holdings of Treasury securities maturing during
each calendar month that exceeds $6 billion, and
to reinvest in agency mortgage-backed securities
the amount of principal payments from the Federal Reserve’s holdings of agency debt and
agency mortgage-backed securities received during each calendar month that exceeds $4 billion.
Small deviations from these amounts for operational reasons are acceptable.
The Committee also directs the Desk to engage
in dollar roll and coupon swap transactions as
necessary to facilitate settlement of the Federal
Reserve’s agency mortgage-backed securities
transactions.”
The vote also encompassed approval of the statement
below to be released at 2:00 p.m.:
“Information received since the Federal Open
Market Committee met in July indicates that the
labor market has continued to strengthen and
that economic activity has been rising moderately so far this year. Job gains have remained
solid in recent months, and the unemployment
rate has stayed low. Household spending has
been expanding at a moderate rate, and growth
in business fixed investment has picked up in
recent quarters. On a 12-month basis, overall
inflation and the measure excluding food and
energy prices have declined this year and are
running below 2 percent. Market-based measures of inflation compensation remain low;
survey-based measures of longer-term inflation
expectations are little changed, on balance.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment
and price stability. Hurricanes Harvey, Irma,

237

and Maria have devastated many communities,
inflicting severe hardship. Storm-related disruptions and rebuilding will affect economic activity
in the near term, but past experience suggests
that the storms are unlikely to materially alter
the course of the national economy over the
medium term. Consequently, the Committee
continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace,
and labor market conditions will strengthen
somewhat further. Higher prices for gasoline
and some other items in the aftermath of the
hurricanes will likely boost inflation temporarily; apart from that effect, inflation on a
12-month basis is expected to remain somewhat
below 2 percent in the near term but to stabilize
around the Committee’s 2 percent objective over
the medium term. Near-term risks to the economic outlook appear roughly balanced, but the
Committee is monitoring inflation developments
closely.
In view of realized and expected labor market
conditions and inflation, the Committee decided
to maintain the target range for the federal funds
rate at 1 to 1¼ percent. The stance of monetary
policy remains accommodative, thereby supporting some further strengthening in labor market
conditions and a sustained return to 2 percent
inflation.
In determining the timing and size of future
adjustments to the target range for the federal
funds rate, the Committee will assess realized
and expected economic conditions relative to its
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 will carefully
monitor actual and expected inflation developments relative to its symmetric inflation goal.
The Committee expects that economic conditions will evolve in a manner that will warrant
gradual increases in the federal funds rate; the
federal funds rate is likely to remain, for some
time, below levels that are expected to prevail in
the longer run. However, the actual path of the
federal funds rate will depend on the economic
outlook as informed by incoming data.

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104th Annual Report | 2017

In October, the Committee will initiate the balance sheet normalization program described in
the June 2017 Addendum to the Committee’s
Policy Normalization Principles and Plans.”
Voting for this action: Janet L. Yellen, William C.
Dudley, Lael Brainard, Charles L. Evans, Stanley
Fischer, Patrick Harker, Robert S. Kaplan, Neel
Kashkari, and Jerome H. Powell.
Voting against this action: None.
Consistent with the Committee’s decision to leave the
target range for the federal funds rate unchanged, the
Board of Governors voted unanimously to leave the
interest rates on required and excess reserve balances
unchanged at 1¼ percent and voted unanimously to
approve establishment of the primary credit rate (discount rate) at the existing level of 1¾ percent.7
7

The second vote of the Board also encompassed approval of the
establishment of the interest rates for secondary and seasonal
credit under the existing formulas for computing such rates.

It was agreed that the next meeting of the Committee
would be held on Tuesday–Wednesday, October 31–
November 1, 2017. The meeting adjourned at 10:05
a.m. on September 20, 2017.

Notation Vote
By notation vote completed on August 15, 2017, the
Committee unanimously approved the minutes of the
Committee meeting held on July 25–26, 2017.
Brian F. Madigan
Secretary

Minutes of Federal Open Market Committee Meetings | September

Addendum:
Summary of Economic Projections
In conjunction with the Federal Open Market Committee (FOMC) meeting held on September 19–20,
2017, meeting participants submitted their projections of the most likely outcomes for real output
growth, the unemployment rate, and inflation for
each year from 2017 to 2020 and over the longer
run.8 Each participant’s projections were based on
information available at the time of the meeting,
together with his or her assessment of appropriate
monetary policy—including a path for the federal
funds rate and its longer-run value—and assumptions about other factors likely to affect economic
outcomes. The longer-run projections represent each
participant’s assessment of the value 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.9 “Appropriate monetary policy” is defined as the future path
of policy that each participant deems most likely to
foster outcomes for economic activity and inflation
that best satisfy his or her individual interpretation of
the Federal Reserve’s objectives of maximum
employment and stable prices.
All participants who submitted longer-run projections expected that, under appropriate monetary
policy, growth in real gross domestic product (GDP)
this year would run somewhat above their individual
estimates of its longer-run rate. Almost all participants projected that economic growth would moderate over the next three years, and almost all projected
that real GDP growth in 2019 and 2020 would be at
or close to their individual estimates of the economy’s longer-run potential growth rate. All participants who submitted longer-run projections expected
that the unemployment rate would run below their
estimates of its longer-run normal level in 2017, and
8

9

Four members of the Board of Governors, the same number as
in June 2017, were in office at the time of the September 2017
meeting. As in June 2017, the office of the president of the Federal Reserve Bank of Richmond was vacant at the time of this
FOMC meeting; First Vice President Mark L. Mullinix again
submitted economic projections.
One participant did not submit longer-run projections for real
output growth, the unemployment rate, or the federal funds
rate. This participant’s projections over the next several years
were informed by the view that the U.S. economy is characterized by multiple medium-term regimes, that these regimes are
persistent, and that optimal monetary policy is regime dependent. Because switches between regimes are difficult to predict
and affect the longer-run outlook, this participant’s forecast did
not incorporate convergence to longer-term outcomes for variables other than inflation.

239

almost all projected that the unemployment rate
would remain below their estimates of its longer-run
level through 2020. All participants projected that
inflation, as measured by the four-quarter percentage
change in the price index for personal consumption
expenditures (PCE), would run below 2 percent in
2017 and then step up in the next three years; about
half of them projected that inflation would be at the
Committee’s 2 percent objective in 2019 and 2020,
and all judged that inflation would be within a couple
of tenths of a percentage point of the objective in
those years. Most participants commented on the
effects of Hurricanes Harvey and Irma and judged
that there would likely be some effect on national
economic activity and inflation in the near term but
little effect in the medium term.10 Table 1 and figure 1 provide summary statistics for the projections.
As shown in figure 2, participants generally expected
that evolving economic conditions would likely warrant further gradual increases in the federal funds
rate to achieve and sustain maximum employment
and 2 percent inflation. Although some participants
lowered their federal funds rate projections since
June, the median projections for the federal funds
rate in 2017 and 2018 were unchanged; the median
projection for 2019 was slightly lower, and the
median projection for the longer-run normal level of
the federal funds rate edged down. However, because
of considerable uncertainty about how the economy
will evolve, the actual path of short-term interest
rates, including the federal funds rate, can differ substantially from projections.
In general, participants viewed the uncertainty
attached to their economic projections as broadly
similar to the average of the past 20 years, and all
participants saw the uncertainty associated with their
forecasts for real GDP growth, the unemployment
rate, and inflation as unchanged from June. Most
participants judged the risks around their projections
for economic growth, the unemployment rate, and
inflation as broadly balanced.

The Outlook for Economic Activity
The median of participants’ projections for the
growth rate of real GDP, conditional on their individual assumptions about appropriate monetary
policy, was 2.4 percent in 2017, about 2 percent in
2018 and 2019, and 1.8 percent in 2020; the median
10

Participants had completed their submissions for the Summary
of Economic Projections before the full effects of Hurricane
Maria were evident.

240

104th Annual Report | 2017

Table 1. Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents, under their individual
assessments of projected appropriate monetary policy, September 2017
Percent
Median1

Central tendency2

Variable
2017

2018

2019

2020

Change in real GDP
June projection
Unemployment rate
June projection
PCE inflation
June projection
Core PCE inflation4
June projection

2.4
2.2
4.3
4.3
1.6
1.6
1.5
1.7

2.1
2.1
4.1
4.2
1.9
2.0
1.9
2.0

2.0
1.9
4.1
4.2
2.0
2.0
2.0
2.0

1.8
n.a.
4.2
n.a.
2.0
n.a.
2.0
n.a.

Memo: Projected
appropriate
policy path
Federal funds rate
June projection

1.4
1.4

2.1
2.1

2.7
2.9

2.9
n.a.

Longer
run

Range3
Longer
run

2018

2019

2020

1.8
1.8
4.6
4.6
2.0
2.0

2.2–2.5
2.1–2.2
4.2–4.3
4.2–4.3
1.5–1.6
1.6–1.7
1.5–1.6
1.6–1.7

2.0–2.3
1.8–2.2
4.0–4.2
4.0–4.3
1.8–2.0
1.8–2.0
1.8–2.0
1.8–2.0

1.7–2.1
1.8–2.0
3.9–4.4
4.1–4.4
2.0
2.0–2.1
2.0
2.0–2.1

1.6–2.0
n.a.
4.0–4.5
n.a.
2.0–2.1
n.a.
2.0–2.1
n.a.

2.8
3.0

1.1–1.4 1.9–2.4 2.4–3.1 2.5–3.5 2.5–3.0 1.1–1.6 1.1–2.6 1.1–3.4 1.1–3.9 2.3–3.5
1.1–1.6 1.9–2.6 2.6–3.1
n.a.
2.8–3.0 1.1–1.6 1.1–3.1 1.1–4.1
n.a.
2.5–3.5

1.8–2.0
1.8–2.0
4.5–4.8
4.5–4.8
2.0
2.0

2017

2018

2019

2020

2.2–2.7
2.0–2.5
4.2–4.5
4.1–4.5
1.5–1.7
1.5–1.8
1.4–1.7
1.6–1.8

1.7–2.6
1.7–2.3
3.9–4.5
3.9–4.5
1.7–2.0
1.7–2.1
1.7–2.0
1.7–2.1

1.4–2.3
1.4–2.3
3.8–4.5
3.8–4.5
1.8–2.2
1.8–2.2
1.8–2.2
1.8–2.2

1.4–2.0
n.a.
3.8–4.8
n.a.
1.9–2.2
n.a.
1.9–2.2
n.a.

Longer
run

2017

1.5–2.2
1.5–2.2
4.4–5.0
4.5–5.0
2.0
2.0

Note: Projections of change in real gross domestic product (GDP) and projections for both measures of inflation are percent changes from the fourth quarter of the previous year
to the fourth quarter of the year indicated. PCE inflation and core PCE inflation are the percentage rates of change in, respectively, the price index for personal consumption
expenditures (PCE) and the price index for PCE excluding food and energy. Projections for the unemployment rate are for the average civilian unemployment rate in the fourth
quarter of the year indicated. Each participant’s projections are based on his or her assessment of appropriate monetary policy. Longer-run projections represent each
participant’s assessment of the rate to which each variable would be expected to converge under appropriate monetary policy and in the absence of further shocks to the
economy. The projections for the federal funds rate are the value of the midpoint of the projected appropriate target range for the federal funds rate or the projected appropriate
target level for the federal funds rate at the end of the specified calendar year or over the longer run. The June projections were made in conjunction with the meeting of the
Federal Open Market Committee on June 13–14, 2017. One participant did not submit longer-run projections for the change in real GDP, the unemployment rate, or the federal
funds rate in conjunction with the June 13–14, 2017, meeting, and one participant did not submit such projections in conjunction with the September 19–20, 2017, meeting.
1
For each period, the median is the middle projection when the projections are arranged from lowest to highest. When the number of projections is even, the median is the
average of the two middle projections.
2
The central tendency excludes the three highest and three lowest projections for each variable in each year.
3
The range for a variable in a given year includes all participants’ projections, from lowest to highest, for that variable in that year.
4
Longer-run projections for core PCE inflation are not collected.

Minutes of Federal Open Market Committee Meetings | September

241

Figure 1. Medians, central tendencies, and ranges of economic projections, 2017–20 and over the longer run
Percent

Change in real GDP
Median of projections
Central tendency of projections
Range of projections

3

2

1

Actual

2012

2013

2014

2015

2016

2017

2018

2019

2020

Longer
run
Percent

Unemployment rate
8
7
6
5
4

2012

2013

2014

2015

2016

2017

2018

2019

2020

Longer
run
Percent

PCE inflation
3

2

1

2012

2013

2014

2015

2016

2017

2018

2019

2020

Longer
run
Percent

Core PCE inflation
3

2

1

2012

2013

2014

2015

2016

2017

2018

2019

Note: Definitions of variables and other explanations are in the notes to table 1. The data for the actual values of the variables are annual.

2020

Longer
run

242

104th Annual Report | 2017

Figure 2. FOMC participants’ assessments of appropriate monetary policy: Midpoint of target range or target level for the
federal funds rate
Percent
5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

2017

2018

2019

2020

Longer run

Note: Each shaded circle indicates the value (rounded to the nearest ⅛ percentage point) of an individual participant’s judgment of the midpoint of the appropriate target range
for the federal funds rate or the appropriate target level for the federal funds rate at the end of the specified calendar year or over the longer run. One participant did not submit
longer-run projections for the federal funds rate.

Minutes of Federal Open Market Committee Meetings | September

of projections for the longer-run normal rate of real
GDP growth was 1.8 percent. Compared with the
June Summary of Economic Projections (SEP), the
median of the forecasts for real GDP growth for 2017
was a bit higher, while the medians for 2018 and
2019, as well as the median assessment of the longerrun growth rate, were mostly unchanged. Most participants did not incorporate expectations of fiscal
stimulus in their projections. Several participants who
included some fiscal stimulus indicated that they had
marked down its expected magnitude relative to their
June projections.
The median of projections for the unemployment
rate in the fourth quarter of 2017 was 4.3 percent,
unchanged from June and 0.3 percentage point below
the median assessment of its longer-run normal level.
The medians of the unemployment rate projections
for 2018 through 2020 were a little above 4 percent.
The median estimate of the longer-run normal rate
of unemployment was 4.6 percent, unchanged from
June.
Figures 3.A and 3.B show the distributions of participants’ projections for real GDP growth and the
unemployment rate from 2017 to 2020 and in the longer run. The distribution of individual projections for
real GDP growth for this year shifted up, with half of
the participants now expecting real GDP growth of
2.4 or 2.5 percent and none seeing it below 2.2 percent. The distribution of projected real GDP growth
in 2018 also shifted up a bit, while the distributions in
2019 and in the longer run were broadly similar to
the distributions of the June projections. The distributions of individual projections for the unemployment rate in 2018 and 2019 shifted down slightly.

The Outlook for Inflation
The median of projections for headline PCE inflation
was 1.6 percent this year, 1.9 percent next year, and
2 percent in 2019 and 2020, about unchanged from
June. Most participants anticipated that inflation
would continue to run slightly below 2 percent in
2018, while no participants expected inflation above
2 percent in that year. About half projected that
inflation would be equal to the Committee’s objective
in 2019 and 2020; others projected that inflation
would run a little above or below the Committee’s
objective in one or both of those years. The median
of projections for core PCE inflation was 1.5 percent
in 2017 and 1.9 percent in 2018, a decline of 0.2 percentage point and 0.1 percentage point from June,

243

respectively. The median projection for core PCE
inflation in 2019 and 2020 was 2.0 percent.
Figures 3.C and 3.D provide information on the distributions of participants’ views about the outlook
for inflation. The distributions of projections for
headline PCE inflation and for core PCE inflation in
2017 moved down somewhat from June, and the distributions for both measures in 2018 shifted down
slightly. Most participants indicated that the soft
readings on inflation so far this year were a factor
contributing to the revisions in their inflation
forecasts.

Appropriate Monetary Policy
Figure 3.E provides the distribution of participants’
judgments regarding the appropriate target or midpoint of the target range for the federal funds rate at
the end of each year from 2017 to 2020 and over the
longer run. The distributions for 2017 and 2018
became somewhat less dispersed compared with
those in June. Even though the range of the distribution in 2019 was narrower than in June, other measures of dispersion were roughly unchanged. The
median projections of the federal funds rate continued to show gradual increases, with the median
assessment for 2017 standing at 1.38 percent, consistent with three 25 basis point increases this year.
Thereafter, the medians of the projections were
2.13 percent at the end of 2018, 2.69 percent at the
end of 2019, and 2.88 percent at the end of 2020.
Compared with their projections prepared for the
June SEP, some participants reduced their projection
for the federal funds rate in the longer run; the
median declined 0.25 percentage point, to
2.75 percent.
In discussing their September projections, many participants again expressed the view that the appropriate upward trajectory of the federal funds rate over
the next few years would likely be gradual. That
anticipated pace reflected a few factors, including a
neutral real interest rate that was currently low and
was expected to move up only slowly as well as a
gradual return of inflation to the Committee’s 2 percent objective. Some participants judged that a
slightly lower path of the federal funds rate than in
their previous projections would likely be appropriate, with a few citing a slower rate of progress toward
the Committee’s 2 percent inflation objective than
previously expected or reduced prospects for fiscal
stimulus. In their discussions of appropriate monetary policy, some of the participants mentioned

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104th Annual Report | 2017

Figure 3.A. Distribution of participants’ projections for the change in real GDP, 2017–20 and over the longer run
Number of participants

2017

18
16
14
12
10
8
6
4
2

September projections
June projections

1.2 –
1.3

1.4 –
1.5

1.6 –
1.7

1.8 –
1.9

2.0 –
2.1

2.2 –
2.3

2.4 –
2.5

2.6 –
2.7

Percent range
Number of participants

2018

18
16
14
12
10
8
6
4
2
1.2 –
1.3

1.4 –
1.5

1.6 –
1.7

1.8 –
1.9

2.0 –
2.1

2.2 –
2.3

2.4 –
2.5

2.6 –
2.7

Percent range
Number of participants

2019

18
16
14
12
10
8
6
4
2
1.2 –
1.3

1.4 –
1.5

1.6 –
1.7

1.8 –
1.9

2.0 –
2.1

2.2 –
2.3

2.4 –
2.5

2.6 –
2.7

Percent range
Number of participants

2020

18
16
14
12
10
8
6
4
2
1.2 –
1.3

1.4 –
1.5

1.6 –
1.7

1.8 –
1.9

2.0 –
2.1

2.2 –
2.3

2.4 –
2.5

2.6 –
2.7

Percent range
Number of participants

Longer run

1.2 –
1.3

18
16
14
12
10
8
6
4
2
1.4 –
1.5

1.6 –
1.7

1.8 –
1.9

2.0 –
2.1

Percent range
Note: Definitions of variables and other explanations are in the notes to table 1.

2.2 –
2.3

2.4 –
2.5

2.6 –
2.7

Minutes of Federal Open Market Committee Meetings | September

245

Figure 3.B. Distribution of participants’ projections for the unemployment rate, 2017–20 and over the longer run
Number of participants

2017

18
16
14
12
10
8
6
4
2

September projections
June projections

3.6 –
3.7

3.8 –
3.9

4.0 –
4.1

4.2 –
4.3

4.4 –
4.5

4.6 –
4.7

4.8 –
4.9

5.0 –
5.1

Percent range
Number of participants

2018

18
16
14
12
10
8
6
4
2
3.6 –
3.7

3.8 –
3.9

4.0 –
4.1

4.2 –
4.3

4.4 –
4.5

4.6 –
4.7

4.8 –
4.9

5.0 –
5.1

Percent range
Number of participants

2019

18
16
14
12
10
8
6
4
2
3.6 –
3.7

3.8 –
3.9

4.0 –
4.1

4.2 –
4.3

4.4 –
4.5

4.6 –
4.7

4.8 –
4.9

5.0 –
5.1

Percent range
Number of participants

2020

18
16
14
12
10
8
6
4
2
3.6 –
3.7

3.8 –
3.9

4.0 –
4.1

4.2 –
4.3

4.4 –
4.5

4.6 –
4.7

4.8 –
4.9

5.0 –
5.1

Percent range
Number of participants

Longer run

3.6 –
3.7

18
16
14
12
10
8
6
4
2
3.8 –
3.9

4.0 –
4.1

4.2 –
4.3

4.4 –
4.5

Percent range
Note: Definitions of variables and other explanations are in the notes to table 1.

4.6 –
4.7

4.8 –
4.9

5.0 –
5.1

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104th Annual Report | 2017

Figure 3.C. Distribution of participants’ projections for PCE inflation, 2017–20 and over the longer run
Number of participants

2017

18
16
14
12
10
8
6
4
2

September projections
June projections

1.5 –
1.6

1.9 –
2.0

1.7 –
1.8

2.1 –
2.2

Percent range
Number of participants

2018

18
16
14
12
10
8
6
4
2
1.5 –
1.6

1.9 –
2.0

1.7 –
1.8

2.1 –
2.2

Percent range
Number of participants

2019

18
16
14
12
10
8
6
4
2
1.5 –
1.6

1.9 –
2.0

1.7 –
1.8

2.1 –
2.2

Percent range
Number of participants

2020

18
16
14
12
10
8
6
4
2
1.5 –
1.6

1.7 –
1.8

1.9 –
2.0

2.1 –
2.2

Percent range
Number of participants

Longer run

18
16
14
12
10
8
6
4
2
1.5 –
1.6

1.7 –
1.8

1.9 –
2.0

Percent range
Note: Definitions of variables and other explanations are in the notes to table 1.

2.1 –
2.2

Minutes of Federal Open Market Committee Meetings | September

247

Figure 3.D. Distribution of participants’ projections for core PCE inflation, 2017–20
Number of participants

2017
18
16
14
12
10
8
6
4
2

September projections
June projections

1.3 –
1.4

1.5 –
1.6

1.7 –
1.8

1.9 –
2.0

2.1 –
2.2

Percent range
Number of participants

2018
18
16
14
12
10
8
6
4
2
1.3 –
1.4

1.5 –
1.6

1.7 –
1.8

1.9 –
2.0

2.1 –
2.2

Percent range
Number of participants

2019
18
16
14
12
10
8
6
4
2
1.3 –
1.4

1.5 –
1.6

1.7 –
1.8

1.9 –
2.0

2.1 –
2.2

Percent range
Number of participants

2020
18
16
14
12
10
8
6
4
2
1.3 –
1.4

1.5 –
1.6

1.7 –
1.8

Percent range
Note: Definitions of variables and other explanations are in the notes to table 1.

1.9 –
2.0

2.1 –
2.2

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104th Annual Report | 2017

Figure 3.E. Distribution of participants’ judgments of the midpoint of the appropriate target range for the federal funds rate or
the appropriate target level for the federal funds rate, 2017–20 and over the longer run
Number of participants

2017

18
16
14
12
10
8
6
4
2

September projections
June projections

1.13 –
1.37

1.38 –
1.62

1.63 –
1.87

1.88 –
2.12

2.13 –
2.37

2.38 –
2.62

2.63 –
2.87

2.88 –
3.12

3.13 –
3.37

3.38 –
3.62

3.63 –
3.87

3.88 –
4.12

4.13 –
4.37

Percent range
Number of participants

2018

1.13 –
1.37

18
16
14
12
10
8
6
4
2
1.38 –
1.62

1.63 –
1.87

1.88 –
2.12

2.13 –
2.37

2.38 –
2.62

2.63 –
2.87

2.88 –
3.12

3.13 –
3.37

3.38 –
3.62

3.63 –
3.87

3.88 –
4.12

4.13 –
4.37

Percent range
Number of participants

2019

1.13 –
1.37

18
16
14
12
10
8
6
4
2
1.38 –
1.62

1.63 –
1.87

1.88 –
2.12

2.13 –
2.37

2.38 –
2.62

2.63 –
2.87

2.88 –
3.12

3.13 –
3.37

3.38 –
3.62

3.63 –
3.87

3.88 –
4.12

4.13 –
4.37

Percent range
Number of participants

2020

1.13 –
1.37

18
16
14
12
10
8
6
4
2
1.38 –
1.62

1.63 –
1.87

1.88 –
2.12

2.13 –
2.37

2.38 –
2.62

2.63 –
2.87

2.88 –
3.12

3.13 –
3.37

3.38 –
3.62

3.63 –
3.87

3.88 –
4.12

4.13 –
4.37

Percent range
Number of participants

Longer run

1.13 –
1.37

18
16
14
12
10
8
6
4
2
1.38 –
1.62

1.63 –
1.87

1.88 –
2.12

2.13 –
2.37

2.38 –
2.62

2.63 –
2.87

Percent range
Note: Definitions of variables and other explanations are in the notes to table 1.

2.88 –
3.12

3.13 –
3.37

3.38 –
3.62

3.63 –
3.87

3.88 –
4.12

4.13 –
4.37

Minutes of Federal Open Market Committee Meetings | September

Table 2. Average historical projection error ranges
Percentage points
Variable
Change in real GDP1
Unemployment rate1
Total consumer prices2
Short-term interest rates3

2017

2018

2019

2020

±1.2
±0.3
±0.8
±0.5

±1.9
±1.1
±1.1
±1.7

±2.0
±1.6
±1.2
±2.3

±2.1
±2.0
±1.1
±2.7

Note: Error ranges shown are measured as plus or minus the root mean squared
error of projections for 1997 through 2016 that were released in the summer by
various private and government forecasters. As described in the box “Forecast
Uncertainty,” under certain assumptions, there is about a 70 percent probability
that actual outcomes for real GDP, unemployment, consumer prices, and the
federal funds rate will be in ranges implied by the average size of projection
errors made in the past. For more information, see David Reifschneider and Peter
Tulip (2017), “Gauging the Uncertainty of the Economic Outlook Using Historical
Forecasting Errors: The Federal Reserve’s Approach,” Finance and Economics
Discussion Series 2017-020 (Washington: Board of Governors of the Federal
Reserve System, February), available at www.federalreserve.gov/econresdata/
feds/2017/files/2017020pap.pdf.
1
Definitions of variables are in the general note to table 1.
2
Measure is the overall consumer price index, the price measure that has been
most widely used in government and private economic forecasts. Projections
are percent changes on a fourth quarter to fourth quarter basis.
3
For Federal Reserve staff forecasts, measure is the federal funds rate. For other
forecasts, measure is the rate on 3-month Treasury bills. Projection errors are
calculated using average levels, in percent, in the fourth quarter.

their assumptions for the Committee’s reinvestment
policy; all of those who did so anticipated that the
Committee would begin its program of balance sheet
normalization, described in the Addendum to the
Policy Normalization Principles and Plans released in
June, before the end of this year.

Uncertainty and Risks
The future outcomes of economic variables are subject to considerable uncertainty. In assessing the path
of monetary policy that, in their view, is likely to be
most appropriate, FOMC participants take account
of the range of possible economic outcomes, the likelihood of those outcomes, and the potential benefits
and costs should they occur. Table 2 provides one
measure of forecast uncertainty for the change in real
GDP, the unemployment rate, and total consumer
price inflation—the root mean squared error
(RMSE) from forecast errors of various private and
government projections made over the past 20 years.
This measure of forecast uncertainty is incorporated
graphically in the top panels of figures 4.A, 4.B, and
4.C, which display “fan charts” plotting the median
SEP projections for the three variables surrounded by
symmetric confidence intervals derived from the
RMSEs presented in table 2. The width of the confidence interval for each variable at a given point is a
measure of forecast uncertainty at that horizon. If
the degree of uncertainty attending these projections

249

is similar to the typical magnitude of past forecast
errors and the risks around the projections are
broadly balanced, future outcomes of these variables
would have about a 70 percent probability of occurring within these confidence intervals. For all three
variables, this measure of forecast uncertainty is substantial and generally increases as the forecast horizon lengthens.
FOMC participants may judge that the width of the
historical fan charts shown in figures 4.A through
4.C does not adequately capture their current assessments of the degree of uncertainty that surrounds
their economic projections. Participants’ assessments
of the current level of uncertainty surrounding their
economic projections are shown in the bottom-left
panels of figures 4.A, 4.B, and 4.C. All or nearly all
participants viewed the degree of uncertainty
attached to their economic projections about GDP
growth, the unemployment rate, and inflation as
broadly similar to the average of the past 20 years,
and all participants saw the degree of uncertainty as
unchanged from June.11 In their discussion of the
uncertainty attached to their current projections, a
few participants judged that near-term uncertainty
for economic activity and inflation had increased as a
result of the effects of Hurricanes Harvey and Irma
but commented that their assessment of mediumterm prospects was unaffected.
The fan charts, which are constructed so as to be
symmetric around the median projections, also may
not fully reflect participants’ current assessments of
the balance of risks to their economic projections.
Participants’ assessments of the balance of risks to
their economic projections are shown in the bottomright panels of figures 4.A, 4.B, and 4.C. As in June,
most participants judged the risks to their projections
of real GDP growth, the unemployment rate, headline inflation, and core inflation as broadly balanced—in other words, as broadly consistent with a
symmetric fan chart. One fewer participant than in
June judged the risks to GDP growth as weighted to
the upside, and one fewer participant judged the risks
to the unemployment rate as weighted to the downside. Also, one fewer participant judged the risks to
inflation to be weighted to the upside, and one more
viewed the risks as weighted to the downside.

11

At the end of this summary, the box “Forecast Uncertainty”
discusses the sources and interpretation of uncertainty in the
economic forecasts and explains the approach used to assess the
uncertainty and risks attending the participants’ projections.

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104th Annual Report | 2017

Figure 4.A. Uncertainty and risks in projections of GDP growth

Median projection and confidence interval based on historical forecast errors

Percent

Change in real GDP
Median of projections
70% confidence interval

4

3

2

1

Actual

0

2012

2013

2014

2015

2016

2017

2018

2019

2020

FOMC participants’ assessments of uncertainty and risks around their economic projections
Number of participants

Uncertainty about GDP growth

Risks to GDP growth

September projections
June projections

Lower

18
16
14
12
10
8
6
4
2

Broadly
similar

Number of participants

Higher

September projections
June projections

Weighted to
downside

18
16
14
12
10
8
6
4
2

Broadly
balanced

Weighted to
upside

Note: The blue and red lines in the top panel show actual values and median projected values, respectively, of the percent change in real gross domestic product (GDP) from the
fourth quarter of the previous year to the fourth quarter of the year indicated. The confidence interval around the median projected values is assumed to be symmetric and is
based on root mean squared errors of various private and government forecasts made over the previous 20 years; more information about these data is available in table 2.
Because current conditions may differ from those that prevailed, on average, over the previous 20 years, the width and shape of the confidence interval estimated on the basis
of the historical forecast errors may not reflect FOMC participants’ current assessments of the uncertainty and risks around their projections; these current assessments are
summarized in the lower panels. Generally speaking, participants who judge the uncertainty about their projections as “broadly similar” to the average levels of the past
20 years would view the width of the confidence interval shown in the historical fan chart as largely consistent with their assessments of the uncertainty about their projections.
Likewise, participants who judge the risks to their projections as “broadly balanced” would view the confidence interval around their projections as approximately symmetric.
For definitions of uncertainty and risks in economic projections, see the box “Forecast Uncertainty.”

Minutes of Federal Open Market Committee Meetings | September

251

Figure 4.B. Uncertainty and risks in projections of the unemployment rate

Median projection and confidence interval based on historical forecast errors

Percent

Unemployment rate

10

Median of projections
70% confidence interval

9
8
7
6

Actual

5
4
3
2
1

2012

2013

2014

2015

2016

2017

2018

2019

2020

FOMC participants’ assessments of uncertainty and risks around their economic projections
Number of participants

Uncertainty about the unemployment rate

Risks to the unemployment rate

September projections
June projections

Lower

18
16
14
12
10
8
6
4
2

Broadly
similar

Number of participants

Higher

September projections
June projections

Weighted to
downside

18
16
14
12
10
8
6
4
2

Broadly
balanced

Weighted to
upside

Note: The blue and red lines in the top panel show actual values and median projected values, respectively, of the average civilian unemployment rate in the fourth quarter of
the year indicated. The confidence interval around the median projected values is assumed to be symmetric and is based on root mean squared errors of various private and
government forecasts made over the previous 20 years; more information about these data is available in table 2. Because current conditions may differ from those that prevailed, on average, over the previous 20 years, the width and shape of the confidence interval estimated on the basis of the historical forecast errors may not reflect FOMC participants’ current assessments of the uncertainty and risks around their projections; these current assessments are summarized in the lower panels. Generally speaking, participants who judge the uncertainty about their projections as “broadly similar” to the average levels of the past 20 years would view the width of the confidence interval shown in
the historical fan chart as largely consistent with their assessments of the uncertainty about their projections. Likewise, participants who judge the risks to their projections as
“broadly balanced” would view the confidence interval around their projections as approximately symmetric. For definitions of uncertainty and risks in economic projections, see
the box “Forecast Uncertainty.”

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104th Annual Report | 2017

Figure 4.C. Uncertainty and risks in projections of PCE inflation

Median projection and confidence interval based on historical forecast errors

Percent

PCE inflation
Median of projections
70% confidence interval
3

2

1
Actual
0

2012

2013

2014

2015

2016

2017

2018

2019

2020

FOMC participants’ assessments of uncertainty and risks around their economic projections
Number of participants

Uncertainty about PCE inflation

Risks to PCE inflation

September projections
June projections

Lower

18
16
14
12
10
8
6
4
2

Broadly
similar

Number of participants

Higher

September projections
June projections

Weighted to
downside

Broadly
balanced

Number of participants

Uncertainty about core PCE inflation
18
16
14
12
10
8
6
4
2

Broadly
similar

Weighted to
upside
Number of participants

Risks to core PCE inflation

September projections
June projections

Lower

18
16
14
12
10
8
6
4
2

Higher

September projections
June projections

Weighted to
downside

Broadly
balanced

18
16
14
12
10
8
6
4
2

Weighted to
upside

Note: The blue and red lines in the top panel show actual values and median projected values, respectively, of the percent change in the price index for personal consumption
expenditures (PCE) from the fourth quarter of the previous year to the fourth quarter of the year indicated. The confidence interval around the median projected values is
assumed to be symmetric and is based on root mean squared errors of various private and government forecasts made over the previous 20 years; more information about
these data is available in table 2. Because current conditions may differ from those that prevailed, on average, over the previous 20 years, the width and shape of the confidence interval estimated on the basis of the historical forecast errors may not reflect FOMC participants’ current assessments of the uncertainty and risks around their projections; these current assessments are summarized in the lower panels. Generally speaking, participants who judge the uncertainty about their projections as “broadly similar” to
the average levels of the past 20 years would view the width of the confidence interval shown in the historical fan chart as largely consistent with their assessments of the
uncertainty about their projections. Likewise, participants who judge the risks to their projections as “broadly balanced” would view the confidence interval around their projections as approximately symmetric. For definitions of uncertainty and risks in economic projections, see the box “Forecast Uncertainty.”

Minutes of Federal Open Market Committee Meetings | September

Participants’ assessments of the future path of the
federal funds rate consistent with appropriate policy
are also subject to considerable uncertainty, reflecting
in part uncertainty about the evolution of GDP
growth, the unemployment rate, and inflation over
time. The final line in table 2 shows the RMSEs for
forecasts of short-term interest rates. These RMSEs
are not strictly consistent with the SEP projections
for the federal funds rate, in part because the SEP
projections are not forecasts of the most likely outcomes but rather reflect each participant’s individual
assessment of appropriate monetary policy. However,
the associated confidence intervals provide a sense of

253

the likely uncertainty around the future path of the
federal funds rate generated by the uncertainty about
the macroeconomic variables and additional adjustments to monetary policy that may be appropriate to
offset the effects of shocks to the economy. To illustrate the uncertainty regarding the appropriate path
for monetary policy, figure 5 shows a fan chart plotting the median SEP projections for the federal funds
rate surrounded by confidence intervals derived from
the results presented in table 2. As with the macroeconomic variables, forecast uncertainty is substantial and increases at longer horizons.

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104th Annual Report | 2017

Figure 5. Uncertainty in projections of the federal funds rate

Median projection and confidence interval based on historical forecast errors

Percent

Federal funds rate
Midpoint of target range
Median of projections
70% confidence interval*

6
5
4
3
2
1

Actual

0

2012

2013

2014

2015

2016

2017

2018

2019

2020

Note: The blue and red lines are based on actual values and median projected values, respectively, of the Committee’s target for the federal funds rate at the end of the year
indicated. The actual values are the midpoint of the target range; the median projected values are based on either the midpoint of the target range or the target level. The confidence interval around the median projected values is based on root mean squared errors of various private and government forecasts made over the previous 20 years. The
confidence interval is not strictly consistent with the projections for the federal funds rate, primarily because these projections are not forecasts of the likeliest outcomes for the
federal funds rate, but rather projections of participants’ individual assessments of appropriate monetary policy. Still, historical forecast errors provide a broad sense of the
uncertainty around the future path of the federal funds rate generated by the uncertainty about the macroeconomic variables as well as additional adjustments to monetary
policy that may be appropriate to offset the effects of shocks to the economy.
The confidence interval is assumed to be symmetric except when it is truncated at zero—the bottom of the lowest target range for the federal funds rate that has been adopted
in the past by the Committee. This truncation would not be intended to indicate the likelihood of the use of negative interest rates to provide additional monetary policy accommodation if doing so was judged appropriate. In such situations, the Committee could also employ other tools, including forward guidance and large-scale asset purchases, to
provide additional accommodation. Because current conditions may differ from those that prevailed, on average, over the previous 20 years, the width and shape of the confidence interval estimated on the basis of the historical forecast errors may not reflect FOMC participants’ current assessments of the uncertainty and risks around their
projections.
* The confidence interval is derived from forecasts of the average level of short-term interest rates in the fourth quarter of the year indicated; more information about these data
is available in table 2. The shaded area encompasses less than a 70 percent confidence interval if the confidence interval has been truncated at zero.

Minutes of Federal Open Market Committee Meetings | September

255

Forecast Uncertainty
The economic projections provided by the members
of the Board of Governors and the presidents of the
Federal Reserve Banks inform discussions of monetary policy among policymakers and can aid public
understanding of the basis for policy actions. Considerable uncertainty attends these projections, however. The economic and statistical models and relationships used to help produce economic forecasts
are necessarily imperfect descriptions of the real
world, and the future path of the economy can be
affected by myriad unforeseen developments and
events. Thus, in setting the stance of monetary
policy, participants consider not only what appears to
be the most likely economic outcome as embodied in
their projections, but also the range of alternative
possibilities, the likelihood of their occurring, and the
potential costs to the economy should they occur.
Table 2 summarizes the average historical accuracy
of a range of forecasts, including those reported in
past Monetary Policy Reports and those prepared by
the Federal Reserve Board’s staff in advance of
meetings of the Federal Open Market Committee
(FOMC). The projection error ranges shown in the
table illustrate the considerable uncertainty associated with economic forecasts. For example, suppose
a participant projects that real gross domestic product (GDP) and total consumer prices will rise steadily
at annual rates of, respectively, 3 percent and 2 percent. If the uncertainty attending those projections is
similar to that experienced in the past and the risks
around the projections are broadly balanced, the
numbers reported in table 2 would imply a probability
of about 70 percent that actual GDP would expand
within a range of 1.8 to 4.2 percent in the current
year, 1.1 to 4.9 percent in the second year, 1.0 to
5.0 percent in the third year, and 0.9 to 5.1 percent in
the fourth year. The corresponding 70 percent confidence intervals for overall inflation would be 1.2 to
2.8 percent in the current year, 0.9 to 3.1 percent in
the second year, 0.8 to 3.2 percent in the third year,
and 0.9 to 3.1 percent in the fourth year. Figures 4.A
through 4.C illustrate these confidence bounds in
“fan charts” that are symmetric and centered on the
medians of FOMC participants’ projections for GDP
growth, the unemployment rate, and inflation. However, in some instances, the risks around the projections may not be symmetric. In particular, the unemployment rate cannot be negative; furthermore, the
risks around a particular projection might be tilted to
either the upside or the downside, in which case the
corresponding fan chart would be asymmetrically
positioned around the median projection.
Because current conditions may differ from those
that prevailed, on average, over history, participants
provide judgments as to whether the uncertainty
attached to their projections of each economic variable is greater than, smaller than, or broadly similar
to typical levels of forecast uncertainty seen in the
past 20 years, as presented in table 2 and reflected
in the widths of the confidence intervals shown in the
top panels of figures 4.A through 4.C. Participants’
current assessments of the uncertainty surrounding

their projections are summarized in the bottom-left
panels of those figures. Participants also provide
judgments as to whether the risks to their projections
are weighted to the upside, are weighted to the
downside, or are broadly balanced. That is, while the
symmetric historical fan charts shown in the top panels of figures 4.A through 4.C imply that the risks to
participants’ projections are balanced, participants
may judge that there is a greater risk that a given
variable will be above rather than below their projections. These judgments are summarized in the lowerright panels of figures 4.A through 4.C.
As with real activity and inflation, the outlook for the
future path of the federal funds rate is subject to considerable uncertainty. This uncertainty arises primarily
because each participant’s assessment of the appropriate stance of monetary policy depends importantly
on the evolution of real activity and inflation over
time. If economic conditions evolve in an unexpected
manner, then assessments of the appropriate setting
of the federal funds rate would change from that
point forward. The final line in table 2 shows the error
ranges for forecasts of short-term interest rates. They
suggest that the historical confidence intervals associated with projections of the federal funds rate are
quite wide. It should be noted, however, that these
confidence intervals are not strictly consistent with
the projections for the federal funds rate, as these
projections are not forecasts of the most likely quarterly outcomes but rather are projections of participants’ individual assessments of appropriate monetary policy and are on an end-of-year basis. However, the forecast errors should provide a sense of
the uncertainty around the future path of the federal
funds rate generated by the uncertainty about the
macroeconomic variables as well as additional
adjustments to monetary policy that would be appropriate to offset the effects of shocks to the economy.
If at some point in the future the confidence interval
around the federal funds rate were to extend below
zero, it would be truncated at zero for purposes of
the fan chart shown in figure 5; zero is the bottom of
the lowest target range for the federal funds rate that
has been adopted by the Committee in the past. This
approach to the construction of the federal funds rate
fan chart would be merely a convention; it would not
have any implications for possible future policy decisions regarding the use of negative interest rates to
provide additional monetary policy accommodation if
doing so were appropriate. In such situations, the
Committee could also employ other tools, including
forward guidance and asset purchases, to provide
additional accommodation.
While figures 4.A through 4.C provide information on
the uncertainty around the economic projections, figure 1 provides information on the range of views
across FOMC participants. A comparison of figure 1
with figures 4.A through 4.C shows that the dispersion of the projections across participants is much
smaller than the average forecast errors over the past
20 years.

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104th Annual Report | 2017

Meeting Held
on October 31–November 1, 2017
A joint meeting of the Federal Open Market Committee and the Board of Governors was held in the
offices of the Board of Governors of the Federal
Reserve System in Washington, D.C., on Tuesday,
October 31, 2017, at 1:30 p.m. and continued on
Wednesday, November 1, 2017, at 9:00 a.m.1

Steven B. Kamin
Economist
Thomas Laubach
Economist
David W. Wilcox
Economist

Present

James A. Clouse, Thomas A. Connors,
Daniel G. Sullivan, William Wascher,
Beth Anne Wilson, and Mark L. J. Wright
Associate Economists

Janet L. Yellen
Chair

Simon Potter
Manager, System Open Market Account

William C. Dudley
Vice Chairman

Lorie K. Logan
Deputy Manager, System Open Market Account

Lael Brainard
Charles L. Evans
Patrick Harker
Robert S. Kaplan
Neel Kashkari
Jerome H. Powell
Randal K. Quarles
Raphael W. Bostic, Loretta J. Mester,
Mark L. Mullinix, and John C. Williams
Alternate Members of the Federal Open Market
Committee
James Bullard, Esther L. George, and Eric Rosengren
Presidents of the Federal Reserve Banks of St. Louis,
Kansas City, and Boston, respectively
Brian F. Madigan
Secretary
Matthew M. Luecke
Deputy Secretary
David W. Skidmore
Assistant Secretary
Michelle A. Smith
Assistant Secretary
Mark E. Van Der Weide
General Counsel

Ann E. Misback
Secretary, Office of the Secretary,
Board of Governors
Matthew J. Eichner2
Director, Division of Reserve Bank Operations and
Payment Systems, Board of Governors
Michael S. Gibson
Director, Division of Supervision and Regulation,
Board of Governors
Andreas Lehnert
Director, Division of Financial Stability,
Board of Governors
Daniel M. Covitz
Deputy Director, Division of Research and Statistics,
Board of Governors
Rochelle M. Edge and Stephen A. Meyer
Deputy Directors, Division of Monetary Affairs,
Board of Governors
Trevor A. Reeve
Senior Special Adviser to the Chair, Office of Board
Members, Board of Governors
John M. Roberts
Special Adviser to the Board, Office of Board
Members, Board of Governors
Linda Robertson
Assistant to the Board, Office of Board Members,
Board of Governors

Michael Held
Deputy General Counsel

David E. Lebow
Senior Associate Director, Division of Research and
Statistics, Board of Governors

1

2

The Federal Open Market Committee is referenced as the
“FOMC” and the “Committee” in these minutes.

Attended through the discussion of developments in financial
markets and open market operations.

Minutes of Federal Open Market Committee Meetings | October–November

Antulio N. Bomfim and Ellen E. Meade
Senior Advisers, Division of Monetary Affairs,
Board of Governors
Shaghil Ahmed and Joseph W. Gruber
Associate Directors, Division of International
Finance, Board of Governors
David López-Salido
Associate Director, Division of Monetary Affairs,
Board of Governors
Stephanie R. Aaronson, Burcu Duygan-Bump,
and Glenn Follette
Assistant Directors, Division of Research and
Statistics, Board of Governors
Christopher J. Gust
Assistant Director, Division of Monetary Affairs,
Board of Governors
Penelope A. Beattie3
Assistant to the Secretary, Office of the Secretary,
Board of Governors
David H. Small
Project Manager, Division of Monetary Affairs,
Board of Governors
Youngsuk Yook
Principal Economist, Division of Research and
Statistics, Board of Governors
Jonathan E. Goldberg
Senior Economist, Division of Monetary Affairs,
Board of Governors
Randall A. Williams
Senior Information Manager, Division of Monetary
Affairs, Board of Governors
James Narron
First Vice President, Federal Reserve Bank of
Philadelphia
David Altig, Kartik B. Athreya, Mary Daly, Jeff
Fuhrer, Ellis W. Tallman, and Christopher J. Waller
Executive Vice Presidents, Federal Reserve Banks of
Atlanta, Richmond, San Francisco, Boston,
Cleveland, and St. Louis, respectively
Marc Giannoni and Paolo A. Pesenti
Senior Vice Presidents, Federal Reserve Banks of
Dallas and New York, respectively
Sarah K. Bell, Satyajit Chatterjee,
and Jonathan L. Willis
Vice Presidents, Federal Reserve Banks of New York,
Philadelphia, and Kansas City, respectively
3

Attended Tuesday session only.

257

Selection of Committee Officer
By unanimous vote, the Committee selected James A.
Clouse to serve as secretary, effective on November 26, 2017. This selection is effective until the selection of a successor at the Committee’s first regularly
scheduled meeting in 2018.

Developments in Financial Markets and
Open Market Operations
The manager of the System Open Market Account
(SOMA) reported on developments in domestic and
foreign financial markets since the September FOMC
meeting. Broad equity price indexes extended earlier
increases, yields on longer-term Treasury securities
rose, yield spreads on corporate bonds declined, and
the foreign exchange value of the dollar increased.
Money market interest rates suggested that market
participants did not anticipate a change in the Committee’s target range for the federal funds rate at this
meeting but saw a high probability of a 25 basis
point increase at the Committee’s December meeting.
The deputy manager followed with a briefing on
money market developments and open market operations. Over the intermeeting period, federal funds
continued to trade near the center of the FOMC’s
target range except on quarter-end. Implementation
of the Committee’s balance sheet normalization program, which began in October, had proceeded
smoothly so far. Take-up at the System’s overnight
reverse repurchase agreement facility averaged
slightly more than in the previous period. A rebalancing of the SOMA’s holdings of euro reserves, which
reflected instructions provided by the Foreign Currency Subcommittee in September, was completed in
October.
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
during the intermeeting period.

Staff Review of the Economic Situation
The information reviewed for the October 31–
November 1 meeting indicated that labor market
conditions generally continued to strengthen and that
real gross domestic product (GDP) expanded at a
solid pace in the third quarter despite hurricanerelated disruptions. Although the effects of the recent
hurricanes led to a reported decline in payroll

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employment in September, the unemployment rate
decreased further. Retail gasoline prices jumped in
the aftermath of the hurricanes, but total consumer
price inflation, as measured by the 12-month percentage change in the price index for personal consumption expenditures (PCE), remained below 2 percent in
September and was lower than early in the year.
Survey-based measures of longer-run inflation expectations were little changed on balance.
Total nonfarm payroll employment was reported to
have decreased in September, consistent with a substantial increase in the number of people who
reported themselves as being absent from work due
to bad weather and with payroll declines in the
hurricane-affected states of Texas and Florida. However, the national unemployment rate moved down to
4.2 percent in September, and the labor force participation rate rose. The unemployment rates for African
Americans, for Hispanics, and for whites were lower
in September than around the start of the year, while
the rate for Asians was roughly flat this year; the
unemployment rates for each of these groups were
close to the levels seen just before the most recent
recession. The overall share of workers employed
part time for economic reasons edged down in September, and the rates of private-sector job openings
and quits were unchanged in August. The four-week
moving average of initial claims for unemployment
insurance benefits moved back down to a low level
by late October after rising in September following
the hurricanes. Recent readings showed a modest
pickup in growth of labor compensation. The
employment cost index for private workers increased
2½ percent over the 12 months ending in September,
a little faster than in the 12-month period ending a
year earlier. Increases in average hourly earnings for
all employees stepped up to a rate of almost 3 percent
over the 12 months ending in September; however, a
portion of that acceleration possibly reflected a
hurricane-related reduction in the number of lowerwage workers reported as having been paid during
the reference week in September.
Total industrial production (IP) increased somewhat
in September, reflecting output gains in manufacturing, in mining, and in utilities; the effects of the hurricanes appeared to hold IP down less in September
than in August. Automakers’ schedules indicated that
light motor vehicle assemblies would increase in the
fourth quarter. Broader indicators of manufacturing
production, such as the new orders indexes from
national and regional manufacturing surveys, pointed
to an expansion in factory output in the near term.

Real PCE growth slowed in the third quarter, likely
reflecting in part temporary effects of the hurricanes.
Recent readings on key factors that influence consumer spending—including gains in real disposable
personal income and households’ net worth—remained supportive of solid increases in real PCE in
the near term. Consumer sentiment in October, as
measured by the University of Michigan Surveys of
Consumers, was at its highest level since before the
most recent recession.
Real residential investment declined further in the
third quarter. Starts of both new single-family homes
and multifamily units moved down in September.
However, building permit issuance for new singlefamily homes—which tends to be a good indicator of
the underlying trend in construction of such
homes—edged up in September. Sales of new homes
increased notably over the two months ending in September, although sales of existing homes decreased
somewhat over that period.
Real private expenditures for business equipment and
intellectual property continued to rise at a brisk pace
in the third quarter. Nominal orders and shipments
of nondefense capital goods excluding aircraft rose
further over the two months ending in September,
and readings on business sentiment remained upbeat.
In contrast, real investment spending for nonresidential structures declined in the third quarter, as a further increase in the drilling and mining sector was
more than offset by a decline in other sectors, particularly manufacturing.
Total real government purchases were about flat in
the third quarter. Real federal purchases rose somewhat, mostly reflecting increased defense expenditures. In contrast, real purchases by state and local
governments declined a little, as construction spending by these governments fell.
The nominal U.S. international trade deficit narrowed in August, as exports rose and imports fell.
Export growth was driven by higher exports of capital goods and consumer goods, while the import
decline was led by lower imports of industrial supplies and capital goods. Advance estimates for September suggested that goods imports grew more than
exports, pointing to a widening of the monthly trade
deficit. Despite this widening, net exports were
reported to have contributed positively to real GDP
growth for the third quarter as a whole.

Minutes of Federal Open Market Committee Meetings | October–November

Total U.S. consumer prices, as measured by the PCE
price index, increased a bit more than 1½ percent
over the 12 months ending in September. Core PCE
price inflation, which excludes changes in consumer
food and energy prices, was about 1¼ percent over
that same period. Retail gasoline prices moved up
sharply following the hurricanes and put upward
pressure on total PCE prices in August and September; gasoline prices subsequently moved down somewhat through late October. The consumer price index
(CPI) rose 2¼ percent over the 12 months ending in
September, while core CPI inflation was 1¾ percent.
Recent readings on survey-based measures of longerrun inflation expectations—including those from the
Michigan survey, the Blue Chip Economic Indicators, and the Desk’s Survey of Primary Dealers and
Survey of Market Participants—were little changed
on balance.
Foreign economic activity continued to expand at a
solid pace. Incoming data suggested that in most
advanced foreign economies (AFEs), economic
growth slowed in the third quarter but remained
firm. Economic activity in the emerging market
economies (EMEs) also continued to grow briskly for
the most part, especially in Asia. The Mexican
economy, however, contracted in the third quarter, in
part because hurricanes and earthquakes disrupted
economic activity. Headline inflation in the AFEs
generally remained subdued, but U.K. inflation
stayed above the Bank of England’s 2 percent target.
Low inflation persisted in most EMEs as well,
although rising food prices continued to put upward
pressure on inflation in Mexico.

Staff Review of the Financial Situation
Movements in domestic financial asset prices over
the intermeeting period reflected FOMC communications that were read as slightly less accommodative
than expected, economic data releases that were generally better than anticipated, and market perceptions that U.S. tax reform was becoming more likely.
On net, Treasury yields increased modestly, U.S.
equity prices moved up, and the dollar appreciated.
There was no discernible reaction in financial markets to the widely anticipated announcement of the
FOMC’s change to its balance sheet policy. Meanwhile, domestic financing conditions generally
remained accommodative. Corporate bond spreads
narrowed modestly, and corporations continued to
tap credit markets at a solid pace. Credit also
remained readily available to households, except for
higher-risk borrowers in some markets.

259

FOMC communications over the intermeeting
period were reportedly viewed by investors as slightly
less accommodative than expected. The Committee’s
decisions at the September FOMC meeting to leave
the target range for the federal funds rate unchanged
and to announce the start of its balance sheet normalization program in October had been widely
anticipated by the public. However, market participants noted that the medians of projections for the
federal funds rate in the September Summary of
Economic Projections (SEP) were unchanged,
whereas some investors had expected slight downward revisions. In addition, market commentaries
observed that, despite low inflation readings in recent
months, the characterization of the inflation outlook
in the September policy statement was little changed
and the SEP showed only modest downward revisions to FOMC participants’ near-term inflation projections. Communications by FOMC participants
were also seen as reinforcing expectations for continued gradual removal of policy accommodation. The
probability of an increase in the target range for the
federal funds rate occurring at the October–
November meeting, as implied by quotes on federal
funds futures contracts, remained essentially zero; the
probability of an increase at the December meeting
rose to about 85 percent by the end of the intermeeting period. Levels of the federal funds rate at the end
of 2018 and 2019 implied by overnight index swap
rates moved up moderately.
The nominal Treasury yield curve shifted up and flattened somewhat over the intermeeting period. Yields
increased following the September FOMC meeting
and in response to news regarding proposals for tax
reform. They also rose, on net, following domestic
economic data releases, which generally came in
above investors’ expectations. Option-adjusted
spreads on current-coupon mortgage-backed securities (MBS) over Treasury yields were little changed.
The FOMC’s September announcement that it
would begin implementing in October its plan for
normalizing the Federal Reserve’s balance sheet was
widely anticipated and appeared to have had little
effect on either Treasury yields or MBS spreads.
Near-term measures of option-implied volatility on
10-year swap rates remained near historically low levels. Measures of inflation compensation based on
Treasury Inflation-Protected Securities declined
somewhat following the slightly lower-than-expected
September CPI data but were little changed on net.
Broad equity price indexes rose notably, reportedly
reflecting in part investors’ perceptions that tax

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104th Annual Report | 2017

reform was becoming more likely. One-month-ahead
option-implied volatility on the S&P 500 index—the
VIX—remained near historically low levels. Spreads
of yields on both investment- and speculative-grade
corporate bonds over comparable-maturity Treasury
securities narrowed modestly.
Conditions in short-term funding markets remained
stable over the intermeeting period. The effective federal funds rate held steady, and rates and volumes in
other unsecured and secured overnight and term
funding markets continued to be stable aside from
quarter-end. At the end of September, changes in
money market rates and volumes were short lived
and in line with previous quarter-ends.
Financing conditions for large nonfinancial firms
remained accommodative. In September, the pace of
gross equity issuance was about in line with that
observed in recent months, gross issuance of corporate bonds dipped somewhat but stayed high by historical standards, and originations of institutional
leveraged loans that raised new funds were robust.
The credit performance of bonds issued by, and
loans extended to, nonfinancial corporations also
remained strong over the intermeeting period. Meanwhile, growth of banks’ commercial and industrial
(C&I) loans continued to be sluggish, although it
picked up a bit in the third quarter. Responses to the
October Senior Loan Officer Opinion Survey on
Bank Lending Practices (SLOOS) suggested that
lackluster demand among banks’ business customers
was a key factor in this subdued growth. The survey
also reported a notable increase in the share of banks
that narrowed loan spreads for C&I loans over the
previous three months, with many respondents citing
more aggressive competition from other bank or
nonbank lenders as an important reason for
doing so.
Financing flows for commercial real estate (CRE)
were more robust in the commercial mortgagebacked securities (CMBS) market than from banks in
the third quarter. Issuance of CMBS continued to be
robust and in line with last year’s pace. Spreads on
lower-rated CMBS over Treasury securities widened
slightly over the intermeeting period but remained
near the lower end of the range seen since the financial crisis. Delinquency rates on loans in CMBS pools
continued to decline in September. Meanwhile, CRE
loan growth at banks slowed, especially for nonfarm
nonresidential loans. In the October SLOOS, banks
reported that demand for CRE loans weakened, on

net, over the third quarter and that lending standards
continued to be somewhat tight.
Credit conditions in the residential mortgage market
stayed accommodative in the third quarter for most
borrowers. However, credit standards continued to be
tight for borrowers with low credit scores or hard-todocument incomes. The October SLOOS suggested
that the recent slowdown in mortgage originations
for home purchases was partly attributable to weaker
demand.
Consumer credit continued to expand at a moderate
pace in the third quarter. However, the October
SLOOS indicated that banks continued to tighten
their credit policies for auto and credit card loans.
Credit bureau data on loan originations and credit
limits suggested that this tightening was most pronounced in the subprime segment of the market.
The broad index of the foreign exchange value of the
dollar rose nearly 3 percent over the intermeeting
period amid the rise in U.S. interest rates, market
expectations that U.S. tax reform was becoming more
likely, and foreign central bank actions and communications. The Canadian dollar depreciated significantly over the period and Canadian yields declined
as the Bank of Canada left its policy rate unchanged
and comments by the bank’s governor were interpreted as more accommodative than expected. The
euro also depreciated, despite the European Central
Bank’s (ECB’s) announcement of a step-down in
asset purchases next year, reflecting slight declines in
investors’ expectations for ECB policy rates and in
German long-term sovereign yields. EME currencies
generally depreciated as well, most notably the Turkish lira and the Mexican peso, the latter of which was
held down in part by uncertainty about negotiations
on the North American Free Trade Agreement. Most
foreign equity indexes increased. In Japan, equity
indexes rose notably in advance of parliamentary
elections that resulted in a strong victory for Prime
Minister Abe’s ruling coalition, a development seen
by market participants as signaling a continuation of
stimulative economic policies.
The staff provided its latest report on vulnerabilities
of the U.S. financial system. The staff continued to
judge that the overall vulnerabilities were moderate:
Asset valuation pressures across markets were judged
to have increased slightly, on balance, since the previous assessment in July and to have remained elevated;
leverage in the nonfinancial sector stayed moderate;

Minutes of Federal Open Market Committee Meetings | October–November

and, in the financial sector, leverage and vulnerabilities from maturity and liquidity transformation continued to be low. In addition, the staff assessed overall vulnerabilities to foreign financial stability as
moderate. The staff highlighted specific vulnerabilities in some foreign economies, including—depending on the country—still-weak banks, heavy indebtedness in the corporate or household sector or both,
rising property prices, overhangs of sovereign debt,
and significant susceptibility to various political
developments.

Staff Economic Outlook
The U.S. economic projection prepared by the staff
for this FOMC meeting was broadly similar to the
previous forecast. Real GDP was expected to rise at a
solid pace in the fourth quarter of this year, boosted
in part by a rebound in spending and production
after the negative effects of the hurricanes in the
third quarter. Payroll employment was also expected
to rebound during the fourth quarter. Beyond 2017,
the forecast for real GDP growth was essentially
unrevised. In particular, the staff continued to project that real GDP would expand at a modestly faster
pace than potential output through 2019. The unemployment rate was projected to decline gradually over
the next couple of years and to continue running
below the staff’s estimate of its longer-run natural
rate over this period.
The staff’s forecast for total PCE price inflation was
little changed for 2017, as a somewhat higher forecast
for consumer energy prices was mostly offset by a
slightly lower forecast for core PCE prices. Although
total PCE price inflation was forecast to be about the
same in 2017 as it was last year, core PCE price inflation was anticipated to be a little lower than in 2016,
and consumer food and energy price inflation was
expected to be a little higher. Total PCE price inflation was projected to pick up in 2018, as most of the
softness in core PCE price inflation this year was
expected to be transitory. However, the staff’s forecasts for core inflation and, thus, for total inflation
were revised down slightly for next year, reflecting the
judgment that a bit of the unexplained weakness in
core inflation this year may carry over into next year.
Beyond 2018, the inflation forecast was unchanged
from the previous projection. The staff continued to
project that inflation would reach the Committee’s
2 percent objective in 2019.
The staff viewed the uncertainty around its projections for real GDP growth, the unemployment rate,

261

and inflation as similar to the average of the past
20 years. On the one hand, many indicators of uncertainty about the macroeconomic outlook continued
to be subdued; on the other hand, considerable
uncertainty remained about a number of federal government policies. The staff saw the risks to the forecasts for real GDP growth and the unemployment
rate as balanced. The risks to the projection for inflation also were seen as balanced. Downside risks
included the possibilities that longer-term inflation
expectations may have edged lower or that the run of
soft readings on core inflation this year could prove
to be more persistent than the staff expected. These
downside risks were seen as essentially counterbalanced by the upside risk that inflation could increase
more than expected in an economy that was projected to move further above its longer-run potential.

Participants’ Views on Current Conditions
and the Economic Outlook
In their discussion of the economic situation and the
outlook, meeting participants agreed that information received since the FOMC met in September indicated that the labor market had continued to
strengthen and that economic activity had been rising
at a solid rate despite hurricane-related disruptions.
Although the hurricanes depressed payroll employment in September, the unemployment rate, which
was less affected by the storms, declined further.
Household spending had been expanding at a moderate rate, and growth in business fixed investment had
picked up in recent quarters. Gasoline prices rose in
the aftermath of the hurricanes, boosting overall
inflation in September; however, inflation for items
other than food and energy remained soft. On a
12-month basis, both inflation measures had declined
this year and were running below 2 percent. Marketbased measures of inflation compensation remained
low; survey-based measures of longer-term inflation
expectations were little changed, on balance.
Participants acknowledged that hurricane-related disruptions and rebuilding would continue to affect economic activity in the near term, and they noted that,
in October, wildfires in California had displaced
many households. Past experience, however, suggested that the economic effects of the hurricanes
and other natural disasters would be mostly temporary and unlikely to materially alter the course of the
national economy over the medium term. Participants saw the incoming information on spending and
the labor market as consistent with continued abovetrend economic growth and a further strengthening

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104th Annual Report | 2017

in labor market conditions, although the hurricanes,
in particular, made it more difficult than usual to
interpret some of this information. They continued
to expect that, with gradual adjustments in the stance
of monetary policy, economic activity would expand
at a moderate pace and labor market conditions
would strengthen somewhat further. Inflation on a
12-month basis was expected to remain somewhat
below 2 percent in the near term but to stabilize
around the Committee’s 2 percent objective over the
medium term. Near-term risks to the economic outlook appeared to be roughly balanced, but participants agreed that it would be important to continue
to monitor inflation developments closely.
Participants expected solid growth in consumer
spending in the near term, supported by ongoing
strength in the labor market, improved household balance sheets, and a high level of consumer sentiment.
Robust gains in consumer spending in September
were viewed as consistent with that outlook. Light
motor vehicle sales had rebounded in September, and
District contacts generally expected sales to remain
strong in the near term, boosted in part by demand to
replace vehicles destroyed by the hurricanes.
Reports on business spending from District contacts
were generally upbeat. Participants anticipated
appreciable increases in business fixed investment.
Improved demand from abroad, rising business profits, and the substitution of capital for labor in
response to tightening labor markets were viewed as
factors supporting growth in investment. Several participants reported that business contacts appeared to
be more confident about the economic outlook and
thus more inclined to undertake capital expansion
plans. In that context, it was noted that the expansion in business fixed investment could be given additional impetus if legislation involving tax reductions
was enacted; a few participants judged that the prospects for significant tax cuts had risen recently. Some
firms, especially those operating in industries in
which technological advances were spurring competition, were reportedly planning to expand capacity
through mergers and acquisitions rather than
through investment in new plant and equipment.
Reports from District contacts about both manufacturing and services were generally positive. District
contacts in regions affected by the hurricanes
reported that the disruptions to production and sales
were mostly short lived, including in the energy sector where drilling and refining outages were tempo-

rary. However, some homebuilders were reporting
shortages of certain building materials in the aftermath of the hurricanes. Farm incomes in some
regions were said to remain under downward pressure because of declining crop and livestock prices.
Participants judged that increases in nonfarm payroll
employment, apart from the temporary effects of the
hurricanes, remained well above the pace likely to be
sustainable in the longer run and that labor market
conditions had strengthened further in recent
months. Changes in payrolls, as measured by the
establishment survey, had been temporarily depressed
by the storms in September but were expected to
bounce back in later months. Data from the household survey, which generally were viewed as not
materially affected by the hurricanes, indicated that
the unemployment rate ticked down to 4.2 percent in
September, falling further below participants’ estimates of its longer-run normal level. Participants also
cited other indicators suggesting that labor market
conditions continued to strengthen, including
increases in the labor force participation rates of
both prime-age and all individuals. Reports from
some Districts pointed to difficulty attracting and
retaining labor, but anecdotal information from other
Districts suggested that workers with the requisite
skills remained reasonably available. Many participants judged that the economy was operating at or
above full employment and anticipated that the labor
market would tighten somewhat further in the near
term, as GDP was expected to grow at a pace exceeding that of potential output.
Participants discussed wage developments in light of
the continued strengthening in labor market conditions. A few participants interpreted recent data on
aggregate wage and labor compensation as indicating
some firming in wage growth; a few others, however,
judged wage growth to have been little changed over
the past year. Overall, wage increases were generally
seen as modest. A couple of participants expressed
the view that, when the rate of labor productivity
growth was taken into account, the pace of recent
wage gains was consistent with an economy operating near full employment. Reports from District contacts indicated that some businesses facing tight labor
markets found it more effective to expand their workforces by using a variety of nonpecuniary means,
including offering greater job flexibility and training,
rather than by increasing wages. Other District contacts, however, reported some increased wage pressure as a result of tightening labor market conditions.

Minutes of Federal Open Market Committee Meetings | October–November

Gasoline prices rose in the aftermath of the hurricanes, boosting overall inflation in September. Still,
on a 12-month basis, PCE price inflation in September, at 1.6 percent, remained below the Committee’s
longer-run objective; core PCE price inflation, which
excludes consumer food and energy prices, was only
1.3 percent. Many participants judged that much of
the recent softness in core inflation reflected temporary or idiosyncratic factors and that inflation would
begin to rise once the influence of these factors
began to wane. Most participants continued to think
that the cyclical pressures associated with a tightening labor market were likely to show through to
higher inflation over the medium term.
With core inflation readings continuing to surprise
on the downside, however, many participants
observed that there was some likelihood that inflation might remain below 2 percent for longer than
they currently expected, and they discussed possible
reasons for the recent shortfall. Several participants
pointed to a diminished responsiveness of inflation
to resource utilization, to the possibility that the
degree of labor market tightness was less than currently estimated, or to lags in the response of inflation to greater resource utilization as plausible explanations for the continued soft readings on inflation.
A few noted that secular influences, such as the effect
of technological innovation in disrupting existing
business models, were likely offsetting cyclical
upward pressure on inflation and contributing to
below-target inflation.
In discussing the implications of these developments,
several participants expressed concern that the persistently weak inflation data could lead to a decline in
longer-term inflation expectations or may have done
so already; they pointed to low market-based measures of inflation compensation, declines in some survey measures of inflation expectations, or evidence
from statistical models suggesting that the underlying
trend in inflation had fallen in recent years. In addition, the possibility was raised that monetary policy
actions or communications over the past couple of
years, while inflation was below the Committee’s
2 percent objective, may have contributed to a decline
in longer-run inflation expectations below a level
consistent with that objective. Some other participants, however, noted that measures of inflation
expectations had remained stable this year despite the
low readings on inflation and judged that this stability should support the return of inflation to the
Committee’s objective.

263

In their comments regarding financial markets, participants generally judged that financial conditions
remained accommodative despite the recent increases
in the exchange value of the dollar and Treasury
yields. In light of elevated asset valuations and low
financial market volatility, several participants
expressed concerns about a potential buildup of
financial imbalances. They worried that a sharp
reversal in asset prices could have damaging effects
on the economy. It was noted, however, that elevated
asset prices could be partly explained by a low neutral rate of interest. It was also observed that regulatory changes had contributed to an appreciable
strengthening of capital and liquidity positions in the
financial sector over recent years, increasing the resilience of the financial system to potential reversals in
valuations.
A few participants mentioned the limited reaction in
financial markets to the announcement and initial
implementation of the Committee’s plan for gradually reducing the Federal Reserve’s securities holdings. It was noted that, consistent with that limited
response, market participants had characterized the
Committee’s communications regarding the balance
sheet normalization program as clear and effective.
In their discussion of monetary policy, all participants thought that it would be appropriate to maintain the current target range for the federal funds rate
at this meeting. Nearly all participants reaffirmed the
view that a gradual approach to increasing the target
range was likely to promote the Committee’s objectives of maximum employment and price stability.
Participants commented on several factors that
informed their assessments of the appropriate path
of the federal funds rate. Several participants noted
that the neutral level of the federal funds rate
appeared to be quite low by historical standards.
Most saw the outlook for economic activity and the
labor market as little changed since the September
meeting, and participants expected increasing tightness in the labor market to put only gradual upward
pressure on inflation. Still, with an accommodative
stance of policy, most participants continued to
anticipate that inflation would stabilize around
the Committee’s 2 percent objective over the
medium term.
Many participants observed, however, that continued
low readings on inflation, which had occurred even
as the labor market tightened, might reflect not only
transitory factors, but also the influence of develop-

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ments that could prove more persistent. A number of
these participants were worried that a decline in
longer-term inflation expectations would make it
more challenging for the Committee to promote a
return of inflation to 2 percent over the medium
term. These participants’ concerns were sharpened
by the apparently weak responsiveness of inflation to
resource utilization and the low level of the neutral
interest rate, and such considerations suggested that
the removal of policy accommodation should be
quite gradual. In contrast, some other participants
were concerned about upside risks to inflation in an
environment in which the economy had reached full
employment and the labor market was projected to
tighten further, or about still very accommodative
financial conditions. They cautioned that waiting too
long to remove accommodation, or removing accommodation too slowly, could result in a substantial
overshoot of the maximum sustainable level of
employment that would likely be costly to reverse or
could lead to increased risks to financial stability. A
few of these participants emphasized that the lags in
the response of inflation to tightening resource utilization implied that there could be increasing upside
risks to inflation as the labor market tightened
further.
Participants agreed that they would continue to
monitor closely and assess incoming data before
making any further adjustment to the target range
for the federal funds rate. Consistent with their
expectation that a gradual removal of monetary
policy accommodation would be appropriate, many
participants thought that another increase in the target range for the federal funds rate was likely to be
warranted in the near term if incoming information
left the medium-term outlook broadly unchanged.
Several participants indicated that their decision
about whether to increase the target range in the near
term would depend importantly on whether the
upcoming economic data boosted their confidence
that inflation was headed toward the Committee’s
objective. A few other participants thought that additional policy firming should be deferred until incoming information confirmed that inflation was clearly
on a path toward the Committee’s symmetric 2 percent objective. A few participants cautioned that further increases in the target range for the federal funds
rate while inflation remained persistently below
2 percent could unduly depress inflation expectations
or lead the public to question the Committee’s commitment to its longer-run inflation objective.

In view of the persistent shortfall of inflation from
the Committee’s 2 percent objective and questions
about whether longer-term inflation expectations
were consistent with achievement of that objective, a
couple of participants discussed the possibility that
potential alternative frameworks for the conduct of
monetary policy could be helpful in fulfilling the
Committee’s statutory mandate. One question, for
example, was whether a framework that generally
sought to keep the price level close to a gradually rising path—rather than the current approach in which
the Committee does not seek to make up for past
deviations of inflation from the 2 percent goal—
might be more effective in fostering the Committee’s
objectives if the neutral level of the federal funds rate
remains low.

Committee Policy Action
In their discussion of monetary policy for the period
ahead, members judged that information received
since the Committee met in September indicated that
the labor market had continued to strengthen and
that economic activity had been rising at a solid rate
despite hurricane-related disruptions. Although the
hurricanes depressed payroll employment in September, the unemployment rate declined further. Household spending had been expanding at a moderate
rate, and growth in business fixed investment had
picked up in recent quarters. Gasoline prices rose in
the aftermath of the hurricanes, boosting overall
inflation in September; however, inflation for items
other than food and energy remained soft. On a
12-month basis, both inflation measures had declined
this year and were running below 2 percent. Marketbased measures of inflation compensation remained
low; survey-based measures of longer-term inflation
expectations were little changed, on balance.
Members acknowledged that hurricane-related disruptions and rebuilding would continue to affect economic activity, employment, and inflation in the near
term. They noted, however, that past experience suggested that the storm-related disruptions were
unlikely to materially alter the course of the national
economy over the medium term. Consequently, the
Committee continued to expect that, with gradual
adjustments in the stance of monetary policy, economic activity would expand at a moderate pace, and
labor market conditions would strengthen somewhat
further. Inflation on a 12-month basis was expected
to remain somewhat below 2 percent in the near term

Minutes of Federal Open Market Committee Meetings | October–November

but to stabilize around the Committee’s 2 percent
objective over the medium term. Members saw the
near-term risks to the economic outlook as roughly
balanced, but, in light of their concern about the
ongoing softness in inflation, they agreed to continue
to monitor inflation developments closely.
After assessing current conditions and the outlook
for economic activity, the labor market, and inflation,
members decided to maintain the target range for the
federal funds rate at 1 to 1¼ percent. They noted that
the stance of monetary policy remained accommodative, thereby supporting some further strengthening
in labor market conditions and a sustained return to
2 percent inflation.
Members agreed that the timing and size of future
adjustments to the target range for the federal funds
rate would depend on their assessments of realized
and expected economic conditions relative to the
Committee’s objectives of maximum employment
and 2 percent inflation. They noted that their assessments 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 reaffirmed their
expectation that economic conditions would evolve
in a manner that would warrant gradual increases in
the federal funds rate, and that the federal funds rate
was likely to remain, for some time, below levels that
are expected to prevail in the longer run. Nonetheless, they reiterated that the actual path of the federal
funds rate would depend on the economic outlook as
informed by incoming data. In particular, members
noted that they would carefully monitor actual and
expected inflation developments relative to the Committee’s symmetric inflation goal. Some members
expressed concerns about the outlook for inflation
expectations and inflation; they emphasized that, in
considering the timing of further adjustments in the
federal funds rate, they would be evaluating incoming
information to assess the likelihood that recent low
readings on inflation were transitory and that inflation was on a trajectory consistent with achieving the
Committee’s 2 percent objective over the medium
term. Several other members, however, were reasonably confident that the economy and inflation would
evolve in coming months such that an additional
firming would likely be appropriate in the near term.
With the balance sheet normalization program under
way and with the balance sheet not anticipated to be
used to adjust the stance of monetary policy in

265

response to incoming information in the years ahead,
members generally agreed that the statement following this meeting needed to contain only a brief reference to the program and that subsequent statements
might not need to mention the program. Balance
sheet normalization was expected to proceed gradually, following the plan described in the Addendum to
the Policy Normalization Principles and Plans that
the Committee released in June.
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, to be
released at 2:00 p.m.:
“Effective November 2, 2017, the Federal Open
Market Committee directs the Desk to undertake open market operations as necessary to
maintain the federal funds rate in a target range
of 1 to 1¼ percent, including overnight reverse
repurchase operations (and reverse repurchase
operations with maturities of more than one day
when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 1.00 percent, in amounts limited only
by the value of Treasury securities held outright
in the System Open Market Account that are
available for such operations and by a percounterparty limit of $30 billion per day.
The Committee directs the Desk to continue
rolling over at auction the amount of principal
payments from the Federal Reserve’s holdings of
Treasury securities maturing during each calendar month that exceeds $6 billion, and to continue reinvesting in agency mortgage-backed
securities the amount of principal payments
from the Federal Reserve’s holdings of agency
debt and agency mortgage-backed securities
received during each calendar month that
exceeds $4 billion. Small deviations from these
amounts for operational reasons are acceptable.
The Committee also directs the Desk to engage
in dollar roll and coupon swap transactions as
necessary to facilitate settlement of the Federal
Reserve’s agency mortgage-backed securities
transactions.”
The vote also encompassed approval of the statement
below to be released at 2:00 p.m.:

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104th Annual Report | 2017

and expected economic conditions relative to 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 will carefully
monitor actual and expected inflation developments relative to its symmetric inflation goal.
The Committee expects that economic conditions will evolve in a manner that will warrant
gradual increases in the federal funds rate; the
federal funds rate is likely to remain, for some
time, below levels that are expected to prevail in
the longer run. However, the actual path of the
federal funds rate will depend on the economic
outlook as informed by incoming data.

“Information received since the Federal Open
Market Committee met in September indicates
that the labor market has continued to
strengthen and that economic activity has been
rising at a solid rate despite hurricane-related
disruptions. Although the hurricanes caused a
drop in payroll employment in September, the
unemployment rate declined further. Household
spending has been expanding at a moderate rate,
and growth in business fixed investment has
picked up in recent quarters. Gasoline prices
rose in the aftermath of the hurricanes, boosting
overall inflation in September; however, inflation
for items other than food and energy remained
soft. On a 12-month basis, both inflation measures have declined this year and are running
below 2 percent. Market-based measures of
inflation compensation remain low; surveybased measures of longer-term inflation expectations are little changed, on balance.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment
and price stability. Hurricane-related disruptions
and rebuilding will continue to affect economic
activity, employment, and inflation in the near
term, but past experience suggests that the
storms are unlikely to materially alter the course
of the national economy over the medium term.
Consequently, the Committee continues to
expect that, with gradual adjustments in the
stance of monetary policy, economic activity
will expand at a moderate pace, and labor market conditions will strengthen somewhat further.
Inflation on a 12-month basis is expected to
remain somewhat below 2 percent in the near
term but to stabilize around the Committee’s
2 percent objective over the medium term. Nearterm risks to the economic outlook appear
roughly balanced, but the Committee is monitoring inflation developments closely.
In view of realized and expected labor market
conditions and inflation, the Committee decided
to maintain the target range for the federal funds
rate at 1 to 1¼ percent. The stance of monetary
policy remains accommodative, thereby supporting some further strengthening in labor market
conditions and a sustained return to 2 percent
inflation.
In determining the timing and size of future
adjustments to the target range for the federal
funds rate, the Committee will assess realized

The balance sheet normalization program initiated in October 2017 is proceeding.”
Voting for this action: Janet L. Yellen, William C.
Dudley, Lael Brainard, Charles L. Evans, Patrick
Harker, Robert S. Kaplan, Neel Kashkari, Jerome H.
Powell, and Randal K. Quarles.
Voting against this action: None.
Consistent with the Committee’s decision to leave the
target range for the federal funds rate unchanged, the
Board of Governors voted unanimously to leave the
interest rates on required and excess reserve balances
unchanged at 1¼ percent and voted unanimously to
approve establishment of the primary credit rate (discount rate) at the existing level of 1¾ percent.4
It was agreed that the next meeting of the Committee
would be held on Tuesday–Wednesday, December 12–13, 2017. The meeting adjourned at 10:30
a.m. on November 1, 2017.

Notation Vote
By notation vote completed on October 10, 2017, the
Committee unanimously approved the minutes of the
Committee meeting held on September 19–20, 2017.
Brian F. Madigan
Secretary
4

The second vote of the Board also encompassed approval of the
establishment of the interest rates for secondary and seasonal
credit under the existing formulas for computing such rates.

Minutes of Federal Open Market Committee Meetings | December

Meeting Held
on December 12–13, 2017
A joint meeting of the Federal Open Market Committee and the Board of Governors was held in the
offices of the Board of Governors of the Federal
Reserve System in Washington, D.C., on Tuesday,
December 12, 2017, at 1:00 p.m. and continued on
Wednesday, December 13, 2017, at 9:00 a.m.1

Present
Janet L. Yellen
Chair
William C. Dudley
Vice Chairman
Lael Brainard
Charles L. Evans
Patrick Harker
Robert S. Kaplan
Neel Kashkari
Jerome H. Powell
Randal K. Quarles
Raphael W. Bostic, Loretta J. Mester,
Mark L. Mullinix, Michael Strine,
and John C. Williams
Alternate Members of the Federal Open Market
Committee
James Bullard, Esther L. George, and Eric Rosengren
Presidents of the Federal Reserve Banks of St. Louis,
Kansas City, and Boston, respectively
James A. Clouse
Secretary
Matthew M. Luecke
Deputy Secretary
David W. Skidmore
Assistant Secretary
Michelle A. Smith
Assistant Secretary
Mark E. Van Der Weide
General Counsel
Michael Held
Deputy General Counsel
1

The Federal Open Market Committee is referenced as the
“FOMC” and the “Committee” in these minutes.

267

Steven B. Kamin
Economist
Thomas Laubach
Economist
David W. Wilcox
Economist
Thomas A. Connors, Michael Dotsey,
Eric M. Engen, Evan F. Koenig,
Daniel G. Sullivan, William Wascher,
and Beth Anne Wilson
Associate Economists
Simon Potter
Manager, System Open Market Account
Lorie K. Logan
Deputy Manager, System Open Market Account
Ann E. Misback
Secretary, Office of the Secretary,
Board of Governors
Matthew J. Eichner2
Director, Division of Reserve Bank Operations and
Payment Systems, Board of Governors
Andreas Lehnert
Director, Division of Financial Stability,
Board of Governors
Jennifer Burns
Deputy Director, Division of Supervision and
Regulation, Board of Governors
Rochelle M. Edge and Stephen A. Meyer
Deputy Directors, Division of Monetary Affairs,
Board of Governors
Michael T. Kiley
Deputy Director, Division of Financial Stability,
Board of Governors
Trevor A. Reeve
Senior Special Adviser to the Chair, Office of Board
Members, Board of Governors
Joseph W. Gruber, David Reifschneider,
and John M. Roberts
Special Advisers to the Board, Office of Board
Members, Board of Governors
Linda Robertson
Assistant to the Board, Office of Board Members,
Board of Governors
2

Attended through the discussion of developments in financial
markets and open market operations.

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104th Annual Report | 2017

Antulio N. Bomfim, Edward Nelson,
Ellen E. Meade, and Robert J. Tetlow
Senior Advisers, Division of Monetary Affairs,
Board of Governors
Shaghil Ahmed
Associate Directors, Division of International
Finance, Board of Governors
Elizabeth Kiser, John J. Stevens,
and Stacey Tevlin
Associate Directors, Division of Research and
Statistics, Board of Governors
David López-Salido
Associate Director, Division of Monetary Affairs,
Board of Governors
Norman J. Morin and Shane M. Sherlund
Assistant Directors, Division of Research and
Statistics, Board of Governors
Eric C. Engstrom
Adviser, Division of Monetary Affairs,
and
Adviser, Division of Research and Statistics,
Board of Governors
Penelope A. Beattie3
Assistant to the Secretary, Office of the Secretary,
Board of Governors
David H. Small
Project Manager,