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105th Annual Report
2018

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

105th Annual Report
2018

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

This and other Federal Reserve Board reports and publications are available online at
https://www.federalreserve.gov/publications/default.htm.
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see the Board’s Publication Order Form (https://www.federalreserve.gov/files/orderform.pdf)
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Letter of Transmittal

Board of Governors of the Federal Reserve System
Washington, D.C.
June 2019
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 105th annual
report of the Board of Governors of the Federal Reserve System.
This report covers operations of the Board during calendar-year 2018.
Sincerely,

Jerome H. Powell
Chair

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 2019 ....................................................................................... 5
Monetary Policy Report July 2018 ............................................................................................. 23

3 Financial Stability

........................................................................................................... 35
Monitoring Risks to Financial Stability ....................................................................................... 35
Domestic and International Cooperation and Coordination ......................................................... 40

4 Supervision and Regulation ......................................................................................... 43
Banking System Conditions ...................................................................................................... 43
Supervisory Developments ....................................................................................................... 47
Regulatory Developments ........................................................................................................ 68

5 Consumer and Community Affairs ........................................................................... 73
Supervision and Examinations .................................................................................................. 73
Consumer Laws and Regulations .............................................................................................. 82
Consumer Research and Analysis of Emerging Issues and Policy ............................................... 83
Community Development ......................................................................................................... 85

6 Federal Reserve Banks ................................................................................................... 87
Federal Reserve Priced Services ............................................................................................... 87
Currency and Coin ................................................................................................................... 90
Fiscal Agency and Government Depository Services .................................................................. 91
Use of Federal Reserve Intraday Credit ..................................................................................... 93
FedLine Access to Reserve Bank Services ................................................................................ 94
Information Technology ............................................................................................................ 94
Examinations of the Federal Reserve Banks .............................................................................. 95
Income and Expenses .............................................................................................................. 95
SOMA Holdings and Loans ...................................................................................................... 98
Federal Reserve Bank Premises ................................................................................................ 99
Pro Forma Financial Statements for Federal Reserve Priced Services ....................................... 100

7 Other Federal Reserve Operations ........................................................................... 105
Regulatory Developments ....................................................................................................... 105

The Board of Governors and the Government Performance and Results Act ............................. 110

8 Record of Policy Actions of the Board of Governors ...................................... 111
Rules and Regulations ............................................................................................................ 111
Policy Statements and Other Actions ...................................................................................... 114
Discount Rates for Depository Institutions in 2018 ................................................................... 116

9 Minutes of Federal Open Market Committee Meetings .................................. 119
Meeting Held on January 30–31, 2018 ..................................................................................... 120
Meeting Held on March 20–21, 2018 ....................................................................................... 140
Meeting Held on May 1–2, 2018 .............................................................................................. 168
Meeting Held on June 12–13, 2018 ......................................................................................... 180
Meeting Held on July 31–August 1, 2018 ................................................................................. 207
Meeting Held on September 25–26, 2018 ................................................................................ 220
Meeting Held on November 7–8, 2018 ..................................................................................... 247
Meeting Held on December 18–19, 2018 ................................................................................. 260

10 Litigation .......................................................................................................................... 291
Pending ................................................................................................................................. 291
Resolved ............................................................................................................................... 291

11 Statistical Tables ............................................................................................................. 293
12 Federal Reserve System Audits

................................................................................. 323
Board of Governors Financial Statements ................................................................................ 324
Federal Reserve Banks Combined Financial Statements .......................................................... 347
Office of Inspector General Activities ....................................................................................... 394
Government Accountability Office Reviews .............................................................................. 395

13 Federal Reserve System Budgets

.............................................................................. 397

System Budgets Overview ...................................................................................................... 397
Board of Governors Budgets .................................................................................................. 400
Federal Reserve Banks Budgets ............................................................................................. 404
Currency Budget .................................................................................................................... 408

14 Federal Reserve System Organization

.................................................................... 413

Board of Governors ................................................................................................................ 413
Federal Open Market Committee ............................................................................................ 419
Board of Governors Advisory Councils .................................................................................... 421
Federal Reserve Banks and Branches ..................................................................................... 425

15 Index

.................................................................................................................................. 441

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 2018. 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.
• Regulatory developments. Section 7 summarizes the
Board’s efforts in 2018 to implement key laws and
statutes, such as the Economic Growth, Regulatory
Relief, and Consumer Protection Act. The section

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 https://www.federalreserve.gov/
aboutthefed/default.htm. An online version of this
annual report is available at https://www
.federalreserve.gov/publications/annual-report/
default.htm.

also discusses 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 2018, 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 2018 budget performance of
the Board and Reserve Banks, as well as their 2018
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

105th Annual Report | 2018

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

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 2018, excerpted
from the Monetary Policy Report published in February 2019 and July 2018. Those complete reports
are available on the Board’s website at https://www
.federalreserve.gov/monetarypolicy/files/
20190222_mprfullreport.pdf (February 2019) and https
://www.federalreserve.gov/monetarypolicy/files/
20180713_mprfullreport.pdf (July 2018).

Monetary Policy Report
February 2019
Summary
Economic activity in the United States appears to
have increased at a solid pace, on balance, over the
second half of 2018, and the labor market strengthened further. Inflation has been near the Federal
Open Market Committee’s (FOMC) longer-run
objective of 2 percent, aside from the transitory
effects of recent energy price movements. In this environment, the FOMC judged that, on balance, current
and prospective economic conditions called for a further gradual removal of policy accommodation. In
particular, the FOMC raised the target range for the
federal funds rate twice in the second half of 2018,
putting its level at 2¼ to 2½ percent following the
December meeting. In light of softer global economic
and financial conditions late in the year and muted
inflation pressures, the FOMC indicated at its January meeting that it will be patient as it determines

what future adjustments to the federal funds rate may
be appropriate to support the Committee’s congressionally mandated objectives of maximum employment and price stability.
Economic and Financial Developments
The labor market. The labor market has continued to
strengthen since the middle of last year. Payroll
employment growth has remained strong, averaging
224,000 per month since June 2018. The unemployment rate has been about unchanged over this
period, averaging a little under 4 percent—a low level
by historical standards—while the labor force participation rate has moved up despite the ongoing downward influence from an aging population. Wage
growth has also picked up recently.
Inflation. Consumer price inflation, as measured by
the 12-month change in the price index for personal
consumption expenditures, moved down from a little
above the FOMC’s objective of 2 percent in the
middle of last year to an estimated 1.7 percent in
December, restrained by recent declines in consumer
energy prices. 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 measure that includes those items,
is estimated to have been 1.9 percent in December—up ¼ percentage point from a year ago. Surveybased measures of longer-run inflation expectations
have generally been stable, though market-based
measures of inflation compensation have moved
down some since the first half of 2018.
Economic growth. Available indicators suggest that
real gross domestic product (GDP) increased at a
solid rate, on balance, in the second half of last year
and rose a little under 3 percent for the year as a
whole—a noticeable pickup from the pace in recent
years. Consumer spending expanded at a strong rate
for most of the second half, supported by robust job
gains, past increases in household wealth, and higher
disposable income due in part to the Tax Cuts and

105th Annual Report | 2018

Jobs Act, though spending appears to have weakened
toward year-end. Business investment grew as well,
though growth seems to have slowed somewhat from
a sizable gain in the first half. However, housing market activity declined last year amid rising mortgage
interest rates and higher material and labor costs.
Indicators of both consumer and business sentiment
remain at favorable levels, but some measures have
softened since the fall, likely a reflection of financial
market volatility and increased concerns about the
global outlook.
Financial conditions. Domestic financial conditions
for businesses and households have become less supportive of economic growth since July. Financial
market participants’ appetite for risk deteriorated
markedly in the latter part of last year amid investor
concerns about downside risks to the growth outlook
and rising trade tensions between the United States
and China. As a result, Treasury yields and risky
asset prices declined substantially between early
October and late December in the midst of heightened volatility, although those moves partially
retraced early this year. On balance since July, the
expected path of the federal funds rate over the next
several years shifted down, long-term Treasury yields
and mortgage rates moved lower, broad measures of
U.S. equity prices increased somewhat, and spreads
of yields on corporate bonds over those on
comparable-maturity Treasury securities widened
modestly. Credit to large nonfinancial firms remained
solid in the second half of 2018; corporate bond issuance slowed considerably toward the end of the year
but has rebounded since then. Despite increases in
interest rates for consumer loans, consumer credit
expanded at a solid pace, and financing conditions
for consumers largely remain supportive of growth in
household spending. The foreign exchange value of
the U.S. dollar strengthened slightly against the currencies of the U.S. economy’s trading partners.
Financial stability. The U.S. financial system remains
substantially more resilient than in the decade preceding the financial crisis. Pressures associated with
asset valuations eased compared with July 2018, particularly in the equity, corporate bond, and leveraged
loan markets. Regulatory capital and liquidity ratios
of key financial institutions, including large banks,
are at historically high levels. Funding risks in the
financial system are low relative to the period leading
up to the crisis. Borrowing by households has risen
roughly in line with household incomes and is concentrated among prime borrowers. While debt owed
by businesses is high and credit standards—especially

within segments of the loan market focused on
lower-rated or unrated firms—deteriorated in the second half of 2018, issuance of these loans has slowed
more recently.
International developments. Foreign economic growth
stepped down significantly last year from the brisk
pace in 2017. Aggregate growth in the advanced foreign economies slowed markedly, especially in the
euro area, and several Latin American economies
continued to underperform. The pace of economic
activity in China slowed noticeably in the second half
of 2018. Inflation pressures in major advanced foreign economies remain subdued, prompting central
banks to maintain accommodative monetary policies.
Financial conditions abroad tightened in the second
half of 2018, in part reflecting political uncertainty in
Europe and Latin America, trade policy developments in the United States and its trading partners,
as well as concerns about moderating global growth.
Although financial conditions abroad improved in
recent weeks, alongside those in the United States, on
balance since July 2018, global equity prices were
lower, sovereign yields in many economies declined,
and sovereign credit spreads in the European periphery and the most vulnerable emerging market economies increased somewhat. Market-implied paths of
policy rates in advanced foreign economies generally
edged down.
Monetary Policy
Interest rate policy. As the labor market continued to
strengthen and economic activity expanded at a
strong rate, the FOMC increased the target range for
the federal funds rate gradually over the second half
of 2018. Specifically, the FOMC decided to raise the
federal funds rate in September and in December,
bringing it to the current range of 2¼ to 2½ percent.
In December, against the backdrop of increased concerns about global growth, trade tensions, and volatility in financial markets, the Committee indicated it
would monitor global economic and financial developments and assess their implications for the economic outlook. In January, the FOMC stated that it
continued to view sustained expansion of economic
activity, strong labor market conditions, and inflation
near the Committee’s 2 percent objective as the most
likely outcomes. Nonetheless, in light of global economic and financial developments and muted inflation pressures, the Committee noted that it will be
patient as it determines what future adjustments to
the target range for the federal funds rate may be

Monetary Policy and Economic Developments

appropriate to support these outcomes. FOMC communications continued to emphasize that the Committee’s approach to setting the stance of policy
should be importantly guided by the implications of
incoming data for the economic outlook. In particular, the timing and size of future adjustments to the
target range for the federal funds rate will depend on
the Committee’s assessment of realized and expected
economic conditions relative to its maximumemployment objective and its symmetric 2 percent
inflation objective.
Balance sheet policy. The FOMC continued to implement the balance sheet normalization program that
has been under way since October 2017. Specifically,
the FOMC reduced its holdings of Treasury and
agency securities in a gradual and predictable manner
by reinvesting only principal payments it received
from these securities that exceeded gradually rising
caps. Consequently, the Federal Reserve’s total assets
declined by about $260 billion since the middle of
last year, ending the period close to $4 trillion.
Together with the January postmeeting statement,
the Committee released an updated Statement
Regarding Monetary Policy Implementation and Balance Sheet Normalization to provide additional
information about its plans to implement monetary
policy over the longer run. In particular, the FOMC
stated that it intends to continue to implement monetary policy in a regime with an ample supply of
reserves so that active management of reserves is not
required. In addition, the Committee noted that it is
prepared to adjust any of the details for completing
balance sheet normalization in light of economic and
financial developments.
Special Topics
Labor markets in urban versus rural areas. The recovery in the U.S. labor market since the end of the
recession has been uneven across the country, with
rural areas showing markedly less improvement than
cities and their surrounding metropolitan areas. In
particular, the employment-to-population ratio and
labor force participation rate in rural areas remain
well below their pre-recession levels, while the recovery in urban areas has been more complete. Differences in the mix of industries in rural and urban
areas—a larger share of manufacturing in rural areas
and a greater concentration of fast-growing services
industries in urban areas—have contributed to the

stronger rebound in urban areas. (See the box
“Employment Disparities between Rural and Urban
Areas” on pages 10–12 of the February 2019 Monetary Policy Report.)
Monetary policy rules. In evaluating the stance of
monetary policy, policymakers consider a wide range
of information on the current economic conditions
and the outlook. Policymakers also consult prescriptions for the policy interest rate derived from a variety of policy rules for guidance, without mechanically following the prescriptions of any specific rule.
The FOMC’s approach for conducting systematic
monetary policy provides sufficient flexibility to
address the intrinsic complexities and uncertainties in
the economy while keeping monetary policy predictable and transparent. (See the box “Monetary Policy
Rules and Systematic Monetary Policy” on pages
36–39 of the February 2019 Monetary Policy Report.)
Balance sheet normalization and monetary policy
implementation. Since the financial crisis, the size of
the Federal Reserve’s balance sheet has been determined in large part by its decisions about asset purchases for economic stimulus, with growth in total
assets primarily matched by higher reserve balances
of depository institutions. However, liabilities other
than reserves have grown significantly over the past
decade. In the longer run, the size of the balance
sheet will be importantly determined by the various
factors affecting the demand for Federal Reserve
liabilities. (See the box “The Role of Liabilities in
Determining the Size of the Federal Reserve’s Balance Sheet” on pages 41–43 of the February 2019
Monetary Policy Report.)
Federal Reserve transparency and accountability. For
central banks, transparency provides an essential
basis for accountability. Transparency also enhances
the effectiveness of monetary policy and a central
bank’s efforts to promote financial stability. For these
reasons, the Federal Reserve uses a wide variety of
communications to explain its policymaking
approach and decisions as clearly as possible.
Through several new initiatives, including a review of
its monetary policy framework that will include outreach to a broad range of stakeholders, the Federal
Reserve seeks to enhance transparency and accountability regarding how it pursues its statutory responsibilities. (See the box “Federal Reserve Transparency:
Rationale and New Initiatives” on pages 45–46 of the
February 2019 Monetary Policy Report.)

105th Annual Report | 2018

Part 1: Recent Economic and Financial
Developments

Figure 2. Labor force participation rates and
employment-to-population ratio

Domestic Developments

Percent

The labor market strengthened further during the
second half of 2018 and early this year . . .

Percent

Payroll employment gains have remained strong,
averaging 224,000 per month since June 2018
(figure 1). This pace is similar to the pace in the first
half of last year, and it is faster than the average pace
of job gains in 2016 and 2017.

Labor force participation rate

64
83
62
82
60
81
Employment-to-population ratio

The strong pace of job gains over this period has primarily been manifest in a rising labor force participation rate (LFPR)—the share of the population that is
either working or actively looking for work—rather
than a declining unemployment rate.1 Since
June 2018, the LFPR has moved up about ¼ percentage point and was 63.2 percent in January—a bit
higher than the narrow range it has maintained in
recent years (figure 2). The improvement is especially
1

The observed pace of payroll job gains would have been sufficient to push the unemployment rate lower had the LFPR not
risen. Indeed, monthly payroll gains in the range of 115,000 to
145,000 appear consistent with an unchanged unemployment
rate around 4.0 percent and an unchanged LFPR around
62.9 percent (which are the June 2018 values of these rates). If
instead the LFPR were declining 0.2 percentage point per
year—roughly the influence of population aging—the range of
job gains needed to maintain an unchanged unemployment rate
would be about 40,000 per month lower. There is considerable
uncertainty around these estimates, as the difference between
monthly payroll gains and employment changes from the Current Population Survey (the source of the unemployment rate
and LFPR) can be quite volatile over short periods.

Figure 1. Net change in payroll employment
Monthly

Thousands of jobs

Private

400
200
+
0
_
200

Total nonfarm

2001

2011

2013

2015

2017

Note: The data are 3-month moving averages.
Source: Bureau of Labor Statistics via Haver Analytics.

2010

2013

2016

2019

Source: Bureau of Labor Statistics via Haver Analytics.

notable because the aging of the population—and, in
particular, the movement of members of the babyboom cohort into their retirement years—has otherwise imparted a downward influence on the LFPR.
Indeed, the LFPR for individuals between 25 and
54 years old—which is much less sensitive to population aging—has improved considerably more than
the overall LFPR, including a ½ percentage point
rise since June 2018.2
At the same time, the unemployment rate has
remained little changed and has generally been running a little under 4 percent.3 Nevertheless, the unemployment rate remains at a historically low level and
is ½ percentage point below the median of the Federal Open Market Committee (FOMC) participants’
estimates of its longer-run normal level (figure 3).4
Combining the movements in both unemployment
and labor force participation, the employment-topopulation ratio for individuals 16 and over—the

600

2009

2007

Note: The data are monthly. The prime-age labor force participation rate is a percentage of the population aged 25 to 54. The labor force participation rate and the
employment-to-population ratio are percentages of the population aged 16
and over.

400

800

2004

58
Prime-age labor force
participation rate

2019
4

Since 2015, the increase in the prime-age LFPR for women was
nearly 2 percentage points, while the increase for men was only
about 1 percentage point. In January, the LFPR for prime-age
women was slightly above where it stood in 2007, whereas for
men it was still about 2 percentage points below.
The unemployment rate in January was 4.0 percent, boosted
somewhat by the partial government shutdown, as some furloughed federal workers and temporarily laid-off federal
contractors are treated as unemployed in the household employment survey.
See the Summary of Economic Projections in Part 3 of the February 2019 Monetary Policy Report.

Monetary Policy and Economic Developments

Figure 3. Measures of labor utilization
Percent

Monthly

18
U-6

U-4

U-5

12
10
8
6

Unemployment rate

4
2

2007

2009

2011

2013

2015

2017

2019

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.

share of that segment of the population who are
working—was 60.7 percent in January and has been
gradually increasing since 2011.
Other indicators are also consistent with a strong
labor market. As reported in the Job Openings and
Labor Turnover Survey (JOLTS), the job openings
rate has moved higher since the first half of 2018,
and in December, it was at its highest level since the
data began in 2000. The quits rate in the JOLTS is
also near the top of its historical range, an indication
that workers have become more confident that they
can successfully switch jobs when they wish to. In
addition, the JOLTS layoff rate has remained low,
and the number of people filing initial claims for
unemployment insurance benefits has also remained
low. Survey evidence indicates that households perceive jobs as plentiful and that businesses see vacancies as hard to fill.
. . . and unemployment rates have fallen for all
major demographic groups over the past several
years

The flattening in unemployment since mid-2018 has
been evident across racial and ethnic groups. Even so,
over the past several years, the decline in the unem-

ployment rates for blacks or African Americans and
for Hispanics has been particularly notable, and the
unemployment rates for these groups are near their
lowest readings since these series began in the early
1970s. Differences in unemployment rates across ethnic and racial groups have narrowed in recent years,
as they typically do during economic expansions,
after having widened during the recession; on net,
unemployment rates for African Americans and Hispanics remain substantially above those for whites
and Asians, with differentials generally a bit below
pre-recession levels.
The rise in LFPRs for prime-age individuals over the
past few years has also been apparent in each of
these racial and ethnic groups. Nonetheless, the
LFPR for whites remains higher than that for other
groups. Important differences in economic outcomes
persist across other characteristics as well (see, for
example, the box “Employment Disparities between
Rural and Urban Areas” on pages 10–12 of the February 2019 Monetary Policy Report, which highlights
that there has been less improvement since 2010 in
the LFPR and employment-to-population ratio for
prime-age individuals in rural areas compared with
urban areas).

105th Annual Report | 2018

Increases in labor compensation have picked up
recently but remain moderate by historical
standards . . .

Most available indicators suggest that growth of
hourly compensation has stepped up further since
June 2018 after having firmed somewhat over the
past few years; however, growth rates remain moderate compared with those that prevailed in the decade
before the recession. Compensation per hour in the
business sector—a broad-based measure of wages
and benefits, but one that is quite volatile—rose
2¼ percent over the four quarters ending in 2018:Q3,
about the same as the average annual increase over
the past seven years or so. The employment cost
index, a less volatile measure of both wages and the
cost to employers of providing benefits, increased
3 percent over the same period, while average hourly
earnings—which do not take account of benefits—
increased 3.2 percent over the 12 months ending in
January of this year; the annual increases in both of
these measures were the strongest in nearly 10 years.
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
3.7 percent in January, near the upper end of its readings in the past three years and well above the average
increase in the preceding few years.5

whether this faster rate of growth will persist, a sustained pickup in productivity growth, as well as additional labor market strengthening, would likely support stronger gains in labor compensation.
Price inflation is close to 2 percent

Consumer price inflation has fluctuated around the
FOMC’s objective of 2 percent, largely reflecting
movements in energy prices. As measured by the
12-month change in the price index for personal consumption expenditures (PCE), inflation is estimated
to have been 1.7 percent in December after being
above 2 percent for much of 2018 (figure 4).6 Core
PCE inflation—that is, inflation excluding consumer
food and energy prices—is estimated to have been
1.9 percent in December. Because food and energy
prices are often quite volatile, core inflation typically
provides a better indication than the total measure of
where overall inflation will be in the future. Total
inflation was below core inflation for the year as a
whole not only because of softness in energy prices,
but also because food price inflation has remained
relatively low.
Core inflation has moved up since 2017, when inflation was held down by some unusually large price
declines in a few relatively small categories of spend6

. . . and have likely been restrained by slow
growth of labor productivity over much of the
expansion

These moderate rates of compensation gains likely
reflect the offsetting influences of a strong labor market and productivity growth that has been weak
through much of the expansion. From 2008 to 2017,
labor productivity increased a little more than 1 percent per year, on average, well below the average pace
from 1996 to 2007 of nearly 3 percent and also below
the average gain in the 1974–95 period. Although
considerable debate remains about the reasons for the
slowdown over this period, the weakness in productivity growth may be partly attributable to the sharp
pullback in capital investment during the most recent
recession and the relatively slow recovery that followed. More recently, however, labor productivity is
estimated to have increased almost 2 percent at an
annual rate in the first three quarters of 2018—still
moderate relative to earlier periods, but its fastest
three-quarter gain since 2010. While it is uncertain
5

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.

The partial government shutdown has delayed publication of
the Bureau of Economic Analysis’s estimate for PCE price inflation in December, and the numbers reported here are estimates
based on the December consumer and producer price indexes.

Figure 4. Change in the price index for personal
consumption expenditures
Monthly

12-month percent change

3.0
Trimmed mean
Total
Excluding food
and energy

2.5
2.0
1.5
1.0
.5
+
0
_

2012

2013

2014

2015

2016

2017

2018

Note: The data for total and excluding food and energy extend through December 2018; final values are staff estimates. The trimmed data extend through
November 2018.
Source: For trimmed mean, Federal Reserve Bank of Dallas; for all else, Bureau of
Economic Analysis; all via Haver Analytics.

Monetary Policy and Economic Developments

ing, such as mobile phone services. The trimmed
mean PCE price index, produced by the Federal
Reserve Bank of Dallas, provides an alternative way
to purge inflation of transitory influences, and it may
be less sensitive than the core index to idiosyncratic
price movements such as those noted earlier. The
12-month change in this measure did not decline as
much as core PCE inflation in 2017, and it was
2.0 percent in November.7 Inflation likely has been
increasingly supported by the strong labor market in
an environment of stable inflation expectations;
inflation last year was also boosted slightly by the
tariffs that were imposed throughout 2018.
Oil prices have dropped markedly in recent
months . . .

As noted, the slower pace of total inflation in late
2018 relative to core inflation largely reflected softening in consumer energy prices toward the end of the
year. After peaking at about $86 per barrel in early
October, the price of crude oil subsequently fell
sharply and has averaged around $60 per barrel this
year (figure 5). The recent decline in oil prices has led
to moderate reductions in the cost of gasoline and
heating oil. Supply factors, including surging oil production in Saudi Arabia, Russia, and the United
States, appear to be most responsible for the recent

The trimmed mean index excludes whichever prices showed the
largest increases or decreases in a given month. Note that over
the past 20 years, changes in the trimmed mean index have averaged about ¼ percentage point above core PCE inflation and
0.1 percentage point above total PCE inflation.

price declines, but concerns about weaker global
growth likely also played a role.
. . . while prices of imports other than energy
have also declined

After climbing steadily since their early 2016 lows,
nonfuel import prices peaked in May 2018 and
declined for much of the rest of 2018 in response to
dollar appreciation, lower foreign inflation, and
declines in commodity prices. In particular, metal
prices fell markedly in the second half of 2018, partly
reflecting concerns about prospects for the global
economy. Nonfuel import prices, before accounting
for the effects of tariffs on the price of imported
goods, had roughly a neutral influence on U.S. price
inflation in 2018.
Survey-based measures of inflation expectations
have been 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 over the second half of 2018. 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 very close
to 2 percent for the past several years (figure 6). In
the University of Michigan Surveys of Consumers,
the median value for inflation expectations over the
next 5 to 10 years has been around 2½ percent since
Figure 6. Median inflation expectations

Figure 5. Spot and futures prices for crude oil
Percent
Weekly

Dollars per barrel

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

Brent spot price

24-month-ahead
futures contracts

2014

2015

2016

2017

2018

2019

Note: The data are weekly averages of daily data and extend through February 20,
2019.
Source: ICE Brent Futures via Bloomberg.

Michigan survey expectations
for next 5 to 10 years

2
SPF expectations
for next 10 years
1

2005

2007

2009

2011

2013

2015

2017

2019

Note: The Michigan survey data are monthly and extend through February 2019;
the February data are preliminary. The SPF data for inflation expectations for personal consumption expenditures are quarterly and begin in 2007:Q1.
Source: University of Michigan Surveys of Consumers; Federal Reserve Bank of
Philadelphia, Survey of Professional Forecasters (SPF).

105th Annual Report | 2018

the end of 2016, though this level is about ¼ percentage point lower than had prevailed through 2014. In
contrast, in the Survey of Consumer Expectations,
conducted by the Federal Reserve Bank of New
York, the median of respondents’ expected inflation
rate three years hence—while relatively stable around
3 percent since early 2018—is nonetheless at the top
of the range it has occupied over the past couple
of years.
. . . while market-based measures of inflation
compensation have come down since the first
half of 2018

Inflation expectations can also be gauged by marketbased measures of inflation compensation. However,
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-maturity Treasury Inflation-Protected Securities (TIPS) or from
inflation swaps—moved down in the fall and are
below levels that prevailed earlier in 2018.8 The TIPSbased measure of 5-to-10-year-forward inflation
compensation and the analogous measure from inflation swaps are now about 1¾ percent and 2¼ percent, respectively, with both measures below their
respective ranges that persisted for most of the
10 years before the start of the notable declines in
mid-2014.9
Real gross domestic product growth was solid,
on balance, in the second half of 2018

Real gross domestic product (GDP) rose at an annual
rate of 3½ percent in the third quarter, and available
indicators point to a moderate gain in the fourth
quarter.10 For the year, GDP growth appears to have
been a little less than 3 percent, up from the 2½ per8

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 total 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. Inflation compensation derived from inflation swaps
typically exceeds TIPS-based compensation, but week-to-week
movements in the two measures are highly correlated.
As these measures are based on CPI inflation, one should probably subtract about ¼ percentage point—the average differential
with PCE inflation over the past two decades—to infer inflation
compensation on a PCE basis.
The initial estimate of GDP by the Bureau of Economic Analysis for the fourth quarter was delayed because of the partial government shutdown and will now be released on February 28.

cent pace in 2017 and the 2 percent pace in the preceding two years (figure 7). Last year’s growth
reflects, in part, solid growth in household and business spending, on balance, as well as an increase in
government purchases of goods and services; by contrast, housing-sector activity turned down last year.
Private domestic final purchases—that is, final purchases by households and businesses, which tend to
provide a better indication of future GDP growth
than most other components of overall spending—
likely posted a strong gain for the year.
Some measures of consumer and business sentiment
have recently softened—likely reflecting concerns
about financial market volatility, the global economic
outlook, trade policy tensions, and the government
shutdown—and consumer spending appears to have
weakened at the end of the year. Nevertheless, the
economic expansion continues to be supported by
steady job gains, past increases in household wealth,
expansionary fiscal policy, and still-favorable domestic financial conditions, including moderate borrowing costs and easy access to credit for many households and businesses.
Ongoing improvements in the labor market
continue to support household income and
consumer spending . . .

Real consumer spending picked up after some transitory weakness in the first half of 2018, rising at a
strong annual rate of 3½ percent in the third quarter
and increasing robustly through November (figure 8).
However, despite anecdotal reports of favorable holiday sales, retail sales were reported to have declined

Figure 7. Change in real gross domestic product and gross
domestic income
Percent, annual rate

Gross domestic product
Gross domestic income

5
Q3
4
H1
3
2
1

2012

2013

2014

2015

2016

2017

Source: Bureau of Economic Analysis via Haver Analytics.

2018

Monetary Policy and Economic Developments

Figure 8. Change in real personal consumption
expenditures and disposable personal income
Percent, annual rate

Personal consumption expenditures
Disposable personal income

6
5
H1

4
3

ages since 2000. However, consumer sentiment has
turned down since around year-end, on net, with the
declines primarily reflecting consumers’ expectations
for future conditions rather than their assessment of
current conditions. Consumer attitudes about car
buying have also weakened. Nevertheless, these indicators of consumers’ outlook remain at generally
favorable levels, likely reflecting rising income, job
gains, and low inflation.

2
1
+
0
_
1
2
3
2012

2013

2014

2015

2016

2017

2018

Source: Bureau of Economic Analysis via Haver Analytics.

sharply in December. Real disposable personal
income—that is, income after taxes and adjusted for
price changes—looks to have increased around 3 percent over the year, boosted by ongoing improvements
in the labor market and the reduction in income taxes
due to the implementation of the Tax Cuts and Jobs
Act (TCJA). With consumer spending rising at about
the same rate as gains in disposable income in 2018
through the third quarter (the latest data available),
the personal saving rate was roughly unchanged, on
net, over this period.
. . . although wealth gains have moderated and
consumer confidence has recently softened

While increases in household wealth have likely continued to support consumer spending, gains in net
worth slowed last year. House prices continued to
move up in 2018, boosting the wealth of homeowners, but the pace of growth moderated. U.S. equity
prices are, on net, similar to their levels at the end of
2017. Still, the level of equity and housing wealth
relative to income remains very high by historical
standards.11
Consumer sentiment as measured by the Michigan
survey flattened out at a high level through much of
2018, and the sentiment measure from the Conference Board survey climbed through most of the year,
with both measures posting their highest annual aver11

Indeed, in the third quarter of 2018—the most recent period for
which data are available—household net worth was seven times
the value of disposable income, the highest-ever reading for that
ratio, which dates back to 1947. However, following the decline
in stock prices since the summer, this ratio has likely fallen
somewhat.

Borrowing conditions for consumers remain
generally favorable despite interest rates being
near the high end of their post-recession range

Despite increases in interest rates for consumer loans
and some reported further tightening in credit card
lending standards, financing conditions for consumers largely remain supportive of growth in household
spending, and consumer credit growth in 2018
expanded further at a solid pace. Mortgage credit has
continued to be readily available for households with
solid credit profiles. For borrowers with low credit
scores, mortgage underwriting standards have eased
somewhat since the first half of 2018 but remain
noticeably tighter than before the recession. Financing conditions in the student loan market remain
stable, with over 90 percent of such credit being
extended by the federal government. Delinquencies
on such loans, though staying elevated, continued to
improve gradually on net.
Business investment growth has moderated after
strong gains early in 2018 . . .

Investment spending by businesses rose rapidly in the
first half of last year, and the available data are consistent with growth having slowed in the second half
(figure 9). The apparent slowdown reflects, in part,
more moderate growth in investment in equipment
and intangibles as well as a likely decline in investment in nonresidential structures after strong gains
earlier in the year. Forward-looking indicators of
business spending—such as business sentiment, capital spending plans, and profit expectations from
industry analysts—have softened recently but remain
positive overall. And while new orders of capital
goods flattened out toward the end of last year, the
backlog of unfilled orders for this equipment has
continued to rise.
. . . as corporate financing conditions tightened
somewhat but remained accommodative overall

Spreads of yields on nonfinancial corporate bonds
over those on comparable-maturity Treasury securities widened modestly, on balance, since the middle
of 2018 as investors’ risk appetite appeared to recede

105th Annual Report | 2018

Figure 9. Change in real private nonresidential fixed
investment

Figure 10. Private housing starts and permits
Monthly

Millions of units, annual rate

Percent, annual rate

Single-family starts

Structures
Equipment and intangible capital

1.2

20
1.0
H1

15
.8
10
Q3

Single-family
permits

5
+
0
_

.6
.4
.2

Multifamily starts

0
10
2008
2010 2011 2012 2013 2014 2015 2016 2017 2018
Source: Bureau of Economic Analysis via Haver Analytics.

2010

2012

2014

2016

2018

Note: The data extend through November 2018.
Source: U.S. Census Bureau via Haver Analytics.

some. Nonetheless, a net decrease in Treasury yields
over the past several months has left interest rates on
corporate bonds still low by historical standards, and
financing conditions appear to have remained
accommodative overall. Aggregate net flows of credit
to large nonfinancial firms remained solid in the
third quarter. The gross issuance of corporate bonds
and new issuance of leveraged loans both fell considerably toward the end of the year but have since
rebounded, mirroring movements in financial market
volatility.

investment reflects rising mortgage rates—which
remain higher than in 2017 despite coming down
some recently—as well as higher material and labor
building costs, which have likely restrained new home
construction. Consumers’ perceptions of homebuying conditions deteriorated sharply over 2018, consistent with the decline in the affordability of housing
associated with both higher mortgage rates and stillrising house prices.

Respondents to the January Senior Loan Officer
Opinion Survey on Bank Lending Practices, or
SLOOS, reported that lending standards for commercial and industrial (C&I) loans remained basically
unchanged in the fourth quarter after having
reported easing standards over the past several quarters. However, banks reported tightening lending
standards on all categories of commercial real estate
(CRE) loans in the fourth quarter on net.

After a strong performance in the first half of last year
supported by robust exports of agricultural products,
real exports declined in the third quarter, and available
indicators suggest only a partial rebound in the fourth
quarter. At the same time, growth in real imports
seems to have picked up in the second half of 2018. As
a result, real net exports—which lifted U.S. real GDP
growth during the first half of 2018—appear to have
subtracted from growth in the second half. For the
year as a whole, net exports likely subtracted a little
from real GDP growth, similar to 2016 and 2017. The
nominal trade deficit and the current account deficit in
2018 were little changed as a percent of GDP from
2017 (figure 11).

Meanwhile, financing conditions for small businesses
have remained generally accommodative. Lending volumes to small businesses rebounded a bit in recent
months, and indicators of recent loan performance
stayed strong.

Net exports likely subtracted from GDP growth
in 2018

Activity in the housing sector has been declining

Federal fiscal policy actions boosted economic
growth in 2018 . . .

Residential investment declined in 2018, as housing
starts held about flat and sales of existing homes
moved lower (figure 10). The drop in residential

Fiscal policy at the federal level boosted GDP growth
in 2018, both because of lower income and business
taxes from the TCJA and because federal purchases

Monetary Policy and Economic Developments

Figure 11. U.S. trade and current account balances
Annual

Percent of nominal GDP

+
0
_
1

the local level, property tax collections continue to
rise at a solid clip, pushed higher by past house price
gains. After declining a bit in 2017, real state and
local government purchases grew moderately last
year, driven largely by a boost in construction but
also reflecting modest growth in employment at these
governments.

2
3
Trade

4
5

Current account

Financial Developments

6
7

2002 2004 2006 2008 2010 2012 2014 2016 2018
Note: Data for 2018 are the average of the first three quarters of the year, at an
annualized rate. GDP is gross domestic product.
Source: Bureau of Economic Analysis via Haver Analytics.

appear to have risen significantly faster than in 2017
as a result of the Bipartisan Budget Act of 2018.12
The partial government shutdown, which was in
effect from December 22 through January 25, likely
held down GDP growth in the first quarter of this
year somewhat, largely because of the lost work of
furloughed federal government workers and temporarily affected federal contractors.
The federal unified deficit widened in fiscal year
2018 to 3¾ percent of nominal GDP because receipts
moved lower, to roughly 16½ percent of GDP.
Expenditures edged down, to 20¼ percent of GDP,
but remain above the levels that prevailed in the
decade before the start of the 2007–09 recession. The
ratio of federal debt held by the public to nominal
GDP equaled 78 percent at the end of fiscal 2018 and
remains quite elevated relative to historical norms.
The Congressional Budget Office projects that this
ratio will rise over the next several years.
. . . 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. After several years of
slow growth, revenue gains of state governments
strengthened notably as sales and income tax collections have picked up over the past few quarters. At

The expected path of the federal funds rate over
the next several years has moved down

Despite the further strengthening in the labor market
and continued expansion in the U.S. economy,
market-based measures of the expected path for the
federal funds rate over the next several years have
declined, on net, since the middle of last year. Various factors contributed to this shift, including
increased investor concerns about downside risks to
the global economic outlook and rising trade tensions, as well as FOMC communications that were
viewed as signaling patience and greater flexibility in
the conduct of monetary policy in response to
adverse macroeconomic or financial market
developments.
Survey-based measures of the expected path of the
policy rate through 2020 also shifted down, on net,
relative to the levels observed in the first half of 2018.
According to the results of the most recent Survey of
Primary Dealers and Survey of Market Participants,
both conducted by the Federal Reserve Bank of New
York just before the January FOMC meeting, the
median of respondents’ modal projections for the
path of the federal funds rate implies two additional
25 basis point rate increases in 2019. Relative to the
December survey, these increases are expected to
occur later in 2019. Looking further ahead, respondents to the January survey forecast no rate increases
in 2020 and in 2021.13 Meanwhile, market-based
measures of uncertainty about the policy rate
approximately one to two years ahead were little
changed, on balance, from their levels at the end of
last June.

13
12

The Joint Committee on Taxation estimated that the TCJA
would reduce average annual tax revenue by a little more than
1 percent of GDP starting in 2018 and for several years thereafter. This revenue estimate does not account for the potential
macroeconomic effects of the legislation.

The results of the Survey of Primary Dealers and the Survey of
Market Participants are available on the Federal Reserve Bank
of New York’s website at https://www.newyorkfed.org/
markets/primarydealer_survey_questions.html and https://www
.newyorkfed.org/markets/survey_market_participants,
respectively.

105th Annual Report | 2018

Broad equity price indexes increased somewhat

The nominal Treasury yield curve continued to
flatten

The nominal Treasury yield curve flattened somewhat
further since the first half of 2018, with the 2-year
nominal Treasury yield little changed and the 5- and
10-year nominal Treasury yields declining about
25 basis points on net (figure 12). At the same time,
yields on inflation-protected Treasury securities
edged up, leaving market-based measures of inflation
compensation moderately lower. In explaining movements in Treasury yields since mid-2018, market participants have pointed to developments related to the
global economic outlook and trade tensions, FOMC
communications, and fluctuations in oil prices.
Option-implied volatility on swap rates—an indicator
of uncertainty about Treasury yields—declined
slightly on net.
Consistent with changes in yields on nominal Treasury securities, yields on 30-year agency mortgagebacked securities (MBS)—an important determinant
of mortgage interest rates—decreased about 20 basis
points, on balance, since the middle of last year and
remain low by historical standards. Meanwhile, yields
on both investment-grade and high-yield corporate
debt declined a bit. As a result, the spreads on corporate bond yields over comparable-maturity Treasury
yields are modestly wider than at the end of June.
The cumulative increases over the past year have left
spreads for high-yield and investment-grade corporate bonds close to their historical medians, with
both spreads notably above the very low levels that
prevailed a year ago.

Broad U.S. stock market indexes increased somewhat
since the middle of last year, on net, amid substantial
volatility (figure 13). Concerns over the sustainability
of corporate earnings growth, the global growth outlook, international trade tensions, and some Federal
Reserve communications that were perceived as less
accommodative than expected weighed on investor
sentiment for a time. There were considerable differences in stock returns across sectors, reflecting their
varying degrees of sensitivities to energy price
declines, trade tensions, and rising interest rates. In
particular, stock prices of companies in the utilities
sector—which tend to benefit from falling interest
rates—and in the health-care sector outperformed
broader indexes. Conversely, stock prices in the
energy sector substantially underperformed the
broad indexes, as oil prices dropped sharply. Basic
materials—a sector that was particularly sensitive to
concerns about the global growth outlook and trade
tensions—also underperformed. Bank stock prices
declined slightly, on net, as the yield curve flattened
and funding costs rose. Measures of implied and realized stock price volatility for the S&P 500 index—the
VIX and the 20-day realized volatility—increased
sharply in the fourth quarter of last year to near the
high levels observed in early February 2018 amid
sharp equity price declines. These volatility measures
partially retraced following the turn of the year, with
the VIX returning to near the 30th percentile of its
historical distribution and with realized volatility
ending the period close to the 70th percentile of its
historical range (figure 14). (For a discussion of
Figure 13. Equity prices

Figure 12. Yields on nominal Treasury securities

Daily
Daily

December 31, 1999 = 100

Percent

200
7

Dow Jones bank index

175

10-year

S&P 500 index

150

5
125
5-year

4
100
3
75
2
50

2-year

1
25
0
2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

2001 2003 2005 2007 2009 2011 2013 2015 2017 2019
Source: Department of the Treasury via Haver Analytics.

Source: Standard & Poor's Dow Jones Indices via Bloomberg. (For Dow Jones
Indices licensing information, see the note on the Contents page.)

Monetary Policy and Economic Developments

Figure 14. S&P 500 volatility
Daily

Percent

80
70
60
VIX

50
40
30
20
10

Realized volatility

2001 2003 2005 2007 2009 2011 2013 2015 2017 2019
Note: The VIX is a measure of implied volatility that represents the expected annualized change in the S&P 500 index over the following 30 days. For realized volatility, five-minute returns are used in an exponentially weighted moving average
with 75 percent of weight distributed over the past 20 days.
Source: Cboe Volatility Index® (VIX®) accessed via Bloomberg.

financial stability issues, see the box “Developments
Related to Financial Stability” on pages 26–28 of the
February 2019 Monetary Policy Report.)

FOMC’s policy actions in September and December.
The effective federal funds rate moved to parity with
the interest rate paid on reserves and was closely
tracked by the overnight Eurodollar rate. Other
short-term interest rates, including those on commercial paper and negotiable certificates of deposits, also
moved up in light of increases in the policy rate.
Bank credit continued to expand, and bank
profitability improved

Aggregate credit provided by commercial banks
expanded through the second half of 2018 at a
stronger pace than the one observed in the first half
of last year, as the strength in C&I loan growth more
than offset the moderation in the growth in CRE
loans and loans to households. In the fourth quarter
of last year, the pace of bank credit expansion was
about in line with that of nominal GDP, leaving the
ratio of total commercial bank credit to currentdollar GDP little changed relative to last June
(figure 15). Overall, measures of bank profitability
improved further in the third quarter despite a flattening yield curve, but they remain below their precrisis levels.
International Developments

Markets for Treasury securities,
mortgage-backed securities, and municipal
bonds have functioned well

Available indicators of Treasury market functioning
have generally remained stable since the first half of
2018, with a variety of liquidity metrics—including
bid-ask spreads, bid sizes, and estimates of transaction costs—displaying few signs of liquidity pressures. Liquidity conditions in the agency MBS
market were also generally stable. Overall, the functioning of Treasury and agency MBS markets has
not been materially affected by the implementation of
the Federal Reserve’s balance sheet normalization
program over the past year and a half. Credit conditions in municipal bond markets have remained
stable since the middle of last year, though yield
spreads on 20-year general obligation municipal
bonds over comparable-maturity Treasury securities
were modestly higher on net.

Economic activity in most foreign economies
weakened in the second half of 2018

After expanding briskly in 2017, foreign GDP growth
moderated in 2018. While part of this slowdown is
likely due to temporary factors, it also appears to
Figure 15. Ratio of total commercial bank credit to nominal
gross domestic product
Quarterly

Percent

75
70
65
60

Money market rates have moved up in line with
increases in the FOMC’s target range

Conditions in domestic short-term funding markets
have also remained generally stable since the beginning of the summer. Increases in the FOMC’s target
range were transmitted effectively through money
markets, with yields on a broad set of money market
instruments moving higher in response to the

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
Note: Data for 2018:Q4 are estimated.
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.

105th Annual Report | 2018

reflect weaker underlying momentum against the
backdrop of somewhat tighter financial conditions,
increased policy uncertainty, and ongoing debt
deleveraging.
The growth slowdown was particularly
pronounced in advanced foreign economies

Real GDP growth in several advanced foreign economies (AFEs) slowed markedly in the second half of
the year. This slowdown was concentrated in the
manufacturing sector against the backdrop of softening global trade flows. In Japan, real GDP contracted in the second half of 2018, as economic
activity, which was disrupted by a series of natural
disasters in the third quarter, rebounded only partly
in the fourth quarter. Growth in the euro area slowed
in the second half of the year: Transportation bottlenecks and complications in meeting tighter emissions
standards for new motor vehicles weighed on German economic activity, while output contracted in
Italy. Although some of these headwinds appear to
be fading, recent indicators—especially for the manufacturing sector—point to only a limited recovery of
activity in the euro area at the start of 2019.
Inflation pressures remain contained in advanced
foreign economies . . .

In recent months, headline inflation has fallen below
central bank targets in many major AFEs, reflecting
large declines in energy prices. In the euro area and
Japan, low headline inflation rates also reflect subdued core inflation. In Canada and the United Kingdom, instead, core inflation rates have been close to
2 percent.
. . . prompting central banks to withdraw
accommodation only gradually

With underlying inflation still subdued, the Bank of
Japan and the European Central Bank (ECB) kept
their short-term policy rates at negative levels.
Although the ECB concluded its asset purchase program in December, it signaled an only very gradual
removal of policy accommodation going forward.
The Bank of England (BOE) and the Bank of
Canada, which both began raising interest rates in
2017, increased their policy rates further in the second half of 2018 but to levels that are still low by historical standards. The BOE noted that elevated
uncertainty around the United Kingdom’s exit from
the European Union (EU) weighed on the country’s
economic outlook.

Political uncertainty and slower economic growth
weighed on AFE asset prices

Moderation in global growth, protracted budget
negotiations between the Italian government and the
EU, and developments related to the United Kingdom’s withdrawal from the EU weighed on AFE
asset prices in the second half of 2018. Broad stock
price indexes in the AFEs fell, interest rates on sovereign bonds in several countries in the European
periphery remained elevated, and European bank
shares underperformed, although these moves have
partially retraced in recent weeks. Market-implied
paths of policy in major AFEs and long-term sovereign bond yields declined somewhat, as economic
data disappointed.
Growth slowed in many emerging market
economies

Chinese GDP growth slowed in the second half of
2018 as an earlier tightening of credit policy, aimed
at restraining the buildup of debt, caused infrastructure investment to fall sharply and squeezed household spending. However, increased concerns about a
sharper-than-expected slowdown in growth, as well
as prospective effects of trade policies, prompted
Chinese authorities to ease monetary and fiscal
policy somewhat. Elsewhere in emerging Asia,
growth remained well below its 2017 pace amid headwinds from moderating global growth. Tighter financial conditions also weighed on growth in other
EMEs—notably, Argentina and Turkey.
Economic activity strengthened somewhat in
Mexico and Brazil, but uncertainty about policy
developments remains elevated

In Mexico, economic activity increased at a more
rapid rate in the third quarter after modest advances
earlier in the year. However, growth weakened again
in the fourth quarter, as perceptions that the newly
elected government would pursue less marketfriendly policies led to a sharp tightening in financial
conditions. Amid a sharp peso depreciation and
above-target inflation, the Bank of Mexico raised its
policy rate to 8.25 percent in December. Brazilian
real GDP growth rebounded in the third quarter
after being held down by a nationwide trucker’s
strike in May, and financial markets have rallied on
expectations that Brazil’s new government will pursue economic policies that support growth. However,
investors continued to focus on whether the new
administration would pass significant fiscal reforms.

Monetary Policy and Economic Developments

Financial conditions in many emerging market
economies were volatile but are, on net, little
changed since July

Financial conditions in the EMEs generally tightened
in the second half of 2018, as investor concerns
about vulnerabilities in several EMEs intensified
against the backdrop of higher policy uncertainty,
slowing global growth, and rising U.S. interest rates.
Trade policy tensions between the United States and
China weighed on asset prices, especially in China
and other Asian economies. Broad measures of EME
sovereign bond spreads over U.S. Treasury yields
rose, and benchmark EME equity indexes declined.
However, financial conditions improved significantly
in recent months, supported in part by more positive
policy developments—including the U.S.-MexicoCanada Agreement and progress on U.S.–China
trade negotiations—and FOMC communications
indicating a more gradual normalization of U.S.
interest rates. EME mutual fund inflows resumed in
recent months after experiencing outflows in the
middle of 2018. While movements in asset prices and
capital flows have been sizable for a number of
economies, broad indicators of financial stress in
EMEs are below those seen during other periods of
stress in recent years.
The dollar appreciated slightly

The foreign exchange value of the U.S. dollar is bit a
higher than in July (figure 16). Concerns about the
global outlook, uncertainty about trade policy, and

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

Week ending January 9, 2015 = 100

150
Dollar appreciation
140

Mexican peso

130
120
Broad dollar

monetary policy normalization in the United States
contributed to the appreciation of the dollar. The
Chinese renminbi depreciated against the dollar
slightly, on net, amid ongoing trade negotiations and
increased concerns about growth prospects in China.
The Mexican peso has been volatile amid ongoing
political developments and trade negotiations but
has, on net, declined only modestly against the dollar.
Sharp declines in oil prices also weighed on the currencies of some energy-exporting economies.

Part 2: Monetary Policy
The Federal Open Market Committee continued
to gradually increase the federal funds rate in the
second half of last year

From late 2015 through the first half of last year, the
Federal Open Market Committee (FOMC) gradually
increased its target range for the federal funds rate as
the economy continued to make progress toward the
Committee’s congressionally mandated objectives of
maximum employment and price stability. In the second half of 2018, the FOMC continued this gradual
process of monetary policy normalization, raising the
federal funds rate at its September and December
meetings, bringing the target range to 2¼ to 2½ percent (figure 17).14 The FOMC’s decisions to increase
the federal funds rate reflected the solid performance
of the U.S. economy, the continued strengthening of
the labor market, and the fact that inflation had
moved near the Committee’s 2 percent longer-run
objective.
Looking ahead, the FOMC will be patient as it
determines what future adjustments to the target
range for the federal funds rate may be
appropriate

With the gradual reductions in the amount of policy
accommodation to date, the federal funds rate is now
at the lower end of the range of estimates of its
longer-run neutral level—that is, the level of the federal funds rate that is neither expansionary nor
contractionary.

110
100
Chinese renminbi

2015

2016

Euro

2017

2018

90
2019

Note: The data, which are in foreign currency units per dollar, are weekly averages
of daily data and extend through February 20, 2019. 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.”

Developments at the time of the December FOMC
meeting, including volatility in financial markets and
increased concerns about global growth, made the
14

See Board of Governors of the Federal Reserve System (2018),
“Federal Reserve Issues FOMC Statement,” press release, September 26, https://www.federalreserve.gov/newsevents/
pressreleases/monetary20180926a.htm; and Board of Governors
of the Federal Reserve System (2018), “Federal Reserve Issues
FOMC Statement,” press release, December 19, https://www
.federalreserve.gov/newsevents/pressreleases/monetary20181219a
.htm.

105th Annual Report | 2018

Figure 17. Selected interest rates
Daily

Percent

5
10-year Treasury rate

4
3
2

2-year Treasury rate

1
0
Target federal funds rate
2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

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.

appropriate extent and timing of future rate increases
more uncertain than earlier. Against that backdrop,
the Committee indicated it would monitor global
economic and financial developments and assess
their implications for the economic outlook. In the
Summary of Economic Projections (SEP) from the
December meeting—the most recent SEP available—
participants generally revised down their individual
assessments of the appropriate path for monetary
policy relative to their assessments at the time of the
September meeting.15
In January, the Committee stated that it continued to
view sustained expansion of economic activity,
strong labor market conditions, and inflation near
the Committee’s symmetric 2 percent objective as the
most likely outcomes. Nonetheless, in light of global
economic and financial developments and muted
inflation pressures, the Committee will be patient as
it determines what future adjustments to the federal
funds rate may be appropriate to support these
outcomes.
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 the
actual path of monetary policy will depend on the
evolution of the economic outlook as informed by
15

See the December Summary of Economic Projections, which
appeared as an addendum to the minutes of the December 18–
19, 2018, meeting of the FOMC and is presented in Part 3 of
the February 2019 Monetary Policy Report.

incoming data. Specifically, in deciding on the timing
and size of future adjustments to 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 addition to evaluating a wide range of economic
and financial data and information gathered from
business contacts and other informed parties around
the country, policymakers routinely consult prescriptions for the policy interest rate from a variety of
rules, which can serve as useful guidance to the
FOMC. However, many practical considerations
make it undesirable for the FOMC to mechanically
follow the prescriptions of any specific rule. Consequently, the FOMC’s framework for conducting systematic monetary policy respects key principles of
good monetary policy and, at the same time, provides
flexibility to address many of the limitations of these
policy rules (see the box “Monetary Policy Rules and
Systematic Monetary Policy” on pages 36–39 of the
February 2019 Monetary Policy Report).
The FOMC has continued to implement its
program to gradually reduce the Federal
Reserve’s balance sheet

The Committee has continued to implement the balance sheet normalization program that has been

Monetary Policy and Economic Developments

under way since October 2017.16 Under this program, the FOMC has been reducing its holdings of
Treasury and agency securities in a gradual and predictable manner by decreasing its reinvestment of the
principal payments it received from these securities.
Specifically, such payments have been reinvested only
to the extent that they exceeded gradually rising caps.
In the third quarter of 2018, the Federal Reserve
reinvested principal payments from its holdings of
Treasury securities maturing during each calendar
month in excess of $24 billion. It also reinvested in
agency mortgage-backed securities (MBS) the
amount of principal payments from its holdings of
agency debt and agency MBS received during each
calendar month in excess of $16 billion. In the fourth
quarter, the FOMC increased the caps for Treasury
securities and for agency securities to their respective
maximums of $30 billion and $20 billion. Of note,
reinvestments of agency debt and agency MBS
ceased in October as principal payments fell below
the maximum redemption caps.

of agency debt and agency MBS at approximately
$1.6 trillion (figure 18).
As the Federal Reserve has continued to gradually
reduce its securities holdings, the level of reserve balances in the banking system has declined. In particular, the level of reserve balances has decreased by
about $350 billion since the middle of last year, and
by about $1.2 trillion since its peak in 2014.17 At the
January meeting, the Committee released an updated
Statement Regarding Monetary Policy Implementation and Balance Sheet Normalization to provide
additional information regarding its plans to implement monetary policy over the longer run.18 In this
statement, the Committee indicated that it intends to
continue to implement monetary policy in a regime
in which an ample supply of reserves ensures that
control over the level of the federal funds rate and
other short-term interest rates is exercised primarily
through the setting of the Federal Reserve's administered rates, and in which active management of the
supply of reserves is not required. This operating
procedure is often called a “floor system.” The
FOMC judges that this approach provides good control of short-term money market rates in a variety of

The Federal Reserve’s total assets have continued to
decline from about $4.3 trillion last July to about
$4.0 trillion at present, with holdings of Treasury
securities at approximately $2.2 trillion and holdings

For more information, see the Addendum to the Policy Normalization Principles and Plans, which is available on the Board’s
website at https://www.federalreserve.gov/monetarypolicy/files/
FOMC_PolicyNormalization.20170613.pdf.

Since the start of the normalization program, reserve balances
have dropped by approximately $600 billion.
See the Statement Regarding Monetary Policy Implementation
and Balance Sheet Normalization, which is available on the
Board’s website at https://www.federalreserve.gov/newsevents/
pressreleases/monetary20190130c.htm.

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

2019

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 13, 2019.
Source: Federal Reserve Board, Statistical Release H.4.1, “Factors Affecting Reserve Balances.”

105th Annual Report | 2018

market conditions and effective transmission of those
rates to broader financial conditions. In addition, the
FOMC stated that it is prepared to adjust any of the
details for completing balance sheet normalization in
light of economic and financial developments.
Although reserve balances play a central role in the
ongoing balance sheet normalization process, in the
longer run, the size of the balance sheet will also be
importantly determined by trend growth in nonreserve liabilities. The box “The Role of Liabilities in
Determining the Size of the Federal Reserve’s Balance Sheet” on pages 41–43 of the February 2019
Monetary Policy Report discusses various factors that
influence the size of reserve and nonreserve liabilities.
Meanwhile, interest income on the Federal Reserve’s
securities holdings has continued to support substantial remittances to the U.S. Treasury. Preliminary
financial statement results indicate that the Federal
Reserve remitted about $65 billion in 2018.
The Federal Reserve’s implementation of
monetary policy has continued smoothly

As with the previous federal funds rate increases
since late 2015, the Federal Reserve successfully
raised the effective federal funds rate in September
and December by increasing the interest rate paid on
reserve balances and the interest rate offered on overnight reverse repurchase agreements (ON RRPs).
Specifically, the Federal Reserve raised the interest
rate paid on required and excess reserve balances to
2.20 percent in September and to 2.40 percent in
December. In addition, the Federal Reserve increased
the ON RRP offering rate to 2.00 percent in September and to 2.25 percent in December. The Federal
Reserve also approved a ¼ percentage point increase
in the discount rate (the primary credit rate) in both
September and December. Yields on a broad set of
money market instruments moved higher, roughly in
line with the federal funds rate, in response to the

FOMC’s policy decisions in September and December. Usage of the ON RRP facility has remained low,
excluding quarter-ends.
The effective federal funds rate moved to parity with
the interest rate paid on reserve balances in the
months before the December meeting. At its December meeting, the Committee made a second small
technical adjustment by setting the interest on excess
reserves rate 10 basis points below the top of the target range for the federal funds rate; this adjustment
was intended to foster trading in the federal funds
market at rates well within the FOMC’s target range.
The Federal Reserve will conduct a review of its
strategic framework for monetary policy in 2019

With labor market conditions close to maximum
employment and inflation near the Committee’s
2 percent objective, the FOMC judges it is an opportune time for the Federal Reserve to conduct a review
of its strategic framework for monetary policy—including the policy strategy, tools, and communication
practices. The goal of this assessment is to identify
possible ways to improve the Committee’s current
policy framework in order to ensure that the Federal
Reserve is best positioned going forward to achieve
its statutory mandate of maximum employment and
price stability.
Specific to the communications practices, the Federal
Reserve judges that transparency is essential to
accountability and the effectiveness of policy, and
therefore the Federal Reserve seeks to explain its
policymaking approach and decisions to the Congress and the public as clearly as possible. The box
“Federal Reserve Transparency: Rationale and New
Initiatives” on pages 45–46 of the February 2019
Monetary Policy Report discusses the steps and new
initiatives the Federal Reserve has taken to improve
transparency.

Monetary Policy and Economic Developments

Monetary Policy Report July 2018
Summary
Economic activity increased at a solid pace over the
first half of 2018, and the labor market has continued to strengthen. Inflation has moved up, and in
May, the most recent period for which data are available, inflation measured on a 12-month basis was a
little above the Federal Open Market Committee’s
(FOMC) longer-run objective of 2 percent, boosted
by a sizable increase in energy prices. In this economic environment, the Committee judged that current and prospective economic conditions called for a
further gradual removal of monetary policy accommodation. In line with that judgment, the FOMC
raised the target for the federal funds rate twice in the
first half of 2018, bringing it to a range of 1¾ to
2 percent.
Economic and Financial Developments
The labor market. The labor market has continued to
strengthen. Over the first six months of 2018, payrolls increased an average of 215,000 per month,
which is somewhat above the average pace of 180,000
per month in 2017 and is considerably faster than
what is needed, on average, to provide jobs for new
entrants into the labor force. The unemployment rate
edged down from 4.1 percent in December to 4.0 percent in June, which is about ½ percentage point
below the median of FOMC participants’ estimates
of its longer-run normal level. Other measures of
labor utilization were consistent with a tight labor
market. However, hourly labor compensation growth
has been moderate, likely held down in part by the
weak pace of productivity growth in recent years.
Inflation. Consumer price inflation, as measured by
the 12-month percentage change in the price index
for personal consumption expenditures, moved up
from a little below the FOMC’s objective of 2 percent at the end of last year to 2.3 percent in May,
boosted by a sizable increase in consumer energy
prices. 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
total figure, was 2 percent in May. This reading was
½ percentage point above where it had been
12 months earlier, as the unusually low readings from
last year were not repeated. Measures of longer-run
inflation expectations have been generally stable.

Economic growth. Real gross domestic product
(GDP) is reported to have increased at an annual rate
of 2 percent in the first quarter of 2018, and recent
indicators suggest that economic growth stepped up
in the second quarter. Gains in consumer spending
slowed early in the year, but they rebounded in the
spring, supported by strong job gains, recent and
past increases in household wealth, favorable consumer sentiment, and higher disposable income due
in part to the implementation of the Tax Cuts and
Jobs Act. Business investment growth has remained
robust, and indexes of business sentiment have been
strong. Foreign economic growth has remained solid,
and net exports had a roughly neutral effect on real
U.S. GDP growth in the first quarter. However, activity in the housing market has leveled off this year.
Financial conditions. Domestic financial conditions
for businesses and households have generally continued to support economic growth. After rising
steadily through 2017, broad measures of equity
prices are modestly higher, on balance, from their levels at the end of last year amid some bouts of heightened volatility in financial markets. While long-term
Treasury yields, mortgage rates, and yields on corporate bonds have risen so far this year, longer-term
interest rates remain low by historical standards, and
corporate bond issuance has continued at a moderate
pace. Moreover, most types of consumer loans
remained widely available for households with strong
creditworthiness, and credit provided by commercial
banks continued to expand. The foreign exchange
value of the U.S. dollar has appreciated somewhat
against the currencies of our trading partners this
year, but it remains below its level at the start of
2017. Foreign financial conditions remain generally
supportive of growth despite recent increases in
financial stress in several emerging market economies.
Financial stability. The U.S. financial system remains
substantially more resilient than during the decade
before the financial crisis. Asset valuations continue
to be elevated despite declines since the end of 2017
in the forward price-to-earnings ratio of equities and
the prices of corporate bonds. In the private nonfinancial sector, borrowing among highly levered and
lower-rated businesses remains elevated, although the
ratio of household debt to disposable income continues to be moderate. Vulnerabilities stemming from
leverage in the financial sector remain low, reflecting
in part strong capital positions at banks, whereas
some measures of hedge fund leverage have

105th Annual Report | 2018

increased. Vulnerabilities associated with maturity
and liquidity transformation among banks, insurance
companies, money market mutual funds, and asset
managers remain below levels that generally prevailed
before 2008.
Monetary Policy
Interest rate policy. Over the first half of 2018, the
FOMC has continued to gradually increase the target
range for the federal funds rate. Specifically, the
Committee decided to raise the target range for the
federal funds rate at its meetings in March and June,
bringing it to the current range of 1¾ to 2 percent.
The decisions to increase the target range for the federal funds rate reflected the economy’s continued
progress toward the Committee’s objectives of maximum employment and price stability. Even with these
policy rate increases, 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 further gradual increases in
the target range for the federal funds rate will be consistent with a sustained expansion of economic activity, strong labor market conditions, and inflation
near the Committee’s symmetric 2 percent objective
over the medium term. Consistent with this outlook,
in the most recent Summary of Economic Projections (SEP), which was compiled at the time of the
June FOMC meeting, the median of participants’
assessments for the appropriate level for the federal
funds rate rises gradually over the period from
2018 to 2020 and stands somewhat above the median
projection for its longer-run level by the end of 2019
and through 2020. (The June SEP is presented in Part 3
of the July 2018 Monetary Policy Report.) However,
as the Committee has continued to emphasize, the
timing and size of future adjustments to the target
range for the federal funds rate will depend on the
Committee’s assessment of realized and expected
economic conditions relative to its maximumemployment objective and its symmetric 2 percent
inflation objective.
Balance sheet policy. The FOMC has continued to
implement the balance sheet normalization program
described in the Addendum to the Policy Normalization Principles and Plans that the Committee issued
about a year ago. Specifically, the FOMC has been
reducing its holdings of Treasury and agency securities by decreasing, in a gradual and predictable manner, the reinvestment of principal payments it receives
from these securities.

Special Topics
Prime-age labor force participation. Labor force participation rates (LFPRs) for men and women
between 25 and 54 years old—that is, the share of
these individuals either working or actively seeking
work—trended lower between 2000 and 2013. Those
trends likely reflect numerous factors, including a
long-run decline in the demand for workers with
lower levels of education and an increase in the share
of the population with some form of disability. By
contrast, the prime-age LFPR has increased notably
since 2013, and the share of nonparticipants who
report wanting a job remains above pre-recession levels. Thus, some continuation of the recent increase in
the prime-age LFPR may be possible if labor
demand remains strong. (See the box “The Labor
Force Participation Rate for Prime-Age Individuals”
on pages 8–10 of the July 2018 Monetary Policy
Report.)
Oil prices. Oil prices have climbed rapidly over the
past year, reflecting both supply and demand factors.
Although higher oil prices are likely to restrain
household consumption in the United States, much
of the negative effect on GDP from lower consumer
spending is likely to be offset by increased production
and investment in the growing U.S. oil sector. Consequently, higher oil prices now imply much less of a
net overall drag on the economy than they did in the
past, although they will continue to have important
distributional effects. The negative effect of upward
moves in oil prices should get smaller still as U.S. oil
production grows and net oil imports decline further.
(See the box “The Recent Rise in Oil Prices” on
pages 16–17 of the July 2018 Monetary Policy
Report.)
Monetary policy rules. Monetary policymakers consider a wide range of information on current economic conditions and the outlook when 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,
among other considerations, careful judgments about
the choice and measurement of the inputs into the
rules such as estimates of the neutral interest rate,
which are highly uncertain. (See the box “Complexities of Monetary Policy Rules” on pages 37–41 of the
July 2018 Monetary Policy Report.)

Monetary Policy and Economic Developments

Interest on reserves. The payment of interest on
reserves—balances held by banks in their accounts at
the Federal Reserve—is an essential tool for implementing monetary policy because it helps anchor the
federal funds rate within the FOMC’s target range.
This tool has permitted the FOMC to achieve a
gradual increase in the federal funds rate in combination with a gradual reduction in the Fed’s securities
holdings and in the supply of reserve balances. The
FOMC judged that removing monetary policy
accommodation through first raising the federal
funds rate and then beginning to shrink the balance
sheet would best contribute to achieving and maintaining maximum employment and price stability
without causing dislocations in financial markets or
institutions that could put the economic expansion at
risk. (See the box “Interest on Reserves and Its
Importance for Monetary Policy”on pages 44–46 of
the July 2018 Monetary Policy Report.)

Part 1: Recent Economic and Financial
Developments
Domestic Developments
The labor market strengthened further during the
first half of the year . . .

Labor market conditions have continued to
strengthen so far in 2018. According to the Bureau of
Labor Statistics (BLS), gains in total nonfarm payroll
employment averaged 215,000 per month over the
first half of the year. That pace is up from the average monthly pace of job gains in 2017 and is considerably faster than what is needed to provide jobs for
new entrants into the labor force.1 Indeed, the unemployment rate edged down from 4.1 percent in
December to 4.0 percent in June. This rate is below
all Federal Open Market Committee (FOMC) participants’ estimates of its longer-run normal level and
is about ½ percentage point below the median of
those estimates.2 The unemployment rate in June is
close to the lows last reached in 2000.
The labor force participation rate (LFPR), which is
the share of individuals aged 16 and older who are
either working or actively looking for work, was
62.9 percent in June and has changed little, on net,
since late 2013. The aging of the population is an
important contributor to a downward trend in the
1

Monthly job gains in the range of 130,000 to 160,000 are consistent with an unchanged unemployment rate and an unchanged
labor force participation rate.
See the Summary of Economic Projections in Part 3 of the
July 2018 Monetary Policy Report.

overall participation rate. In particular, members of
the baby-boom cohort are increasingly moving into
their retirement years, a time when labor force participation is typically low. Indeed, the share of the
civilian population aged 65 and over in the United
States climbed from 16 percent in 2000 to 19 percent
in 2017 and is projected to rise to 24 percent by 2026.
Given this trend, the flat trajectory of the LFPR during the past few years is consistent with strengthening
labor market conditions. Similarly, the LFPR for
individuals between 25 and 54 years old—which is
much less sensitive to population aging—has been
rising for the past several years. (The box “The Labor
Force Participation Rate for Prime-Age Individuals”
on pages 8–10 of the July 2018 Monetary Policy
Report examines the prospects for further increases in
participation for these individuals.) The employmentto-population ratio for individuals 16 and over—the
share of the total population who are working—was
60.4 percent in June and has been gradually increasing since 2011, reflecting the combination of the
declining unemployment rate and the flat LFPR.
Other indicators are also consistent with a strong
labor market. As reported in the Job Openings and
Labor Turnover Survey (JOLTS), the rate of job
openings has remained quite elevated.3 The rate of
quits has stayed high in the JOLTS, an indication
that workers are able to successfully switch jobs when
they wish to. In addition, the JOLTS layoff rate has
been low, and the number of people filing initial
claims for unemployment insurance benefits has
remained near its lowest level in decades. Other survey evidence indicates that households perceive jobs
as plentiful and that businesses see vacancies as hard
to fill. Another indicator, 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 labor underutilization from the BLS—fell further in the first six months of the year and now
stands close to its pre-recession level.
. . . and unemployment rates have fallen for all
major demographic groups

The continued decline in the unemployment rate has
been reflected in the experiences of multiple racial
and ethnic groups. The unemployment rates for
blacks or African Americans and Hispanics tend to
rise considerably more than rates for whites and
Asians during recessions but decline more rapidly
during expansions. Indeed, the declines in the unem3

Indeed, the number of job openings now about matches the
number of unemployed individuals.

105th Annual Report | 2018

ployment rates for blacks and Hispanics have been
particularly striking, and the rates have recently been
at or near their lowest readings since these series
began in the early 1970s. Although differences in
unemployment rates across ethnic and racial groups
have narrowed in recent years, they remain substantial and similar to pre-recession levels. The rise in
LFPRs for prime-age individuals over the past few
years has also been evident in each of these racial and
ethnic groups, with increases again particularly
notable for African Americans. Even so, the LFPR
for whites remains higher than that for the other
groups.4
Increases in labor compensation have been
moderate . . .

Despite the strong labor market, the available indicators generally suggest that increases in hourly labor
compensation have been moderate. Compensation
per hour in the business sector—a broad-based measure of wages, salaries, and benefits that is quite volatile—rose 2¾ percent over the four quarters ending in
2018:Q1, slightly more than the average annual
increase over the preceding seven or so years. The
employment cost index—a less volatile measure of
both wages and the cost to employers of providing
benefits—likewise was 2¾ percent higher in the first
quarter of 2018 relative to its year-earlier level; this
increase was ½ percentage point faster than its gain a
year earlier. Among measures that do not account for
benefits, average hourly earnings rose 2¾ percent in
June relative to 12 months earlier, a gain in line with
the average increase in the preceding few years.
According to the Federal Reserve Bank of Atlanta,
the median 12-month wage growth of individuals
reporting to the Current Population Survey increased
about 3¼ percent in May, also similar to its readings
from the past few years.5
. . . and likely have been restrained by slow
growth of labor productivity

Those moderate rates of compensation gains likely
reflect the offsetting influences of a strong 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
4

The lower levels of labor force participation for these other
groups differ importantly by sex. For African Americans, men
have a lower participation rate relative to white men, while the
participation rate for African American women is as high as
that of white women. By contrast, the lower LFPRs for Hispanics and Asians reflect lower participation among women.
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.

the average pace from 1996 through 2007 of 2.8 percent and also below the average gain in the 1974–95
period of 1.6 percent. The weakness in productivity
growth may be partly attributable to the sharp pullback in capital investment during the most recent
recession and the relatively slow recovery that followed. However, considerable debate remains about
the reasons for the recent slowdown in productivity
growth and whether it will persist.6
Price inflation has picked up from the low
readings in 2017

In 2017, inflation remained below the FOMC’s
longer-run objective of 2 percent. Partly because the
softness in some price categories appeared idiosyncratic, Federal Reserve policymakers expected inflation to move higher in 2018.7 This expectation
appears to be on track so far. Consumer price inflation, as measured by the 12-month percentage
change in the price index for personal consumption
expenditures (PCE), moved up to 2.3 percent in May.
Core PCE inflation, which excludes consumer food
and energy prices that are often quite volatile and
typically provides a better indication than the total
measure of where overall inflation will be in the
future, was 2 percent over the 12 months ending in
May—0.5 percentage point higher than it had been
one year earlier. The total measure exceeded core
inflation because of a sizable increase in consumer
energy prices. In contrast, food price inflation has
continued to be low by historical standards—data
through May show the PCE price index for food and
beverages having increased less than ½ percent over
the past year.
The higher readings in both total and core inflation
relative to a year earlier reflect faster price increases
for a wide range of goods and services this year and
the dropping out of the 12-month calculation of the
steep one-month decline in the price index for wireless telephone services in March last year. The
12-month change in the trimmed mean PCE price
index—an alternative indicator of underlying infla6

The box “Productivity Developments in the Advanced Economies” in the July 2017 Monetary Policy Report provides more
information. See Board of Governors of the Federal Reserve
System (2017), Monetary Policy Report (Washington: Board of
Governors, July), pp. 12–13, https://www.federalreserve.gov/
monetarypolicy/2017-07-mpr-part1.htm.
Additional details can be found in the June 2017 Summary of
Economic Projections, an addendum to the minutes of the
June 2017 FOMC meeting. See Board of Governors of the Federal Reserve System (2017), “Minutes of the Federal Open Market Committee, June 13–14, 2017,” press release, July 5, https://
www.federalreserve.gov/newsevents/pressreleases/
monetary20170705a.htm.

Monetary Policy and Economic Developments

tion produced by the Federal Reserve Bank of Dallas
that may be less sensitive than the core index to idiosyncratic price movements—slowed by less than core
inflation over 2017 and has also increased a bit less
this year. This index rose 1.8 percent over the
12 months ending in May, up a touch from the
increase over the same period last year.8
Oil prices have surged amid supply concerns . . .

As noted, the faster pace of total inflation this year
relative to core inflation reflects a substantial rise in
consumer energy prices. Retail gasoline prices this
year were driven higher by a rise in oil prices. The
spot price of Brent crude oil rose from about $65 per
barrel in December to around $75 per barrel in early
July. Although that increase took place against a
backdrop of continued strength in global demand,
supply concerns have become more prevalent in
recent months. (For a discussion of the reasons
behind the oil price increases along with a review of
the effects of oil prices on U.S. economic growth, see
the box “The Recent Rise in Oil Prices” on pages
16–17 of the July 2018 Monetary Policy Report.)
. . . while prices of imports other than energy
have also increased

Nonfuel import prices rose sharply in early 2018,
partly reflecting the pass-through of earlier increases
in commodity prices. In particular, metals prices
posted sizable gains late last year due to strong global
demand but have retreated somewhat in recent weeks.
Survey-based measures of inflation expectations
have been 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 so far this year. 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. In the University of
Michigan Surveys of Consumers, the median value
for inflation expectations over the next 5 to 10 years
has been about 2½ percent since the end of 2016,
though this level is about ¼ percentage point lower
than had prevailed through 2014. In contrast, in the
Survey of Consumer Expectations conducted by the
8

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.

Federal Reserve Bank of New York, the median of
respondents’ expected inflation rate three years hence
has been moving up recently and is currently at the
top of the range it has occupied over the past couple
of years.
. . . while market-based measures of inflation
compensation have largely moved sideways
this year

Inflation expectations can also be gauged by marketbased measures of inflation compensation. However,
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-maturity Treasury Inflation-Protected Securities (TIPS) or from
inflation swaps—have moved sideways for the most
part this year after having returned to levels seen in
early 2017.9 The TIPS-based measure of 5-to-10year-forward inflation compensation and the analogous measure of inflation swaps are now about 2 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-2014.10
Real gross domestic product growth slowed in
the first quarter, but spending by households
appears to have picked up in recent months

After having expanded at an annual rate of 3 percent
in the second half of 2017, real gross domestic product (GDP) is now reported to have increased 2 percent in the first quarter of this year. The step-down
in growth during the first quarter was largely attributable to a sharp slowing in the growth of consumer
spending that appears transitory, and gains in GDP
appear to have rebounded in the second quarter.
Meanwhile, business investment has remained strong,
9

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 total 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.
As these measures are based on CPI inflation, one should probably subtract about ¼ to ½ percentage point—the average differential with PCE inflation over the past two decades—to infer
inflation compensation on a PCE basis.

105th Annual Report | 2018

and net exports had little effect on output growth in
the first quarter. On balance, over the first half of
this year, overall economic activity appears to have
expanded at a solid pace.

highest-ever reading for that ratio, which dates back
to 1947.

The economic expansion continues to be supported
by favorable consumer and business sentiment, past
increases in household wealth, solid economic growth
abroad, and accommodative domestic financial conditions, including moderate borrowing costs and easy
access to credit for many households and businesses.

Financing conditions for consumers are generally
favorable and remain supportive of growth in household spending. However, banks have continued to
tighten standards for credit cards and auto loans for
borrowers with low credit scores, possibly in response
to some upward moves in the delinquency rates of
those borrowers. Mortgage credit has remained readily available for households with solid credit profiles.
For borrowers with low credit scores, mortgage
financing conditions have eased somewhat further
but remain tight overall. In this environment, consumer credit continued to increase in the first few
months of 2018, though the rate of increase moderated some from its robust pace in the previous year.

Gains in income and wealth continue to support
consumer spending . . .

Following exceptionally strong growth in the fourth
quarter of 2017, consumer spending in the first quarter of this year was tepid, rising at an annual rate of
0.9 percent. The slowdown in growth was evident in
outlays for motor vehicles and in retail sales more
generally; moreover, unseasonably warm weather
depressed spending on energy services. However, consumer spending picked up in more recent months as
retail sales firmed, and PCE in April and May rose at
an annual rate of 2¼ percent relative to the average
over the first quarter.
Real disposable personal income (DPI), a measure of
after-tax income adjusted for inflation, has increased
at a solid annual rate of about 3 percent so far this
year. Real DPI has been supported by the reduction
in income taxes owing to the implementation of the
Tax Cuts and Jobs Act (TCJA) as well as the continued strength in the labor market. With consumer
spending rising just a little less than the gains in disposable income so far this year, the personal saving
rate has edged up after having fallen for the past
two years.
Ongoing gains in household net worth likely have
also supported consumer spending. House prices,
which are of particular importance for the balance
sheet positions of a large set of households, have
been increasing at an average annual pace of about
6 percent in recent years.11 Although U.S. equity
prices have posted modest gains, on net, so far this
year, this flattening followed several years of sizable
gains. Buoyed by the cumulative increases in home
and equity prices, aggregate household net worth was
6.8 times household income in the first quarter, down
just slightly from its ratio in the fourth quarter—the

For the majority of households, home equity makes up the largest share of their wealth.

. . . and borrowing conditions for consumers
remain generally favorable . . .

. . . while consumer confidence remains strong

Consumers have remained upbeat. So far this year,
the Michigan survey index of consumer sentiment
has been near its highest level since 2000, likely
reflecting rising income, job gains, and low inflation.
Indeed, households’ expectations for real income
changes over the next year or two now stand above
levels preceding the previous recession.
Business investment has continued to rebound . . .

Investment spending by businesses has continued to
increase so far this year, with notable gains for spending, both on equipment and intangibles and on nonresidential structures. Within structures, the rise in oil
prices propelled another steep ramp-up in investment
in drilling and mining structures—albeit not yet back
to the levels recorded from 2012 to 2014—while
investment in nonresidential structures outside of the
energy sector picked up after declining in 2017.
Forward-looking indicators of business investment
spending remain favorable on balance. Business sentiment and the profit expectations of industry analysts
have been positive overall, while new orders of capital
goods have advanced on net this year.
. . . while corporate financing conditions have
remained accommodative

Aggregate flows of credit to large nonfinancial firms
remained strong in the first quarter, supported in
part by relatively low interest rates and accommodative financing conditions. The gross issuance of corporate bonds stayed robust during the first half of
2018, while yields on both investment- and
speculative-grade corporate bonds moved up notably

Monetary Policy and Economic Developments

but remained low by historical standards. Despite
strong growth in business investment, outstanding
commercial and industrial (C&I) loans on banks’
books rose only modestly in the first quarter,
although their pace of expansion in more recent
months has strengthened on average. In April,
respondents to the Senior Loan Officer Opinion Survey on Bank Lending Practices, or SLOOS, reported
that demand for C&I loans weakened in the first
quarter even as lending standards and terms on such
loans eased.12 Respondents attributed this decline in
demand in part to firms drawing on internally generated funds or using alternative sources of financing.
Meanwhile, growth in commercial real estate loans
has moderated some but remains strong. In addition,
financing conditions for small businesses appear to
have remained generally accommodative, with lending standards little changed at most banks and with
most firms reporting that they are able to obtain
credit. Although small business credit growth has
been subdued, survey data suggest this sluggishness is
largely due to continued weak demand for credit by
small businesses.
But activity in the housing sector has leveled off

Residential investment, which rose a modest 2½ percent in 2017, appears to have largely moved sideways
over the first five months of the year. The slowing in
residential investment likely is partly a result of
higher mortgage interest rates. Although these rates
are still low by historical standards, they have moved
up and are near their highest levels in seven years. In
addition, higher lumber prices and tight supplies of
skilled labor and developed lots reportedly have been
restraining home construction. While starts of both
single-family and multifamily housing units rose in
the fourth quarter, single-family starts have been little
changed, on net, since then, whereas multifamily
starts continued to climb earlier this year before flattening out. Meanwhile, over the first five months of
this year, new home sales have held at around the rate
of late last year, but sales of existing homes have
eased somewhat. Despite the continued increases in
house prices, the pace of construction has not kept
up with demand. As a result, the months’ supply of
inventories of homes for sale has remained at a relatively low level, and the aggregate vacancy rate stands
at the lowest level since 2003.

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

Net exports had a neutral effect on GDP growth
in the first quarter

After being a small drag on U.S. real GDP growth
last year, net exports had a neutral effect on growth
in the first quarter. Real U.S. exports increased about
3½ percent at an annual rate, as exports of automobiles and consumer goods remained robust. Real
import growth slowed sharply following a surge late
last year. Nominal trade data through May suggest
that export growth picked up in the second quarter,
led by agricultural exports, while import growth was
tepid. All told, the available data suggest that the
nominal trade deficit likely narrowed relative to GDP
in the second quarter.
Fiscal policy became more expansionary
this year . . .

Federal fiscal policy will likely provide a moderate
boost to GDP growth this year. The individual and
corporate tax cuts in the TCJA should lead to
increased private consumption and investment, while
the Bipartisan Budget Act of 2018 (BBA) enables
increased federal spending on goods and services. As
the effects of the BBA had yet to show through, federal government purchases posted only a modest gain
in the first quarter.
After narrowing significantly for several years, the
federal unified deficit widened from about 2½ percent of GDP in fiscal year 2015 to 3½ percent in fiscal 2017, and it is on pace to move up further in fiscal
2018. Although expenditures as a share of GDP in
2017 were relatively stable at 21 percent, receipts
moved lower to roughly 17 percent of GDP and have
remained at about the same level so far this year. The
ratio of federal debt held by the public to nominal
GDP was 76½ percent at the end of fiscal 2017 and is
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 remains stable, although there is a range of
experiences across these governments and some states
are still struggling. After several years of slow
growth, revenue gains of state governments have
strengthened notably as sales and income tax collections have picked up over the past few quarters. In
addition, house price gains have continued to push
up property tax revenues at the local level. But expenditures by state and local governments have been

105th Annual Report | 2018

restrained. Employment growth in this sector has
been moderate, while real outlays for construction by
these governments have largely been moving sideways
at a relatively low level.
Financial Developments
The expected path of the federal funds rate has
moved up

Market-based measures of the path of the federal
funds rate continue to suggest that market participants expect further gradual increases in the federal
funds rate. Relative to the end of last year, the
expected policy rate path has moved up, boosted in
part by investors’ perception of a strengthening in
the domestic economic outlook. In particular, the
policy path moved higher in response to incoming
economic data so far this year, especially the
employment reports, which were seen as supporting
expectations for a solid pace of growth in domestic
economic activity. In addition, investors reportedly
interpreted FOMC communications in the first half
of 2018 as signaling an upbeat economic outlook and
as reinforcing expectations for further gradual
removal of monetary policy accommodation.
Survey-based measures of the expected path of the
policy rate over the next few years have also increased
modestly since the end of last year. According to the
results of the most recent Survey of Primary Dealers
and Survey of Market Participants, both conducted
by the Federal Reserve Bank of New York just before
the June FOMC meeting, the median of respondents’
projections for the path of the federal funds rate
shifted up about 25 basis points for 2018 and beyond,
compared with the median of assessments last
December.13 Market-based measures of uncertainty
about the policy rate approximately one to two years
ahead increased slightly, on balance, from their levels
at the end of last year.
The nominal Treasury yield curve has shifted up

The nominal Treasury yield curve has shifted up and
flattened somewhat further during the first half of
2018 after flattening considerably in the second half
of 2017. In particular, the yields on 2- and 10-year
nominal Treasury securities increased about 70 basis
points and 45 basis points, respectively, from their
13

levels at the end of 2017. The increase in Treasury
yields seems to largely reflect investors’ greater optimism about the domestic growth outlook and firming expectations for further gradual removal of monetary policy accommodation. Expectations for
increases in the supply of Treasury securities following the federal budget agreement in early February
also appear to have contributed to the increase in
Treasury yields, while increased concerns about trade
policy both domestically and abroad, political developments in Europe, and the foreign economic outlook weighed on longer-dated Treasury yields. Yields
on 30-year agency mortgage-backed securities
(MBS)—an important determinant of mortgage
interest rates—increased about 60 basis points over
the first half of the year, a bit more than the rise in
the 10-year nominal Treasury yield, but remain low
by historical standards. Yields on corporate debt
securities—both investment grade and high yield—
rose more than Treasury yields, leaving the spreads
on corporate bond yields over comparable-maturity
Treasury yields notably wider than at the beginning
of the year.
Broad equity indexes rose modestly amid some
bouts of market volatility

After surging as much as 20 percent in 2017, broad
stock market indexes rose modestly, on balance, so
far this year amid some bouts of heightened volatility
in financial markets. The boost to equity prices from
first-quarter earnings reports that generally beat analysts’ expectations was reportedly offset by increased
uncertainty about trade policy, rising interest rates,
and concerns about political developments abroad.
While stock prices for companies in the technology
and consumer discretionary sectors rose notably,
those of companies in the industrial and financial
sectors declined modestly. After spiking considerably
in early February, the implied volatility for the S&P
500 index—the VIX—declined and ended the period
slightly above the low levels that prevailed in 2017.
(For a discussion of financial stability issues, see the
box “Developments Related to Financial Stability”
on pages 26–28 of the July 2018 Monetary Policy
Report.)
Markets for Treasury securities,
mortgage-backed securities, and municipal
bonds have functioned well

On balance, indicators of Treasury market functioning remained broadly stable over the first half of
2018. A variety of liquidity metrics—including bidask spreads, bid sizes, and estimates of transaction
costs—have displayed minimal signs of liquidity

Monetary Policy and Economic Developments

pressures overall, with the exception of a brief period
of reduced liquidity in early February amid elevated
financial market volatility. Liquidity conditions in the
agency MBS market were also generally stable. Overall, the functioning of Treasury and agency MBS
markets has not been materially affected by the
implementation of the Federal Reserve’s balance
sheet normalization program, including the accompanying reduction in reinvestment of principal payments from the Federal Reserve’s securities holdings.
Credit conditions in municipal bond markets have
remained stable since the turn of the year. Over that
period, yield spreads on 20-year general obligation
municipal bonds over comparable-maturity Treasury
securities edged up a bit.
Money market rates have moved up in line with
increases in the FOMC’s target range

Conditions in domestic short-term funding markets
have also remained generally stable so far in 2018.
Yields on a broad set of money market instruments
moved higher in response to the FOMC’s policy
actions in March and June. Some money market
rates rose during the first quarter more than what
would normally occur with monetary tightening. For
example, the spreads of certificates of deposit and
term London interbank offered rates relative to overnight index swap (OIS) rates increased notably,
reportedly reflecting increased issuance of Treasury
bills and perhaps also the anticipated tax-induced
repatriation of foreign earnings by U.S. corporations.
The upward pressure on short-term funding rates,
beyond that driven by expected monetary policy,
eased in recent months, leading to a narrowing of
spreads of some money market rates to OIS rates.
However, the spreads remain wider than at the beginning of the year.
Bank credit continued to expand and bank
profitability improved

Aggregate credit provided by commercial banks continued to increase through the first quarter of 2018 at
a pace similar to the one seen in 2017. Its pace was
slower than that of nominal GDP, thus leaving the
ratio of total commercial bank credit to currentdollar GDP slightly lower than in the previous year.
Available data for the second quarter suggest that
growth in banks’ core loans continued to be moderate. Measures of bank profitability improved in the
first quarter of 2018 after having experienced a temporary decline in the last quarter of 2017. Weaker
fourth-quarter measures of bank profitability were
partly driven by higher write-downs of deferred tax
assets in response to the U.S. tax legislation.

International Developments
Political developments and signs of moderating
growth weighed on advanced foreign economy
asset prices

Since February, political developments in Europe and
moderation in economic growth outside of the
United States weighed on some risky asset prices in
advanced foreign economies (AFEs). Interest rates
on sovereign bonds in several countries in the European periphery rose notably relative to core countries,
and European bank shares came under pressure, as
investors focused on the formation of the Italian government. Nonetheless, peripheral bond spreads
remained well below their levels at the height of the
euro-area crisis, and the moves partly retraced as a
government was put in place. Broad stock price
indexes were little changed on net. In contrast to the
United States, long-term sovereign yields and
market-implied paths of policy rates in the core euro
area as well as the United Kingdom declined somewhat, and rates were little changed in Japan.
Heightened investor focus on vulnerabilities in
emerging market economies led asset prices to
come under pressure

Investor concerns about financial vulnerabilities in
several emerging market economies (EMEs) intensified this spring against the backdrop of rising U.S.
interest rates. Broad measures of EME sovereign
bond spreads over U.S. Treasury yields widened
notably, and benchmark EME equity indexes
declined, as investors scrutinized macroeconomic
policy approaches in several countries. Turkey and
Argentina, which faced persistently high inflation,
expansionary fiscal policies, and large current
account deficits, were among the worst performers.
Trade policy developments between the United States
and its trading partners also weighed on EME asset
prices, especially on stock prices in China and some
emerging Asian countries. EME mutual funds saw
net outflows in May and June after generally solid
inflows earlier in the year. While movements in asset
prices and capital flows were notable for a number of
economies, broad indicators of financial stress in
EMEs remained low relative to levels seen during
other periods of stress in recent years.
The dollar appreciated

After depreciating during 2017, the broad exchange
value of the U.S. dollar has appreciated moderately
in recent months. Factors contributing to the appreciation of the dollar likely include moderating growth
in some foreign economies combined with continued

105th Annual Report | 2018

output strength and ongoing policy tightening in the
United States, downside risks stemming from political developments in Europe and several EMEs, and
the recent developments in trade policy. Several currencies appeared particularly sensitive to trade policy
developments, including the Canadian dollar and the
Mexican peso, related to the North American Free
Trade Agreement negotiations, as well as the Chinese
renminbi, which fell notably against the dollar
in June.
The pace of economic activity moderated in
the AFEs

In the first quarter, real GDP growth decelerated in
all major AFEs and turned negative in Japan, down
from robust rates of activity in 2017. Part of this
slowing is a result of temporary factors, though,
including unusually cold weather in Japan and the
United Kingdom, labor strikes in the euro area, and
disruptions in oil production in Canada. In most
AFEs, economic indicators for the second quarter,
including purchasing manager surveys and exports,
are generally consistent with solid economic growth.
Despite tight labor markets, inflation pressures
remain subdued in most AFEs . . .

Sustained increases in oil prices provided upward
pressure on consumer price inflation across all AFEs
in the first half of the year. However, core inflation
has generally remained muted in most AFEs, despite
further improvement in labor market conditions. In
Canada, in contrast, core inflation picked up amid
solid wage growth, pushing the total inflation rate
above the central bank target.
. . . prompting central banks to maintain highly
accommodative monetary policies

With underlying inflation still subdued, the Bank of
Japan and the European Central Bank (ECB) kept
their policy rates at historically low levels, although
the ECB indicated it would again reduce the pace of
its asset purchases starting in October. The Bank of
England and the Bank of Canada, which both began
raising interest rates last year, signaled that further
rate increases will be gradual, given a moderation in
the pace of economic activity.

in credit may have softened domestic demand. Most
other emerging Asian economies registered strong
growth in the first quarter of 2018, partly reflecting
solid external demand.
. . . while growth in some Latin American
economies was mixed

In Mexico, real GDP surged in the first quarter as
economic activity rebounded from two major earthquakes and a hurricane last year. Following a brief
recovery in the first half of 2017, Brazil’s economy
stalled in the fourth quarter and grew tepidly in the
first quarter, and a truckers’ strike paralyzed economic activity in late May.

Part 2: Monetary Policy
The Federal Open Market Committee continued
to gradually increase the federal funds target
range in the first half of the year . . .

Since December 2015, the Federal Open Market
Committee (FOMC) has been gradually increasing
its target range for the federal funds rate as the
economy has continued to make progress toward the
Committee’s congressionally mandated objectives of
maximum employment and price stability. In the first
half of this year, the Committee continued this
gradual process of scaling back monetary policy
accommodation, increasing its target range for the
federal funds rate ¼ percentage point at its meetings
in both March and June. With these increases, the
federal funds rate is currently in the range of 1¾ to
2 percent.14 The Committee’s decisions reflected the
continued strengthening of the labor market and the
accumulating evidence that, after many years of running below the Committee’s 2 percent longer-run
objective, inflation had moved close to 2 percent.
. . . but monetary policy continues to support
economic growth

Even after the gradual increases in the federal funds
rate over the first half of the year, 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. In particular, the federal funds rate

In emerging Asia, growth remained solid . . .

Economic growth in China remained solid in the first
quarter of 2018, as a rebound in steel production and
strong external demand bolstered a recovery in industrial activity and overall growth. Indicators of investment and retail sales have slowed in recent months,
however, suggesting that the authorities’ effort to rein

See Board of Governors of the Federal Reserve System (2018),
“Federal Reserve Issues FOMC Statement,” press release,
March 21, https://www.federalreserve.gov/newsevents/
pressreleases/monetary20180321a.htm; and Board of Governors
of the Federal Reserve System (2018), “Federal Reserve Issues
FOMC Statement,” press release, June 13, https://www
.federalreserve.gov/newsevents/pressreleases/monetary20180613a
.htm.

Monetary Policy and Economic Developments

remains somewhat below most FOMC participants’
estimates of its longer-run value.
The Committee expects that a gradual approach to
increasing the target range for the federal funds rate
will be consistent with a sustained expansion of economic activity, strong labor market conditions, and
inflation near the Committee’s symmetric 2 percent
objective over the medium term. Consistent with this
outlook, in the most recent Summary of Economic
Projections (SEP), which was compiled at the time of
the June FOMC meeting, the median of participants’
assessments for the appropriate level of the target
range for the federal funds rate at year-end rises
gradually over the period from 2018 to 2020 and
stands somewhat above the median projection for its
longer-run level by the end of 2019 and through
2020.15
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 maximum-employment objective and its
symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions,
indicators of inflation pressures and inflation expectations, and readings on financial and international
developments.
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, among other considerations,
careful judgments about the choice and measurement
of the inputs to these rules such as estimates of the
neutral interest rate, which are highly uncertain (see
the box “Complexities of Monetary Policy Rules” on
pages 37–41 of the July 2018 Monetary Policy
Report).
The FOMC has continued to implement its
program to gradually reduce the Federal
Reserve’s balance sheet

June 2017 Addendum to the Policy Normalization
Principles and Plans.16 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. Since the initiation of
the balance sheet normalization program in October
of last year, such payments have been reinvested to
the extent that they exceeded gradually rising caps.
In the first 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
$12 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
each calendar month in excess of $8 billion. Over the
second quarter, payments of principal from maturing
Treasury securities and from the Federal Reserve’s
holdings of agency debt and agency MBS were reinvested to the extent that they exceeded $18 billion
and $12 billion, respectively. At its meeting in June,
the FOMC increased the cap for Treasury securities
to $24 billion and the cap for agency debt and agency
MBS to $16 billion, both effective in July. The
Committee has indicated that the caps for Treasury
securities and for agency securities will increase to
$30 billion and $20 billion per month, respectively, in
October. These terminal 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 implementation of the program has proceeded
smoothly without causing disruptive price movements in Treasury and MBS markets. As the caps
have increased gradually and predictably, the Federal
Reserve’s total assets have started to decrease, from
about $4.4 trillion last October to about $4.3 trillion
at present, with holdings of Treasury securities at
approximately $2.4 trillion and holdings of agency
and agency MBS at approximately $1.7 trillion.
The Federal Reserve’s implementation of
monetary policy has continued smoothly

The Committee has continued to implement the balance sheet normalization program described in the

To implement the FOMC’s decisions to raise the target range for the federal funds rate in March and
June of 2018, the Federal Reserve increased the rate

See the June SEP, which appeared as an addendum to the minutes of the June 12–13, 2018, meeting of the FOMC and is presented in Part 3 of the July 2018 Monetary Policy Report.

The addendum, adopted on June 13, 2017, is available at https://
www.federalreserve.gov/monetarypolicy/files/FOMC_
PolicyNormalization.20170613.pdf.

105th Annual Report | 2018

of interest on excess reserves (IOER) along with the
interest rate offered on overnight reverse repurchase
agreements (ON RRPs). Specifically, the Federal
Reserve increased the IOER rate to 1¾ percent and
the ON RRP offering rate to 1½ percent in March.
In June, the Federal Reserve increased the IOER rate
to 1.95 percent—5 basis points below the top of the
target range—and the ON RRP offering rate to
1¾ percent. In addition, the Board of Governors
approved a ¼ percentage point increase in the discount rate (the primary credit rate) in both March
and June. Yields on a broad set of money market
instruments moved higher, roughly in line with the
federal funds rate, in response to the FOMC’s policy
decisions in March and June. Usage of the ON RRP
facility has declined, on net, since the turn of the
year, reflecting relatively attractive yields on alternative investments.

The effective federal funds rate moved up toward the
IOER rate in the months before the June FOMC
meeting and, therefore, was trading near the top of
the target range. At its June meeting, the Committee
made a small technical adjustment in its approach to
implementing monetary policy by setting the IOER
rate modestly below the top of the target range for
the federal funds rate. This adjustment resulted in the
effective federal funds rate running closer to the
middle of the target range since mid-June. In an environment of large reserve balances, the IOER rate has
been an essential policy tool for keeping the federal
funds rate within the target range set by the FOMC
(see the box “Interest on Reserves and Its Importance
for Monetary Policy” on pages 44–46 of the
July 2018 Monetary Policy Report).

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 loan associations,
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. 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; 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 regulation that, in addition to a traditional approach
focused on the safety and soundness of individual
institutions, accounts for the stability of the financial
system as a whole. In particular, a supervisory

approach accounting for financial stability concerns
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 2018, 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.
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.”

Monitoring Risks to Financial
Stability
Financial institutions are linked together through a
complex set of relationships, and their condition

105th Annual Report | 2018

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.

the Board’s current assessment of financial system
vulnerabilities. It aims to promote public understanding about Federal Reserve views on this topic and
thereby increase transparency and accountability.
The report complements the annual report of the
FSOC, which is chaired by the Secretary of the
Treasury and includes the Federal Reserve Chair and
other financial regulators.

Asset Valuation Pressures
A stable financial system, when hit by adverse events
or “shocks,” is able to continue meeting demands for
financial services from households and businesses,
such as credit provision and payment services. In
contrast, in an unstable system, these same shocks
are likely to have much larger effects, disrupting the
flow of credit and leading to declines in employment
and economic activity.
Consistent with this view of financial stability, the
Federal Reserve Board’s monitoring framework distinguishes between shocks to and vulnerabilities of
the financial system. Shocks, such as sudden changes
to financial or economic conditions, are typically surprises and are inherently hard to predict. Vulnerabilities tend to build up over time and are the aspects of
the financial system that are most expected to cause
widespread problems in times of stress. As a result,
the Federal Reserve maintains a flexible, forwardlooking financial stability monitoring program
focused on assessing the financial system’s vulnerabilities to a wide range of potential adverse shocks.
Each quarter, Federal Reserve Board staff assess a set
of vulnerabilities relevant for financial stability,
including but not limited to asset valuation pressures,
borrowing by businesses and households, leverage in
the financial sector, and funding risk. These monitoring efforts inform discussions concerning 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).
In November 2018, the Federal Reserve Board published its first Financial Stability Report.1 The report,
which will be published on a semiannual basis, summarizes the Board’s framework for assessing the
resilience of the U.S. financial system and presents
1

See Board of Governors of the Federal Reserve System (2018),
Financial Stability Report (Washington: Board of Governors,
November), https://www.federalreserve.gov/publications/files/
financial-stability-report-201811.pdf.

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
result, the Federal Reserve’s analysis of asset valuation pressures 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.
Across markets, asset valuations remained elevated
through most of 2018, supported by the solid economic expansion and an apparent increase in investors’ appetite for risk. However, valuation pressures
Figure 1. Forward price-to-earnings ratio of S&P 500 firms,
1988−2018
Ratio
Monthly

30
25
20

Dec.

Median

15
10
5
0

1988

1993

1998

2003

2008

2013

2018

Note: The data, based on expected earnings for 12 months ahead, extend through
December 2018 and consist of the aggregate forward price-to-earnings ratio of
S&P 500 firms. The shaded bars indicate periods of business recession as defined
by the National Bureau of Economic Research.
Source: Federal Reserve Board staff calculations using Refinitiv (formerly Thomson Reuters), IBES Estimates.

Financial Stability

Figure 2. S&P 500 volatility, 2000−18

Figure 4. Commercial real estate price index, 1998−2018
Percent (log scale)

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

100

2001:Q1 = 100

300

Monthly

250

Dec.
Dec.
20

200
150
100

50
5

0
2000

2003

2006

2009

2012

2015

2018

Note: The data extend through December 2018. 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.
Source: Bloomberg Finance LP.

2000

2003

2006

2009

2012

2015

2018

Note: The data extend through December 2018. Series deflated using the consumer price index for all urban consumers less food and energy and seasonally
adjusted by Board staff. The shaded bars indicate periods of business recession
as defined by the National Bureau of Economic Research.
Source: CoStar Group, Inc., CoStar Commercial Repeat Sale Indices (CCRSI);
Bureau of Labor Statistics via Haver Analytics, consumer price index.

in equity and corporate bond markets moderated in
the fourth quarter of 2018 amid a step-up in market
volatility.
In equity markets, price fluctuations toward the end
of 2018 brought down the forward price-to-earnings
ratio of S&P 500 firms, a metric of valuations in
equity markets, to a level near the median of its historical distribution (figure 1). At the same time, both
realized and option-implied market volatility, which
had remained low since mid-2016, jumped back to
levels slightly above historical averages (figure 2). In
debt markets, corporate bond spreads to comparablematurity Treasury securities widened slightly through
2018, though spreads on investment- and speculative-

grade bonds remained near the lower end of their
historical range (figure 3).
Property prices continued to be an area of ongoing
valuation pressures over the past year. Commercial
real estate prices, which had risen substantially over
the previous seven years, were about flat last year,
although at historical highs (figure 4). Similar patterns were also observed in farmland prices, where
price-to-rent ratios also remained at historical highs,
and in home prices, with price-to-rent ratios above
long-run historical trends but below the extraordinary levels seen before the financial crisis.

Borrowing by Households and Businesses
Figure 3. Corporate bond spreads, 1997−2018
8
7
6
5
4
3
2
1
0

Percentage points
Monthly

1997

2000

Percentage points

16
14
12
10
8
6
Dec.
4
2
0

10-year high-yield
(right scale)
10-year triple-B
(left scale)

2003

2006

2009

2012

2015

2018

Note: The data extend through December 2018. The 10-year triple-B reflects the
effective yield of the ICE BofAML 7-to-10-year triple-B U.S. Corporate Index
(C4A4), and the 10-year high-yield reflects the effective yield of the ICE BofAML
7-to-10-year U.S. Cash Pay High Yield Index (J4A0). Treasury yields from
smoothed yield curve estimated from off-the-run securities.
Source: ICE Data Indices, LLC, used with permission; Department of the Treasury.

Excessive borrowing by households and businesses
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
weaknesses among households, nonfinancial businesses, and financial institutions cause further
declines in income and accelerate financial losses,
potentially leading to financial instability and a sharp
contraction in economic activity.
Vulnerabilities associated with household and business borrowing remained moderate overall in 2018.

105th Annual Report | 2018

However, business debt and household debt, which
started to diverge following the 2007–09 recession,
have continued to trend in opposite directions (figure 5). Business credit continued to grow faster than
nominal gross domestic product (GDP), leaving the
business-sector credit-to-GDP ratio close to historical highs.
Risky debt issuance picked up in 2017 and 2018 (figure 6). Moreover, highly leveraged corporations,
measured by debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) ratios

Figure 5. Credit-to-GDP ratio, 1980−2018

1.1

Household (left scale)
Ratio
Quarterly

Business (right scale)

Ratio

1.0

0.75

above 6, increased their share of large loan issuance
to historically high levels, above the previous peak
levels observed in 2007 and 2014 (figure 7). Nonetheless, the strong economy and low interest rates helped
sustain a solid credit performance of leveraged loans
in 2018, with the default rate on such loans near the
low end of its historical range. At the same time, the
favorable credit performance of the corporate sector
recently was likely due in part to the strength of
overall economic activity, and high leverage could
leave some parts of the corporate sector vulnerable to
difficulties should adverse shocks materialize.
Furthermore, the share of bonds rated at the lowest
investment-grade level (for example, an S&P rating of
triple-B) reached near-record levels. As of December 2018, around 42 percent of corporate bonds outstanding were at the lowest end of the investmentgrade segment, amounting to about $3 trillion.

0.70
Q4

0.9

0.65

0.8
0.7

0.60

0.6

0.55

0.5
0.50

0.4
0.3

In contrast to the business sector, household debt
growth continued to be modest over the past year
and remained mostly in line with income growth.
Aggregate borrowing relative to income in the household sector has declined significantly from its 2007
peak, with growth skewed mostly toward households
with strong credit histories.

0.45
1982

1988

1994

2000

2006

2012

2018

Note: The data extend through 2018: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 via Haver Analytics, national income
and product accounts, Table 1.1.5: Gross Domestic Product; Board staff
calculations.

The composition of household debt has, however,
experienced significant changes over the past 10 years
(figure 8). Credit card debt decreased significantly
Figure 7. Distribution of large institutional leveraged loan
volumes, by debt-to-EBITDA ratio, 2001−18
Debt multiples ≥ 6x
Debt multiples 5x–5.99x
Debt multiples 4x–4.99x
Debt multiples < 4x

Figure 6. Total net issuance of risky debt, 2005−18
Annual

Quarterly

Total
Institutional leveraged loans
High-yield and unrated bonds

Percent

100

Billions of dollars

80
80
Q4

60
60

40
20

-20
0
2006

2008

2010

2012

2014

2016

2018

-40

Note: The data extend through 2018:Q4. Total net issuance of risky debt is the
sum of the net issuance of speculative-grade and unrated bonds and leveraged
loans. The data are four-quarter moving averages.
Source: Mergent, Fixed Investment Securities Database (FISD); S&P Global, Leveraged Commentary & Data.

2002

2006

2010

2014

2018

Note: The data extend through 2018. Volumes are for large corporations with
earnings before interest, taxes, depreciation, and amortization (EBITDA) greater
than $50 billion and exclude existing tranches of add-ons and amendments and
restatements with no new money. Key identifies bar segments in order from top to
bottom.
Source: S&P Global, Leveraged Commentary & Data.

Financial Stability

Figure 8. Consumer credit balances, 1999−2018

Figure 9. Common equity tier 1 ratio, 2001−18

Billions of dollars (real)

Percent of
risk-weighted assets

1600

Quarterly

Student loans

1400
Q4

Credit cards
Auto loans

1200

1000

800

600

400
Large BHCs
Other BHCs

200
2000

2003

2006

2009

2012

2015

2018

Note: The data extend through 2018:Q4. The data are converted to constant 2018
dollars using the consumer price index.

2002

between 2009 and 2011, and its recent level (in real
terms) remains well below its 2008 peak. In contrast,
student and auto loans have maintained a strong
upward trend during the past 10 years.

Vulnerabilities related to financial-sector leverage
appear low, in part because of regulatory reforms
enacted since the financial crisis. Core financial intermediaries, including large banks, insurance companies, and broker-dealers, appear well positioned to
weather economic stress.
Regulatory capital remained at historically high levels
for large domestic banks. The ratio of tier 1 common
equity to risk-weighted assets remained around
12 percent, on average, for BHCs in 2018 (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 precrisis norms. Finally, all 34 firms participating in the
Federal Reserve’s supervisory stress tests for 2018
were able to maintain capital ratios above required
minimums to absorb losses from a severe macroeconomic shock.2
Leverage of broker-dealers has been trending down
and, as of 2018, was substantially below pre-crisis
levels. At property and casualty insurance firms,
2

The 2018 supervisory stress-test methodology and results are
available on the Board’s website at https://www.federalreserve
.gov/publications/2018-june-dodd-frank-act-stress-test-preface
.htm.

2006

2010

2014

2018

Note: The data extend through 2018:Q4 and are seasonally adjusted by Board
staff. Sample consists of banks as of 2018:Q2. Before 2014:Q1, the numerator of
the common equity tier 1 ratio is tier 1 common capital for advanced-approaches
bank holding companies (BHCs) (before 2015:Q1, for non-advanced-approaches
BHCs). Afterward, the numerator is common equity tier 1 capital. Large BHCs are
those with greater than $50 billion in total assets. The denominator is riskweighted assets. The shaded bars indicate periods of business recession as
defined by the National Bureau of Economic Research.

Source: FRBNY Consumer Credit Panel/Equifax; Bureau of Labor Statistics, consumer price index.

Leverage in the Financial System

Source: Federal Reserve Board, Form FR Y-9C, Consolidated Financial Statements
for Holding Companies.

leverage has also been falling, while it has been
roughly constant over the past decade for life insurance companies. However, hedge fund leverage
appears to have been increasing over the past two
years. The increased use of leverage by hedge funds
exposes their counterparties to risk and raises the
possibility that adverse shocks would result in forced
asset sales that could exacerbate price declines. That
said, hedge funds do not play the same central role in
the financial system as banks or other institutions.

Funding Risk
Vulnerabilities associated with funding risk continued to be low in 2018, in part because of the postcrisis implementation of liquidity regulations for
banks and the 2016 money market reforms.3
In total, liquid assets in the banking system have
increased more than $3 trillion since the financial crisis. Large banks, in particular, hold substantial
amounts of liquid assets, far exceeding pre-crisis levels and well above regulatory requirements (figure 10). Bank funding is less susceptible to runs now
than in the period leading up to the financial crisis—
3

See Securities and Exchange Commission (2014), “SEC Adopts
Money Market Fund Reform Rules,” press release, July 23,
https://www.sec.gov/news/press-release/2014-143.

105th Annual Report | 2018

Figure 10. High-quality liquid assets, by BHC size, 2001−18
Percent of assets
Quarterly

24
20

Large BHCs
Other BHCs

16
Q4

12
8
4
0
2002

2006

2010

2014

Domestic and International
Cooperation and Coordination

2018

Note: The data extend through 2018:Q4. High-quality liquid assets (HQLA) are
excess reserves plus estimates of securities that qualify for HQLA. Haircuts and
Level 2 asset caps are incorporated into the estimate. Large bank holding companies (BHCs) are those with greater than $50 billion in total assets.
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).

further reducing vulnerabilities from liquidity transformation. Core deposits, which include checking
accounts, small-denomination time deposits, and
other retail deposits that are typically insured, are
near historical highs as a share of banks’ total liabilities. Core deposits have traditionally been a relatively
stable source of funds for banks, in the sense that
they have been less prone to runs. In contrast, shortterm wholesale funding, a source of funds that
proved unreliable during the crisis, is near historical
lows as a share of banks’ total liabilities.
Money market fund (MMF) reforms implemented in
2016 have reduced run risk in the financial system.
The reforms required “prime” MMFs, which have
proved vulnerable to runs in the past, to use floating
net asset values that adjust with the market prices of
the assets they hold, which resulted in a shift by
investors into government MMFs. A shift in investments toward short-term vehicles that provide alternatives to MMFs and could also be vulnerable to
runs or run-like dynamics would increase risk, but
assets in these alternatives have increased only modestly compared with the drop in prime MMF assets.

The Federal Reserve cooperated and coordinated
with both domestic and international institutions in
2018 to promote financial stability.

Financial Stability Oversight Council
Activities
As mandated by the Dodd-Frank Wall Street Reform
and Consumer Protection Act (Dodd-Frank Act),
the FSOC was created in 2010 and, as noted earlier,
is chaired by the Treasury Secretary and includes the
Federal Reserve Chair as a member (see box 1). It
established an institutional framework for identifying
and responding to the sources of systemic risk.
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,

Box 1. Regular Reporting on
Financial Stability Oversight Council
Activities
The Federal Reserve cooperated and coordinated
with domestic agencies in 2018 to promote financial stability, including through the activities of the
Financial Stability Oversight Council (FSOC).
Meeting minutes. In 2018, 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/meetingminutes.aspx).
FSOC annual report. On December 19, 2018,
the FSOC released its eighth annual report
(https://home.treasury.gov/system/files/261/
FSOC2018AnnualReport.pdf), which includes a
review of key developments in 2018 and a set of
recommended actions that could be taken to
ensure financial stability and to mitigate systemic
risks that affect the economy.
For more on the FSOC, see https://home.treasury
.gov/policy-issues/financial-markets-financialinstitutions-and-fiscal-service/fsoc.

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 2018, the Federal Reserve worked, in conjunction
with other FSOC participants, on the following
major initiatives:

FSOC made the decision that Prudential’s potential
to pose material financial distress to U.S. financial
stability was substantially reduced following changes
to simplify the company’s corporate structure and
enhanced capital and liquidity management policies.
Further, Prudential is subject to a new regulatory
regime under New Jersey state law that allows for
groupwide supervision.

Financial Stability Board Activities
Application under section 117 of the Dodd-Frank Act.
On September 12, 2018, the council announced its
decision to grant the appeal of ZB, N.A. (Zions),
under section 117 of the Dodd-Frank Act.4 The
action removed the firm’s treatment as a nonbank
financial company following its merger with Zions
Bancorporation. The FSOC found that Zions’s
potential to pose material financial distress to U.S.
financial stability was greatly reduced, as the firm
engages in limited capital markets activities, presents
minimal fire sale risks, and is subject to extensive
regulation and supervision.
Nonbank designations process. On October 17, 2018,
the council announced it had voted to rescind its
determination that material financial distress at Prudential Financial, Inc. (Prudential), could pose a
threat to U.S. financial stability, and that the company should be subject to supervision by the Federal
Reserve and enhanced prudential standards.5 The
4

See U.S. Department of the Treasury (2018), “Financial Stability Oversight Council Announces Final Decision to Grant Petition from ZB, N.A.,” press release, September 12, https://home
.treasury.gov/news/press-releases/sm478.
See U.S. Department of the Treasury (2018), “Financial Stability Oversight Council Announces Rescission of Nonbank
Financial Company Designation,” press release, October 17,
https://home.treasury.gov/news/press-releases/sm525.

In light of the interconnected global financial system
and the global activities of large U.S. financial institutions, the Federal Reserve participates in international bodies, such as the FSB. The FSB monitors the
global financial system and promotes financial stability through the adoption of sound policies across
countries. The Federal Reserve participates in the
FSB, along with the Securities and Exchange Commission and the U.S. Treasury.
In the past year, the FSB has examined 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 November, the FSB published its report on
incentives to centrally clear over-the-counter derivatives.6 Also in November, Randal K. Quarles, the
Federal Reserve’s Vice Chair for Supervision, was
appointed chair of the FSB.
6

See Financial Stability Board (2018), “Incentives to Centrally
Clear Over-the-Counter (OTC) Derivatives,” press release,
November 19, http://www.fsb.org/2018/11/incentives-tocentrally-clear-over-the-counter-otc-derivatives-2.

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.

and guidance), and regulating the U.S. banking
and financial structure by acting on a variety of
proposals.

Banking System Conditions

The Federal Reserve carries out its supervisory and
regulatory responsibilities and supporting functions
primarily by
• collecting data, along with the other federal financial regulatory agencies, to monitor trends in the
banking sector;
• engaging in supervisory activities that
—promote the safety and soundness of individual
institutions supervised by the Federal Reserve;
—identify requirements and set priorities for supervisory information technology initiatives; and
—meet evolving supervisory responsibilities
through ongoing staff development; and
• developing regulatory policy (rulemakings, supervision and regulation letters, policy statements,

The financial condition of the U.S. banking system is
generally strong. The strong economic trends of the
last several years have contributed to improvements
in the financial condition of banks. Two important
measures of profitability—return on equity (ROE)
and return on average assets (ROAA)—have seen
steady gains over the past several years and ended the
year near a 10-year high (figure 1).1 Earnings for
firms of all sizes have been bolstered by rising net
interest income and the recent reduction in effective
tax rates. Moderately rising interest rates have been
positive for bank earnings and have helped drive
increases in net interest income.
1

The dip in ROE and ROAA in 2017 was driven by a one-time
tax effect.

Figure 1. Bank profitability
20

Percent

Percent 2.0
ROE (left)

ROAA (right)

1.0

0.5

0.0

-5

-0.5

-10

-1.0

-15

-1.5

ROE

1.5

-2.0

-20
2006

2007

2008

2009

2010

2011

2012

2013

2014

Note: ROAA is net income/quarterly average assets; ROE is net income/average equity capital. Values are annualized.
Source: Call Report and FR Y-9C.

2015

2016

2017

2018

ROA A

105th Annual Report | 2018

Figure 2. Loan growth by sector
Percent

150

Non-residential real estate
C&I

140

Total

130

Consumer
Residential real estate

120
110
100
90

2013

2014

2015

2016

2017

2018

Source: Call Report and FR Y-9C.

Firms have reported growth in loan volume coupled
with lower nonperforming loan ratios. Loan growth
remains robust, with total loan volume for the industry growing over 30 percent since 2013 (figure 2).
Commercial and industrial (C&I) loans and nonresidential real estate loans have experienced the
strongest growth. Since 2013, the volume of C&I and
non-residential real estate loans has grown by close to
50 percent. Residential real estate lending, which
experienced structural changes over this period,
exhibited tepid growth.
In recent quarters, nonbank finance companies are
increasing their market share in new mortgage originations, and large banks are shifting their mortgage

exposures from loans to securities. As a result, the
banking industry’s overall loan portfolio is shifting
away from residential real estate loans toward C&I
loans and consumer loans (figure 3).
The nonperforming loan ratio—one measure of asset
quality—is generally improving or stable across the
banking system (figure 4).2 Currently, nonperforming
loans as a share of total loans and leases are at or
near a 10-year low. However, nonperforming consumer loans saw a slight increase in the second half
of 2018.
2

Nonperforming loans, or problem loans, are those loans that are
90 days or more past due, plus loans in nonaccrual status.

Figure 3. Loan composition
100

Percent

80
60
40
20
0
2013

2014
Residential real estate

2015
Non-residential real estate

2016
C&I

Consumer

2017
Other

Note: Loan composition is individual loan categories as a share of total loans. Chart key shows bars in order from top to bottom.
Source: Call Report and FR Y-9C.

2018

Supervision and Regulation

Figure 4. Nonperforming loan ratio
10

Percent
Residential real estate
Total
Consumer
C&I
Non-residential real estate

8
6
4
2
0
2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Note: Nonperforming loan ratio is the ratio of loans 90 days or delinquent and nonaccrual loans to total loans.
Source: Call Report and FR Y-9C.

Firms maintain reserves to provide a cushion against
losses on loans and leases they are unable to collect.
One important financial metric is the ratio of allowance for loan and lease losses (ALLL, which is the
amount of reserves banks set aside to absorb losses
related to troubled loans) to the volume of nonperforming loans and leases held by a bank, also known
as the reserve coverage ratio (figure 5). A higher ratio
generally indicates a better ability to absorb future
loan losses.
Since 2013, as the volume of nonperforming loans
has declined, the industrywide coverage ratio has
improved considerably. While the entire industry has
seen an improvement in this ratio, the largest firms
have seen the greatest improvement. It is important
to note that nonperforming loan status is a lagging
Figure 5. Reserve coverage ratio
200

Percent

150

indicator of loan losses and other factors are considered when estimating the allowance, such as changes
in underwriting standards and changes in local or
regional economic conditions.
As profitability and asset quality continue to improve,
firms still maintain high levels of quality capital. Capital provides a buffer to absorb losses that may result
from unexpected operational, credit, or market
events. Since the financial crisis, the Federal Reserve
has implemented new rules that have significantly
raised the requirements for the quantity and quality
of bank capital, particularly at the largest firms. As a
result of the new requirements, capital levels have
increased across the industry (figure 6).
Firms have also significantly bolstered their liquidity
after coming under funding pressure during the financial crisis. The funding stresses faced by large banks
during the financial crisis heavily influenced the subsequent U.S. regulatory framework for addressing
funding and liquidity risk. The financial crisis demonstrated the need to ensure that banks hold enough
fundamentally sound and reliable liquid assets to survive a stress scenario. Liquidity requirements put in
place since the crisis have significantly increased
aggregate levels of highly liquid assets (figure 7).

100

50
2006

2008

2010

2012

2014

2016

2018

Note: Reserve coverage ratio is the ratio of ALLL to loans 90 days or more delinquent and nonaccrual loans. Data adjusted for GNMA guaranteed loans.
Source: Call Report and FR Y-9C.

The banking industry remains concentrated, while the
market share of the largest banking organizations has
declined. Over the past few decades, as the banking
system has grown, there has been a trend of
increased bank consolidation. During the height of
the financial crisis, and immediately after, as the
financial system was strained, many banks merged

105th Annual Report | 2018

Figure 6. Common equity tier 1 ratio/share of instituions not well capitalized
Percent

Percent

Common equity tier 1 ratio

6
5

10
Common equity tier 1 leverage ratio (left)
Share of institutions (right)

4
3
2
1
0

0
2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Share of institutions not well capitalized

2018

Note: Common equity tier 1 is the ratio of tier 1 common equity to risk-weighted assets.
Source: Call Report and FR Y-9C.

with other institutions, or failed. Upon closing, the
assets of these failed banks were sold to other, often
larger, institutions, and the industry saw a wave of
consolidation and growth of the largest institutions.
In recent years, however, concentration has slowed by
some measures. Even as the total volume of loans
and leases has been growing, the distribution of
those loans has spread to a broader section of the
industry. The market share of loans for the 10 largest
banking organizations has declined (figure 8).

Figure 7. Highly liquid assets as share of total assets
30

Percent

10
2006

2008

2010

2012

2014

2016

2018

Note: Highly liquid assets (HLA) displayed here are an approximation of highquality liquid assets (HQLA).
Source: Call Report and FR Y-9C.

Market indicators generally reflect stronger industry
performance. The improvements in overall banking
system conditions since the crisis are reflected in market indicators of bank health, such as the market
leverage ratio and credit default swap (CDS) spreads.
The market leverage ratio is a market-based measure
of firm capital, and a higher ratio generally indicates
investor confidence in banks’ financial strength.

Figure 8. Concentration of banking industry outstanding loans and leases
100

Percent

80
60
40
20
0

2000 2001 2002 2003 2004

2005 2006 2007 2008 2009
Largest 10 firms (top)

Source: Call Report and FR Y-9C.

2010

2011 2012 2013 2014

Largest 11–30 firms (middle)

2015 2016 2017 2018

Other firms (bottom)

Supervision and Regulation

Figure 9. Average credit default swap (CDS) spread and market leverage ratio
300

Percent

Percent
CDS (left)

Market leverage (right)

250

10
8

150

100

Market leverage

200
CDS

2
0

0
2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Note: Market leverage ratio is the ratio of market value of equity to market value of equity plus total liabilities. CDS values are for the eight U.S. and four FBO LISCC firms only
(U.S.: Bank of America; Bank of New York Mellon; Citigroup; Goldman Sachs; JPMorgan Chase; Morgan Stanley; State Street; Wells Fargo; FBO: Barclays; Credit Suisse; Deutsche Bank; UBS).
Source: CDS—IHS Markit; market leverage—Bloomberg, Factset.

Credit default spreads are a measure of market perceptions of bank risk, and a small spread reflects
investor confidence in banks’ financial health. Both
measures are close to pre-crisis levels, despite
increased market volatility in the fourth quarter of
2018 (figure 9).3

Supervisory Developments
In overseeing the institutions under its authority, the
Federal Reserve seeks primarily to promote safety,
soundness, and efficiency, including compliance with
laws and regulations. For supervisory purposes, the
Federal Reserve categorizes institutions into the
groups described in table 1.

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 necessary. The Federal Reserve also provides training and
technical assistance to foreign supervisors and
minority-owned and de novo depository institutions.
3

For definitions of market leverage and credit default swap
spreads, see the Federal Reserve Supervision and Regulation
report at https://www.federalreserve.gov/publications/2018-11supervision-and-regulation-report-appendix-a.htm.

Examinations and Inspections
The Federal Reserve conducts examinations of state
member banks, financial market utilities (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
• analysis of financial condition, including capital,
asset quality, earnings, and liquidity;
• an assessment of the risk-management and internal
control processes in place to identify, measure,
monitor, and control risks;
• an evaluation of the adequacy of governance,
including oversight by the board and execution by
senior management, which incorporates an assessment of internal policies, procedures, risk limits,
and controls; and
• a review for compliance with applicable laws and
regulations.
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

105th Annual Report | 2018

Table 1. Summary of organizations supervised by the Federal Reserve
Portfolio

Definition

Number of institutions

Total assets
($ trillions)

12*

12.1

0.7

Non-LISCC U.S. firms with total assets $50 billion and larger and
non-LISCC FBOs

153

7.7

Large banking organizations

Non-LISCC U.S. firms with total assets $100 billion and greater

3.5

FBOs

Non-LISCC FBOs

162**

3.8

State member banks

SMBs within LFBO organizations

0.9

Total assets between $10 billion and $100 billion

1.8

SMBs within RBOs

0.6

3,912 holding
companies

2.3

731 (includes
663 SMBs with a
holding company
and 68 without a
holding company)

0.5

Large Institution Supervision
Coordinating Committee (LISCC)
State member banks (SMBs)
Large and foreign banking
organizations (LFBO)

Regional banking organizations
(RBOs)
State member banks
Community banking organizations
(CBO)
State member banks

Insurance and commercial
savings and loan holding
companies (SLHCs)

Eight U.S. G-SIBs, four foreign banking organizations (FBOs) with large and
complex U.S. operations, and a nonbank financial institution designated
systemically important by the FSOC
SMBs within LISCC organizations

Total assets less than $10 billion

SMBs within CBOs

SLHCs primarily engaged in insurance or commercial activities

9 insurance SLHCs
4 commercial SLHCs

* Bank of America; Bank of New York Mellon; Citigroup; Goldman Sachs; JPMorgan Chase; Morgan Stanley; State Street; Wells Fargo; Barclays; Credit Suisse; Deutsche Bank;
UBS; Credit Suisse, BBVA, and Industrial and Commercial Bank of China did not publish their fourth quarter assets. Assets were generated via regulatory report forms (FFIEC
002, FFIEC Y9C).
** Count includes foreign banks that operate in the U.S. through a representative office.

pose a danger to the consolidated organization, its
banking offices, or to the broader economy.4
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 Comprehensive Capital Analysis and Review
(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
bank holding companies (BHCs) with $100 billion or
more in total consolidated assets and U.S. intermediate holding companies (IHCs).5 In CCAR, the Fed4

“Banking offices” are defined as U.S. depository institution subsidiaries as well as the U.S. branches and agencies of foreign
banking organizations.
On February 5, 2019, the Board announced that it will provide
relief to less-complex firms from stress testing requirements and
CCAR by effectively moving the firms to an extended stress test

eral 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.6 The 2018
CCAR results are available at https://www
.federalreserve.gov/publications/files/2018-ccarassessment-framework-results-20180628.pdf.

cycle this year. The relief applies to firms generally with total
consolidated assets between $100 and $250 billion. As a result,
these less-complex firms will not be subject to the supervisory
stress test during the 2019 cycle and their capital distributions
for this year will be largely based on the results from the 2018
supervisory stress test.
For more information on CCAR, see https://www.federalreserve
.gov/supervisionreg/ccar.htm.

Supervision and Regulation

DFAST is a supervisory stress test conducted by the
Federal Reserve to evaluate whether large BHCs and
IHCs have sufficient capital to absorb losses resulting
from stressful economic and financial market conditions. The Dodd-Frank Wall Street Reform and Consumer Protection Act (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 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
2018 DFAST results are available at https://www
.federalreserve.gov/publications/files/2018-dfastmethodology-results-20180621.pdf.
State Member Banks

At the end of 2018, a total of 1,611 banks (excluding
nondepository trust companies and private banks)
were members of the Federal Reserve System, of
which 794 were state chartered. Federal Reserve
System member banks operated 53,339 branches, and
accounted for 33 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 17 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.7
However, qualifying well-capitalized, well-managed
state member banks with less than $3 billion in total
assets are eligible for an 18-month examination
cycle.8 The Federal Reserve conducted 321 examinations of state member banks in 2017. Table 2 provides information on examinations and inspections

conducted by the Federal Reserve during the past
five years.
Bank Holding Companies

At year-end 2018, a total of 4,300 U.S. BHCs were in
operation, of which 3,848 were top-tier BHCs. These
organizations controlled 3,948 insured commercial
banks and held approximately 94 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
primary responsibility for the supervision of those
banks, thereby minimizing duplication of effort and
reducing the supervisory burden on banking
organizations.
Inspections of BHCs with less than $100 billion in
assets, including financial holding companies
(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.9 Noncomplex BHCs with consolidated assets of $1 billion
or less are subject to a special supervisory program
that permits a more flexible approach.10 In 2018, the
Federal Reserve conducted 533 inspections of large
9

10
7

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.
Effective January 28, 2019. 83 Fed. Reg. 67,033
(December 28, 2018).

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 2018 by an interim final rule that increased
the asset threshold from $1 billion to $3 billion (83 Fed. Reg.
44,195). See SR letter 13-21 for a discussion of the factors considered in determining whether a BHC is complex or noncomplex (https://www.federalreserve.gov/bankinforeg/srletters/sr1321
.htm).

105th Annual Report | 2018

Table 2. State member banks and bank holding companies, 2014–18
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 System1
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

2018

2017

2016

2015

2014

794
2,851
563
321
242

815
2,729
643
354
289

829
2,577
663
406
257

839
2,356
698
392
306

858
2,233
723
438
285

604
19,233
549
533
325
208
16

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

3,273
893
2,216
2,132
81
2,051
84

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

490
44

492
42

473
42

442
40

426
40

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

BHCs and 2,132 inspections of small, noncomplex BHCs.
In 2018, the Board adopted a new ratings framework
for BHCs with $100 billion or more in assets, which
was designed to align with the supervisory program
for Large Institution Supervision Coordinating Committee (LISCC) firms and other large financial institutions. Under the system, known as LFI, these firms
are assigned ratings for three separate components:
Capital Planning and Positions; Liquidity Risk Management and Positions; and Governance and Controls. The Federal Reserve is using the new ratings
framework to assign ratings to LISCC firms in 2019,
and to other large financial institutions in 2020. (See
box 1 for further explanation of the Board’s newly
adopted ratings system.)
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 full-

scope securities underwriting, merchant banking,
and insurance underwriting and sales. As of year-end
2018, a total of 490 domestic BHCs and 44 foreign
banking organizations had FHC status. Of the
domestic FHCs, 25 had consolidated assets of
$50 billion or more; 48, between $10 billion and
$50 billion; 153, between $1 billion and $10 billion;
and 264, less than $1 billion.
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 2018, a total of 379
SLHCs were in operation, of which 194 were top-tier
SLHCs. These SLHCs control 203 depository institutions and include 16 companies engaged primarily in
nonbanking activities, such as insurance underwriting (9 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 91 percent of

Supervision and Regulation

Box 1. LFI Ratings Framework
In 2018, the Board adopted a new supervisory ratings framework for large financial institutions (LFIs)
that is designed to align with the Federal Reserve’s
current supervisory programs and practices.1 For
these purposes, LFIs include bank holding companies and non-insurance, non-commercial savings
and loan holding companies with total consolidated
assets of $100 billion or more, and U.S. intermediate
holding companies of foreign banking organizations
established under Regulation YY with total consolidated assets of $50 billion or more.
In the years following the 2007-09 financial crisis, the
Federal Reserve developed a supervisory program
specifically designed to enhance resiliency and
address the risks posed by large financial institutions
to U.S. financial stability (LFI supervisory program).
The LFI supervisory program focuses supervisory
attention on capital, liquidity, and governance and
controls, which were identified as the core areas that
are most likely to threaten the firm’s financial and
operational strength and resilience.
1

For more information about the supervisory framework, see SR
letter 19-3/CA 19-2, “Large Financial Institution (LFI) Rating
System” at https://www.federalreserve.gov/supervisionreg/
srletters/sr1903.htm.

SLHCs engage primarily in depository activities.
These firms hold approximately 20 percent ($331 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 3 provides information on
examinations of SLHCs for the past five years.

The new ratings system is applicable to these firms
and is more closely aligned with the LFI supervisory
program, so that the ratings more directly communicate the results of the Federal Reserve’s supervisory
assessment. The new ratings system also provides
more transparency related to the supervisory consequences of a given rating.
The Federal Reserve would assign ratings to LFIs in
the three core areas of supervision: capital planning
and positions, liquidity risk management and positions, and governance and controls. The LFI rating
system also uses a new rating scale, which includes
the following four ratings categories: Broadly Meets
Expectations, Conditionally Meets Expectations,
Deficient-1, and Deficient-2. All three component ratings must be rated either “Broadly Meets Expectations” or “Conditionally Meets Expectations” for an
LFI to be considered “well managed” for purposes of
laws and regulations, including activity restrictions
under the Bank Holding Company Act. The “Conditionally Meets Expectations” rating category enables
the Federal Reserve to identify certain material issues
at a firm and provide a firm with notice and the ability
to fix those issues before the firm experiences regulatory consequences as a result of the ratings
downgrade.

Several complex policy issues continue to be
addressed by the Board, including those related to
consolidated capital requirements for insurance
SLHCs and issues pertaining to intermediate holding
companies for commercial SLHCs. 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

Table 3. Savings and loan holding companies, 2014–18
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

2018

2017

2016

2015

2014

55
1,615
40
40
20
20

59
1,696
52
52
31
21

67
1,664
54
54
34
20

67
1,525
58
57
31
26

76
1,493
83
82
45
37

139
38
107
107
1
106

164
47
165
165
9
156

171
50
181
181
9
172

194
55
187
187
13
174

221
65
212
212
10
202

105th Annual Report | 2018

companies with significant insurance activities.11 A
request for public comment on the adoption of the
formal rating system for certain SLHCs closed on
February 13, 2017. On November 9, 2018, the Board
determined that it would apply the formal rating
system to SLHCs that are depository in nature. The
determination does not apply the formal rating
system to SLHCs engaged in significant insurance or
commercial activities. Additionally, SLHCs that are
depository in nature and have $100 billion or more in
consolidated assets will be rated under the RFI rating
system until the Board applies the new rating system
for large financial institutions.
Savings and loan holding companies primarily engaged
in insurance underwriting activities. The Federal
Reserve supervises 9 insurance SLHCs (ISLHCs),
with $886 billion in estimated total combined assets,
and $151 billion in thrift assets. Of the ten, three
firms have total assets greater than $100 billion, four
firms have total assets between $10 billion and
$100 billion, and three firms have total assets less
than $10 billion. With the exception of two ISLHCs,
each of which owns a thrift subsidiary that comprises
roughly 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 riskmanagement 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
11

The ANPR is available at https://www.gpo.gov/fdsys/pkg/FR2016-06-14/pdf/2016-14004.pdf. The comment period for this
ANPR closed on September 16, 2016.

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 supporting 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.12
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.
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 Com12

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

Supervision and Regulation

mission (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.
Designated Nonbank Financial Companies

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. There are currently no nonbank
financial companies subject to Federal Reserve
supervision.
In March 2019, the FSOC sought comment on proposed guidance to prioritize its efforts to identify,
assess, and address potential risks and threats to U.S.
financial stability through a process that emphasizes
an activities-based approach. The proposed guidance
indicated that the FSOC would pursue entity-specific
determinations under the Dodd-Frank Act only if a
potential risk or threat could not be addressed
through an activities-based approach. This approach
is intended to enable the FSOC to more effectively
identify and address the underlying sources of risks
to financial stability, rather than addressing risks
only at a particular nonbank financial company that
may be designated.
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
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.
At the end of 2018, a total of 29 member banks were
operating 322 branches in foreign countries and overseas areas of the United States; 14 national banks
were operating 271 of these branches, and 15 state
member banks were operating the remaining 51. In
addition, 6 nonmember banks were operating 14
branches in foreign countries and overseas areas of
the United States.
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 2018, out of 36 banking organizations
chartered as Edge Act or agreement corporations,
3 operated 6 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 2018, a total of 140 foreign banks from 48 countries operated 155 statelicensed branches and agencies, of which 6 were
insured by the Federal Deposit Insurance Corporation (FDIC), and 57 OCC-licensed branches and
agencies, of which 4 were insured by the FDIC.
These foreign banks also owned 8 Edge Act and
agreement corporations. In addition, they held a controlling interest in 39 U.S. commercial banks. Altogether, the U.S. offices of these foreign banks controlled approximately 20 percent of U.S. commercial

105th Annual Report | 2018

banking assets. These 140 foreign banks also operated 79 representative offices; an additional 36 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.13 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 468 examinations of
foreign banks in 2018.

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.15
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).14 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
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
13

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.”

In 2018, the Federal Reserve contributed to FFIEC
information systems and technology policy and
emerging technology issues, including prescribing
principles and guidance for the examination of
financial institutions and their technology service
providers to promote uniformity in the supervision of
these entities. The Federal Reserve chaired the
FFIEC’s IT Subcommittee of the Task Force on
Supervision, the primary interagency group responsible for coordination across member agencies on
information technology policy 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
updates to the IT Examination Handbook to incorporate a more enterprise-wide, risk-management
approach to the assessment of information technology and related risks at supervised institutions in
reflection of changes that have occurred in technology and the financial sector.
In October 2018, the Cybersecurity and Critical
Infrastructure Working Group (CCIWG) published
an interagency joint statement on Office of Foreign
15

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.

Supervision and Regulation

Assets Control (OFAC) sanctions to raise awareness
that entities were targeting U.S. financial institutions
with malicious software and services. Because of the
nature of the claims under OFAC’s Cyber-Related
Sanctions Program, financial institutions were
advised to assess the risk of having, or continuing to
use, sanctioned entities’ software and services. In recognition of National Cybersecurity Awareness
Month, the CCIWG hosted a webinar on October 31, 2018, to announce free public and private sector resources to help financial institutions enhance
their resilience.
Fiduciary Activities

The Federal Reserve has supervisory responsibility
for state member banks and some nondepository
trust companies, which hold assets in various fiduciary and custodial capacities. On-site examinations
of fiduciary and custodial activities are risk-focused
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 2018, Federal Reserve
examiners conducted 95 fiduciary examinations of
state member banks and nondepository trust
companies.
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 2018, the Federal Reserve conducted transfer agent examinations
at two 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 govern-

ment securities dealers or brokers not exempt from
the Treasury’s regulations. During 2018, the Federal
Reserve conducted six examinations of broker-dealer
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. Five entities supervised by the Federal Reserve that dealt in municipal
securities were examined during 2018.
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).
Cybersecurity and Critical Infrastructure

The Federal Reserve collaborated with other financial regulators, the U.S. Treasury, private industry,
and international partners to promote effective safeguards against cyber threats to the financial services
sector and to bolster the sector’s cyber resiliency.
Throughout the year, Federal Reserve examiners conducted targeted cybersecurity assessments of the
largest and most systemically important financial
institutions (SIFIs), FMUs, and technology service
providers (TSPs). The Federal Reserve worked closely
with the OCC and FDIC to develop and implement
improved examination procedures for the cybersecurity assessments of TSPs. Federal Reserve examiners
also continued to conduct tailored cybersecurity
assessments at community and regional banking
organizations.
In October 2018, the Federal Reserve presented a
webinar to examiners to inform them of internal

105th Annual Report | 2018

resources to assist financial institutions in meeting
their control objectives, regardless of whether they
use the FFIEC Cybersecurity Assessment Tool,
National Institute for Standards and Technology
(NIST) Cybersecurity Framework, Financial Services
Sector Specific Cybersecurity Profile, or any other
methodology to assess their cybersecurity preparedness. Also, in December 2018, the Federal Reserve
issued an advisory letter to examiners and other
supervisory staff responsible for responding to cyber
and security incidents at supervised institutions. The
advisory letter formalizes roles, responsibilities, and
process guiding S&R’s response to cyber and security
incidents, and implements a playbook to guide
response actions and interdivisional communication
during and after incidents.
In 2018, the Financial and Banking Information
Infrastructure Committee (FBIIC) Harmonization
Working Group (HWG), chaired by the Federal
Reserve, analyzed the cyber terms and definitions
used by the FBIIC agencies in published cyberrelated laws, regulations, tools, and guidance. The
HWG sought to identify instances of the FBIIC
agencies using different definitions for the same cyber
terms. Going forward, the agencies agreed to use
NIST as the primary source of cyber terms and definitions in cyber-related regulations, tools and guidance. Also in 2018, representatives of the HWG conducted outreach to a number of financial institutions
with multiple regulators to gather information that
would help the HWG identify opportunities to
improve regulatory harmonization and the coordination of cyber examinations.
The Federal Reserve actively participated in interagency groups, such as the FFIEC’s CCIWG and the
FBIIC 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.
In addition, the Federal Reserve was actively involved
in international policy coordination to address cyber-

related risks and efforts to bolster cyber resiliency.
The Federal Reserve supported the Group of Seven
(G-7) Fundamental Elements of Threat-led Penetration Testing and Third Party Cyber Risk Management in the Financial Sector and the development of
incident coordination protocols to enhance international coordination and knowledge sharing. The Federal Reserve also supported the Financial Stability
Board’s (FSB’s) cyber lexicon for the financial sector.
Additional information about the FSB cyber lexicon
is available at http://www.fsb.org/2018/11/cyber-lexicon/.
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 2018,
the Federal Reserve completed 92 formal enforcement actions. Civil money penalties totaling
$223,960,223 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 (https://www.federalreserve.gov/apps/
enforcementactions/search.aspx).
In 2018, the Reserve Banks completed 62 informal
enforcement actions. Informal enforcement actions
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 offsite 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

Supervision and Regulation

(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 https://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 2018, 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 2018, 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 2018 to
organize regional training programs included the
South East Asian Central Banks Research and Training Centre, the Caribbean Group of Banking Supervisors, the Reserve Bank of India, the Arab Monetary Fund, the European Central Bank, 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
(https://www.fedpartnership.gov). Representatives
from each 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 2018, the Federal Reserve’s MDI
portfolio consisted of 14 state member banks.
In 2018, the Federal Reserve System continued to
support MDIs through the following activities:
• Staff of the PFP program organized the first biannual MDI Leadership Forum that took place
April 19–20, 2018, in Washington, D.C. The MDI
Leadership Forum will continue as a biannual
opportunity for the Fed to host CEOs of a number
of state-member-bank (SMB) MDIs to provide

105th Annual Report | 2018

them with an opportunity to express their experiences and challenges and provide the PFP staff
with an opportunity to improve our communication and outreach. In addition, it provides an
opportunity for Federal Reserve staff to present on
a number of pertinent supervision and regulation
and consumer affairs topics. The conference was
attended by senior level officers from SMB MDIs
supervised by the Federal Reserve. During the
course of the Leadership Forum, the senior level
officers also had an opportunity to speak with the
Vice Chairman of the Federal Reserve Board concerning issues particular to MDIs. The next Leadership Forum will take place in 2020.
• In April 2018, the Federal Reserve System, together
with the other federal banking agencies sent representatives to present at the Native Banks Gathering
II in Shawnee, Oklahoma. This gathering was a
collaborative assembly of native-owned banks
sponsored by the Citizen Potawatomi Nation, the
Federal Reserve Bank of Minneapolis’ Center for
Indian Country Development, and the Board of
Governors, in conjunction with the Office of
Indian Energy and Economic Development, a division under the U.S. Department of Interior’s
Bureau of Indian Affairs. The Federal Reserve discussed “Banking in Indian Country” and provided
“A Washington Perspective on the Banking Industry and the Opportunities of Minority-Owned
Banks.” The goal of the gathering was to familiarize native-owned banks with the Indian Loan
Guarantee Program and to better understand
opportunities for growth and diversification of
portfolios for all Native American and Alaskan
Native businesses. The gathering helped identify
new growth strategies and ways to increase revenue
streams to contribute to the nurturing of vital,
strong economies in Indian Country.
• On August 27, 2018, the Federal Reserve Board of
Governors and the Center for Indian Country
Development at the Federal Reserve Bank of Minneapolis organized a peer-to-peer meeting for
Native American banks, Native American credit
unions, and Native American community development financial institutions. The meeting was held at
the Flathead Reservation of the Confederated Salish and Kootenai Tribes, Polson, Montana, with
the goal of the gathering being one of sharing best
banking practices and developing networks to better serve the financial needs of Native Americans
and their communities.

• P4P staff and a senior Board employee attended
the annual National Bankers Association meeting
in October 2018 in Washington, D.C., and hosted
an exhibit table.
• System staff provided technical assistance to the
industry through the presentation of commissioned
research results on a webinar open to the MDI
audience; provided examiner training via a Rapid
Response Session educating Federal Reserve examiners on the mission of the P4P program.
• The Board of Governors co-sponsored the Forum
for Minority Bankers with the Federal Reserve
Banks of Kansas City (lead sponsor), Philadelphia,
Richmond, Atlanta, Chicago, St. Louis, and Dallas. The forum is a national program that provides
minority bank leaders with industry knowledge
and professional development. The forum was held
in September 2018 in Charlotte, North Carolina.
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 2018, 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 capital requirements for
market risk, the revised assessment methodology for
global systemically important banking organizations,
supervisory guidelines related to stress testing and
fintech developments, and further updates to the
Basel III disclosure requirements. 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 2018 include
• Sound practices: Implications of fintech developments for banks and bank supervisors (issued in Feb-

Supervision and Regulation

ruary and available at https://www.bis.org/bcbs/
publ/d431.pdf).
• Progress report on adoption of the Basel regulatory
framework (issued in April and October and available at https://www.bis.org/bcbs/publ/d440.pdf and
https://www.bis.org/bcbs/publ/d452.pdf).
• Capital treatment for short-term “simple, transparent and comparable” securitizations (issued in May
and available at https://www.bis.org/bcbs/publ/
d442.pdf).
• Treatment of extraordinary monetary policy operations in the Net Stable Funding Ratio (issued in
June and available at https://www.bis.org/bcbs/
publ/d444.pdf).
• Global systemically important banks: revised assessment methodology and the higher loss absorbency
requirements (issued in July and available at https://
www.bis.org/bcbs/publ/d445.pdf).
• Pillar 3 disclosure requirements – regulatory treatment of accounting provisions (issued in August and
available at https://www.bis.org/bcbs/publ/d446
.pdf).
• Stress testing principles (issued in October and
available at https://www.bis.org/bcbs/publ/d450
.pdf).
• Cyber-resilience: Range of practices (issued in
December and available at https://www.bis.org/
bcbs/publ/d454.pdf).
• Pillar 3 disclosure requirements – updated framework (issued in December and available at https://
www.bis.org/bcbs/publ/d455.pdf).
• Minimum capital requirements for market risk
(issued in December and available at https://www
.bis.org/bcbs/publ/d457.pdf).
Consultative BCBS documents issued in 2018 include
• Leverage ratio treatment of client cleared derivatives
(issued in October and available at https://www.bis
.org/bcbs/publ/d451.pdf).
• Revisions to the leverage ratio disclosure requirements (issued in December and available at https://
www.bis.org/bcbs/publ/d456.pdf).
Financial Stability Board

In 2018, 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 imple-

mentation of financial sector policies in the interest
of financial stability.
FSB publications issued in 2018 include
• Monitoring the technical implementation of the FSB
total loss-absorbing capacity (TLAC) standard
(issued in June and available at http://www.fsb.org/
wp-content/uploads/P060618.pdf).
• Crypto-assets: Report to the G20 on the work of the
FSB and standard-setting bodies (issued in July and
available at http://www.fsb.org/wp-content/uploads/
P160718-1.pdf).
• Incentives to centrally clear over-the-counter derivatives (issued jointly by the BCBS, the Committee
on Payments and Market Infrastructures, and the
International Organization of Securities Commissions in August and available at http://www.fsb.org/
wp-content/uploads/P070818.pdf).
Committee on Payments and Market
Infrastructures

In 2018, 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 and settlement activities
and related arrangements. In conducting its work on
financial market infrastructure and market-related
reforms, the CPMI often coordinated with the International Organization of Securities Commissions
(IOSCO). Over the course of 2018, CPMI-IOSCO
continued to monitor implementation of the Principles for Financial Market Infrastructures. Additionally, CPMI-IOSCO published a framework for
supervisory stress testing of central counterparties as
well as two additional reports as part of a series on
critical, over-the-counter data elements. The CPMI
also issued a report on cross border retail payments,
released its final strategy on addressing the risk of
wholesale payments fraud related to endpoint security, and, jointly with the Markets Committee, prepared a report on central bank digital currencies.
Additional information is available at http://www.
bis.org/.
International Association of Insurance
Supervisors

The Federal Reserve continued its participation in
2018 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 collabo-

105th Annual Report | 2018

ration with state insurance regulators, the NAIC, and
the Federal Insurance Office to present a coordinated
U.S. voice in these proceedings. The Federal
Reserve’s participation focuses on those aspects most
relevant to financial stability and consolidated
supervision.
In 2018, the IAIS issued for public consultation the
revised text of five Insurance Core Principles (ICPs)
as well as certain associated standards and guidance
specific to supervision of internationally active insurance groups, and adopted revisions to one of these
ICPs (covering change of control and portfolio transfers).16 The IAIS plans to adopt revisions to all of
these ICPs by year-end 2019.17
The IAIS also issued a second version of its developing Insurance Capital Standard in July 2018.18 In
addition, the IAIS issued several final and consultative reports as well as research reports in 2018.19
Papers and reports:
• Issues Paper on Index-based Insurances Particularly in Inclusive Insurance Markets (issued in June
and available at https://www.iaisweb.org/page/
supervisory-material/issues-papers/file/75169/
issues-paper-on-index-based-insurancesparticularly-in-inclusive-insurance-markets).
• IAIS and [Sustainable Insurance Forum] Issues
Paper on Climate Change Risks to the Insurance
Sector (issued in July and available at https://www
.iaisweb.org/page/supervisory-material/issuespapers/file/76026/sif-iais-issues-paper-on-climatechanges-risk).
• Issues Paper on Increasing Digitalization in Insurance and its Potential Impact on Consumer Outcomes (issued in November and available at https://
www.iaisweb.org/page/supervisory-material/issuespapers/file/77816/issues-paper-on-increasingdigitalisation-in-insurance-and-its-potentialimpact-on-consumer-outcomes).
• Application Paper on the Use of Digital Technology in Inclusive Insurance (issued in November
16
17

This material is addressed in ICP 6.
Additional information is available at https://www.iaisweb.org/
page/supervisory-material/insurance-core-principles/file/78064/
timeline-of-comframe-development-and-icps-revision.
Additional information is available at https://www.iaisweb.org/
page/supervisory-material/insurance-capital-standard/file/76133/
ics-version-20-public-consultation-document.
Additional information is available at https://www.iaisweb.org.

and available at https://www.iaisweb.org/page/
supervisory-material/application-papers/file/77815/
application-paper-on-the-use-of-digitaltechnology-in-inclusive-insurance).
• Application Paper on Supervision of Insurer
Cybersecurity (issued in November and available at
https://www.iaisweb.org/page/supervisory-material/
application-papers/file/77763/application-paper-onsupervision-of-insurer-cybersecurity).
• Application Paper on the Composition and the
Role of the Board (issued in November and available at https://www.iaisweb.org/page/supervisorymaterial/application-papers/file/77741/applicationpaper-on-the-composition-and-the-role-of-theboard).
Consultative papers:
• Holistic Framework for Systemic Risk in the Insurance Sector (issued in November and available at
https://www.iaisweb.org/page/consultations/closedconsultations/2019/holistic-framework-forsystemic-risk-in-the-insurance-sector/file/77862/
holistic-framework-for-systemic-risk-consultationdocument).
• Application Paper on Proactive Supervision of
Corporate Governance (issued in November and
available at https://www.iaisweb.org/page/
consultations/closed-consultations/2018/
application-paper-on-proactive-supervision-ofcorporate-governance/file/77733/draft-applicationpaper-on-proactive-supervision-of-corporategovernance).
• Application Paper on Recovery Planning (issued in
November and available at https://www.iaisweb
.org/page/consultations/closed-consultations/2018/
application-paper-on-recovery-planning/file/77804/
draft-application-paper-on-recovery-planning).
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.

Supervision and Regulation

Federal Reserve staff regularly consult with key constituents in the accounting and auditing professions,
including domestic and international standardsetters, 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 the Current Expected Credit Losses
(CECL) methodology. CECL’s implementation will
affect a broad range of supervisory activities, including
regulatory reports, examinations, and examiner training. During 2018, 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. During 2018, the Board, along with the OCC
and FDIC issued a comment letter on the FASB’s proposed codification improvements to financial instruments guidance on credit losses.
Other notable outreach efforts during 2018 include
the Federal Reserve co-hosting a series of “Ask the
Regulators” webinars in February and July on “Practical Examples of How Smaller, Less Complex Community Banks can Implement CECL” and “CECL
Q&A for Community Institutions,” respectively. In
December 2018, the Board, along with the OCC and
FDIC, issued a final rule that provides firms with the
option to phase in the day-one adverse regulatory
capital effects of CECL over a three-year period.
Separately, in December 2018, the Board issued a
statement on supervisory stress testing, announcing
that it will maintain the current modeling framework
for loan allowances in its supervisory stress test
through 2021.
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 and a
comment letter that were issued by the BCBS, including guidelines on identification and management of
step-in risk and a comment letter to the International
Auditing and Assurance Standards Board on the
proposed auditing standard on identifying and
assessing the risk of material misstatement. In collaboration with international insurance supervisors,
Federal Reserve staff also made contributions to
work related to enhancing IAIS standards on disclosures and drafting comment letters to standard setters on accounting and audit exposure documents.
Additionally, Federal Reserve staff provided their
accounting and business expertise through participation in other supervisory activities during the past
year. These activities included supporting DoddFrank Act initiatives related to stress testing of banks
as well as various regulatory capital-related 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. The Federal Reserve jointly with other federal banking agencies develops and maintains a regulatory framework
covering the use of real estate appraisals in federally
related transactions engaged in by regulated institutions; a component in the management of credit risk.
Shared National Credit Program

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.
A SNC is any loan or formal loan commitment—and
any asset, such as other real estate, stocks, notes,
bonds, and debentures taken as debts previously contracted—extended to borrowers by a supervised institution, its subsidiaries, and affiliates, which has the

105th Annual Report | 2018

following characteristics: an original loan amount
that aggregates to $100 million or more20 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 end of 2018, the SNC portfolio totaled
$4.4 trillion, with 8,567 credit facilities to 5,314 borrowers. Summary examination findings rate the overall risk in the SNC portfolio as moderate, given the
asset quality outside of leveraged loans. The percentages of non-pass (aggregate special mention and classified) assets declined from 2017,21 largely due to
improving conditions in the oil and gas sectors.
Despite the improvement in the percentage of nonpass commitments, the overall level of criticized
assets 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. During prior cycles, non-investment-grade
borrowers relied more heavily on the high-yield 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 riskmanagement practices. Risks associated with leveraged lending activities are building, as contrasted
with the SNC portfolio overall. Leveraged loans with
supervisory ratings below pass typically reflect borrowers with higher than average leverage levels and
weaker repayment capabilities. The SNC review
found that many leveraged loan transactions possess
weakened transaction structures and increased reliance upon revenue growth or anticipated cost
savings/synergies to support borrower repayment
capacity. Weaknesses include the prevalence of covenant lite transactions, incremental facilities with lim20

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 https://
www.federalreserve.gov/newsevents/pressreleases/
bcreg20171221c.htm.
Results discussed here are based on examinations conducted in
the first and third quarters of 2018, and cover loan commitments originated on or before March 31, 2018.

ited lending restrictions, and loan agreement language which allows the removal of assets to unrestricted subsidiaries. Borrowers possess greater
control over lending relationships and market
dynamics are changing. Non-regulated entities have
increased their participation in the leveraged lending
market via both purchases of loans and/or direct
underwriting and syndication of exposure. More leveraged lending risk is being transferred to these nonregulated entities.
For more information on the 2018 SNC review, visit
the Board’s website at https://www.federalreserve
.gov/newsevents/pressreleases/bcreg20190125a.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.
Bank Secrecy Act and Anti-Money-Laundering
Compliance

In 2018, 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 Treasury-led
BSA Advisory Group, which includes representatives
of regulatory agencies, law enforcement, and the
financial services industry and covers all aspects of
the BSA. In October 2018, the Federal Reserve, in
conjunction with the World Bank and International
Monetary Fund, hosted the Seminar for Senior Bank
Supervisors from Emerging Economies which was
attended by representatives from over 45 foreign
jurisdictions. That seminar included a discussion of
anti-money-laundering developments for banks
designed to promote information sharing and understanding of BSA/AML issues. In addition, the Federal Reserve participated in meetings during the year
to discuss BSA/AML issues with delegations from
Canada and Japan.
The Federal Reserve participates in the FFIEC BSA/
AML working group, a monthly forum for the dis-

Supervision and Regulation

cussion 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 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 2018, 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 Regulation of Virtual Assets published
in October 2018.
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. The Federal Reserve
participated in the BCBS, CPMI, FATF, and FSB
joint issuance welcoming the Correspondent Banking
Due Diligence Questionnaire published by the Wolfsberg Group, as one of the industry initiatives that
will help to address the decline in the number of correspondent banking relationships by facilitating due
diligence processes.
Incentive Compensation
The Federal Reserve believes that supervision of
incentive compensation programs at financial institutions can play an important role in helping safeguard
financial institutions against practices that threaten

safety and soundness, provide for excessive compensation, or could lead to material financial loss. The
Federal Reserve along with the other federal banking
agencies adopted interagency guidance oriented to
the risk-taking 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.
Section 956 of the Dodd-Frank Act requires the
Board, OCC, FDIC, SEC, NCUA, and FHFA to
develop joint regulations or guidelines implementing
disclosures and prohibitions concerning incentivebased compensation at covered financial institutions
with at least $1 billion in assets. The agencies published a revised proposed rule in 2016.
Guidance on Guidance
The federal banking agencies issue various types of
supervisory guidance, including interagency statements advisories, bulletins, policy statements, questions and answers, and frequently asked questions, to
their respective supervised institutions. In September 2018, the Federal Reserve—along with other federal financial agencies—issued a statement confirming the proper role of this supervisory guidance. The
statement clarified that unlike a law or regulation,
supervisory guidance does not have the force and
effect of law. Examiners cannot cite a financial institution for a violation of supervisory guidance as they
would violation of a law or regulation. To ensure that
supervisory guidance is properly applied, the Federal
Reserve has taken several steps since issuance of the
statement, including conducting several internal
training sessions, providing internal examination
materials, more closely reviewing draft supervisory
communications to institutions, and coordinating
with other federal banking agencies. The Federal
Reserve remains committed to ensuring the proper
role of guidance in the supervisory process going
forward.
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 develop-

105th Annual Report | 2018

ing, 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 supervisors, to recommend and implement appropriate and timely revisions to the reporting forms and the attendant instructions.
Federal Reserve Regulatory Reports

The Federal Reserve requires that U.S. holding companies (HCs) periodically submit reports that provide
information about their financial condition and
structure.22 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
https://www.federalreserve.gov/apps/reportforms/
default.aspx.
During 2018, the following reporting forms had substantive revisions:
• FR Y-9C—to implement a number of burdenreducing revisions corresponding to Call Report
revisions, as applicable. The revisions, effective
June 2018, included deleting certain data items,
consolidating existing data items into new data
items, and adding new or raising existing reporting
thresholds for certain data items. These changes
affected approximately 28 percent of the data items
collected for holding companies filing the FR Y-9C.
Additionally, several reporting schedules were
revised in response to changes in the accounting for
equity securities, and changes to the definitions of
reciprocal deposits brokered deposits and high
volatility commercial real estate exposures. Effective September 2018, the reporting threshold was
increased from $1 billion or more to $3 billion or
more in total consolidated assets, as a result of section 207 of the Economic Growth, Regulatory
Relief, and Consumer Protection Act (EGRRCPA)
(box 2). EGRRCPA directed the Board to revise
the Small Bank Holding Company Policy Statement (Policy Statement) to raise the total consolidated asset limit in the Policy Statement from
22

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

$1 billion to $3 billion in total consolidated assets.
As a result of this change, nearly 55 percent of
holding companies filing the Y-9C quarterly report
became eligible to file the significantly shorter
semiannual FR Y-9SP report.
• FR Y-9LP and FR Y-9SP—to implement revisions
in response to changes in the accounting for equity
securities, effective March 2018. Effective September 2018, reporting thresholds on these forms were
modified as a result of EGRRCPA section 207.
The FR Y-9LP reporting threshold was increased
to $3 billion or more in total consolidated assets
(from $1 billion or more), and the FR Y-9SP
threshold was increased to under $3 billion in total
consolidated assets (from under $1 billion). As a
result, nearly 55 percent of holding companies filing the FR Y-9LP quarterly reports became eligible
to file the shorter semiannual FR Y-9SP report.
• FR Y-14—to modify several FR Y-14Q schedules
to improve consistency of reported data and to
enhance supervisory modeling. Additionally, various FR Y-14A, FR Y-1Q, and FR Y-14M schedules were revised to reflect current accounting standards, eliminate a sub-schedule, and streamline
reporting. These changes were effective
March 2018.
• FR Y-16—to discontinue this form and transfer the
stress testing information collection for institutions
with between $10 billion and $50 billion in total
consolidated assets to an FFIEC collection.
FFIEC Regulatory Reports

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 2018, the following FFIEC reporting forms had substantive
revisions:
• FFIEC 031, 041, and 051—to implement certain
burden-reducing revisions to the FFIEC 031,
FFIEC 041 and FFIEC 051 Call Reports. See section below on the Call Report Burden Reduction
Initiative for more details. Additionally, several
reporting schedules were revised in response to
changes in the accounting for equity securities.

Supervision and Regulation

Box 2. The Economic Growth, Regulatory Relief, and Consumer Protection
Act: Reducing Regulatory Burden
The Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA), enacted on
May 24, 2018, changed several aspects of banking
law to reduce regulatory burden on community banks
and also required the federal banking agencies to further tailor their regulations to better reflect the character of the different banking firms that the agencies

supervise. On October 2, 2018, Vice Chair Quarles
testified before the Senate Committee on Banking,
Housing, and Urban Affairs on the Federal Reserve’s
implementation of EGRRCPA (table A). In his testimony, Vice Chair Quarles noted that the Federal
Reserve's implementation of EGRRCPA is underway
and that progress continues to be made.

Table A. Implementation of EGRRCPA, 2018
Date issued
7/6/2018
8/22/2018
8/23/2018
8/28/2018
9/18/2018
10/31/2018
11/7/2018
11/20/2018
11/21/2018
12/4/2018
12/21/2018
12/21/2018

Rules/guidance
Federal Reserve Board issues statement describing how, consistent with recently enacted EGRRCPA, the Board will no
longer subject primarily smaller, less complex banking organizations to certain Board regulations
https://www.federalreserve.gov/newsevents/pressreleases/bcreg20180706b.htm
Agencies issue interim final rule regarding the treatment of certain municipal securities as high-quality liquid assets
https://www.federalreserve.gov/newsevents/pressreleases/bcreg20180822a.htm
Agencies issue interim final rules expanding examination cycles for qualifying small banks and U.S. branches and agencies
of foreign banks
https://www.federalreserve.gov/newsevents/pressreleases/bcreg20180823a.htm
Federal Reserve Board issues interim final rule expanding the applicability of the Board’s small bank holding company policy
statement
https://www.federalreserve.gov/newsevents/pressreleases/bcreg20180828a.htm
Agencies propose rule regarding the treatment of high volatility commercial real estate
https://www.federalreserve.gov/newsevents/pressreleases/bcreg20180918a.htm
Federal Reserve Board invites public comment on framework that would more closely match regulations for large banking
organizations with their risk profiles
https://www.federalreserve.gov/newsevents/pressreleases/bcreg20181031a.htm
Agencies issue proposal to streamline regulatory reporting for qualifying small institutions
https://www.federalreserve.gov/newsevents/pressreleases/bcreg20181107a.htm
Agencies propose amendments to Regulation CC regarding funds availability
https://www.federalreserve.gov/newsevents/pressreleases/bcreg20181120a.htm
Agencies propose community bank leverage ratio for qualifying community banking organizations
https://www.federalreserve.gov/newsevents/pressreleases/bcreg20181121c.htm
Agencies seek public comment on proposal to raise appraisal exemption threshold for residential real estate transactions
https://www.federalreserve.gov/newsevents/pressreleases/bcreg20181204a.htm
Agencies invite comment on a proposal to exclude community banks from the Volcker rule
https://www.federalreserve.gov/newsevents/pressreleases/bcreg20181221d.htm
Agencies issue final rules expanding examination cycles for qualifying small banks and U.S. branches and agencies of
foreign banks
https://www.federalreserve.gov/newsevents/pressreleases/bcreg20181221c.htm

• FFIEC 002—to implement certain burdenreducing revisions corresponding to Call Report
revisions, as applicable. Additionally, certain
reporting information was revised in response to
changes in the accounting for equity securities.
• FFIEC 016—to create a new, single FFIEC form to
combine the agencies’ three separate, yet identical,
stress test forms for institutions with between
$10 billion and $50 billion in total consolidated
assets, with modifications to align the report form
with burden-reducing changes made to other financial reports and to collect an institution’s legal

entity identifier if they already have one. The passage of EGRRCPA in 2018 eliminated the DoddFrank Act stress testing requirements for these
firms and no data was collected on this form.
Call Report Burden Reduction Initiative

In 2018, the FFIEC concluded a multiyear initiative
that began in 2015 to streamline and simplify regulatory reporting requirements for banking institutions,
primarily community banks, and reduce their reporting burden. The objectives of this initiative were consistent with feedback the FFIEC received as part of

105th Annual Report | 2018

Table 4. Cumulative data items revised through June 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

1,002
113
36
55

316
31
3
287

244
31
3
395

* “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.

the regulatory review conducted as required by the
Economic Growth and Regulatory Paperwork
Reduction Act of 1996 to reduce burden.
Through this initiative, the FFIEC implemented
burden-reducing changes that removed or consolidated data items, added new or raised certain existing
reporting thresholds, or reduced the frequency of
reporting data items. Collectively, these changes
affected approximately 51 percent of required data
items for smaller, less complex institutions filing the
FFIEC 051 Call Report, and 28 percent of required
data items for all other institutions filing the
FFIEC 031 and FFIEC 041 Call Reports, that were
included in the Call Reports for December 31, 2016.
Table 4 summarizes the overall number of changes
finalized and implemented by Call Report form
under the burden reduction initiative.

Supervisory Information Technology
The Federal Reserve’s supervisory information technology function established a new multiyear IT strategy focused on optimizing our technology spend,
simplifying our IT environment and leveraging new
or emerging technologies. High priority initiatives
included: (1) the completion of the IT strategy,
(2) establishing an Enterprise Information Management Program for the Supervision function,
(3) developing a Records and Document Management Strategy, and (4) the successful investigation of
new technology solutions to improve examiner efficiency while reducing burden for regulated
institutions.
Supervisory and support tools. To support examiners
and other supervisory staff, IT continues to manage
tools to support the collection, use, and storage of
supervisory data—both directly within the supervisory programs or to manage resources. There has
been increased investment and growth in the

advanced quantitative analysis platforms and toolsets, as well as and data visualization software to
allow supervisory analysts to glean insights from
supervisory data.
Streamlined data access and improved security. For
the supervision function, IT continues to enhance its
data-access process using a central tool established
for managing and granting user access. This central
tool provides assurance that user-access is established
for important data, applications, and research that
will be published externally. The resulting effect of
this tool is enhanced prevention and detection controls that reduces information security risks.
IT has implemented information security policies,
procedures, and practices designed to safeguard confidential information, including confidential supervisory information and personally identifiable information. A comprehensive, defense-in-depth approach
leveraging multiple layers of security are implemented to protect confidential information. IT continually assesses the effectiveness of its information
security programs and controls, and implements
additional security measures as needed to further
enhance the protection of confidential information.
Information sharing and external collaboration. IT
provides a Federal Reserve business area representative to the FFIEC Task Force on Information Sharing, and representatives who lead both the Technical
Working Group and the Path Forward Working
Group, which focuses efforts to work with the business areas to increase capabilities for collaboration
between the agencies.
The Federal Reserve exchanges approved regulatory
interagency information with several external agencies, managed through interagency sharing agreements for specific data sets, and overseen by the
IT area.

Supervision and Regulation

Document management. In addition to continued
efforts to implement a document and records management strategy, IT continues 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.”23
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 2018, 58 examiners passed the proficiency examination (35 in safety
and soundness and 23 in consumer compliance).

National Information Center
IT continues to be responsible for the delivery of the
NIC, the Federal Reserve’s authoritative source for
supervisory, financial, and banking structure data as
well as information on supervisory documents. The
NIC includes (1) structure, financial, and supervisory
data on banking structures throughout the United
States and foreign banking concerns (2) national
applications on various supervisory programs and
the data they capture, (3) data collection processes,
and (4) a platform for sharing of the information
with external agencies and the public. Thousands of
data points are updated on a daily basis and a public
version of the data is made available through the
NIC’s website.

In 2018, the Board enhanced the consumer compliance proficiency examination by adding applicationbased 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 2019.

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 2018 are summarized
in table 5.

Continuing Professional Development
Throughout 2018, the Federal Reserve System continued to enhance its continuing professional development program. Professional development and
training content was developed to support several
major supervision initiatives, including CECL, Divergent Views, Cybersecurity, and the LISCC program.
23

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

Table 5. Training for banking supervision and regulation, 2018
Number of enrollments
Course sponsor or type

Federal Reserve System
FFIEC
Rapid Response2
1
2

Federal Reserve
personnel

State and federal
banking agency
personnel

1,299
794
14,208

64
467
897

Instructional time
(approximate training
days)1

Number of course
offerings

510
324
3

102
81
30

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.

105th Annual Report | 2018

Box 3. Transparency in Supervising and Regulating Financial Institutions
In an effort to increase transparency around the Federal Reserve’s work in supervising and regulating
financial institutions and activities, the Board of Governors of the Federal Reserve System is issuing a
Supervision and Regulation Report.1 The inaugural
report was issued on November 2018.
The focus of the report will be key developments and
trends in supervision (particularly prudential supervision) and regulation. The report will contain three
main sections:
• The Banking System Conditions section, which
provides an overview of trends in the banking sector based on data collected by the Federal
1

See https://www.federalreserve.gov/publications/files/201811supervision-and-regulation-report.pdf.

Educational efforts specific to financial technology,
including use cases and industry perspectives, were
also delivered to a national supervision audience.

Regulatory Developments
Post-Crisis Framework
Regulatory policies implemented over the past
decade have contributed significantly to improving
the safety and soundness of banking organizations
and the financial system so they are able to support
the needs of the economy through good times and
bad. Today, U.S. banking firms are significantly better capitalized and have much stronger liquidity positions. They rely less on short-term wholesale funding,
which can evaporate quickly during periods of stress.
The largest banking firms have also developed resolution plans that reduce the potential negative systemic
impact that could result in the event of their failures.
As the regulatory framework has been strengthened,
the Federal Reserve has also focused on the efficiency
of financial institution supervision. Compliance burden should be minimized without compromising the
safety and soundness gains that have been made in
recent years. In addition, the Federal Reserve continues to tailor its regulations, ensuring that the rules
vary with the risk of the institution.

Reserve and other federal financial regulatory
agencies as well as market indicators of industry
conditions.
• The Supervisory Developments section, which
provides background information on supervisory
programs and approaches as well as an overview
of key themes and trends, supervisory findings,
and supervisory priorities. The report distinguishes
between large financial institutions and regional
and community banking organizations because
supervisory approaches and priorities for these
institutions frequently differ.
• The Regulatory Developments section, which
provides an overview of the current areas of focus
of the Federal Reserve’s regulatory policy framework, including pending rules.

Efficiency involves two components. The first is
related to methods: efficient methods tailor the
requirements and intensity of regulations and supervision programs based on the asset size and complexity of firms. Efficient methods also minimize compliance burdens generally while achieving regulatory
objectives. The second is related to goals: we have a
strong public interest in an efficient financial system,
just as we do in a safe and sound one. We include the
efficient operation of the financial sector as one of
the goals we seek to promote through our regulation
and supervision.24
Transparency is not only a core requirement for
accountability to the public but also benefits the
regulatory process by exposing ideas to a variety of
perspectives. Similarly, transparent supervisory principles and guidance allow firms and the public to
understand the basis on which supervisory decisions
are made and allow firms the ability to respond constructively to supervisors (box 3).
Simplicity complements and reinforces transparency
by promoting the public’s understanding of the
Board’s regulatory and supervisory programs. Confusion and unnecessary compliance burden resulting
from overly complex regulation do not advance the
goal of a safe financial system.
24

In an effort to refine the post-crisis supervisory and
regulatory framework, the Board promotes the principles of efficiency, transparency, and simplicity.

The Federal Reserve’s bank holding company supervision program also involves reliance on—and extensive coordination
with—the insured depository primary regulator in order to
reduce burden and duplicative efforts, thereby promoting
efficiency.

Supervision and Regulation

Since the crisis, the Federal Reserve has substantially
strengthened its supervisory programs for the largest
institutions. The financial crisis made clear that policymakers needed to address more substantially the
threat to financial stability posed by the largest and
most complex banking organizations, in particular
those considered systemically important. As a result,
the Federal Reserve has strategically shifted supervisory resources to its large bank supervision programs. For SIFIs, LISCC was established in 2010 to
oversee a national program for these firms.25 An
increased number of horizontal examinations were
introduced, focusing on capital, liquidity, governance
and controls, and resolution planning.26 In addition,
financial and management information collections
from large institutions increased, giving supervisors
more timely and better insight into firms’ risk profiles and activities.

• increasing the loan size under which regulations
require banks to obtain formal real estate appraisals for commercial loans, and

The Federal Reserve also enhanced its supervision
programs for smaller institutions to address lessons
learned during the crisis and has more recently
focused on tailoring its supervisory expectations to
minimize regulatory burden whenever possible without compromising safety and soundness. During the
financial crisis of 2007–09, a large number of
regional and community banks failed or experienced
financial stress. Accordingly, the Federal Reserve
took steps to improve its regional and community
bank supervision programs to enhance expectations
for examinations, particularly for those conducted at
banks with significant concentrations of credit risk in
particular loan segments or that relied significantly
on less-stable funding sources.

U.S. Banking System Structure

As banking conditions have improved and regulators
have gained more experience implementing the postcrisis regulatory regime, the Federal Reserve, along
with other regulatory agencies, has recalibrated
supervisory programs to ensure they are effectively
and efficiently achieving their goals. As a result, the
agencies have implemented several burden-reducing
supervisory changes, including
• reducing the volume of financial data that smaller,
less-risky banks must submit to the agencies each
quarter,
25

See also SR letter 15-7, “Governance Structure of the Large
Institution Supervision Coordinating Committee (LISCC)
Supervisory Program,” at https://www.federalreserve.gov/
supervisionreg/srletters/sr1507.htm.
Horizontal examinations are exercises in which several institutions are examined simultaneously. Doing so encompasses both
firm-specific supervision and the development of broader perspectives across firms.

• proposing changes to simplify regulatory capital
rules.
In addition, the Federal Reserve has taken steps to
reduce the amount of undue burden associated with
examinations, including conducting portions of
examinations offsite. There has also been an
increased emphasis on risk-focusing examination
activities, where more in-depth examinations are conducted for banks identified as high risk or in areas
with high-risk activities, and less-intensive examinations are conducted at lower-risk banks, or in lines of
businesses at banks that have historically been lower
in risk.

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 nonbank
firms. In 2018, the Federal Reserve acted on 1,356
applications filed under the six statutes.
In 2018, 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 https://www.federalreserve.gov/publications/
semiannual-report-on-banking-applications-activity
.htm
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 deci-

105th Annual Report | 2018

sion, 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 (https://
www.federalreserve.gov/newsevents/pressreleases
.htm) as well as a guide for U.S. and foreign banking
organizations that wish to submit applications (https
://www.federalreserve.gov/bankinforeg/afi/afi.htm).

Other Laws and Regulation Enforcement
Activity/Actions
The Federal Reserve issued the following rules and
guidance in 2018 (table 6).
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.27 As most of the publicly held banking 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
27

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

2018. 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 $564,081,227 in 2018 for the
2017 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 Financial
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.

Supervision and Regulation

Table 6. Federal Reserve or interagency rulemakings/statements (proposed and final), 2018
Date
issued

Rule/guidance

1/4/2018

Federal Reserve requests comments on proposed guidance that would clarify the Board’s supervisory expectations related to risk
management for large financial institutions.
Federal Register (FR) doc: https://www.gpo.gov/fdsys/pkg/FR-2018-01-11/pdf/2018-00294.pdf
2/5/2018
Agencies seek comment on proposed technical amendments to the swap margin rule.
FR doc: https://www.gpo.gov/fdsys/pkg/FR-2018-02-21/pdf/2018-02560.pdf
4/2/2018
Agencies issue final rule to exempt commercial real estate transactions of $500,000 or less from appraisal requirements.
FR doc: https://www.federalreserve.gov/newsevents/pressreleases/files/2018-06960.pdf
4/10/2018 Federal Reserve seeks comment on proposal to simplify capital rule for large banks while preserving strong capital levels that would
maintain their ability to lend under stressful conditions.
FR doc: https://www.gpo.gov/fdsys/pkg/FR-2018-04-25/pdf/2018-08006.pdf
4/11/2018 Federal Reserve and OCC propose rule to tailor enhanced supplementary leverage ratio requirements. Comment period ended 6/25/18.
FR doc: https://www.gpo.gov/fdsys/pkg/FR-2018-04-19/pdf/2018-08066.pdf
4/17/2018 Agencies issue proposal to revise regulatory capital rules to address and provide an option to phase in the effects of the new accounting
standard for credit losses (CECL). Comment period ended 6/13/18.
FR doc: https://www.gpo.gov/fdsys/pkg/FR-2018-05-14/pdf/2018-08999.pdf
5/7/2018
Federal Reserve Board announces approval of final amendments to its Regulation A.
FR doc: https://www.federalreserve.gov/newsevents/pressreleases/bcreg20180507a.htm
5/18/2018 Federal Reserve and Office of the Comptroller of the Currency extend comment period for proposed rule tailoring leverage ratio
requirements.
FR doc: https://www.federalreserve.gov/newsevents/pressreleases/bcreg20180518a.htm
5/30/2018 Federal Reserve Board asks for comment on proposed rule to simplify and tailor compliance requirements relating to the “Volcker rule.”
FR doc: https://www.federalreserve.gov/newsevents/pressreleases/bcreg20180530a.htm
6/5/2018
Agencies ask for public comment on a proposed rule to simplify and tailor the Volcker Rule. Comment period ended 10/17/18.
FR doc: https://www.gpo.gov/fdsys/pkg/FR-2018-07-17/pdf/2018-13502.pdf
6/14/2018 Federal Reserve approves final rule to prevent concentration of risk between large banking organizations and their counterparties from
undermining financial stability.
FR doc: https://www.gpo.gov/fdsys/pkg/FR-2018-08-06/pdf/2018-16133.pdf
7/6/2018
Agencies issue statement regarding the impact of the Economic Growth, Regulatory Relief, and Consumer Protection Act.
Statement: https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20180706a1.pdf
8/22/2018 Agencies issue interim final rule regarding the treatment of certain municipal securities as high-quality liquid assets.
FR doc: https://www.federalreserve.gov/newsevents/pressreleases/files/2018-18610.pdf
8/28/2018 Federal Reserve issues interim final rule expanding the applicability of the Board’s Small Bank Holding Company Policy Statement.
FR doc: https://www.federalreserve.gov/newsevents/pressreleases/files/2018-18756.pdf
9/11/2018 Agencies issue statement reaffirming the role of supervisory guidance.
FR doc: https://www.federalreserve.gov/newsevents/pressreleases/bcreg20180911a.htm
9/14/2018 Federal and state financial regulatory agencies issue interagency statement on supervisory practices regarding financial institutions
affected by Hurricane Florence.
FR doc: https://www.federalreserve.gov/newsevents/pressreleases/bcreg20180914a.htm
9/18/2018 Agencies issue proposed rule regarding the treatment of high-volatility commercial real estate. Comment period ends 60 days after
publication in the FR.
FR doc: https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20180918a1.pdf
9/21/2018 Agencies issue final rule to amend swap margin rule.
FR doc: https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20180921a.pdf
9/21/2018 Federal Reserve Board seeks public comment on proposal to amend Regulation H and Regulation K to reflect the transferal of the Board’s
rulemaking for the Secure and Fair Enforcement for Mortgage Licensing Act (S.A.F.E. Act) to the Bureau of Consumer Financial Protection.
FR doc: https://www.federalreserve.gov/newsevents/pressreleases/bcreg20180921b.htm
10/3/2018 Federal agencies issue a joint statement on banks and credit unions sharing resources to improve efficiency and effectiveness of Bank
Secrecy Act compliance.
FR doc: https://www.federalreserve.gov/newsevents/pressreleases/bcreg20181003a.htm
10/10/2018 Federal and state financial regulatory agencies issue interagency statement on supervisory practices regarding financial institutions
affected by Hurricane Michael.
FR doc: https://www.federalreserve.gov/newsevents/pressreleases/bcreg20181010a.htm
10/30/2018 Agencies propose rule to update calculation of derivative contract exposure amounts under regulatory capital rules.
FR doc: https://www.federalreserve.gov/newsevents/pressreleases/bcreg20181030a.htm
10/31/2018 Federal Reserve Board invites public comment on framework that would more closely match regulations for large banking organizations
with their risk profiles.
Proposed prudential standards for large bank holding companies and savings and loan holding companies (83 Fed. Reg. 61,408
(November 29, 2018)).
Proposed changes to applicable threshold for regulatory capital and liquidity requirements (83 Fed. Reg. 66,024 (December 21, 2018)).
FR doc: https://www.federalreserve.gov/newsevents/pressreleases/bcreg20181031a.htm
11/2/2018 Federal Reserve Board finalizes new supervisory rating system for large financial institutions.
FR doc: https://www.federalreserve.gov/newsevents/pressreleases/bcreg20181102a.htm

(continued on next page)

105th Annual Report | 2018

Table 6.—continued
Date
issued
11/7/2018
11/15/2018
11/21/2018
12/3/2018
12/4/2018
12/21/2018
12/21/2018
12/21/2018
12/21/2018

Rule/guidance
Agencies issue proposal to streamline regulatory reporting for qualifying small institutions.
FR doc: https://www.federalreserve.gov/newsevents/pressreleases/bcreg20181107a.htm
Federal and state financial regulatory agencies issue interagency statement on supervisory practices regarding financial institutions and
their customers affected by California wildfires.
FR doc: https://www.federalreserve.gov/newsevents/pressreleases/bcreg20181115b.htm
Agencies propose community bank leverage ratio for qualifying community banking organizations.
FR doc: https://www.federalreserve.gov/newsevents/pressreleases/bcreg20181120a.htm
Federal Reserve Board issues joint statement encouraging depository institutions to explore innovative approaches to meet
BSA/anti-money-laundering compliance obligations and to further strengthen the financial system against illicit financial activity.
FR doc: https://www.federalreserve.gov/newsevents/pressreleases/bcreg20181203a.htm
Agencies seek public comment on proposal to raise appraisal exemption threshold for residential real estate transactions.
FR doc: https://www.federalreserve.gov/newsevents/pressreleases/bcreg20181204a.htm
Agencies allow three-year regulatory capital phase-in for new Current Expected Credit Losses (CECL) accounting standard.
FR doc: https://www.federalreserve.gov/newsevents/pressreleases/bcreg20181221a.htm
Federal Reserve Board will maintain current modeling framework for loan allowances in its supervisory stress test through 2021.
FR doc: https://www.federalreserve.gov/newsevents/pressreleases/bcreg20181221b.htm
Agencies issue final rules expanding examination cycles for qualifying small banks and U.S. branches and agencies of foreign banks.
FR doc:https://www.federalreserve.gov/newsevents/pressreleases/bcreg20181221c.htm
Agencies invite comment on a proposal to exclude community banks from the Volcker rule.
FR doc: https://www.federalreserve.gov/newsevents/pressreleases/bcreg20181221d.htm

Consumer and
Community Affairs

The Division of Consumer and Community Affairs
(DCCA) has primary responsibility for carrying out
the Board of Governors’ consumer protection and
community development activities 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 reinvestment.
Throughout 2018, 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 Federal Reserve’s
consumer protection supervision program includes
a review of state member banks’ performance
under the Community Reinvestment Act (CRA) as
well as 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. The division developed policies that govern, and provided oversight
of, the Reserve Banks’ programs for consumer
compliance supervision and examination of state
member banks and bank holding companies
(BHCs). The division’s activities also included the
development and delivery of examiner training;
analysis of bank and BHC applications related 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 eco-

nomic 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 2018, 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, savings and loan holding
companies, foreign banking organizations, Edge Act

105th Annual Report | 2018

corporations, and agreement corporations.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 794 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 159 bank and financial holding companies
with assets over $10 billion. Division staff provide
guidance and expertise to the Reserve Banks on

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.

consumer protection laws and regulations, bank and
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 2018, the Reserve Banks completed 253 consumer compliance examinations of
state member banks, 237 CRA examinations of state
member banks, 24 examinations of foreign banking
organizations, 2 examinations of Edge Act corporations, and no examinations of agreement
corporations.

Mortgage Servicing and Foreclosure
Payment Agreement Status
As of 2018, the majority of 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 were terminated. 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

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

servicers to contribute an additional $5.8 billion in
other foreclosure prevention assistance, such as loan
modifications and forgiveness of deficiency
judgments.
A paying agent, Rust Consulting, Inc. (Rust), was
retained to administer payments to borrowers on
behalf of the participating servicers.
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 Federal Reserve’s direction, 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
2016.

ful home preservation actions within two years from
the date the agreement in principle was reached.
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 had to
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.
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
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. The majority of the enforcement actions
were terminated in 2018.5 For the remaining servicers, the Federal Reserve supervisory team continues 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.

In 2018, the audit of the final reconciliation of the
payment funds was completed, and funds remaining
that were provided by servicers supervised by the
Federal Reserve as part of the Payment Agreement
have been remitted to the U.S. Treasury. Board staff
is currently working with Rust to close the qualified
settlement funds.

Supervisory Matters

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 meaning-

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

Enforcement Activities
Fair Lending and UDAP Enforcement

5
4

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

For the press releases, see https://www.federalreserve.gov/
newsevents/pressreleases/enforcement20180112a.htm and
https://www.federalreserve.gov/newsevents/pressreleases/
enforcement20180810a.htm.

105th Annual Report | 2018

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
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.
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
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 one public enforcement action
for UDAP violations in 2018, issuing a consent order
against a bank for unfair practices related to the billing of deposit add-on products administered through
third parties. The order required the bank to pay
approximately $4.75 million in restitution to approximately 11,000 consumers and take other corrective
actions.6
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. This
includes DCCA staff’s participation in numerous
meetings, conferences, and trainings sponsored by
consumer advocates, industry representatives, and
interagency groups.

For more information, see https://www.federalreserve.gov/
newsevents/pressreleases/enforcement20180726b.htm.

Consumer and Community Affairs

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 determined 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 2018, the Federal Reserve issued six formal consent orders and assessed $196,000 in civil money penalties against state member banks to address violations of the flood regulations. These statutorily mandated penalties were forwarded to the National Flood
Mitigation Fund held by 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 where 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 practices to bankers and the public
through community development offices at the
Reserve Banks.7
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 2018 reporting period, the Reserve
Banks completed 237 CRA examinations of state
member banks. Of those banks examined, 36 were
7

For more information on various community development
activities of the Federal Reserve System, see https://www
.fedcommunities.org/.

rated “Outstanding,” 198 were rated “Satisfactory,” 3
were rated “Needs to Improve,” and none were rated
“Substantial Non-Compliance.”
The Federal Reserve is interested in updating the
CRA regulations to better reflect structural and technological changes in the banking industry. To help
achieve that, in 2018 DCCA established a dedicated
team to focus on modernizing the CRA. The Board
also held a series of external engagement meetings
with bankers and community members to collect
information to help identify issues and potential solutions that will inform our work to revise the
regulations.
The Federal Reserve also improved its public website
to include better information on the CRA, including
educational materials; enhanced navigation and functionality; and access to state and component ratings,
as well as direct access to bank strategic plans and
performance evaluations. The updated website is
available at https://www.federalreserve.gov/
consumerscommunities/cra_about.htm.
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 consideration in the mergers and acquisitions process
because it represents a detailed on-site evaluation of
the institution’s performance under the CRA by its
federal supervisor.

105th Annual Report | 2018

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 a proposed transaction that has a
less-than-satisfactory 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.8
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, the Board assesses the
merits of the public comments in addition to 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 transaction 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.9
The Board provides information on its actions associated with these merger and acquisition transactions,
issuing press releases and Board Orders for each.10
The Federal Reserve also publishes semiannual
reports that provide pertinent information on applications and notices filed with the Federal Reserve.11
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 2018, the Board considered over 100 applications, with topics ranging from change in control
notices, to branching requests, to mergers and acquisitions. DCCA staff analyzed 14 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.12
Coordination with the Consumer Financial
Protection Bureau
During 2018, 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
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, pro9

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

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 https://www.federalreserve.gov/supervisionreg/
srletters/SR1511.htm.
To access the Board’s Orders on Banking Applications, see
https://www.federalreserve.gov/newsevents/pressreleases.htm.
For these reports, see https://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.

Consumer and Community Affairs

vide 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.13
In 2018, the banking agencies continued to work
together on various initiatives.
Updating Examination Procedures

In June, the Board issued examination procedures
with respect to the Protecting Tenants at Foreclosure
Act (PTFA), which had previously expired at the end
of December 2014 but was restored in May 2018 by
the Economic Growth, Regulatory Relief, and Consumer Protection Act. When examiners review PTFA
compliance in an examination, they use the examination procedures to evaluate an institution’s awareness
of the law, its compliance efforts, and its responsiveness to addressing implementation deficiencies.
In December, the Board, working in consultation
with the Federal Deposit Insurance Corporation
(FDIC) and the OCC developed updated information regarding the key data fields that examiners use
in connection with validating the accuracy of Home
Mortgage Disclosure Act (HMDA) data collected
since January 1, 2018, pursuant to the CFPB’s
amendments to Regulation C and the Economic
Growth, Regulatory Relief, and Consumer Protection Act’s amendments to HMDA. The HMDA key
data 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.
Outreach
The Federal Reserve maintains a comprehensive public outreach program to promote consumer protection, financial inclusion, and community reinvestment. During 2018, the Federal Reserve continued to
enhance its program. Box 1 highlights some of the
key supervisory-related outreach activities the Board
engaged in during 2018.

Examiner Training
The Examiner Training team of DCCA supports the
ongoing professional development of the 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.
The goal of these efforts is to ensure that examiners
have the skills necessary to meet their supervisory
responsibilities now and in the future.
Consumer Compliance Examiner
Commissioning Program

An overview of the Federal Reserve System’s Examiner Commissioning Program for assistant examiners
is set forth in supervision and regulation (SR)/
community affairs (CA) letter SR 17-6/CA 17-1,
“Overview of the Federal Reserve’s Supervisory Education Programs.”14
The consumer compliance examiner training curriculum consists of five courses focused on consumer
protection laws, regulations, and examining concepts.
On average, examiners progress 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 2018, 23 examiners passed the Consumer
Compliance Proficiency Examination. The combination of multiple training delivery channels offers
learners and Reserve Banks an ability to customize
and to meet training demands more individually and
cost effectively.
Continuing Professional Development

In addition to providing core examiner training, the
Examiner Staff Development function emphasizes
the importance of continuing, career-long learning.
Opportunities for continuing professional development include special projects and assignments, selfstudy programs, rotational assignments, instruction
at System schools, mentoring programs, and a consumer compliance examiner forum held every
18 months. Additionally, staff have begun to create a
resource for examiners moving into examination
responsibilities at large financial institutions.

14
13

For more information, see https://www.ffiec.gov/.

See https://www.federalreserve.gov/supervisionreg/srletters/
sr1706.htm.

105th Annual Report | 2018

Box 1. Federal Reserve Consumer and Community Outreach Highlights
in 2018
The Federal Reserve conducts outreach to provide
various stakeholders with information and resources
that support their roles in consumer protection, financial inclusion, and community reinvestment. In
July 2018, the Board launched a new outreach tool,
the Consumer Compliance Supervision Bulletin, to
provide bankers, consumer advocates, and others
interested in consumer protection with high-level
summaries of examiners’ observations. The publication also covers other noteworthy developments
related to consumer protection supervisory issues.
The Bulletin, which will be published periodically, is
intended to enhance transparency regarding the Federal Reserve’s consumer compliance supervisory
program by highlighting supervisory observations. It
also provides practical steps for institutions to consider when managing consumer compliance risks.
The inaugural issue of the Bulletin focused on the illegal discrimination practice known as “redlining,” as
well as on discriminatory loan pricing and underwriting. The issue also discussed unfair or deceptive acts
or practices involving overdrafts, loan officer misrepresentations, and products and services marketed to
students. Finally, the Bulletin briefly highlighted
recent regulatory and policy developments. The publication is available on the Board’s website at https://
www.federalreserve.gov/publications/consumercompliance-supervision-bulletin.htm.
The Bulletin complements other Federal Reserve
System outreach efforts to banking organizations,
consumer and community advocates, and other
stakeholders, such as the Outlook Live webinar
series, the Consumer Compliance Outlook publication, and the Connecting Communities webinar
series.
Outlook Live webinars (https://www.consumer
complianceoutlook.org/outlook-live/) focus on delivering timely, relevant information on current consumer protection and community reinvestment topics
to the banking industry, advocates, and other stakeholders. In 2018, the Federal Reserve collaborated
with its supervisory agency partners to offer an Outlook Live seminar entitled “2018 Interagency Fair
Lending Hot Topics.”

In 2018, the System continued to offer Rapid
Response sessions. Introduced in 2008, these sessions
offer examiners webinars and case studies on emerging issues or urgent training needs that result from,
for example, the implementation of new laws or regulations. Four Rapid Response sessions with an exclusive consumer compliance focus were designed, developed, and presented to System staff during 2018.
Additionally, four Rapid Response sessions were

The Federal Reserve also offered the following Outlook Live webinars:
• “Healthy Communities: Opportunities for CRA Collaboration” (https://consumercomplianceoutlook
.org/outlook-live/2018/healthy-communitiesopportunities-for-cra-collaboration/)
• “Complaints as a Supervisory and Risk Management Tool” (https://consumercomplianceoutlook
.org/outlook-live/2018/complaints-as-asupervisory-and-risk-management-tool/)
• “Keeping Fintech Fair: Thinking About Fair Lending and UDAP Risks” (https://www
.consumercomplianceoutlook.org/2017/secondissue/keeping-fintech-fair-thinking-about-fairlending-and-udap-risks/)
Consumer Compliance Outlook (https://www
.consumercomplianceoutlook.org/) discusses consumer compliance topics of interest to compliance
professionals. This publication is distributed electronically to state member banks and to bank and
savings and loan holding companies supervised by
the Federal Reserve, among other subscribers. In
2018, two issues of Consumer Compliance Outlook
were published, covering topics such as preparing
for a consumer compliance exam and understanding
how culture drives a bank’s mission.
The Connecting Communities webinar series (https://
bsr.stlouisfed.org/connectingcommunities/) provides
timely insights and information on emerging and
important community and economic development
topics. As the Fed recognizes that stable communities promote stable regions and, thus, a more robust
economy overall, its community development offices
work to help advance economic growth and financial
stability in communities, especially low- and
moderate-income neighborhoods. Connecting Communities shares information and research with community development practitioners, financial institution
representatives, nonprofit organizations, and policymakers, complementing existing Federal Reserve
Community Development outreach initiatives conducted by the 12 Reserve Bank regional offices and
the Board.

offered that addressed a broader range of supervisory issues, including consumer compliance issues.
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 busi-

Consumer and Community Affairs

nesses 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.

Table 1. Investigated complaints against state member
banks and selected nonbank subsidiaries of bank holding
companies about regulated practices, by regulation/act,
2018
Regulation/act

Number

Regulation AA (Unfair or Deceptive Acts or Practices)
Regulation B (Equal Credit Opportunity)
Regulation BB (Community Reinvestment)
Regulation C (Home Mortgage Disclosure Act)
Regulation CC (Expedited Funds Availability)
Check21
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
Homeownership Counseling
Homeowners Protection Act of 1998
Fair Credit Reporting Act
Fair Debt Collection Practices Act
Fair Housing Act
Real Estate Settlement Procedures Act
Right to Financial Privacy Act
Total

Federal Reserve Consumer Help (FRCH) processes
consumer complaints and inquiries centrally. In 2018,
FRCH processed 32,226 cases. Of these cases, 17,761
were inquiries and the remainder (14,465) 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, more than half of the FRCH consumer contacts occurred by telephone (53 percent).
Nevertheless, 47 percent (15,121) of complaint and
inquiry submissions were made in writing (via email,
online submissions, mail, and fax). The online form
page received 20,135 visits during the year.
Consumer Complaints

Complaints against Federal Reserve regulated entities
totaled 3,349 in 2018. Of the total, 89 percent (2,990)
were investigated. Fifty-four percent (1,606) of the
investigated complaints involved unregulated practices, and 46 percent (1,384) involved regulated practices. (Table 1 shows the breakdown of complaints
about regulated practices by regulation or act; table 2
shows complaints by product type.)

33
24
4
2
131
1
4
55
179
6
1
9
88
131
4
1
4
644
25
12
24
2
1,384

cent (262) of the total complaints were still under
investigation in January 2019.
Complaints about Regulated Practices
The majority of regulated practices complaints concerned credit card accounts (approximately 54 percent), checking accounts (21 percent), and real estate
(6 percent).15 The most common credit card com-

Approximately 1 percent (33) of the total complaints
were closed without investigation, pending the receipt
of additional information from consumers. Two percent (64) were withdrawn by the consumer. Eight per-

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

Table 2. Investigated complaints against state member banks and selected nonbank subsidiaries of bank holding companies
about regulated practices, by product type, 2018
All complaints

Complaints involving violations

Subject of complaint/product type

Total
Discrimination alleged
Real estate loans
Credit cards
Other loans
Nondiscrimination complaints
Checking accounts
Real estate loans
Credit cards
Other

Number

Percent

Number

Percent

1,384

100

0
0
0

17
9
4
10

42
23
10
25

13
3
6
287
72
739
264

1
<1
<1
21
5
53
19

105th Annual Report | 2018

plaints related to inaccurate credit reporting (75 percent), forgery/fraud (5 percent), and billing error
resolution (4 percent). The most common checking
account complaints related to deposit error resolution (24 percent), funds availability not as expected
(22 percent), and insufficient funds/overdraft charges
and procedures (9 percent). The most common real
estate complaints by problem code related to debt
collection/foreclosure concerns (14 percent), rates
and/or fees (13 percent), and escrow problems
(7 percent).
Twenty-two regulated practices complaints alleging
credit discrimination on the basis of prohibited borrower traits or rights were received in 2018. Thirteen
discrimination complaints were related to the race,
color, national origin, or ethnicity of the applicant or
borrower. Nine 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 2018, there were no violations
related to illegal credit discrimination.
In 70 percent of investigated complaints against Federal Reserve regulated entities, evidence revealed that
institutions correctly handled the situation. Of the
remaining 30 percent of investigated complaints,
12 percent were identified errors that were corrected
by the bank; 3 percent were deemed violations of
law; and the remainder included matters involving
litigation or factual disputes, internally referred complaints, or complaints about matters for which the
consumer was provided responsive information.
Complaints about Unregulated Practices
The Board continued to monitor complaints about
banking practices not subject to existing regulations.
In 2018, the Board received 1,606 complaints against
Federal Reserve regulated entities that involved these
unregulated practices. The majority of the complaints were related to electronic transactions/prepaid
products (45 percent), checking account activity
(21 percent), and credit cards (13 percent).
Complaint Referrals
In 2018, the Federal Reserve forwarded 10,998 complaints to other regulatory agencies and government
offices for investigation. The Federal Reserve forwarded 12 complaints to the Department of Housing
and Urban Development (HUD) that alleged violaimprovement loans, home purchase loans, home refinance/
closed-end loans, and reverse mortgages.

tions of the Fair Housing Act16 and were closed in
2018. The Federal Reserve’s investigation of these
complaints revealed no instances of illegal credit
discrimination.
Consumer Inquiries

The Federal Reserve received 17,761 consumer inquiries in 2018 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 2018, 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.

Annual Indexing of Exempt Consumer
Credit and Lease Transactions
In November 2018, 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 2019 for determining exempt consumer credit and lease transactions.
These thresholds are set pursuant to statutory
changes enacted by the Dodd-Frank 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.17

Threshold for Small Loan Exemption from
Appraisal Requirements for Higher-Priced
Mortgage Loans
In November 2018, the Board, the CFPB, and the
OCC announced that the threshold for exempting
loans from special appraisal requirements for higher16

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.
For more information, see https://www.federalreserve.gov/
newsevents/pressreleases/bcreg20181121b.htm.

Consumer and Community Affairs

priced mortgage loans would increase for 2019.18 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.19
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 2.59 percent increase in the CPI-W
for the period ending in November 2018, 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
$1.284 billion.
• “Intermediate small bank” or “intermediate small
savings association” means a small institution with
assets of at least $321 million as of December 31 of
both of the prior two calendar years and less than
18

For more information, see https://www.federalreserve.gov/
newsevents/pressreleases/bcreg20181121a.htm.
For more information, see https://www.federalreserve.gov/
newsevents/pressreleases/bcreg20181220a.htm.

$1.284 billion as of December 31 of either of the
prior two calendar years.
These asset-size threshold adjustments took effect
January 1, 2019.

Consumer Research and Analysis of
Emerging Issues and Policy
Throughout 2018, 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. This
research and analysis also provided insight into consumer financial decisionmaking.

Researching Issues Affecting Consumers
and Communities
In 2018, 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 fifth annual Survey of Household
Economics and Decisionmaking (SHED) were published in the Report on the Economic Well-Being of
U.S. Households in 2017, released in May 2018.20
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. In 2017, the
survey was doubled in size to be able to study smaller
subpopulations and geographies.
20

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

105th Annual Report | 2018

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
• banking and credit
• housing and living arrangements
• education and human capital
• education debt and student loans
• retirement
The latest findings underscored the overall economic
recovery and expansion over the five years of the survey. When asked about their finances, 74 percent of
adults said they were either doing okay or living
comfortably in 2017—over 10 percentage points more
than in the first survey in 2013. Despite these gains,
stark differences in economic well-being remain, in
particular, by education and race. Over three-fourths
of whites were at least doing okay financially in 2017
versus less than two-thirds of blacks and Hispanics.
The survey also highlights some aspects of subjective
well-being and emerging issues that can be missed in
long-standing measures of objective outcomes. Our
understanding of full employment and how to measure it is a key example. Many workers in the survey
have a full-time job with regular hours, pay raises,
and good benefits. Others who are also employed
describe a very different experience: fewer hours than
they want to work, only a few days’ notice on work
schedules, and little in benefits or pay increases. Still
others supplement their income through side jobs
and gig work. In an effort to understand how the opioid crisis may relate to economic well-being, the survey asked questions related to opioids for the first
time. About one-fifth of adults (and one-quarter of
white adults) personally know someone who has been
addicted to opioids. Exposure to opioid addiction
was much more common among whites—at all education levels—than among minorities. Those who
have been exposed to addiction have somewhat less
favorable assessments of economic conditions than
those who have not been exposed.

Analysis of Emerging Issues
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, monitor legislative activity,
form working groups, and organize expert roundtables to identify emerging consumer risks and
inform supervision, research, and policy.
In 2018, Policy Analysis staff developed a new article
series, Consumer & Community Context, for policymakers and the public about the financial conditions
and experiences of consumers and communities,
including traditionally underserved and economically
vulnerable households and neighborhoods. The goal
of the series is to further understanding of how the
financial well-being of consumers and communities
affects the broader economy. The first issue, released
in January 2019, focused on student loans while subsequent issues will focus on other themes.21
In addition, staff developed analyses on a broad
range of issues in financial services markets that
potentially pose risks to consumers:
• Auto lending. Staff has continued to explore developments in the auto finance market and their
impact on consumers, especially subprime auto
borrowers. Topics of particular focus in 2018
included early payment delinquency rates and loan
performance trends.
• Housing. In March, the team convened an
invitation-only workshop with nationally recognized experts to discuss policies to address the
diminished production of new affordable housing
units in many areas of the country. Speakers discussed the various factors limiting new housing
supply including rising labor and material costs as
well as the growth of restrictive local regulations
and the dearth of vacant lots for development.
Representatives from four Federal Reserve Bank
Districts highlighted regional challenges. DCCA
will continue monitoring this issue along with general housing market trends.
• 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. In 2019, staff
will continue to track technology’s influence on
access to financial services and monitor the degree
21

For more information, see https://www.federalreserve.gov/
publications/consumer-community-context.htm.

Consumer and Community Affairs

to which bank branches and branch alternatives are
effectively serving customers.
• Small business lending. The Policy Analysis section
monitored credit availability and access for smaller
firms that often lack the financing options and
in-house financial expertise of larger firms. Staff
conducted outreach with banks, nonbank lenders,
and borrower advocates to stay abreast of developments. In June, the team, together with the Federal
Reserve Bank of Cleveland, released a report,
Browsing to Borrow: “Mom and Pop” Small Business Perspectives on Online Lenders,22 that analyzes
small business owners’ perceptions of online lenders and their understanding of information provided by online lenders about credit products.
• Student lending. DCCA staff analyzed the relationship between rural-urban migration patterns and
student loan balances. This work, presented at the
Student Financial Aid Research Network Conference,23 also was the basis of an article included in
the first issue of Consumer & Community Context
(mentioned above).
• Gender wealth gap. Recent media focus on income
equality does not fully capture the challenges
women experience in building household wealth,
especially women of color and those who are lower
income. In 2018, the Policy Analysis team gathered
Federal Reserve economists specializing in the Survey of Consumer Finances (SCF) and the SHED
along with researchers from the Closing the Women’s Wealth Gap organization. These discussions
have identified areas for further analysis that will
enhance understanding of the issues surrounding
the gender wealth gap.

Community Development
The Federal Reserve System’s Community Development function promotes economic growth and financial stability—particularly for underserved households and communities—by informing research,
policy, and action. Soliciting diverse views on issues
affecting the economy and financial markets
improves the quality of Federal Reserve research,
ensures the fairness of its policies, and the transpar22

See https://www.federalreserve.gov/publications/files/2018-smallbusiness-lending.pdf.
See http://pellinstitute.org/downloads/sfarn_2018-Tabit_
Winters_060718.pdf.

ency of its actions. Raising awareness of emerging
economic trends and risks makes regulation and
supervision more responsive to evolving consumer
financial services markets and technologies.
Community Development is a decentralized function
within the Federal Reserve System, and 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.
Over the next several years, Community Development staff across the System will focus their efforts
on advancing the economic resiliency and mobility of
LMI and underserved households and communities.
The barriers that prevent LMI and underserved
households and communities from participating and
deriving benefit from the economy are complex and
often structural in nature. The Federal Reserve is well
positioned to research and analyze the underlying
factors of those barriers as well as the policies and
practices that can help to overcome them. The Community Development function is committed to
engaging practitioners and policymakers in an independent, objective, and nonpartisan manner that will
identify shared interests, stimulate new ideas, and foster collective action.
The Community Development function also
advances the Federal Reserve’s Community Reinvestment Act supervisory responsibilities by analyzing
and disseminating information related to local financial needs and successful approaches for attracting
and deploying capital. These efforts support both
financial institutions and community organizations
to meet the needs of the communities they serve.
In addition to providing a richer, more nuanced
understanding of current economic and financial
conditions, Community Development staff across the
System are deeply engaged in helping lower-income
and underserved communities overcome their challenges and capitalize on their assets. They foster local
partnerships and comprehensive solutions that support building both physical infrastructure and human
capital. To recognize the individual and collective
efforts of System staff in this mission, the Board
announced the Janet L. Yellen Award for Excellence
in Community Development. For more information
on the inaugural award, see box 2.

105th Annual Report | 2018

Box 2. Recognizing Outstanding
Achievement in Community
Development
In 2018, the Board established the Janet L. Yellen
Award for Excellence in Community Development.
The award honors former Chair Yellen’s legacy and
her commitment to ensuring that the perspectives of
consumers and communities continue to inform Federal Reserve research, policy, and action.1 Through
her leadership at the Federal Reserve, Chair Yellen
elevated the importance of economic and financial
inclusion, underscoring that a vibrant economy is one
that is inclusive. She also recognized the unique role
the community development function plays in
advancing its mission to facilitate innovative solutions
that bring capital to support economic development
in lower-income communities.2
The award was created by the Division of Consumer
and Community Affairs (DCCA) to recognize staff in
the Federal Reserve System’s community development function who demonstrate exemplary leadership and outstanding achievement through activities
that further the System’s responsibilities and goals to
support community economic development, as Chair
Jerome Powell described at the event.3 Each year,
the Federal Reserve Banks and DCCA can nominate
staff for consideration.
Ariel Cisneros, senior community development advisor at the Federal Reserve Bank of Kansas City,
received the inaugural award on December 3, 2018.
DCCA recognized him for his work in establishing
innovative and impactful community development
resources and programs that benefit low- to
moderate-income communities both within the 10th
District and at a national level.

For more information, see https://www.federalreserve.gov/
newsevents/pressreleases/other20181130a.htm.

For more information, see https://www.federalreserve.gov/
newsevents/speech/files/brainard20181203b.pdf.

For more information, see https://www.federalreserve.gov/
newsevents/speech/files/powell20181203a.pdf.

Community Development function strives to understand the ever-changing financial services marketplace and its implications for access to capital, particularly for underserved households and communities. Bank branch locations and the people and
communities that they are serving—or, in some cases,
not serving adequately—are of particular interest.
Data at the county and national level indicate that
most rural markets are well served, but that can mask
the impact of bank branch closures in smaller markets. To assess the effects of bank closures on rural
communities, the Community Development function
conducted a national series of listening sessions with
local residents and small business owners to hear
what the loss of a bank meant to them and their
community.24 Not surprisingly, small businesses,
older people, and people with limited access to transportation are most affected. The listening sessions
also revealed that the loss of the branch often means
more than the loss of access to financial services; it
also means the loss of financial advice, local civic
leadership, and an institution that brings needed customer activity to nearby businesses.

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 recent
years, community development programs across the
System dedicated significant resources to identifying
disparities in labor market outcomes and understanding policies that could improve economic outcomes for vulnerable workers. Board staff completed
an analysis of disparities in job separations across
racial groups based on data from the 2018 SHED.

Access to Capital and Financial Services
in Rural Communities
Rooted in its responsibility to help banks meet their
obligations under the CRA, the Federal Reserve’s

For more information, see https://www.federalreserve.gov/
newsevents/speech/quarles20181205a.htm.

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.

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

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.2 The
imputed costs and imputed profit are collectively
referred to as the private-sector adjustment factor
(PSAF). From 2009 through 2018, the Reserve Banks
recovered 102.6 percent of the total priced services
costs, including the PSAF (see table 1).3
In 2018, Reserve Banks recovered 102.1 percent of
the total priced services costs, including the PSAF.4
The Reserve Banks’ operating expenses and imputed
costs totaled $428.1 million. Revenue from operations totaled $442.5 million, resulting in net income
from priced services of $14.4 million. The commercial check-collection service and the Fedwire Funds
and National Settlement Services achieved full cost
recovery; however, the FedACH Service and Fedwire
Securities Service did not achieve full cost recovery.
FedACH Service did not achieve full cost recovery
because of investment costs associated with the multiyear technology initiative to modernize its processing
2

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 $624.1 million reduction in equity
related to the priced services’ benefit plans through 2018.
Including this reduction in equity, which represents a decline in
economic value, results in cost recovery of 104.1 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.

105th Annual Report | 2018

Table 1. Priced services cost recovery, 2009–18
Millions of dollars, except as noted
Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2009–18

Revenue from services1

Operating expenses and
imputed costs2

Targeted return on equity3

Total costs

Cost recovery (percent)4

675.4
574.7
478.6
449.8
441.3
433.1
429.1
434.1
441.6
442.5
4,800.4

707.5
532.8
444.4
423.0
409.3
418.7
397.8
410.5
419.4
428.1
4,591.6

19.9
13.1
16.8
8.9
4.2
5.5
5.6
4.1
4.6
5.2
88.0

727.5
545.9
461.2
432.0
413.5
424.1
403.4
414.7
424.0
433.3
4,679.6

92.8
105.3
103.8
104.1
106.7
102.1
106.4
104.7
104.1
102.1
102.6

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 $4,777.8 million and other income and expense (net) of $22.6 million.
2
For the 10-year period, includes operating expenses of $4,444.7 million, imputed costs of $58.5 million, and imputed income taxes of $88.4 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 104.1 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.

platform. Fedwire Securities Services did not achieve
full cost recovery because of volume declines driven
by market changes.

Commercial Check-Collection Service
The commercial check-collection service provides a
suite of electronic and paper processing options for
forward and return collections. In 2018, the Reserve
Banks recovered 102.7 percent of the total costs of
their commercial check-collection service, including
the related PSAF. Revenue from operations totaled
$132.9 million, resulting in net income of $5.1 million. The Reserve Banks’ operating expenses and
imputed costs totaled $127.8 million. Reserve Banks
handled 4.7 billion checks in 2018, a decrease of
8.0 percent from 2017 (see table 2). The average daily
value of checks collected by the Reserve Banks in
2018 was approximately $33.8 billion, a decrease of
0.6 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 2018, the Reserve Banks
recovered 99.2 percent of the total costs of their commercial ACH services, including the related PSAF.
Revenue from operations totaled $149.7 million,
resulting in a net income of $0.6 million. The Reserve

Banks’ operating expenses and imputed costs totaled
$149.1 million. The Reserve Banks processed
14.7 billion commercial ACH transactions in 2018,
an increase of 6.9 percent from 2017 (see table 2).
The average daily value of FedACH transfers in 2018
was approximately $103.0 billion, an increase of
10.5 percent from the previous year.

Fedwire Funds and National Settlement
Services
In 2018, the Reserve Banks recovered 105.8 percent
of the costs of their Fedwire Funds and National
Settlement Services, including the related PSAF. Revenue from operations totaled $132.4 million, resulting
in a net income of $8.8 million. The Reserve Banks’
operating expenses and imputed costs totaled
$123.7 million in 2018.
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 2017 to 2018, the number of Fedwire
funds transfers originated by depository institutions
increased 3.9 percent, to approximately 163.0 million
(see table 2). The average daily value of Fedwire
funds transfers in 2018 was $2.8 trillion, a decrease of
3.2 percent from the previous year.

Federal Reserve Banks

Table 2. Activity in Federal Reserve priced services, 2016–18
Thousands of items, except as noted
Percent change
Service

Commercial check
Commercial ACH
Fedwire funds transfer
National settlement
Fedwire securities

2018

4,739,534
14,691,615
162,980
521
3,510

2017

2016

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

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

2017–18

2016–17

-8.0
6.9
3.9
0.8
1.3

-1.7
6.1
3.1
3.3
-10.7

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.

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 2018, the
service processed settlement files for 12 local and
national private-sector arrangements. The Reserve
Banks processed 9,674 files that contained about

521,000 settlement entries for these arrangements in
2018 (see table 2). Settlement file activity in 2018
increased 4.5 percent, and settlement entries
increased 0.8 percent.

Fedwire Securities Service
The Fedwire Securities Service allows its participants
to transfer electronically to other service participants

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” paper, issued
in January 2015. The strategies outlined in the paper
included the creation of the Faster Payments Task
Force (FPTF) and the Secure Payments Task Force
(SPTF) , both of which provided forums for a diverse
group of industry participants to collaborate on payment system improvements.
In its final report, released in 2017, the FPTF published a set of consensus recommendations for
achieving its vision of ubiquitous, safe, and efficient
faster payment capabilities for the United States.
One recommendation called for industry development of a governance framework for faster payments, and in response, an industry group called the
Governance Framework Formation Team (GFFT) was
established with Federal Reserve leadership. The
GFFT focused on defining the structure, decisionmaking, and processes of a governance framework
and in late 2018 announced a newly formed,
industry-led U.S. Faster Payments Council (FPC) that
is intended to develop collaborative approaches to
accelerate U.S. adoption of faster payments.

The launch of the FPC formally concluded the
GFFT’s work.
Also as part of its recommendations, the task force
asked the Federal Reserve to develop a 24x7x365
settlement service to support faster payments and to
explore and assess the need for other Federal
Reserve operational roles in faster payments. In
response, the Federal Reserve initiated a strategic
assessment of its settlement services and, in October 2018, published a Federal Register notice
requesting public comments on two potential actions
the Federal Reserve could take to support real-time
gross settlement of faster payments in the United
States: a service for 24x7x365 real-time gross interbank settlement of faster payments and a liquidity
management tool to support private-sector faster
payment settlement services.
The SPTF concluded in 2018, having largely accomplished its objective of identifying and promoting
actions that can be taken by payment system participants to promote payment security through developing and publishing two resources: one on shared
data sources on payments security and another on
risks associated with various payment processes.
The Federal Reserve has developed plans through
2020 to continue its engagement with the industry on
secure payments topics through research and other
collaboration efforts.

105th Annual Report | 2018

certain securities issued by the U.S. Treasury Department, federal government agencies, governmentsponsored enterprises, and certain international organizations.5 In 2018, the Reserve Banks recovered
98.7 percent of the costs of their Fedwire Securities
Service, including the related PSAF. Revenue from
operations totaled $27.5 million, resulting in a net
income of $0.0 million. The Reserve Banks’ operating expenses and imputed costs totaled $27.5 million
in 2018. In 2018, the number of non-Treasury securities transfers processed via the service increased
1.3 percent from 2017, to approximately 3.5 million
(see table 2). The average daily value of Fedwire
Securities transfers in 2018 was approximately
$1.2 trillion, a decrease of approximately 1.0 percent
from the previous year.

Float
In 2018, the Reserve Banks had daily average credit
float of $254.6 million, compared with daily average
credit float of $379.3 million in 2017.6

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. Together,
the Board and Reserve Banks work to maintain the
integrity of and confidence in Federal Reserve notes.
In 2018, the Board paid Treasury’s Bureau of
Engraving and Printing (BEP) $804.8 million for
costs associated with the production of 8.0 billion
Federal Reserve notes. The Reserve Banks also distribute coin to depository institutions on behalf of
the United States Mint.7
The volume of Federal Reserve notes in circulation at
year-end 2018 totaled 43.4 billion pieces, a 4.2 percent increase from 2017. More than half of this
5

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
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, while the United States Mint, a bureau of the
U.S. Department of the Treasury, is the issuing authority
for coin.

growth was attributable to growth in demand for
$100 notes, and an additional 32.0 percent was attributable to growth in demand for $1 and $20 notes. In
2018, the Reserve Banks distributed 36.8 billion Federal Reserve notes into circulation and received
35.0 billion Federal Reserve notes from circulation,
which is relatively unchanged from 2017.
The value of Federal Reserve notes in circulation at
year-end 2018 totaled $1,671.9 billion, a 6.4 percent
increase from 2017. 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 69.9 billion coins into circulation, a 2.8 percent decrease
from 2017, and received 56.0 billion coins from circulation, a 3.8 percent decrease from 2017.

Other Improvements and Efforts
During 2018, the Federal Reserve continued developmental work to replace the aging high-speed currency
processing equipment and sensors at all Reserve
Banks by 2026. Through a competitive process, the
Federal Reserve selected two vendors to build prototype machines for delivery in 2020. Following the
prototype assessments, the Reserve Banks will select
one vendor to develop new production machines. In
addition to new machine development, the Federal
Reserve issued a request for proposals to replace sensors within the replacement high-speed currency processing equipment, and expects to award this contract in 2019.
In 2018, the Board approved a policy change permitting the Reserve Banks to accept and distribute misfaced $50 and $100 notes, improved the quality of
$1 notes that the Reserve Banks distribute to circulation, and accelerated the destruction of old-design
$5, $10, $20, and $50 notes.8
8

Misfaced notes are notes that are reverse-side up, rather than
portrait-side up; in previous years, Reserve Banks destroyed $50
and $100 misfaced notes during processing, even if they were
otherwise fit for recirculation. In 2018, Reserve Banks began to
pay out misfaced $50 and $100 notes to depository institutions
and accept misfaced notes in deposits from depository institutions. This change reduces the number of notes that Reserve
Banks destroy and increases the number of fit notes that
Reserve Banks can pay out to meet domestic demand.
Based on analysis of circulation patterns and the condition of
notes being deposited at the Reserve Banks, the policy changed
to improve the quality of $1 notes, tightened the screening for
soiling used by high-speed currency processing equipment to

Federal Reserve Banks

Fiscal Agency and Government
Depository Services
In accordance with section 15 of the Federal Reserve
Act, the Reserve Banks, upon the direction of the
Secretary of the United States Department of the
Treasury, act as fiscal agents of the United States
government. As fiscal agents, the Reserve Banks auction Treasury securities, process electronic and check
payments for the Treasury, collect funds owed to the
federal government, maintain the Treasury’s operating cash account, and develop, operate, and maintain
a number of automated systems to support the Treasury’s mission. In addition, the Reserve Banks also
provide certain fiscal agency services to other entities.
The Treasury and other entities fully reimburse the

evaluate $1 bank notes for either recirculation or destruction.
This change is expected to increase the number of $1 notes
destroyed in 2019 for soiling, reduce the number but improve the
fitness of $1 notes returned to circulation, and should help
ensure that $1 notes in circulation continue to function well in
commerce.
The accelerated destruction of $5, $10, $20, and $50 notes
reduces the variety of note designs co-circulating and the burden to authenticate a very small population of older design
notes. All designs of U.S. currency, however, remain legal tender.

Reserve Banks for the expense of providing fiscal
agency and depository services.
In 2018, the Reserve Banks successfully concluded a
Treasury-initiated, multiyear fiscal agent consolidation effort, migrated an information repository to the
cloud, and completed efforts to modernize systems
that the Reserve Banks operate and maintain on
behalf of the Treasury, while strengthening the Treasury’s systems against ever-evolving cybersecurity
threats.9 In addition, Reserve Banks provided bookentry securities services and custodial and correspondent banking services to other government agencies,
government-sponsored enterprises, official international organizations, and foreign central banks.
The Reserve Banks expenses for providing fiscal
agency services in 2018 were $706.0 million, an
increase of $7.7 million, or 1.1 percent (see table 3).
Support for Treasury programs accounted for
94.4 percent of expenses, and support for other entities accounted for 5.6 percent.
9

The Federal Reserve migrated the financial information system
to the cloud and can be accessed at https://www.transparency
.treasury.gov/.

Table 3. Expenses of the Federal Reserve Banks for fiscal agency and depository services, 2016–18
Thousands of dollars
Agency and service
Department of the Treasury
Payment, cash-management, and collection services
Payment services
Cash-management services
Collection services
Technology infrastructure development and support1
Other services
Total payment, collection, and cash-management services
Treasury securities services
Treasury wholesale securities
Treasury auction
Treasury securities safekeeping and transfer
Treasury retail securities
Technology infrastructure development and support1
Other services
Total Treasury securities services
Other Treasury services
Total other Treasury Services
Total, Treasury
Other entities
Total, other entities
Total reimbursable expenses

2018

2017

2016

206,809
85,391
70,326
115,850
13,214
491,589

195,306
82,281
75,960
117,380
12,115
483,043

177,558
96,455
75,039
96,931
11,708
457,691

46,695
26,564
49,249
6,140
674
129,321

47,227
25,171
50,370
7,442
1,573
131,783

46,430
22,890
54,838
6,909
3,640
134,706

45,853
666,763

45,686
660,511

43,312
635,709

39,231
705,995

37,759
698,271

41,270
676,979

Note: Service costs include reimbursable pension costs, where applicable. Previous versions of the Annual Report provided a separate line item for pension expenses.
These costs include the development and support costs of Treasury technology infrastructure.

105th Annual Report | 2018

Payment Services
The Reserve Banks work closely with the Treasury
and other government agencies to process payments
to individuals, businesses, institutions, and government agencies. 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 payment-related
activities were $206.8 million in 2018, an increase of
5.9 percent. The most notable programs that contributed to cost changes included the stored-value card
program, the post-payment system, the invoiceprocessing platform, and the U.S. Electronic Payment
Solution Center.
The stored-value card program comprises three military cash-management services: 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.
Stored-value cards can be found on over 80 U.S. military bases and installations in over 19 countries and
on over 135 naval ships. In 2018, Reserve Bank operating expenses for the stored-value card program
were $48.2 million, an increase of 19.6 percent, primarily driven by the Reserve Banks incurring a full
year of operations and maintenance costs based on
work that transitioned from a financial agent to the
Reserve Banks in mid-2017.
The Reserve Banks continued work on the postpayment system initiative, a multiyear effort to modernize several of the Treasury’s legacy post-payment
processing systems into a single system to enhance
operations, reduce expenses, improve data analytics
capabilities, and provide a centralized and standardized set of payment data. In 2018, the program conducted an assessment that resulted in a change in
approach and technical architecture. In 2018, program expenses for the post-payment system initiative
were $31.1 million, an increase of 32.3 percent,
largely because of software development costs and
software amortization.
The invoice-processing platform is 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 system accepts, processes, and presents
data from supplier systems related to various stages
of a payment transaction, such as the purchase order

and invoice. In 2018, expenses for the invoiceprocessing platform were $21.0 million, a decrease of
31.9 percent, largely because of decreased costs following Treasury’s fiscal agent 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. In
fiscal year 2018, Treasury disbursed 98.4 percent of
all benefit payments electronically.10 In 2018,
expenses for the U.S. Treasury Electronic Payment
Solution Support Center were $20.7 million, an
increase of 7.6 percent, largely attributable to
increased software amortization and personnel costs.

Treasury Cash-Management Services
The Reserve Banks maintain the Treasury’s operating
cash account and provide collateral-management and
collateral-monitoring services for those Treasury programs that have collateral requirements.
In 2018, Reserve Bank operating expenses related to
Treasury cash-management services were $85.4 million, an increase of 3.8 percent. The increase reflects
higher application development and operations and
maintenance costs associated with the Bank Management System application and the Financial Information Repository.11 The Bank Management System
determines commercial bank compensation for
depository services provided to the Treasury. The
Financial Information Repository provides information on financial transactions processed by the
Treasury.

Collection Services
The Reserve Banks work closely with the Treasury to
collect funds, including various taxes, fees for goods
and services, and delinquent debts owed to the federal government. In 2018, Reserve Bank expenses
related to collection services were $70.3 million, a
decrease of 7.4 percent, largely because of decreased
staffing costs following Treasury’s fiscal agent consolidation program.
The Reserve Banks operate and maintain Pay.gov, an
application that allows the public to use the internet
to initiate and authorize payments to federal agen10

The U.S. government fiscal year 2018 spanned October 1, 2017,
through September 30, 2018.
The Bank Management System also provides analytical tools to
review and approve compensation, budgets, and outflows.

Federal Reserve Banks

cies. Pay.gov expenses were $24.7 million in 2018, an
increase of 2.5 percent, primarily because of
increased software, personnel, and support costs.
During the year, the Pay.gov program expanded to
include more than 143 new agency programs and
processed more than 205 million online payments
totaling over $179 billion.12

services were $49.2 million in 2018, a decrease of
2.2 percent, largely because of the Treasury’s
July 2017 decision to phase out the myRA retirement
savings program.14 Program expenses included technology enhancements to TreasuryDirect.gov, savings
bond processing, and fulfillment center costs such as
mail processing and virtual case file management.

Treasury Securities Services

Services Provided to Other Entities

The Reserve Banks work closely with the Treasury in
support of the borrowing needs to operate 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 wholesale securities programs, which primarily serve institutional investors, and retail securities programs, which primarily serve individual
investors.

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

Wholesale Securities Programs
The Reserve Banks support wholesale securities services through the sale, issuance, safekeeping, and
transfer of marketable Treasury securities for institutional investors. During 2018, the Reserve Banks conducted 284 Treasury securities auctions and issued
approximately $10.2 trillion in securities.
In 2018, Reserve Bank operating expenses to support
Treasury securities auctions were $46.7 million, a
slight decrease of 1.1 percent. Operating expenses
reflect upgrades to the application that receives and
processes auction bids submitted primarily by wholesale securities auction participants.
Operating expenses associated with Treasury securities safekeeping and transfer activities were $26.6 million in 2018, an increase of 5.5 percent, primarily
because of increased activity.

Retail Securities Programs
The Reserve Banks support Treasury’s retail securities services, which provide retail securities to institutional and individual customers through electronic
systems and provide customer service.13 Reserve
Bank operating expenses to support retail securities
12

In 2017, Pay.gov processed more than 189 million online payments, totaling nearly $155 billion.
The retail securities program operates and maintains the
TreasuryDirect.gov website.

Reserve Bank operating expenses for services provided to other entities were $39.2 million in 2018, an
increase of 3.9 percent. Debt servicing activities,
which include issuing principal and interest payments
on mortgage-backed securities, 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 mar14

The Treasury’s July 2017 announcement is available at https://
www.treasury.gov/press-center/press-releases/Pages/sm0135
.aspx.

105th Annual Report | 2018

Figure 1. Aggregate daylight overdrafts, 2008–18
200

Billions of dollars
Peak daylight overdrafts
Average daylight overdrafts

150

100

Between 2008 and 2017, Reserve Bank priced FedLine connections decreased nearly 23 percent, while
the number of depository institutions in the United
States declined 34 percent.

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
Exchange, FedLine Web, 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.

2008

2010

2012

2014

2016

2018

ket 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 2018,
while daylight overdrafts remained historically low,
as shown in figure 1.
Daylight overdraft fees are also at historically low
levels. In 2018, institutions paid about $111,417 in
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

The Reserve Banks continue to advance the safety
and security of the FedLine network through key
infrastructure upgrades, proactive monitoring of an
evolving threat environment, strengthened endpoint
security policies, and dedicated customer communication and education programs.

Information Technology
The improvement of the efficiency, effectiveness, and
security of information technology (IT) services and
operations continued to be a central focus of the Federal Reserve Banks. Led by the Federal Reserve’s
National IT organization, the 2016–2020 IT System
Strategy continued to mature to enhance the delivery
of IT services and better support the Federal Reserve
business strategies. Elements of the plan focus on IT
productivity, simplicity, accountability, and stewardship across the Reserve Banks. Several specific initiatives under the strategy also strengthened the
System’s information security posture. National IT
continues to guide the strategy’s implementation and
track progress toward the strategy’s goals and will
refresh the effort in 2020.
The Reserve Banks remained vigilant about their
cybersecurity posture, investing in risk-mitigation initiatives and programs and continuously monitoring
and assessing cybersecurity risks to operations and
protecting systems and data. The Federal Reserve
implemented several cybersecurity initiatives that
enhanced identity and access management capabilities; enhanced the ability to respond to evolving
cybersecurity threats with agility, decisiveness, and
speed by streamlining decision making during a

Federal Reserve Banks

cybersecurity incident; and continue to improve continuous monitoring capabilities of 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.15 In addition, the Reserve
Banks are subject to oversight by the Board of Governors, which performs its own reviews (see box 2).
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. 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 2018 combined and individual
financial statements of the Reserve Banks.16 In 2018,
KPMG also conducted audits of the internal controls associated with financial reporting for each of
the Reserve Banks. Fees for KPMG’s services totaled
$7.0 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 2018, 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 oversight activities, conducted primarily by its Division of Reserve Bank Operations and
Payment Systems. Division personnel monitor, on an
15

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

ongoing basis, the activities of each Reserve Bank,
National IT, and the System’s Office of Employee
Benefits (OEB). The oversight program identifies the
most strategically important Reserve Bank current
and emerging risks and defines specific approaches to
achieve a comprehensive evaluation of the Reserve
Banks’ controls, operations, and management
effectiveness.
The comprehensive 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 Professional Practice
of Internal Auditing, applicable policies and guidance, and the IIA’s code of ethics.
The Board also reviews System Open Market
Account (SOMA) and foreign currency holdings
annually to
• 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
• assess SOMA-related IT project management and
application development, vendor management, and
system resiliency and contingency plans.
In addition, KPMG audits the year-end schedule of
SOMA participated asset and liability accounts and
the related schedule of participated income accounts.
The FOMC is provided with the external audit
reports and a report on the Board review.

Income and Expenses
Table 4 summarizes the income, expenses, and distributions of net earnings of the Reserve Banks for
2018 and 2017. Income in 2018 was $112.9 billion,
compared with $114.2 billion in 2017.
Expenses totaled $49,383 million, including
• $38,486 million in interest paid to depository institutions on reserve balances and others;
• $4,527 million in Reserve Bank operating expenses;
• $4,559 million in interest expense on securities sold
under agreements to repurchase;
• $484 million in net periodic pension expense;
• $838 million in assessments for Board of Governors expenditures;

105th Annual Report | 2018

Box 2. Oversight
The Board of Governors is authorized by the Federal
Reserve Act to exercise general supervision over the
Reserve Banks; to examine at its discretion the
accounts, books, and affairs of each Reserve Bank;
and to require such statements and reports as it may
deem necessary. In addition, the Board is required to
order an examination of each Reserve Bank at least
once each year.
The Act is silent on the form of these annual examinations. In its first Annual Report (1914), the Board
stated that examinations of Reserve Banks should
include compliance with provisions of the Act and
Board regulations, competency of management, and
adequacy of records, calling attention to any unsafe
or unsound condition.
Since the passage of the Act, the management and
operational structure of the Reserve Banks has
changed significantly. In recent years, critical operations were consolidated into fewer sites, and management decisions have increasingly been made at
the System level. For example, before 2005, each
Reserve Bank was engaged in the processing of
check payments, but now most processing occurs at
a single Reserve Bank. In addition, the role and
responsibilities of the Reserve Banks’ internal audit
and the audit committee of each Reserve Bank’s
board of directors have grown in importance. To
address these changes, the Board’s Committee on
Federal Reserve Bank Affairs and the Division of
Reserve Bank Operations and Payment Systems
(RBOPS) have continuously refined their oversight
strategy to maintain a focus on areas of high risk and
strategic importance to the System.
Since 1995, the Board has contracted with a public
accounting firm to conduct on-site audits of the
financial statements of each Reserve Bank, the
System Open Market Account at the Federal Reserve
Bank of New York, and the combined financial statements of the Reserve Banks. In 1999, the Act was
amended to require that the Board order an annual
independent audit of each Reserve Bank. The external auditor also conducts audits of the internal controls associated with financial reporting for each of
the Reserve Banks. Before the contract with an external auditor, RBOPS examiners conducted that work.
In 2001, RBOPS reviewed its oversight approach to
assess the relevance of its longstanding oversight
activities for the current operations and risk profiles
of the Reserve Banks. RBOPS staff had been

performing annual on-site attentions at each Reserve
Bank and annual on-site attentions of critical System
functions, such as information technology and markets operations. After reviewing its approach, RBOPS
adopted more flexibility, determining the frequency of
on-site attentions based on an assessment of risk. In
addition to on-site attentions, the revised approach
recognized that other oversight activities contribute
to the essential elements of an examination. For
example, Board staff has access to the Reserve
Banks’ deliberation and decisionmaking process and
documentation through liaison roles on a wide array
of Reserve Bank policy committees, advisory groups,
and task forces. In addition, Board staff analyzes
each Reserve Bank’s annual budget, both individually
and in the context of System initiatives, and throughout the year monitors actual performance against
budgets.
In 2017, RBOPS again reassessed its oversight
approach, concluding that the existing approach
remained largely relevant and permitted a sufficient
degree of flexibility. However, continued evolution of
the Reserve Banks, including consolidation and more
coordination among functional areas, indicated that
increased targeted and System-level oversight focus
on specific programs and functions was warranted,
supplementing and, in some cases, replacing the
focus on each Reserve Bank entity. Another outcome
of this assessment was a renewed emphasis on
evaluating management effectiveness and the
planned introduction of periodic assessments of
management culture.
The results of the examination process are reported
to the Board throughout the year through a variety of
mechanisms. Written reports to the Board’s Committee on Federal Reserve Bank Affairs and the examined entity (senior management and boards of directors) are produced for each external audit attention
and significant attention by RBOPS staff. Staff members write analyses covering major Reserve Bank initiatives and projects as well as proposals requiring
Board approval. The Committee on Federal Reserve
Bank Affairs meets with the chairman and deputy
chairman of the board of directors, president, and
first vice president of each Reserve Bank each year
to discuss their Bank’s past year’s performance and
strategic plans. Through this reporting process, the
Board members receive a wealth of information and
assessments that together constitute a complete and
thorough picture of each Reserve Bank.

Federal Reserve Banks

Table 4. Income, expenses, and distribution of net earnings of the Federal Reserve Banks, 2018 and 2017
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 others
Interest expense on securities sold under agreements to repurchase
Other expenses
Current net income
Net (deductions from) additions to current net income
Treasury securities gains, net
Federal agency and government-sponsored enterprise mortgage-backed securities (losses) gains, net
Foreign currency translation (losses) gains, net
Net income from consolidated VIE, net
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
Comprehensive (loss) income
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

2018

2017

112,862
3
112,257
602
47,354
4,527
-706
484
38,486
4,559
4
65,508
-383
5
-3
-390
7
-2
2,024
838
849
337
63,101
65,319
-2,218
42
-2,176
63,143
999
-3,175
65,319

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

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.

• $849 million for the cost of producing, issuing, and
retiring currency; and
• $337 million for Consumer Financial Protection
Bureau costs.
• The expenses were reduced by $706 million in reimbursements for services provided to government
agencies.
Net deductions from current net income totaled
$383 million, which includes $390 million in unrealized losses on foreign currency denominated investments revalued to reflect current market exchange
rates, $5 million in realized gains on Treasury securities, $3 million in realized losses on federal agency
and government-sponsored enterprise mortgagebacked securities (GSE MBS), and $5 million in
other net additions.

Net income before remittances to Treasury totaled
$63,143 million in 2018 (net income of $63,101 million increased by other comprehensive gain of
$42 million). Dividends paid to member banks for
2018 totaled $999 million. Earnings remittances to
the Treasury totaled $65,319 million in 2018, inclusive of a $2,500 million payment made in February 2018 as required by the Bipartisan Budget Act of
2018 and a $675 million payment made in June 2018
as required by the Economic Growth, Regulatory
Relief, and Consumer Protection Act. The Reserve
Banks reported comprehensive loss of $2,176 million
in 2018 after providing for remittances to Treasury.
Section 11 of this report, “Statistical Tables,” provides more detailed information on the Reserve
Banks. Table 9A is a statement of condition for each
Reserve Bank; table 10 details the income and

105th Annual Report | 2018

Table 5. System Open Market Account (SOMA) holdings of the Federal Reserve Banks, 2018 and 2017
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

2018

2017

2018

2017

2018

2017

2,442,075
3,638
1,769,026
21,335
677
7
4,236,758

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

62,807
175
49,289
-29
15
*
112,257

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

2.57
4.81
2.79
-0.14
2.23
1.50
2.65

2.51
4.19
2.68
-0.08
1.63
0.68
2.57

-12,552

-145,959

-186

-1,224

1.48

0.84

-236,818
-249,370
-302
-249,672
3,987,086

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

-4,373
-4,559
n/a
-4,559
107,698

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

1.85
1.83
n/a
1.83
2.70

0.89
0.87
n/a
0.87
2.74

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

expenses of each Reserve Bank for 2018; table 11
shows a condensed statement for each Reserve Bank
for the years 1914 through 2018; 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
The Reserve Banks’ average net daily SOMA holdings during 2018 amounted to $3,987 billion, a
decrease of $39 billion from 2017 (see table 5).

SOMA Securities Holdings
The average daily holdings of Treasury securities
decreased by $119 billion, to an average daily amount
of $2,442 billion. The average daily holdings of
GSE debt securities decreased by $6 billion, to an
average daily amount of $4 billion. The average daily

holdings of federal agency and GSE MBS decreased
by $54 billion, to an average daily amount of
$1,769 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 specified caps.
There were no significant holdings of securities purchased under agreements to resell in 2018 or 2017.
Average daily holdings of foreign currency denominated investments in 2018 were $21,335 million, compared with $20,673 million in 2017. The average daily
balance of central bank liquidity swap drawings was
$677 million in 2018 and $858 million in 2017. The

Federal Reserve Banks

average daily balance of securities sold under agreements to repurchase was $249,370 million, a decrease
of $138,170 million from 2017.
The average rates of interest earned on the Reserve
Banks’ holdings of Treasury securities increased to
2.57 percent, and the average rates on GSE debt securities increased to 4.81 percent in 2018. The average
rate of interest earned on federal agency and GSE
MBS increased to 2.79 percent in 2018. The average
interest rates paid for securities sold under agreements to repurchase increased to 1.83 percent in
2018. The average rate of interest earned on foreign
currency denominated investments decreased to
-0.14 percent,17 while the average rate of interest
earned on central bank liquidity swaps increased to
2.23 percent in 2018.

Lending
In 2018, the average daily primary, secondary, and
seasonal credit extended by the Reserve Banks to
depository institutions increased by $26 million, to
$129 million. The average rate of interest earned on
primary, secondary, and seasonal credit increased to
2.14 percent in 2018, from 1.16 percent in 2017.
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.
During 2018, the FRBNY sold all remaining securities from the ML portfolio, and in accordance with
the ML agreements, net proceeds were distributed to
17

As a result of negative interest rates in certain foreign currency
denominated investments held in the SOMA, interest income on
foreign currency denominated investments, net contains negative
interest.

the Bank. On November 1, 2018, ML LLC was dissolved. While its affairs are being wound up, ML
LLC will retain minimal cash to meet any trailing
expenses as required by law. The costs to wind up
ML LLC are not expected to be material. Net portfolio assets and liabilities at the end of 2018 were
immaterial amounts and decreased from $1,722 million and $9 million, respectively, at the end of 2017.
ML net income of $7 million in 2018 was composed
of interest income of $20 million, loss on investments
of $11 million, and operating expenses of $2 million.

Federal Reserve Bank Premises
Several Reserve Banks took action in 2018 to maintain and renovate their facilities. Multiyear renovation programs at the New York, Cleveland, and San
Francisco Reserve Banks’ headquarters buildings
continued. Many Reserve Banks implemented projects to update building automation systems and
uninterruptable power supplies to ensure infrastructure resiliency and continuity of operations. The New
York Reserve Bank continued repairs and renovations to the 33 Maiden Lane building, and the Philadelphia Reserve Bank continued development of a
building project to replace its entire mechanical and
electrical infrastructure, with construction to begin in
2019. The Minneapolis Reserve Bank completed the
purchase of land for a new parking ramp and began
schematic design for the structure.
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.

100

105th Annual Report | 2018

Pro Forma Financial Statements for
Federal Reserve Priced Services
Table 6. Pro forma balance sheet for Federal Reserve priced services, December 31, 2018 and 2017
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 (note 3)
Deferred-availability items
Short-term debt
Short-term payables
Total short-term liabilities
Long-term liabilities (note 3)
Long-term debt
Accrued benefit costs
Total long-term liabilities
Total liabilities
Equity (including accumulated other comprehensive loss of $624.1 million
and $628.1 million at December 31, 2018 and 2017, respectively)
Total liabilities and equity (note 3)

2018

2017

770.1
38.2
0.6
14.4
236.2

920.1
36.4
0.6
12.4
80.8
1,059.5

113.0
37.0
103.8
183.3

1,050.3
139.3
39.4
105.2
184.4

437.1
1,496.6
1,006.2
27.6
25.7

468.4
1,518.7
1,000.9
23.3
26.1

1,059.5
20.2
342.1

1,050.3
44.7
347.7

362.3
1,421.8

392.4
1,442.8

74.8
1,496.6

75.9
1,518.7

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

101

Table 7. Pro forma income statement for Federal Reserve priced services, 2018 and 2017
Millions of dollars
Item

2018

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)

2017
442.5
421.6
20.9

3.1
-4.7
3.8

441.6
410.7
30.9
2.0r
-3.8r
4.0

2.3
18.7

2.2
28.7

18.7
4.2
14.4
5.2

28.7
6.5
22.2
4.6

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.
r Revised

Table 8. Pro forma income statement for Federal Reserve priced services, by service, 2018
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 7)
Income before income taxes
Imputed income taxes (note 6)
Net income
Memo: Targeted return on equity (note 6)
Cost recovery (percent) (note 8)

Total

Commercial check
collection

Commercial ACH

Fedwire funds

Fedwire securities

442.5
421.6
20.9
2.3
18.7
0
18.7
4.2
14.4
5.2
102.1

132.9
124.1
8.8
2.2
6.6
0
6.6
1.5
5.1
1.5
102.7

149.7
151.3
-1.6
-2.4
0.8
0
0.8
0.2
0.6
1.9
99.2

132.4
119.1
13.3
2.0
11.3
0
11.3
2.6
8.8
1.5
105.8

27.5
27.1
0.4
0.4
0
0
0
0
0
0.3
98.7

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.
Operating expenses include pension costs, Board expenses, and reimbursements for certain nonpriced services.

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105th Annual Report | 2018

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 rate associated with the deferred tax asset was
22.7 percent for 2018 and 2017.
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 2018 equity is imputed at 5.0 percent of total assets and 11.3 percent of risk-weighted assets, and 2017 equity is
imputed at 5.0 percent of total assets and 11.0 percent of risk-weighted assets.
The Board’s Payment System Risk policy reflects the 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 outlines the expectation that the Fedwire Services will meet or
exceed the applicable risk-management standards. Although the Fedwire Funds
Service does not face the risk that a business shock would cause the service to wind
down in a disorderly manner and disrupt the stability of the financial system, in
order to foster competition with private-sector financial market infrastructures, 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
2018 and 2017, there was sufficient assets and equity such that additional imputed
balances were not required.

Federal Reserve Banks

In accordance with Accounting Standards Codification (ASC) Topic 715 (ASC
715), Compensation–Retirement Benefits, the Reserve Banks record the funded
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 $19.1 million in 2018 and a pension asset of $32.0 million in 2017.
The change in the funded status of the pension and other benefit plans resulted in
a corresponding decrease in accumulated other comprehensive loss of $4.0 million
in 2018.
(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 $5.1 million in
2018 and $5.4 million in 2017.
In accordance with ASC 715, the Reserve Bank priced services recognized qualified pension-plan operating expenses of $26.5 million in 2018 and $31.9 million in
2017. Operating expenses also include the nonqualified net pension expense of
$5.0 million in 2018 and $3.3 million in 2017. 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 rate associated with
imputed taxes was 22.7 percent for 2018 and 2017, 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 2018 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.18

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.

103

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105th Annual Report | 2018

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
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 2018, in millions of dollars:
Total float
Float not related to priced services1
Float subject to recovery through per-item fees
1

-254.6
-0.1
-254.5

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 2018 and 2017.
(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.

105

Other Federal Reserve
Operations

Regulatory Developments
Passage and Implementation of the
Economic Growth, Regulatory Relief, and
Consumer Protection Act
On May 24, 2018, the Economic Growth, Regulatory
Relief, and Consumer Protection Act (EGRRCPA)
was signed into law.1 In addition to a number of
standalone provisions, EGRRCPA amended the
Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) as well as other statutes administered by the Board. For example,
EGRRCPA provides for additional tailoring of various provisions of federal banking law while maintaining the authority of the federal banking agencies
to apply enhanced prudential standards to address
financial stability and ensure the safety and soundness of depository institutions and their holding
companies.
On July 6, 2018, the Board released two statements
regarding regulations and associated reporting
requirements that EGRRCPA immediately affected.
The Board issued one statement that related to regulations and reporting requirements administered
solely by the Board, and a second interagency statement with the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) (collectively, the agencies). Both
statements detailed interim positions that the Board
and the agencies would take until the relevant regulations and reporting forms were amended to reflect
EGRRCPA’s changes. Specifically, in the Board’s
statement, the Board provided that it would not take
action to enforce certain regulations and reporting
requirements for firms with less than $100 billion in
total consolidated assets, such as rules implementing
enhanced prudential standards and the liquidity coverage ratio requirements. Additionally, the interagency statement provided relief regarding companyrun stress testing, resolution planning, the Volcker
1

Pub. L. No. 115-174, 132 Stat. 1296 (2018).

rule, high-volatility commercial real estate exposures,
and the treatment of certain municipal obligations as
high-quality liquid assets, among other topics mentioned in the statement.
Since issuance of the two statements in July, the
Board has made substantial progress in implementing
EGRRCPA. The following is a summary of the regulatory initiatives undertaken in response to EGRRCPA’s changes that have taken effect, as well as initiatives that have been proposed but are not yet effective. Interim final rules are effective immediately
upon publication.
Effective EGRRCPA Initiatives
Treatment of Certain Municipal Securities as
High-Quality Liquid Assets (Regulation WW)

In August 2018, the agencies adopted an interim final
rule to implement section 403 of EGRRCPA.2 Section 403 amended section 18 of the Federal Deposit
Insurance Act and required the agencies, for purposes of their liquidity coverage ratio (LCR) rules
and any other regulation that incorporates a definition of the term “high-quality liquid asset” (HQLA)
or another substantially similar term, to treat a
municipal obligation as an HQLA if the obligation is
“liquid and readily marketable” and “investment
grade,” as those terms were defined in EGRRCPA.
To effect this change, the interim final rule amended
each agency’s LCR rule to include a definition of
“municipal obligation” that is consistent with the
definition in section 403. The interim final rule also
amends the HQLA criteria by adding municipal obligations that are both liquid and readily marketable as
well as investment grade to the list of assets eligible
for treatment as level 2B liquid assets. In addition,
the interim final rule rescinds certain amendments
the Board made to its LCR rule in 2016 related to the
treatment of certain U.S. municipal securities as
2

Liquidity Coverage Ratio Rule: Treatment of Certain Municipal
Obligations as High-Quality Liquid Assets, 83 Fed. Reg. 44,451
(August 31, 2018).

106

105th Annual Report | 2018

HQLA so that municipal obligations under the
Board’s rule will be treated consistently with section 403.
Small Bank Holding Company and Savings and
Loan Holding Company Policy Statement
(Regulations Q and Y)

In August 2018, the Board adopted an interim final
rule to implement section 207 of EGRRCPA, which
directed the Board to revise its Small Bank Holding
Company and Savings and Loan Holding Company
Policy Statement (Policy Statement).3 Bank holding
companies and savings and loan holding companies
that are subject to the Policy Statement are exempt
from the Board’s regulatory capital rule. Section 207
required the Board to raise the consolidated asset
threshold for application of the Policy Statement
from $1 billion to $3 billion. In accordance with section 207, the interim final rule increased the Policy
Statement’s asset size threshold from $1 billion to
$3 billion and made other conforming amendments
to the Policy Statement.
Expanded Examination Cycles for Qualifying
Small Banks and U.S. Branches and Agencies of
Foreign Banks (Regulations H and K)

In December 2018, the agencies adopted final rules
to implement section 210 of EGRRCPA.4 Section 210 amended section 10(d) of the Federal
Deposit Insurance Act to permit the agencies to conduct on-site examinations of qualifying insured
depository institutions with under $3 billion in total
assets not less than once during each 18-month
period. Prior to EGRRCPA’s enactment, qualifying
insured depository institutions with less than $1 billion in total assets were eligible for an 18-month
on-site examination cycle.
The final rules generally allow qualifying insured
depository institutions with under $3 billion in total
consolidated assets to benefit from the extended
18-month examination schedule. In addition, the
interim final rules make parallel changes to the agencies’ regulations governing the on-site examination
cycle for U.S. branches and agencies of foreign
banks, consistent with the International Banking Act
of 1978.
3

Small Bank Holding Company and Savings and Loan Holding
Company Policy Statement and Related Regulations; Changes
to Reporting Requirements, 83 Fed. Reg. 44,195 (August 30,
2018).
Expanded Examination Cycle for Certain Small Insured
Depository Institutions and U.S. Branches and Agencies of
Foreign Banks, 83 Fed. Reg. 67,033 (December 28, 2018).

Proposed EGRRCPA Initiatives
Regulatory Capital Treatment for High Volatility
Commercial Real Estate Exposures
(Regulation Q)

In September 2018, the agencies requested comment
on a proposed rule that would amend the regulatory
capital rule to revise the definition of “high volatility
commercial real estate exposure” (HVCRE) to conform to the statutory definition of “high volatility
commercial real estate acquisition, development, or
construction (HVCRE ADC) loan,” in accordance
with section 214 of EGRRCPA.5 Section 214
amended the Federal Deposit Insurance Act by adding a new section 51 to provide a statutory definition
of an HVCRE ADC loan. The statute stated that the
agencies may only require a depository institution to
assign a heightened risk weight to an HVCRE exposure, as defined under the capital rule, if such exposure is an HVCRE ADC loan under EGRRCPA.
In accordance with section 214 of EGRRCPA, the
agencies proposed to revise the HVCRE exposure
definition in section 2 of the agencies’ capital rule to
conform to the statutory definition of an HVCRE
ADC loan. Loans that meet the revised definition of
an HVCRE exposure would receive a 150 percent
risk weight under the capital rule’s standardized
approach.
Although not expressly required by EGRRCPA, the
proposed rule also would apply the revised definition
of an HVCRE exposure to all Board-regulated institutions that are subject to the Board’s capital rule,
including bank holding companies, savings and loan
holding companies, and intermediate holding companies of foreign banking organizations. The comment
period ended on November 27, 2018.
Prudential Standards for Large Bank Holding
Companies and Savings and Loan Holding
Companies (Regulations Y, LL, PP, and YY) and
Proposed Changes to Applicability Thresholds for
Regulatory Capital and Liquidity Requirements
(Regulations Q and WW)

In October 2018, the Board requested comment on a
Board-only proposal that would establish risk-based
categories for determining prudential standards for
large U.S. banking organizations, consistent with section 401 of EGRRCPA. At the same time and in
connection with the Board-only proposal, the agen5

Regulatory Capital Treatment for High Volatility Commercial
Real Estate (HVCRE) Exposures, 83 Fed. Reg. 48,990 (September 28, 2018).

Other Federal Reserve Operations

cies also requested comment on an interagency proposal that would establish risk-based categories for
determining liquidity and capital standards for large
U.S. banking organizations, again consistent with
section 401 of EGRRCPA.
Section 401 raised the minimum asset threshold from
$50 billion to $250 billion for general application of
enhanced prudential standards under section 165 of
the Dodd-Frank Act. In addition, section 401
authorized the Board to apply such standards to
bank holding companies with total consolidated
assets of $100 billion or more but less than $250 billion, provided that the Board take into consideration
certain statutory factors—capital structure, riskiness,
complexity, financial activities (including financial
activities of subsidiaries), size, and any other riskrelated factors that the Board deems appropriate—
when doing so. EGRRCPA also raised the threshold
from $10 billion to $50 billion in total consolidated
assets for application of risk committee and riskmanagement standards to publicly traded bank holding companies and required the Board to implement
periodic supervisory stress testing for bank holding
companies with $100 billion or more but less than
$250 billion in total consolidated assets.
The first proposal would establish four categories of
prudential standards for large U.S. bank holding
companies and certain savings and loan holding
companies.6 Consistent with EGRRCPA, riskcommittee and risk-management requirements would
be required for all bank holding companies and certain savings and loan holding companies with at least
$50 billion in total consolidated assets. Likewise,
bank holding companies and certain savings and
loan holding companies with at least $100 billion in
total consolidated assets would be subject to supervisory stress tests, with the periodicity depending on
the applicable category of standards. The first proposal also included proposed changes to related
reporting forms, as well as proposed definitional
changes in the Board’s Regulation PP.
The second proposal, which was proposed by the
agencies, would utilize the categories introduced in
the Board-only proposal and apply tailored capital
and liquidity requirements for banking organizations
subject to each category.7 Specifically, the agencies
6

Prudential Standards for Large Bank Holding Companies and
Savings and Loan Holding Companies, 83 Fed. Reg. 61,408
(November 29, 2018).
Proposed Changes to Applicability Thresholds for Regulatory

107

proposed to amend the scope of certain aspects of
the regulatory capital rule and the LCR rule and
re-propose the scope of the net stable funding ratio
rule to incorporate the four categories of standards
and differentiate the application of standards in each
category to align with the risk profile of banking
organizations.
The comment period for both proposals ended on
January 22, 2019.
Reduced Reporting for Covered Depository
Institutions (Regulation H)

In November 2018, the agencies requested comment
on a proposal to implement section 205 of
EGRRCPA.8 Section 205 amended section 7(a) of
the Federal Deposit Insurance Act and required the
agencies to issue regulations that allow for a reduced
reporting requirement by “covered depository institutions” for the first and third reports of condition in
a year. “Covered depository institution” is defined in
section 205 as an insured depository institution
“that—(i) has less than $5,000,000,000 in total consolidated assets; and (ii) satisfies such other criteria
as the [agencies] determine appropriate.”
The proposed rule would implement section 205 by
(1) authorizing covered depository institutions to file
the Federal Financial Institutions Examinations
Council (FFIEC) 051 Call Report (the most streamlined version of the Call Report), and (2) reducing
the information required to be reported on the
FFIEC 051 Call Report by covered depository institutions in the first and third calendar quarters. The
proposal would define “covered depository institution” to include certain insured depository institutions that have less than $5 billion in total consolidated assets and satisfy certain other proposed criteria. The OCC and the Board also proposed to
establish reduced reporting for certain uninsured
institutions under their supervision that have less
than $5 billion in total consolidated assets and meet
the proposed criteria. In addition, the Board proposed a technical amendment to its Regulation H to
implement the requirement in section 9 of the Federal Reserve Act pursuant to which state member
banks are required to file Call Reports. The comment
period ended on January 18, 2019.

Capital and Liquidity Requirements, 83 Fed. Reg. 66,024
(November 21, 2018).
Reduced Reporting for Covered Depository Institutions, 83
Fed. Reg. 58,432 (November 19, 2018).

108

105th Annual Report | 2018

Regulatory Capital Rule: Capital Simplification
for Qualifying Community Banking Organizations
(Regulation Q)

In November 2018, the agencies requested comment
on a proposal that would provide for a simple measure of capital adequacy for certain community banking organizations, consistent with section 201 of
EGRRCPA.9 Section 201 directed the agencies to
develop a community bank leverage ratio of not less
than 8 percent and not more than 10 percent for
qualifying community banking organizations, which
are depository institutions or depository institution
holding companies with total consolidated assets of
less than $10 billion that the agencies have not determined are ineligible based on the banking organization’s risk profile.
Under the proposal, depository institutions and
depository institution holding companies that have
less than $10 billion in total consolidated assets, meet
qualifying criteria, and have a community bank leverage ratio (as defined in the proposal) of greater than
9 percent would be eligible to opt in to a community
bank leverage ratio framework. Such banking organizations that elect to use the community bank leverage
ratio and maintain a community bank leverage ratio
of greater than 9 percent would not be subject to
other risk-based and leverage capital requirements. In
addition, these banking organizations would be considered to be “well capitalized” for purposes of section 38 of the Federal Deposit Insurance Act and
regulations implementing that section, as applicable,
and the generally applicable capital requirements
under the agencies’ capital rule. The comment period
ended on April 9, 2019.
Prohibitions and Restrictions on Proprietary
Trading and Certain Interests in, and
Relationships with, Hedge Funds and Private
Equity Funds (Regulation VV)

In December 2018, the agencies, along with the Securities and Exchange Commission and Commodities
Futures Trading Commission, requested comment on
a proposal that would amend Regulation VV (known
as the Volcker rule) to align with amendments in sections 203 and 204 of EGRRCPA.10 Section 203
amended section 13 of the Bank Holding Company
9

Regulatory Capital Rule: Capital Simplification for Qualifying
Community Banking Organizations, 84 Fed. Reg. 3062 (February 8, 2019).
Proposed Revisions to Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships with,
Hedge Funds and Private Equity Funds, 84 Fed. Reg. 2778
(February 8, 2019).

Act by narrowing the definition of banking entity,
and section 204 revised the statutory provisions
related to the naming of hedge funds and private
equity funds.
The Volcker rule generally restricts banking entities
from engaging in proprietary trading and from owning or sponsoring hedge funds or private equity
funds. The proposed rule would exclude community
banks with $10 billion or less in total consolidated
assets, and total trading assets and liabilities of 5 percent or less of total consolidated assets, from the
restrictions of the Volcker rule. Additionally, the proposal would, under certain circumstances, permit a
hedge fund or private equity fund to share the same
name or a variation of the same name with an investment adviser that is not an insured depository institution, company that controls an insured depository
institution, or bank holding company. The comment
period ends on March 11, 2019.
Real Estate Appraisals (Regulation Y)

In December 2018, the agencies requested comment
on a proposal that would raise the transaction value
threshold for residential real estate transactions
requiring an appraisal from $250,000 to $400,000, as
well as align the agencies’ appraisal regulations with
section 103 of EGRRCPA.11 Section 103 provided an
exemption to the appraisal requirement for certain
transactions with values of less than $400,000 involving real property or an interest in real property that is
located in a rural area.
The proposal would eliminate the requirement under
the agencies’ appraisal regulations for regulated
financial institutions to obtain an appraisal for real
estate-related financial transactions with a transaction value of $400,000 or less, or that are exempted
by the rural residential exemption in section 103 of
EGRRCPA. Instead, the proposal would require
evaluations for such transactions that are consistent
with safe and sound banking practices. The comment
period ended on February 5, 2019.

Other Dodd-Frank Implementation
Throughout 2018, in addition to implementing
EGRRCPA, the Federal Reserve continued to implement the Dodd-Frank Act, which gives the Federal
Reserve important responsibilities to issue rules and
supervise financial companies to enhance financial

Real Estate Appraisals, 83 Fed. Reg. 63,110 (February 5, 2019).

Other Federal Reserve Operations

stability and preserve the safety and soundness of the
banking system.
The following is a summary of the key Dodd-Frank
regulatory initiatives that were finalized during 2018
that were not related to EGRRCPA.
Single Counterparty Credit Limits
(Regulation YY)
In June 2018, the Board adopted a final rule to establish single-counterparty credit limits for bank holding
companies and foreign banking organizations with
$250 billion or more in total consolidated assets,
including any U.S. intermediate holding company of
such a foreign banking organization with $50 billion
or more in total consolidated assets and any bank
holding company identified as a global systemically
important bank holding company (G-SIB) under the
Board’s capital rules.12 The final rule implements section 165(e) of the Dodd-Frank Act, which requires
the Board to impose limits on the amount of credit
12

Single-Counterparty Credit Limits for Bank Holding Companies and Foreign Banking Organizations, 83 Fed. Reg. 38,460
(August 6, 2018).

109

exposure that such a bank holding company or foreign banking organization can have to an unaffiliated
company in order to reduce the risks arising from the
unaffiliated company’s possible failure.13
Under the final rule, a bank holding company with
$250 billion or more in total consolidated assets that
is not a G-SIB is prohibited from having aggregate
net credit exposure to an unaffiliated counterparty in
excess of 25 percent of its tier 1 capital. A U.S.
G-SIB is prohibited from having aggregate net credit
exposure in excess of 15 percent of its tier 1 capital to
an unaffiliated counterparty that is a G-SIB or a
nonbank financial company supervised by the Board
(major counterparty) and in excess of 25 perfect of
its tier 1 capital to any other unaffiliated counterparty. The final rule also includes requirements for
any foreign banking organization operating in the
United States with $250 billion or more in total
global consolidated assets and any U.S. intermediate
holding companies of such an organization with
$50 billion or more in total assets.

12 USC 5365(e).

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105th Annual Report | 2018

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-

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 https://www.federalreserve.gov/
publications/gpra.htm.

111

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 2018, 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.
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

Backed Securities Loan Facility (or TALF).2 The
final rule is effective June 8, 2018.
Voting for this action: Chair Powell, Vice Chair
for Supervision Quarles, and Governor Brainard.

Regulations H (Membership of State
Banking Institutions in the Federal
Reserve System) and K (International
Banking Operations)
On August 21, 2018, the Board approved an interim
final rule and request for comment (Docket No.
R-1615), published jointly with the Federal Deposit
Insurance Corporation (FDIC) and Office of the
Comptroller of the Currency (OCC), to increase the
asset threshold, from $1 billion to $3 billion in total
assets, below which certain small insured depository
institutions and U.S. branches and agencies of foreign banks may qualify for an extended on-site
examination cycle, from 12 to 18 months, in accordance with the Economic Growth, Regulatory Relief,
and Consumer Protection Act (EGRRCPA).3 The
interim final rule is effective August 29, 2018.

Regulation A (Extensions of Credit by
Federal Reserve Banks)
On April 30, 2018, the Board approved a final rule
(Docket No. R-1585) to (1) revise the provisions
regarding the establishment of the primary credit rate
in a financial emergency to provide that the primary
credit rate will be the target federal funds rate or, if
the Federal Open Market Committee has established
a target range for the federal funds rate, a rate corresponding to the top of the target range; and
(2) delete references to the expired Term Asset-

Voting for this action: Chair Powell, Vice Chair
for Supervision Quarles, and Governor Brainard.
On December 20, 2018, the Board approved a final
rule (Docket No. R-1615), published jointly with the
FDIC and OCC, to adopt without change the
interim final rule establishing an 18-month on-site
examination cycle for insured depository institutions
and U.S. branches and agencies of foreign banks
with total assets of less than $3 billion, consistent
with the EGRRCPA.4 The final rule is effective
January 28, 2019.
2

Jerome Powell was sworn in as Chair on February 5, and
Richard Clarida was sworn in as Vice Chair and a member of
the Board on September 17, 2018. Michelle Bowman was sworn
in as a member of the Board on November 26, 2018.

See Federal Register notice at https://www.govinfo.gov/content/
pkg/FR-2018-05-09/html/2018-09805.htm.
See Federal Register notice at https://www.govinfo.gov/content/
pkg/FR-2018-08-29/html/2018-18685.htm.
See Federal Register notice at https://www.govinfo.gov/content/
pkg/FR-2018-12-28/html/2018-28267.htm.

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105th Annual Report | 2018

Voting for this action: Chair Powell, Vice Chair
Clarida, Vice Chair for Supervision Quarles, and
Governors Brainard and Bowman.

Regulation J (Collection of Checks and
Other Items by Federal Reserve Banks and
Funds Transfers through Fedwire)
On November 14, 2018, the Board approved a final
rule (Docket No. R-1599) to clarify and simplify certain provisions of the regulation and remove obsolete
provisions; align the rights and obligations of sending banks, paying banks, and Federal Reserve Banks
with provisions in the Board’s 2017 amendments to
Regulation CC (Availability of Funds and Collection
of Checks) to reflect the virtually all-electronic check
collection and return environment; and clarify that
financial messaging standards for Fedwire funds
transfers, such as the international common format
standard ISP 20022, do not confer or connote legal
status to the funds transfers.5 The final rule is effective January 1, 2019.
Voting for this action: Chair Powell, Vice Chair
Clarida, Vice Chair for Supervision Quarles, and
Governor Brainard.

Regulation Q (Capital Adequacy of Bank
Holding Companies, Savings and Loan
Holding Companies, and State Member
Banks)
On December 20, 2018, the Board approved a final
rule (Docket No. R-1605) to revise its regulatory
capital rule to address upcoming changes to credit
loss accounting under U.S. generally accepted
accounting principles, including banking organizations’ implementation of the Current Expected
Credit Losses (CECL) methodology.6 The final rule
would (1) identify which credit loss allowances under
CECL are eligible for inclusion in firms’ tier 2 capital
and (2) provide firms with the option to phase in,
over three years, any immediate adverse effects of
CECL on regulatory capital. In addition, the rule
would direct firms that have adopted CECL to
include provisions calculated under CECL in their
stress testing projections, starting with the 2020 stress
test cycle. The final rule was published jointly with
the FDIC and OCC, both of which similarly
5

See Federal Register notice at https://www.govinfo.gov/content/
pkg/FR-2018-11-30/html/2018-25267.htm.
See Federal Register notice at https://www.govinfo.gov/content/
pkg/FR-2019-02-14/html/2018-28281.htm.

amended their respective capital rules. The final rule,
which also made conforming changes to other Board
regulations, is effective April 1, 2019. Banking organizations may choose to early-adopt the final rule as
of the first quarter of 2019.
Voting for this action: Chair Powell, Vice Chair
Clarida, Vice Chair for Supervision Quarles, and
Governors Brainard and Bowman.

Regulation Y (Bank Holding Companies
and Change in Bank Control)
On March 23, 2018, the Board approved a final rule
(Docket No. R-1568), published jointly with the
FDIC and OCC (together with the Board, “the agencies”), to increase, from $250,000 to $500,000, the
dollar threshold at or below which appraisals are not
required for commercial real estate transactions
under the agencies’ appraisal regulations.7 Regulated
institutions would be required to obtain evaluations
for such transactions at or below the threshold,
rather than an appraisal. The agencies determined
that the higher threshold would reduce regulatory
burden without posing a threat to the safety and
soundness of financial institutions. The final rule is
effective April 9, 2018.
Voting for this action: Chair Powell, Vice Chair
for Supervision Quarles, and Governor Brainard.
On August 21, 2018, the Board approved an interim
final rule and request for comment (Docket No.
R-1619) to raise the asset-size threshold, from $1 billion to $3 billion of total consolidated assets, for
determining applicability of the Small Bank Holding
Company and Savings and Loan Holding Company
Policy Statement, in accordance with the
EGRRCPA.8 The Policy Statement facilitates the
transfer of ownership of small community banks by
allowing their holding companies to operate with
higher levels of debt than would normally be permitted. The interim final rule, which also makes conforming changes to Regulation Q, is effective
August 30, 2018.
Voting for this action: Chair Powell, Vice Chair
for Supervision Quarles, and Governor Brainard.

See Federal Register notice at https://www.govinfo.gov/content/
pkg/FR-2018-04-09/html/2018-06960.htm.
See Federal Register notice at https://www.govinfo.gov/content/
pkg/FR-2018-08-30/html/2018-18756.htm.

Record of Policy Actions of the Board of Governors

Regulation CC (Availability of Funds and
Collection of Checks)
On September 4, 2018, the Board approved final
amendments (Docket No. R-1620) to address disputes between banks on whether a substitute or an
electronic check has been altered or was issued with
an unauthorized signature, when the original check is
not available for inspection.9 The final rule is effective
January 1, 2019.
Voting for this action: Chair Powell, Vice Chair
for Supervision Quarles, and Governor Brainard.

Regulation KK (Swaps Margin and Swaps
Push-Out)
On September 18, 2018, the Board approved a final
rule (Docket No. R-1596) amending its swap margin
requirements to conform with recently adopted
restrictions on certain qualified financial contracts of
systemically important banking organizations (QFC
Rules).10 The rule provides that legacy swaps entered
into before the applicable compliance date will not
become subject to swap margin requirements if they
are amended solely to comply with the requirements
of the QFC Rules. The final rule was published
jointly with the FDIC, OCC, Farm Credit Administration, and Federal Housing Finance Agency, all of
which similarly amended their respective swap margin requirements. The final rule also harmonizes the
definition of “Eligible Master Netting Agreement” in
the swap margin requirements with recent changes to
the definition of “Qualifying Master Netting Agreement” in the capital and liquidity regulations of the
Board, OCC, and FDIC by recognizing the restrictions that were adopted by those agencies with
respect to the QFC Rules. The final rule is effective
November 9, 2018.
Voting for this action: Chair Powell, Vice Chair
Clarida, Vice Chair for Supervision Quarles, and
Governor Brainard.

113

to modify its liquidity coverage ratio rule to treat certain eligible municipal obligations as high-quality liquid assets, in accordance with the EGRRCPA.11 The
interim final rule is effective August 31, 2018.
Voting for this action: Chair Powell, Vice Chair
for Supervision Quarles, and Governor Brainard.

Regulation YY (Enhanced Prudential
Standards)
On June 14, 2018, the Board approved a final rule
(Docket No. R-1534) to establish single-counterparty
credit limits for large banking organizations.12 The
final rule implements section 165(e) of the DoddFrank Wall Street Reform and Consumer Protection
Act, which requires the Board to impose limits on the
amount of credit exposure a domestic bank holding
company that has $250 billion or more in total consolidated assets, including bank holding companies
identified as global systemically important banking
organizations (G-SIBs) under the Board’s capital
rules (together, “covered companies”), can have to an
unaffiliated counterparty in order to reduce the risks
that an individual company’s failure or distress might
pose to the stability of the U.S. financial system.
Under the final rule, a covered company is prohibited
from having an aggregate net credit exposure of more
than 25 percent of its tier 1 capital to a single unaffiliated counterparty. G-SIBs are subject to an additional restriction—15 percent of tier 1 capital—on
their aggregate net credit exposures to another systemically important financial firm. Foreign banking
organizations operating in the United States that
have $250 billion or more in total global consolidated
assets, as well as their intermediate holding companies (IHCs) that have $50 billion or more in total U.S.
consolidated assets, would also be subject to credit
exposure limits. The scope and application of all the
credit exposure limits in the final rule are consistent
with the EGRRCPA. The final rule is effective
October 5, 2018.
Voting for this action: Chair Powell, Vice Chair
for Supervision Quarles, and Governor Brainard.

Regulation WW (Liquidity Risk
Measurement Standards)

Rules Regarding Delegation of Authority
On August 21, 2018, the Board approved an interim
final rule and request for comment (Docket No.
R-1616), published jointly with the FDIC and OCC,

On February 27, 2018, the Board approved a final
rule (Docket No. R-1600) amending its delegation of

See Federal Register notice at https://www.govinfo.gov/content/
pkg/FR-2018-09-17/html/2018-20029.htm.
See Federal Register notice at https://www.govinfo.gov/content/
pkg/FR-2018-10-10/html/2018-22021.htm.

See Federal Register notice at https://www.govinfo.gov/content/
pkg/FR-2018-08-31/html/2018-18610.htm.
See Federal Register notice at https://www.govinfo.gov/content/
pkg/FR-2018-08-06/html/2018-16133.htm.

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105th Annual Report | 2018

authority rules to delegate authority to the Secretary
of the Board to review and determine appeals of
denial of access to Board records under the Freedom
of Information Act, the Privacy Act, and the Board’s
rules regarding access to such records.13 The rule
would repeal the existing delegation of authority on
these matters to any Board member designated by
the Chair. The final rule is effective March 6, 2018.
Voting for this action: Chair Powell, Vice Chair
for Supervision Quarles, and Governor Brainard.

Policy Statements and Other Actions
Policy Statement on Interagency
Notification of Formal Enforcement
Actions
On April 2, 2018, the Board approved a policy statement (Docket No. OP-1609), published jointly with
the FDIC and OCC, to promote notification of, and
coordination on, formal enforcement actions among
the three agencies at the earliest practicable date.14
The final policy statement incorporates and reflects
current practices and replaces the Federal Financial
Institutions Examination Council’s rescinded policy
statement, “Interagency Coordination of Formal
Corrective Action by the Federal Bank Regulatory
Agencies.” The final policy statement is effective
June 12, 2018.
Voting for this action: Chair Powell, Vice Chair
for Supervision Quarles, and Governor Brainard.

Determination on New Markets Tax Credit
Investments as Public Welfare Investments
On June 28, 2018, the Board determined that an
investment made by a state member bank in a “qualified community development entity” eligible for the
U.S. Department of the Treasury’s New Markets Tax
Credit program is an investment “designed primarily
to promote the public welfare” within the meaning of
section 9(23) of the Federal Reserve Act and section 208.22(b)(1)(i) of Regulation H, provided all
other statutory and regulatory criteria are met.
Voting for this action: Chair Powell, Vice Chair
for Supervision Quarles, and Governor Brainard.
13

See Federal Register notice at https://www.govinfo.gov/content/
pkg/FR-2018-03-06/html/2018-04385.htm.
See Federal Register notice at https://www.govinfo.gov/content/
pkg/FR-2018-06-12/html/2018-12556.htm.

Statements on the Impact of the Economic
Growth, Regulatory Relief, and Consumer
Protection Act
On July 4, 2018, the Board approved two public
statements to provide information on regulations and
associated reporting requirements that the
EGRRCPA immediately affected. Enacted in
May 2018, EGRRCPA amended various provisions
of banking law to reduce regulatory requirements or
provide additional tailoring for certain banking organizations. The first statement describes statutory
changes that do not require Board action to have an
immediate effect as well as other Board actions that
would be consistent with EGRRCPA’s provisions.15
In particular, the statement describes how the Board
will not take action to require certain smaller, less
complex banking organizations to comply with certain Board regulations, including those relating to
stress testing and liquidity. The second statement,
issued jointly with the FDIC and OCC, provides
similar relief for depository institutions.16
Voting for this action: Chair Powell, Vice Chair
for Supervision Quarles, and Governor Brainard.

Customer Identification Program
On August 30, 2018, the Board approved an order,
issued jointly with the FDIC, OCC, Financial Crimes
Enforcement Network, and National Credit Union
Administration, granting an exemption to banks
from the requirements in the customer identification
program (CIP) rules under the Bank Secrecy Act
(BSA) when a bank extends loans to commercial customers to facilitate the purchase of property and
casualty insurance.17 Under the CIP rules, banks are
generally required to obtain certain identifying information from a customer at account opening in order
to verify the true identity of the customer. The CIP
rules permit exemptions from these requirements,
provided any exemption is consistent with the purposes of the BSA and safety and soundness. The
order is effective September 27, 2018.
Voting for this action: Chair Powell, Vice Chair
for Supervision Quarles, and Governor Brainard.

See press release at https://www.federalreserve.gov/newsevents/
pressreleases/bcreg20180706b.htm.
See press release at https://www.federalreserve.gov/newsevents/
pressreleases/bcreg20180706a.htm.
See interagency order at https://www.federalreserve.gov/
supervisionreg/srletters/sr1806a1.pdf.

Record of Policy Actions of the Board of Governors

Voting for this action: Chair Powell, Vice Chair
Clarida, Vice Chair for Supervision Quarles, and
Governor Brainard.

Large Financial Institution Rating System
On November 1, 2018, the Board approved a new
supervisory rating system for large financial institutions (LFIs) to align with the Federal Reserve’s current supervisory programs and practices for these
firms.18 The new rating system applies to (1) bank
holding companies and non-insurance, noncommercial savings and loan holding companies
(SLHCs) with at least $100 billion in total consolidated assets and (2) U.S. IHCs of foreign banking
organizations established under Regulation YY that
have at least $50 billion in total consolidated assets.
The rating system will assign component ratings for
capital planning and positions, liquidity risk management and positions, and governance and controls,
and will introduce a new rating scale. Initial LFI ratings will be assigned to institutions under the Large
Institution Supervision Coordinating Committee
framework beginning in early 2019 and to other LFIs
in early 2020. Conforming revisions were also made
to Regulations K and LL (Docket No. R-1569),
which are effective February 1, 2019.
Voting for this action: Chair Powell, Vice Chair
Clarida, Vice Chair for Supervision Quarles, and
Governor Brainard.

Application of the RFI/C(D) Rating System
to Savings and Loan Holding Companies
On November 1, 2018, the Board approved a notice
(Docket No. OP-1631) to apply the RFI/C(D) rating
system (the RFI rating system) to SLHCs that are
depository in nature.19 However, SLHCs that are
depository in nature and have at least $100 billion in
total consolidated assets will be rated under the RFI
rating system only until the Board applies its new
LFI rating system to them, beginning in early 2020.
SLHCs that are depository in nature but have less
than $100 billion in total consolidated assets would
remain subject to the RFI rating system. The RFI
rating system would not apply to SLHCs that meet
certain criteria to be considered commercial or insurance SLHCs. Commercial SLHCs and insurance
SLHCs would continue to receive “indicative ratings,” which describe how the firm would be rated if
subject to the RFI rating system. The notice is effective February 1, 2019.
18

See Federal Register notice at https://www.govinfo.gov/content/
pkg/FR-2018-11-21/html/2018-25350.htm.
See Federal Register notice at https://www.govinfo.gov/content/
pkg/FR-2018-11-09/html/2018-24496.htm.

115

Conversion Triggers in Eligible Long-Term
Debt
On December 10, 2018, the Board identified criteria
for evaluating whether a proposed internal debt “conversion trigger” of a U.S. intermediate holding company of a foreign global systemically important
banking organization (a covered IHC) is consistent
with the requirements of the Board’s total lossabsorbing capacity (TLAC) regulation, in connection
with its approval of the proposed internal debt “conversion triggers” of two covered IHCs.20 Under the
TLAC regulation, covered IHCs are required to
maintain outstanding a minimum amount of longterm debt that meets certain eligibility factors, beginning on January 1, 2019. In addition, eligible longterm debt issued by a covered IHC to its foreign
affiliates must include a conversion trigger, a contractual provision that permits the Board to order the
conversion of the debt into equity. The Board also
approved a delegation of authority to the General
Counsel, in consultation with the Director of the
Division of Supervision and Regulation, to approve
proposed conversion triggers for other covered IHCs,
provided the triggers meet the eligibility criteria and
do not raise significant legal, policy, or supervisory
issues.
Voting for this action: Chair Powell, Vice Chair
Clarida, Vice Chair for Supervision Quarles, and
Governors Brainard and Bowman.

Resolution Plan Guidance
On December 19, 2018, the Board approved final
guidance (Docket No. OP-1644), published jointly
with the FDIC, for the eight largest, most complex
U.S. banking organizations regarding their future
resolution plan submissions.21 The joint final guidance consolidates prior resolution plan guidance provided to these institutions and describes the two
agencies’ expectations regarding a number of key
vulnerabilities for an orderly resolution under the
20

See the Board’s letters to UBS Group AG and Credit Suisse
AG: https://www.federalreserve.gov/supervisionreg/
legalinterpretations/bhc_changeincontrol20181213g.pdf and
https://www.federalreserve.gov/supervisionreg/
legalinterpretations/bhc_changeincontrol20181213c.pdf.
See Federal Register notice at https://www.govinfo.gov/content/
pkg/FR-2019-02-04/html/2019-00800.htm.

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105th Annual Report | 2018

U.S. Bankruptcy Code. This includes updated expectations regarding payment, clearing, and settlement
services and on derivatives and trading activities.

Voting for this action: Chair Powell, Vice Chair
Clarida, Vice Chair for Supervision Quarles, and
Governor Brainard.

Voting for this action: Chair Powell, Vice Chair
Clarida, Vice Chair for Supervision Quarles, and
Governors Brainard and Bowman.

On December 19, 2018, the Board approved raising
the interest rate paid on required and excess reserve
balances from 2.20 percent to 2.40 percent, effective
December 20, 2018.25 This action was taken to support the FOMC’s decision on December 19 to raise
the target range for the federal funds rate by 25 basis
points, to a range of 2¼ percent to 2½ percent. Setting the interest rate paid on required and excess
reserve balances 10 basis points below the top of the
target range for the federal funds rate was intended to
foster trading in the federal funds market at rates well
within the FOMC’s target range.

Interest on Reserves
On March 21, 2018, the Board approved raising the
interest rate paid on required and excess reserve balances from 1½ percent to 1¾ percent, effective
March 22, 2018.22 This action was taken to support
the Federal Open Market Committee’s (FOMC’s)
decision on March 21 to raise the target range for the
federal funds rate by 25 basis points, to a range of
1½ percent to 1¾ percent.

Voting for this action: Chair Powell, Vice Chair
Clarida, Vice Chair for Supervision Quarles, and
Governors Brainard and Bowman.

Voting for this action: Chair Powell, Vice Chair
for Supervision Quarles, and Governor Brainard.
On June 13, 2018, the Board approved raising the
interest rate paid on required and excess reserve balances from 1¾ percent to 1.95 percent, effective
June 14, 2018.23 This action was taken to support the
FOMC’s decision on June 13 to raise the target range
for the federal funds rate by 25 basis points, to a
range of 1¾ percent to 2 percent. Setting the interest
rate paid on required and excess reserve balances
5 basis points below the top of the target range for
the federal funds rate was intended to foster trading
in the federal funds market at rates well within the
FOMC’s target range.
Voting for this action: Chair Powell, Vice Chair
for Supervision Quarles, and Governor Brainard.
On September 26, 2018, the Board approved raising
the interest rate paid on required and excess reserve
balances from 1.95 percent to 2.20 percent, effective
September 27, 2018.24 This action was taken to support the FOMC’s decision on September 26 to raise
the target range for the federal funds rate by 25 basis
points, to a range of 2 percent to 2¼ percent.

See press release at https://www.federalreserve.gov/newsevents/
pressreleases/monetary20180321a1.htm.
See press release at https://www.federalreserve.gov/newsevents/
pressreleases/monetary20180613a1.htm.
See press release at https://www.federalreserve.gov/newsevents/
pressreleases/monetary20180926a1.htm.

Discount Rates for Depository
Institutions in 2018
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 2018, the Board
approved four increases in the primary credit rate,
bringing the rate from 2 percent to 3 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
25

See press release at https://www.federalreserve.gov/newsevents/
pressreleases/monetary20181219a1.htm.

Record of Policy Actions of the Board of Governors

in conjunction with the FOMC’s decisions to raise
the target range for the federal funds rate by
100 basis points, to 2¼ percent to 2½ percent. Monetary policy developments are reviewed more fully in
other parts of this report (see section 2, “Monetary
Policy and Economic Developments”).
Secondary credit is available in appropriate circumstances to depository institutions that do not qualify
for primary credit. The secondary credit rate is set at
a spread above the primary credit rate. Throughout
2018, the spread was set at 50 basis points. At yearend, the secondary credit rate was 3½ 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 2.40 percent.26

Votes on Changes to Discount Rates for
Depository Institutions

117

June 13, 2018. Effective June 14, 2018, the Board
approved actions taken by the boards of directors of
the Federal Reserve Banks of Boston, Philadelphia,
Cleveland, Richmond, Atlanta, Chicago, St. Louis,
Minneapolis, Kansas City, Dallas, and San Francisco
to increase the primary credit rate from 2¼ percent
to 2½ percent. On June 14, 2018, the Board approved
an identical action subsequently taken by the board
of directors of the Federal Reserve Bank of New
York, effective immediately.
Voting for this action: Chair Powell, Vice Chair
for Supervision Quarles, and Governor Brainard.
September 26, 2018. Effective September 27, 2018,
the Board approved actions taken by the boards of
directors of the Federal Reserve Banks of Boston,
Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Kansas City, Dallas, and San Francisco to increase the primary credit rate from 2½ percent to 2¾ percent. On September 27, 2018, the
Board approved identical actions subsequently taken
by the boards of directors of the Federal Reserve
Banks of New York and Minneapolis, effective
immediately.

Details on the four actions by the Board to approve
increases in the primary credit rate are provided
below.

Voting for this action: Chair Powell, Vice Chair
Clarida, Vice Chair for Supervision Quarles, and
Governor Brainard.

March 21, 2018. Effective March 22, 2018, the Board
approved actions taken by the boards of directors of
the Federal Reserve Banks of Boston, New York,
Philadelphia, Cleveland, Richmond, Atlanta, St.
Louis, Kansas City, Dallas, and San Francisco to
increase the primary credit rate from 2 percent to
2¼ percent. On March 22, 2018, the Board approved
identical actions subsequently taken by the boards of
directors of the Federal Reserve Banks of Chicago
and Minneapolis, effective immediately.

December 19, 2018. Effective December 20, 2018, the
Board approved actions taken by the boards of directors of the Federal Reserve Banks of Boston, Cleveland, Richmond, Atlanta, Chicago, and San Francisco to increase the primary credit rate from 2¾ percent to 3 percent. On December 20, 2018, the Board
approved identical actions subsequently taken by the
boards of directors of the Federal Reserve Banks of
New York, Philadelphia, St. Louis, Minneapolis,
Kansas City, and Dallas, effective immediately.

Voting for this action: Chair Powell, Vice Chair
for Supervision Quarles, and Governor Brainard.

Voting for this action: Chair Powell, Vice Chair
Clarida, Vice Chair for Supervision Quarles, and
Governors Brainard and Bowman.

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

119

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

As of January 1, 2018, the Federal Reserve Bank of New York
was operating under the Domestic Policy Directive approved at
the December 12–13, 2017, Committee meeting. The other
policy instruments (the Authorization for Domestic Open Market Operations, the Authorization for Foreign Currency Operations, and the Foreign Currency Directive) in effect as of January 1, 2018, were approved at the January 31–February 1, 2017,
meeting.

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105th Annual Report | 2018

Meeting Held
on January 30–31, 2018
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 30, 2018, at 10:00 a.m. and continued on
Wednesday, January 31, 2018, at 9:00 a.m.1

Present
Janet L. Yellen
Chair
William C. Dudley
Vice Chairman
Thomas I. Barkin
Raphael W. Bostic
Lael Brainard
Loretta J. Mester
Jerome H. Powell
Randal K. Quarles
John C. Williams
James Bullard, Charles L. Evans, Esther L. George,
Michael Strine, and Eric Rosengren
Alternate Members of the Federal Open Market
Committee

Steven B. Kamin
Economist
Thomas Laubach
Economist
David W. Wilcox
Economist
David Altig, Kartik B. Athreya, Thomas A. Connors,
Mary Daly, David E. Lebow, Trevor A. Reeve,
Argia M. Sbordone, Ellis W. Tallman,
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
Rochelle M. Edge
Deputy Director, Division of Monetary Affairs,
Board of Governors

Patrick Harker, Robert S. Kaplan, and Neel Kashkari
Presidents of the Federal Reserve Banks of
Philadelphia, Dallas, and Minneapolis, respectively

Maryann F. Hunter
Deputy Director, Division of Supervision and
Regulation, Board of Governors

James A. Clouse
Secretary

David Reifschneider and John M. Roberts
Special Advisers to the Board, Office of Board
Members, Board of Governors

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.

Linda Robertson
Assistant to the Board, Office of Board Members,
Board of Governors
Joseph W. Gruber
Senior Associate Director, Division of International
Finance, Board of Governors
Michael G. Palumbo
Senior Associate Director, Division of Research and
Statistics, Board of Governors

Attended through the discussion of developments in financial
markets and open market operations.

Minutes of Federal Open Market Committee Meetings | January

Antulio N. Bomfim, Ellen E. Meade,
Stephen A. Meyer, Edward Nelson,
and Joyce K. Zickler
Senior Advisers, Division of Monetary Affairs,
Board of Governors
Jeremy B. Rudd
Senior Adviser, Division of Research and Statistics,
Board of Governors
William F. Bassett
Associate Director, Division of Financial Stability,
Board of Governors
Andrew Figura
Assistant Director, Division of Research and
Statistics, Board of Governors
Jason Wu
Assistant Director, Division of Monetary Affairs,
Board of Governors
Penelope A. Beattie3
Assistant to the Secretary, Office of the Secretary,
Board of Governors
Dana L. Burnett and Michele Cavallo
Section Chiefs, Division of Monetary Affairs,
Board of Governors
David H. Small
Project Manager, Division of Monetary Affairs,
Board of Governors
Andrea Ajello, Kurt F. Lewis, and Bernd Schlusche
Principal Economists, Division of Monetary Affairs,
Board of Governors
Ekaterina Peneva and Daniel J. Vine
Principal Economists, Division of Research and
Statistics, Board of Governors
Camille Bryan
Lead Financial Analyst, Division of International
Finance, Board of Governors
Ellen J. Bromagen
First Vice President, Federal Reserve Bank
of Chicago
Jeff Fuhrer and Daniel G. Sullivan
Executive Vice Presidents, Federal Reserve Banks
of Boston and Chicago, respectively
Todd E. Clark,3 Evan F. Koenig, Keith Sill,
and Mark L. J. Wright
Senior Vice Presidents, Federal Reserve Banks of
Cleveland, Dallas, Philadelphia, and Minneapolis,
respectively

Carlos Garriga and Jonathan L. Willis
Vice Presidents, Federal Reserve Banks of St. Louis
and Kansas City, respectively

Annual Organizational Matters4
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 30, 2018, 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.
Thomas I. Barkin
President of the Federal Reserve Bank of Richmond,
with
Eric Rosengren
President of the Federal Reserve Bank of Boston,
as alternate.
Loretta J. Mester
President of the Federal Reserve Bank of Cleveland,
with
Charles L. Evans
President of the Federal Reserve Bank of Chicago,
as alternate.
Raphael W. Bostic
President of the Federal Reserve Bank of Atlanta,
with
James Bullard
President of the Federal Reserve Bank of St. Louis,
as alternate.
John C. Williams
President of the Federal Reserve Bank of
San Francisco, with
Esther L. George
President of the Federal Reserve Bank of
Kansas City, as alternate.
By unanimous vote, the Committee selected Janet L.
Yellen to serve as Chairman through February 2,
4

Attended Tuesday session only.

121

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

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105th Annual Report | 2018

2018, and Jerome H. Powell to serve as Chairman,
effective February 3, 2018, until the selection of his
successor at the first regularly scheduled meeting of
the Committee in 2019.
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 2019:
William C. Dudley
Vice Chairman
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
Richard M. Ashton
Assistant General Counsel
Steven B. Kamin
Economist
Thomas Laubach
Economist
David W. Wilcox
Economist
David Altig
Kartik B. Athreya
Thomas A. Connors
Mary Daly
David E. Lebow
Trevor A. Reeve
Argia M. Sbordone
Ellis W. Tallman
William Wascher
Beth Anne Wilson
Associate Economists
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 Authorization for Domestic
Open Market Operations was approved with revisions to incorporate transactions of securities lending
into the existing operational readiness testing provision and to improve the document’s readability. The
Guidelines for the Conduct of System Open Market
Operations in Federal-Agency Issues remained
suspended.
Authorization for Domestic Open Market
Operations (As Amended Effective
January 30, 2018)
Open Market Transactions
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 principal 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

Minutes of Federal Open Market Committee Meetings | January

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.
Securities Lending
2. 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

123

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 2; and
iii. Accept agency securities as collateral only
for a loan of agency securities authorized
in this paragraph 2.
Operational Readiness Testing
3. The Committee authorizes the Selected Bank to
undertake transactions of the type described in
paragraphs 1 and 2 from time to time for the purpose of testing operational readiness, subject to
the following limitations:
A. All transactions authorized in this paragraph
3 shall be conducted with prior notice to the
Committee;
B. The aggregate par value of the transactions
authorized in this paragraph 3 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 paragraphs 1.A.ii and 2 shall not
exceed $5 billion at any given time.
Transactions with Customer Accounts
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
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:

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105th Annual Report | 2018

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.
Additional Matters
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.
The Committee voted unanimously to reaffirm without revision the Authorization for Foreign Currency
Operations and the Foreign Currency Directive as
shown below.
Authorization for Foreign Currency Operations
(As Reaffirmed Effective January 30, 2018)
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

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).1
B. In close and continuous cooperation and
consultation, as appropriate, with the United
States Treasury.

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, 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

C. In consultation, as appropriate, with foreign
monetary authorities, foreign central banks,
and international monetary institutions.

ii. Undertaken to adjust System balances in
light of probable future needs for currencies; or

D. At prevailing market rates.

iii. Conducted for such other purposes as
may be determined by the Committee.

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
1

125

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.

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

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105th Annual Report | 2018

Authorization and to the extent necessary to
carry out any foreign currency directive of the
Committee.

consistent with principles discussed with
and guidance provided by the Committee.
Other Operations in Foreign Currencies

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

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

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

127

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 30, 2018)
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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105th Annual Report | 2018

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 revised its
Program for Security of FOMC Information
with a set of technical changes to update references to other documents.
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 the median of FOMC
participants’ estimates of the longer-run normal rate
of unemployment from 4.8 percent to 4.6 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 30, 2018)
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 mediumterm 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 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

Minutes of Federal Open Market Committee Meetings | January

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
4.6 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.

Developments in Financial Markets and
Open Market Operations
The manager of the System Open Market Account
(SOMA) provided a summary of developments in
domestic and global financial markets over the intermeeting period. Financial conditions eased further
over recent weeks with market participants pointing
to increasing appetites for risk and perceptions of
diminished downside risks as factors buoying market
sentiment. In this environment, yields on safe assets
such as U.S. Treasury securities moved up some while
corporate risk spreads narrowed and equity prices
recorded further significant gains. Breakeven measures of inflation compensation derived from Treasury
Inflation Protected Securities (TIPS) moved up but
remained low. Survey measures of longer-term inflation expectations showed little change. Judging from
interest rate futures, the expected path of the federal

129

funds rate shifted up over the period but continued to
imply a gradual expected pace of policy firming. The
deputy manager followed with a discussion of recent
developments in money markets and FOMC operations. Year-end pressures were evident in the market
for foreign exchange basis swaps, but conditions
returned to normal early in 2018. Yields on Treasury
bills maturing in early March were elevated, reflecting investors’ concerns about the possibility that a
failure to raise the federal debt ceiling could affect
the timing of principal payments for these securities.
The Open Market Desk continued to execute reinvestment operations for Treasury and agency securities in the SOMA in accordance with the procedure
specified in the Committee’s directive to the Desk.
The deputy manager also reported on the volume of
overnight reverse repurchase agreement operations
over the intermeeting period and discussed the
Desk’s plans for small-value operational tests of various types of open market operations over the coming year.
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.

Inflation Analysis and Forecasting
The staff presented three briefings on inflation analysis and forecasting. The presentations reviewed a
number of commonly used structural and reducedform models. These included structural models in
which the rate of inflation is linked importantly to
measures of resource slack and a measure of
expected inflation relevant for wage and price
setting—so-called Phillips curve specifications—as
well as statistical models in which inflation is primarily determined by a time-varying inflation trend or
longer-run inflation expectations. The briefings noted
several factors beyond those captured in the models
that appeared to have put downward pressure on
prices in recent years. These included structural
changes in price setting for some items, such as medical care, and the effects of idiosyncratic price shocks,
such as the unusual drop in prices of wireless telephone services in 2017. The staff found little compelling evidence for the possible influence of other factors such as a more competitive pricing environment
or a change in the markup of prices over unit labor
costs. Overall, for the set of models presented, the
prediction errors in recent years were larger than
those observed during the 2001–07 period but were

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consistent with historical norms and, in most models,
did not appear to be biased.
The staff presentations considered two key channels
by which monetary policy influences inflation—the
response of inflation to changes in resource utilization and the role of inflation expectations, or trend
inflation, in the price-setting process. In part because
inflation was importantly influenced by a number of
short-lived factors, the effects of current and
expected resource utilization gaps on inflation were
not easy to discern empirically. Estimates of the
strength of those effects had diminished noticeably in
recent years. The briefings highlighted a number of
other challenges associated with estimating the
strength and timing of the linkage between resource
utilization and inflation, including the reliability of
and changes over time in estimates of the natural rate
of unemployment and potential output and the ability to adequately account for supply shocks. In addition, some research suggested that the relationship
between resource utilization and inflation may be
nonlinear, with the response of inflation increasing as
rates of utilization rise to very high levels.
With regard to inflation expectations, two of the
briefings presented findings that the longer-run trend
in inflation, absent cyclical disturbances or transitory
fluctuations, had been stable in recent years at a little
below 2 percent. The briefings reported that the average forecasting performance of models employing
either statistical estimates of inflation trends or
survey-based measures of inflation expectations as
proxies for inflation expectations appeared comparable, even though different versions of such models
could yield very different forecasts at any given point
in time. Moreover, although survey-based measures
of longer-run inflation expectations tended to move
in parallel with estimated inflation trends, the empirical research provided no clear guidance on how to
construct a measure of inflation expectations that
would be the most useful for inflation forecasting.
The staff noted that although reduced-form models
in which inflation tends to revert toward longer-run
inflation trends described the data reasonably well,
those models offered little guidance to policymakers
on how to conduct policy so as to achieve their
desired outcome for inflation.
Following the staff presentations, participants discussed how the inflation frameworks reviewed in the
briefings informed their views on inflation and monetary policy. Almost all participants who commented
agreed that a Phillips curve–type of inflation frame-

work remained useful as one of their tools for understanding inflation dynamics and informing their decisions on monetary policy. Policymakers pointed to a
number of possible reasons for the difficulty in estimating the link between resource utilization and
inflation in recent years. These reasons included an
extended period of low and stable inflation in the
United States and other advanced economies during
which the effects of resource utilization on inflation
became harder to identify, the shortcomings of commonly used measures of resource gaps, the effects of
transitory changes in relative prices, and structural
factors that had made business pricing more competitive or prices more flexible over time. It was noted
that research focusing on inflation across U.S. states
or metropolitan areas continued to find a significant
relationship between price or wage inflation and
measures of resource gaps. A couple of participants
questioned the usefulness of a Phillips curve–type
framework for policymaking, citing the limited ability of such frameworks to capture the relationship
between economic activity and inflation.
Participants generally agreed that inflation expectations played a fundamental role in understanding and
forecasting inflation, with stable inflation expectations providing an important anchor for the rate of
inflation over the longer run. Participants acknowledged that the causes of movements in short- and
longer-run inflation expectations, including the role
of monetary policy, were imperfectly understood.
They commented that various proxies for inflation
expectations—readings from household and business
surveys or from economic forecasters, estimates
derived from market prices, or estimated trends—
were imperfect measures of actual inflation expectations, which are unobservable. That said, participants
emphasized the critical need for the FOMC to maintain a credible longer-run inflation objective and to
clearly communicate the Committee’s commitment
to achieving that objective. Several participants indicated that they viewed the available evidence as suggesting that longer-run inflation expectations
remained well anchored; one cited recent research
finding that inflation expectations had become better
anchored following the Committee’s adoption of a
numerical inflation target. However, a few saw low
levels of inflation over recent years as reflecting, in
part, slippage in longer-run inflation expectations
below the Committee’s 2 percent objective. In that
regard, a number of participants noted the importance of continuing to emphasize that the Committee’s 2 percent inflation objective is symmetric. A
couple of participants suggested that the Committee

Minutes of Federal Open Market Committee Meetings | January

might consider expressing its objective as a range
rather than a point estimate. A few other participants
suggested that the FOMC could begin to examine
whether adopting a monetary policy framework in
which the Committee would strive to make up for
past deviations of inflation from target might address
the challenge of achieving and maintaining inflation
expectations consistent with the Committee’s inflation objective, particularly in an environment in
which the neutral rate of interest appeared likely to
remain low.

Staff Review of the Economic Situation
The information reviewed for the January 30–31
meeting indicated that labor market conditions continued to strengthen through December and that real
gross domestic product (GDP) expanded at about a
2½ percent pace in the fourth quarter of last year.
Growth of real final domestic purchases by households and businesses, generally a good indicator of
the economy’s underlying momentum, was solid.
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 December. Survey-based measures
of longer-run inflation expectations were little
changed on balance.
Total nonfarm payroll employment increased solidly
in December, and the national unemployment rate
remained at 4.1 percent. The unemployment rates for
Hispanics, for Asians, and for African Americans
were lower than earlier in the year and close to the
levels seen just before the most recent recession. The
national labor force participation rate held steady in
December; relative to the declining trend suggested
by an aging population, this sideways movement in
the participation rate represented a further strengthening in labor market conditions. The participation
rate for prime-age (defined as ages 25 to 54) men
edged up in December, while the rate for prime-age
women declined slightly. The share of workers who
were employed part time for economic reasons was
little changed in December and was close to its prerecession level. The rates of private-sector job openings and quits were little changed in November, and
the four-week moving average of initial claims for
unemployment insurance benefits continued to be at
a low level in mid-January. Recent readings showed
that gains in hourly labor compensation remained
modest. Both the employment cost index for privatesector workers and average hourly earnings for all

131

employees rose about 2½ percent over the 12 months
ending in December.
Total industrial production increased over the two
months ending in December, with broad-based gains
in manufacturing, mining, and utilities output. Automakers’ schedules indicated that assemblies of light
motor vehicles would likely move up over the coming
months. Broader indicators of manufacturing production, such as the new orders indexes from
national and regional manufacturing surveys, pointed
to further solid increases in factory output in the
near term.
Real PCE increased strongly in the fourth quarter.
Recent readings on key factors that influence consumer spending—including gains in employment,
real disposable personal income, and households’ net
worth—continued to be supportive of further solid
growth of real PCE in the near term. Consumer sentiment in early January, as measured by the University of Michigan Surveys of Consumers, remained
upbeat.
Real residential investment rose briskly in the fourth
quarter after having declined in the previous two
quarters. Both starts and issuance of building permits for new single-family homes increased in the
fourth quarter as a whole, and starts for multifamily
units also moved up. Moreover, sales of both new
and existing homes rose in the fourth quarter.
Real private expenditures for business equipment and
intellectual property increased at a solid pace in the
fourth quarter. Recent indicators of business equipment spending—such as rising new orders of nondefense capital goods excluding aircraft and upbeat
readings on business sentiment from national and
regional surveys—pointed to further gains in equipment spending in the near term. Firms’ real spending
for nonresidential structures rose modestly in the
fourth quarter, as an increase in outlays for drilling
and mining structures was largely offset by a decline
in expenditures for other business structures. 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 edge up
through late January.
Total real government purchases rose modestly in the
fourth quarter. Increased federal government purchases mostly reflected a rise in defense spending,
and the gains in purchases by state and local govern-

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ments were led by an increase in construction spending in this sector.
The nominal U.S. international trade deficit widened
further in November after widening sharply in October. Exports of goods and services picked up in
November, while imports, particularly of consumer
goods, increased robustly. Available data for goods
trade in December suggested that import growth
again outpaced export growth. All told, real net
exports were estimated to be a substantial drag on
real GDP growth in the fourth quarter.
Total U.S. consumer prices, as measured by the PCE
price index, increased about 1¾ percent over the
12 months ending in December. Core PCE price
inflation, which excludes changes in consumer food
and energy prices, was 1½ percent over that same
period. The consumer price index (CPI) rose around
2 percent over the same period, while core CPI inflation was 1¾ percent. Recent readings on surveybased measures of longer-run inflation expectations—including those from the Michigan survey and
the Desk’s Survey of Primary Dealers and Survey of
Market Participants—were little changed on balance.
Incoming data suggested that economic activity
abroad continued to expand at a solid pace and that
this expansion was broad based across countries. In
the advanced foreign economies (AFEs), real GDP in
the euro area and the United Kingdom expanded at a
moderate pace in the fourth quarter. In the emerging
market economies (EMEs), Mexico’s economy
rebounded after being held back by natural disasters
in the third quarter. Economic growth remained solid
in China but cooled off a bit in some emerging Asian
economies after a very strong third-quarter performance. Inflation in both AFEs and EMEs picked up
significantly in the fourth quarter, largely reflecting a
boost from rising oil prices. Inflation excluding food
and energy prices remained well below central bank
targets in several economies, including the euro area
and Japan.

nancial corporate bonds over those for comparablematurity Treasury securities narrowed further. In
addition, the dollar depreciated broadly amid strong
foreign economic data and monetary policy communications by some foreign central banks that investors
reportedly viewed as less accommodative than
expected.
FOMC communications over the intermeeting
period were generally characterized by market participants as consistent with their expectations for
continued gradual removal of monetary policy
accommodation. The Committee’s decision to raise
the target range for the federal funds rate at the
December meeting was widely expected, and the
probability of an increase in the target range for the
federal funds rate occurring at the January meeting,
as implied by quotes on federal funds futures contracts, remained essentially zero. Over the intermeeting period, the futures-implied probability of policy
firming at the March meeting rose to about 85 percent; respondents to the Desk’s Survey of Primary
Dealers and Survey of Market Participants assigned,
on average, similarly high odds to a rate increase at
the March meeting. 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 over the
intermeeting period amid an improved outlook for
domestic and foreign economic growth. Yields on
both 2- and 10-year Treasury securities moved up
about 30 basis points. Measures of inflation compensation based on TIPS fell in response to the soft reading on core inflation in the November CPI release but
subsequently moved up against the backdrop of an
improving global growth outlook, higher commodity
prices, depreciation of the dollar, and the strongerthan-expected reading on core inflation in the
December CPI release. On net, inflation compensation moved up at both the 5-year and the 5-to-10year horizons, and both measures returned to levels
seen in early 2017 before the string of generally
weaker-than-expected inflation readings.

Staff Review of the Financial Situation
Domestic financial market conditions eased considerably further over the intermeeting period. A strengthening outlook for economic growth in the United
States and abroad, along with recently enacted tax
legislation, appeared to boost investor sentiment.
U.S. equity prices, Treasury yields, and market-based
measures of inflation compensation rose, and spreads
of yields on investment- and speculative-grade nonfi-

Broad equity price indexes rose substantially over the
intermeeting period, with investors pointing to a
stronger global economic outlook and the supportive
effect of the recently enacted tax legislation on risk
sentiment. The VIX, an index of option-implied
volatility for one-month returns on the S&P 500
index, increased but remained low by historical standards. Spreads of both investment- and speculativegrade corporate bond yields over comparable-

Minutes of Federal Open Market Committee Meetings | January

maturity Treasury yields declined slightly and
remained well below their historical averages.
The FOMC’s decision at its December meeting to
raise the target range for the federal funds rate was
transmitted smoothly to money market rates. The
effective federal funds rate held steady at a level near
the middle of the target range except at year-end.
While borrowing costs moved up briefly in offshore
dollar funding markets over year-end, conditions in
money markets were reported to be orderly. In line
with recent year-end experiences, rates and volumes
in the federal funds and Eurodollar markets declined,
while in secured markets, rates on Treasury repurchase agreements increased. After year-end, pressures
in money markets abated quickly and rates and volumes returned to recent ranges.
The broad nominal dollar index declined nearly
4 percent relative to its value at the time of the
December FOMC meeting; the decline was most pronounced against AFE currencies, but the dollar
depreciated notably against most EME currencies as
well. EME equity prices registered substantial gains,
in part supported by a significant rise in commodity
prices; emerging market bond spreads narrowed
moderately, and flows into EME equity and bond
funds strengthened substantially.
Market-based measures of policy expectations and
longer-term sovereign yields moved up in most
AFEs. The Bank of Canada raised its policy rate at
its January meeting, largely in response to betterthan-expected economic data. The Bank of England,
the Bank of Japan, and the European Central Bank
(ECB) left their monetary policy stances unchanged,
as expected. Nonetheless, the ECB president’s optimistic assessment of the euro-area economy at the
press conference following the January meeting was
interpreted by market participants as a signal that
monetary policy would be less accommodative than
expected. Following those remarks, the euro appreciated notably against the dollar and core euro-area
sovereign yields moved higher. That said, marketbased measures of policy expectations continued to
indicate that investors anticipate a gradual pace of
monetary policy normalization in the euro area.
Financing conditions for nonfinancial businesses and
households remained generally accommodative over
the intermeeting period and continued to be supportive of economic activity. Respondents to the January
Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS) reported easing standards and

133

narrowing loan spreads for large and middle-market
firms and attributed this easing to more aggressive
competition from other bank or nonbank lenders.
Net debt financing by investment-grade nonfinancial
corporations turned negative in December, but the
weakness appeared to reflect a softening in the
demand for credit, possibly related to the anticipation of higher after-tax cash flows and repatriation of
foreign earnings. In contrast, gross issuance of
speculative-grade bonds and institutional leveraged
loans remained strong. Credit market conditions for
small businesses remained relatively accommodative
despite sluggish credit growth among these firms.
Credit conditions in municipal bond markets also
remained accommodative.
In commercial real estate (CRE) markets, growth of
loans held by banks slowed further in the fourth
quarter, though CRE loans held by small banks and
some types of CRE loans held by large banks—construction and land development loans in particular—
expanded at a more robust pace. Financing conditions in the commercial mortgage-backed securities
(CMBS) market remained accommodative as issuance continued at a robust pace and spreads on
CMBS remained near their lowest levels since the
financial crisis. Credit conditions in the residential
mortgage market remained accommodative for most
borrowers, though credit standards remained tight
for borrowers with low credit scores or hard-todocument incomes. Mortgage rates increased in tandem with rates on longer-term Treasury securities but
remained quite low by historical standards.
Conditions in consumer credit markets remained
largely supportive of economic activity. Consumer
credit increased notably in November, exceeding the
more moderate volume of borrowing observed earlier
in the year. Revolving credit expanded in November,
while nonrevolving credit grew robustly, mainly
driven by expansion in student and other consumer
loans. In contrast, growth of auto lending slowed in
recent months, consistent with the weakening
demand for such loans in the fourth quarter as
reported in the January SLOOS. For subprime borrowers, conditions remained tight, particularly in the
market for credit cards and auto loans.
The staff provided its latest report on the potential
risks to financial stability; the report continued to
characterize the financial vulnerabilities of the U.S.
financial system as moderate on balance. This overall
assessment incorporated the staff’s judgment that
vulnerabilities associated with asset valuation pres-

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sures continued to be elevated; asset valuation pressures apparently reflected, in part, a broad-based
appetite for risk among investors. The staff judged
that vulnerabilities from leverage in the nonfinancial
sector appeared to remain moderate, while vulnerabilities stemming from financial-sector leverage and
from maturity and liquidity transformation continued to be viewed as low.

Staff Economic Outlook
The U.S. economic projection prepared by the staff
for the January FOMC meeting was stronger than
the staff forecast at the time of the December meeting. Real GDP was estimated to have risen in the
fourth quarter of last year by somewhat more than
the staff had previously expected, as gains in both
household and business spending were larger than
anticipated. Beyond 2017, the forecast for real GDP
growth was revised up, reflecting a reassessment of
the recently enacted tax cuts, along with higher projected paths for equity prices and foreign economic
growth and a lower assumed path for the foreign
exchange value of the dollar. Real GDP was projected to increase at a somewhat faster pace than
potential output through 2020; the staff continued to
assume that the recently enacted tax cuts would
boost real GDP growth moderately over the medium
term. The unemployment rate was projected to
decline further over the next few years and to continue to run well below the staff’s estimate of its
longer-run natural rate over this period.
Estimates of total and core PCE price inflation for
2017 were in line with the staff’s previous forecast.
The projection for inflation over the medium term
was revised up slightly, primarily reflecting tighter
resource utilization in the January forecast. Total
PCE price inflation in 2018 was projected to be
somewhat faster than in 2017 despite a slower projected pace of increases in consumer energy prices;
core PCE prices were forecast to rise notably faster in
2018, importantly reflecting both the expected waning of transitory factors that held down 12-month
measures of inflation in 2017 as well as the projected
further tightening in resource utilization. The staff
projected that core inflation would reach 2 percent in
2019 and that total inflation would be at the Committee’s 2 percent objective in 2020.
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 indicators of uncer-

tainty about the macroeconomic outlook remained
subdued; on the other hand, considerable uncertainty
remained about a number of federal government
policies relevant for the economic outlook. 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 core inflation readings
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
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 December indicated that the labor market continued to strengthen
and that economic activity expanded at a solid rate.
Gains in employment, household spending, and business fixed investment were solid, and the unemployment rate stayed low. On a 12-month basis, both
overall inflation and inflation for items other than
food and energy continued to run below 2 percent.
Market-based measures of inflation compensation
increased in recent months but remained low; surveybased measures of longer-term inflation expectations
were little changed, on balance.
Participants generally saw incoming information on
economic activity and the labor market as consistent
with continued above-trend economic growth and a
further strengthening in labor market conditions,
with the recent solid gains in household and business
spending indicating substantial underlying economic
momentum. They pointed to accommodative financial conditions, the recently enacted tax legislation,
and an improved global economic outlook as factors
likely to support economic growth over coming quarters. Participants expected that with further gradual
adjustments in the stance of monetary policy, economic activity would expand at a moderate pace and
labor market conditions would remain strong. Nearterm risks to the economic outlook appeared roughly
balanced. Inflation on a 12-month basis was expected
to move up this year and to stabilize around the
Committee’s 2 percent objective over the medium
term. However, participants judged that it was

Minutes of Federal Open Market Committee Meetings | January

important to continue to monitor inflation developments closely.
Participants expected the recent solid growth in consumer spending to continue, supported by further
gains in employment and income, increased household wealth resulting from higher asset prices, and
high levels of consumer confidence. It was noted that
spending on durable goods to replace those damaged
during the hurricanes in September may have provided a temporary boost to consumer spending. In
connection with solid growth in consumer spending,
a couple of participants noted that the household
saving rate had declined to its lowest level since 2005,
likely driven by buoyant consumer sentiment or
expectations that the rise in household wealth would
be sustained.
Participants characterized their business contacts as
generally upbeat about the economy; their contacts
cited the recent tax cuts and notable improvements in
the global economic outlook as positive factors.
Manufacturers in a number of Districts had
responded to increased orders by boosting production. Against a backdrop of higher energy prices and
increased global demand for crude oil, a couple of
participants revised up their forecasts for energy production in their respective Districts. Businesses in a
number of Districts reported plans to further
increase investment in coming quarters in order to
expand capacity. Even so, several participants
expressed considerable uncertainty about the degree
to which changes to corporate taxes would support
business investment and capacity expansion; according to these participants, firms may be only just
beginning to determine how they might allocate their
tax savings among investment, worker compensation,
mergers and acquisitions, returns to shareholders, or
other uses.
The labor market had strengthened further in recent
months, as indicated by continued solid payroll gains,
a small increase in average hours worked, and a labor
force participation rate that had held steady despite
the longer-run declining trend implied by an aging
population. Many participants reported that labor
market conditions were tight in their Districts, evidenced by low unemployment rates, difficulties for
employers in filling open positions or retaining workers, or some signs of upward pressure on wages. The
unemployment rate, at 4.1 percent, had remained
near the lowest level seen in the past 20 years. It was
noted that other labor market indicators—such as
the U-6 measure of unemployment or the share of

135

involuntary part-time employment—had returned to
their pre-recession levels. A few participants judged
that while the labor market was close to full employment, some margins of slack remained; these participants pointed to the employment-to-population ratio
or the labor force participation rate for prime-age
workers, which remained below pre-recession levels,
as well as the absence to date of clear signs of a
pickup in aggregate wage growth.
During their discussion of labor market conditions,
participants expressed a range of views about recent
wage developments. While some participants heard
more reports of wage pressures from their business
contacts over the intermeeting period, participants
generally noted few signs of a broad-based pickup in
wage growth in available data. With regard to how
firms might use part of their tax savings to boost
compensation, a few participants suggested that such
a boost could be in the form of onetime bonuses or
variable pay rather than a permanent increase in
wage structures. It was noted that the pace of wage
gains might not increase appreciably if productivity
growth remains low. That said, a number of participants judged that the continued tightening in labor
markets was likely to translate into faster wage
increases at some point.
In their discussion of inflation developments, many
participants noted that inflation data in recent
months had generally pointed to a gradual rise in
inflation, as the 12-month core PCE price inflation
rose to 1.5 percent in December, up 0.2 percentage
point from the low recorded in the summer. Meanwhile, total PCE price inflation was 1.7 percent over
the same 12-month period. Participants anticipated
that inflation would continue to gradually rise as
resource utilization tightened further and as wage
pressures became more apparent; several expected
that declines in the foreign exchange value of the dollar in recent months would also likely help return
inflation to 2 percent over the medium term. Business
contacts in a few Districts reported that they had
begun to have some more ability to raise prices to
cover higher input costs. That said, a few participants
posited that the recently enacted corporate tax cuts
might lead firms to cut prices in order to remain
competitive or to gain market share, which could
result in a transitory drag on inflation.
With regard to inflation expectations, available readings from surveys had been steady and TIPS-based
measures of inflation compensation had moved up,
although they remained low. Many participants

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thought that inflation expectations remained well
anchored and would support the gradual return of
inflation to the Committee’s 2 percent objective over
the medium term. However, a few other participants
pointed to the record of inflation consistently running below the Committee’s 2 percent objective over
recent years and expressed the concern that longerrun inflation expectations may have slipped below
levels consistent with that objective.
Many participants noted that financial conditions
had eased significantly over the intermeeting period;
these participants generally viewed the economic
effects of the decline in the dollar and the rise in
equity prices as more than offsetting the effects of
the increase in nominal Treasury yields. One participant reported that financial market contacts did not
see the relatively flat slope of the yield curve as signaling an increased risk of recession. A few others
judged that it would be important to continue to
monitor the effects of policy firming on the slope of
the yield curve, noting the strong association between
past yield curve inversions and recessions.
Regulatory actions and improved risk management
in recent years had put the financial system in a better position to withstand adverse shocks, such as a
substantial decline in asset prices, than in the past.
However, amid elevated asset valuations and an
increased use of debt by nonfinancial corporations,
several participants cautioned that imbalances in
financial markets may begin to emerge as the
economy continued to operate above potential. In
this environment, increased use of leverage by nonbank financial institutions might be difficult to detect
in a timely manner. It was also noted that the Committee should regularly reassess risks to the financial
system and their implications for the economic outlook in light of the potential for changes in regulatory policies over time.
In their consideration of monetary policy, participants discussed the implications of recent economic
and financial developments for the outlook for economic growth, labor market conditions, and inflation
and, in turn, for the appropriate path of the federal
funds rate. Participants agreed that a gradual
approach to raising the target range for the federal
funds rate remained appropriate and reaffirmed that
adjustments to the policy path would depend on their
assessments of how the economic outlook and risks
to the outlook were evolving relative to the Committee’s policy objectives. While participants continued
to expect economic activity to expand at a moderate

pace over the medium term, they anticipated that the
rate of economic growth in 2018 would exceed their
estimates of its sustainable longer-run pace and that
labor market conditions would strengthen further. A
number of participants indicated that they had
marked up their forecasts for economic growth in the
near term relative to those made for the December
meeting in light of the strength of recent data on economic activity in the United States and abroad, continued accommodative financial conditions, and
information suggesting that the effects of recently
enacted tax changes—while still uncertain—might be
somewhat larger in the near term than previously
thought. Several others suggested that the upside
risks to the near-term outlook for economic activity
may have increased. A majority of participants noted
that a stronger outlook for economic growth raised
the likelihood that further gradual policy firming
would be appropriate.
Almost all participants continued to anticipate that
inflation would move up to the Committee’s 2 percent objective over the medium term as economic
growth remained above trend and the labor market
stayed strong; several commented that recent developments had increased their confidence in the outlook for further progress toward the Committee’s
2 percent inflation objective. A couple noted that a
step-up in the pace of economic growth could tighten
labor market conditions even more than they currently anticipated, posing risks to inflation and financial stability associated with substantially overshooting full employment. However, some participants saw
an appreciable risk that inflation would continue to
fall short of the Committee’s objective. These participants saw little solid evidence that the strength of
economic activity and the labor market was showing
through to significant wage or inflation pressures.
They judged that the Committee could afford to be
patient in deciding whether to increase the target
range for the federal funds rate in order to support
further strengthening of the labor market and allow
participants to assess whether incoming information
on inflation showed that it was solidly on a track
toward the Committee’s objective.
Some participants also commented on the likely evolution of the neutral federal funds rate. By most estimates, the neutral level of the federal funds rate had
been very low in recent years, but it was expected to
rise slowly over time toward its longer-run level.
However, the outlook for the neutral rate was uncertain and would depend on the interplay of a number
of forces. For example, the neutral rate, which

Minutes of Federal Open Market Committee Meetings | January

appeared to have fallen sharply during the Global
Financial Crisis when financial headwinds had
restrained demand, might move up more than anticipated as the global economy strengthened. Alternatively, the longer-run level of the neutral rate might
remain low in the absence of fundamental shifts in
trends in productivity, demographics, or the demand
for safe assets.

Committee Policy Action
In their discussion of monetary policy for the period
ahead, members judged that information received
since the Committee met in December indicated that
the labor market had continued to strengthen and
that economic activity had been rising at a solid rate.
Gains in employment, household spending, and business fixed investment had been solid, and the unemployment rate had stayed low. On a 12-month basis,
both overall inflation and inflation for items other
than food and energy had continued to run below
2 percent. Market-based measures of inflation compensation had increased in recent months but
remained low; survey-based measures of longer-term
inflation expectations were little changed, on balance.
Members expected that, with further gradual adjustments in the stance of monetary policy, economic
activity would expand at a moderate pace and labor
market conditions would remain strong. In their discussion of the economic outlook, most members
viewed the recent data bearing on real economic
activity as suggesting a modestly stronger near-term
outlook than they had anticipated at their meeting in
December. In addition, financial conditions had
remained accommodative, and the details of the tax
legislation suggested that its effects on consumer and
business spending—while still uncertain—might be a
bit greater in the near term than they had previously
thought. Although several saw increased upside risks
to the near-term outlook for economic activity, members generally continued to judge the risks to that
outlook as remaining roughly balanced.
Most members noted that recent information on
inflation along with prospects for a continued solid
pace of economic activity provided support for the
view that inflation on a 12-month basis would likely
move up in 2018 and stabilize around the Committee’s 2 percent objective over the medium term. However, a couple of members expressed concern about
the outlook for inflation, seeing little evidence of a
meaningful improvement in the underlying trend in

137

inflation, measures of inflation expectations, or wage
growth. Several members commented that they saw
both upside and downside risks to the inflation outlook, and members agreed to continue to monitor
inflation developments closely.
After assessing current conditions and the outlook
for economic activity, the labor market, and inflation,
members voted to maintain the target range for the
federal funds rate at 1¼ to 1½ percent. They indicated that the stance of monetary policy remained
accommodative, thereby supporting strong 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 reiterated that this
assessment would take into account a wide range of
information, including measures of labor market
conditions, indicators of inflation pressures and
inflation expectations, and readings on financial and
international developments. Members also agreed to
carefully monitor actual and expected inflation developments relative to the Committee’s symmetric inflation goal. Members expected that economic conditions would evolve in a manner that would warrant
further gradual increases in the federal funds rate.
They judged that a gradual approach to raising the
target range would sustain the economic expansion
and balance the risks to the outlook for inflation and
unemployment. Members agreed that the strengthening in the near-term economic outlook increased the
likelihood that a gradual upward trajectory of the
federal funds rate would be appropriate. They therefore agreed to update the characterization of their
expectation for the evolution of the federal funds rate
in the postmeeting statement to point to “further
gradual increases” while maintaining the target range
at the current meeting. Members continued to anticipate that the federal funds rate would likely remain,
for some time, below levels that were expected to prevail in the longer run. Nonetheless, they again stated
that the actual path for the federal funds rate would
depend on the economic outlook as informed by the
incoming data.
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,

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105th Annual Report | 2018

to execute transactions in the SOMA in accordance
with the following domestic policy directive, to be
released at 2:00 p.m.:
“Effective February 1, 2018, 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 1¼ to 1½ 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 1.25 percent, in amounts limited only
by the value of Treasury securities held outright
in the System Open Market Account that are
available for such operations and by a 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 $12 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 $8 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 December indicates
that the labor market has continued to
strengthen and that economic activity has been
rising at a solid rate. Gains in employment,
household spending, and business fixed investment have been solid, and the unemployment
rate has stayed low. On a 12-month basis, both
overall inflation and inflation for items other
than food and energy have continued to run
below 2 percent. Market-based measures of
inflation compensation have increased in recent
months but 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 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 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 1¼ to 1½ percent. The stance of monetary policy remains accommodative, thereby
supporting strong 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
further 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.”
Voting for this action: Janet L. Yellen, William C.
Dudley, Thomas I. Barkin, Raphael W. Bostic, Lael
Brainard, Loretta J. Mester, Jerome H. Powell, Randal K. Quarles, and John C. William
Voting against this action: None.

Minutes of Federal Open Market Committee Meetings | January

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 1½ percent and voted unanimously to
approve establishment of the primary credit rate (discount rate) at the existing level of 2 percent.5
It was agreed that the next meeting of the Committee
would be held on Tuesday–Wednesday, March 20–21,
5

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.

139

2018. The meeting adjourned at 10:50 a.m. on January 31, 2018.

Notation Vote
By notation vote completed on January 2, 2018, the
Committee unanimously approved the minutes of the
Committee meeting held on December 12–13, 2017.
James A. Clouse
Secretary

140

105th Annual Report | 2018

Meeting Held on March 20–21, 2018

David W. Wilcox
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 20, 2018, at 1:00 p.m. and continued on
Wednesday, March 21, 2018, at 9:00 a.m.1

David Altig, Kartik B. Athreya,
Thomas A. Connors, Trevor A. Reeve,
Ellis W. Tallman, and William Wascher
Associate Economists

Present

Lorie K. Logan
Deputy Manager, System Open Market Account

Jerome H. Powell
Chairman
William C. Dudley
Vice Chairman
Thomas I. Barkin
Raphael W. Bostic
Lael Brainard
Loretta J. Mester
Randal K. Quarles
John C. Williams
James Bullard, Charles L. Evans, Esther L. George,
Eric Rosengren, and Michael Strine2
Alternate Members of the Federal Open Market
Committee

Simon Potter
Manager, System Open Market Account

Ann E. Misback
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. Gibson
Director, Division of Supervision and Regulation,
Board of Governors
Andreas Lehnert
Director, Division of Financial Stability,
Board of Governors
Rochelle M. Edge
Deputy Director, Division of Monetary Affairs,
Board of Governors

Patrick Harker, Robert S. Kaplan, and Neel Kashkari
Presidents of the Federal Reserve Banks of
Philadelphia, Dallas, and Minneapolis, respectively

Michael T. Kiley
Deputy Director, Division of Financial Stability,
Board of Governors

James A. Clouse
Secretary

Antulio N. Bomfim
Special Adviser to the Chairman, Office of Board Members,
Board of Governors

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
Thomas Laubach
Economist
1

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

Joseph W. Gruber and John M. Roberts2
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
Shaghil Ahmed, Brian M. Doyle,
and Christopher J. Erceg
Senior Associate Directors, Division of International
Finance, Board of Governors
Eric M. Engen and Diana Hancock
Senior Associate Directors, Division of Research and
Statistics, Board of Governors
3

Attended through the discussion of developments in financial
markets and open market operations.

Minutes of Federal Open Market Committee Meetings | March

Ellen E. Meade, Stephen A. Meyer,
Edward Nelson, and Robert J. Tetlow
Senior Advisers, Division of Monetary Affairs,
Board of Governors
Stacey Tevlin
Associate Director, Division of Research
and Statistics, Board of Governors
Glenn Follette and Karen M. Pence2
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
Etienne Gagnon
Section Chief, Division of Monetary Affairs,
Board of Governors
David H. Small
Project Manager, Division of Monetary Affairs,
Board of Governors
Kurt F. Lewis
Principal Economist, Division of Monetary Affairs,
Board of Governors
Anna Orlik
Senior Economist, Division of Monetary Affairs,
Board of Governors
Valerie Hinojosa
Information Manager, Division of Monetary Affairs,
Board of Governors
Meredith Black
First Vice President, Federal Reserve Bank of Dallas
Michael Dotsey, Glenn D. Rudebusch,
and Daniel G. Sullivan
Executive Vice Presidents, Federal Reserve Banks of
Philadelphia, San Francisco, and Chicago,
respectively
Marc Giannoni, Luke Woodward,
and Mark L. J. Wright
Senior Vice Presidents, Federal Reserve Banks of
Dallas, Kansas City, and Minneapolis, respectively
David Andolfatto, Jonathan P. McCarthy,
Giovanni Olivei, and Jonathan L. Willis
Vice Presidents, Federal Reserve Banks of St. Louis,
New York, Boston, and Kansas City, respectively

141

Developments in Financial Markets and
Open Market Operations
The deputy manager of the System Open Market
Account (SOMA) provided a summary of developments in domestic and global financial markets over
the intermeeting period; she also reported on open
market operations and related issues. Financial markets experienced a notable bout of volatility early in
the intermeeting period; volatility was particularly
pronounced in equity markets. Market participants
pointed to incoming economic data released in early
February—particularly data on average hourly earnings—as raising concerns about the prospects for
higher inflation and higher interest rates. These concerns reportedly contributed to a steep decline in
equity prices and an associated rise in measures of
volatility. Some reports suggested that the increase in
volatility was amplified by the unwinding of trading
positions based on various types of volatility trading
strategies. Measures of equity market volatility
declined over subsequent weeks but remained above
levels that prevailed earlier in the year, and stock
prices finished lower, on net, over the intermeeting
period. Interest rates rose modestly over the period.
Respondents to the Open Market Desk’s surveys of
primary dealers and market participants suggested
that revisions in investors’ views regarding the fiscal
outlook were an important factor boosting yields
and contributing to a slightly steeper expected trajectory of the federal funds rate. The deputy manager
noted that a rapid and sizable increase in Treasury
bill issuance over recent weeks had put upward pressure on money market yields over the period. Threemonth Treasury bill yields moved up significantly
and those increases passed through to rates on other
short-term instruments such as three-month Eurodollar deposits and commercial paper. The spread of
market rates on overnight repurchase agreements
over the offering rate at the Federal Reserve’s overnight reverse repurchase (ON RRP) facility widened,
and take-up at the facility fell to quite low levels as a
result. Rates on overnight federal funds and Eurodollar transactions edged higher relative to the interest
rate on excess reserves. The Desk continued to
execute the FOMC’s balance sheet normalization
plan initiated in October of last year.
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.

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105th Annual Report | 2018

Staff Review of the Economic Situation
The information reviewed for the March 20–21 meeting indicated that labor market conditions continued
to strengthen through February and suggested that
real gross domestic product (GDP) was rising at a
moderate pace in the first quarter. 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
January. Survey-based measures of longer-run inflation expectations were little changed on balance.
Gains in total nonfarm payroll employment were
strong over the two months ending in February. The
labor force participation rate held steady in January
and then stepped up markedly in February, with the
participation rates for prime-age (defined as ages
25 to 54) women and men moving up on net. The
national unemployment rate remained at 4.1 percent.
Similarly, the unemployment rates for African
Americans, Asians, and Hispanics were roughly flat,
on balance, in recent months. The share of workers
employed part time for economic reasons edged up
but remained close to its pre-recession levels. The
rates of private-sector job openings and quits
increased slightly, on net, over the two months ending in January, and the four-week moving average of
initial claims for unemployment insurance benefits
continued to be low in early March. Recent readings
showed that increases in labor compensation
remained modest. Compensation per hour in the
nonfarm business sector advanced 2¾ percent over
the four quarters of last year, and average hourly
earnings for all employees rose 2½ percent over the
12 months ending in February.

declined slightly. However, household spending was
probably held back somewhat in February because of
a delay in many federal tax refunds, and the subsequent delivery of those refunds would likely contribute to an increase in consumer spending in March.
Moreover, the lower tax withholding resulting from
the tax cuts enacted late last year, which was beginning to show through in consumers’ paychecks,
would likely provide some impetus to spending in
coming months. More broadly, recent readings on
key factors that influence consumer spending—
including gains in employment and real disposable
personal income, along with households’ elevated net
worth—continued to be supportive of solid real PCE
growth in the near term. In addition, consumer sentiment in early March, as measured by the University
of Michigan Surveys of Consumers, was at its highest level since 2004.
Real residential investment looked to be slowing in
the first quarter after rising briskly in the fourth
quarter. Starts of new single-family homes increased
in January and February, although building permit
issuance moved down somewhat. Starts of multifamily units jumped in January but fell back in February.
Sales of both new and existing homes declined in
January.

Total industrial production expanded, on net, in
January and February, with gains in both manufacturing and mining. Automakers’ schedules indicated
that assemblies of light motor vehicles would likely
edge down in coming months. However, broader
indicators of manufacturing production, such as the
new orders indexes from national and regional manufacturing surveys, pointed to further solid increases
in factory output in the near term.

Growth in real private expenditures for business
equipment and intellectual property appeared to be
moderating in the first quarter after increasing at a
solid pace in the preceding quarter. Nominal shipments of nondefense capital goods excluding aircraft
edged down in January. However, recent forwardlooking indicators of business equipment spending—
such as the backlog of unfilled capital goods orders,
along with upbeat readings on business sentiment
from national and regional surveys—pointed to further solid gains in equipment spending in the near
term. Firms’ nominal spending for nonresidential
structures outside of the drilling and mining sector
declined in January. In contrast, the number of crude
oil and natural gas rigs in operation—an indicator of
business spending for structures in the drilling and
mining sector—continued to move up through
mid-March.

Consumer expenditures appeared likely to rise at a
modest pace in the first quarter following a strong
gain in the preceding quarter. Real PCE edged down
in January, and the components of the nominal retail
sales data used by the Bureau of Economic Analysis
to construct its estimate of PCE rose somewhat in
February while the pace of light motor vehicle sales

Total real government purchases seemed to be flattening out, on balance, in the first quarter after rising
solidly in the fourth quarter. Nominal defense spending in January and February was consistent with a
decline in real federal purchases. In contrast, real purchases by state and local governments looked to be
rising, as the payrolls of these governments increased

Minutes of Federal Open Market Committee Meetings | March

in January and February and nominal state and local
construction spending advanced somewhat in
January.
The change in net exports was a significant drag on
real GDP growth in the fourth quarter of 2017, as
imports grew rapidly. The nominal U.S. international
trade deficit widened in January; exports declined,
led by lower exports of capital goods and industrial
supplies, while imports were about flat. The slowing
of real import growth following the rapid increase in
the fourth quarter suggested that the drag on real
GDP growth from net exports would lessen 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 January. Core PCE price inflation, which
excludes changes in consumer food and energy prices,
was 1½ percent over that same period. The consumer
price index (CPI) rose 2¼ percent over the 12 months
ending in February, while core CPI inflation was
1¾ percent. Recent readings on survey-based measures of longer-run inflation expectations—including
those from the Michigan survey, the Survey of Professional Forecasters, and the Desk’s Survey of Primary Dealers and Survey of Market Participants—
were little changed on balance.
Foreign economic activity expanded at a moderate
pace in the fourth quarter. Real GDP growth picked
up in Mexico but slowed a bit in some advanced foreign economies (AFEs) and in emerging Asia. Recent
indicators pointed to solid economic growth abroad
in the first quarter of this year. Inflation abroad continued to be boosted by the pass-through to consumer prices of past increases in oil prices. However,
excluding food and energy prices, inflation remained
subdued in many foreign economies, including the
euro area and Japan.

143

Those concerns appeared to induce a substantial
decline in equity prices. The decline may have been
exacerbated by broader concerns about the level of
stock market valuations. On February 5, the
VIX—an index of option-implied volatility for onemonth returns on the S&P 500 index—rose to its
highest level since 2015, reportedly driven in part by
the unwinding of investment strategies designed to
profit from low volatility. Subsequently, equity prices
recovered about half of their decline, and the VIX
partially retraced its earlier increase.
Monetary policy communications over the intermeeting period—including the January FOMC statement,
the minutes of the January FOMC meeting, and the
Chairman’s semiannual testimony to the Congress—
were generally viewed by market participants as signaling a somewhat stronger economic outlook and
thus reinforced expectations for further gradual
increases in the target range for the federal funds rate.
The probability of the next rate hike occurring at the
March FOMC meeting, as implied by quotes on federal funds futures contracts, increased to near certainty. Conditional on a March rate hike, the marketimplied probability of another increase in the federal
funds rate target range at the June FOMC meeting
edged up to just above 70 percent. Expectations for
the federal funds rate at the end of 2019 and 2020,
derived from overnight index swap (OIS) quotes,
moved up somewhat since late January.

Financial markets were turbulent over the intermeeting period, and market volatility increased notably.
On net, U.S. equity prices declined, corporate bond
spreads widened, and nominal Treasury yields rose.

On net, the nominal Treasury yield curve shifted up
and flattened a bit. Monetary policy communications, higher-than-expected domestic price data, and
expectations for increases in the supply of Treasury
securities following the federal budget agreement in
early February contributed to the increase in Treasury yields. Measures of inflation compensation
derived from Treasury Inflation-Protected Securities
were little changed on net. Option-implied volatility
on longer-term rates rose notably following the jump
in equity market volatility on February 5 but mostly
retraced that increase by the end of the intermeeting
period. On balance, spreads on investment- and
speculative-grade corporate bond yields over
comparable-maturity Treasury yields widened but
remained near the lower end of their historical ranges.

Broad equity price indexes decreased over the intermeeting period. Market participants pointed to a
larger-than-expected increase in average hourly earnings in the January employment report as a factor
triggering increased investor concerns about inflation
and the associated pace of interest rate increases.

In short-term funding markets, increased issuance of
Treasury bills lifted Treasury bill yields above
comparable-maturity OIS rates for the first time in
almost a decade. The rise in bill yields was a factor
that pushed up money market rates and widened the
spreads of certificates of deposit and term London

Staff Review of the Financial Situation

144

105th Annual Report | 2018

interbank offered rates relative to OIS rates. The
upward pressure on money market rates also showed
up in slight increases in the effective federal funds
rate and the overnight bank funding rate relative to
the interest rate on excess reserves. The rise in market
rates on overnight repurchase agreements relative to
the offering rate on the Federal Reserve’s ON RRP
facility resulted in low levels of take-up at the facility.
Reductions in the size of the Federal Reserve’s balance sheet continued as scheduled without a notable
effect on markets.
Despite the recent volatility in some financial markets, financing conditions for nonfinancial corporations and households remained accommodative over
the intermeeting period and continued to support
further expansion of economic activity. Gross issuance of investment- and speculative-grade bonds was
slightly lower than usual in January and February,
while gross issuance of institutional leveraged loans
stayed strong. The provision of bank-intermediated
credit to businesses slowed further, likely reflecting
weak loan demand rather than tight supply. Small
business owners continued to report accommodative
credit supply conditions but also weak demand for
credit. Credit conditions in municipal bond markets
remained accommodative.
In commercial real estate markets, loan growth at
banks slowed further in January and February.
Financing conditions in commercial mortgagebacked securities (CMBS) markets remained accommodative, as issuance was robust (relative to the usual
seasonal slowdown) and CMBS spreads continued to
be at low levels. Financing conditions in the residential mortgage market remained accommodative for
most borrowers, though credit conditions stayed tight
for borrowers with low credit scores or with hard-todocument incomes. Mortgage rates moved up, on
net, over the period, along with the rise in other longterm rates.
Consumer credit grew at a solid pace in January following a rapid expansion in the fourth quarter.
Aggregate credit card balances continued to expand
steadily in January. Nonetheless, for subprime borrowers, conditions remained tight, with credit limits
and balances still low by historical standards. Auto
lending continued to grow at a moderate pace in
recent months; although underwriting standards in
the subprime segment continued to tighten, there
were few signs of a significant restriction in credit
supply for auto loans.

Since the January FOMC meeting, foreign equity
prices moved notably lower, on net, and generally
declined more in the AFEs than in the United States.
Longer-term yields on sovereign debt in AFEs either
decreased moderately or ended the period little
changed, in contrast to the increase in U.S. Treasury
yields. Weaker-than-expected economic data weighed
on market-based measures of expected policy rate
paths and on longer-term yields in Canada and in the
euro area. Communications from the Bank of
Canada also seemed to contribute to the decline in
Canadian yields. In the United Kingdom, longerterm yields were little changed, on net, although the
market-based path of expected policy rates moved up
moderately in response to Bank of England communications. In emerging market economies (EMEs),
sovereign yield spreads widened modestly, and flows
into EME mutual funds were volatile over the period.
The broad nominal dollar index appreciated moderately over the period, largely reflecting an outsized
depreciation of the Canadian dollar and a massive
devaluation of the Venezuelan bolivar. (The Venezuelan government devalued the official Venezuelan
exchange rate by more than 99 percent against the
dollar, bringing the official rate closer to its black
market value.) Lower oil prices, weaker-thanexpected economic data, and uncertainty over U.S.
trade policy likely contributed to the weakness in the
Canadian dollar. In contrast, the Japanese yen appreciated against the dollar, in part supported by safehaven demand. Late in the intermeeting period, the
British pound was boosted by news of a preliminary
agreement between U.K. and European Union
authorities regarding the transition period of the
Brexit process, but the pound still ended the intermeeting period modestly weaker against the dollar.

Staff Economic Outlook
The staff projection for U.S. economic activity prepared for the March FOMC meeting was somewhat
stronger, on balance, than the forecast at the time of
the January meeting. The near-term forecast for real
GDP growth was revised down a little; the incoming
spending data were a bit softer than the staff had
expected, and the staff judged that the softness was
not associated with residual seasonality in the data.
However, the slowing in the pace of spending in the
first quarter was expected to be transitory, and the
medium-term projection for GDP growth was revised
up modestly, largely reflecting the expected boost to
GDP from the federal budget agreement enacted in

Minutes of Federal Open Market Committee Meetings | March

February. Real GDP was projected to increase at a
faster pace than potential output through 2020. The
unemployment rate was projected to decline further
over the next few years and to continue to run below
the staff’s estimate of its longer-run natural rate over
this period.
The projection for inflation over the medium term
was revised up a bit, reflecting the slightly tighter
resource utilization in the new forecast. The rates of
both total and core PCE price inflation were projected to be faster in 2018 than in 2017. The staff
projected 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,
and inflation as similar to the average of the past
20 years. The staff saw the risks to the forecasts for
real GDP growth and the unemployment rate as balanced. On the upside, recent fiscal policy changes
could lead to a greater expansion in economic activity over the next few years than the staff projected.
On the downside, those fiscal policy changes could
yield less impetus to the economy than the staff
expected if the economy was already operating above
its potential level and resource utilization continued
to tighten, as the staff projected. Risks to the inflation projection also were seen as balanced. An upside
risk was that inflation could increase more than
expected in an economy that was projected to move
further above its potential. Downside risks included
the possibilities that longer-term inflation expectations may have edged lower or that the run of low
core inflation readings last year could prove to be
more persistent than the staff expected.

145

described in the Summary of Economic Projections
(SEP), which is an addendum to these minutes.
In their discussion of economic conditions and the
outlook, meeting participants agreed that information received since the FOMC met in January indicated that economic activity had been rising at a
moderate rate and that the labor market had continued to strengthen. Job gains had been strong in
recent months, and the unemployment rate had
stayed low. On a 12-month basis, both overall inflation and inflation for items other than food and
energy continued to run below 2 percent. Marketbased measures of inflation compensation had
increased in recent months but remained low; surveybased measures of longer-term inflation expectations
were little changed, on balance.
Participants noted incoming data suggesting some
slowing in the rate of growth of household spending
and business fixed investment after strong fourthquarter readings. However, they expected that the
first-quarter softness would be transitory, pointing to
a variety of factors, including delayed payment of
some personal tax refunds, residual seasonality in the
data, and more generally to strong economic fundamentals. Among the fundamentals that participants
cited were high levels of consumer and business sentiment, supportive financial conditions, improved economic conditions abroad, and recent changes in fiscal
policy. Participants generally saw the news on spending and the labor market over the past few quarters
as being consistent with continued above-trend
growth and a further strengthening in labor markets.
Participants expected that, with further gradual
increases in the federal funds rate, economic activity
would expand at a solid rate during the remainder of
this year and a moderate pace in the medium term,
and that labor market conditions would remain
strong. Inflation on a 12-month basis was expected
to move up in coming months and to stabilize around
the Committee’s 2 percent objective over the medium
term. Several participants noted that the 12-month
PCE price inflation rate would likely shift upward
when the March data are released because the effects
of the outsized decline in the prices of cell phone service plans in March of last year will drop out of that
calculation. 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.
Many participants reported considerable optimism
among the business contacts in their Districts, consis-

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105th Annual Report | 2018

tent with a firming in business expenditures. Respondents to District surveys in both the manufacturing
and service sectors were generally upbeat about the
economic outlook. In some Districts, reports from
business contacts or evidence from surveys pointed
to continuing shortages of workers in segments of
the labor market. Activity in the energy sector continued to expand, with contacts suggesting that further increases were likely, provided that sufficient
labor resources were forthcoming. In contrast, contacts in the agricultural sector reported that farm
income continued to experience downward pressure
due to low crop prices.
A number of participants reported concern among
their business contacts about the possible ramifications of the recent imposition of tariffs on imported
steel and aluminum. Participants did not see the steel
and aluminum tariffs, by themselves, as likely to have
a significant effect on the national economic outlook,
but a strong majority of participants viewed the
prospect of retaliatory trade actions by other countries, as well as other issues and uncertainties associated with trade policies, as downside risks for the
U.S. economy. Contacts in the agricultural sector
reported feeling particularly vulnerable to retaliation.
Tax changes enacted late last year and the recent federal budget agreement, taken together, were expected
to provide a significant boost to output over the next
few years. However, participants generally regarded
the magnitude and timing of the economic effects of
the fiscal policy changes as uncertain, partly because
there have been few historical examples of expansionary fiscal policy being implemented when the
economy was operating at a high level of resource
utilization. A number of participants also suggested
that uncertainty about whether all elements of the
tax cuts would be made permanent, or about the
implications of higher budget deficits for fiscal sustainability and real interest rates, represented sources
of downside risk to the economic outlook. A few
participants noted that the changes in tax policy
could boost the level of potential output.
Most participants described labor market conditions
as strong, noting that payroll gains had remained
well above the pace regarded as consistent with
absorbing new labor force entrants over time, the
unemployment rate had stayed low, job openings had
been high, or that initial claims for unemployment
insurance benefits had been low. Many participants
observed that the labor force participation rate had
been higher recently than they had expected, helping

to keep the unemployment rate flat over the past few
months despite strong payroll gains. The firmness in
the overall participation rate—relative to its demographically driven downward trend—and the rising
participation rate of prime-age adults were regarded
as signs of continued strengthening in labor market
conditions. A few participants thought that these
favorable developments could continue for a time,
whereas others expressed doubts. A few participants
warned against inferring too much from comparisons
of the current low level of the unemployment rate
with historical benchmarks, arguing that the much
higher levels of education of today’s workforce—and
the lower average unemployment rate of more highly
educated workers than less educated workers—suggested that the U.S. economy might be able to sustain
lower unemployment rates than was the case in the
1950s or 1960s.
In some Districts, reports from business contacts or
evidence from surveys pointed to a pickup in wages,
particularly for unskilled or entry-level workers.
However, business contacts or national surveys led a
few participants to conclude that some businesses
facing labor shortages were changing job requirements so that they matched more closely the skills of
available workers, increasing training, or offering
more flexible work arrangements, rather than
increasing wages in a broad-based fashion. Regarding wage growth at the national level, several participants noted a modest increase, but most still
described the pace of wage gains as moderate; a few
participants cited this fact as suggesting that there
was room for the labor market to strengthen somewhat further.
In some Districts, surveys or business contacts
reported increases in nonwage costs, particularly in
the cost of materials, and in a few Districts, contacts
reported passing on some of those costs in the form
of higher prices. Contacts in a few Districts suggested that widely known, observable cost
increases—such as those associated with rising commodity prices—would be more likely to be accepted
and passed through to final goods prices than would
less observable costs such as wage increases. A few
participants argued that either an absence of pricing
power among at least some firms—perhaps stemming from globalization and technological innovations, including ones that facilitate price comparisons—or the ability of firms to find ways to cut costs
of production has been damping inflationary pressures. Many participants stated that recent readings
from indicators on inflation and inflation expecta-

Minutes of Federal Open Market Committee Meetings | March

tions increased their confidence that inflation would
rise to the Committee’s 2 percent objective in coming
months and then stabilize around that level; others
suggested that downside risks to inflation were subsiding. In contrast, a few participants cautioned that,
despite increases in market-based measures of inflation compensation in recent months and the stabilization of some survey measures of inflation expectations, the levels of these indicators remained too low
to be consistent with the Committee’s 2 percent inflation objective.
In their discussion of developments in financial markets, some participants observed that financial conditions remained accommodative despite the rise in
market volatility and repricing of assets that had
occurred in February. Many participants reported
that their contacts had taken the previous month’s
turbulence in stride, although a few participants suggested that financial developments over the intermeeting period highlighted some downside risks
associated with still-high valuations for equities or
from market volatility more generally. A few participants expressed concern that a lengthy period in
which the economy operates beyond potential and
financial conditions remain highly accommodative
could, over time, pose risks to financial stability.
In their consideration of monetary policy, participants discussed the implications of recent economic
and financial developments for the appropriate path
of the federal funds rate. All participants agreed that
the outlook for the economy beyond the current
quarter had strengthened in recent months. In addition, all participants expected inflation on a
12-month basis to move up in coming months. This
expectation partly reflected the arithmetic effect of
the soft readings on inflation in early 2017 dropping
out of the calculation; it was noted that the increase
in the inflation rate arising from this source was
widely expected and, by itself, would not justify a
change in the projected path for the federal funds
rate. Most participants commented that the stronger
economic outlook and the somewhat higher inflation
readings in recent months had increased the likelihood of progress toward the Committee’s 2 percent
inflation objective. A few participants suggested that
a modest inflation overshoot might help push up
longer-term inflation expectations and anchor them
at a level consistent with the Committee’s 2 percent
inflation objective. A number of participants offered
their views on the potential benefits and costs associated with an economy operating well above potential
for a prolonged period while inflation remained low.

147

On the one hand, the associated tightness in the labor
market might help speed the return of inflation to the
Committee’s 2 percent goal and induce a further
increase in labor force participation; on the other
hand, an overheated economy could result in significant inflation pressures or lead to financial instability.
Based on their current assessments, almost all participants expressed the view that it would be appropriate
for the Committee to raise the target range for the
federal funds rate 25 basis points at this meeting.
These participants agreed that, even after such an
increase in the target range, the stance of monetary
policy would remain accommodative, supporting
strong labor market conditions and a sustained
return to 2 percent inflation. A couple of participants
pointed to possible benefits of postponing an
increase in the target range for the federal funds rate
until a subsequent meeting; these participants suggested that waiting for additional data to provide
more evidence of a sustained return of the 12-month
inflation rate to 2 percent might more clearly demonstrate the data dependence of the Committee’s decisions and its resolve to achieve the price-stability
component of its dual mandate.
With regard to the medium-term outlook for monetary policy, all participants saw some further firming
of the stance of monetary policy as likely to be warranted. Almost all participants agreed that it
remained appropriate to follow a gradual approach
to raising the target range for the federal funds rate.
Several participants commented that this gradual
approach was most likely to be conducive to maintaining strong labor market conditions and returning
inflation to 2 percent on a sustained basis without
resulting in conditions that would eventually require
an abrupt policy tightening. A number of participants indicated that the stronger outlook for economic activity, along with their increased confidence
that inflation would return to 2 percent over the
medium term, implied that the appropriate path for
the federal funds rate over the next few years would
likely be slightly steeper than they had previously
expected. Participants agreed that the longer-run
normal federal funds rate was likely lower than in the
past, in part because of secular forces that had put
downward pressure on real interest rates. Several participants expressed the judgment that it would likely
become appropriate at some point for the Committee
to set the federal funds rate above its longer-run normal value for a time. Some participants suggested
that, at some point, it might become necessary to
revise statement language to acknowledge that, in

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105th Annual Report | 2018

pursuit of the Committee’s statutory mandate and
consistent with the median of participants’ policy
rate projections in the SEP, monetary policy eventually would likely gradually move from an accommodative stance to being a neutral or restraining factor
for economic activity. However, participants
expressed a range of views on the amount of policy
tightening that would likely be required over the
medium term to achieve the Committee’s goals. Participants agreed that the actual path of the federal
funds rate would depend on the economic outlook as
informed by incoming data.

months and stabilize around the Committee’s 2 percent objective over the medium term. Members agreed
to continue to monitor inflation developments closely.

Committee Policy Action

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 reiterated that this
assessment would take into account a wide range of
information, including measures of labor market
conditions, indicators of inflation pressures and
inflation expectations, and readings on financial and
international developments. Members also agreed
that they would carefully monitor actual and
expected developments in inflation in relation to the
Committee’s symmetric inflation goal. Members
expected that economic conditions would evolve in a
manner that would warrant further gradual increases
in the federal funds rate. They judged that raising the
target range gradually would balance the risks to the
outlook for inflation and unemployment and was
most likely to support continued economic expansion. Members agreed that the strengthening in the
economic outlook in recent months increased the
likelihood that a gradual upward trajectory of the
federal funds rate would be appropriate. Members
continued to anticipate that the federal funds rate
would likely remain, for some time, below levels that
were expected to prevail in the longer run. Nonetheless, they again stated that the actual path for the federal funds rate would depend on the economic outlook as informed by incoming data.

In their discussion of monetary policy for the period
ahead, members judged that information received
since the Committee met in January indicated that
the labor market had continued to strengthen and
that economic activity had been rising at a moderate
rate. Job gains had been strong in recent months, and
the unemployment rate had stayed low. Recent data
suggested that growth rates of household spending
and business fixed investment had moderated from
their strong fourth-quarter readings. On a 12-month
basis, both overall inflation and inflation for items
other than food and energy had continued to run
below 2 percent. Market-based measures of inflation
compensation had increased in recent months but
remained low; survey-based measures of longer-term
inflation expectations were little changed, on balance.
All members viewed the recent data and other developments bearing on real economic activity as suggesting that the outlook for the economy beyond the
current quarter had strengthened in recent months.
In addition, notwithstanding increased market volatility over the intermeeting period, financial conditions had stayed accommodative, and developments
since the January meeting had indicated that fiscal
policy was likely to provide greater impetus to the
economy over the next few years than members had
previously thought. Consequently, members expected
that, with further gradual adjustments in the stance
of monetary policy, economic activity would expand
at a moderate pace in the medium term, and labor
market conditions would remain strong. Members
generally continued to judge the risks to the economic outlook as remaining roughly balanced.
Most members noted that recent readings on inflation, along with the strengthening of the economic
outlook, provided support for the view that inflation
on a 12-month basis would likely move up in coming

After assessing current conditions and the outlook
for economic activity, the labor market, and inflation,
members voted to raise the target range for the federal funds rate to 1½ to 1¾ percent. They indicated
that the stance of monetary policy remained accommodative, thereby supporting strong labor market
conditions and a sustained return to 2 percent
inflation.

Minutes of Federal Open Market Committee Meetings | March

maintain the federal funds rate in a target range
of 1½ to 1¾ 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 1.50 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 at auction the amount of principal
payments from the Federal Reserve’s holdings of
Treasury securities maturing during March that
exceeds $12 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
March that exceeds $8 billion. Effective in April,
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 $18 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 mortgagebacked securities received during each calendar
month that exceeds $12 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 January indicates that
the labor market has continued to strengthen
and that economic activity has been rising at a
moderate rate. Job gains have been strong in
recent months, and the unemployment rate has
stayed low. Recent data suggest that growth rates
of household spending and business fixed investment have moderated from their strong fourth-

149

quarter readings. On a 12-month basis, both
overall inflation and inflation for items other
than food and energy have continued to run
below 2 percent. Market-based measures of
inflation compensation have increased in recent
months but 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 economic outlook has
strengthened in recent months. The Committee
expects that, with further gradual adjustments in
the stance of monetary policy, economic activity
will expand at a moderate pace in the medium
term and labor market conditions will remain
strong. Inflation on a 12-month basis is expected
to move up in coming months and 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 raise the target range for the federal funds
rate to 1½ to 1¾ percent. The stance of monetary policy remains accommodative, thereby
supporting strong 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
further 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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105th Annual Report | 2018

Voting for this action: Jerome H. Powell, William C.
Dudley, Thomas I. Barkin, Raphael W. Bostic, Lael
Brainard, Loretta J. Mester, Randal K. Quarles, and
John C. Williams.

It was agreed that the next meeting of the Committee
would be held on Tuesday–Wednesday, May 1–2, 2018.
The meeting adjourned at 9:55 a.m. on March 21, 2018.

Notation Vote
Voting against this action: None.
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 1¾ percent, effective March 22,
2018. The Board of Governors also voted unanimously to approve a ¼ percentage point increase in
the primary credit rate (discount rate) to 2¼ percent,
effective March 22, 2018.4
4

In taking this action, the Board approved requests submitted by
the boards of directors of the Federal Reserve Banks of Boston,
New York, Philadelphia, Cleveland, Richmond, Atlanta, St.
Louis, Kansas City, Dallas, and San Francisco. This vote also
encompassed approval by the Board of Governors of the establishment of a 2¼ percent primary credit rate by the remaining

By notation vote completed on February 20, 2018,
the Committee unanimously approved the minutes of
the Committee meeting held on January 30–31, 2018.
James A. Clouse
Secretary

Federal Reserve Banks, effective on the later of March 22, 2018,
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 Chicago and Minneapolis were
informed by the Secretary of the Board of the Board’s approval
of their establishment of a primary credit rate of 2¼ percent,
effective March 22, 2018.) 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

Addendum:
Summary of Economic Projections
In conjunction with the Federal Open Market Committee (FOMC) meeting held on March 20–21, 2018,
meeting participants submitted their projections of
the most likely outcomes for real gross domestic
product (GDP) growth, the unemployment rate, and
inflation for each year from 2018 to 2020 and over
the longer run.1 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.2
“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 statutory mandate to promote
maximum employment and price stability.
All participants who submitted longer-run projections expected that real GDP in 2018 would expand
at a pace exceeding their individual estimates of the
longer-run growth rate of real GDP. Participants
generally saw real GDP growth moderating somewhat in each of the following two years, with almost
all participants who submitted longer-run projections
anticipating that real GDP growth in 2020 would be
at or within a few tenths of a percentage point of
their longer-run estimates. All participants who submitted longer-run projections expected that, throughout the projection period, the unemployment rate
would run below their estimates of its longer-run
level. All participants projected that inflation, as
measured by the four-quarter percentage change in
the price index for personal consumption expenditures (PCE), would rise to or toward the Committee’s
2 percent objective this year and would be at or a
little above that objective by 2020. Compared with
the Summary of Economic Projections (SEP) from
December, a substantial majority of participants
1

Three members of the Board of Governors were in office at the
time of the March 2018 meeting, one member fewer than in
December 2017.
One participant did not submit longer-run projections for real
GDP growth, the unemployment rate, or the federal funds rate.

151

marked up their projections for real GDP growth and
lowered their projections for the unemployment rate;
participants indicated that these revisions reflected a
number of factors, such as changes in fiscal policy, a
stronger outlook for economic growth abroad, or
recent strong job gains. For inflation, a majority of
participants made slight upward revisions to their
projections; these revisions were attributed to recent
price data and the effects of a stronger economic outlook than in the December SEP. Table 1 and figure 1
provide summary statistics for the projections.
As shown in figure 2, participants generally continued to expect that the evolution of the economy relative to their objectives of maximum employment and
2 percent inflation would likely warrant further
gradual increases in the federal funds rate. Although
the median of participants’ projections for the federal
funds rate at the end of 2018 was unchanged relative
to the December SEP, a number of participants
marked up their projections for this year. Moreover, a
substantial majority of participants revised up their
federal funds rate projections for 2019 and 2020. The
median of participants’ projections for the longerrun level of the federal funds rate was slightly higher
relative to the December SEP. Nearly all participants
who submitted longer-run projections expected that
evolving economic conditions would make it appropriate for the federal funds rate to move above their
estimates of its longer-run level during part of the
projection period.
In general, participants continued to view the uncertainty attached to their economic projections as
broadly similar to the average of the past 20 years. As
in December, most participants judged the risks
around their projections for real GDP growth, the
unemployment rate, and inflation to be broadly
balanced.

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105th Annual Report | 2018

Table 1. Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents, under their individual
assessments of projected appropriate monetary policy, March 2018
Percent
Median1

Central tendency2

Variable
2018

2019

2020

Change in real GDP
December projection
Unemployment rate
December projection
PCE inflation
December projection
Core PCE inflation4
December projection

2.7
2.5
3.8
3.9
1.9
1.9
1.9
1.9

2.4
2.1
3.6
3.9
2.0
2.0
2.1
2.0

2.0
2.0
3.6
4.0
2.1
2.0
2.1
2.0

Memo: Projected
appropriate
policy path
Federal funds rate
December projection

2.1
2.1

2.9
2.7

3.4
3.1

Longer
run

2018

2019

2020

1.8
1.8
4.5
4.6
2.0
2.0

2.6–3.0
2.2–2.6
3.6–3.8
3.7–4.0
1.8–2.0
1.7–1.9
1.8–2.0
1.7–1.9

2.2–2.6
1.9–2.3
3.4–3.7
3.6–4.0
2.0–2.2
2.0
2.0–2.2
2.0

1.8–2.1
1.7–2.0
3.5–3.8
3.6–4.2
2.1–2.2
2.0–2.1
2.1–2.2
2.0–2.1

2.9
2.8

2.1–2.4
1.9–2.4

2.8–3.4
2.4–3.1

3.1–3.6
2.6–3.1

Range3
Longer
run

Longer
run

2018

2019

2020

1.8–2.0
1.8–1.9
4.3–4.7
4.4–4.7
2.0
2.0

2.5–3.0
2.2–2.8
3.6–4.0
3.6–4.0
1.8–2.1
1.7–2.1
1.8–2.1
1.7–2.0

2.0–2.8
1.7–2.4
3.3–4.2
3.5–4.2
1.9–2.3
1.8–2.3
1.9–2.3
1.8–2.3

1.5–2.3
1.1–2.2
3.3–4.4
3.5–4.5
2.0–2.3
1.9–2.2
2.0–2.3
1.9–2.3

1.7–2.2
1.7–2.2
4.2–4.8
4.3–5.0
2.0
2.0

2.8–3.0
2.8–3.0

1.6–2.6
1.1–2.6

1.6–3.9
1.4–3.6

1.6–4.9
1.4–4.1

2.3–3.5
2.3–3.0

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 December projections were made in conjunction with the meeting of
the Federal Open Market Committee on December 12–13, 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 December 12–13, 2017, meeting, and one participant did not submit such projections in conjunction with the March 20–21, 2018,
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

153

Figure 1. Medians, central tendencies, and ranges of economic projections, 2018–20 and over the longer run
Percent

Change in real GDP
Median of projections
Central tendency of projections
Range of projections

Actual

2
1

2013

2014

2015

2016

2017

2018

2019

2020

Longer
run

Percent

Unemployment rate
7
6
5
4
3

2013

2014

2015

2016

2017

2018

2019

2020

Longer
run

Percent

PCE inflation
3

2013

2014

2015

2016

2017

2018

2019

2020

Longer
run

Percent

Core PCE inflation
3

2013

2014

2015

2016

2017

2018

2019

2020

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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105th Annual Report | 2018

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

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 | March

pants mentioned other factors that influenced their
economic projections, including accommodative
monetary policy and financial conditions, strength in
the global economic outlook, and continued momentum in the labor market. Compared with the December SEP, the medians of participants’ projections for
real GDP growth this year and next year were up a
few tenths of a percentage point.
Consistent with their projections for economic activity, almost all participants expected labor market
conditions to strengthen further over the projection
period. The medians of projections for the unemployment rate showed that rate stepping down from
4.1 percent in the final quarter of 2017 to 3.8 percent
in the final quarter of this year, and then to 3.6 percent in the final quarters of 2019 and 2020. The
median of participants’ estimates of the longer-run
unemployment rate was 4.5 percent. Compared with
the December SEP, almost all participants marked
down their unemployment rate projections. Some
participants also lowered their estimates of the
longer-run level of the unemployment rate, leading to
a small decline in the corresponding median
projection.
Figures 3.A and 3.B show the distributions of participants’ projections for real GDP growth and the
unemployment rate from 2018 to 2020 and in the longer run. The distributions of individual projections
for real GDP growth this year and next year shifted
up noticeably from those in the December SEP; participants’ projections ranged from 2.5 to 3.0 percent
in 2018 and from 2.0 to 2.8 percent in 2019. By contrast, the distributions of projected real GDP growth
in 2020 and in the longer run shifted up modestly
since December. Consistent with participants’ generally more upbeat outlook for real GDP growth, the
distributions of individual projections for the unemployment rate were lower than the corresponding distributions in December for each year of the projection period.

The Outlook for Inflation
The medians of participants’ projections for both
total and core PCE price inflation were 1.9 percent in
2018—with all participants anticipating that each
measure would rise from its 2017 rate—and 2.1 percent by 2020. Compared with the December SEP, the
medians of participants’ projections for each measure were unchanged this year and up 0.1 percentage
point in 2020.

155

Figures 3.C and 3.D provide information on the distributions of participants’ views about the outlook
for inflation. Participants generally made minor
upward adjustments to their inflation projections,
resulting in slight shifts of the distributions to the
right relative to the distributions in December. Participants generally expected each measure to increase
to no more than 2 percent this year and to rise to, or
edge above, 2 percent in 2019 and 2020.

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 2018 to 2020 and in the
longer run. The distributions of projected policy
rates through 2020 shifted modestly higher, consistent with the revisions to participants’ projections of
real GDP growth, the unemployment rate, and inflation. For 2018, there was a notable reduction in the
dispersion of participants’ views, with most participants now regarding the appropriate target at the end
of the year as being between 2.13 and 2.62 percent.
For each subsequent year, the dispersion of participants’ year-end projections was somewhat greater
than that in the December SEP, and the range of
participants’ projections was noticeably larger than
for 2018.
The median of participants’ projections of the federal funds rate rises gradually to a level of 2.1 percent
at the end of this year, 2.9 percent at the end of 2019,
and 3.4 percent at the end of 2020. The median of
participants’ longer-run estimates, at 2.9 percent, was
a bit higher than in the December SEP. Nearly all
participants projected that it would likely be appropriate for the federal funds rate to rise above their
individual longer-run estimates at some point over
the forecast period.
In discussing their projections, many participants
continued to express the view that the appropriate
trajectory of the federal funds rate over the next few
years would likely involve gradual increases. This
view was predicated on several factors, including a
judgment that a gradual path likely would appropriately balance the risks associated with, among other
considerations, the possibility that inflation pressures
and financial imbalances could build if economic
activity were to run well above its long-run sustainable level and the possibility that the forces depressing inflation could prove to be more persistent than
currently anticipated. Another factor mentioned was

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105th Annual Report | 2018

Figure 3.A. Distribution of participants’ projections for the change in real GDP, 2018–20 and over the longer run
Number of participants

2018
March projections
December projections

1.0 –
1.1

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

2.2 –
2.3

2.4 –
2.5

2.6 –
2.7

2.8 –
2.9

3.0 –
3.1
Number of participants

2019
18
16
14
12
10
8
6
4
2
1.0 –
1.1

1.2 –
1.3

1.4 –
1.5

1.6 –
1.7

1.8 –
1.9

2.0 –
2.1
Percent range

2.2 –
2.3

2.4 –
2.5

2.6 –
2.7

2.8 –
2.9

3.0 –
3.1
Number of participants

2020
18
16
14
12
10
8
6
4
2
1.0 –
1.1

1.2 –
1.3

1.4 –
1.5

1.6 –
1.7

1.8 –
1.9

2.0 –
2.1
Percent range

2.2 –
2.3

2.4 –
2.5

2.6 –
2.7

2.8 –
2.9

3.0 –
3.1
Number of participants

Longer run
18
16
14
12
10
8
6
4
2
1.0 –
1.1

1.2 –
1.3

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

2.8 –
2.9

3.0 –
3.1

Minutes of Federal Open Market Committee Meetings | March

157

Figure 3.B. Distribution of participants’ projections for the unemployment rate, 2018–20 and over the longer run
Number of participants

2018
March projections
December projections

3.0 –
3.1

3.2 –
3.3

3.4 –
3.5

18
16
14
12
10
8
6
4
2
3.6 –
3.7

3.8 –
3.9

4.0 –
4.1
Percent range

4.2 –
4.3

4.4 –
4.5

4.6 –
4.7

4.8 –
4.9

5.0 –
5.1
Number of participants

2019
18
16
14
12
10
8
6
4
2
3.0 –
3.1

3.2 –
3.3

3.4 –
3.5

3.6 –
3.7

3.8 –
3.9

4.0 –
4.1
Percent range

4.2 –
4.3

4.4 –
4.5

4.6 –
4.7

4.8 –
4.9

5.0 –
5.1
Number of participants

2020
18
16
14
12
10
8
6
4
2
3.0 –
3.1

3.2 –
3.3

3.4 –
3.5

3.6 –
3.7

3.8 –
3.9

4.0 –
4.1
Percent range

4.2 –
4.3

4.4 –
4.5

4.6 –
4.7

4.8 –
4.9

5.0 –
5.1
Number of participants

Longer run
18
16
14
12
10
8
6
4
2
3.0 –
3.1

3.2 –
3.3

3.4 –
3.5

3.6 –
3.7

3.8 –
3.9

4.0 –
4.1
Percent range

Note: Definitions of variables and other explanations are in the notes to table 1.

4.2 –
4.3

4.4 –
4.5

4.6 –
4.7

4.8 –
4.9

5.0 –
5.1

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105th Annual Report | 2018

Figure 3.C. Distribution of participants’ projections for PCE inflation, 2018–20 and over the longer run
Number of participants

2018
March projections
December projections

1.7–
1.8

18
16
14
12
10
8
6
4
2
1.9 –
2.0

2.1–
2.2

2.3 –
2.4

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

2.3 –
2.4

Percent range

Number of participants

2020
18
16
14
12
10
8
6
4
2
1.7–
1.8

1.9 –
2.0

2.1–
2.2

2.3 –
2.4

Percent range

Number of participants

Longer run
18
16
14
12
10
8
6
4
2
1.7–
1.8

2.1–
2.2

1.9 –
2.0
Percent range

Note: Definitions of variables and other explanations are in the notes to table 1.

2.3 –
2.4

Minutes of Federal Open Market Committee Meetings | March

159

Figure 3.D. Distribution of participants’ projections for core PCE inflation, 2018–20
Number of participants

2018
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

2.3 –
2.4
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

2.3 –
2.4
Number of participants

2020
18
16
14
12
10
8
6
4
2
1.7–
1.8

1.9 –
2.0

2.1–
2.2
Percent range

Note: Definitions of variables and other explanations are in the notes to table 1.

2.3 –
2.4

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105th Annual Report | 2018

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, 2018–20 and over the longer run
Number of participants

2018
March projections
December projections

18
16
14
12
10
8
6
4
2

0.88 – 1.13 – 1.38 – 1.63 – 1.88 – 2.13 – 2.38 – 2.63 – 2.88 – 3.13 – 3.38 – 3.63 – 3.88 – 4.13 – 4.38 – 4.63 – 4.88 –
1.12 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37 4.62 4.87 5.12
Percent range
Number of participants
2019
18
16
14
12
10
8
6
4
2
0.88 – 1.13 – 1.38 – 1.63 – 1.88 – 2.13 – 2.38 – 2.63 – 2.88 – 3.13 – 3.38 – 3.63 – 3.88 – 4.13 – 4.38 – 4.63 – 4.88 –
1.12 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37 4.62 4.87 5.12
Percent range
Number of participants
2020
18
16
14
12
10
8
6
4
2
0.88 – 1.13 – 1.38 – 1.63 – 1.88 – 2.13 – 2.38 – 2.63 – 2.88 – 3.13 – 3.38 – 3.63 – 3.88 – 4.13 – 4.38 – 4.63 – 4.88 –
1.12 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37 4.62 4.87 5.12
Percent range
Number of participants
Longer run
18
16
14
12
10
8
6
4
2
0.88 – 1.13 – 1.38 – 1.63 – 1.88 – 2.13 – 2.38 – 2.63 – 2.88 – 3.13 – 3.38 – 3.63 – 3.88 – 4.13 – 4.38 – 4.63 – 4.88 –
1.12 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37 4.62 4.87 5.12
Percent range
Note: Definitions of variables and other explanations are in the notes to table 1.

Minutes of Federal Open Market Committee Meetings | March

three variables, this measure of uncertainty is substantial and generally increases as the forecast horizon lengthens.

Table 2. Average historical projection error ranges
Percentage points
Variable
Change in real GDP1
Unemployment rate1
Total consumer prices2
Short-term interest rates3

161

2018

2019

2020

±1.5
±0.5
±0.9
±0.9

±2.0
±1.3
±1.0
±2.0

±2.0
±1.7
±1.1
±2.5

Note: Error ranges shown are measured as plus or minus the root mean squared
error of projections for 1998 through 2017 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), 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.

the view that the neutral real interest rate was historically low and would likely move up only slowly. As
always, the appropriate path of the federal funds rate
would depend on evolving economic conditions and
their implications for participants’ economic outlooks and assessments of risks.

Uncertainty and Risks
In assessing the path for the federal funds rate that,
in their view, is likely to be 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. As a reference, table 2 provides measures of
forecast uncertainty, based on the forecast errors of
various private and government forecasts over the
past 20 years, for real GDP growth, the unemployment rate, and total PCE inflation. Those measures
are represented graphically in the “fan charts” shown
in the top panels of figures 4.A, 4.B, and 4.C. The
fan charts display the median SEP projections for the
three variables surrounded by symmetric confidence
intervals derived from the forecast errors reported in
table 2. If the degree of uncertainty attending these
projections is similar to the typical magnitude of past
forecast errors and the risks around the projections
are broadly balanced, then future outcomes of these
variables would have about a 70 percent probability
of being within these confidence intervals. For all

Participants’ assessments of the level of uncertainty
surrounding their individual economic projections
are shown in the bottom-left panels of figure 4.A,
4.B, and 4.C. Nearly all participants viewed the
degree of uncertainty attached to their economic
projections about real GDP growth, the unemployment rate, and inflation as broadly similar to the
average of the past 20 years, a view that was essentially unchanged from December.3
Because the fan charts are constructed to be symmetric around the median projections, they do not reflect
any asymmetries in the balance of risks that participants may see in 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
of real GDP growth, the unemployment rate, total
inflation, and core inflation as broadly balanced—in
other words, as broadly consistent with a symmetric
fan chart. Participants who saw the risks as skewed
typically judged that the balance of risks was tilted
toward stronger GDP growth, lower unemployment
rates, and higher inflation. Compared with the
December SEP, participants’ assessments of the balance of risks attending their projections were little
changed overall, with one more participant reporting
that the risks to the unemployment rate were
weighted to the downside and two fewer participants
reporting that the risks to either total or core PCE
inflation were weighted to the downside.
In discussing the uncertainty and risks surrounding
their projections, most participants noted that the
magnitude and timing of the economic effects of
recent changes in fiscal policy were uncertain or that
fiscal policy developments posed upside risks to real
economic activity. Most participants also cited trade
policy as a source of either uncertainty or downside
risk. A few participants noted that a prolonged
period of tight labor markets posed risks of higher
inflation, could fuel financial imbalances, and might
contribute to heightened recession risks.
3

At the end of this summary, the box “Forecast Uncertainty”
discusses the sources and interpretation of uncertainty surrounding the economic forecasts and explains the approach
used to assess the uncertainty and risks attending the participants’ projections.

162

105th Annual Report | 2018

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

Actual

2013

2014

2015

2016

2017

2018

2019

2020

FOMC participants’ assessments of uncertainty and risks around their economic projections
Number of participants

Risks to GDP growth

Uncertainty about GDP growth
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

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

163

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
2013

2014

2015

2016

2017

2018

2019

2020

FOMC participants’ assessments of uncertainty and risks around their economic projections
Number of participants

Number of participants

Risks to the unemployment rate

Uncertainty about the unemployment rate
March projections
December projections

Lower

18
16
14
12
10
8
6
4
2
Broadly
similar

Higher

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 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.”

164

105th Annual Report | 2018

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

1
Actual

2013

2014

2015

2016

2017

2018

2019

2020

FOMC participants’ assessments of uncertainty and risks around their economic projections
Number of participants

Risks to PCE inflation

Uncertainty about PCE inflation
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

18
16
14
12
10
8
6
4
2
Broadly
balanced

Number of participants

Uncertainty about core PCE inflation
18
16
14
12
10
8
6
4
2
Broadly
similar

Number of participants

Risks to core PCE inflation

March projections
December projections

Lower

Weighted to
upside

Higher

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

Participants’ assessments of the appropriate future
path of the federal funds rate are also subject to considerable uncertainty. Because the Committee adjusts
the federal funds rate in response to actual and prospective developments over time in real GDP growth,
the unemployment rate, and inflation, uncertainty
surrounding the projected path for the federal funds
rate importantly reflects the uncertainties about the
paths for those key economic variables. Figure 5 pro-

165

vides a graphical representation of this uncertainty,
plotting the median SEP projection for the federal
funds rate surrounded by confidence intervals
derived from the results presented in table 2. As with
the macroeconomic variables, forecast uncertainty
surrounding the appropriate path of the federal
funds rate is substantial and increases for longer
horizons.

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105th Annual Report | 2018

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

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 | March

167

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 1.5 to 4.5 percent in the current year
and 1.0 to 5.0 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, 1.0 to 3.0 percent in the second year,
and 0.9 to 3.1 percent in the third 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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105th Annual Report | 2018

Meeting Held on May 1–2, 2018

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,
May 1, 2018, at 1:00 p.m. and continued on Wednesday, May 2, 2018, at 9:00 a.m.1

Thomas Laubach
Economist
David W. Wilcox
Economist

Jerome H. Powell
Chairman

Kartik B. Athreya, Thomas A. Connors,
Mary Daly, Trevor A. Reeve,
Ellis W. Tallman, William Wascher,
and Beth Anne Wilson
Associate Economists

William C. Dudley
Vice Chairman

Simon Potter
Manager, System Open Market Account

Thomas I. Barkin

Lorie K. Logan
Deputy Manager, System Open Market Account

Present

Raphael W. Bostic
Lael Brainard
Loretta J. Mester
Randal K. Quarles
John C. Williams
James Bullard, Charles L. Evans, Esther L. George,
Eric Rosengren, and Michael Strine
Alternate Members of the Federal Open Market
Committee

Patrick Harker, Robert S. Kaplan, and Neel Kashkari
Presidents of the Federal Reserve Banks of
Philadelphia, Dallas, and Minneapolis, respectively

Margie Shanks
Deputy Secretary, Office of the Secretary,
Board of Governors

James A. Clouse
Secretary

Daniel M. Covitz
Deputy Director, Division of Research and Statistics,
Board of Governors

Matthew M. Luecke
Deputy Secretary
David W. Skidmore
Assistant Secretary
Michelle A. Smith
Assistant Secretary
Mark E. Van Der Weide
General Counsel
Michael Held2
Deputy General Counsel

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

Rochelle M. Edge
Deputy Director, Division of Monetary Affairs,
Board of Governors
Michael T. Kiley
Deputy Director, Division of Financial Stability,
Board of Governors
Antulio N. Bomfim
Special Adviser to the Chairman, Office of Board
Members, Board of Governors
Joseph W. Gruber and John M. Roberts
Special Advisers to the Board, Office of Board
Members, Board of Governors

Attended through the discussion of developments in financial
markets and open market operations.

Minutes of Federal Open Market Committee Meetings | May

Linda Robertson
Assistant to the Board, Office of Board Members,
Board of Governors
Eric M. Engen and Joshua Gallin
Senior Associate Directors, Division of Research and
Statistics, Board of Governors
Stephen A. Meyer and Joyce K. Zickler
Senior Advisers, Division of Monetary Affairs,
Board of Governors

169

George A. Kahn
Vice President, Federal Reserve Bank of Kansas City
Richard K. Crump
Assistant Vice President, Federal Reserve Bank of
New York
Anthony Murphy
Senior Economic Policy Advisor, Federal Reserve
Bank of Dallas

Jeremy B. Rudd
Senior Adviser, Division of Research and Statistics,
Board of Governors

Developments in Financial Markets and
Open Market Operations

Jane E. Ihrig and David López-Salido
Associate Directors, Division of Monetary Affairs,
Board of Governors

The manager of the System Open Market Account
(SOMA) provided a summary of domestic and
global financial developments over the intermeeting
period. Broad measures of financial conditions had
tightened somewhat in recent weeks, with U.S. equity
prices lower, the foreign exchange value of the dollar
moderately higher, and longer-term Treasury yields
up a little. Market participants pointed to a range of
factors contributing to the decline in stock prices,
including concerns about the outlook for trade policy
both in the United States and abroad, the potential
for increased regulatory oversight of U.S. technology
companies, and incoming data suggesting some moderation in global economic growth. The rise in nominal U.S. Treasury yields was associated with an
increase in inflation compensation that, in turn,
seemed to reflect a firming in inflation data as well as
a notable rise in crude oil prices. Judging from federal
funds futures quotes, the expected path of the federal
funds rate changed relatively little over the intermeeting period. While term LIBOR (London interbank
offered rates) had widened relative to comparablematurity OIS (overnight index swap) rates in recent
months, the cost of dollar funding through the foreign exchange swap market had not risen to the same
degree. Recent usage of standing U.S. dollar liquidity
swap lines had been low, consistent with a view that
the recent widening in LIBOR–OIS spreads did not
reflect increased funding pressures or rising concerns
about the condition of financial institutions.

Stephanie R. Aaronson and Norman J. Morin
Assistant Directors, Division of Research and
Statistics, Board of Governors
Robert Vigfusson
Assistant Director, Division of International Finance,
Board of Governors
Eric C. Engstrom
Adviser, Division of Monetary Affairs,
and
Adviser, Division of Research and Statistics,
Board of Governors
Penelope A. Beattie4
Assistant to the Secretary, Office of the Secretary,
Board of Governors
Dana L. Burnett and Rebecca Zarutskie
Section Chiefs, Division of Monetary Affairs,
Board of Governors
Marcelo Rezende
Principal Economist, Division of Monetary Affairs,
Board of Governors
Ron Feldman
First Vice President, Federal Reserve Bank of
Minneapolis
Michael Dotsey, Geoffrey Tootell, and
Christopher J. Waller
Executive Vice Presidents, Federal Reserve Banks of
Philadelphia, Boston, and St. Louis, respectively
Spencer Krane, Paula Tkac, and Mark L. J. Wright
Senior Vice Presidents, Federal Reserve Banks of
Chicago, Atlanta, and Minneapolis, respectively
4

Attended through the discussion on financial stability issues.

The manager discussed the role of standing liquidity
swap lines in supporting financial stability and recommended that these swap lines be renewed at this
meeting following the usual annual schedule. The
manager also discussed current projections for principal payments received from mortgage-backed securities (MBS) held in the SOMA. These projections suggested that, under the Committee’s plan for balance
sheet normalization, reinvestments of MBS principal

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105th Annual Report | 2018

would likely cease later this year, although the timing
is uncertain.
The deputy manager followed with a briefing focused
on recent developments in the federal funds market,
noting that the effective federal funds rate had
increased in recent weeks and had moved toward the
top of the target range for the federal funds rate. In
large part, this development seemed to reflect a firming in rates on repurchase agreements (repos) that, in
turn, had resulted from an increase in Treasury bill
issuance and the associated higher demands for repo
financing by dealers and others. Higher rates had
reportedly made repos a more attractive alternative
investment for major lenders in the federal funds
market, thus reducing the availability of funding in
that market and putting some upward pressure on
the federal funds rate. While some of the recent pressure on the federal funds rate could be expected to
fade over coming weeks as the market adjusts to
higher levels of Treasury bills, the gradual normalization of the Federal Reserve’s balance sheet and the
accompanying decline in reserves was anticipated to
continue putting some upward pressure on the federal funds rate relative to the interest on excess
reserves (IOER) rate.
The deputy manager then discussed the possibility of
a small technical realignment of the IOER rate relative to the top of the target range for the federal
funds rate. Since the target range was established in
December 2008, the IOER rate has been set at the
top of the target range to help keep the effective federal funds rate within the range. Lately the spread of
the IOER rate over the effective federal funds rate
had narrowed to only 5 basis points. A technical
adjustment of the IOER rate to a level 5 basis points
below the top of the target range could keep the
effective federal funds rate well within the target
range. This could be accomplished by implementing
a 20 basis point increase in the IOER rate at a time
when the Committee raised the target range for the
federal funds rate by 25 basis points. Alternatively,
the IOER rate could be lowered 5 basis points at a
meeting in which the Committee left the target range
for the federal funds rate unchanged.
In their discussion of this issue, participants generally
agreed that it could become appropriate to make a
small technical adjustment in the Federal Reserve’s
approach to implementing monetary policy by setting the IOER rate modestly below the top of the target range for the federal funds rate. Such an adjustment would be consistent with the Committee’s state-

ment in the Policy Normalization Principles and
Plans that it would be prepared to adjust the details
of the approach to policy implementation during the
period of normalization in light of economic and
financial developments. Many participants judged
that it would be useful to make such a technical
adjustment sooner rather than later. Participants generally agreed that it would be desirable to make that
adjustment at a time when the FOMC decided to
increase the target range for the federal funds rate;
that timing would simplify FOMC communications
and emphasize that the IOER rate is a helpful tool
for implementing the FOMC’s policy decisions but
does not, in itself, convey the stance of policy. While
additional technical adjustments in the IOER rate
could become necessary over time, these were not
expected to be frequent. A number of participants
also suggested that, before too long, the Committee
might want to further discuss how it can implement
monetary policy most effectively and efficiently when
the quantity of reserve balances reaches a level appreciably below that seen in recent years.
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 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 May 1–2 meeting
indicated that labor market conditions continued to
strengthen in the first quarter, while real gross
domestic product (GDP) rose at a moderate pace.
Consumer price inflation, as measured by the
12{month percentage change in the price index for
personal consumption expenditures (PCE), was
2 percent in March. Survey-based measures of

Minutes of Federal Open Market Committee Meetings | May

longer-run inflation expectations were, on balance,
little changed.
Total nonfarm payroll employment rose less in
March than in the previous two months, but the
increase for the first quarter as a whole was solid.
The labor force participation rate edged down in
March but moved up a little, on net, in the first quarter. The national unemployment rate remained at
4.1 percent for a sixth consecutive month. Similarly,
the unemployment rates for African Americans,
Asians, and Hispanics were roughly flat, on balance,
in recent months. The share of workers employed
part time for economic reasons was little changed at
a rate close to that prevailing before the previous
recession. The rate of private-sector job openings
stayed at an elevated level in February, the rate of
quits remained high, and initial claims for unemployment insurance benefits continued to be low through
mid-April. Recent readings showed that increases in
labor compensation stepped up modestly over the
past year. The employment cost index for private
workers rose 2.8 percent over the 12 months ending
in March, and average hourly earnings for all
employees increased 2.7 percent over that period.
Both increases were larger than those reported for
the 12 months ending in March 2017.
Total industrial production increased in March and
rose at a solid pace for the first quarter as a whole,
with gains in the output of manufacturers, mines,
and utilities. Automakers’ schedules suggested that
assemblies of light motor vehicles would edge down
in the second quarter from the average pace in the
first quarter, but broader indicators of manufacturing production, such as the new orders indexes from
national and regional manufacturing surveys, continued to point to further gains in factory output in the
near term.
Consumer expenditures rose at a modest pace in the
first quarter following a strong gain in the preceding
quarter. Monthly data pointed to some improvement
toward the end of the quarter, as real PCE moved up
in March after declining in January and February.
However, the recent movements might have partly
reflected the effects of a delay in many federal tax
refunds, which could have shifted some consumer
spending from February to March. Light motor
vehicle sales stepped down in the first quarter after a
strong fourth-quarter pace that was partly boosted
by replacement sales following the fall hurricanes;
sales declined in April, but indicators of vehicle
demand remained upbeat. More broadly, key factors

171

that influence consumer spending—including gains
in employment and real disposable personal income,
along with households’ elevated net worth—should
continue to support solid real PCE growth in the
near term. In addition, the lower tax withholding
resulting from the tax cuts enacted late last year was
likely to provide some impetus to spending in coming
months. Consumer sentiment, as measured by the
University of Michigan Surveys of Consumers,
remained elevated in April.
Real residential investment was unchanged in the first
quarter after a strong increase in the fourth quarter.
Starts for new single-family homes decreased in
March, but the average pace in the first quarter was
little changed from the fourth quarter. In contrast,
starts of multifamily units moved up in March after
contracting in February, and they were higher in the
first quarter than in the fourth. Sales of both new
and existing homes increased in February and
March.
Real private expenditures for business equipment and
intellectual property increased at a moderate pace in
the first quarter after rising briskly in the second half
of last year. Nominal shipments of nondefense capital goods excluding aircraft edged down in March.
However, forward-looking indicators of business
equipment spending—such as the backlog of unfilled
capital goods orders, along with upbeat readings on
business sentiment from national and regional surveys—continued to point to robust gains in equipment spending in the near term. Real business expenditures for nonresidential structures rose at a robust
pace in the first quarter, and the number of crude oil
and natural gas rigs in operation—an indicator of
business spending for structures in the drilling and
mining sector—continued to move up through
mid-April.
Total real government purchases rose at a slower rate
in the first quarter than in the fourth quarter. Real
federal purchases increased in the first quarter, with
gains in both defense and nondefense spending. Real
purchases by state and local governments also moved
higher; state and local government payrolls were
unchanged in the first quarter, but nominal construction spending by these governments rose somewhat.
The nominal U.S. international trade deficit widened
in February as imports rose briskly, outpacing the
increase in exports. Preliminary data on trade in
goods suggested that the trade deficit narrowed
sharply in March, with exports continuing to grow

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105th Annual Report | 2018

robustly but imports retracing earlier gains. The
Bureau of Economic Analysis estimated that the
change in 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 2 percent over the 12 months
ending in March. Core PCE price inflation, which
excludes changes in consumer food and energy prices,
was 1.9 percent over that same period. The consumer
price index (CPI) rose 2.4 percent over the 12 months
ending in March, while core CPI inflation was
2.1 percent. Recent readings on survey-based measures of longer-run inflation expectations—including
those from the Michigan survey, the Survey of Professional Forecasters, and the Desk’s Survey of Primary Dealers and Survey of Market Participants—
were little changed on balance.
Incoming data suggested that foreign economic activity continued to expand at a solid pace. Real GDP
growth picked up in the first quarter in several
emerging market economies (EMEs), including
Mexico, China, and some other parts of emerging
Asia. However, incoming data in a number of
advanced foreign economies (AFEs)—in particular,
real GDP in the United Kingdom—showed somewhat slower growth than market participants were
expecting, partly because of transitory factors such
as severe weather. Overall, inflation in most AFEs
and EMEs continued to be subdued, increasing in
the AFEs in the first quarter on higher energy prices
but stepping down some in the EMEs, partly reflecting lower food prices in some Asian economies.

Staff Review of the Financial Situation
Early in the intermeeting period, uncertainty over
trade policy and negative news about the technology
sector reportedly contributed to lower prices for risky
assets, but these concerns subsequently seemed to
recede amid stronger-than-expected corporate earnings reports. Equity prices declined, nominal Treasury yields increased modestly, and market-based
measures of inflation compensation ticked up on net.
Meanwhile, financing conditions for nonfinancial
businesses and households largely remained supportive of spending.
FOMC communications over the intermeeting
period were generally viewed by market participants
as reflecting an upbeat outlook for economic growth
and as consistent with a continued gradual removal
of monetary policy accommodation. The FOMC’s

decision to raise the target range for the federal funds
rate 25 basis points at the March meeting was widely
anticipated. Market reaction to the release of the
March FOMC minutes later in the intermeeting
period was minimal. The probability of an increase in
the target range for the federal funds rate occurring
at the May FOMC meeting, as implied by quotes on
federal funds futures contracts, remained close to
zero; the probability of an increase at the June
FOMC meeting rose to about 90 percent by the end
of the intermeeting period. Expected levels of the
federal funds rate at the end of 2019 and 2020
implied by OIS rates rose modestly.
The nominal Treasury yield curve continued to flatten over the intermeeting period, with yields on
2-year and 10-year Treasury securities up 17 basis
points and 7 basis points, respectively. Measures of
inflation compensation derived from Treasury
Inflation-Protected Securities increased 4 basis points
and 7 basis points at the 5- and 5-to-10-year horizons, respectively, against a backdrop of rising oil
prices. Option-implied measures of volatility of
longer-term interest rates continued to decline over
the intermeeting period after their marked increase
earlier this year.
The S&P 500 index decreased over the period on net.
Equity prices declined early in the intermeeting
period, reportedly in response to trade tensions
between the United States and China as well as negative news about the technology sector. However,
equity prices subsequently retraced some of the earlier declines as concerns about trade policy seemed to
ease and corporate earnings reports for the first quarter of 2018 generally came in stronger than expected.
Option-implied volatility on the S&P 500 index at the
one-month horizon—the VIX—declined but
remained at elevated levels relative to 2017, ending
the period at approximately 15 percent. On net,
spreads of yields of investment-grade corporate
bonds over comparable-maturity Treasury securities
widened a bit, while spreads for speculative-grade
corporate bonds were unchanged.
Conditions in short-term funding markets remained
generally stable over the intermeeting period. Spreads
on term money market instruments relative to
comparable-maturity OIS rates were still larger than
usual in some segments of the money market.
Reflecting the FOMC’s policy action in March,
yields on a broad set of money market instruments
moved about 25 basis points higher. Bill yields also
stayed high relative to OIS rates as cumulative Treas-

Minutes of Federal Open Market Committee Meetings | May

ury bill supply remained elevated. Money market
dynamics over quarter-end were muted relative to
previous quarter-ends.
Foreign equity markets were mixed over the intermeeting period, with investors attuned to developments related to U.S. and Chinese trade policies and
to news about the U.S. technology sector. Broad
Japanese and European equity indexes outperformed
their U.S. counterparts, ending the period somewhat
higher. Market-based measures of policy expectations and longer-term yields were little changed in
the euro area and Japan but declined modestly in the
United Kingdom on weaker-than-expected economic
data. Longer-term yields in Canada moved up moderately amid notably higher oil prices. In EMEs, sovereign bond spreads edged up; capital continued to
flow into EME mutual funds, although at a slower
pace lately.
On net, the broad nominal dollar index appreciated
moderately over the intermeeting period. In the early
part of the period, the index depreciated slightly, as
relatively positive news about the current round of
NAFTA (North American Free Trade Agreement)
negotiations led to appreciation of the Mexican peso
and Canadian dollar, two currencies with large
weights in the index. Later in the period, there was a
broad-based appreciation of the dollar against most
currencies as U.S. yields increased relative to those in
AFEs and as the Mexican peso declined amid uncertainty associated with the upcoming presidential
elections.
Growth in banks’ commercial and industrial (C&I)
loans strengthened in March and the first half of
April following relatively weak growth in January and
February. Respondents to the April Senior Loan
Officer Opinion Survey on Bank Lending Practices
(SLOOS) reported that their institutions had eased
standards and terms on C&I loans in the first quarter, most often citing increased competition from
other lenders as the reason for doing so. Gross issuance of corporate bonds and leveraged loans was
strong in March, and equity issuance was robust. The
credit quality of nonfinancial corporations was stable
over the intermeeting period, and the ratio of aggregate debt to assets remained near multidecade highs.
Commercial real estate (CRE) financing conditions
remained accommodative over the intermeeting
period. CRE loan growth at banks strengthened in
March but edged down in the first half of April.

173

Spreads on commercial mortgage-backed securities
(CMBS) were little changed over the intermeeting
period and remained near their post-crisis lows.
CMBS issuance continued to be strong in March but
slowed somewhat in April. Respondents to the April
SLOOS reported easing standards on nonfarm nonresidential loans and tightening standards on multifamily loans, whereas standards on construction and
land development loans were little changed in the
first quarter. Meanwhile, respondents indicated
weaker demand for loans across these three CRE
loan categories.
Financing conditions in the residential mortgage
market remained accommodative for most borrowers
in March and April. For borrowers with low credit
scores, conditions continued to ease, but credit
remained relatively tight and the volume of mortgage
loans extended to this group remained low. Banks
responding to the April SLOOS reported weaker
loan demand across most residential real estate
(RRE) loan categories, while standards were reportedly about unchanged for most RRE loan types in
the first quarter.
Consumer credit growth moderated in March and
the first half of April. Respondents to the April
SLOOS reported that standards and terms on auto
and credit card loans tightened, and that demand for
these loans weakened in the first quarter. On balance,
credit remained readily available to prime-rated borrowers, but tight for subprime borrowers, over the
intermeeting period.
The staff provided its latest report on potential risks
to financial stability; the report again characterized
the financial vulnerabilities of the U.S. financial
system as moderate on balance. This overall assessment incorporated the staff’s judgment that vulnerabilities associated with asset valuation pressures,
while having come down a little in recent months,
nonetheless continued to be elevated. The staff
judged vulnerabilities from financial-sector leverage
and maturity and liquidity transformation to be low,
vulnerabilities from household leverage as being in
the low-to-moderate range, and vulnerabilities from
leverage in the nonfinancial business sector as
elevated. The staff also characterized overall vulnerabilities to foreign financial stability as moderate
while highlighting specific issues in some foreign
economies, including—depending on the country—
elevated asset valuation pressures, high private or
sovereign debt burdens, and political uncertainties.

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105th Annual Report | 2018

Staff Economic Outlook
The staff projection for U.S. economic activity prepared for the May FOMC meeting continued to suggest that the economy was expanding at an abovetrend pace. Real GDP growth, which slowed in the
first quarter, was expected to pick up in the second
quarter and to outpace potential output growth
through 2020. The unemployment rate was projected
to decline further over the next few years and to continue to run below the staff’s estimate of its longerrun natural rate over this period. Relative to the forecast prepared for the March meeting, the projection
for real GDP growth in 2018 was revised down a
little, primarily in response to incoming consumer
spending data that were somewhat softer than the
staff had expected. Beyond 2018, the projection for
GDP growth was essentially unrevised. With real
GDP rising a little less, on balance, over the forecast
period, the projected decline in the unemployment
rate over the next few years was also a touch smaller
than in the previous forecast.
The near-term projection for consumer price inflation was revised up slightly in response to incoming
data on prices. Beyond the near term, the forecast for
inflation was a bit lower than in the previous projection, reflecting the slightly higher unemployment rate
in the new forecast. The rates of both total and core
PCE price inflation were projected to be faster in
2018 than in 2017. The staff projected that total PCE
inflation would be near the Committee’s 2 percent
objective over the next several years. Total PCE inflation was expected to run slightly below core inflation
in 2019 and 2020 because of a projected decline in
energy prices.
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 staff saw the risks to the forecasts for
real GDP growth and the unemployment rate as balanced. On the upside, recent fiscal policy changes
could lead to a greater expansion in economic activity over the next few years than the staff projected.
On the downside, those fiscal policy changes could
yield less impetus to the economy than the staff
expected if the economy was already operating above
its potential level and resource utilization continued
to tighten, as the staff projected. Risks to the inflation projection also were seen as balanced. An upside
risk was that inflation could increase more than
expected in an economy that was projected to move

further above its potential. Downside risks included
the possibilities that longer-term inflation expectations may be lower than was assumed or that the run
of low core inflation readings last year could prove to
be more persistent than the staff expected.

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 March indicated that the labor market had continued to
strengthen and that economic activity had been rising
at a moderate rate. Job gains had been strong, on
average, in recent months, and the unemployment
rate had stayed low. Recent data suggested that
growth of household spending had moderated from
its strong fourth-quarter pace, while business fixed
investment had continued to grow strongly. On a
12-month basis, both overall inflation and inflation
for items other than food and energy had moved
close to 2 percent. Market-based measures of inflation compensation remained low; survey-based measures of longer-term inflation expectations were little
changed, on balance.
Participants viewed recent readings on spending,
employment, and inflation as suggesting little change,
on balance, in their assessments of the economic outlook. Real GDP growth slowed somewhat less in the
first quarter than anticipated at the time of the
March meeting, and participants expected that the
moderation in the growth of consumer spending
early in the year would prove temporary. They noted
a number of economic fundamentals were currently
supporting continued above-trend economic growth;
these included a strong labor market, federal tax and
spending policies, high levels of household and business confidence, favorable financial conditions, and
strong economic growth abroad. Participants generally expected that further gradual increases in the target range for the federal funds rate would be consistent with solid expansion of economic activity, strong
labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the
medium term. Participants generally viewed the risks
to the economic outlook to be roughly balanced.
Participants generally reported that their business
contacts were optimistic about the economic outlook. However, in a number of Districts, contacts
expressed concern about the possible adverse effects

Minutes of Federal Open Market Committee Meetings | May

of tariffs and trade restrictions, including the potential for postponing or pulling back on capital spending. Labor markets were generally strong, and contacts in a number of Districts reported shortages of
workers in specific industries or occupations. In some
cases, labor shortages were contributing to upward
pressure on wages. In many Districts, business contacts experienced rising costs of nonlabor inputs, particularly trucking, rail, and shipping rates and prices
of steel, aluminum, lumber, and petroleum-based
commodities. Reports on the ability of firms to pass
through higher costs to customers varied across Districts. Activity in the energy sector remained strong,
and crude oil production was expected to continue to
expand in response to rising global demand. In contrast, in agricultural areas, low crop prices continued
to weigh on farm income. It was noted that the
potential for higher Chinese tariffs on key agricultural products could, in the longer run, hurt U.S.
competitiveness.
Participants generally agreed that labor market conditions strengthened further during the first quarter
of the year. Nonfarm payroll employment posted
strong gains, averaging 200,000 per month. The
unemployment rate was unchanged, but at a level
below most estimates of its longer-run normal rate.
Both the overall labor force participation rate and the
employment-to-population ratio moved up. The firstquarter data from the employment cost index indicated that the strength in the labor market was showing through to a gradual pickup in wage increases,
although the signal from other wage measures was
less clear. Many participants commented that overall
wage pressures were still moderate or were strong
only in industries and occupations experiencing very
tight labor supply; several of them noted that recent
wage developments provided little evidence of general overheating in the labor market. With economic
growth anticipated to remain above trend, participants generally expected the unemployment rate to
remain below, or to decline further below, their estimates of its longer-run normal rate. Several participants also saw scope for a strong labor market to
continue to draw individuals into the workforce.
However, a few others questioned whether tight labor
markets would have a lasting positive effect on labor
force participation.
The 12-month changes in overall and core PCE
prices moved up in March, to 2 percent and 1.9 percent, respectively. Most participants viewed the
recent firming in inflation as providing some reassurance that inflation was on a trajectory to achieve the

175

Committee’s symmetric 2 percent objective on a sustained basis. In particular, the recent readings
appeared to support the view that the downside surprises last year were largely transitory. Some participants noted that inflation was likely to modestly
overshoot 2 percent for a time. However, several participants suggested that the underlying trend in inflation had changed little, noting that some of the
recent increase in inflation may have represented
transitory price changes in some categories of health
care and financial services, or that various measures
of underlying inflation, such as the 12-month
trimmed mean PCE inflation rate from the Federal
Reserve Bank of Dallas, remained relatively stable at
levels below 2 percent. In discussing the outlook for
inflation, many participants emphasized that, after
an extended period of low inflation, the Committee’s
longer-run policy objective was to return inflation to
its symmetric 2 percent goal on a sustained basis.
Many saw tight resource utilization, the pickup in
wage increases and nonlabor input costs, and stable
inflation expectations as supporting their projections
that inflation would remain near 2 percent over the
medium term. But a few cautioned that, although
market-based measures of inflation compensation
had moved up over recent months, in their view these
measures, as well as some survey-based measures,
remained at levels somewhat below those that would
be consistent with an expectation of sustained 2 percent inflation as measured by the PCE price index.
Participants commented on a number of risks and
uncertainties associated with their expectations for
economic activity, the labor market, and inflation
over the medium term. Some participants saw a risk
that, as resource utilization continued to tighten, supply constraints could develop that would intensify
upward wage and price pressures, or that financial
imbalances could emerge, which could eventually
erode the sustainability of the economic expansion.
Alternatively, some participants thought that a
strengthening labor market could bring a further
increase in labor supply, allowing the unemployment
rate to decline further with less upward pressure on
wages and prices. Another area of uncertainty was
the outlook for fiscal and trade policies. Several participants continued to note the challenge of assessing
the timing and magnitude of the effects of recent fiscal policy changes on household and business spending and on labor supply over the next several years.
In addition, they saw the trajectory of fiscal policy
thereafter as difficult to forecast. With regard to
trade policies, a number of participants viewed the
range of possible outcomes for economic activity and

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105th Annual Report | 2018

inflation to be particularly wide, depending on what
actions were taken by the United States and how U.S.
trading partners responded. And some participants
observed that while these policies were being debated
and negotiations continued, the uncertainty surrounding trade issues could damp business sentiment
and spending. In their discussion of the outlook for
inflation, a few participants also noted the risk that,
if global oil prices remained high or moved higher,
U.S. inflation would be boosted by the direct effects
and pass-through of higher energy costs.
Financial conditions tightened somewhat over the
intermeeting period but remained accommodative
overall. The foreign exchange value of the dollar rose
modestly, but this move retraced only a bit of the
depreciation of the dollar since its 2016 peak. With
their decline over the intermeeting period, equity
prices were about unchanged, on net, since the beginning of the year but were still near their historical
highs. Longer-term Treasury yields rose, but somewhat less than shorter-term yields, and the yield
curve flattened somewhat further.
In commenting on the staff’s assessment of financial
stability, a couple of participants noted that after the
bout of financial market volatility in early February,
the use of investment strategies predicated on a lowvolatility environment may have become less prevalent, and that some investors may have become more
cautious. However, asset valuations across a range of
markets and leverage in the nonfinancial corporate
sector remained elevated relative to historical norms,
leaving some borrowers vulnerable to unexpected
negative shocks. With regard to the ability of the
financial system to absorb such shocks, several participants commented that regulatory reforms since
the crisis had contributed to appreciably stronger
capital and liquidity positions in the financial sector.
In this context, a few participants emphasized the
need to build additional resilience in the financial sector at this point in the economic expansion.
In their consideration of monetary policy over the
near term, participants discussed the implications of
recent economic and financial developments for the
outlook for economic growth, labor market conditions, and inflation and, in turn, for the appropriate
path of the federal funds rate. All participants
expressed the view that it would be appropriate for
the Committee to leave the target range for the federal funds rate unchanged at the May meeting. Participants concurred that information received during

the intermeeting period had not materially altered
their assessment of the outlook for the economy. Participants commented that above-trend growth in real
GDP in recent quarters, together with somewhat
higher recent inflation readings, had increased their
confidence that inflation on a 12-month basis would
continue to run near the Committee’s longer-run
2 percent symmetric objective. That said, it was noted
that it was premature to conclude that inflation
would remain at levels around 2 percent, especially
after several years in which inflation had persistently
run below the Committee’s 2 percent objective. In
light of subdued inflation over recent years, a few
participants observed that adjustments in the stance
of policy should take account of the possibility that
longer-term inflation expectations have drifted a bit
below levels consistent with the Committee’s 2 percent inflation objective. Most participants judged
that if incoming information broadly confirmed their
current economic outlook, it would likely soon be
appropriate for the Committee to take another step
in removing policy accommodation. Overall, participants agreed that the current stance of monetary
policy remained accommodative, supporting strong
labor market conditions and a return to 2 percent
inflation on a sustained basis.
With regard to the medium-term outlook for monetary policy, all participants reaffirmed that adjustments to the path for the policy rate would depend
on their assessments of the evolution of the economic outlook and risks to the outlook relative to
the Committee’s statutory objectives. Participants
generally agreed with the assessment that continuing
to raise the target range for the federal funds rate
gradually would likely be appropriate if the economy
evolves about as expected. These participants commented that this gradual approach was most likely to
be conducive to maintaining strong labor market
conditions and achieving the symmetric 2 percent
inflation objective on a sustained basis without
resulting in conditions that would eventually require
an abrupt policy tightening. A few participants commented that recent news on inflation, against a background of continued prospects for a solid pace of
economic growth, supported the view that inflation
on a 12-month basis would likely move slightly above
the Committee’s 2 percent objective for a time. It was
also noted that a temporary period of inflation modestly above 2 percent would be consistent with the
Committee’s symmetric inflation objective and could
be helpful in anchoring longer-run inflation expectations at a level consistent with that objective.

Minutes of Federal Open Market Committee Meetings | May

177

Meeting participants also discussed the recent flatter
profile of the term structure of interest rates. Participants pointed to a number of factors contributing to
the flattening of the yield curve, including the
expected gradual rise of the federal funds rate, the
downward pressure on term premiums from the Federal Reserve’s still-large balance sheet as well as asset
purchase programs by other central banks, and a
reduction in investors’ estimates of the longer-run
neutral real interest rate. A few participants noted
that such factors could make the slope of the yield
curve a less reliable signal of future economic activity. However, several participants thought that it
would be important to continue to monitor the slope
of the yield curve, emphasizing the historical regularity that an inverted yield curve has indicated an
increased risk of recession.

economic activity had been rising at a moderate rate.
Job gains had been strong, on average, in recent
months, and the unemployment rate had stayed low.
Recent data suggested that growth of household
spending had moderated from its strong fourthquarter pace, while business fixed investment continued to grow strongly. On a 12-month basis, both
overall inflation and inflation for items other than
food and energy had moved close to 2 percent. In
particular, in March the 12-month percent increase in
PCE prices was equal to the Committee’s longer-run
objective of 2 percent, while the measure excluding
food and energy prices was only slightly below 2 percent. Market-based measures of inflation compensation remained low, and survey-based measures of
longer-term inflation expectations were little
changed, on balance.

Participants commented on how the Committee’s
communications in its postmeeting statement might
need to be revised in coming meetings if the economy
evolved broadly as expected. A few participants
noted that if increases in the target range for the federal funds rate continued, the federal funds rate could
be at or above their estimates of its longer-run normal level before too long. In addition, a few observed
that the neutral level of the federal funds rate might
currently be lower than their estimates of its longerrun level. In light of this, some participants noted it
might soon be appropriate to revise the forwardguidance language in the statement indicating that
the “federal funds rate is likely to remain, for some
time, below levels that are expected to prevail in the
longer run” or to modify the language stating that
“the stance of monetary policy remains accommodative.” Participants expressed a range of views on the
amount of further policy firming that would likely be
required over the medium term to achieve the Committee’s goals. Participants indicated that the Committee, in making policy decisions over the next few
years, should conduct policy with the aim of keeping
inflation near its longer-run symmetric objective
while sustaining the economic expansion and a
strong labor market. Participants agreed that the
actual path of the federal funds rate would depend
on the economic outlook as informed by incoming
information.

All members viewed the recent data as indicating that
the outlook for the economy had changed little since
the previous meeting. In addition, financial conditions, although somewhat tighter than at the time of
the March FOMC meeting, had stayed accommodative overall, while fiscal policy was likely to provide
sizable impetus to the economy over the next few
years. Consequently, members expected that, with
further gradual adjustments to the stance of monetary policy, economic activity would expand at a
moderate pace in the medium term and labor market
conditions would remain strong. Members agreed
that inflation on a 12-month basis is expected to run
near the Committee’s symmetric 2 percent objective
over the medium term. Members judged that the
risks to the economic outlook appeared to be roughly
balanced.

Committee Policy Action
In their discussion of monetary policy for the period
ahead, members judged that information received
since the Committee met in March indicated that the
labor market had continued to strengthen and that

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 1½ to 1¾ 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 reiterated that this
assessment would take into account a wide range of
information, including measures of labor market
conditions, indicators of inflation pressures and

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105th Annual Report | 2018

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. Members
expected that economic conditions would evolve in a
manner that would warrant further 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.
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 3, 2018, 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
1½ to 1¾ 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 1.50 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 at auction the amount of principal
payments from the Federal Reserve’s holdings of
Treasury securities maturing during each calendar month that exceeds $18 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 $12 billion. Small
deviations from these amounts for operational
reasons are acceptable.
The Committee also directs the Desk to engage
in dollar roll and coupon swap transactions as
necessary to facilitate settlement of the Federal
Reserve’s agency mortgage-backed securities
transactions.”

The vote also encompassed approval of the statement
below to be released at 2:00 p.m.:
“Information received since the Federal Open
Market Committee met in March indicates that
the labor market has continued to strengthen
and that economic activity has been rising at a
moderate rate. Job gains have been strong, on
average, in recent months, and the unemployment rate has stayed low. Recent data suggest
that growth of household spending moderated
from its strong fourth-quarter pace, while business fixed investment continued to grow
strongly. On a 12-month basis, both overall
inflation and inflation for items other than food
and energy have moved close to 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 further gradual adjustments in the stance of
monetary policy, economic activity will expand
at a moderate pace in the medium term and
labor market conditions will remain strong.
Inflation on a 12-month basis is expected to run
near the Committee’s symmetric 2 percent
objective over the medium term. Risks to the
economic outlook appear roughly balanced.
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 1½ to 1¾ percent. The stance of monetary policy remains accommodative, thereby
supporting strong 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.

Minutes of Federal Open Market Committee Meetings | May

The Committee expects that economic conditions will evolve in a manner that will warrant
further 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.”
Voting for this action: Jerome H. Powell, William C.
Dudley, Thomas I. Barkin, Raphael W. Bostic, Lael
Brainard, Loretta J. Mester, Randal K. Quarles, and
John C. Williams.

approve establishment of the primary credit rate (discount rate) at the existing level of 2¼ percent.5
It was agreed that the next meeting of the Committee
would be held on Tuesday–Wednesday, June 12–13,
2018. The meeting adjourned at 10:00 a.m. on
May 2, 2018.

Notation Vote
By notation vote completed on April 10, 2018, the
Committee unanimously approved the minutes of the
Committee meeting held on March 20–21, 2018.

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 1¾ percent and voted unanimously to

179

James A. Clouse
Secretary

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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105th Annual Report | 2018

Meeting Held on June 12–13, 2018

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 12, 2018, at 1:00 p.m. and continued on
Wednesday, June 13, 2018, at 9:00 a.m.1

David W. Wilcox
Economist

Present

David Altig, Kartik B. Athreya,
Thomas A. Connors, David E. Lebow,
Trevor A. Reeve, Ellis W. Tallman,
William Wascher,2 and Beth Anne Wilson
Associate Economists

Jerome H. Powell
Chairman

Simon Potter
Manager, System Open Market Account

William C. Dudley
Vice Chairman

Lorie K. Logan
Deputy Manager, System Open Market Account

Thomas I. Barkin

Ann E. Misback
Secretary, Office of the Secretary,
Board of Governors

Raphael W. Bostic
Lael Brainard
Loretta J. Mester
Randal K. Quarles
John C. Williams
James Bullard, Charles L. Evans, Esther L. George,
Eric Rosengren, and Michael Strine2
Alternate Members of the Federal Open Market
Committee
Patrick Harker, Robert S. Kaplan, and Neel Kashkari
Presidents of the Federal Reserve Banks of
Philadelphia, Dallas, and Minneapolis, 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
Steven B. Kamin
Economist
1

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
Rochelle M. Edge
Deputy Director, Division of Monetary Affairs,
Board of Governors
Michael T. Kiley
Deputy Director, Division of Financial Stability,
Board of Governors
Antulio N. Bomfim
Special Adviser to the Chairman, Office of Board Members,
Board of Governors
Joseph W. Gruber 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
Shaghil Ahmed
Senior Associate Director, Division of International
Finance, Board of Governors
3

Attended through the discussion of developments in financial
markets and open market operations.

Minutes of Federal Open Market Committee Meetings | June

Ellen E. Meade, Stephen A. Meyer,
and Robert J. Tetlow
Senior Advisers, Division of Monetary Affairs,
Board of Governors
John J. Stevens and Stacey Tevlin
Associate Directors, Division of Research and
Statistics, Board of Governors
Jeffrey D. Walker3
Deputy Associate Director, Division of Reserve Bank
Operations and Payment Systems,
Board of Governors
Min Wei
Deputy Associate Director, Division of Monetary
Affairs, Board of Governors
Burcu Duygan-Bump, Norman J. Morin,
John Sabelhaus, and Paul A. Smith
Assistant Directors, Division of Research and
Statistics, Board of Governors

Achilles Sangster II
Information Management Analyst, Division of
Monetary Affairs, Board of Governors
Kenneth C. Montgomery
First Vice President, Federal Reserve Bank of Boston
Jeff Fuhrer, Daniel G. Sullivan,
and Christopher J. Waller
Executive Vice Presidents, Federal Reserve Banks of
Boston, Chicago, and St. Louis, respectively
Marc Giannoni, Paolo A. Pesenti,
and Mark L. J. Wright
Senior Vice Presidents, Federal Reserve Banks of
Dallas, New York, and Minneapolis, respectively
Roc Armenter
Vice President, Federal Reserve Bank of Philadelphia
Willem Van Zandweghe
Assistant Vice President, Federal Reserve Bank of
Kansas City

Christopher J. Gust
Assistant Director, Division of Monetary Affairs,
Board of Governors

Nicolas Petrosky-Nadeau
Senior Research Advisor, Federal Reserve Bank of
San Francisco

Penelope A. Beattie2
Assistant to the Secretary, Office of the Secretary,
Board of Governors

Developments in Financial Markets and
Open Market Operations

John Ammer2
Senior Economic Project Manager, Division of
International Finance, Board of Governors
Dan Li
Section Chief, Division of Monetary Affairs,
Board of Governors
David H. Small
Project Manager, Division of Monetary Affairs,
Board of Governors
Martin Bodenstein and Marcel A. Priebsch
Principal Economists, Division of Monetary Affairs,
Board of Governors
Logan T. Lewis
Principal Economist, Division of International
Finance, Board of Governors
Maria Otoo
Principal Economist, Division of Research and
Statistics, Board of Governors
Marcelo Ochoa
Senior Economist, Division of Monetary Affairs,
Board of Governors

181

The manager of the System Open Market Account
(SOMA) provided a summary of developments in
domestic and global financial markets over the intermeeting period. Developments in emerging market
economies (EMEs) and in Europe were the focus of
considerable attention by financial market participants over recent weeks. Investor perceptions of
increased economic and political vulnerabilities in
several EMEs led to a notable depreciation in EME
currencies relative to the dollar. Market participants
reported that an unwinding of investor positions had
been a factor amplifying these currency moves. In
Europe, concerns about the political situation in Italy
and its potential economic implications prompted a
significant widening in risk spreads on Italian sovereign securities. The share prices of Italian banks and
other banks that could be exposed to Italy declined
sharply. In domestic financial markets, expectations
for the path of the federal funds rate were little
changed over the intermeeting period. The manager
noted that the release of the minutes of the May
FOMC meeting, and particularly the reference to a
possible technical adjustment in the interest on excess
reserves (IOER) rate relative to the top of the

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105th Annual Report | 2018

FOMC’s target range for the federal funds rate,
prompted a small reduction in federal funds futures
rates.
The deputy manager followed with a discussion of
money markets and open market operations. Rates
on Treasury repurchase agreements (repo) had
remained elevated in recent weeks, apparently
responding, in part, to increased Treasury issuance
over recent months. In light of the firmness in repo
rates, the volume of operations conducted through
the Federal Reserve’s overnight reverse repurchase
agreement facility remained low. Elevated repo rates
may also have contributed to some upward pressure
on the effective federal funds rate in recent weeks as
lenders in that market shifted some of their investments to earn higher rates available in repo markets.
The deputy manager also discussed the current outlook for reinvestment purchases of agency mortgagebacked securities (MBS). Based on current projections, principal payments on the Federal Reserve’s
holdings of agency MBS would likely be lower than
the monthly cap on redemptions that will be in effect
beginning in the fall of this year. Consistent with the
June 2017 addendum to the Policy Normalization
Principles and Plans, reinvestment purchases of
agency MBS then are projected to fall to zero from
that point onward. However, principal payments on
agency MBS are sensitive to changes in various factors, particularly long-term interest rates. As a result,
agency MBS principal payments could rise above the
monthly redemption cap in some future scenarios
and thus require MBS reinvestment purchases. In
light of this possibility, the deputy manager
described plans for the Desk to conduct small value
purchases of agency MBS on a regular basis in order
to maintain operational readiness.
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 June 12–13 meeting
indicated that labor market conditions continued to
strengthen in recent months, and that real gross
domestic product (GDP) appeared to be rising at a
solid rate in the first half of the year. Consumer price
inflation, as measured by the 12-month percentage
change in the price index for personal consumption
expenditures (PCE), was 2 percent in April. Survey-

based measures of longer-run inflation expectations
were little changed on balance.
Total nonfarm payroll employment expanded at a
strong pace, on average, in April and May. The
national unemployment rate edged down in both
months and was 3.8 percent in May. The unemployment rates for African Americans, Asians, and Hispanics all declined, on net, from March to May; the
rate for African Americans was the lowest on record
but still noticeably above the rates for other groups.
The overall labor force participation rate edged down
in April and May but was still at about the same level
as a year earlier. The share of workers employed part
time for economic reasons was little changed at a
level close to that from just before the previous recession. The rate of private-sector job openings rose in
March and stayed at that elevated level in April; the
rate of quits edged up, on net, over those two
months; and initial claims for unemployment insurance benefits continued to be low through early June.
Recent readings showed that increases in labor compensation stepped up over the past year. Compensation per hour in the nonfarm business sector
increased 2.7 percent over the four quarters ending in
the first quarter of this year (compared with 1.9 percent over the same four quarters a year earlier), and
average hourly earnings for all employees increased
2.7 percent over the 12 months ending in May (compared with 2.5 percent over the same 12 months a
year earlier).
Total industrial production increased at a solid pace
in April, but the available indicators for May, particularly production worker hours in manufacturing,
indicated that output declined in that month. Automakers’ schedules suggested that assemblies of light
motor vehicles would increase in the coming months,
and broader indicators of manufacturing production,
such as the new orders indexes from national and
regional manufacturing surveys, continued to point
to solid gains in factory output in the near term.
Consumer spending appeared to be increasing briskly
in the second quarter after rising at only a modest
pace in the first quarter. Real PCE increased at a
robust pace in April after a strong gain in March.
Although light motor vehicle sales declined in May,
indicators of vehicle demand generally remained
upbeat. More broadly, recent readings on key factors
that influence consumer spending—including gains
in employment, real disposable personal income, and
households’ net worth—continued to be supportive
of solid real PCE growth in the near term. In addi-

Minutes of Federal Open Market Committee Meetings | June

tion, the lower tax withholding resulting from the tax
cuts enacted late last year still appeared likely to provide some additional impetus to spending in coming
months. Consumer sentiment, as measured by the
University of Michigan Surveys of Consumers,
remained elevated in May.
Residential investment appeared to be declining further in the second quarter after decreasing in the first
quarter. Starts for new single-family homes were
unchanged in April from their first-quarter average,
but starts of multifamily units declined noticeably.
Sales of both new and existing homes decreased in
April.
Real private expenditures for business equipment and
intellectual property appeared to be rising at a moderate pace in the second quarter after a somewhat
faster increase in the first quarter. Nominal shipments of non-defense capital goods excluding aircraft
rose in April, and forward-looking indicators of
business equipment spending—such as the backlog
of unfilled capital goods orders, along with upbeat
readings on business sentiment from national and
regional surveys—continued to point to robust gains
in equipment spending in the near term. Real business expenditures for nonresidential structures
appeared to be expanding at a solid pace again in the
second quarter, and the number of crude oil and
natural gas rigs in operation—an indicator of business spending for structures in the drilling and mining sector—increased, on net, from mid-April
through early June.
Nominal federal government spending data for April
and May pointed to an increase in real federal purchases in the second quarter. Real state and local government purchases also appeared to be moving up;
although nominal construction expenditures by these
governments edged down in April, their payrolls rose
at a moderate pace, on net, in April and May.
Net exports made a negligible contribution to real
GDP growth in the first quarter, with growth of both
real exports and real imports slowing from the brisk
pace of the fourth quarter of last year. After narrowing in March, the nominal trade deficit narrowed further in April, as exports continued to increase while
imports declined slightly, which suggested that net
exports might add modestly to real GDP growth in
the second quarter.
Total U.S. consumer prices, as measured by the PCE
price index, increased 2.0 percent over the 12 months

183

ending in April. Core PCE price inflation, which
excludes changes in consumer food and energy prices,
was 1.8 percent over that same period. The consumer
price index (CPI) rose 2.8 percent over the 12 months
ending in May, while core CPI inflation was 2.2 percent. Recent readings on survey-based measures of
longer-run inflation expectations—including those
from the Michigan survey, the Survey of Professional
Forecasters, and the Desk’s Survey of Primary Dealers and Survey of Market Participants—were little
changed on balance.
Incoming data suggested that foreign economic activity continued to expand at a solid pace. Real GDP
growth picked up in the first quarter in several
EMEs—including Mexico, China, and much of
emerging Asia—although recent indicators pointed
to some moderation in the pace of activity in most
EMEs. By contrast, in the advanced foreign economies (AFEs), real GDP growth slowed in the first
quarter, owing partly to temporary factors such as
labor strikes in some European countries and bad
weather in Japan. More recent indicators pointed to
a partial rebound in AFE economic growth in the
second quarter. Inflation pressures in the foreign
economies generally remained subdued, even though
higher oil prices put some upward pressure on headline inflation.

Staff Review of the Financial Situation
During the intermeeting period, global financial markets were buffeted by increased concerns about the
outlook for foreign growth and political developments in Italy, but these concerns subsequently eased.
On net, Treasury yields were little changed despite
significant intraperiod moves, and the dollar appreciated notably as a range of AFE and EME currencies
and sovereign bonds came under pressure. However,
broad domestic stock price indexes increased, on net,
as generally strong corporate earnings reports helped
support prices. Meanwhile, financing conditions for
nonfinancial businesses and households remained
supportive of economic activity on balance.
Over the intermeeting period, macroeconomic data
releases signaling moderating growth in some foreign
economies, along with downside risks stemming from
political developments in Italy and several EMEs,
weighed on prices of foreign risk assets. These developments, together with a still-solid economic outlook
for the United States, supported an increase in the
broad trade-weighted index of the foreign exchange
value of the dollar.

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The dollar appreciated notably against several EME
currencies (primarily those of Argentina, Turkey,
Mexico, and Brazil), as the increase in U.S. interest
rates since late 2017, along with political developments and other issues, intensified concerns about
financial vulnerabilities. EME mutual funds saw
slight net outflows, and, on balance, EME sovereign
spreads widened and equity prices edged lower. In
the AFEs, sovereign spreads in some peripheral
European countries widened and European bank
shares came under pressure, as investors focused on
political developments in Italy. Broad equity indexes
in the euro area, with the exception of Italy, ended
the period little changed, while those in Canada, the
United Kingdom, and Japan edged higher. Marketbased measures of expected policy rates were little
changed, on balance, and flight-to-safety flows
reportedly contributed to declines in German longerterm sovereign yields.
FOMC communications over the intermeeting
period—including the May FOMC statement and
the May FOMC meeting minutes—elicited only
minor reactions in asset markets. Quotes on federal
funds futures contracts suggested that the probability
of an increase in the target range for the federal
funds rate occurring at the June FOMC meeting
inched up further to near certainty. Levels of the federal funds rate at the end of 2019 and 2020 implied
by overnight index swap (OIS) rates were little
changed on net.
Longer-term nominal Treasury yields ended the
period largely unchanged despite notable movements
during the intermeeting period. Measures of inflation compensation derived from Treasury InflationProtected Securities were also little changed on net.
Broad U.S. equity price indexes increased about
5 percent, on net, since the May FOMC meeting,
boosted in part by the stronger-than-expected May
Employment Situation report. Stock prices also
appeared to have been buoyed by first-quarter earnings reports that generally beat expectations—particularly for the technology sector, which outperformed the broader market. However, the turbulence
abroad and, to a lesser degree, mounting concerns
about trade policy weighed on equity prices at times.
Option-implied volatility on the S&P 500 at the onemonth horizon—the VIX—was down somewhat, on
net, remaining just a couple of percentage points
above the very low levels that prevailed before early
February. Over the intermeeting period, spreads of
yields on nonfinancial corporate bonds over those of

comparable-maturity Treasury securities widened
moderately for both investment- and speculativegrade firms. However, these spreads remained low by
historical standards.
Over the intermeeting period, short-term funding
markets stayed generally stable despite still-elevated
spreads between rates on some private money market
instruments and OIS rates of similar maturity. While
some of the factors contributing to pressures in
short-term funding markets had eased recently, the
three-month spread between the London interbank
offered rate and the OIS rate remained significantly
wider than at the start of the year.
Growth of outstanding commercial and industrial
loans held by banks appeared to have moderated in
May after a strong reading in April. The issuance of
institutional leveraged loans was strong in April and
May; meanwhile, corporate bond issuance was weak,
likely reflecting seasonal patterns. Gross issuance of
municipal bonds in April and May was solid, as issuance continued to recover from the slow pace
recorded at the start of the year.
Financing conditions for commercial real estate
(CRE) remained accommodative. Even so, the
growth of CRE loans held by banks ticked down in
April and May. Commercial mortgage-backed securities (CMBS) issuance, in general, continued at a
robust pace; although issuance softened somewhat in
April, partly reflecting seasonal factors, it recovered
in May. Spreads on CMBS were little changed over
the intermeeting period, remaining near their postcrisis lows.
Residential mortgage financing conditions remained
accommodative for most borrowers. For borrowers
with low credit scores, conditions stayed tight but
continued to ease. Growth in home-purchase mortgages slowed a bit and refinancing activity continued
to be muted in recent months, with both developments partly reflecting the rise in mortgage rates earlier this year.
Financing conditions in consumer credit markets
were little changed in the first few months of 2018,
on balance, and remained largely supportive of
growth in household spending. Growth in consumer
credit slowed a bit in the first quarter, as seasonally
adjusted credit card balances were about flat after
having surged in the fourth quarter of last year.
Financing conditions for consumers with subprime
credit scores continued to tighten, likely contributing

Minutes of Federal Open Market Committee Meetings | June

to a decline in auto loan extensions to such
borrowers.

Staff Economic Outlook
In the U.S. economic forecast prepared for the June
FOMC meeting, the staff continued to project that
the economy would expand at an above-trend pace.
Real GDP appeared to be rising at a much faster
pace in the second quarter than in the first, and it
was forecast to increase at a solid rate in the second
half of this year. Over the 2018–20 period, output
was projected to rise further above the staff’s estimate of its potential, and the unemployment rate was
projected to decline further below the staff’s estimate
of its longer-run natural rate. Relative to the forecast
prepared for the May meeting, the projection for real
GDP growth beyond the first half of 2018 was
revised down a little in response to a higher assumed
path for the exchange value of the dollar. In addition,
the staff continued to anticipate that supply constraints might restrain output growth somewhat.
With real GDP rising a little less, on balance, over the
forecast period, the projected decline in the unemployment rate over the next few years was a touch
smaller than in the previous forecast.
The staff forecast for total PCE price inflation from
2018 to 2020 was not revised materially. Total consumer price inflation over the first half of 2018
appeared to be a little lower than in the previous projection, mainly because of slightly softer incoming
data on nonmarket prices, but the forecast for the
second half of the year was a little higher, reflecting
an upward revision to projected consumer energy
prices over the next couple of quarters. The staff
continued to project that total PCE inflation would
remain near the Committee’s 2 percent objective over
the medium term and that core PCE price inflation
would run slightly higher than total inflation over
that period because of a projected decline in consumer energy prices in 2019 and 2020.
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 staff saw the risks to the forecasts for
real GDP growth and the unemployment rate as balanced. On the upside, recent fiscal policy changes
could lead to a greater expansion in economic activity over the next few years than the staff projected.
On the downside, those fiscal policy changes could
yield less impetus to the economy than the staff
expected if, for example, the marginal propensities to

185

consume for groups most affected by the tax cuts are
lower than the staff had assumed. Risks to the inflation projection also were seen as balanced. The
upside risk that inflation could increase more than
expected in an economy that was projected to move
further above its potential was counterbalanced by
the downside risk that longer-term inflation expectations may be lower than was assumed in the staff
forecast.

Participants’ Views on Current Conditions
and the Economic Outlook
In conjunction with this FOMC meeting, members
of the Board of Governors and Federal Reserve
Bank presidents submitted their projections of the
most likely outcomes for real GDP growth, the
unemployment rate, and inflation for each year from
2018 through 2020 and over the longer run, based on
their individual assessments of the appropriate path
for the federal funds rate. 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 since the FOMC met in May indicated
that the labor market had continued to strengthen
and that economic activity had been rising at a solid
rate. Job gains had been strong, on average, in recent
months, and the unemployment rate had declined.
Recent data suggested that growth of household
spending had picked up, while business fixed investment had continued to grow strongly. On a 12-month
basis, overall inflation and core inflation, which
excludes changes in food and energy prices, had both
moved close to 2 percent. Indicators of longer-term
inflation expectations were little changed, on balance.
Participants viewed recent readings on spending,
employment, and inflation as suggesting little change,
on balance, in their assessments of the economic outlook. Incoming data suggested that GDP growth
strengthened in the second quarter of this year, as
growth of consumer spending picked up after slowing earlier in the year. Participants noted a number of
favorable economic factors that were supporting
above-trend GDP growth; these included a strong
labor market, stimulative federal tax and spending

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policies, accommodative financial conditions, and
continued high levels of household and business confidence. They also generally expected that further
gradual increases in the target range for the federal
funds rate would be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric
2 percent objective over the medium term. Participants generally viewed the risks to the economic outlook as roughly balanced.
Participants reported that business fixed investment
had continued to expand at a strong pace in recent
months, supported in part by substantial investment
growth in the energy sector. Higher oil prices were
expected to continue to support investment in that
sector, and District contacts in the industry were generally upbeat, though supply constraints for labor
and infrastructure were reportedly limiting expansion
plans. By contrast, District reports regarding the construction sector were mixed, although here, too, some
contacts reported that supply constraints were acting
as a drag on activity. Conditions in both the manufacturing and service sectors in several Districts were
reportedly strong and were seen as contributing to
solid investment gains. However, many District contacts expressed concern about the possible adverse
effects of tariffs and other proposed trade restrictions, both domestically and abroad, on future investment activity; contacts in some Districts indicated
that plans for capital spending had been scaled back
or postponed as a result of uncertainty over trade
policy. Contacts in the steel and aluminum industries
expected higher prices as a result of the tariffs on
these products but had not planned any new investments to increase capacity. Conditions in the agricultural sector reportedly improved somewhat, but contacts were concerned about the effect of potentially
higher tariffs on their exports.
Participants agreed that labor market conditions
strengthened further over the intermeeting period.
Nonfarm payroll employment posted strong gains in
recent months, averaging more than 200,000 per
month this year. The unemployment rate fell to
3.8 percent in May, below the estimate of each participant who submitted a longer-run projection. Participants pointed to other indicators such as a very
high rate of job openings and an elevated quits rate
as additional signs that labor market conditions were
strong. With economic growth anticipated to remain
above trend, participants generally expected the
unemployment rate to remain below, or decline further below, their estimates of its longer-run normal

rate. Several participants, however, suggested that
there may be less tightness in the labor market than
implied by the unemployment rate alone, because
there was further scope for a strong labor market to
continue to draw individuals into the workforce.
Contacts in several Districts reported difficulties
finding qualified workers, and, in some cases, firms
were coping with labor shortages by increasing salaries and benefits in order to attract or retain workers.
Other business contacts facing labor shortages were
responding by increasing training for less-qualified
workers or by investing in automation. On balance,
for the economy overall, recent data on average
hourly earnings indicated that wage increases
remained moderate. A number of participants noted
that, with the unemployment rate expected to remain
below estimates of its longer-run normal rate, they
anticipated wage inflation to pick up further.
Participants noted that the 12-month changes in both
overall and core PCE prices had recently moved close
to 2 percent. The recent large increases in consumer
energy prices had pushed up total PCE price inflation
relative to the core measure, and this divergence was
expected to continue in the near term, resulting in a
temporary increase in overall inflation above the
Committee’s 2 percent longer-run objective. In general, participants viewed recent price developments as
consistent with their expectation that inflation was
on a trajectory to achieve the Committee’s symmetric
2 percent objective on a sustained basis, although a
number of participants noted that it was premature
to conclude that the Committee had achieved that
objective. The generally favorable outlook for inflation was buttressed by reports from business contacts
in several Districts suggesting some firming of inflationary pressures; for example, many business contacts indicated that they were experiencing rising
input costs, and, in some cases, firms appeared to be
passing these cost increases through to consumer
prices. Although core inflation and the 12-month
trimmed mean PCE inflation rate calculated by the
Federal Reserve Bank of Dallas remained a little
below 2 percent, many participants anticipated that
high levels of resource utilization and stable inflation
expectations would keep overall inflation near 2 percent over the medium term. In light of inflation having run below the Committee’s 2 percent objective for
the past several years, a few participants cautioned
that measures of longer-run inflation expectations
derived from financial market data remained somewhat below levels consistent with the Committee’s
2 percent objective. Accordingly, in their view, inves-

Minutes of Federal Open Market Committee Meetings | June

tors appeared to judge the expected path of inflation
as running a bit below 2 percent over the medium
run. Some participants raised the concern that a prolonged period in which the economy operated
beyond potential could give rise to heightened inflationary pressures or to financial imbalances that
could lead eventually to a significant economic
downturn.
Participants commented on a number of risks and
uncertainties associated with their outlook for economic activity, the labor market, and inflation over
the medium term. Most participants noted that
uncertainty and risks associated with trade policy
had intensified and were concerned that such uncertainty and risks eventually could have negative effects
on business sentiment and investment spending. Participants generally continued to see recent fiscal
policy changes as supportive of economic growth
over the next few years, and a few indicated that fiscal policy posed an upside risk. A few participants
raised the concern that fiscal policy is not currently
on a sustainable path. Many participants saw potential downside risks to economic growth and inflation
associated with political and economic developments
in Europe and some EMEs.
Meeting participants also discussed the term structure of interest rates and what a flattening of the
yield curve might signal about economic activity
going forward. Participants pointed to a number of
factors, other than the gradual rise of the federal
funds rate, that could contribute to a reduction in the
spread between long-term and short-term Treasury
yields, including a reduction in investors’ estimates of
the longer-run neutral real interest rate; lower longerterm inflation expectations; or a lower level of term
premiums in recent years relative to historical experience reflecting, in part, central bank asset purchases.
Some participants noted that such factors might temper the reliability of the slope of the yield curve as an
indicator of future economic activity; however, several others expressed doubt about whether such factors were distorting the information content of the
yield curve. A number of participants thought it
would be important to continue to monitor the slope
of the yield curve, given the historical regularity that
an inverted yield curve has indicated an increased
risk of recession in the United States. Participants
also discussed a staff presentation of an indicator of
the likelihood of recession based on the spread
between the current level of the federal funds rate
and the expected federal funds rate several quarters
ahead derived from futures market prices. The staff

187

noted that this measure may be less affected by many
of the factors that have contributed to the flattening
of the yield curve, such as depressed term premiums
at longer horizons. Several participants cautioned
that yield curve movements should be interpreted
within the broader context of financial conditions
and the outlook, and would be only one among
many considerations in forming an assessment of
appropriate policy.
In their consideration of monetary policy at this
meeting, participants generally agreed that the economic expansion was progressing roughly as anticipated, with real economic activity expanding at a
solid rate, labor market conditions continuing to
strengthen, and inflation near the Committee’s objective. Based on their current assessments, almost all
participants expressed the view that it would be
appropriate for the Committee to continue its
gradual approach to policy firming by raising the target range for the federal funds rate 25 basis points at
this meeting. These participants agreed that, even
after such an increase in the target range, the stance
of monetary policy would remain accommodative,
supporting strong labor market conditions and a sustained return to 2 percent inflation. One participant
remarked that, with inflation having run consistently
below 2 percent in recent years and market-based
measures of inflation compensation still low, postponing an increase in the target range for the federal
funds rate would help push inflation expectations up
to levels consistent with the Committee’s objective.
With regard to the medium-term outlook for monetary policy, participants generally judged that, with
the economy already very strong and inflation
expected to run at 2 percent on a sustained basis over
the medium term, it would likely be appropriate to
continue gradually raising the target range for the
federal funds rate to a setting that was at or somewhat above their estimates of its longer-run level by
2019 or 2020. Participants reaffirmed that adjustments to the path for the policy rate would depend
on their assessments of the evolution of the economic outlook and risks to the outlook relative to
the Committee’s statutory objectives.
Participants pointed to various reasons for raising
short-term interest rates gradually, including the
uncertainty surrounding the level of the federal funds
rate in the longer run, the lags with which changes in
monetary policy affect the economy, and the potential constraints on adjustments in the target range for
the federal funds rate in response to adverse shocks

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when short-term interest rates are low. In addition, a
few participants saw survey- or market-based indicators as suggesting that inflation expectations were not
yet firmly anchored at a level consistent with the
Committee’s objective. A few also noted that a temporary period of inflation modestly above 2 percent
could be helpful in anchoring longer-run inflation
expectations at a level consistent with the Committee’s symmetric objective.
Participants offered their views about how much
additional policy firming would likely be required to
sustainably achieve the Committee’s objectives of
maximum employment and 2 percent inflation. Many
noted that, if gradual increases in the target range for
the federal funds rate continued, the federal funds
rate could be at or above their estimates of its neutral
level sometime next year. In that regard, participants
discussed how the Committee’s communications
might evolve over coming meetings if the economy
progressed about as anticipated; in particular, a number of them noted that it might soon be appropriate
to modify the language in the postmeeting statement
indicating that “the stance of monetary policy
remains accommodative.”
Participants supported a plan to implement a technical adjustment to the IOER rate that would place it
at a level 5 basis points below the top of the FOMC’s
target range for the federal funds rate. A few participants suggested that, before too long, the Committee
might want to further discuss how it can implement
monetary policy most effectively and efficiently when
the quantity of reserve balances reaches a level appreciably below that seen recently.

Committee Policy Action
In their discussion of monetary policy for the period
ahead, members judged that information received
since the FOMC met in May indicated that the labor
market had continued to strengthen and that economic activity had been rising at a solid rate. Job
gains had been strong, on average, in recent months,
and the unemployment rate had declined. Recent
data suggested that growth of household spending
had picked up, while business fixed investment had
continued to grow strongly. On a 12-month basis,
both overall inflation and inflation for items other
than food and energy had moved close to 2 percent.
Indicators of longer-term inflation expectations were
little changed, on balance.

Members viewed the recent data as consistent with a
strong economy that was evolving about as they had
expected. They judged that continuing along a path
of gradual policy firming would balance the risk of
moving too quickly, which could leave inflation short
of a sustained return to the Committee’s symmetric
goal, against the risk of moving too slowly, which
could lead to a buildup of inflation pressures or
material financial imbalances. Consequently, members expected that further gradual increases in the
target range for the federal funds rate would be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation
near the Committee’s symmetric 2 percent objective
over the medium term. Members continued to judge
that the risks to the economic outlook remained
roughly balanced.
After assessing current conditions and the outlook
for economic activity, the labor market, and inflation,
members voted to raise the target range for the federal funds rate to 1¾ to 2 percent. They indicated
that the stance of monetary policy remained accommodative, thereby supporting strong 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 upon their assessment of realized
and expected economic conditions relative to the
Committee’s maximum employment objective and
symmetric 2 percent inflation objective. They reiterated that this assessment would take into account a
wide range of information, including measures of
labor market conditions, indicators of inflation pressures and inflation expectations, and readings on
financial and international developments.
With regard to the postmeeting statement, members
favored the removal of the forward-guidance language stating that “the federal funds rate is likely to
remain, for some time, below levels that are expected
to prevail in the longer run.” Members noted that,
although this forward-guidance language had been
useful for communicating the expected path of the
federal funds rate during the early stages of policy
normalization, this language was no longer appropriate in light of the strong state of the economy and
the current expected path for policy. Moreover, the
removal of the forward-guidance language and other
changes to the statement should streamline and

Minutes of Federal Open Market Committee Meetings | June

facilitate the Committee’s communications. Importantly, the changes were a reflection of the progress
toward achieving the Committee’s statutory goals
and did not reflect a shift in the approach to policy
going forward.
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 June 14, 2018, 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
1¾ to 2 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 1.75 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 at auction the amount of principal
payments from the Federal Reserve’s holdings of
Treasury securities maturing during June that
exceeds $18 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 June
that exceeds $12 billion. Effective in July, 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 $24 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 mortgagebacked securities received during each calendar
month that exceeds $16 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

189

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 at a
solid rate. Job gains have been strong, on average, in recent months, and the unemployment
rate has declined. Recent data suggest that
growth of household spending has picked up,
while business fixed investment has continued to
grow strongly. On a 12-month basis, both overall
inflation and inflation for items other than food
and energy have moved close to 2 percent. Indicators 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
further gradual increases in the target range for
the federal funds rate will be consistent with sustained expansion of economic activity, strong
labor market conditions, and inflation near the
Committee’s symmetric 2 percent objective over
the medium term. Risks to the economic outlook appear roughly balanced.
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 1¾ to 2 percent. The stance of monetary
policy remains accommodative, thereby supporting strong 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
maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of
information, including measures of labor market
conditions, indicators of inflation pressures and
inflation expectations, and readings on financial
and international developments.”
Voting for this action: Jerome H. Powell, William C.
Dudley, Thomas I. Barkin, Raphael W. Bostic, Lael

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105th Annual Report | 2018

Brainard, Loretta J. Mester, Randal K. Quarles, and
John C. Williams.
Voting against this action: None.
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 to
1.95 percent, effective June 14, 2018. The Board of
Governors also voted unanimously to approve a
¼ percentage point increase in the primary credit rate
(discount rate) to 2½ percent, effective June 14,
2018.4
4

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, St.
Louis, Minneapolis, Kansas City, Dallas, and San Francisco.
This vote also encompassed approval by the Board of Governors of the establishment of a 2½ percent primary credit rate by
the remaining Federal Reserve Bank, effective on the later of
June 14, 2018, and the date such Reserve Bank informed the
Secretary of the Board of such a request. (Secretary’s note:
Subsequently, the Federal Reserve Bank of New York was
informed by the Secretary of the Board of the Board’s approval
of their establishment of a primary credit rate of 2½ percent,
effective June 14, 2018.) The second vote of the Board also

Election of Committee Vice Chairman
By unanimous vote, the Committee selected John C.
Williams to serve as Vice Chairman, effective on
June 18, 2018, until the selection of a successor at the
Committee’s first regularly scheduled meeting in
2019.
It was agreed that the next meeting of the Committee
would be held on Tuesday–Wednesday, July 31–
August 1, 2018. The meeting adjourned at 10:00 a.m.
on June 13, 2018.

Notation Vote
By notation vote completed on May 22, 2018, the
Committee unanimously approved the minutes of the
Committee meeting held on May 1–2, 2018.
James A. Clouse
Secretary
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 | June

Addendum:
Summary of Economic Projections
In conjunction with the Federal Open Market Committee (FOMC) meeting held on June 12–13, 2018,
meeting participants submitted their projections of
the most likely outcomes for real gross domestic
product (GDP) growth, the unemployment rate, and
inflation for each year from 2018 to 2020 and over
the longer run.1 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.2
“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 statutory mandate to promote
maximum employment and price stability.
All participants who submitted longer-run projections expected that, in 2018, real GDP would expand
at a pace exceeding their individual estimates of the
longer-run growth rate of real GDP. Participants
generally saw real GDP growth moderating somewhat in each of the following two years but remaining above their estimates of the longer-run rate. All
participants who submitted longer-run projections
expected that, throughout the projection period, the
unemployment rate would run below their estimates
of its longer-run level. All participants projected that
inflation, as measured by the four-quarter percentage
change in the price index for personal consumption
expenditures (PCE), would run at or slightly above
the Committee’s 2 percent objective by the end of
2018 and remain roughly flat through 2020. Compared with the Summary of Economic Projections
(SEP) from March, most participants slightly marked
up their projections of real GDP growth in 2018 and
somewhat lowered their projections for the unemployment rate from 2018 through 2020; participants
indicated that these revisions reflected, in large part,
1

Three members of the Board of Governors were in office at the
time of the June 2018 meeting.
One participant did not submit longer-run projections for real
GDP growth, the unemployment rate, or the federal funds rate.

191

strength in incoming data. A large majority of participants made slight upward adjustments to their
projections of inflation in 2018. Table 1 and figure 1
provide summary statistics for the projections.
As shown in figure 2, participants generally continued to expect that the evolution of the economy relative to their objectives of maximum employment and
2 percent inflation would likely warrant further
gradual increases in the federal funds rate. The central tendencies of participants’ projections of the federal funds rate for both 2018 and 2019 were roughly
unchanged, but the medians for both years were
25 basis points higher relative to March. Nearly all
participants who submitted longer-run projections
expected that, during part of the projection period,
evolving economic conditions would make it appropriate for the federal funds rate to move somewhat
above their estimates of its longer-run level.
In general, participants continued to view the uncertainty attached to their economic projections as
broadly similar to the average of the past 20 years. As
in March, most participants judged the risks around
their projections for real GDP growth, the unemployment rate, and inflation to be broadly balanced.

The Outlook for Economic Activity
The median of participants’ projections for the
growth rate of real GDP, conditional on their individual assessments of appropriate monetary policy,
was 2.8 percent for this year and 2.4 percent for next
year. The median was 2.0 percent for 2020, a touch
above the median projection of longer-run growth.
Most participants continued to cite fiscal policy as a
driver of strong economic activity over the next
couple of years. Many participants also mentioned
accommodative monetary policy and financial conditions, strength in the global outlook, continued
momentum in the labor market, or positive readings
on business and consumer sentiment as important
factors shaping the economic outlook. Compared
with the March SEP, the median of participants’ projections for the rate of real GDP growth was 0.1 percentage point higher for this year and unchanged for
the next two years.
Almost all participants expected the unemployment
rate to decline somewhat further over the projection
period. The median of participants’ projections for
the unemployment rate was 3.6 percent for the final
quarter of this year and 3.5 percent for the final
quarters of 2019 and 2020. The median of partici-

192

105th Annual Report | 2018

Central tendency2

Variable
2018

2019

2020

Change in real GDP
March projection
Unemployment rate
March projection
PCE inflation
March projection
Core PCE inflation4
March projection

2.8
2.7
3.6
3.8
2.1
1.9
2.0
1.9

2.4
2.4
3.5
3.6
2.1
2.0
2.1
2.1

2.0
2.0
3.5
3.6
2.1
2.1
2.1
2.1

Memo: Projected
appropriate
policy path
Federal funds rate
March projection

2.4
2.1

3.1
2.9

3.4
3.4

Longer
run

2018

2019

2020

1.8
1.8
4.5
4.5
2.0
2.0

2.7–3.0
2.6–3.0
3.6–3.7
3.6–3.8
2.0–2.1
1.8–2.0
1.9–2.0
1.8–2.0

2.2–2.6
2.2–2.6
3.4–3.5
3.4–3.7
2.0–2.2
2.0–2.2
2.0–2.2
2.0–2.2

1.8–2.0
1.8–2.1
3.4–3.7
3.5–3.8
2.1–2.2
2.1–2.2
2.1–2.2
2.1–2.2

2.9
2.9

2.1–2.4
2.1–2.4

2.9–3.4
2.8–3.4

3.1–3.6
3.1–3.6

Range3
Longer
run

Longer
run

2018

2019

2020

1.8–2.0
1.8–2.0
4.3–4.6
4.3–4.7
2.0
2.0

2.5–3.0
2.5–3.0
3.5–3.8
3.6–4.0
2.0–2.2
1.8–2.1
1.9–2.1
1.8–2.1

2.1–2.7
2.0–2.8
3.3–3.8
3.3–4.2
1.9–2.3
1.9–2.3
2.0–2.3
1.9–2.3

1.5–2.2
1.5–2.3
3.3–4.0
3.3–4.4
2.0–2.3
2.0–2.3
2.0–2.3
2.0–2.3

1.7–2.1
1.7–2.2
4.1–4.7
4.2–4.8
2.0
2.0

2.8–3.0
2.8–3.0

1.9–2.6
1.6–2.6

1.9–3.6
1.6–3.9

1.9–4.1
1.6–4.9

2.3–3.5
2.3–3.5

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 20–21, 2018. 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 20–21, 2018, meeting, and one participant did not submit such projections in conjunction with the June 12–13, 2018, 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 | June

193

Figure 1. Medians, central tendencies, and ranges of economic projections, 2018–20 and over the longer run
Percent

Change in real GDP
Median of projections
Central tendency of projections
Range of projections

Actual

2
1

2013

2014

2015

2016

2017

2018

2019

2020

Longer
run
Percent

Unemployment rate
7
6
5
4
3

2013

2014

2015

2016

2017

2018

2019

2020

Longer
run
Percent

PCE inflation
3

2013

2014

2015

2016

2017

2018

2019

2020

Longer
run
Percent

Core PCE inflation
3

2013

2014

2015

2016

2017

2018

2019

2020

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

194

105th Annual Report | 2018

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

2018

2019

2020

Longer run

Minutes of Federal Open Market Committee Meetings | June

pants’ estimates of the longer-run unemployment
rate was unchanged at 4.5 percent.
Figures 3.A and 3.B show the distributions of participants’ projections for real GDP growth and the
unemployment rate from 2018 to 2020 and over the
longer run. The distribution of individual projections
for real GDP growth this year shifted up noticeably
from that in the March SEP. By contrast, the distributions of projected real GDP growth in 2019 and
2020 and over the longer run were little changed. The
distributions of individual projections for the unemployment rate in 2018 to 2020 shifted down relative
to the distributions in March, while the downward
shift in the distribution of longer-run projections was
very modest.

195

conditions would likely warrant the equivalent of a
total of either three or four increases of 25 basis
points in the target range for the federal funds rate
over 2018. There was a slight reduction in the dispersion of participants’ views, with no participant
regarding the appropriate target at the end of the
year to be below 1.88 percent. For each subsequent
year, the dispersion of participants’ year-end projections was somewhat smaller than that in the
March SEP.
The medians of participants’ projections of the federal funds rate rose gradually to 2.4 percent at the
end of this year, 3.1 percent at the end of 2019, and
3.4 percent at the end of 2020. The median of participants’ longer-run estimates, at 2.9 percent, was
unchanged relative to the March SEP.

The Outlook for Inflation
The medians of participants’ projections for total
and core PCE price inflation in 2018 were 2.1 percent
and 2.0 percent, respectively, and the median for each
measure was 2.1 percent in 2019 and 2020. Compared with the March SEP, the medians of participants’ projections for total PCE price inflation for
this year and next were revised up slightly. Some participants pointed to incoming data on energy prices
as a reason for their upward revisions. The median of
participants’ forecasts for core PCE price inflation
was up a touch for this year and unchanged for subsequent years.
Figures 3.C and 3.D provide information on the distributions of participants’ views about the outlook
for inflation. The distributions of both total and core
PCE price inflation for 2018 shifted to the right relative to the distributions in March. The distributions
of projected inflation in 2019, 2020, and over the longer run were roughly unchanged. Participants generally expected each measure to be at or slightly above
2 percent in 2019 and 2020.

In discussing their projections, many participants
continued to express the view that the appropriate
trajectory of the federal funds rate over the next few
years would likely involve gradual increases. This
view was predicated on several factors, including a
judgment that a gradual path of policy firming likely
would appropriately balance the risks associated
with, among other considerations, the possibilities
that U.S. fiscal policy could have larger or more persistent positive effects on real activity and that shifts
in trade policy or developments abroad could weigh
on the expansion. As always, the appropriate path of
the federal funds rate would depend on evolving economic conditions and their implications for participants’ economic outlooks and assessments of risks.

Uncertainty and Risks
In assessing the path for the federal funds rate that,
in their view, is likely to be 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. As a reference, table 2 provides measures of
forecast uncertainty, based on the forecast errors of
various private and government forecasts over the
past 20 years, for real GDP growth, the unemployment rate, and total PCE price inflation. Those measures are represented graphically in the “fan charts”
shown in the top panels of figures 4.A, 4.B, and 4.C.
The fan charts display the median SEP projections
for the three variables surrounded by symmetric confidence intervals derived from the forecast errors
reported in table 2. If the degree of uncertainty
attending these projections is similar to the typical
magnitude of past forecast errors and the risks

196

105th Annual Report | 2018

Figure 3.A. Distribution of participants’ projections for the change in real GDP, 2018–20 and over the longer run
Number of participants

2018
18
16
14
12
10
8
6
4
2

June projections
March projections

1.4 –
1.5

1.6 –
1.7

1.8 –
1.9

2.0 –
2.1

2.2 –
2.3
Percent range

2.4 –
2.5

2.6 –
2.7

2.8 –
2.9

3.0 –
3.1
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
Percent range

2.4 –
2.5

2.6 –
2.7

2.8 –
2.9

3.0 –
3.1
Number of participants

2020
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
Percent range

2.4 –
2.5

2.6 –
2.7

2.8 –
2.9

3.0 –
3.1
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

2.2 –
2.3
Percent range

Note: Definitions of variables and other explanations are in the notes to table 1.

2.4 –
2.5

2.6 –
2.7

2.8 –
2.9

3.0 –
3.1

Minutes of Federal Open Market Committee Meetings | June

197

Figure 3.B. Distribution of participants’ projections for the unemployment rate, 2018–20 and over the longer run
Number of participants

2018
18
16
14
12
10
8
6
4
2

June projections
March projections

3.0 –
3.1

3.2 –
3.3

3.4 –
3.5

3.6 –
3.7

3.8 –
3.9

4.0 –
4.1
Percent range

4.2 –
4.3

4.4 –
4.5

4.6 –
4.7

4.8 –
4.9

5.0 –
5.1
Number of participants

2019
18
16
14
12
10
8
6
4
2
3.0 –
3.1

3.2 –
3.3

3.4 –
3.5

3.6 –
3.7

3.8 –
3.9

4.0 –
4.1
Percent range

4.2 –
4.3

4.4 –
4.5

4.6 –
4.7

4.8 –
4.9

5.0 –
5.1
Number of participants

2020
18
16
14
12
10
8
6
4
2
3.0 –
3.1

3.2 –
3.3

3.4 –
3.5

3.6 –
3.7

3.8 –
3.9

4.0 –
4.1
Percent range

4.2 –
4.3

4.4 –
4.5

4.6 –
4.7

4.8 –
4.9

5.0 –
5.1
Number of participants

Longer run
18
16
14
12
10
8
6
4
2
3.0 –
3.1

3.2 –
3.3

3.4 –
3.5

3.6 –
3.7

3.8 –
3.9

4.0 –
4.1
Percent range

Note: Definitions of variables and other explanations are in the notes to table 1.

4.2 –
4.3

4.4 –
4.5

4.6 –
4.7

4.8 –
4.9

5.0 –
5.1

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105th Annual Report | 2018

Figure 3.C. Distribution of participants’ projections for PCE inflation, 2018–20 and over the longer run
Number of participants

2018
18
16
14
12
10
8
6
4
2

June projections
March projections

1.7–
1.8

1.9 –
2.0

2.1–
2.2

2.3 –
2.4

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

2.3 –
2.4

Percent range

Number of participants

2020
18
16
14
12
10
8
6
4
2
1.7–
1.8

1.9 –
2.0

2.1–
2.2

2.3 –
2.4

Percent range

Number of participants

Longer run
18
16
14
12
10
8
6
4
2
1.7–
1.8

1.9 –
2.0

2.1–
2.2
Percent range

Note: Definitions of variables and other explanations are in the notes to table 1.

2.3 –
2.4

Minutes of Federal Open Market Committee Meetings | June

199

Figure 3.D. Distribution of participants’ projections for core PCE inflation, 2018–20
Number of participants

2018
June projections
March projections

18
16
14
12
10
8
6
4
2

1.7–
1.8

1.9 –
2.0

2.1–
2.2

2.3 –
2.4

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

2.3 –
2.4

Percent range

Number of participants

2020
18
16
14
12
10
8
6
4
2
1.7–
1.8

1.9 –
2.0

2.1–
2.2
Percent range

Note: Definitions of variables and other explanations are in the notes to table 1.

2.3 –
2.4

200

105th Annual Report | 2018

2018
18
16
14
12
10
8
6
4
2

June projections
March projections

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 – 3.38 –
3.37
3.62
Percent range

3.63 –
3.87

3.88 –
4.12

4.13 –
4.37

4.38 –
4.62

4.63 –
4.87

4.88 –
5.12

Number of participants

2019
18
16
14
12
10
8
6
4
2
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 – 3.38 –
3.37
3.62
Percent range

3.63 –
3.87

3.88 –
4.12

4.13 –
4.37

4.38 –
4.62

4.63 –
4.87

4.88 –
5.12

Number of participants

2020
18
16
14
12
10
8
6
4
2
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 – 3.38 –
3.37
3.62
Percent range

3.63 –
3.87

3.88 –
4.12

4.13 –
4.37

4.38 –
4.62

4.63 –
4.87

4.88 –
5.12

Number of participants

Longer run
18
16
14
12
10
8
6
4
2
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 – 3.38 –
3.37
3.62
Percent range

Note: Definitions of variables and other explanations are in the notes to table 1.

3.63 –
3.87

3.88 –
4.12

4.13 –
4.37

4.38 –
4.62

4.63 –
4.87

4.88 –
5.12

Minutes of Federal Open Market Committee Meetings | June

Table 2. Average historical projection error ranges
Percentage points
Variable
Change in real GDP1
Unemployment rate1
Total consumer prices2
Short-term interest rates3

2018

2019

2020

±1.3
±0.4
±0.7
±0.7

±2.0
±1.2
±1.0
±2.0

±2.1
±1.8
±1.0
±2.2

Note: Error ranges shown are measured as plus or minus the root mean squared
error of projections for 1998 through 2017 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), 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.

around the projections are broadly balanced, then
future outcomes of these variables would have about
a 70 percent probability of being within these confidence intervals. For all three variables, this measure
of uncertainty is substantial and generally increases
as the forecast horizon lengthens.
Participants’ assessments of the level of uncertainty
surrounding their individual economic projections
are shown in the bottom-left panels of figures 4.A,
4.B, and 4.C. Nearly all participants viewed the
degree of uncertainty attached to their economic
projections for real GDP growth, the unemployment
rate, and inflation as broadly similar to the average of
the past 20 years, a view that was essentially
unchanged from March.3
Because the fan charts are constructed to be symmetric around the median projections, they do not reflect
any asymmetries in the balance of risks that participants may see in their economic projections. Participants’ assessments of the balance of risks to their
3

201

economic projections are shown in the bottom-right
panels of figures 4.A, 4.B, and 4.C. Most participants judged the risks to their projections of real
GDP growth, the unemployment rate, total inflation,
and core inflation as broadly balanced—in other
words, as broadly consistent with a symmetric fan
chart. Compared with March, even more participants
saw the risks to their projections as broadly balanced.
Specifically, for GDP growth, only one participant
viewed the risks as tilted to the downside, and the
number of participants who viewed the risks as tilted
to the upside dropped from four to two. For the
unemployment rate, the number of participants who
saw the risks as tilted toward low readings dropped
from four to two. For inflation, all but one participant judged the risks to either total or core PCE
price inflation as broadly balanced.
In discussing the uncertainty and risks surrounding
their projections, several participants continued to
point to fiscal developments as a source of upside
risk, many participants cited developments related to
trade policy as posing downside risks to their growth
forecasts, and a few participants also pointed to
political developments in Europe or the global outlook more generally as downside-risk factors. A few
participants noted that the appreciation of the dollar
posed downside risks to the inflation outlook. A few
participants also noted the risk of inflation moving
higher than anticipated as the unemployment rate
falls.
Participants’ assessments of the appropriate future
path of the federal funds rate were also subject to
considerable uncertainty. Because the Committee
adjusts the federal funds rate in response to actual
and prospective developments over time in real GDP
growth, the unemployment rate, and inflation, uncertainty surrounding the projected path for the federal
funds rate importantly reflects the uncertainties
about the paths for those key economic variables.
Figure 5 provides a graphical representation of this
uncertainty, plotting the median SEP projection for
the federal funds rate surrounded by confidence
intervals derived from the results presented in table 2.
As with the macroeconomic variables, forecast uncertainty surrounding the appropriate path of the federal funds rate is substantial and increases for longer
horizons.

202

105th Annual Report | 2018

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

Actual

1
0

2013

2014

2015

2017

2016

2018

2019

2020

FOMC participants’ assessments of uncertainty and risks around their economic projections
Number of participants

Risks to GDP growth

Uncertainty about GDP growth
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

Minutes of Federal Open Market Committee Meetings | June

203

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

Median of projections
70% confidence interval

9
8
7
6

Actual

5
4
3
2
1

2013

2014

2015

2017

2016

2018

2019

2020

FOMC participants’ assessments of uncertainty and risks around their economic projections
Number of participants

Risks to the unemployment rate

Uncertainty about 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

204

105th Annual Report | 2018

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

1
Actual

2013

2014

2015

2016

2017

2018

2019

2020

FOMC participants’ assessments of uncertainty and risks around their economic projections
Number of participants

Risks to PCE inflation

Uncertainty about PCE inflation
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

Number of participants

Uncertainty about core PCE inflation
18
16
14
12
10
8
6
4
2
Broadly
similar

Number of participants

Risks to core PCE inflation

June projections
March projections

Lower

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

Minutes of Federal Open Market Committee Meetings | June

205

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

2013

2014

2015

2016

2017

2018

2019

2020

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105th Annual Report | 2018

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 1.7 to 4.3 percent in the current
year, 1.0 to 5.0 percent in the second year, and 0.9 to
5.1 percent in the third year. The corresponding
70 percent confidence intervals for overall inflation
would be 1.3 to 2.7 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

Minutes of Federal Open Market Committee Meetings | July–August

Meeting Held
on July 31–August 1, 2018
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 31, 2018, at 10:00 a.m. and continued on
Wednesday, August 1, 2018, at 9:00 a.m.1

207

Steven B. Kamin
Economist
Thomas Laubach
Economist
David W. Wilcox
Economist

Present

Kartik B. Athreya, Thomas A. Connors, Mary Daly,
David E. Lebow, Trevor A. Reeve, Ellis W. Tallman,
William Wascher, and Beth Anne Wilson
Associate Economists

Jerome H. Powell
Chairman

Simon Potter
Manager, System Open Market Account

John C. Williams
Vice Chairman

Lorie K. Logan
Deputy Manager, System Open Market Account

Thomas I. Barkin

Ann E. Misback
Secretary, Office of the Secretary, Board of
Governors

Raphael W. Bostic
Lael Brainard
Loretta J. Mester
Randal K. Quarles
James Bullard, Charles L. Evans, Esther L. George,
Eric Rosengren, and Michael Strine
Alternate Members of the Federal Open Market
Committee
Patrick Harker, Robert S. Kaplan, and Neel Kashkari
Presidents of the Federal Reserve Banks of
Philadelphia, Dallas, and Minneapolis, respectively
Mark A. Gould
First Vice President, Federal Reserve Bank of
San Francisco
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

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
Rochelle M. Edge
Deputy Director, Division of Monetary Affairs,
Board of Governors
Jon Faust
Senior Special Adviser to the Chairman, Office of
Board Members, Board of Governors
Antulio N. Bomfim
Special Adviser to the Chairman, Office of Board
Members, Board of Governors
Joseph W. Gruber 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

Michael Held
Deputy General Counsel

Christopher J. Erceg
Senior Associate Director, Division of International
Finance, Board of Governors

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.

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105th Annual Report | 2018

Gretchen C. Weinbach
Senior Associate Director, Division of Monetary
Affairs, Board of Governors

James M. Trevino4
Technology Analyst, Division of Monetary Affairs,
Board of Governors

Ellen E. Meade, Edward Nelson, and Robert J. Tetlow
Senior Advisers, Division of Monetary Affairs, Board
of Governors

Michael Dotsey, Beverly Hirtle,
and Christopher J. Waller
Executive Vice Presidents, Federal Reserve Banks of
Philadelphia, New York, and St. Louis, respectively

Jeremy B. Rudd
Senior Adviser, Division of Research and Statistics,
Board of Governors
John J. Stevens
Associate Director, Division of Research and
Statistics, Board of Governors

Anna Paulson
Senior Vice President, Federal Reserve Bank of
Chicago
Joe Peek
Vice President, Federal Reserve Bank of Boston

Luca Guerrieri
Deputy Associate Director, Division of Financial
Stability, Board of Governors

Karel Mertens
Senior Economic Policy Advisor, Federal Reserve
Bank of Dallas

Glenn Follette and Shane M. Sherlund
Assistant Directors, Division of Research and
Statistics, Board of Governors

A. Lee Smith
Senior Economist, Federal Reserve Bank of
Kansas City

Christopher J. Gust
Assistant Director, Division of Monetary Affairs,
Board of Governors

Brent Meyer
Policy Advisor and Economist, Federal Reserve Bank
of Atlanta

Penelope A. Beattie3
Assistant to the Secretary, Office of the Secretary,
Board of Governors

Cristina Arellano
Monetary Advisor, Federal Reserve Bank of
Minneapolis

Etienne Gagnon4
Section Chief, Division of Monetary Affairs,
Board of Governors

Monetary Policy Options at the Effective
Lower Bound

Matthias Paustian4
Section Chief, Division of Research and Statistics,
Board of Governors
David H. Small
Project Manager, Division of Monetary Affairs,
Board of Governors
Hess T. Chung4
Group Manager, Division of Research and Statistics,
Board of Governors
Andrea Ajello, Edward Herbst, and Bernd Schlusche4
Principal Economists, Division of Monetary Affairs,
Board of Governors
Randall A. Williams
Senior Information Manager, Division of Monetary
Affairs, Board of Governors
3
4

Attended Tuesday session only.
Attended through the discussion of monetary policy options at
the effective lower bound.

The staff provided a briefing that summarized its
analysis of the extent to which some of the Committee’s monetary policy tools could provide adequate
policy accommodation if, in future economic downturns, the policy rate were again to become constrained by the effective lower bound (ELB).5 The
staff examined simulations from the staff’s FRB/US
model and various other economic models to assess
the likelihood of the policy rate returning to the ELB
and to evaluate how much additional policy accommodation could be delivered by the current toolkit.
This toolkit included threshold-based forwardguidance policies, in which the Committee communicates that the federal funds rate will remain at the
ELB until either inflation or the unemployment rate
reaches a certain threshold, and balance sheet policies, involving increases in the size or duration of the
Federal Reserve’s asset holdings.
5

In the analysis, the staff assumed that the ELB was 12.5 basis
points, equal to the midpoint of the target range for the federal
funds rate from December 2008 to December 2015.

Minutes of Federal Open Market Committee Meetings | July–August

The staff’s analysis indicated that under various
policy rules, including those prescribing aggressive
reductions in the federal funds rate in response to
adverse economic shocks, there was a meaningful
risk that the ELB could bind sometime during the
next decade. That analysis also implied that
threshold-based forward guidance and balance sheet
actions could provide additional accommodation
that could help support economic activity and mitigate disinflationary pressures in these episodes. In the
model simulations, because of unanticipated shocks
and lags in the transmission of the effects of monetary policy actions on economic activity and inflation, the effectiveness of monetary policy in general,
including forward-guidance and balance sheet policies, was limited in mitigating the initial downturn in
the economy. The staff noted that there was considerable uncertainty surrounding the estimated effects of
those policies on the economy; in addition, estimates
of how frequently the ELB could bind in the future
differed across the models that the staff examined.
In the discussion that followed the staff’s briefing,
participants generally agreed that their current toolkit could provide significant accommodation but
expressed concern about the potential limits on
policy effectiveness stemming from the ELB. They
viewed it as a matter of prudent planning to evaluate
potential policy options in advance of such ELB
events. Many participants commented on the monetary policy implications of the apparent secular
decline in neutral real interest rates. That decline was
viewed as likely driven by various factors, including
slower trend growth of the labor force and productivity as well as increased demand for safe assets. In
such circumstances, those participants saw monetary
policy as having less scope than in the past to reduce
the federal funds rate in response to negative shocks.
Accordingly, in their view, spells at the ELB could
become more frequent and protracted than in the
past, consistent with the staff’s analysis. Moreover,
the secular decline in interest rates was a global phenomenon, and a couple of participants emphasized
that this decline increased the likelihood that the
ELB could bind simultaneously in a number of
countries. A few other participants raised the concern
that frequent or extended ELB episodes could result
in expectations for inflation that were below the
Committee’s symmetric 2 percent objective, further
limiting the scope for reductions in the federal funds
rate to serve as a buffer for the economy and increasing the likelihood of ELB episodes. Fiscal policy was
viewed as a potentially important tool in addressing a

209

future economic downturn in which monetary policy
was constrained by the ELB; however, countercyclical fiscal policy actions in the United States may be
constrained by the high and rising level of federal
government debt. A couple of participants saw macroprudential and regulatory policies as tools that
could be used to mitigate the risk of financial imbalances inducing an economic downturn in which the
ELB constrained the federal funds rate.
Participants generally agreed that both forward guidance and balance sheet actions would be effective
tools to use if the federal funds rate were to become
constrained by the ELB. In the Addendum to the
Policy Normalization Principles and Plans statement
issued in June 2017, the Committee indicated that it
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. However, participants acknowledged that
there may be limits to the effectiveness of these tools
in addressing an ELB episode. They also emphasized
that there was considerable uncertainty about the
economic effects of these tools. Consistent with that
view, a few participants noted that economic
researchers had not yet reached a consensus about
the effectiveness of unconventional policies. A number of participants indicated that there might be significant costs associated with the use of unconventional policies, and that these costs might limit, in
particular, the extent to which the Committee should
engage in large-scale asset purchases.
Participants discussed the prominent role that previous communications about forward guidance and
balance sheet actions, in conjunction with those
policy measures, had in shaping public expectations
about the potential future use of these tools and in
determining their effectiveness. In general, advance
communications about these policies were seen as
important in reinforcing public understanding of the
Committee’s commitment to achieving its dualmandate objectives. However, several participants
cautioned against being too specific about how the
Committee would deploy such tools. In particular, it
was difficult to anticipate the forces that might push
the economy into a recession, and thus preserving
some flexibility in responding to an economic downturn could be appropriate. Moreover, although making multiyear commitments regarding asset purchases or the future path of the federal funds rate

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105th Annual Report | 2018

could enhance the effectiveness of these policies, such
commitments could unduly constrain the choices of
the Committee in the future.
While the Committee’s current toolkit was judged to
be effective, participants agreed, as a matter of prudent planning, to discuss their policy options further
and to broaden the discussion to include the evaluation of potential alternative policy strategies for
addressing the ELB. Building on their discussions at
previous meetings, participants suggested that a number of possible alternatives might be worth consideration and agreed to return to this topic at future
meetings. Several participants indicated that it would
be desirable to hold periodic and systematic reviews
in which the Committee assessed the strengths and
weaknesses of its current monetary policy framework.

Developments in Financial Markets and
Open Market Operations
The manager of the System Open Market Account
(SOMA) provided a summary of developments in
domestic and global financial markets over the intermeeting period. Asset prices were influenced by a
number of factors, including reports concerning
trade tensions among the United States and its major
trading partners, foreign monetary policy developments, and data pointing to strong growth momentum in the United States. Escalating trade tensions
between China and the United States prompted
notable market moves, particularly in foreign
exchange markets. News on an agreement between
the United States and the European Union to continue talks to resolve their trade disputes provided
some support for global equity prices. The manager
summarized recent policy announcements by the
European Central Bank (ECB) and the Bank of
Japan (BOJ). European yields moved lower following
a revision of the ECB’s forward guidance at its June
meeting concerning asset purchases and the path of
short-term rates. The Japanese yield curve steepened
following reports that the BOJ may facilitate an
increase in longer-term interest rates. At its July
meeting, the BOJ announced a number of changes
with respect to forward guidance on its policy outlook, including its intention to keep interest rates low
for an extended period. Meanwhile, expectations concerning the path of monetary policy in the United
States were little changed over the intermeeting
period. Futures quotes indicated that market participants placed high odds on a further quarter-point
firming in the federal funds rate at the September
FOMC meeting. Responses to the Open Market

Desk’s Survey of Primary Dealers and Survey of
Market Participants indicated that concerns about
trade tensions had not affected the outlook for U.S.
monetary policy.
The deputy manager followed with a discussion of
money markets and open market operations. Money
market rates had moved up in line with the 20 basis
point increase in the interest on excess reserves
(IOER) rate at the June meeting. Over the days following the June FOMC meeting, the effective federal
funds rate (EFFR) moved up relative to the IOER
rate, reportedly reflecting some special factors in the
federal funds market, including increased demand for
overnight funding by banks in connection with
liquidity regulations and a pullback by Federal Home
Loan Banks in their lending in the federal funds market. These developments proved temporary, and the
EFFR subsequently returned to a level about 4 basis
points below the IOER rate. The deputy manager
also discussed the Desk’s plans for small-value purchases of agency mortgage-backed securities (MBS).
The staff projected that principal payments from the
Federal Reserve’s holdings of agency MBS would fall
below the FOMC’s monthly redemption cap beginning in October. If principal payments followed this
anticipated trajectory, the Desk planned to begin
conducting monthly small-value purchases of agency
MBS at that time to maintain operational readiness.
The deputy manager also discussed the Federal
Housing Finance Agency’s Single Security Initiative,
under which Uniform Mortgage-Backed Securities
(UMBS) would be issued by both Fannie Mae and
Freddie Mac beginning in June 2019. The Desk
planned to develop the capability to conduct UMBS
transactions and, to more efficiently manage the
portfolio, convert some portion of the SOMA’s existing agency MBS holdings to UMBS where appropriate.
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 July 31–August 1
meeting indicated that labor market conditions continued to strengthen in recent months and that real
gross domestic product (GDP) rose at a strong rate in
the first half of the year. Consumer price inflation, as
measured by the 12-month percentage change in the
price index for personal consumption expenditures

Minutes of Federal Open Market Committee Meetings | July–August

(PCE), remained near 2 percent in June. Surveybased measures of longer-run inflation expectations
were little changed on balance.
Total nonfarm payroll employment expanded at a
strong pace again in June. The national unemployment rate moved up to 4.0 percent, but the labor
force participation rate rose by a similar amount,
leaving the employment-to-population ratio
unchanged from May. The three-month moving averages of the unemployment rates for African Americans, Asians, and Hispanics were each at or below the
lows achieved during the previous expansion. The
share of workers employed part time for economic
reasons edged down to its lowest level since late 2007.
The rate of private-sector job openings ticked down
in May but remained elevated, while the rate of quits
moved higher; initial claims for unemployment insurance benefits continued to be low through mid-July.
Recent readings showed that increases in hourly
labor compensation stepped up modestly over the
past year. The employment cost index for private
workers increased 2.9 percent over the 12 months
ending in June (compared with 2.4 percent over the
same 12 months a year earlier), and average hourly
earnings for all employees rose 2.7 percent over that
period (compared with 2.5 percent over the same
12 months a year earlier). (Data on compensation
per hour that reflected the comprehensive revision of
the national income and product accounts by the
Bureau of Economic Analysis (BEA) were not available at the time of the meeting.)
Total industrial production was little changed, on
net, from April to June despite solid increases in the
output of the mining sector. Over the first half of the
year, manufacturing production rose at a modest
pace. Automakers’ assembly schedules suggested a
sizable increase in light motor vehicle production in
the third quarter, and broader indicators of manufacturing production, such as the new orders indexes
from national and regional manufacturing surveys,
pointed to solid gains in factory output in the near
term.
Real PCE rose briskly in the second quarter after a
modest gain in the first quarter. Light motor vehicle
sales maintained a robust pace in June, and indicators of vehicle demand were mixed but generally
favorable. More broadly, recent readings on key factors that influence consumer spending—including
gains in employment, real disposable personal
income, and households’ net worth—continued to be

211

supportive of solid real PCE growth in the near term.
Consumer sentiment, as measured by the University
of Michigan Surveys of Consumers, remained
upbeat in June and July.
Residential investment declined again in the second
quarter. Starts for new single-family homes were little
changed, on average, in May and June, but starts of
multifamily units declined on net. The issuance of
building permits for both types of housing was lower
in the second quarter than in the first quarter, which
suggested that starts might move lower in coming
months. Sales of existing homes edged down in May
and June, while sales of new homes moved up on
balance.
Real private expenditures for business equipment and
intellectual property rose at a moderate pace in the
second quarter after a strong gain in the first quarter.
Nominal shipments of nondefense capital goods
excluding aircraft rose in May and June, and
forward-looking indicators of business equipment
spending—such as the backlog of unfilled capital
goods orders, along with upbeat readings on business
sentiment from national and regional surveys—continued to point to robust gains in equipment spending in the near term. Real business expenditures for
nonresidential structures expanded at a solid pace
again in the second quarter. However, the number of
crude oil and natural gas rigs in operation—an indicator of business spending for structures in the drilling and mining sector—decreased slightly in recent
weeks.
Total real government purchases rose at a faster rate
in the second quarter than in the first. Real federal
defense and nondefense purchases both increased in
the second quarter. Real purchases by state and local
governments also moved higher; state and local government payrolls and construction spending by those
governments increased in the second quarter.
The nominal U.S. international trade deficit narrowed in May, as exports, led by agricultural products (particularly soybeans) and capital goods,
increased strongly and imports increased only modestly. In June, however, advance data suggested that
nominal goods exports fell and imports rose. All told,
the BEA estimates that net exports made a positive
contribution of about 1 percentage point to real
GDP growth in the second quarter after a near-zero
contribution in the first.
Total U.S. consumer prices, as measured by the PCE
price index, increased 2.2 percent over the 12 months

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105th Annual Report | 2018

ending in June. Core PCE price inflation, which
excludes changes in consumer food and energy prices,
was 1.9 percent over that same period. The consumer
price index (CPI) rose 2.9 percent over the 12 months
ending in June, while core CPI inflation was 2.3 percent. Recent readings on survey-based measures of
longer-run inflation expectations—including those
from the Michigan survey and the Desk’s Survey of
Primary Dealers and Survey of Market Participants—were little changed on balance.
Incoming data suggested that foreign economic activity expanded at a moderate pace in the second quarter. Monthly indicators pointed to a pickup in the
pace of economic activity in most advanced foreign
economies (AFEs) following a temporary dip in the
first quarter. However, real GDP growth remained
moderate in the euro area and appeared to have
slowed notably in many emerging market economies
(EMEs), especially Mexico, from an unusually strong
start to the year. Foreign inflation fell in the second
quarter, largely reflecting lower retail energy and
food price inflation. Underlying inflation pressures in
most foreign economies, especially in some AFEs,
remained subdued.

Staff Review of the Financial Situation
Concerns regarding international trade policy
weighed on market sentiment at times over the intermeeting period, prompting notable declines in some
foreign equity markets but leaving only a modest
imprint on domestic asset prices on net. Meanwhile,
FOMC communications were viewed by market participants as slightly less accommodative than
expected, and domestic economic data releases were
seen as mixed. On balance, market-based measures of
the expected path of the federal funds rate through
the end of 2019 edged up slightly. Yields on mediumand longer-term nominal Treasury securities were
little changed. The broad dollar index moved up.
Financing conditions for nonfinancial businesses and
households remained supportive of economic activity
on balance.
Although the reactions of asset prices to FOMC
communications during the period were generally
modest, market participants reportedly interpreted
the June FOMC statement and Summary of Economic Projections (SEP) as somewhat less accommodative than expected. The probability of an increase
in the target range for the federal funds rate occurring at the August FOMC meeting, as implied by
quotes on federal funds futures contracts, remained

close to zero; the probability of an increase at the
September FOMC meeting rose to about 90 percent
by the end of the intermeeting period. Levels of the
federal funds rate at the end of 2019 and 2020
implied by overnight index swap (OIS) rates edged up
slightly on net.
The nominal Treasury yield curve flattened somewhat
during the intermeeting period. Measures of inflation compensation derived from Treasury InflationProtected Securities were little changed on net.
Concerns about international trade disputes led to a
slight decline in sentiment toward some domestic
risky assets early in the period, but sentiment was
buoyed later by positive corporate earnings releases
for the second quarter. Broad U.S. equity price
indexes displayed mixed results since the June FOMC
meeting. Option-implied volatility on the S&P 500
index at the one-month horizon—the VIX—was little
changed, on net, and remained only a bit above the
very low levels that prevailed before early February.
Over the intermeeting period, spreads of yields on
nonfinancial corporate bonds over those of
comparable-maturity Treasury securities were little
changed, on net, for both investment- and
speculative-grade firms. These spreads remained low
by historical standards.
Short-term funding markets functioned smoothly,
and spreads of unsecured rates over comparablematurity OIS rates continued to narrow during the
intermeeting period. After the June FOMC meeting,
the EFFR rose around 20 basis points, in line with
the increase in the IOER rate, and traded well within
the target range throughout the period.
The dollar appreciated against most currencies, with
the notable exception of the Mexican peso, which
appreciated on some easing of investor concerns
around prospective economic policies of the newly
elected government. Escalating trade tensions contributed to an unusually sharp depreciation of the
Chinese renminbi. Trade tensions also drove foreign
equity prices lower, but there was a modest reversal
late in the intermeeting period following an agreement between the United States and the European
Union to hold off on tariff increases pending further
negotiations. On net, equity prices were little changed
in the AFEs, while they declined in the EMEs, led
largely by a steep drop in China. Outflows from dedicated emerging market funds slowed, and EME sovereign bond spreads narrowed slightly.

Minutes of Federal Open Market Committee Meetings | July–August

On balance, longer-term bond yields in the AFEs
declined slightly over the intermeeting period. ECB
communications following its June meeting were perceived as more accommodative than expected and led
to a noticeable decline in market-based measures of
policy rate expectations. The BOJ issued revised forward guidance at its July meeting indicating that it
intends to maintain current low short- and long-term
interest rates for an extended period. Finally, the
Bank of England held its policy rate steady at its
June meeting, but U.K. yields declined slightly amid
ongoing Brexit-related concerns as well as lowerthan-expected inflation data.
Financing conditions for nonfinancial corporations
continued to be favorable over the intermeeting
period. Gross issuance of corporate bonds and institutional leveraged loans picked up in May and stayed
strong in June, with the rise in corporate bond issuance concentrated in the investment-grade segment
of the market. Meanwhile, the volume of equity issuance remained robust.
Growth of outstanding commercial and industrial
(C&I) loans held by banks was strong, on average, in
June. Respondents to the June Senior Loan Officer
Opinion Survey on Bank Lending Practices (SLOOS)
reported that their institutions had eased standards
and terms on C&I loans in the second quarter, most
often citing increased competition from other lenders
and increased ease of transacting in the secondary
market as the reasons for doing so. Although some
signs of deterioration emerged over the intermeeting
period, the credit quality of nonfinancial corporations continued to be solid overall. The ratio of
aggregate debt to assets in this sector stayed near
multidecade highs. Gross issuance of municipal
bonds in June was robust, continuing to increase
from its slow start to the year.
Financing conditions for commercial real estate
(CRE) remained accommodative. CRE loans at
banks maintained solid growth over the past several
quarters, with growth shared across all three major
CRE loan categories. On a weighted basis across all
major CRE loan categories, respondents to the June
SLOOS reported that standards and demand for
CRE loans continued to be unchanged, on the whole,
over the second quarter. Interest rate spreads on
commercial mortgage-backed securities (CMBS)
were little changed over the intermeeting period and
remained near their post-crisis lows, while issuance of
non-agency and agency CMBS maintained a solid
pace in the second quarter.

213

Most borrowers in the residential mortgage market
continued to face accommodative financing conditions. For borrowers with low credit scores, credit
conditions continued to ease but stayed tight overall.
Growth in home-purchase mortgages slowed a bit,
and refinancing activity continued to be muted over
the past year, with both developments partly reflecting the rise in mortgage rates earlier this year. Relative to the June FOMC meeting, interest rates on
30-year conforming mortgages and yields on agency
MBS were little changed.
Financing conditions in consumer credit markets
were little changed so far this year, on balance, and
remained largely supportive of growth in household
spending. Growth in consumer credit picked up in
May from the more moderate pace seen earlier this
year. Despite rising interest rates, financing rates
remained low compared with historical levels, and
recent household surveys indicated that consumers’
assessments of buying conditions for autos and other
expensive durable goods were generally positive.
Credit supply conditions also continued to be largely
supportive of spending. A moderate net fraction of
July SLOOS respondents reported easing standards
on auto loans over the previous three months after
several quarters in which banks had reported tightening standards. However, a significant net fraction of
banks reportedly continued to tighten standards for
credit card accounts.
The staff provided its latest report on potential risks
to financial stability; the report again characterized
the financial vulnerabilities of the U.S. financial
system as moderate on balance. This overall assessment incorporated the staff’s judgment that vulnerabilities associated with asset valuation pressures
continued to be elevated, with no major asset class
exhibiting valuations below their historical midpoints. Additionally, the staff judged vulnerabilities
from financial-sector leverage and maturity and
liquidity transformation to be low, vulnerabilities
from household leverage as being in the low-tomoderate range, and vulnerabilities from leverage in
the nonfinancial business sector as elevated.

Staff Economic Outlook
In the U.S. economic forecast prepared for this
FOMC meeting, the staff continued to project that
the economy would expand at an above-trend pace.
Real GDP was forecast to increase in the second half
of this year at a pace that was just a little slower than
in the first half of the year. Over the 2018–20 period,

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output was projected to rise further above the staff’s
estimate of potential output, and the unemployment
rate was projected to decline further below the staff’s
estimate of the longer-run natural rate. However,
with labor market conditions already tight, the staff
continued to assume that the projected decline in the
unemployment rate will be attenuated by a greaterthan-usual cyclical improvement in the labor force
participation rate. Relative to the forecast prepared
for the June meeting, the projection for real GDP
growth was revised up a little, primarily in response
to stronger incoming data on household spending. In
addition, the staff continued to anticipate that supply
constraints might restrain output growth somewhat
in the medium term. The unemployment rate was
projected to be a little higher over the next few quarters than in the previous forecast, but it was essentially unrevised thereafter.
The staff forecast for total PCE price inflation in
2018 was revised down a little, mainly because of a
slower-than-expected increase in consumer energy
prices in the second quarter and a downward revision
to the forecast for energy price inflation in the second
half of this year. The staff continued to project that
total PCE inflation would remain near the Committee’s 2 percent objective over the medium term and
that core PCE price inflation would run slightly
higher than total inflation over that period because of
a projected decline in consumer energy prices in 2019
and 2020.
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 staff saw the risks to the forecasts for
real GDP growth and the unemployment rate as balanced. On the upside, household spending and business investment could expand faster over the next few
years than the staff projected, supported in part by
the tax cuts enacted last year. On the downside, trade
policies could move in a direction that would have
significant negative effects on economic growth.
Another possibility was that recent fiscal policy
actions could produce less of a boost to aggregate
demand than assumed in the baseline projection, as
the current tightness of resource utilization may
result in smaller multiplier effects than would be typical at other points in the business cycle. Risks to the
inflation projection also were seen as balanced. The
upside risk that inflation could increase more than
expected in an economy that was projected to move
further above its potential was counterbalanced by
the downside risk that longer-term inflation expecta-

tions may be lower than was assumed in the staff
forecast.

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 June indicated
that the labor market had continued to strengthen
and that economic activity had been rising at a
strong rate. Job gains had been strong, on average, in
recent months, and the unemployment rate had
stayed low. Household spending and business fixed
investment had grown strongly. On a 12-month basis,
both overall inflation and core inflation, which
excludes changes in food and energy prices, had
remained near 2 percent. Indicators of longer-term
inflation expectations were little changed, on balance.
Participants generally noted that economic growth in
the second quarter had been strong; incoming data
indicated considerable momentum in spending by
households and businesses. Several participants
stressed the possibility that real GDP growth in the
second quarter may have been boosted by transitory
factors, including an outsized increase in U.S.
exports. For the second half of the year, participants
generally expected that GDP growth would likely
slow from its second-quarter rate but would still
exceed that of potential output. Participants noted a
number of favorable economic factors that were supporting above-trend GDP growth; these included a
strong labor market, stimulative federal tax and
spending policies, accommodative financial conditions, and continued high levels of household and
business confidence. Participants generally viewed the
risks to the economic outlook as roughly balanced.
Reports from business contacts confirmed a robust
pace of expansion in several sectors of the economy,
including energy, manufacturing, and services. Crude
oil production was reported as having grown rapidly.
In contrast to other sectors, residential construction
activity appeared to have softened somewhat, possibly reflecting declining home affordability, higher
mortgage rates, scarcity of available lots in certain
cities, and delays in building approvals. However, a
couple of participants reported vibrancy in industrial
and multifamily construction activity. Business contacts in various sectors had cited labor shortages and
other supply constraints as impediments to production. Furthermore, recent tariff increases had put
upward pressure on input prices. Business contacts in

Minutes of Federal Open Market Committee Meetings | July–August

a few Districts reported that uncertainty regarding
trade policy had led to some reductions or delays in
their investment spending. Nonetheless, a number of
participants indicated that most businesses concerned
about trade disputes had not yet cut back their capital expenditures or hiring but might do so if trade
tensions were not resolved soon. Several participants
observed that the agricultural sector had been
adversely affected by significant declines in crop and
livestock prices over the intermeeting period. A
couple of participants noted that this development
likely partly flowed from trade tensions.
Participants agreed that labor market conditions had
strengthened further over the intermeeting period.
Payrolls had grown strongly in June, and labor market tightness was reflected in recent readings on rates
of private-sector job openings and quits and on jobto-job switching by workers. Although the unemployment rate increased slightly in June, this increase was
accompanied by an uptick in the labor force participation rate.
Many participants commented on the fact that measures of aggregate nominal wage growth had so far
picked up only modestly. Among the factors cited as
containing the pickup in wage growth were low trend
productivity growth, lags in the response of nominal
wage growth to resource pressures, and improvements in the terms of employment that were not
recorded in the wage data. Alternatively, the recent
pace of nominal wage growth might indicate continued slack in the labor market. However, some participants expected a pickup in aggregate nominal wage
growth to occur before long, with a number of participants reporting that wage pressures in their Districts were rising or that firms now exhibited greater
willingness to grant wage increases.
Participants noted that both overall inflation and
inflation for items other than food and energy
remained near 2 percent on a 12-month basis. A few
participants expressed increased confidence that the
recent return of inflation to near the Committee’s
longer-term 2 percent objective would be sustained.
Several participants commented that increases in the
prices of particular goods, such as those induced by
the tariff increases, would likely be one source of
short-term upward pressure on the inflation rate,
although offsetting influences—including the negative effects that trade developments were having on
agricultural prices—were also noted. Reports from
several Districts suggested that firms had greater
scope than in the recent past to raise prices in

215

response to strong demand or increases in input
costs, including those associated with tariff increases
and recent rises in fuel and freight expenses. Many
participants anticipated that, over the medium term,
high levels of resource utilization and stable inflation
expectations would keep inflation near 2 percent.
However, some participants observed that inflation in
recent years had shown only a weak connection to
measures of resource pressures or indicated that they
would like to see further evidence that measures of
underlying inflation or readings on inflation expectations were on course to attain levels consistent with
sustained achievement of the Committee’s symmetric
2 percent inflation objective. Although a few participants observed that the trimmed mean measure of
inflation calculated by the Federal Reserve Bank of
Dallas was still below 2 percent, a couple noted forecasts that this measure would reach 2 percent by the
end of the year. Some participants raised the concern
that a prolonged period in which the economy operated beyond potential could give rise to inflationary
pressures or to financial imbalances that could eventually trigger an economic downturn.
Participants commented on a number of risks and
uncertainties associated with their outlook for economic activity, the labor market, and inflation over
the medium term. They generally continued to see
fiscal policy and the strengthening of the labor market as supportive of economic growth in the near
term. Some noted larger or more persistent positive
effects of these factors as an upside risk to the outlook. A few participants indicated, however, that a
faster-than-expected fading of the fiscal impetus or a
greater-than-anticipated subsequent fiscal tightening
constituted a downside risk. In addition, all participants pointed to ongoing trade disagreements and
proposed trade measures as an important source of
uncertainty and risks. Participants observed that if a
large-scale and prolonged dispute over trade policies
developed, there would likely be adverse effects on
business sentiment, investment spending, and
employment. Moreover, wide-ranging tariff increases
would also reduce the purchasing power of U.S.
households. Further negative effects in such a scenario could include reductions in productivity and
disruptions of supply chains. Other downside risks
cited included the possibility of a significant weakening in the housing sector, a sharp increase in oil
prices, or a severe slowdown in EMEs.
Participants remarked on the extent to which financial conditions remained supportive of economic
expansion. Over the intermeeting period, only a small

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change in overall financial conditions occurred, with
modest movements on net in equity prices and in the
foreign exchange value of the dollar. The yield curve
had flattened further over the intermeeting period.
Participants who commented on financial stability
noted that asset valuations remained elevated and
corporate borrowing terms remained easy. They also
noted that regulatory changes introduced in the past
decade had helped to reduce the susceptibility of the
financial sector to runs and to strengthen the capital
positions of banks and other financial institutions. In
discussing the capital positions of large banks, a few
participants emphasized that financial stability risks
could be reduced if these institutions further boosted
their capital cushions while their profits are strong
and the economic outlook is favorable; arguments for
and against the activation of the countercyclical capital buffer as a means of further strengthening the
capital positions of large banks were discussed in this
context.
In their consideration of monetary policy, participants discussed the implications of recent economic
and financial developments for the economic outlook
and the associated risks to that outlook. Participants
remarked on recent above-trend growth in real GDP
and on indicators of resource utilization. Some commented that consumer spending had been quite
strong in the second quarter, confirming their
impressions that the first-quarter weakness had been
temporary. Several participants also pointed to the
continued strength in business fixed investment,
although the persistent weakness and the risk of a
further slowdown in residential investment were also
noted. A few participants suggested there could still
be some labor market slack, citing recent increases in
labor force participation rates relative to prevailing
demographically driven downward trends; the participation rate of prime-age men, in particular, was
still below its previous business cycle peak. Other
participants judged that labor market conditions
were tight, pointing to other data, including job quits
and openings rates, and anecdotes from contacts.
Participants generally characterized inflation as running close to the Committee’s objective of 2 percent,
and most of those who expressed a view indicated
that recent readings on inflation had come in close to
their expectations. Consistent with their SEP submissions in June, several participants remarked that
inflation, measured on a 12-month basis, was likely
to move modestly above the Committee’s objective
for a time. Others pointed to some indicators suggest-

ing that long-term inflation expectations could be
below levels consistent with the Committee’s 2 percent inflation objective.
Participants generally judged that the current stance
of monetary policy remained accommodative, supporting strong labor market conditions and inflation
of around 2 percent. Participants agreed that it
would be appropriate for the Committee to leave the
target range for the federal funds rate unchanged at
this meeting.
With regard to the medium term, various participants indicated that information gathered since the
Committee met in June had not significantly altered
their outlook for the U.S. economy. Many participants suggested that if incoming data continued to
support their current economic outlook, it would
likely soon be appropriate to take another step in
removing policy accommodation. Participants generally expected that further gradual increases in the target range for the federal funds rate would be consistent with a sustained expansion of economic activity,
strong labor market conditions, and inflation near
the Committee’s symmetric 2 percent objective over
the medium term. Many participants reiterated that
the actual path for the federal funds rate would ultimately depend on the incoming data and on how
those data affect the economic outlook.
Participants discussed the economic forces and risks
they saw as providing the rationale for gradual
increases in the federal funds rate as well as scenarios
that might cause them to depart from this expected
path. Among other factors, they pointed to uncertainty about the appropriate level of the federal funds
rate over the longer run and to constraints on the
provision of monetary accommodation during ELB
episodes as reasons for proceeding gradually in the
removal of accommodation. Some participants noted
that stronger underlying momentum in the economy
was an upside risk; most expressed the view that an
escalation in international trade disputes was a
potentially consequential downside risk for real activity. Some participants suggested that, in the event of
a major escalation in trade disputes, the complex
nature of trade issues, including the entire range of
their effects on output and inflation, presented a
challenge in determining the appropriate monetary
policy response.
Participants also discussed the possible implications
of a flattening in the term structure of market interest rates. Several participants cited statistical evidence

Minutes of Federal Open Market Committee Meetings | July–August

for the United States that inversions of the yield
curve have often preceded recessions. They suggested
that policymakers should pay close attention to the
slope of the yield curve in assessing the economic
and policy outlook. Other participants emphasized
that inferring economic causality from statistical correlations was not appropriate. A number of global
factors were seen as contributing to downward pressure on term premiums, including central bank asset
purchase programs and the strong worldwide
demand for safe assets. In such an environment, an
inversion of the yield curve might not have the significance that the historical record would suggest; the
signal to be taken from the yield curve needed to be
considered in the context of other economic and
financial indicators.
A couple of participants commented on issues
related to the operating framework for the implementation of monetary policy, including, among other
things, the implications of changes in financial market regulations for the demand for reserves and for
the size and composition of the Federal Reserve’s
balance sheet. These participants judged that it
would be important for the Committee to resume its
discussion of operating frameworks before too long.
The Chairman suggested that the Committee would
likely resume a discussion of operating frameworks
in the fall.
Many participants noted that it would likely be
appropriate in the not-too-distant future to revise the
Committee’s characterization of the stance of monetary policy in its postmeeting statement. They
agreed that the statement’s language that “the stance
of monetary policy remains accommodative” would,
at some point fairly soon, no longer be appropriate.
Participants noted that the federal funds rate was
moving closer to the range of estimates of its neutral
level. A number of participants emphasized the considerable uncertainty in estimates of the neutral rate
of interest, stemming from sources such as fiscal
policy and large-scale asset purchase programs.
Against this background, continuing to provide an
explicit assessment of the federal funds rate relative
to its neutral level could convey a false sense of
precision.

Committee Policy Action
In their discussion of monetary policy for the period
ahead, members judged that information received
since the FOMC met in June indicated that the labor
market had continued to strengthen and that eco-

217

nomic activity had been rising at a strong rate. Job
gains had been strong, on average, in recent months,
and the unemployment rate had stayed low. Household spending and business fixed investment had
grown strongly. On a 12-month basis, both overall
inflation and inflation for items other than food and
energy remained near 2 percent. Indicators of
longer-term inflation expectations were little
changed, on balance.
Policymakers viewed the recent data as indicating
that the outlook for the economy was evolving about
as they had expected. Consequently, members
expected that further gradual increases in the target
range for the federal funds rate would be consistent
with sustained expansion of economic activity,
strong labor market conditions, and inflation near
the Committee’s symmetric 2 percent objective over
the medium term. Members continued to judge that
the risks to the economic outlook appeared roughly
balanced.
After assessing the incoming data, 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
1¾ to 2 percent. They noted that the stance of monetary policy remained accommodative, thereby supporting strong 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
objectives of maximum employment and 2 percent
inflation. They reiterated that this assessment would
take into account a wide range of information,
including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international
developments.
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 August 2, 2018, 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

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105th Annual Report | 2018

of 1¾ to 2 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 1.75 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.

Committee’s symmetric 2 percent objective over
the medium term. Risks to the economic outlook appear roughly balanced.
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 1¾ to 2 percent. The stance of monetary
policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.

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 $24 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 $16 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 June indicates that
the labor market has continued to strengthen
and that economic activity has been rising at a
strong rate. Job gains have been strong, on average, in recent months, and the unemployment
rate has stayed low. Household spending and
business fixed investment have grown strongly.
On a 12-month basis, both overall inflation and
inflation for items other than food and energy
remain near 2 percent. Indicators 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
further gradual increases in the target range for
the federal funds rate will be consistent with sustained expansion of economic activity, strong
labor market conditions, and inflation near the

In determining the timing and size of future
adjustments to the target range for the federal
funds rate, the Committee will assess realized
and expected economic conditions relative to its
maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of
information, including measures of labor market
conditions, indicators of inflation pressures and
inflation expectations, and readings on financial
and international developments.”
Voting for this action: Jerome H. Powell, John C.
Williams, Thomas I. Barkin, Raphael W. Bostic, Lael
Brainard, Esther L. George, Loretta J. Mester, and
Randal K. Quarles.
Voting against this action: None.
Ms. George voted as alternate member at this
meeting.
Consistent with the Committee’s decision to leave the
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 1.95 percent and voted unanimously to
approve establishment of the primary credit rate (discount rate) at the existing level of 2½ percent, effective August 2, 2018.6
It was agreed that the next meeting of the Committee
would be held on Tuesday–Wednesday, September 25–26, 2018. The meeting adjourned at 9:45 a.m.
on August 1, 2018.

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 | July–August

Notation Vote
By notation vote completed on July 3, 2018, the
Committee unanimously approved the minutes of the
Committee meeting held on June 12–13, 2018.
James A. Clouse
Secretary

219

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105th Annual Report | 2018

Meeting Held
on September 25–26, 2018
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 25, 2018, at 2:00 p.m. and continued on
Wednesday, September 26, 2018, at 9:00 a.m.1

Steven B. Kamin
Economist
Thomas Laubach
Economist
David W. Wilcox
Economist

Present

David Altig, Kartik B. Athreya, Thomas A. Connors,
Mary C. Daly, David E. Lebow, Trevor A. Reeve,
William Wascher, and Beth Anne Wilson
Associate Economists

Jerome H. Powell
Chairman

Simon Potter
Manager, System Open Market Account

John C. Williams
Vice Chairman

Lorie K. Logan
Deputy Manager, System Open Market Account

Thomas I. Barkin

Ann E. Misback
Secretary, Office of the Secretary,
Board of Governors

Raphael W. Bostic
Lael Brainard
Richard H. Clarida
Loretta J. Mester
Randal K. Quarles
James Bullard, Charles L. Evans, Esther L. George,
Eric Rosengren, and Michael Strine
Alternate Members of the Federal Open Market
Committee
Patrick Harker, Robert S. Kaplan, and Neel Kashkari
Presidents of the Federal Reserve Banks of
Philadelphia, Dallas, and Minneapolis, respectively
Mark A. Gould
First Vice President, Federal Reserve Bank
of San Francisco
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

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 L. Burns
Deputy Director, Division of Supervision and
Regulation, Board of Governors
Rochelle M. Edge
Deputy Director, Division of Monetary Affairs,
Board of Governors
Michael T. Kiley
Deputy Director, Division of Financial Stability,
Board of Governors
Jon Faust
Senior Special Adviser to the Chairman, Office of
Board Members, Board of Governors
Antulio N. Bomfim
Special Adviser to the Chairman, Office of Board
Members, Board of Governors
Joseph W. Gruber and John M. Roberts
Special Advisers to the Board, Office of Board
Members, Board of Governors

Michael Held
Deputy General Counsel

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

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 | September

Eric M. Engen, Joshua Gallin,
and Michael G. Palumbo
Senior Associate Directors, Division of Research
and Statistics, Board of Governors
Christopher J. Erceg
Senior Associate Director, Division of International
Finance, Board of Governors
Ellen E. Meade, Edward Nelson,
and Joyce K. Zickler3
Senior Advisers, Division of Monetary Affairs,
Board of Governors
Jeremy B. Rudd
Senior Adviser, Division of Research and Statistics,
Board of Governors
David López-Salido
Associate Director, Division of Monetary Affairs,
Board of Governors
Stacey Tevlin
Associate Director, Division of Research and
Statistics, Board of Governors
Eric C. Engstrom
Deputy Associate Director, Division of
Monetary Affairs,
and
Adviser, Division of Research and Statistics,
Board of Governors
Penelope A. Beattie4
Assistant to the Secretary, Office of the Secretary,
Board of Governors
Jeffrey Huther
Section Chief, Division of Monetary Affairs,
Board of Governors
David H. Small
Project Manager, Division of Monetary Affairs,
Board of Governors
Benjamin K. Johannsen
Senior Economist, Division of Monetary Affairs,
Board of Governors
Achilles Sangster II
Information Management Analyst, Division of
Monetary Affairs, Board of Governors
Gregory L. Stefani
First Vice President, Federal Reserve Bank of
Cleveland
3
4

Attended opening remarks for Tuesday session only.
Attended Tuesday session only.

221

Michael Dotsey and Geoffrey Tootell
Executive Vice Presidents, Federal Reserve Banks of
Philadelphia and Boston, respectively
Edward S. Knotek II, Spencer Krane,
and Mark L. J. Wright
Senior Vice Presidents, Federal Reserve Banks of
Cleveland, Chicago, and Minneapolis, respectively
Jonathan P. McCarthy and Jonathan L. Willis
Vice Presidents, Federal Reserve Banks of New York
and Kansas City, respectively
William Dupor
Assistant Vice President, Federal Reserve Bank of
St. Louis
Jim Dolmas
Senior Research Economist, Federal Reserve Bank of
Dallas

Developments in Financial Markets and
Open Market Operations
The manager of the System Open Market Account
(SOMA) discussed U.S. and global financial developments. In global markets, strains in emerging market
economies (EMEs) contributed to volatility in currency and equity markets over the period. In addition, concerns about trade tensions between the
United States and China were the focus of a great
deal of attention among market participants. Such
concerns led the Shanghai Composite index to drop
as much as 8 percent at one point over the intermeeting period before recovering somewhat. The renminbi, however, was relatively stable, reportedly in
part because investors believed that Chinese authorities were prepared to take measures to counter significant renminbi depreciation.
Regarding domestic financial markets, the manager
noted that U.S. equity markets had posted strong
gains, spurred by optimism regarding the U.S. economic outlook and rising corporate earnings.
Longer-term Treasury yields moved higher, and
market-based measures of the expected path of the
funds rate edged up. According to the Open Market
Desk’s Survey of Primary Dealers and Survey of
Market Participants, a 25 basis point increase in the
target range for the federal funds rate at the September meeting was widely expected; moreover, investors
appeared to be placing high odds on a further
quarter-point policy firming at the December meeting. In U.S. money markets, the spread between the
three-month London interbank offered rate and
three-month overnight index swap (OIS) rates contin-

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105th Annual Report | 2018

ued to narrow. The widening in that spread earlier in
the year appeared to reflect an especially rapid
run-up in Treasury bill supply. Treasury bill supply
remained elevated and reportedly continued to contribute to upward pressure on overnight repurchase
agreement (repo) rates. The relatively high level of
repo rates was associated with continued very modest
take-up in the Federal Reserve’s overnight reverse
repurchase agreement (ON RRP) operations.
Elevated repo rates may also have contributed to the
relatively tight spread between the interest on excess
reserves (IOER) rate and the effective federal funds
rate. That spread stood at 3 basis points over much of
the period and seemed likely to narrow to 2 basis
points in the near future. As yet, there were no signs
that the upward pressure on the federal funds rate
relative to the IOER rate was due to scarcity of
aggregate reserves in the banking system. The level of
reserves in the banking system temporarily dipped
sharply in mid-September in connection with a sizable inflow of tax receipts to the Treasury’s account
at the Federal Reserve; however, that reduction in
reserves in the banking system did not seem to have
any effect on the federal funds market or the effective
federal funds rate.
In reviewing Federal Reserve operations, the manager
noted that market reaction to the ongoing reduction
in the System’s holdings of Treasury and agency
securities had been muted to date. With the increase
in the caps on redemptions to be implemented beginning in October, reinvestment of Treasury securities
would occur almost exclusively in the middle month
of each quarter in connection with the Treasury’s
mid-quarter refunding auctions. Under the baseline
path for interest rates, the Federal Reserve’s reinvestments of principal payments on agency mortgagebacked securities would likely fall to zero beginning
in October; however, prepayments could rise somewhat above the redemption cap in some months in
the future given the uncertainties surrounding prepayment projections.
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 25–26
meeting indicated that labor market conditions continued to strengthen in recent months and that real

gross domestic product (GDP) appeared to be rising
at a strong rate in the third quarter, similar to its pace
in the first half of the year. The flooding and damage
from Hurricane Florence, which made landfall on
September 14, seemed likely to have a modest, transitory effect on national economic growth in the second half of the year. Consumer price inflation, as
measured by the 12-month percentage change in the
price index for personal consumption expenditures
(PCE), remained near 2 percent in July. Survey-based
measures of longer-run inflation expectations were
little changed on balance.
Total nonfarm payroll employment increased at a
strong pace, on average, in July and August. The
national unemployment rate decreased to 3.9 percent
in July and remained at that level in August, while the
labor force participation rate and the employment-topopulation ratio moved down somewhat, on balance,
over those two months. The unemployment rates for
African Americans, Asians, and Hispanics in August
were below their levels at the end of the previous
expansion. The share of workers employed part time
for economic reasons declined further to below its
level in late 2007. The rate of private-sector job openings continued to be elevated in June and July, while
the rate of quits moved higher on balance; initial
claims for unemployment insurance benefits were at
a historically low level in mid-September. Total labor
compensation per hour in the nonfarm business sector increased 3.3 percent over the four quarters ending in the second quarter, and average hourly earnings for all employees rose 2.9 percent over the
12 months ending in August.
Industrial production expanded at a solid pace in
July and August. Automakers’ assembly schedules
suggested that light motor vehicle production would
be roughly flat in the fourth quarter, although
broader indicators of manufacturing production,
such as the new orders indexes from national and
regional manufacturing surveys, pointed to further
solid gains in factory output in the near term.
Real PCE appeared to be rising strongly in the third
quarter. Retail sales increased somewhat in August,
and the data for July were revised up to show a sizable gain. However, the rate of light motor vehicle
sales moved down in July and August from the robust
pace in the second quarter. The staff’s preliminary
assessment was that the consequences of Hurricane
Florence would have a slight negative effect on aggregate real PCE growth in the third quarter but that
spending would bounce back in the fourth quarter.

Minutes of Federal Open Market Committee Meetings | September

More broadly, recent readings on key factors that
influence consumer spending—including gains in
employment, real disposable personal income, and
households’ net worth—continued to be supportive
of solid real PCE growth in the near term. Moreover,
consumer sentiment, as measured by the University
of Michigan Surveys of Consumers, remained
upbeat in August and early September.
Real residential investment looked to be declining
further in the third quarter. Starts for new singlefamily homes and multifamily units were, on average,
below their second-quarter rates in July and August.
The issuance of building permits for both types of
housing stepped down, on net, over those two
months, which suggested that starts might move
lower in coming months. Sales of both new and existing homes declined somewhat in July, and existing
home sales were flat in August.
Growth in real private expenditures for business
equipment and intellectual property appeared to be
moderating a little in the third quarter following
strong gains in expenditures in the first half of the
year. Nominal shipments of nondefense capital
goods excluding aircraft rose briskly in July, although
spending for transportation equipment investment
moved down in recent months. Forward-looking
indicators of business equipment spending—such as
increases in new and unfilled capital goods orders,
along with upbeat readings on business sentiment
from national and regional surveys—pointed to
robust gains in equipment spending in the near term.
Nominal business expenditures for nonresidential
structures outside of the drilling and mining sector
declined in July, and the number of crude oil and
natural gas rigs in operation—an indicator of business spending for structures in the drilling and mining sector—held about steady in recent weeks.
Total real government purchases looked to be rising
further in the third quarter. Nominal defense spending in July and August was consistent with continued
increases in real federal purchases. Real expenditures
by state and local governments appeared to be
roughly flat, as state and local government payrolls
decreased slightly in July and August, while nominal
construction spending by these governments rose
modestly in July.
The nominal U.S. international trade deficit widened
in June and July, with declining exports and rising
imports. The decline in exports largely reflected lower
exports of capital goods, while greater imports of

223

industrial supplies boosted overall imports. The available data suggested that the change in net exports
would be a notable drag on real GDP growth in the
third quarter.
Total U.S. consumer prices, as measured by the PCE
price index, increased 2.3 percent over the 12 months
ending in July. Core PCE price inflation, which
excludes changes in consumer food and energy prices,
was 2.0 percent over that same period. The consumer
price index (CPI) rose 2.7 percent over the 12 months
ending in August, while core CPI inflation was
2.2 percent. Recent readings on survey-based measures of longer-run inflation expectations—including
those from the Michigan survey, the Survey of Professional Forecasters, and the Desk’s Survey of Primary Dealers and Survey of Market Participants—
were little changed on balance.
Foreign economic growth slowed in the second quarter, as a pickup in growth for the advanced foreign
economies (AFEs) was more than offset by slower
growth in the EMEs. Incoming indicators for the
AFEs pointed to some moderation in the pace of
growth in the third quarter, especially for Canada
and Japan, while indicators for the EMEs suggested a
pickup in many countries from the unusually slow
pace of the second quarter. Foreign inflation had
risen a bit recently, boosted by higher oil prices and,
in the EMEs, higher food prices and recent currency
depreciation.

Staff Review of the Financial Situation
Nominal Treasury yields increased over the intermeeting period, as market reactions to domestic economic data releases that were, on balance, slightly
stronger than expected appeared to outweigh ongoing concerns about trade policy and negative developments in some EMEs. FOMC communications
over the period were largely in line with expectations
and elicited little market reaction. Domestic stock
prices rose, buoyed in part by positive news about
corporate earnings, while foreign equity indexes
declined and the broad dollar index moved up.
Financing conditions for nonfinancial businesses and
households remained supportive of economic activity
on balance.
Global financial markets were volatile during the
intermeeting period amid significant stress in some
EMEs, ongoing focus on Brexit and on fiscal policy
in Italy, and continued trade tensions. On balance,
the dollar was little changed against AFE currencies

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and appreciated against EME currencies, as financial
pressures on some EMEs weighed on broader risk
sentiment. Turkey and Argentina experienced significant stress, and other countries with similar macroeconomic vulnerabilities also came under pressure.
There were small outflows from dedicated emerging
market funds, and EME sovereign bond spreads widened. Trade tensions weighed on foreign equity
prices, as the United States continued its trade negotiations with Canada and placed additional tariffs on
Chinese products.
FOMC communications elicited limited price reactions in financial markets over the intermeeting
period, and market-implied measures of monetary
policy expectations were little changed. The probability of an increase in the target range for the federal
funds rate occurring at the September FOMC meeting, as implied by quotes on the federal funds futures
contracts, increased to near certainty. The marketimplied probability of an additional rate increase at
the December FOMC meeting rose to about 75 percent. The market-implied path for the federal funds
rate beyond 2018 increased a touch.
Evolving trade-related risks and other international
developments reportedly weighed somewhat on market sentiment. However, domestic economic data
releases came in a bit above market expectations, on
net, with the stronger-than-expected average hourly
earnings in the August employment report notably
boosting Treasury yields. Nominal Treasury yields
moved up over the intermeeting period, with the
10-year yield rising above 3 percent. Measures of
inflation compensation derived from Treasury
Inflation-Protected Securities over the next 5 years
ticked up and were little changed 5 to 10 years ahead.
Broad U.S. equity price indexes increased about
4 percent since the August FOMC meeting, as positive news about corporate earnings and the domestic
economy outweighed negative international developments. Stock prices increased for many sectors in the
S&P 500 index, as the second-quarter earnings
reports for firms that reported later in the earnings
cycle came in strong. However, concerns about economic prospects abroad—particularly with respect to
trade policy and China—appeared to weigh on
stocks in the energy and basic materials sectors,
which declined. Option-implied volatility on the S&P
500 index at the one-month horizon—the VIX—
moved down but remained somewhat above the
extremely low levels seen in late 2017. Spreads of
investment- and speculative-grade corporate bond

yields over comparable-maturity Treasury yields narrowed a bit on net.
Short-term funding markets functioned smoothly
over the intermeeting period. An elevated level of
Treasury bills outstanding, following heavy issuance
this summer, continued to put upward pressure on
money market rates and reduced the attractiveness of
the Federal Reserve’s ON RRP facility. Take-up at
the facility averaged $2.9 billion per day over the
intermeeting period. Spreads of unsecured funding
rates over comparable-maturity OIS rates continued
to retrace the rise in spreads recorded earlier
this year.
On balance, financing conditions for large nonfinancial firms remained accommodative in recent months.
Demand for corporate borrowing appeared to have
declined, in part because of strong earnings, rising
interest rates, and seasonal factors. In July and
August, gross issuance of corporate bonds was relatively weak, while commercial and industrial loan
growth moderated. Meanwhile, the pace of equity
issuance was solid in July but fell in August, reflecting seasonal factors. Financing conditions for small
businesses remained favorable, and survey-based
measures of credit demand among small business
owners showed signs of strengthening, although
demand was still weak relative to pre-crisis levels.
Gross issuance of municipal bonds continued to
be solid.
In the commercial real estate (CRE) sector, financing
conditions also remained accommodative. Although
CRE loan growth at banks moderated in July and
August, issuance of commercial mortgage-backed
securities (CMBS) was robust. CMBS spreads were
little changed over the intermeeting period and
stayed near their post-crisis lows.
Residential mortgage financing conditions remained
accommodative on balance. For borrowers with low
credit scores, however, conditions were still somewhat
tight despite continued easing in credit availability.
Refinancing activity continued to be muted in recent
months, and the growth in purchase mortgage originations slowed a bit relative to year-earlier levels, in
part reflecting the notable increase in mortgage rates
earlier this year.
On net, financing conditions in consumer credit markets were little changed in recent months and
remained largely supportive of growth in household
spending. However, the supply of credit to consum-

Minutes of Federal Open Market Committee Meetings | September

ers with subprime credit scores remained tight. More
broadly, although interest rates for credit cards and
auto loans continued to rise, consumer credit
expanded at a solid pace.

Staff Economic Outlook
In the U.S. economic forecast prepared for the September FOMC meeting, real GDP was projected to
increase in the second half of this year at a rate that
was just a little slower than in the first half of the
year. The staff’s preliminary assessment was that the
effects of Hurricane Florence would lead to a slight
reduction in real GDP growth in the third quarter
and a small addition to growth in the fourth quarter
as economic activity returned to more normal levels
and some disrupted activity was made up. Over the
2018–20 period, output was projected to rise at a rate
above or at the staff’s estimate of potential growth
and then slow to a pace below it in 2021. The unemployment rate was projected to decline further below
the staff’s estimate of its longer-run natural rate but
to bottom out in 2020 and begin to edge up in 2021.
Relative to the forecast prepared for the previous
meeting, the projection for real GDP growth this year
was revised up a little, primarily in response to
stronger-than-expected incoming data on household
spending and business investment. The projection for
the medium term was not materially changed, in part
because the recently enacted tariffs on Chinese goods
and the retaliatory actions of China were judged to
have only a small net effect on U.S. real GDP growth
over the next few years. In addition, the staff continued to anticipate that supply constraints might
restrain output growth somewhat in the medium
term. The unemployment rate was projected to be a
little lower over the medium term than in the previous forecast, partly in response to the staff’s assessment that the natural rate of unemployment was a bit
lower than previously assumed. With labor market
conditions already tight, the staff continued to
assume that projected employment gains would
manifest in smaller-than-usual downward pressure on
the unemployment rate and in larger-than-usual
upward pressure on the labor force participation rate.
The staff forecast for total PCE price inflation in
2018 was revised up slightly, mainly because of a
faster-than-expected increase in consumer energy
prices in the second half. The staff continued to project that total PCE inflation would remain near the
Committee’s 2 percent objective over the medium
term and that core PCE price inflation would run
slightly higher than total inflation over that period

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because of a projected decline in consumer energy
prices in 2019 through 2021.
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 staff also saw the risks to the forecasts
for real GDP growth and the unemployment rate as
balanced. On the upside, household spending and
business investment could expand faster than the
staff projected, supported in part by the tax cuts
enacted last year. On the downside, trade policies and
foreign economic developments could move in directions that have significant negative effects on U.S.
economic growth. Risks to the inflation projection
also were seen as balanced. The upside risk that inflation could increase more than expected in an
economy that was projected to move further above its
potential was counterbalanced by the downside risk
that longer-term inflation expectations may be lower
than was assumed in the staff forecast.

Participants’ Views on Current Conditions
and the Economic Outlook
In conjunction with this FOMC meeting, members
of the Board of Governors and Federal Reserve
Bank presidents submitted their projections of the
most likely outcomes for real GDP growth, the
unemployment rate, and inflation for each year from
2018 through 2021 and over the longer run, based on
their individual assessments of the appropriate path
for the federal funds rate. 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 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 since the FOMC met in August indicated that the labor market continued to strengthen
and that economic activity rose at a strong rate. Job
gains were strong, on average, in recent months, and
the unemployment rate stayed low. Recent data suggested that household spending and business fixed
investment grew strongly. On a 12-month basis, both
overall inflation and inflation for items other than
food and energy remained near 2 percent. Indicators
of longer-term inflation expectations were little
changed on balance.

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Meeting participants noted that a number of communities suffered devastating losses associated with
Hurricane Florence. Despite the magnitude of the
storm-related destruction, participants expected the
imprint on the level of overall economic activity at
the national level to be relatively modest, consistent
with the experience following several previous major
storms.
Based on recent readings on spending, employment,
and inflation, almost all participants saw little change
in their assessment of the economic outlook,
although a few of them judged that recent data
pointed to a pace of economic activity that was
stronger than they had expected earlier this year. Participants noted a number of favorable economic factors that were supporting above-trend GDP growth;
these included strong labor market conditions, stimulative federal tax and spending policies, accommodative financial conditions, solid household balance
sheets, and continued high levels of household and
business confidence. A number of participants
observed that the stimulative effects of the changes in
fiscal policy would likely diminish over the next several years. A couple of participants commented that
recent strong growth in GDP may also be due in part
to increases in the growth rate of the economy’s productive capacity.
In their discussion of the household sector, participants generally characterized consumption growth as
strong, and they judged that robust increases in disposable income, high levels of consumer confidence,
and solid household balance sheets had contributed
to the strength in spending. Several participants
noted that the household saving rate had been revised
up significantly in the most recent estimates published by the Bureau of Economic Activity. A few of
those participants remarked that the upward revision
in the saving rate could be viewed as evidence of the
strength of the financial position of the household
sector and could be a factor that would further support solid expansion of consumption spending.
However, a couple of participants noted that the
higher saving rate may not be a precursor to higher
future consumption growth. For example, the higher
saving rate may indicate some greater caution on the
part of consumers, greater inequality of income and
wealth—which would imply a lower aggregate propensity to spend—or changing consumer behavior in
a low interest rate environment. With regard to residential investment, a few participants noted weak
residential construction activity at the national or

District level, which was attributed in part to higher
interest rates or supply constraints.
Participants noted that business fixed investment had
grown strongly so far this year. A few commented
that recent changes in federal tax policy had likely
bolstered investment spending. Contacts in most sectors remained optimistic about their business prospects, and surveys of manufacturing activity were
broadly favorable. Despite this optimism, a number
of contacts cited factors that were causing them to
forego production or investment opportunities in
some cases, including labor shortages and uncertainty regarding trade policy. In particular, tariffs on
aluminum and steel were cited as reducing new
investment in the energy sector. Contacts also suggested that firms were attempting to diversify the set
of countries with which they trade—both imports
and exports—as a result of uncertainty over tariff
policy. Contacts in the agricultural industry reported
that tariffs imposed by China had resulted in lower
crop prices, further depressing incomes in that sector,
although a new federal program was expected to offset some income losses.
In their discussion of labor markets, participants
generally agreed that conditions continued to
strengthen. Contacts in many Districts reported tight
labor markets, with difficulty finding qualified workers. In some cases, firms were coping with labor
shortages by increasing salaries, benefits, or workplace amenities in order to attract and retain workers.
Other business contacts facing labor shortages were
responding by increasing training for less-qualified
workers. For the economy overall, participants generally agreed that, on balance, recent data suggested
some acceleration in labor costs, but that wage
growth remained moderate by historical standards,
which was due in part to tepid productivity growth.
Regarding inflation, participants noted that on a
12-month basis, both overall inflation and inflation
for items other than food and energy remained near
2 percent. Indicators of longer-term inflation expectations were little changed on balance. In general,
participants viewed recent consumer price developments as consistent with their expectation that inflation was on a trajectory to achieve the Committee’s
symmetric 2 percent objective on a sustained basis.
Several participants commented that inflation may
modestly exceed 2 percent for a period of time.
Reports from business contacts and surveys in a
number of Districts also indicated some firming in

Minutes of Federal Open Market Committee Meetings | September

inflationary pressures. In particular, some contacts
indicated that input prices had been bolstered by
strong demand or import tariffs. Moreover, several
participants reported that firms in their Districts that
were facing higher input prices because of tariffs perceived that they had an increased ability to raise the
prices of their products. A couple of participants
emphasized that because inflation had run below the
Committee’s 2 percent objective for the past several
years, some measures of trend inflation or longerterm inflation expectations were below levels consistent with the 2 percent objective; these participants
judged that a modest increase in inflation expectations would be important for achieving the inflation
objective on a sustained basis.
In their discussion of developments in financial markets, a number of participants noted that financial
conditions remained accommodative: The rise in
interest rates and appreciation of the dollar over the
intermeeting period had been offset by increases in
equity prices, and broader measures continued to
point to accommodative financial conditions. Some
participants commented about the continued growth
in leveraged loans, the loosening of terms and standards on these loans, or the growth of this activity in
the nonbank sector as reasons to remain mindful of
vulnerabilities and possible risks to financial stability.
Participants commented on a number of risks and
uncertainties associated with their outlook for economic activity, the labor market, and inflation over
the medium term. Participants generally agreed that
risks to the outlook appeared roughly balanced.
Some participants commented that trade policy
developments remained a source of uncertainty for
the outlook for domestic growth and inflation. The
divergence between domestic and foreign economic
growth prospects and monetary policies was cited as
presenting a downside risk because of the potential
for further strengthening of the U.S. dollar; some
participants noted that financial stresses in a few
EMEs could pose additional risks if they were to
spread more broadly through the global economy
and financial markets. With regard to upside risks,
participants variously noted that high consumer confidence, accommodative financial conditions, or
greater-than-expected effects of fiscal stimulus could
lead to stronger-than-expected economic outcomes.
Tightening resource utilization and an increasing
ability of firms to raise output prices were cited as
factors that could lead to higher-than-expected inflation, while lower-than-expected growth, a strengthening of the U.S. dollar, or inflation expectations per-

227

sistently running below 2 percent were mentioned as
risks that could lead to lower inflation.
A few participants offered perspectives on the term
structure of interest rates and what a potential inversion of the yield curve might signal about economic
prospects in light of the historical regularity that an
inverted yield curve has often preceded the onset of
recessions in the United States. On the one hand, an
inverted yield curve could indicate an increased risk
of recession; on the other hand, the low level of term
premiums in recent years—reflecting, in part, central
bank asset purchases—could temper the reliability of
the slope of the yield curve as an indicator of future
economic activity. In addition, the recent rise and
possible further increases in longer-term interest rates
might diminish the likelihood that the yield curve
would invert in the near term.
In their consideration of monetary policy at this
meeting, participants generally judged that the
economy was evolving about as anticipated, with real
economic activity rising at a strong rate, labor market
conditions continuing to strengthen, and inflation
near the Committee’s objective. Based on their current assessments, all participants expressed the view
that it would be appropriate for the Committee to
continue its gradual approach to policy firming by
raising the target range for the federal funds rate
25 basis points at this meeting. Almost all considered
that it was also appropriate to revise the Committee’s
postmeeting statement in order to remove the language stating that “the stance of monetary policy
remains accommodative.” Participants discussed a
number of reasons for removing the language at this
time, noting that the Committee would not be signaling a change in the expected path for policy, particularly as the target range for the federal funds rate
announced after the Committee’s meeting would still
be below all of the estimates of its longer-run level
submitted in the September SEP. In addition, waiting
until the target range for the federal funds rate had
been increased further to remove the characterization
of the policy stance as “accommodative” could convey a false sense of precision in light of the considerable uncertainty surrounding all estimates of the neutral federal funds rate.
With regard to the outlook for monetary policy
beyond this meeting, participants generally anticipated that further gradual increases in the target
range for the federal funds rate would most likely be
consistent with a sustained economic expansion,
strong labor market conditions, and inflation near

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2 percent over the medium term. This gradual
approach would balance the risk of tightening monetary policy too quickly, which could lead to an
abrupt slowing in the economy and inflation moving
below the Committee’s objective, against the risk of
moving too slowly, which could engender inflation
persistently above the objective and possibly contribute to a buildup of financial imbalances.
Participants offered their views about how much
additional policy firming would likely be required for
the Committee to sustainably achieve its objectives of
maximum employment and 2 percent inflation. A few
participants expected that policy would need to
become modestly restrictive for a time and a number
judged that it would be necessary to temporarily raise
the federal funds rate above their assessments of its
longer-run level in order to reduce the risk of a sustained overshooting of the Committee’s 2 percent
inflation objective or the risk posed by significant
financial imbalances. A couple of participants indicated that they would not favor adopting a restrictive
policy stance in the absence of clear signs of an overheating economy and rising inflation.
Participants reaffirmed that adjustments to the path
for the policy rate would depend on their assessments
of the evolution of the economic outlook and risks
to the outlook relative to the Committee’s statutory
objectives. Many of them noted that future adjustments to the target range for the federal funds rate
will depend on the evaluation of incoming information and its implications for the economic outlook.
In this context, estimates of the level of the neutral
federal funds rate would be only one among many
factors that the Committee would consider in making
its policy decisions.
Building on comments expressed at previous meetings, a couple of participants indicated that it would
be desirable to assess the Committee’s strategic
approach to the conduct of policy and to hold a periodic and systematic review of the strengths and
weaknesses of the Committee’s monetary policy
framework.

Committee Policy Action
In their discussion of monetary policy for the period
ahead, members judged that information received
since the Committee met in August indicated that the
labor market had continued to strengthen and that
economic activity had been rising at a strong rate.
Job gains had been strong, on average, in recent

months, and the unemployment rate had stayed low.
Household spending and business fixed investment
had grown strongly. On a 12-month basis, both overall inflation and inflation for items other than food
and energy remained near 2 percent. Indicators of
longer-term inflation expectations were little changed
on balance.
Members viewed the recent data as consistent with
an economy that was evolving about as they had
expected. Consequently, members expected that further gradual increases in the target range for the federal funds rate would be consistent with sustained
expansion of economic activity, strong labor market
conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term.
Members continued to judge that the risks to the economic outlook remained roughly balanced.
After assessing current conditions and the outlook
for economic activity, the labor market, and inflation,
members voted to raise the target range for the federal funds rate to 2 to 2¼ percent. 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
maximum-employment objective and symmetric
2 percent inflation objective. They reiterated that this
assessment would take into account a wide range of
information, including measures of labor market
conditions, indicators of inflation pressures and
inflation expectations, and readings on financial and
international developments.
With regard to the postmeeting statement, members
agreed to remove the sentence indicating that “the
stance of monetary policy remains accommodative.”
Members made various points regarding the removal
of the sentence from the statement. These points
included that the characterization of the stance of
policy as “accommodative” had provided useful forward guidance in the early stages of the policy normalization process, that this characterization was no
longer providing meaningful information in light of
uncertainty surrounding the level of the neutral
policy rate, that it was appropriate to remove the
characterization of the stance from the Committee’s
statement before the target range for the federal
funds rate moved closer to the range of estimates of
the neutral policy rate, and that the Committee’s earlier communications had helped prepare the public
for this change.

Minutes of Federal Open Market Committee Meetings | September

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 27, 2018, 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 2 to 2¼ percent, including overnight reverse
repurchase operations (and reverse repurchase
operations with maturities of more than one day
when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 2.00 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 September
that exceeds $24 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 September that exceeds $16 billion. Effective in
October, 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 $30 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 $20 billion. Small
deviations from these amounts for operational
reasons are acceptable.
The Committee also directs the Desk to engage
in dollar roll and coupon swap transactions as
necessary to facilitate settlement of the Federal
Reserve’s agency mortgage-backed securities
transactions.”
The vote also encompassed approval of the statement
below to be released at 2:00 p.m.:

229

“Information received since the Federal Open
Market Committee met in August indicates that
the labor market has continued to strengthen
and that economic activity has been rising at a
strong rate. Job gains have been strong, on average, in recent months, and the unemployment
rate has stayed low. Household spending and
business fixed investment have grown strongly.
On a 12-month basis, both overall inflation and
inflation for items other than food and energy
remain near 2 percent. Indicators 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
further gradual increases in the target range for
the federal funds rate will be consistent with sustained expansion of economic activity, strong
labor market conditions, and inflation near the
Committee’s symmetric 2 percent objective over
the medium term. Risks to the economic outlook appear roughly balanced.
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 2 to 2¼ percent.
In determining the timing and size of future
adjustments to the target range for the federal
funds rate, the Committee will assess realized
and expected economic conditions relative to its
maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of
information, including measures of labor market
conditions, indicators of inflation pressures and
inflation expectations, and readings on financial
and international developments.”
Voting for this action: Jerome H. Powell, John C.
Williams, Thomas I. Barkin, Raphael W. Bostic, Lael
Brainard, Richard H. Clarida, Esther L. George,
Loretta J. Mester, and Randal K. Quarles.
Voting against this action: None.
Ms. George voted as alternate member at this
meeting.
To support the Committee’s decision to raise the target range for the federal funds rate, the Board of

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Governors voted unanimously to raise the interest
rates on required and excess reserve balances to
2.20 percent, effective September 27, 2018. The
Board of Governors also voted unanimously to
approve a ¼ percentage point increase in the primary
credit rate (discount rate) to 2.75 percent, effective
September 27, 2018.5

In taking this action, the Board approved requests to establish
that rate submitted by the Boards of Directors of the Federal
Reserve Banks of Boston, Philadelphia, Cleveland, Richmond,
Atlanta, Chicago, St. Louis, Kansas City, Dallas, and San Francisco. This vote also encompassed approval by the Board of
Governors of the establishment of a 2.75 percent primary credit
rate by the remaining Federal Reserve Banks, effective on the
later of September 27, 2018, 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 and Minneapolis were informed by the Secretary of the
Board of the Board’s approval of their establishment of a primary credit rate of 2.75 percent, effective September 27, 2018.)
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.

Following the vote, Chairman Powell noted that he
had asked Governor Clarida to serve as chair of a
subcommittee on communications issues. The other
members of the subcommittee will include Governor
Brainard, President Kaplan, and President Rosengren. The role of the subcommittee will be to help
prioritize and frame communications issues for the
Committee.
It was agreed that the next meeting of the Committee
would be held on Wednesday–Thursday, November 7–8, 2018. The meeting adjourned at 10:00 a.m.
on September 26, 2018.

Notation Vote
By notation vote completed on August 21, 2018, the
Committee unanimously approved the minutes of the
Committee meeting held on July 31–August 1, 2018.
James A. Clouse
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 25–26,
2018, meeting participants submitted their projections of the most likely outcomes for real gross
domestic product (GDP) growth, the unemployment
rate, and inflation for each year from 2018 to 2021
and over the longer run.1 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.2
“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 statutory mandate to promote
maximum employment and price stability.
All participants who submitted longer-run projections expected that, in 2018, real GDP would expand
at a pace exceeding their individual estimates of the
longer-run growth rate of real GDP. All participants
anticipated that real GDP growth would moderate in
the coming years, and a majority of participants projected growth in 2021 to be below their estimates of
the longer-run rate. All participants who submitted
longer-run projections expected that the unemployment rate would run below their estimates of its
longer-run level throughout the projection period.
Participants generally projected that inflation, as
measured by the four-quarter percentage change in
the price index for personal consumption expenditures (PCE), would be at or near the Committee’s
2 percent objective at the end of 2018 and would continue at close to that rate through 2021. Compared
with the Summary of Economic Projections (SEP)
from June, a solid majority of participants marked
1

Four members of the Board of Governors, one more than in
June 2018, were in office at the time of the September 2018
meeting and submitted economic projections. The office of the
president of the Federal Reserve Bank of San Francisco was
vacant at the time of this FOMC meeting; First Vice President
Mark A. Gould submitted economic projections.
One participant did not submit longer-run projections for real
GDP growth, the unemployment rate, or the federal funds rate.

231

up their projections of real GDP growth and most
increased their forecast of the unemployment rate in
2018, with participants indicating that these revisions
mostly reflected incoming data. Participants’ projections of inflation were largely unchanged from June.
Table 1 and figure 1 provide summary statistics for
the projections.
As shown in figure 2, almost all participants continued to expect that the evolution of the economy, relative to their objectives of maximum employment and
2 percent inflation, would likely warrant further
gradual increases in the federal funds rate. The medians of participants’ projections of the federal funds
rate through 2020 were unchanged relative to their
June projections, and the median of participants’
projections for 2021 was the same as that for 2020.
The median projection for the longer-run federal
funds rate rose slightly, with several participants citing increases in model-based estimates of the longerrun real federal funds rate and strong economic data
as reasons for the revision. A substantial majority of
participants expected that the year-end 2020 and
2021 federal funds rate would be above their estimates of the longer-run rate.
In general, participants continued to view the uncertainty around their economic projections as broadly
similar to the average of the past 20 years. Risks to
their outlooks were viewed as balanced, although a
couple more participants than in June saw risks to
their inflation projections as weighted to the upside.

The Outlook for Economic Activity
The medians of participants’ projections for the
growth rate of real GDP, conditional on their individual assessments of appropriate monetary policy,
were 3.1 percent for 2018, 2.5 percent for 2019, and
2.0 percent for 2020. For this SEP, participants also
submitted projections for economic variables in 2021
for the first time. Participants’ projections for real
GDP growth in 2021 were almost all below participants’ projections of growth in 2020 and, for a
majority of participants, below their longer-run projections of real GDP growth. Some participants cited
the waning of fiscal stimulus, less accommodative
monetary policy, or anticipated appreciation of the
dollar as factors contributing to their forecasts for a
moderation of real GDP growth over the course of
the projection period.
While most participants made slight upward revisions to their unemployment rate projections for this

232

105th Annual Report | 2018

Central tendency2

Variable
2018

2019

2020

2021

Change in real GDP
June projection
Unemployment rate
June projection
PCE inflation
June projection
Core PCE inflation4
June projection

3.1
2.8
3.7
3.6
2.1
2.1
2.0
2.0

2.5
2.4
3.5
3.5
2.0
2.1
2.1
2.1

2.0
2.0
3.5
3.5
2.1
2.1
2.1
2.1

1.8
n.a.
3.7
n.a.
2.1
n.a.
2.1
n.a.

Memo: Projected
appropriate
policy path
Federal funds rate
June projection

2.4
2.4

3.1
3.1

3.4
3.4

3.4
n.a.

Longer
run

Range3
Longer
run

2018

2019

2020

2021

2.9–3.2
2.5–3.0
3.7–3.8
3.5–3.8
1.9–2.2
2.0–2.2
1.9–2.0
1.9–2.1

2.1–2.8
2.1–2.7
3.4–3.8
3.3–3.8
2.0–2.3
1.9–2.3
2.0–2.3
2.0–2.3

1.7–2.4
1.5–2.2
3.3–4.0
3.3–4.0
2.0–2.2
2.0–2.3
2.0–2.2
2.0–2.3

1.5–2.1
n.a.
3.4–4.2
n.a.
2.0–2.3
n.a.
2.0–2.3
n.a.

Longer
run

2018

2019

2020

2021

1.8
1.8
4.5
4.5
2.0
2.0

3.0–3.2
2.7–3.0
3.7
3.6–3.7
2.0–2.1
2.0–2.1
1.9–2.0
1.9–2.0

2.4–2.7
2.2–2.6
3.4–3.6
3.4–3.5
2.0–2.1
2.0–2.2
2.0–2.1
2.0–2.2

1.8–2.1
1.8–2.0
3.4–3.8
3.4–3.7
2.1–2.2
2.1–2.2
2.1–2.2
2.1–2.2

1.6–2.0
n.a.
3.5–4.0
n.a.
2.0–2.2
n.a.
2.0–2.2
n.a.

3.0
2.9

2.1–2.4 2.9–3.4 3.1–3.6 2.9–3.6 2.8–3.0 2.1–2.4 2.1–3.6 2.1–3.9 2.1–4.1 2.5–3.5
2.1–2.4 2.9–3.4 3.1–3.6
n.a.
2.8–3.0 1.9–2.6 1.9–3.6 1.9–4.1
n.a.
2.3–3.5

1.8–2.0
1.8–2.0
4.3–4.6
4.3–4.6
2.0
2.0

1.7–2.1
1.7–2.1
4.0–4.6
4.1–4.7
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 12–13, 2018. 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 12–13, 2018, meeting, and one participant did not submit such projections in conjunction with the September 25–26, 2018, 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

233

Figure 1. Medians, central tendencies, and ranges of economic projections, 2018–21 and over the longer run
Percent

Change in real GDP
Median of projections
Central tendency of projections
Range of projections

Actual

2
1

2013

2014

2015

2016

2017

2018

2019

2020

2021

Longer
run

Percent

Unemployment rate
7
6
5
4
3

2013

2014

2015

2016

2017

2018

2019

2020

2021

Longer
run

Percent

PCE inflation
3

2013

2014

2015

2016

2017

2018

2019

2020

2021

Longer
run

Percent

Core PCE inflation
3

2013

2014

2015

2016

2017

2018

2019

2020

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.

2021

Longer
run

234

105th Annual Report | 2018

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

2018

2019

2020

2021

Longer run

Minutes of Federal Open Market Committee Meetings | September

year, their projections in subsequent years and in the
longer run were largely unchanged. A substantial
majority of participants expected the unemployment
rate to bottom out in 2019 or 2020 at levels below
their estimates of the unemployment rate in the longer run, and then to rise a little in 2021.
Figures 3.A and 3.B show the distributions of participants’ projections for real GDP growth and the
unemployment rate from 2018 to 2021 and over the
longer run. The distribution of individual projections
for real GDP growth for this year shifted noticeably
to the right relative to that in the June SEP; the distribution for projected real GDP growth for 2019 also
shifted to the right, albeit only a little. The distributions of individual projections for the unemployment
rate in 2018 and 2019 shifted up a little relative to the
distributions in June, while the distributions of the
projections for the unemployment rate in the longer
run were largely unchanged.

235

butions of participants’ views of the appropriate federal funds rate at the ends of 2019 and 2020 were
relatively wide, as was the case in the June SEP.
In discussing their projections, almost all participants
continued to express the view that the appropriate
trajectory of the federal funds rate would likely
involve gradual increases. This view was predicated
on several factors, including a judgment that a
gradual path of policy firming would appropriately
balance the risk of a buildup of inflationary pressures or other imbalances associated with high levels
of resource utilization, against the risk that factors
such as diminishing fiscal stimulus and adverse developments in foreign economies could become a significant drag on real GDP growth. As always, the
appropriate path of the federal funds rate would
depend on incoming economic data and their implications for participants’ economic outlooks and
assessments of risks.

The Outlook for Inflation
Uncertainty and Risks
The medians of projections for total PCE price inflation were 2.1 percent in 2018, 2.0 percent in 2019,
and 2.1 percent in 2020 and 2021. The medians of
projections for core PCE price inflation were 2.0 percent in 2018 and 2.1 percent in 2019, 2020, and 2021.
For the entire period between 2018 and 2020, these
medians were very similar to the June SEP. Figures
3.C and 3.D provide information on the distributions
of participants’ views about the outlook for inflation.
Relative to the June SEP, a number of participants
revised slightly down their projections for total PCE
inflation this year and next. Most participants projected total PCE price inflation in the range of 1.9 to
2.0 percent for 2018 and 2019 and 2.1 to 2.2 percent
in 2020 and 2021. Most participants projected that
core PCE inflation would run at 1.9 to 2.0 percent in
2018 and at 2.1 to 2.2 percent in 2019, 2020, and
2021. Relative to the June SEP, a larger number of
participants projected that core PCE inflation in
2019 and 2020 would fall in the 2.1 to 2.2 percent
range.

Appropriate Monetary Policy
Figure 3.E shows distributions of participants’ judgments regarding the appropriate target—or midpoint
of the target range—for the federal funds rate for the
end of each year from 2018 to 2021 and over the longer run. The distribution of projected policy rates for
year-end 2018 was higher than in the June SEP, with
projections clustered around 2.4 percent. The distri-

In assessing the appropriate path of the federal funds
rate, 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. As a reference, table 2 provides
measures of forecast uncertainty, based on the forecast errors of various private and government forecasts over the past 20 years, for real GDP growth, the
unemployment rate, and total PCE price inflation.
Those measures are represented graphically in the
“fan charts” shown in the top panels of figures 4.A,
4.B, and 4.C. The fan charts display the median SEP
projections for the three variables surrounded by
symmetric confidence intervals derived from the forecast errors reported in table 2. If the degree of uncertainty attending these projections is similar to the
typical magnitude of past forecast errors and the
risks around the projections are broadly balanced,
then future outcomes of these variables would have
about a 70 percent probability of being within these
confidence intervals. For all three variables, this
measure of uncertainty is substantial and generally
increases as the forecast horizon lengthens.
Participants’ assessments of the level of uncertainty
surrounding their individual economic projections
are shown in the bottom-left panels of figures 4.A,
4.B, and 4.C. Nearly all participants viewed the
degree of uncertainty attached to their economic
projections for real GDP growth and inflation as

236

105th Annual Report | 2018

Figure 3.A. Distribution of participants’ projections for the change in real GDP, 2018–21 and over the longer run
Number of participants

2018

18
16
14
12
10
8
6
4
2

September projections
June projections

1.4 –
1.5

1.6 –
1.7

1.8 –
1.9

2.0 –
2.1

2.2 –
2.4 –
2.5
2.3
Percent range

2.6 –
2.7

2.8 –
2.9

3.0 –
3.1

3.2 –
3.3
Number of participants

2019

1.4 –
1.5

18
16
14
12
10
8
6
4
2
1.6 –
1.7

1.8 –
1.9

2.0 –
2.1

2.2 –
2.4 –
2.3
2.5
Percent range

2.6 –
2.7

2.8 –
2.9

3.0 –
3.1

3.2 –
3.3
Number of participants

2020

1.4 –
1.5

18
16
14
12
10
8
6
4
2
1.6 –
1.7

1.8 –
1.9

2.0 –
2.1

2.2 –
2.4 –
2.3
2.5
Percent range

2.6 –
2.7

2.8 –
2.9

3.0 –
3.1

3.2 –
3.3
Number of participants

2021

1.4 –
1.5

18
16
14
12
10
8
6
4
2
1.6 –
1.7

1.8 –
1.9

2.0 –
2.1

2.2 –
2.4 –
2.3
2.5
Percent range

2.6 –
2.7

2.8 –
2.9

3.0 –
3.1

3.2 –
3.3
Number of participants

Longer run

1.4 –
1.5

18
16
14
12
10
8
6
4
2
1.6 –
1.7

1.8 –
1.9

2.0 –
2.1

2.2 –
2.4 –
2.3
2.5
Percent range

Note: Definitions of variables and other explanations are in the notes to table 1.

2.6 –
2.7

2.8 –
2.9

3.0 –
3.1

3.2 –
3.3

Minutes of Federal Open Market Committee Meetings | September

237

Figure 3.B. Distribution of participants’ projections for the unemployment rate, 2018–21 and over the longer run
Number of participants

2018

18
16
14
12
10
8
6
4
2

September projections
June projections

3.0 –
3.1

3.2 –
3.3

3.4 –
3.5

3.6 –
3.7

3.8 –
3.9

4.0 –
4.1
Percent range

4.2 –
4.3

4.4 –
4.5

4.6 –
4.7

4.8 –
4.9

5.0 –
5.1
Number of participants

2019

3.0 –
3.1

18
16
14
12
10
8
6
4
2
3.2 –
3.3

3.4 –
3.5

3.6 –
3.7

3.8 –
3.9

4.0 –
4.1
Percent range

4.2 –
4.3

4.4 –
4.5

4.6 –
4.7

4.8 –
4.9

5.0 –
5.1
Number of participants

2020

3.0 –
3.1

18
16
14
12
10
8
6
4
2
3.2 –
3.3

3.4 –
3.5

3.6 –
3.7

3.8 –
3.9

4.0 –
4.1
Percent range

4.2 –
4.3

4.4 –
4.5

4.6 –
4.7

4.8 –
4.9

5.0 –
5.1
Number of participants

2021

3.0 –
3.1

18
16
14
12
10
8
6
4
2
3.2 –
3.3

3.4 –
3.5

3.6 –
3.7

3.8 –
3.9

4.0 –
4.1
Percent range

4.2 –
4.3

4.4 –
4.5

4.6 –
4.7

4.8 –
4.9

5.0 –
5.1
Number of participants

Longer run

3.0 –
3.1

18
16
14
12
10
8
6
4
2
3.2 –
3.3

3.4 –
3.5

3.6 –
3.7

3.8 –
3.9

4.0 –
4.1
Percent range

Note: Definitions of variables and other explanations are in the notes to table 1.

4.2 –
4.3

4.4 –
4.5

4.6 –
4.7

4.8 –
4.9

5.0 –
5.1

238

105th Annual Report | 2018

Figure 3.C. Distribution of participants’ projections for PCE inflation, 2018–21 and over the longer run
Number of participants

2018

18
16
14
12
10
8
6
4
2

September projections
June projections

1.9 –
2.0

2.1–
2.2
Percent range

2.3 –
2.4
Number of participants

2019

18
16
14
12
10
8
6
4
2
1.9 –
2.0

2.1–
2.2
Percent range

2.3 –
2.4
Number of participants

2020

18
16
14
12
10
8
6
4
2
1.9 –
2.0

2.1–
2.2
Percent range

2.3 –
2.4
Number of participants

2021

18
16
14
12
10
8
6
4
2
1.9 –
2.0

2.1–
2.2
Percent range

2.3 –
2.4
Number of participants

Longer run

18
16
14
12
10
8
6
4
2
1.9 –
2.0

2.1–
2.2
Percent range

Note: Definitions of variables and other explanations are in the notes to table 1.

2.3 –
2.4

Minutes of Federal Open Market Committee Meetings | September

239

Figure 3.D. Distribution of participants’ projections for core PCE inflation, 2018–21
Number of participants

2018
September projections
June projections

1.9 –
2.0

18
16
14
12
10
8
6
4
2
2.1–
2.2
Percent range

2.3 –
2.4
Number of participants

2019
18
16
14
12
10
8
6
4
2
1.9 –
2.0

2.1–
2.2
Percent range

2.3 –
2.4
Number of participants

2020
18
16
14
12
10
8
6
4
2
1.9 –
2.0

2.1–
2.2
Percent range

2.3 –
2.4
Number of participants

2021
18
16
14
12
10
8
6
4
2
1.9 –
2.0

2.1–
2.2
Percent range

Note: Definitions of variables and other explanations are in the notes to table 1.

2.3 –
2.4

240

105th Annual Report | 2018

2018

18
16
14
12
10
8
6
4
2

September projections
June projections

1.88 –
2.12

2.13 –
2.37

2.38 –
2.62

2.63 –
2.87

2.88 –
3.12

3.13 –
3.38 –
3.63 –
3.37
3.62
3.87
Percent range

3.88 –
4.12

4.13 –
4.37

4.38 –
4.62

4.63 –
4.87

4.88 –
5.12

Number of participants

2019

1.88 –
2.12

18
16
14
12
10
8
6
4
2
2.13 –
2.37

2.38 –
2.62

2.63 –
2.87

2.88 –
3.12

3.13 –
3.38 –
3.63 –
3.37
3.62
3.87
Percent range

3.88 –
4.12

4.13 –
4.37

4.38 –
4.62

4.63 –
4.87

4.88 –
5.12

Number of participants

2020

1.88 –
2.12

18
16
14
12
10
8
6
4
2
2.13 –
2.37

2.38 –
2.62

2.63 –
2.87

2.88 –
3.12

3.13 –
3.38 –
3.63 –
3.37
3.62
3.87
Percent range

3.88 –
4.12

4.13 –
4.37

4.38 –
4.62

4.63 –
4.87

4.88 –
5.12

Number of participants

2021

1.88 –
2.12

18
16
14
12
10
8
6
4
2
2.13 –
2.37

2.38 –
2.62

2.63 –
2.87

2.88 –
3.12

3.13 –
3.38 –
3.63 –
3.37
3.62
3.87
Percent range

3.88 –
4.12

4.13 –
4.37

4.38 –
4.62

4.63 –
4.87

4.88 –
5.12

Number of participants

Longer run

1.88 –
2.12

18
16
14
12
10
8
6
4
2
2.13 –
2.37

2.38 –
2.62

2.63 –
2.87

2.88 –
3.12

3.13 –
3.38 –
3.63 –
3.37
3.62
3.87
Percent range

Note: Definitions of variables and other explanations are in the notes to table 1.

3.88 –
4.12

4.13 –
4.37

4.38 –
4.62

4.63 –
4.87

4.88 –
5.12

Minutes of Federal Open Market Committee Meetings | September

balanced—in other words, as broadly consistent with
a symmetric fan chart.

Table 2. Average historical projection error ranges
Percentage points
Variable
Change in real GDP1
Unemployment rate1
Total consumer prices2
Short-term interest rates3

2018

2019

2020

2021

±1.2
±0.3
±0.8
±0.5

±1.8
±1.1
±1.0
±1.7

±1.9
±1.6
±1.1
±2.3

±2.0
±2.0
±1.1
±2.7

Note: Error ranges shown are measured as plus or minus the root mean squared
error of projections for 1998 through 2017 that were released in the fall 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), 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.

broadly similar to the average of the past 20 years.3 A
couple more participants than in June viewed the
uncertainty around the unemployment rate as higher
than average.
Because the fan charts are constructed to be symmetric around the median projections, they do not reflect
any asymmetries in the balance of risks that participants may see in 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. Most participants assessed the risks to their projections of real
GDP growth and the unemployment rate as broadly
3

241

Those participants who did not judge the risks to
their real GDP growth and unemployment rate projections as balanced were roughly evenly split
between those who viewed the risks as being
weighted to the upside and those who viewed the
risks as being weighted to the downside. Risks
around both total and core inflation projections were
judged to be broadly balanced by a solid majority of
participants; however, those participants who saw the
risks as uneven saw them as weighted to the upside.
In discussing the uncertainty and risks surrounding
their economic projections, many participants
pointed to upside risks to real GDP growth from fiscal stimulus or stronger-than-expected effects of
business optimism. Many participants also pointed
to downside risks for the economy and inflation
stemming from factors such as trade policy, stresses
in emerging market economies, or stronger-thananticipated appreciation of the dollar.
Participants’ assessments of the appropriate future
path of the federal funds rate were also subject to
considerable uncertainty. Because the Committee
adjusts the federal funds rate in response to actual
and prospective developments over time in real GDP
growth, the unemployment rate, and inflation, uncertainty surrounding the projected path for the federal
funds rate importantly reflects the uncertainties
about the paths for those key economic variables
along with other factors. Figure 5 provides a graphical representation of this uncertainty, plotting the
median SEP projection for the federal funds rate surrounded by confidence intervals derived from the
results presented in table 2. As with the macroeconomic variables, the forecast uncertainty surrounding
the appropriate path of the federal funds rate is substantial and increases for longer horizons.

242

105th Annual Report | 2018

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

Actual

2013

2014

2015

2016

2017

2018

2019

2020

2021

FOMC participants’ assessments of uncertainty and risks around their economic projections
Number of participants

Number of participants

Risks to GDP growth

Uncertainty about GDP growth
September projections
June projections

Lower

18
16
14
12
10
8
6
4
2
Broadly
similar

Higher

September projections
June projections

Weighted to
downside

18
16
14
12
10
8
6
4
2
Broadly
balanced

Weighted to
upside

Minutes of Federal Open Market Committee Meetings | September

243

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
2013

2014

2015

2016

2017

2018

2019

2020

2021

FOMC participants’ assessments of uncertainty and risks around their economic projections
Number of participants

Uncertainty about the unemployment rate
September projections
June projections

Lower

18
16
14
12
10
8
6
4
2
Broadly
similar

Number of participants

Risks to the unemployment rate

Higher

September projections
June projections

Weighted to
downside

18
16
14
12
10
8
6
4
2
Broadly
balanced

Weighted to
upside

244

105th Annual Report | 2018

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

1
Actual
0

2013

2014

2015

2016

2017

2018

2019

2020

2021

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

18
16
14
12
10
8
6
4
2
Broadly
balanced

Number of participants

Uncertainty about core PCE inflation
18
16
14
12
10
8
6
4
2
Broadly
similar

Number of participants

Risks to core PCE inflation

September projections
June projections

Lower

Weighted to
upside

Higher

September projections
June projections

Weighted to
downside

18
16
14
12
10
8
6
4
2
Broadly
balanced

Weighted to
upside

Minutes of Federal Open Market Committee Meetings | September

245

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

2013

2014

2015

2016

2017

2018

2019

2020

2021

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105th Annual Report | 2018

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, 1.2 to 4.8 percent in the second year, 1.1 to
4.9 percent in the third year, and 1.0 to 5.0 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, 1.0 to 3.0 percent in
the second year, and 0.9 to 3.1 percent in the third
and fourth 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 | November

Meeting Held
on November 7–8, 2018
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 Wednesday,
November 7, 2018, at 1:00 p.m. and continued on
Thursday, November 8, 2018, at 9:00 a.m.1

Steven B. Kamin
Economist
Thomas Laubach
Economist
David W. Wilcox
Economist

Present

David Altig, Thomas A. Connors,
Trevor A. Reeve, Ellis W. Tallman,
William Wascher, and Beth Anne Wilson
Associate Economists

Jerome H. Powell
Chairman

Simon Potter
Manager, System Open Market Account

John C. Williams
Vice Chairman

Lorie K. Logan
Deputy Manager, System Open Market Account

Thomas I. Barkin

Ann E. Misback
Secretary, Office of the Secretary,
Board of Governors

Raphael W. Bostic
Lael Brainard
Richard H. Clarida
Mary C. Daly
Loretta J. Mester
Randal K. Quarles
James Bullard, Charles L. Evans, Esther L. George,
Eric Rosengren, and Michael Strine
Alternate Members of the Federal Open Market
Committee
Patrick Harker, Robert S. Kaplan, and Neel Kashkari
Presidents of the Federal Reserve Banks of
Philadelphia, Dallas, and Minneapolis, 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

247

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
Deputy Director, Division of Monetary Affairs,
Board of Governors
Michael T. Kiley
Deputy Director, Division of Financial Stability,
Board of Governors
Jon Faust
Senior Special Adviser to the Chairman, Office of
Board Members, Board of Governors
Antulio N. Bomfim
Special Adviser to the Chairman, Office of Board
Members, Board of Governors

Michael Held
Deputy General Counsel
1

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.

248

105th Annual Report | 2018

Brian M. Doyle, Joseph W. Gruber,
Ellen E. Meade, 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
Eric M. Engen
Senior Associate Director, Division of Research
and Statistics, Board of Governors
Christopher J. Erceg
Senior Associate Director, Division of International
Finance, Board of Governors
Edward Nelson
Senior Adviser, Division of Monetary Affairs,
Board of Governors
S. Wayne Passmore
Senior Adviser, Division of Research and Statistics,
Board of Governors
William F. Bassett
Associate Director, Division of Financial Stability,
Board of Governors
Marnie Gillis DeBoer3 and David López-Salido
Associate Directors, Division of Monetary Affairs,
Board of Governors
Molly E. Mahar3
Associate Director, Division of Supervision and
Regulation, Board of Governors
Stacey Tevlin
Associate Director, Division of Research and
Statistics, Board of Governors
Jeffrey D. Walker2
Deputy Associate Director, Division of Reserve
Bank Operations and Payment Systems,
Board of Governors
Min Wei
Deputy Associate Director, Division of Monetary
Affairs, Board of Governors
Christopher J. Gust, Laura Lipscomb,3
and Zeynep Senyuz3
Assistant Directors, Division of Monetary Affairs,
Board of Governors
Patrick E. McCabe
Assistant Director, Division of Research and
Statistics, Board of Governors
3

Attended through the discussion of the long-run monetary
policy implementation frameworks.

Penelope A. Beattie4
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
Alyssa G. Anderson3 and Kurt F. Lewis
Principal Economists, Division of Monetary Affairs,
Board of Governors
Joshua S. Louria3
Lead Financial Institution and Policy Analyst,
Division of Monetary Affairs, Board of Governors
Sriya Anbil3
Senior Economist, Division of Monetary Affairs,
Board of Governors
Randall A. Williams
Senior Information Manager, Division of Monetary
Affairs, Board of Governors
Andre Anderson
First Vice President, Federal Reserve Bank of Atlanta
Jeff Fuhrer, Sylvain Leduc, Kevin Stiroh,4
Daniel G. Sullivan, and Christopher J. Waller
Executive Vice Presidents, Federal Reserve Banks of
Boston, San Francisco, New York, Chicago,
and St. Louis, respectively
Paolo A. Pesenti, Paula Tkac,3 Luke Woodward,
Mark L. J. Wright, and Nathaniel Wuerffel3
Senior Vice Presidents, Federal Reserve Banks of
New York, Atlanta, Kansas City, Minneapolis,
and New York, respectively
Roc Armenter,3 Satyajit Chatterjee,
Deborah L. Leonard,3 Pia Orrenius,
Matthew D. Raskin,3 and Patricia Zobel3
Vice Presidents, Federal Reserve Banks of
Philadelphia, Philadelphia, New York, Dallas,
New York, New York, respectively
John P. McGowan3
Assistant Vice President, Federal Reserve Bank of
New York
Andreas L. Hornstein
Senior Advisor, Federal Reserve Bank of Richmond

Attended Wednesday session only.

Minutes of Federal Open Market Committee Meetings | November

Samuel Schulhofer-Wohl
Senior Economist and Research Advisor,
Federal Reserve Bank of Chicago
Gara Afonso3
Research Officer, Federal Reserve Bank of New York

Long-Run Monetary Policy Implementation
Frameworks
Committee participants resumed their discussion of
potential long-run frameworks for monetary policy
implementation, a topic last discussed at the November 2016 FOMC meeting. The staff provided briefings that described changes in recent years in banks’
uses of reserves, outlined tradeoffs associated with
potential choices of operating regimes to implement
monetary policy and control short-term interest
rates, reviewed potential choices of the policy target
rate, and summarized developments in the policy
implementation frameworks of other central banks.
The staff noted that banks’ liquidity management
practices had changed markedly since the financial
crisis, with large banks now maintaining substantial
buffers of reserves, among other high-quality liquid
assets, to meet potential outflows and to comply with
regulatory requirements. Information from bank contacts as well as a survey of banks indicated that, in an
environment in which money market interest rates
were very close to the interest rate paid on excess
reserve balances, banks would likely be comfortable
operating with much lower levels of reserve balances
than at present but would wish to maintain substantially higher levels of balances than before the crisis.
On average, survey responses suggested that banks
might reduce their reserve holdings only modestly
from those “lowest comfortable” levels if money
market interest rates were somewhat above the interest on excess reserves (IOER) rate. Across banks,
however, individual survey responses on this issue
varied substantially.
The staff highlighted how changes in the determinants of reserve demand since the crisis could affect
the tradeoffs between two types of operating regimes:
(1) one in which aggregate excess reserves are sufficiently limited that money market interest rates are
sensitive to small changes in the supply of reserves
and (2) one in which aggregate excess reserves are
sufficiently abundant that money market interest
rates are not sensitive to small changes in reserve supply. In the former type of regime, the Federal Reserve
actively adjusts reserve supply in order to keep its

249

policy rate close to target. This technique worked
well before the financial crisis, when reserve demand
was fairly stable in the aggregate and largely influenced by payment needs and reserve requirements.
However, with the increased use of reserves for precautionary liquidity purposes following the crisis,
there was some uncertainty about whether banks’
demand for reserves would now be sufficiently predictable for the Federal Reserve to be able to precisely
target an interest rate in this way. In the latter type of
regime, money market interest rates are not sensitive
to small fluctuations in the demand for and supply of
reserves, and the stance of monetary policy is instead
transmitted from the Federal Reserve’s administered
rates to market rates—an approach that has been
effective in controlling short-term interest rates in the
United States since the financial crisis, as well as in
other countries where central banks have used this
approach.
The staff briefings also examined the tradeoffs
between alternative policy rates that the Committee
could choose in each of the regimes. In a regime of
limited excess reserves, the Federal Reserve’s policy
tools most directly affect overnight unsecured rates
paid by banks, such as the effective federal funds rate
(EFFR) and the overnight bank funding rate
(OBFR). These rates could also be targeted with
abundant excess reserves, as could interest rates on
secured funding or a mixture of secured and unsecured rates.
Participants commented on the advantages of a
regime of policy implementation with abundant
excess reserves. Based on experience over recent
years, such a regime was seen as providing good control of short-term money market rates in a variety of
market conditions and effective transmission of those
rates to broader financial conditions. Participants
commented that, by contrast, interest rate control
might be difficult to achieve in an operating regime
of limited excess reserves in view of the potentially
greater unpredictability of reserve demand resulting
from liquidity regulations or changes in risk appetite,
or the increased variability of factors affecting
reserve supply. Participants also observed that
regimes with abundant excess reserves could provide
effective control of short-term rates even if large
amounts of liquidity needed to be added to address
liquidity strains or if large-scale asset purchases
needed to be undertaken to provide macroeconomic
stimulus in situations where short-term rates are at
their effective lower bound. Monetary policy operations in this regime would also not require active

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105th Annual Report | 2018

management of reserve supply. In addition, the provision of sizable quantities of reserves could enhance
financial stability and reduce operational risks in the
payment system by maintaining a high level of
liquidity in the banking system.
A number of participants commented that the attractive features of a regime of abundant excess reserves
should be weighed against the potential drawbacks of
such a regime as well as the potential benefits of
returning to a regime similar to that employed before
the financial crisis. Potential drawbacks of an abundant reserves regime included challenges in precisely
determining the quantity of reserves necessary in
such systems, the need to maintain relatively sizable
quantities of reserves and holdings of securities, and
relatively large ongoing interest expenses associated
with the remuneration of reserves. Some noted that
returning to a regime of limited excess reserves could
demonstrate the Federal Reserve’s ability to fully
unwind the policies used to respond to the crisis and
might thereby increase public acceptance or effectiveness of such policies in the future. Participants noted
that the level of reserve balances required to remain
in a regime where rate control does not entail active
management of the supply of reserves was quite
uncertain, but they thought that reserve supply could
be reduced substantially below its current level while
remaining in such a regime. They expected to learn
more about the demand for reserves as the balance
sheet continued to shrink in a gradual and predictable manner. They also observed that it might be possible to adopt strategies that provide incentives for
banks to reduce their demand for reserves. Participants judged that if the level of reserves needed for a
regime with abundant excess reserves turned out to
be considerably higher than anticipated, the possibility of returning to a regime in which excess reserves
were limited and adjustments in reserve supply were
used to influence money market rates would warrant
further consideration.
Participants noted that lending in the federal funds
market was currently dominated by the Federal Home
Loan Banks (FHLBs). Participants cited several
potential benefits of targeting the OBFR rather than
the EFFR: The larger volume of transactions and
greater variety of lenders underlying the OBFR could
make that rate a broader and more robust indicator of
banks’ overnight funding costs, the OBFR could
become an even better indicator after the potential
incorporation of data on onshore wholesale deposits,
and the similarity of the OBFR and the EFFR suggested that transitioning to the OBFR would not

require significant changes in the way the Committee
conducted and communicated monetary policy. Some
participants saw it as desirable to explore the possibility of targeting a secured interest rate. Some also
expressed interest in studying, over the longer term,
approaches in which the Committee would target a
mixture of secured and unsecured rates.
Participants expected to continue their discussion of
long-run implementation frameworks and related
issues at upcoming meetings. They emphasized that it
would be important to communicate clearly the rationale for any choice of operating regime and target
interest rate.

Developments in Financial Markets and
Open Market Operations
The manager of the System Open Market Account
(SOMA) reviewed recent developments in domestic
and global financial markets. The equity market was
quite volatile over the intermeeting period, with U.S.
stock prices down as much as 10 percent at one point
before recovering somewhat. Investors pointed to a
number of uncertainties in the global outlook that
may have contributed to the decline in stock prices,
including ongoing trade tensions between the United
States and China, growing concerns about the fiscal
position of the Italian government and its broader
implications for financial markets and institutions,
and some worries about the outcome of the Brexit
negotiations. Market contacts also noted some nervousness about corporate earnings growth and an
increase in longer-term Treasury yields over recent
weeks as factors contributing to downward pressure
on equity prices. The volatility in equity markets was
accompanied by a rise in risk spreads on corporate
debt, although the widening in risk spreads was not
as notable as in some past stock market downturns.
On balance, the turbulence in equity markets did not
leave much imprint on near-term U.S. monetary
policy expectations. Respondents to the Open Market Desk’s recent Survey of Primary Dealers and
Survey of Market Participants indicated that respondents placed high odds on a further quarter-point
increase in the target range for the federal funds rate
at the December FOMC meeting; that expectation
also seemed to be embedded in federal funds futures
quotes. Further out, the median of survey respondents’ modal expectations for the path of the federal
funds rate pointed to about three additional policy
firmings next year while futures quotes appeared to
be pricing in a somewhat flatter trajectory.

Minutes of Federal Open Market Committee Meetings | November

251

The manager also reviewed recent developments in
global markets. In China, investors were concerned
about the apparent slowing of economic expansion
and the implications of continued trade tensions with
the United States. Chinese stock price indexes
declined further over the intermeeting period and
were off nearly 20 percent on the year to date. The
renminbi continued to depreciate, moving closer to
7.0 renminbi per dollar—a level that some market
participants viewed as a possible trigger for intensifying depreciation pressures. Anecdotal reports suggested that Chinese authorities had intervened to
support the renminbi.

become a very important factor influencing the
spread between the IOER rate and the EFFR over
the last three quarters of next year. The deputy manager also provided an update on plans to incorporate
additional data on overnight deposits in the OBFR.
Banks had begun reporting new data on onshore
overnight deposits in October. In aggregate, the volumes reported in onshore overnight deposits were
substantial and the rates reported for these instruments were very close to rates reported on overnight
Eurodollar transactions. The new data were expected
to be incorporated in the calculation of the OBFR
later next year.

The deputy manager followed with a discussion of
recent developments in money markets and Desk
operations. The EFFR along with other overnight
rates edged higher over the weeks following the
increase in the target range at the previous meeting.
Most recently, the EFFR had risen to the level of the
IOER rate, placing it 5 basis points below the top of
the target range. The upward pressure on the EFFR
and other money market rates reportedly stemmed
partly from a sizable increase in Treasury bill supply
and a corresponding increase in Treasury bill yields.
In part reflecting that development, FHLBs shifted
the composition of their liquidity portfolios away
from overnight lending in the federal funds market in
favor of the higher returns on overnight repurchase
agreements and on interest-bearing deposit accounts
at banks; these reallocations in their liquidity portfolios in turn contributed to upward pressure on the
EFFR. At the same time, anecdotal reports suggested
that some depositories were seeking to increase their
borrowing in federal funds from FHLBs, partly
because of the favorable treatment of such borrowing
under liquidity regulations. In addition, rates on term
borrowing had moved higher over recent weeks, perhaps encouraging some depositories to bid up rates
on overnight federal funds loans. To date, there were
no clear signs that the ongoing decline in reserve balances in the banking system associated with the
gradual normalization of the Federal Reserve’s balance sheet had contributed meaningfully to the
upward pressure on money market rates. Indeed,
banks reportedly were willing to reduce reserve holdings in order to lend in overnight repurchase agreement (repo) markets at rates just a few basis points
above the IOER rate.

Following the Desk briefings, the Chairman noted
the upward trend in the EFFR relative to the IOER
rate over the intermeeting period and suggested that
it might be appropriate to implement another technical adjustment in the IOER rate relative to the top of
the target range for the federal funds rate fairly soon.
While the funds rate seemed to have stabilized
recently, there remained some risk that it could continue to drift higher before the Committee’s next
meeting. As a contingency plan, participants agreed
that it would be appropriate for the Board to implement such a technical adjustment in the IOER rate
before the December meeting if necessary to keep the
federal funds rate well within the target range established by the FOMC.

However, respondents to the Desk’s recent Survey of
Primary Dealers and Survey of Market Participants
indicated that they anticipated the reduction in the
supply of reserves in the banking system could

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 November 7–8
meeting indicated that labor market conditions continued to strengthen in recent months and that real
gross domestic product (GDP) rose at a strong rate in
the third quarter, similar to its pace in the first half of
the year. Consumer price inflation, as measured by
the 12-month percentage change in the price index
for personal consumption expenditures (PCE), was
2.0 percent in September. Survey-based measures of
longer-run inflation expectations were little changed
on balance.
Total nonfarm payroll employment increased at a
strong pace, on average, in September and October.
The national unemployment rate decreased to
3.7 percent in September and remained at that level

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105th Annual Report | 2018

in October, while the labor force participation rate
and the employment-to-population ratio moved up
somewhat over those two months. The unemployment rates for African Americans, Asians, and Hispanics in October were below their levels at the end
of the previous expansion. The share of workers
employed part time for economic reasons continued
to be close to the lows reached in late 2007. The rates
of private-sector job openings and quits both
remained at high levels in September; initial claims
for unemployment insurance benefits in late October
were close to historically low levels. Total labor compensation per hour in the nonfarm business sector
increased 2.8 percent over the four quarters ending in
the third quarter, the employment cost index for private workers increased 2.9 percent over the
12 months ending in September, and average hourly
earnings for all employees rose 3.1 percent over the
12 months ending in October.
Industrial production expanded at a solid pace again
in September, and indicators for output in the fourth
quarter were generally positive. Production worker
hours in the manufacturing sector increased in October, automakers’ assembly schedules suggested that
light motor vehicle production would rise in the
fourth quarter, and new orders indexes from national
and regional manufacturing surveys pointed to solid
gains in factory output in the near term.
Real PCE continued to grow strongly in the third
quarter. Overall consumer spending rose steadily in
recent months, and light motor vehicle sales stepped
up to a robust pace in September and edged higher in
October. Key factors that influence consumer spending—including solid gains in real disposable personal
income and the effects of earlier increases in equity
prices and home values on households’ net worth—
continued to be supportive of solid real PCE growth
in the near term. Consumer sentiment, as measured
by the University of Michigan Surveys of Consumers, remained upbeat in October.
Real residential investment declined further in the
third quarter, likely reflecting a range of factors
including the continued effects of rising mortgage
interest rates on the affordability of housing. Starts
of both new single-family homes and multifamily
units decreased last quarter, but building permit issuance for new single-family homes—which tends to be
a good indicator of the underlying trend in construction of such homes—was little changed on net. Sales
of both new and existing homes declined again in the

third quarter, while pending home sales edged up in
September.
Growth in real private expenditures for business
equipment and intellectual property moderated in the
third quarter following strong gains in these expenditures in the first half of the year. Nominal orders and
shipments of nondefense capital goods excluding aircraft edged down over the two months ending in September after brisk increases in July, while readings on
business sentiment remained upbeat. Real business
expenditures for nonresidential structures declined in
the third quarter both for the drilling and mining sector and outside that sector. The number of crude oil
and natural gas rigs in operation—an indicator of
business spending for structures in the drilling and
mining sector—held about steady from late May
through late October.
Total real government purchases rose in the third
quarter. Real federal purchases increased, mostly
reflecting higher defense expenditures. Real purchases by state and local governments also increased,
as real construction spending by these governments
rose and payrolls expanded.
The nominal U.S. international trade deficit widened
in August and September. Exports decreased in
August but more than recovered in September,
reflecting the pattern of industrial supplies exports.
Imports of consumer goods led imports higher in
both months. The change in net exports was estimated to have been a sizable drag on real GDP
growth in the third quarter.
Total U.S. consumer prices, as measured by the PCE
price index, increased 2.0 percent over the 12 months
ending in September. Core PCE price inflation,
which excludes changes in consumer food and energy
prices, also was 2.0 percent over that same period.
The consumer price index (CPI) rose 2.3 percent over
the 12 months ending in September, while core CPI
inflation was 2.2 percent. Recent readings on surveybased measures of longer-run 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 growth appeared to pick up in the
third quarter, as a strong rebound in economic activity in several emerging market economies (EMEs)
more than offset a slowdown in China and most

Minutes of Federal Open Market Committee Meetings | November

advanced foreign economies (AFEs). Preliminary
GDP data showed that Mexico’s economy grew
briskly, reversing its second-quarter contraction,
while indicators suggested that Brazil’s economy
rebounded from a nationwide truckers’ strike. In contrast, GDP growth slowed in China and the euro
area, and indicators pointed to a step-down in Japanese growth. Foreign inflation picked up in the third
quarter, boosted by higher oil prices and, in China,
by higher food prices. However, underlying inflation
pressures remained muted, especially in some AFEs.

253

for the federal funds rate at the November FOMC
meeting and high odds of a further firming at the
December FOMC meeting. The market-implied path
for the federal funds rate beyond 2018 increased a bit.
Medium- and longer-term nominal Treasury yields
ended the period higher amid some moderate volatility over the intermeeting period. Meanwhile, measures of inflation compensation derived from Treasury
Inflation-Protected Securities declined somewhat,
with some of the decline occurring following the
weaker-than-expected September CPI release.

Staff Review of the Financial Situation
Concerns about ongoing international trade tensions,
the global growth outlook, and rising interest rates
weighed on global equity market sentiment over the
intermeeting period. Domestic stock prices declined
considerably, on net, and equity market implied volatility rose. Nominal Treasury yields ended the period
higher amid some moderate volatility, and the broad
dollar index moved up. Financing conditions for
nonfinancial businesses and households remained
supportive of economic activity on balance.
During the intermeeting period, broad U.S. equity
price indexes declined considerably, on net, amid
somewhat elevated day-to-day volatility. Various factors appeared to weigh on investor sentiment including news related to ongoing international trade tensions and investors’ concerns about the sustainability
of strong corporate earnings growth. Stock prices in
the basic materials and industrial sectors underperformed the broader market, reportedly reflecting an
increase in trade tensions with China. More broadly,
investors seemed to reassess equity valuations that
appeared elevated. Investors also reacted to some
large firms raising concerns about the effect of rising
costs on their future profitability in their latest earnings reports. Option-implied volatility on the S&P
500 index at the one-month horizon—the VIX—increased, though it remained below the levels seen in
early February. Despite the considerable declines in
domestic stock prices, spreads of investment- and
speculative-grade corporate bonds over comparablematurity Treasury yields widened only modestly.
FOMC communications over the intermeeting
period were viewed by market participants as consistent with a continued gradual removal of monetary
policy accommodation. Market-implied measures of
monetary policy expectations were generally little
changed. Investors continued to see virtually no odds
of a further quarter-point firming in the target range

Overnight interest rates in short-term funding markets rose in line with the increase in the target range
for the federal funds rate announced at the September FOMC meeting. Over the intermeeting period,
the spread between the EFFR and the IOER rate
narrowed from 2 basis points to 0 basis points.
Take-up at the Federal Reserve’s overnight reverse
repo facility remained low.
Over the intermeeting period, global investors
focused on changes in U.S. equity prices and interest
rates, ongoing trade tensions between the United
States and China, and uncertainty regarding budget
negotiations between the Italian government and the
European Union. Foreign equity prices posted
notable net declines; option-implied measures of foreign equity volatility spiked in October but remained
well below levels seen in February and subsequently
retraced some of those increases. Ten-year Italian
sovereign bond spreads over German equivalents
widened significantly, and there were moderate spillovers to other euro-area peripheral spreads. Bond
yields in Germany and the United Kingdom fell,
partly reflecting weaker-than-expected inflation data
and European political developments. In contrast,
Canadian yields increased slightly, bolstered by the
announcement of the U.S.-Mexico-Canada trade
agreement and a policy rate hike by the Bank of
Canada. The dollar appreciated against most
advanced and emerging market currencies, and
EME-dedicated funds experienced small outflows.
Financing conditions for nonfinancial firms continued to be supportive of borrowing and spending over
the intermeeting period. Net debt financing of nonfinancial firms was robust in the third quarter, as weak
speculative-grade bond issuance was largely offset by
rapid leveraged loan issuance. The pace of equity
issuance was solid in September but slowed somewhat in October. The outlook for corporate earnings
remained favorable on balance.

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105th Annual Report | 2018

Respondents to the October Senior Loan Officer
Opinion Survey on Bank Lending Practices (SLOOS)
reported, on net, that their institutions had eased
standards and terms for commercial and industrial
loans to large and middle-market firms over the past
three months. All respondents that had done so cited
increased competition from other lenders as an
important reason. The credit quality of nonfinancial
corporations remained solid, though there were some
signs of modest deterioration. Gross issuance of
municipal bonds in September and October was
strong, much of which raised new capital.
Financing conditions in the commercial real estate
(CRE) sector remained accommodative. Banks in the
October SLOOS reported, on a portfolio-weighted
basis, an easing of standards on CRE loans over the
third quarter on net. Interest rate spreads on commercial mortgage-backed securities (CMBS)
remained near their post-crisis lows, while issuance of
non-agency and agency CMBS was stable in recent
months and similar to year-earlier levels.
Most borrowers in the residential mortgage market
continued to experience accommodative financing
conditions, although the increase in mortgage rates
since 2016 appeared to have reduced housing
demand, and financing conditions remained somewhat tight for borrowers with low credit scores.
Growth in home-purchase mortgage originations
slowed over the past year as mortgage rates stayed
near their highest level since 2011, and refinancing
activity continued to be very muted.
Financing conditions in consumer credit markets, on
balance, remained supportive of growth in household
spending, although interest rates for consumer loans
continued to rise. Credit card loan growth showed
signs of moderating amid rising interest rates and
reported tightening of lending standards at the largest credit card banks. Compared with the beginning
of this year, respondents to the October 2018 SLOOS
reported, on a portfolio-weighted basis, a reduced
willingness to issue credit card loans to borrowers
across the credit spectrum and, in particular, to borrowers with lower credit scores; meanwhile, banks
reported having eased standards on auto loans.
The staff provided its latest report on potential risks
to financial stability; the report again characterized
the financial vulnerabilities of the U.S. financial
system as moderate on balance. This overall assessment incorporated the staff’s judgment that vulnerabilities associated with asset valuation pressures

continued to be elevated, that vulnerabilities from
financial-sector leverage and maturity and liquidity
transformation remained low, and that vulnerabilities
from household leverage were still in the low-tomoderate range. Additionally, the staff judged vulnerabilities from leverage in the nonfinancial business
sector as elevated and noted a pickup in the issuance
of risky debt and the continued deterioration in
underwriting standards on leveraged loans. The staff
also characterized overall vulnerabilities to foreign
financial stability as moderate while highlighting specific issues in some foreign economies, including—depending on the country—high private or sovereign
debt burdens, external vulnerabilities, and political
uncertainties.

Staff Economic Outlook
In the U.S. economic forecast prepared for the
November FOMC meeting, the staff continued to
project that real GDP would increase a little less rapidly in the second half of the year than in the first
half. Hurricanes Florence and Michael had devastating effects on many communities, but they appeared
likely to leave essentially no imprint on the national
economy in the second half of the year as a whole.
Relative to the forecast prepared for the previous
meeting, the projection for real GDP growth this year
was little revised. Over the 2018–20 period, output
was forecast to rise at a rate above or at the staff’s
estimate of potential growth and then slow to a pace
below it in 2021. The unemployment rate was projected to decline further below the staff’s estimate of
its longer-run natural rate but to bottom out in 2020
and begin to edge up in 2021. The medium-term projection for real GDP growth was only a bit weaker
than in the previous forecast, primarily reflecting a
lower projected path for equity prices, leaving the
unemployment rate forecast little revised. With labor
market conditions already tight, the staff continued
to assume that projected employment gains would
manifest in smaller-than-usual downward pressure on
the unemployment rate and in larger-than-usual
upward pressure on the labor force participation rate.
The staff expected both total and core PCE price
inflation to remain close to 2 percent through the
medium term. The staff’s forecasts for both total and
core PCE price inflation were little revised on net.
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 staff also saw the risks to the forecasts

Minutes of Federal Open Market Committee Meetings | November

for real GDP growth and the unemployment rate as
balanced. On the upside, household spending and
business investment could expand faster than the
staff projected, supported in part by the tax cuts
enacted last year. On the downside, trade policies and
foreign economic developments could move in directions that have significant negative effects on U.S.
economic growth. Risks to the inflation projection
also were seen as balanced. The upside risk that inflation could increase more than expected in an
economy that was projected to move further above its
potential was counterbalanced by the downside risk
that longer-term inflation expectations may be lower
than was assumed in the staff forecast.

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 strong rate. Job gains had been strong, on average, in recent months, and the unemployment rate
had declined. Household spending had continued to
grow strongly, while growth of business fixed investment had moderated from its rapid pace earlier in the
year. On a 12-month basis, both overall inflation and
core inflation, which excludes changes in food and
energy prices, had remained near 2 percent. Indicators of longer-term inflation expectations were little
changed on balance.
Based on recent readings on spending, prices, and the
labor market, participants generally indicated little
change in their assessment of the economic outlook,
with above-trend economic growth expected to continue before slowing to a pace closer to trend over the
medium term. Participants pointed to several factors
supporting above-trend growth, including strong
employment gains, expansionary federal tax and
spending policies, and continued high levels of consumer and business confidence. Several participants
observed that the stimulative effects of fiscal policy
would likely diminish over time, while the lagged
effects of reductions in monetary policy accommodation would show through more fully, with both factors contributing to their expectation that economic
growth would slow to a pace closer to trend.
In their discussion of the household sector, participants generally continued to characterize consumption growth as strong. This view was supported by

255

reports from District contacts, which were mostly
upbeat regarding consumer spending. Although
household spending overall was seen as strong, most
participants noted weakness in residential investment. This weakness was attributed to a variety of
factors, including increased mortgage rates, building
cost increases, and supply constraints.
Participants observed that growth in business fixed
investment slowed in the third quarter following several quarters of rapid growth. Some participants
pointed to anecdotal evidence regarding higher tariffs
and uncertainty about trade policy, slowing global
demand, rising input costs, or higher interest rates as
possible factors contributing to the slowdown. A
couple of others noted that business investment
growth can be volatile on a quarterly basis and factors such as the recent cuts in corporate taxes and
high levels of business sentiment were expected to
support investment going forward.
Reports from District contacts in the manufacturing,
energy, and service sectors were generally favorable,
though growth in manufacturing activity was reportedly moderating in a couple of Districts. Business
contacts generally remained optimistic about the outlook, but concerns about trade policy, slowing foreign demand, and labor shortages were reportedly
weighing on business prospects. Contacts in the agricultural sector reported that conditions remain
depressed, in part, due to the effects of trade policy
actions on exports and farm incomes.
Participants agreed that labor market conditions had
strengthened further over the intermeeting period.
Payrolls had increased strongly in October, and
measures of labor market tightness such as rates of
job openings and quits continued to be elevated. The
unemployment rate remained at a historically low
level in October, and the labor force participation
rate moved up. A couple of participants saw scope
for further increases in the labor force participation
rate as the strong economy pulled more workers into
the labor market, while a couple of other participants
judged that there was little scope for significant further increases.
Contacts in many Districts continued to report tight
labor markets with difficulties finding qualified workers. In some cases, firms were responding to these difficulties by increasing training for less-qualified
workers, outsourcing work, or automating production, while in other cases, firms were responding by
raising wages. Contacts in a couple of Districts indi-

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105th Annual Report | 2018

cated that labor shortages, particularly for skilled
labor, might be constraining activity in certain industries. Participants observed that, at the national level,
measures of nominal wage growth appeared to be
picking up. Many participants noted that the recent
pace of aggregate wage gains was broadly consistent
with trends in productivity growth and inflation.
Participants observed that both overall and core PCE
price inflation remained near 2 percent on a
12-month basis. In general, participants viewed
recent price developments as consistent with their
expectation that inflation would remain near the
Committee’s symmetric 2 percent objective on a sustained basis. Reports from business contacts and surveys in a number of Districts were consistent with
some firming in inflationary pressure. Contacts in
many Districts indicated that input costs had risen
and that increased tariffs were raising costs, especially
for industries relying heavily on steel and aluminum.
In a few Districts, transportation costs had reportedly increased. Some contacts indicated that while
input costs were higher, it appeared that the passthrough of these higher costs to consumer prices was
limited.
Participants commented on a number of risks and
uncertainties associated with their outlook for economic activity, the labor market, and inflation over
the medium term. A few participants indicated that
uncertainty had increased recently, pointing to the
high levels of uncertainty regarding the effects of fiscal and trade policies on economic activity and inflation. Some participants viewed economic and financial developments abroad, including the possibility of
further appreciation of the U.S. dollar, as posing
downside risks for domestic economic growth and
inflation. A couple of participants expressed the concern that measures of inflation expectations would
remain low, particularly if economic growth slowed
more than expected. Several participants were concerned that the high level of debt in the nonfinancial
business sector, and especially the high level of leveraged loans, made the economy more vulnerable to a
sharp pullback in credit availability, which could
exacerbate the effects of a negative shock on economic activity. The potential for an escalation in tariffs or trade tensions was also cited as a factor that
could slow economic growth more than expected.
With regard to upside risks, participants noted that
greater-than-expected effects of fiscal stimulus and
high consumer confidence could lead to strongerthan-expected economic outcomes. Some participants raised the concern that tightening resource uti-

lization in conjunction with an increase in the ability
of firms to pass through increases in tariffs or in
other input costs to consumer prices could generate
undesirable upward pressure on inflation. In general,
participants agreed that risks to the outlook
appeared roughly balanced.
In their discussion of financial developments, participants observed that financial conditions tightened
over the intermeeting period, as equity prices
declined, longer-term yields and borrowing costs for
most sectors increased, and the foreign exchange
value of the dollar rose. Despite these developments,
a number of participants judged that financial conditions remained accommodative relative to historical
norms.
Among those who commented on financial stability,
a number cited possible risks related to elevated CRE
prices, narrow corporate bond spreads, or strong
issuance of leveraged loans. A few participants suggested that some of these financial vulnerabilities
might not currently represent risks to financial stability so much as they represent downside risks to the
economic outlook; a couple of participants suggested
that financial stability risks and risks to the outlook
are interconnected. A couple of participants also
commented on the upcoming release of the Board’s
first public Financial Stability Report and noted that
the report would increase the transparency of the
Federal Reserve’s financial stability work as well as
enhance communications on this topic.
In their discussion of monetary policy, participants
agreed that it would be appropriate to maintain the
current target range for the federal funds rate at this
meeting. Participants generally judged that the
economy had been evolving about as they had anticipated, with economic activity rising at a strong rate,
labor market conditions continuing to strengthen,
and inflation running at or near the Committee’s
longer-run objective. Almost all participants reaffirmed the view that further gradual increases in the
target range for the federal funds rate would likely be
consistent with sustaining the Committee’s objectives
of maximum employment and price stability.
Consistent with their judgment that a gradual
approach to policy normalization remained appropriate, almost all participants expressed the view that
another increase in the target range for the federal
funds rate was likely to be warranted fairly soon if
incoming information on the labor market and inflation was in line with or stronger than their current

Minutes of Federal Open Market Committee Meetings | November

expectations. However, a few participants, while
viewing further gradual increases in the target range
of the federal funds rate as likely to be appropriate,
expressed uncertainty about the timing of such
increases. A couple of participants noted that the
federal funds rate might currently be near its neutral
level and that further increases in the federal funds
rate could unduly slow the expansion of economic
activity and put downward pressure on inflation and
inflation expectations.
Participants emphasized that the Committee’s
approach to setting the stance of policy should be
importantly guided by incoming data and their implications for the economic outlook. They noted that
their expectations for the path of the federal funds
rate were based on their current assessment of the
economic outlook. Monetary policy was not on a
preset course; if incoming information prompted
meaningful reassessments of the economic outlook
and attendant risks, either to the upside or the downside, their policy outlook would change. Various factors such as the recent tightening in financial conditions, risks in the global outlook, and some signs of
slowing in interest-sensitive sectors of the economy
on the one hand, and further indicators of tightness
in labor markets and possible inflationary pressures,
on the other hand, were noted in this context. Participants also commented on how the Committee’s communications in its postmeeting statement might need
to be revised at coming meetings, particularly the language referring to the Committee’s expectations for
“further gradual increases” in the target range for the
federal funds rate. Many participants indicated that it
might be appropriate at some upcoming meetings to
begin to transition to statement language that placed
greater emphasis on the evaluation of incoming data
in assessing the economic and policy outlook; such a
change would help to convey the Committee’s flexible approach in responding to changing economic
circumstances.

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 strong
rate. Job gains had been strong, on average, in recent
months, and the unemployment rate had declined.
Household spending had continued to grow strongly,
while growth of business fixed investment had moderated recently from its rapid pace earlier in the year.

257

On a 12-month basis, both overall inflation and inflation for items other than food and energy remained
near 2 percent. Indicators of long-term inflation
expectations were little changed on balance.
Members generally judged that the economy had
been evolving about as they had anticipated at the
previous meeting. Financial conditions, although
somewhat tighter than at the time of the September
FOMC meeting, had stayed accommodative overall,
while the effects of expansionary fiscal policies
enacted over the past year were expected to continue
through the medium term. Consequently, members
continued to expect that further gradual increases in
the target range for the federal funds rate would be
consistent with sustained expansion of economic
activity, strong labor market conditions, and inflation
near the Committee’s symmetric 2 percent objective
over the medium term. Members continued to judge
that the risks to the economic outlook were roughly
balanced.
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 2 to 2¼ percent. 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
maximum employment and symmetric 2 percent
inflation objectives. They reiterated that this assessment would take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation
expectations, and readings on financial and international developments. More generally, members noted
that decisions regarding near-term adjustments of
the stance of monetary policy would appropriately
remain dependent on the evolution of the outlook as
informed by incoming data.
At the conclusion of the discussion, the Committee
voted to authorize and direct the Federal Reserve
Bank of New York, until instructed otherwise, to
execute transactions in the SOMA in accordance
with the following domestic policy directive, to be
released at 2:00 p.m.:
“Effective November 9, 2018, 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 2 to 2¼ percent, including overnight reverse

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105th Annual Report | 2018

repurchase operations (and reverse repurchase
operations with maturities of more than one day
when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 2.00 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.

labor market conditions, and inflation near the
Committee’s symmetric 2 percent objective over
the medium term. Risks to the economic outlook appear roughly balanced.

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 September indicates
that the labor market has continued to
strengthen and that economic activity has been
rising at a strong rate. Job gains have been
strong, on average, in recent months, and the
unemployment rate has declined. Household
spending has continued to grow strongly, while
growth of business fixed investment has moderated from its rapid pace earlier in the year. On a
12-month basis, both overall inflation and inflation for items other than food and energy
remain near 2 percent. Indicators 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
further gradual increases in the target range for
the federal funds rate will be consistent with sustained expansion of economic activity, strong

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 2 to 2¼ percent.

Voting for this action: Jerome H. Powell, John C.
Williams, Thomas I. Barkin, Raphael W. Bostic, Lael
Brainard, Richard H. Clarida, Mary C. Daly, Loretta
J. Mester, 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 2.20 percent and voted unanimously to
approve establishment of the primary credit rate at
the existing level of 2.75 percent, effective November 9, 2018.

Update from Subcommittee on
Communications
Governor Clarida presented a proposal from the subcommittee on communications to conduct a review
during 2019 of the Federal Reserve’s strategic framework for monetary policy. This assessment would
consider the strategy, tools, and communications that
would best enable the Federal Reserve to meet its
statutory objectives of maximum employment and
price stability. With labor market conditions close to
maximum employment and inflation near the Committee’s 2 percent objective, it was an opportune time
for the Federal Reserve to undertake this review and
assess the robustness of its strategic framework.

Minutes of Federal Open Market Committee Meetings | November

During the review, the Federal Reserve would engage
with a broad range of interested stakeholders across
the country and host a research conference in
June 2019. FOMC participants would discuss the
strategic framework at subsequent FOMC meetings,
drawing on the lessons from the outreach efforts and
on staff analysis. The goal of these discussions would
be to identify possible ways to improve the Committee’s current strategic policy framework in order to
ensure that the Federal Reserve is best positioned
going forward to achieve its statutory mandate.

259

Notation Vote
By notation vote completed on October 16, 2018, the
Committee unanimously approved the minutes of the
Committee meeting held on September 25–26, 2018.
James A. Clouse
Secretary

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105th Annual Report | 2018

Meeting Held
on December 18–19, 2018
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 18, 2018, at 1:00 p.m. and continued on
Wednesday, December 19, 2018, at 9:00 a.m.1

Steven B. Kamin
Economist
Thomas Laubach
Economist
David W. Wilcox
Economist

Present

David Altig, Kartik B. Athreya, Thomas A. Connors,
David E. Lebow, Trevor A. Reeve, William Wascher,
and Beth Anne Wilson
Associate Economists

Jerome H. Powell
Chairman

Simon Potter
Manager, System Open Market Account

John C. Williams
Vice Chairman
Thomas I. Barkin
Raphael W. Bostic
Michelle W. Bowman
Lael Brainard
Richard H. Clarida
Mary C. Daly
Loretta J. Mester
Randal K. Quarles
James Bullard, Charles L. Evans, Esther L. George,
Eric Rosengren, and Michael Strine
Alternate Members of the Federal Open Market
Committee

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
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

Patrick Harker, Robert S. Kaplan, and Neel Kashkari
Presidents of the Federal Reserve Banks of
Philadelphia, Dallas, and Minneapolis, respectively

Rochelle M. Edge
Deputy Director, Division of Monetary Affairs,
Board of Governors

James A. Clouse
Secretary

Michael T. Kiley
Deputy Director, Division of Financial Stability,
Board of Governors

Matthew M. Luecke
Deputy Secretary
David W. Skidmore
Assistant Secretary
Michelle A. Smith
Assistant Secretary
Mark E. Van Der Weide
General Counsel

Jon Faust
Senior Special Adviser to the Chairman, Office of
Board Members, Board of Governors
Antulio N. Bomfim
Special Adviser to the Chairman, Office of Board
Members, Board of Governors

Michael Held
Deputy General Counsel

Brian M. Doyle, Joseph W. Gruber, Ellen E. Meade,
and John M. Roberts
Special Advisers to the Board, Office of Board
Members, Board of Governors

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 | December

261

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

Michele Cavallo5
Section Chief, Division of Monetary Affairs,
Board of Governors

Shaghil Ahmed and Christopher J. Erceg
Senior Associate Directors, Division of International
Finance, Board of Governors

Mark A. Carlson2
Senior Economic Project Manager, Division of
Monetary Affairs, Board of Governors

Eric M. Engen
Senior Associate Director, Division of Research and
Statistics, Board of Governors

David H. Small
Project Manager, Division of Monetary Affairs,
Board of Governors

Gretchen C. Weinbach3
Senior Associate Director, Division of Monetary
Affairs, Board of Governors

Andrea Ajello and Alyssa G. Anderson3
Principal Economists, Division of Monetary Affairs,
Board of Governors

Edward Nelson
Senior Adviser, Division of Monetary Affairs,
Board of Governors

Arsenios Skaperdas3
Economist, Division of Monetary Affairs,
Board of Governors

Marnie Gillis DeBoer,3 David López-Salido,
and Min Wei
Associate Directors, Division of Monetary Affairs,
Board of Governors

Donielle A. Winford
Information Management Analyst, Division of
Monetary Affairs, Board of Governors

John J. Stevens
Associate Director, Division of Research and
Statistics, Board of Governors
Steven A. Sharpe
Deputy Associate Director, Division of Research and
Statistics, Board of Governors
Jeffrey D. Walker2
Deputy Associate Director, Division of Reserve Bank
Operations and Payment Systems, Board of
Governors
Andrew Figura and John Sabelhaus
Assistant Directors, Division of Research and
Statistics, Board of Governors
Christopher J. Gust,4 Laura Lipscomb,3
and Zeynep Senyuz3
Assistant Directors, Division of Monetary Affairs,
Board of Governors
Don Kim
Adviser, Division of Monetary Affairs, Board of
Governors
Penelope A. Beattie5
Assistant to the Secretary, Office of the Secretary,
Board of Governors
3

Attended through the discussion of the long-run monetary
policy implementation frameworks.
Attended the discussion of financial developments and open
market operations through the close of the meeting.
Attended Tuesday session only.

Michael Dotsey, Sylvain Leduc, Daniel G. Sullivan,
Geoffrey Tootell, and Christopher J. Waller
Executive Vice Presidents, Federal Reserve Banks of
Philadelphia, San Francisco, Chicago, Boston, and
St. Louis, respectively
Todd E. Clark, Evan F. Koenig, Antoine Martin,
and Julie Ann Remache3
Senior Vice Presidents, Federal Reserve Banks of
Cleveland, Dallas, New York, and New York,
respectively
Roc Armenter,3 Kathryn B. Chen,3 Jonathan L. Willis,
and Patricia Zobel3
Vice Presidents, Federal Reserve Banks of
Philadelphia, New York, Kansas City, and
New York, respectively
Gara Afonso3 and William E. Riordan3
Assistant Vice Presidents, Federal Reserve Bank of
New York
Suraj Prasanna3 and Lisa Stowe3
Markets Officers, Federal Reserve Bank of New York
Samuel Schulhofer-Wohl2
Senior Economist and Research Advisor, Federal
Reserve Bank of Chicago
Fabrizio Perri
Monetary Advisor, Federal Reserve Bank of
Minneapolis

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105th Annual Report | 2018

Long-Run Monetary Policy Implementation
Frameworks
Committee participants resumed their discussion
from the November 2018 FOMC meeting of potential long-run frameworks for monetary policy implementation. At the December meeting, the staff provided a set of briefings that considered various issues
related to the transition to a long-run operating
regime with lower levels of excess reserves than at
present and to a long-run composition of the balance sheet.
The staff noted that during the transition to a longrun operating regime with excess reserves below current levels, the effective federal funds rate (EFFR)
could begin to rise a little above the interest on excess
reserves (IOER) rate as reserves in the banking
system declined gradually to a level that the Committee judges to be most appropriate for efficient and
effective implementation of policy. This upward
movement in the federal funds rate could be gradual.
However, the staff noted that the federal funds rate
and other money market rates could possibly become
somewhat volatile at times as banks and financial
markets adjusted to lower levels of reserve balances.
Were upward pressures on the federal funds rate to
emerge, it could be challenging to distinguish
between pressures that were transitory and likely to
abate as financial institutions adjust and those that
were more persistent and associated with aggregate
reserve scarcity. The staff reported on the monitoring
of conditions in money markets as well as various
survey and market outreach activities that could
assist in detecting reserve scarcity. The staff reviewed
a number of steps that the Federal Reserve could
take to ensure effective monetary policy implementation were upward pressures on the federal funds rate
and other money market rates to emerge. These steps
included lowering the IOER rate further within the
target range, using the discount window to support
the efficient distribution of reserves, and slowing or
smoothing the pace of reserve decline through open
market operations or through slowing portfolio
redemptions. The staff also discussed new ceiling
tools that could help keep the EFFR within the
Committee’s target range, including options that
would add new counterparties for the Open Market
Desk’s operations. The staff also provided a review of
the liabilities on the Federal Reserve’s balance sheet;
the review described the factors that influence the
size of reserve and nonreserve liabilities and discussed the increase in the size of these liabilities since
the financial crisis. Additionally, the staff outlined

various issues related to the long-run composition of
the System Open Market Account (SOMA) portfolio, including the maturity composition of the portfolio’s Treasury securities and the management of
residual holdings of agency mortgage-backed securities (MBS) after the Committee has normalized the
size of the balance sheet.
In discussing the transition to a long-run operating
regime, participants commented on the advantages
and disadvantages of allowing reserves to decline to a
level that could put noticeable upward pressure on
the federal funds rate, at least for a time. Reducing
reserves close to the lowest level that still corresponded to the flat portion of the reserve demand
curve would be one approach consistent with the
Committee’s previously stated intention, in the Policy
Normalization Principles and Plans that it issued in
2014, to “hold no more securities than necessary to
implement monetary policy efficiently and effectively.” However, reducing reserves to a point very
close to the level at which the reserve demand curve
begins to slope upward could lead to a significant
increase in the volatility in short-term interest rates
and require frequent sizable open market operations
or new ceiling facilities to maintain effective interest
rate control. These considerations suggested that it
might be appropriate to instead provide a buffer of
reserves sufficient to ensure that the Federal Reserve
operates consistently on the flat portion of the
reserve demand curve so as to promote the efficient
and effective implementation of monetary policy.
Participants discussed options for maintaining control of interest rates should upward pressures on
money market rates emerge during the transition to a
regime with lower excess reserves. Several participants commented on options that rely on existing or
currently used tools, such as further technical adjustments to the IOER rate to keep the federal funds rate
within the target range or using the discount window,
although such options were recognized to have limitations in some situations. Some participants commented on the possibility of slowing the pace of the
decline in reserves in approaching the longer-run
level of reserves. Standard temporary open market
operations could be used for this purpose. In addition, participants discussed options such as ending
portfolio redemptions with a relatively high level of
reserves still in the system and then either maintaining that level of reserves or allowing growth in nonreserve liabilities to very gradually reduce reserves further. These approaches could allow markets and
banks more time to adjust to lower reserve levels

Minutes of Federal Open Market Committee Meetings | December

while maintaining effective control of interest rates.
Several participants, however, expressed concern that
a slowing of redemptions could be misinterpreted as
a signal about the stance of monetary policy. Some
participants expressed an interest in learning more
about possible options for new ceiling tools to provide firmer control of the policy rate.
Participants commented on the role that the Federal
Reserve’s nonreserve liabilities have played in the
expansion of the Federal Reserve’s balance sheet
since the financial crisis. Many participants noted
that the magnitudes of these nonreserve liabilities—
most significantly currency but also liabilities to the
Treasury through the Treasury General Account and
liabilities to foreign official institutions through their
accounts at the Federal Reserve—are not closely
related to Federal Reserve monetary policy decisions.
They also remarked that the size of the Federal
Reserve’s balance sheet was expected to increase over
time as the growth of these liabilities roughly tracks
the growth of nominal gross domestic product
(GDP). Additionally, participants cited the social
benefits provided by these liabilities to the economy.
Participants considered it important to present information on the Federal Reserve’s balance sheet to the
public in ways that communicated these facts. In discussing the long-run level of reserve liabilities, participants noted that it might be useful to explore ways
to encourage banks to reduce their demand for
reserves and to provide information to banks and the
public about the likely long-run level of reserves.
Participants commented on a number of issues
related to the long-run composition of the SOMA
portfolio. With regard to the portfolio of Treasury
securities, participants discussed the advantages of
different portfolio maturity compositions. Several
participants noted that a portfolio of holdings
weighted toward shorter maturities would provide
greater flexibility to lengthen maturity if warranted
by an economic downturn, while a couple of others
noted that a portfolio with maturities that matched
the outstanding Treasury market would have a more
neutral effect on the market. With regard to the MBS
portfolio, participants noted that the passive runoff
of MBS holdings through principal paydowns would
continue for many years after the size of the balance
sheet had been normalized. Several participants commented on the possibility of reducing agency MBS
holdings somewhat more quickly than the passive
approach by implementing a program of very
gradual MBS sales sometime after the size of the balance sheet had been normalized.

263

Participants expected to continue their discussion of
long-run implementation frameworks and related
issues at upcoming meetings. They reiterated the
importance of communicating clearly on the rationale for any decision made on the implementation
framework.

Developments in Financial Markets and
Open Market Operations
The SOMA manager reviewed developments in
financial markets over the intermeeting period. Asset
prices were volatile in recent weeks, reportedly
reflecting a pullback from risk-taking by investors. In
part, the deterioration in risk sentiment appeared to
stem importantly from uncertainty about the state of
trade negotiations between China and the United
States. In addition, investors pointed to concerns
about the global growth outlook, the unsettled state
of Brexit negotiations, and uncertainties about the
political situation in Europe.
Against this backdrop, U.S. stock prices were down
nearly 8 percent on the period. Risk spreads on corporate bonds widened appreciably, with market participants reportedly focusing on the potential implications of downside risks to the U.S. economic outlook for the financial condition of companies,
particularly for companies at the lower end of the
investment-grade spectrum. Treasury yields declined
significantly, especially at longer maturities, contributing to some flattening of the Treasury yield curve.
Based on readings from Treasury Inflation-Protected
Securities (TIPS), the decline in nominal Treasury
yields was associated with a notable drop in inflation
compensation. A sizable decline in oil prices was
cited as an important factor contributing to the drop
in measures of inflation compensation.
The deterioration in market sentiment was accompanied by a significant downward revision in the
expected path of the federal funds rate based on federal funds futures quotes. In addition, futures-based
measures of policy expectations moved lower in
response to speeches by Federal Reserve officials. The
revision in the expected policy path was less noticeable
in the Desk’s survey-based measures of the expected
path of the federal funds rate. Desk surveys indicated
that respondents placed high odds on a further
quarter-point firming in the stance of monetary policy
at the December meeting, but lower than the near certainty of a rate increase reported just before previous
policy firmings in 2018; survey responses anticipated
that the median projected path of the federal funds

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rate in the Summary of Economic Projections (SEP)
would show only two additional quarter-point policy
firmings next year—down from the three policy firmings in the median path in the September SEP results.
The deputy manager followed with a discussion of
money market developments and open market operations. After a fast narrowing of the spread between the
IOER rate and the EFFR before the November meeting, the EFFR had remained stable at, or just 1 basis
point below the level of the IOER rate since then.
Some upward pressures on overnight rates were evident in the repurchase agreement (repo) market,
apparently from higher issuance of Treasury bills and
an associated expansion of primary dealer inventories
over the intermeeting period. Banks expanded their
lending in repo markets in light of higher repo rates
relative to the IOER rate; the willingness of banks to
lend in repo markets suggested that the reserve supply
was still ample. The deputy manager noted the results
of the recent Desk surveys of primary dealers and
market participants indicating an increase in the
median respondent’s estimate of the long-run level of
reserve balances to a level closer to that implied by
banks’ responses in the Senior Financial Officer Survey conducted in advance of the November FOMC
meeting. The deputy manager also reported on paydowns on the SOMA securities holdings. Under the
baseline outlook, prepayments of principal on agency
MBS would remain below the $20 billion redemption
cap for the foreseeable future. However, if longer-term
interest rates moved substantively lower than assumed
in the baseline, some modest reinvestments in MBS
could occur for a few months next year concurrent
with the pickup in seasonal turnover.
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 December 18–19
meeting indicated that labor market conditions continued to strengthen in recent months and that real
GDP growth was strong. Consumer price inflation,
as measured by the 12-month percentage change in
the price index for personal consumption expenditures (PCE), was 2 percent in October. Survey-based
measures of longer-run inflation expectations were
little changed on balance.

Total nonfarm payroll employment expanded further
in November, and job gains were strong, on average,
over recent months. The national unemployment rate
remained at a very low level of 3.7 percent, and both
the labor force participation rate and the
employment-to-population ratio also stayed flat in
November. The unemployment rates for African
Americans, Asians, and Hispanics in November were
below their levels at the end of the previous economic
expansion. The share of workers employed part time
for economic reasons was still close to the lows
reached in late 2007. The rates of private-sector job
openings and quits were both still at high levels in
October; initial claims for unemployment insurance
benefits in early December were still close to historically low levels. Total labor compensation per hour in
the nonfarm business sector—a volatile measure even
on a four-quarter change basis—increased 2.2 percent over the four quarters ending in the third quarter. Average hourly earnings for all employees rose
3.1 percent over the 12 months ending in November.
Industrial production expanded, on net, over October and November. Output increased in the mining
and utilities sectors, while manufacturing production
edged down on balance. Automakers’ assembly
schedules suggested that production of light motor
vehicles would rise in December, and new orders
indexes from national and regional manufacturing
surveys pointed to moderate gains in total factory
output in the coming months.
Household spending continued to increase at a strong
pace in recent months. Real PCE growth was brisk in
October, and the components of the nominal retail
sales used by the Bureau of Economic Analysis to construct its estimate of PCE rose considerably in November. The pace of light motor vehicle sales edged down
in November but stayed near its recent elevated level.
Key factors that influence consumer spending—including ongoing gains in real disposable personal
income and the effects of earlier increases in equity
prices and home values on households’ net worth—
continued to be supportive of solid real PCE growth in
the near term. Consumer sentiment, as measured by
the University of Michigan Surveys of Consumers,
remained relatively upbeat through early December.
Real residential investment appeared to be declining
further in the fourth quarter, likely reflecting in part
the effects of the rise in mortgage interest rates over
the past year on the affordability of housing. Starts of
new single-family homes decreased in October and
November, although starts of multifamily units rose

Minutes of Federal Open Market Committee Meetings | December

265

sharply in November. Building permit issuance for new
single-family homes, which tends to be a good indicator of the underlying trend in construction of such
homes, moved down modestly over recent months.
Sales of new homes declined markedly in October,
although existing home sales increased modestly.

2.2 percent. Recent readings on survey-based measures of longer-run inflation expectations—including
those from the Michigan survey, the Survey of Professional Forecasters, and the Desk’s Survey of Primary Dealers and Survey of Market Participants—
were little changed on balance.

Growth in real private expenditures for business
equipment and intellectual property looked to be
picking up solidly in the fourth quarter after moderating in the previous quarter. Nominal shipments of
nondefense capital goods excluding aircraft moved
up in October. Forward-looking indicators of business equipment spending—such as a rising backlog
of unfilled orders for nondefense capital goods
excluding aircraft and upbeat readings on business
sentiment—pointed to further spending gains in the
near term. Nominal business expenditures for nonresidential structures outside of the drilling and mining sector declined modestly in October, while the
number of crude oil and natural gas rigs in operation—an indicator of business spending for structures in the drilling and mining sector—held about
steady in November through early December.

Foreign economic growth continued at a moderate
pace in the third quarter, as a pickup in emerging
market economies (EMEs) roughly offset slowing
growth in advanced foreign economies (AFEs).
Among EMEs, growth in Mexico and Brazil bounced
back from transitory second-quarter weakness, more
than offsetting a slowdown in China and India. The
softness in AFE growth partly reflected temporary
factors, including disruptions from natural disasters
in Japan and the adoption of new car emissions testing in Germany. Indicators for economic activity in
the fourth quarter were consistent with continued
moderate foreign economic growth. Foreign inflation
fell in recent months, largely reflecting a significant
drag from lower oil prices. Underlying inflation pressures, especially in some AFEs, remained muted.

Staff Review of the Financial Situation
Total real government purchases appeared to be rising moderately in the fourth quarter. Nominal
defense spending in October and November pointed
to solid growth in real federal purchases. Real purchases by state and local governments looked to be
only edging up, as nominal construction spending by
these governments rose solidly in October but their
payrolls declined a little in October and November.
The nominal U.S. international trade deficit widened
slightly in October. Exports declined a little, with
decreases in exports of agricultural products and
capital goods, although exports of industrial supplies
increased. Imports rose a bit, with increases in
imports of consumer goods and automotive products, but imports of capital goods declined sharply
from September’s elevated level. Available trade data
suggested that the contribution of the change in net
exports to the rate of real GDP growth in the fourth
quarter would be much less negative than the drag of
nearly 2 percentage points in the third quarter.
Total U.S. consumer prices, as measured by the PCE
price index, increased 2 percent over the 12 months
ending in October. Core PCE price inflation, which
excludes changes in consumer food and energy prices,
was 1.8 percent over that same period. The consumer
price index (CPI) rose 2.2 percent over the 12 months
ending in November, and core CPI inflation was also

Investors’ perceptions of downside risks to the
domestic and global outlook appeared to increase
over the intermeeting period, reportedly driven in
part by signs of slowing in foreign economies and
growing concerns over escalating trade frictions. Both
nominal U.S. Treasury yields and U.S. equity prices
declined notably over the period. Financing conditions for businesses and households tightened a bit
but generally remained supportive of economic
growth.
Remarks by Federal Reserve officials over the intermeeting period were interpreted by market participants as signaling a shift in the stance of policy
toward a more gradual path of federal funds rate
increases. The market-implied path for the federal
funds rate for 2019 and 2020 shifted down markedly,
while the market-implied probability for a rate hike at
the December FOMC meeting declined slightly
though remained high.
Nominal Treasury yields fell considerably over the
period, with the declines most pronounced in longerdated maturities and contributing to a flattening of
the yield curve. The spread between 10- and 2-year
nominal Treasury yields narrowed to near the
20th percentile of its distribution since 1971. Investor
perceptions of increased downside risks to the out-

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105th Annual Report | 2018

looks for domestic and foreign economic growth,
including growing concerns over trade frictions
between the United States and China, reportedly
weighed on yields. Measures of inflation compensation derived from TIPS also decreased notably over
the period along with the declines in oil prices.
Concerns over escalating trade tensions, global
growth prospects, and the sustainability of corporate
earnings growth were among the factors that
appeared to contribute to a significant drop in U.S.
equity prices. The declines were largest in the technology and retail sectors. One-month option-implied
volatility on the S&P 500 index—the VIX—increased
over the period and corporate credit spreads widened, consistent with the selloff in equities.
Over the intermeeting period, foreign financial markets were affected by perceived increases in downside
risks to the global growth outlook and ongoing
uncertainty about trade relations between the United
States and China. Investors also focused on the state
of negotiations over Brexit and the Italian government budget deficit. Equity markets in AFEs posted
notable declines, and Europe-dedicated bond and
equity funds reported strong outflows. Equity
declines in EMEs were more modest, and emerging
market funds received modest inflows on net.
AFE sovereign yields declined significantly, reflecting
decreases in U.S. bond yields and weaker-thanexpected euro-area and U.K. economic data. Measures of inflation compensation generally fell, partly
reflecting sharp decreases in oil prices. Spreads of
Italian sovereign yields over German counterparts
narrowed amid progress on budget negotiations
between the Italian government and the European
Commission. The U.S. dollar appreciated modestly;
although declines in U.S. yields weighed on the dollar, deteriorating global risk sentiment provided support. Ongoing uncertainty about the passage of a
Brexit withdrawal agreement put downward pressure
on the exchange value of the British pound.

Financing conditions for nonfinancial firms
remained accommodative, on net, though funding
conditions for capital markets tightened somewhat as
spreads on nonfinancial corporate bonds widened to
near the middle of their historical distribution. Gross
issuance of corporate bonds also moderated in
November, driven by a significant step-down in
speculative-grade bond issuance, while institutional
leveraged loan issuance also slowed in November.
Small business credit market conditions were little
changed, and credit conditions in municipal bond
markets stayed accommodative on net.
Private-sector analysts revised down their projections
for year-ahead corporate earnings a bit. In many
cases, nonfinancial firms’ earnings reports suggested
that tariffs were a salient concern in the changed outlook for corporate earnings. The pace of gross equity
issuance through both seasoned and initial offerings
moderated, consistent with the weakness and volatility in the stock market.
In the commercial real estate (CRE) sector, financing
conditions remained accommodative. Commercial
mortgage-backed securities (CMBS) spreads widened
slightly over the intermeeting period but remained
near post-crisis lows. Issuance of non-agency CMBS
was stable while CRE loan growth remained strong at
banks. Financing conditions in the residential mortgage market also remained accommodative for most
borrowers, but the demand for mortgage credit softened. Purchase mortgage origination activity declined
modestly, while refinance activity remained muted.
Financing conditions in consumer credit markets also
remained accommodative. Broad consumer credit
grew at a solid pace through September, though
October and November saw credit card growth at
banks edge a bit lower on average. Conditions in the
consumer asset-backed securities market remained
stable over the intermeeting period with slightly
higher spreads and robust issuance.

Staff Economic Outlook
Short-term funding markets functioned smoothly
over the intermeeting period. Elevated levels of
Treasury bills outstanding have continued to put
upward pressure on money market rates. The EFFR
held steady at or very close to the level of the IOER
rate, while take-up in the overnight reverse repo facility remained near historically low levels. In offshore
funding markets, the one-month foreign exchange
swap basis for most major currencies increased, consistent with typical year-end pressures.

With some stronger-than-expected incoming data on
economic activity and the recent tightening in financial conditions, particularly the decline in equity
prices, the U.S. economic forecast prepared by the
staff for the December FOMC meeting was little
revised on balance. The staff continued to expect that
real GDP growth would be strong in the fourth quarter of 2018, although somewhat slower than the rapid
pace of growth in the previous two quarters. Over the

Minutes of Federal Open Market Committee Meetings | December

2018–20 period, real GDP was forecast to rise at a
rate above the staff’s estimate of potential output
growth and then slow to a pace below it in 2021. The
unemployment rate was projected to decline further
below the staff’s estimate of its longer-run natural
rate but to bottom out by 2020 and begin to edge up
in 2021. With labor market conditions already tight,
the staff continued to assume that projected employment gains would manifest in smaller-than-usual
downward pressure on the unemployment rate and in
larger-than-usual upward pressure on the labor force
participation rate.

267

their individual assessments of the appropriate path
for the federal funds rate. 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 SEP, which is an addendum to these
minutes.

The staff expected both total and core PCE price
inflation to be just a touch below 2 percent in 2018,
with total inflation revised down a bit because of
recent declines in consumer energy prices. Core PCE
price inflation was forecast to move up to 2 percent
in 2019 and remain at that level through the medium
term; total inflation was forecast to be a little below
core inflation in 2019, reflecting projected declines in
energy prices, and then to run at the same level as
core inflation over the following two years. The
staff’s medium-term projections for both total and
core PCE price inflation were little revised on net.

In their discussion of the economic situation and the
outlook, meeting participants agreed that information received since the FOMC met in November indicated that the labor market had continued to
strengthen and that economic activity had been rising
at a strong rate. Job gains had been strong, on average, in recent months, and the unemployment rate
had remained low. Household spending had continued to grow strongly, while growth of business fixed
investment had moderated from its rapid pace earlier
in the year. On a 12-month basis, both overall inflation and inflation for items other than food and
energy remained near 2 percent. Indicators of
longer-term inflation expectations were little changed
on balance.

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 staff also saw the risks to the forecasts
for real GDP growth and the unemployment rate as
balanced. On the upside, household spending and
business investment could expand faster than the
staff projected, supported in part by the tax cuts
enacted last year. On the downside, trade policies and
foreign economic developments could move in directions that have significant negative effects on U.S.
economic growth. Risks to the inflation projection
also were seen as balanced. The upside risk that inflation could increase more than expected in an
economy that was projected to move further above its
potential was counterbalanced by the downside risk
that longer-term inflation expectations may be lower
than was assumed in the staff forecast.

In assessing the economic outlook, participants
noted the contrast between the strength of incoming
data on economic activity and the concerns about
downside risks evident in financial markets and in
reports from business contacts. Recent readings on
household and business spending, inflation, and
labor market conditions were largely in line with participants’ expectations and indicated continued
strength of the economy. By contrast, financial markets were volatile and conditions had tightened over
the intermeeting period, with sizable declines in
equity prices and notably wider corporate credit
spreads coinciding with a continued flattening of the
Treasury yield curve; in part, these changes in financial conditions appeared to reflect greater concerns
about the global economic outlook. Participants also
reported hearing more frequent concerns about the
global economic outlook from business contacts.

Participants’ Views on Current Conditions
and the Economic Outlook

After taking into account incoming economic data,
information from business contacts, and the tightening of financial conditions, participants generally
revised down their individual assessments of the
appropriate path for monetary policy and indicated
either no material change or only a modest downward revision in their assessment of the economic
outlook. Economic growth was expected to remain
above trend in 2019 and then slow to a pace closer to

In conjunction with this FOMC meeting, members
of the Board of Governors and Federal Reserve
Bank presidents submitted their projections of the
most likely outcomes for real GDP growth, the
unemployment rate, and inflation for each year from
2018 through 2021 and over the longer run, based on

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trend over the medium term. Participants who downgraded their assessment of the economic outlook
pointed to a variety of factors underlying their
assessment, including recent financial market developments, some softening in the foreign economic
growth outlook, or a more pessimistic outlook for
housing-sector activity.
In their discussion of the household sector, participants generally characterized real PCE growth as
remaining strong. Participants pointed to a number
of factors that were supporting consumer spending,
including further gains in wages and household
income reflecting a strong labor market, expansionary federal tax policies, still-upbeat readings on consumer sentiment, recent declines in oil prices, and
household balance sheets that generally remained
healthy despite tighter financial conditions. Although
household spending overall was seen as strong, several participants noted continued weakness in residential investment. This weakness was attributed to a
variety of factors, including increased mortgage rates
and rising home prices. Reports from District contacts in the auto sector were mixed.
Several participants noted that business fixed investment remained solid despite a slowdown in the third
quarter, as more recent data pointed to a rebound in
investment spending. Business contacts in several
Districts reported robust activity through the end of
2018 and planned to follow through or expand on
their current capital expenditure projects. However,
contacts in a number of Districts appeared less
upbeat than at the time of the November meeting, as
concerns about a variety of factors—including trade
policy, waning fiscal stimulus, slowing global economic growth, or financial market volatility—were
reportedly beginning to weigh on business sentiment.
A couple of participants commented that the recent
decline in oil prices could be a sign of a weakening in
global demand that could weigh on capital spending
by oil production companies and affect companies
providing services to the oil industry. However, a
couple of participants noted that the recent oil price
decline could also be associated with increasing oil
supply rather than softening global demand.
Contacts in the agricultural sector reported that conditions remained depressed, in part because of the
effects of trade policy actions on exports and farm
incomes, uncertainty about future trade agreements,
and continued low commodity prices. Banks continued to report a gradual increase in agricultural loan
delinquencies in recent months. Nonetheless, partici-

pants cited a few recent favorable developments,
including new trade mitigation payments as well as
legislative action to maintain crop insurance that was
seen as reducing uncertainty.
Participants agreed that labor market conditions had
remained strong. Payrolls continued to grow at an
above-trend rate in November, and measures of labor
market tightness such as rates of job openings and
quits continued to be elevated. The unemployment
rate remained at a historically low level in November,
and the labor force participation rate stayed steady,
which represented an improvement relative to its
gradual downward-sloping underlying trend. Several
participants observed that labor force participation
had been improving for low-skilled workers and for
prime-age workers. A couple of participants saw
scope for further improvements in the labor force
participation rate relative to its historical downward
trend, while a couple of others judged that there was
little scope for significant further improvements.
Contacts in many Districts continued to report tight
labor markets with difficulties finding qualified workers. In some cases, firms were responding to these difficulties by using various types of nonwage incentives
to attract and retain workers, while in other cases,
firms were responding by raising wages. Many participants observed that, at the national level, most
measures of nominal wage growth had risen and were
currently at levels that were broadly in line with
trends in productivity growth and inflation.
Participants observed that both overall and core PCE
price inflation remained near 2 percent on a
12-month basis, but that core inflation had edged
lower in recent months. A few participants noted that
the recent declines in energy prices would likely only
temporarily weigh on headline inflation. Several participants remarked that longer-term TIPS-based
inflation compensation had declined notably since
November, concurrent with both falling oil prices
and a deterioration in investor risk sentiment. A few
participants pointed to the decline in longer-term
inflation compensation as an indication that longerrun inflation expectations may have edged lower,
while several others cited survey-based measures as
suggesting that longer-run expectations likely
remained anchored. Participants generally continued
to view recent price developments as consistent with
their expectation that inflation would remain near
the Committee’s symmetric 2 percent objective on a
sustained basis. Although a few participants pointed
to anecdotal and survey evidence indicating rising

Minutes of Federal Open Market Committee Meetings | December

input costs and pass-through of these higher costs to
consumer prices, reports from business contacts and
surveys in some other Districts suggested some moderation in inflationary pressure.
In their discussion of financial developments, participants agreed that financial markets had been volatile
and financial conditions had tightened over the intermeeting period, as equity prices declined, corporate
credit spreads widened, and the Treasury yield curve
continued to flatten. Some participants commented
that these developments may reflect an increased focus
among market participants on tail risks such as a
sharp escalation of trade tensions or could be a signal
of a significant slowdown in the pace of economic
growth in the future. A couple of participants noted
that the tightening in financial conditions so far did
not appear to be restraining real activity, although a
more persistent tightening would undoubtedly weigh
on business and household spending. Participants
agreed to continue to monitor financial market developments and assess the implications of these developments for the economic outlook.
Participants commented on a number of risks associated with their outlook for economic activity, the labor
market, and inflation over the medium term. Various
factors that could pose downside risks for domestic
economic growth and inflation were mentioned,
including the possibilities of a sharper-than-expected
slowdown in global economic growth, a more rapid
waning of fiscal stimulus, an escalation in trade tensions, a further tightening of financial conditions, or
greater-than-anticipated negative effects from the monetary policy tightening to date. A few participants
expressed concern that longer-run inflation expectations would remain low, particularly if economic
growth slowed more than expected. With regard to
upside risks, participants noted that the effects of fiscal
stimulus could turn out to be greater than expected
and the uncertainties surrounding trade tensions or the
global growth outlook could be resolved favorably,
leading to stronger-than-expected economic outcomes,
while a couple of participants suggested that tightening resource utilization in conjunction with an increase
in the ability of firms to pass through increases in
input costs to consumer prices could generate undesirable upward pressure on inflation. A couple of participants pointed to risks to financial stability stemming
from high levels of corporate borrowing, especially by
riskier firms, and elevated CRE prices. In general, participants agreed that risks to the outlook appeared
roughly balanced, although some noted that downside
risks may have increased of late.

269

In their consideration of monetary policy at this meeting, participants generally judged that the economy
was evolving about as anticipated, with real economic
activity rising at a strong rate, labor market conditions
continuing to strengthen, and inflation near the Committee’s objective. Based on their current assessments,
most participants expressed the view that it would be
appropriate for the Committee to raise the target range
for the federal funds rate 25 basis points at this meeting. A few participants, however, favored no change in
the target range at this meeting, judging that the
absence of signs of upward inflation pressure afforded
the Committee some latitude to wait and see how the
data would develop amid the recent rise in financial
market volatility and increased uncertainty about the
global economic growth outlook.
With regard to the outlook for monetary policy
beyond this meeting, participants generally judged
that some further gradual increases in the target
range for the federal funds rate would most likely be
consistent with a sustained economic expansion,
strong labor market conditions, and inflation near
2 percent over the medium term. With an increase in
the target range at this meeting, the federal funds rate
would be at or close to the lower end of the range of
estimates of the longer-run neutral interest rate, and
participants expressed that recent developments,
including the volatility in financial markets and the
increased concerns about global growth, made the
appropriate extent and timing of future policy firming less clear than earlier. Against this backdrop,
m

Full text of Annual Report of the Board of Governors of the Federal Reserve System : 2018

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