Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, January 30-31, 2018 : Presentation Materials

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January 30–31, 2018

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Appendix 1: Materials used by Mr. Potter and Ms. Logan

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January 30–31, 2018

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Class II FOMC – Restricted (FR)

Material for the Briefing on

Financial Developments and
Open Market Operations

Simon Potter and Lorie Logan
January 30, 2018

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Exhibit 1

(2) U.S. Dollar Performance*

(1) Asset Price Changes*
Jan. '18
Dec. '17 Current
FOMC IMP FOMC IMP Level
Goldman Sachs FCI

Contribution to T.W. Dollar Change in USD-Currency Pair
CNY

CNY

EUR

CAD

MXN

-0.6

-0.2

98.2

S&P 500 Index

+7.8%

+3.5%

2873

High-Yield Credit Spread

-33 bps

+6 bps

311 bps

10-Yr Nominal Treasury Yield

+26 bps

+2 bps

2.66%

10-Yr Real Treasury Yield

+8 bps

-1 bps

0.57%

JPY

U.S. Broad T.W. Dollar

-4.3%

-0.3%

115

GBP

MSCI World Index

+7.9%

+2.3%

2249

+1 ppts

-3 ppts

VIX Index

*Red indicates tightening of financial conditions, blue indicates loosening.
Source: Barclays, Bloomberg, Federal Reserve Board, Goldman Sachs, MSCI

USD
Depreciation

GBP
-1.0

CNYUSD

CFETS Index*
1.30
1.20

95
90
RMB Devaluation
85
01/04/15

01/04/16

01/04/17

-2

Percent Change

EURUSD (LHS)
3Y1Y Forward - 1Y Spot (RHS)

Euro Appreciation;
EONIA Slope Steepening
vs. USD OIS.

1.00

-80

-130
08/04/16

03/04/17

10/04/17

01/04/18 *Slope differentials based on swaps: EONIA swap rate less U.S. dollar OIS
rate.
Source: Bloomberg, Desk Calculations

(6) U.S. Breakeven Inflation*
12/15/15

Percent

2.5

3.0

5-Year Breakeven
Barclays 5-Year, 5-Year Breakeven

2.5
2.0

2.0
1.5

1.5

1.0
0.5

Dec. '17 FOMC

0.0
2Y

5Y
Tenor

Source: Bloomberg

BPS

-30

0.90
01/04/16

Percent

1.10

(5) Treasury Yield Curve
12/12/17

-4

Dec. '17 FOMC

Dec. '17
FOMC

*An estimation from Standard Chartered of the CFETS EER basket.
Source: Bloomberg, Standard Chartered

01/26/18

-6

(4) Euro-Dollar and Slope Differentials*

CNY Appreciation
vs. USD and
CFETS Basket

100

0.0

*Values shown indicate contribution to the Broad Trade-Weighted Dollar's
4.3% depreciation since 12/12/17.
Source: Bloomberg, Desk Calculations, Federal Reserve Board

EURUSD

105

-0.5

Contributed Change

(3) Chinese Exchange Rate
Indexed to
01/04/15

JPY

10Y

1.0
01/04/16

06/04/16

11/04/16

04/04/17

*Dashed horizontal lines indicate 10-year averages.
Source: Bloomberg, Barclays

09/04/17

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Exhibit 2

(7) Average PDF-Implied Point Estimate of Annual
Average CPI Inflation Rate*
Percent

5-Year, 5-Year

2.15

(8) Average Estimate for U.S. Fiscal Deficit as a
Percent of GDP*

Percent

Oct. '16**
Dec. '17

5.0

5-Year

4.0

2.05
2.00

3.5

1.95

3.0

1.90

2.5
FY 2018

1.85
01/16

05/16

09/16

01/17

05/17

09/17

01/18

*Based on the average across all responses from the Surveys of Primary
Dealers and Market Participants.
Source: FRBNY

Dec. '17 FOMC

Dec. '17 SEP (Median)
Jan. '18 Survey Modal Path (Median)
Dec. '17 Survey Unconditional Path (Mean)
Jan. '18 Survey Unconditional Path (Mean)
Dec. '17 FOMC Market Path
Current Market Path

Percent

3.5

FY 2020

(10) Implied Path of the Policy Rate*

Tightening Priced In Over Q1 2018*
Tightening Priced In Over 2018**

BPS

FY 2019

*Based on all responses from the Surveys of Primary Dealers and Market
Participants.
**Oct. '16 levels are computed based on results from two questions in the Jan.
'17 survey that ask about expectations of the level and change since Oct. '16.
Source: FRBNY

(9) Amount of Tightening Priced In

3.0

2.5

2.0

1.5

10
0
06/15/17

08/15/17

10/15/17

12/15/17

*Computed as Apr. '18 less Jan. '18 federal funds futures-implied rates.
**Computed as Jan. '19 less Jan. '18 federal funds futures-implied rates.
Source: Bloomberg

(11) Basis Points of Tightening by Year-End 2018
Implied by Unconditional PDF*

Percent

Average

1.0
12/12/17

12/12/19

12/12/20

(12) End-Q1 2019 Fed Funds Expectation Given +50
bps in Core PCE, -50 bps in Unemployment Rate*
Percent
4.25

≥ 4.00

3.75

Median
Average

3.50

0
PPTS

12/12/18

*Market-implied paths derived from federal funds and Eurodollar futures.
Unconditional survey path is the average PDF-implied means from the Surveys
of Primary Dealers and Market Participants.
Source: Bloomberg, Desk Calculations, Federal Reserve Board, FRBNY

6
3
0
-3
-6

Oct./Nov. '17

4.5

2.10

Mar. '17
Jan. '18

Cut
+25 bps from Dec.
+75 '17
bps Survey**
>+100 bps
Change in Average

*Based on complete responses to the Jan. '18 Survey of Primary Dealers and
Market Participants.
**Based on a matched sample from the Dec. '17 and Jan. '18 Surveys.
Source: FRBNY

3.25
3.00
2.75
2.50
≤ 2.25

Jul. '17

1.25

Jan. '18

2.5

*Changes relative to the median SEP projections of core PCE inflation and the
unemployment rate at the time. Based on all responses from the Surveys of
Primary Dealers and Market Participants.
Source: FRBNY

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Exhibit 3

(14) Three-Month FX Swap-Implied Basis Spread

(13) Overnight Unsecured Rates*
EFFR

BPS

OBFR

EURUSD

BPS

150

USDJPY

120

125

Relative Cost of
Borrowing USD
over LIBOR

100

50
40

0
12/01/16

03/01/17

06/01/17

09/01/17

12/01/17

0
12/01/16

*Grey dashed line indicates quarter-end. Shaded band reflects target range for
the federal funds rate.
Source: FRBNY

(15) Three-Month LIBOR and Trimmed Mean CP
and CD Rates*
Percent

LIBOR (LHS)
LIBOR-OIS (RHS)

50
45
40
35
30
25
20
15
10
5
0

*CP/CD rates calculated based on a 5-day moving average. The bottom and top
24 percent of rates on a day are removed before calculating the average.
Source: Bloomberg, DTCC, FRBNY

BPS

09/01/17

Dec. '17 IMP

250
200
150
100

0
900

1000

1100

1200

Tri-Party ($ Billions)
*Tri-party data includes all OMO-eligible collateral, overnight and term.
Excludes month- and quarter- end dates.
**Pre-Dec. '17 IMP is from 12/01/16 to 10/31/17.
Source: BNYM, Desk Calculations, JPMC, FRBNY

(18) MBS Reinvestments In Excess of Caps

2017 Debt Ceiling Episode**
Current Debt Ceiling Episode***

$ Billions

25
20

$4 Billion Cap
$12 Billion Cap

$8 Billion Cap
$16 Billion Cap

Projections

10
15
5

-5
80

Days to Expected Deadline

Jan. '18 IMP

12/01/17

300

(17) "At Risk" Bill Compared to Adjacent Bills*

Pre-Dec. '17 IMP**

350

BPS

2.00
1.80
1.60
1.40
1.20
1.00
0.80
0.60
0.40
01/04/16 06/04/16 11/04/16 04/04/17 09/04/17

06/01/17

(16) ON RRP Usage vs Tri-Party Volumes*

ON RRP ($ Billions)

FR2420 CD (LHS)
DTCC CP (LHS)

03/01/17

Source: Bloomberg

*Calculated as the "at risk" bill less average of bills maturing 1 week prior and 1
week after.
**Uses bill that matured on 10/05/17. Expected deadline was 09/29/17. Data
shown through 09/08/17, when debt ceiling suspension was passed.
***Uses bill maturing on 03/01/18. Expected deadline is early March.
Source: Bloomberg

Purchase Periods*
*Purchase periods run from mid-month to mid-month.
Source: FRBNY, Desk Calculations

1300

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Appendix 1

Appendix 1
(1) FX Swaps Outstanding
$ Billions

BOJ

ECB

12
10
8
6
4
2
0
12/14/2016

2/14/2017

4/14/2017

6/14/2017

8/14/2017

10/14/2017

12/14/2017

Source: FRBNY

(2) MBS Purchase Summary Since Cap Implementation Through January 26, 2018 ($ Millions)
Actual
Paydowns

Cap

Actual
Purchases

Net Deviation:
Over (Under) Purchase

Cumulative
Deviation

10/16/17 - 11/13/17

24,353

4,000

20,355

Nov* 11/14/17 - 12/13/17

28,316

4,000

24,327

Dec

24,032

4,000

20,038

N/A

8,000

6,222

N/A

Purchase Period
Oct

12/14/17 - 01/12/18

Jan** 01/16/18 - 02/13/18

*November included agency debt maturity of $2,366 million.
**Actual purchases ongoing, reflect data through 01/26/18. Target amount for January purchase period is $14,909 million.

(3) FX Intervention
• There were no intervention operations in foreign currencies for the System's account during the intermeeting period

(4) Summary of Operational Testing
Summary of Operational Tests in prior period:
• None
Upcoming Operational Tests:
• Two tests scheduled under the Domestic Authorization
• February 8: Treasury outright purchase of up to $200 million par
• February 14: Securities lending (utilizing a backup tool) for up to $115 million

• Three tests scheduled under the Foreign Authorization
• February 13: Euro-denominated repo with private counterparties for €1 million
• March 12: Euro-denominated callable term deposit with an official institution for €1 million
• March 19: Early liquidation of a euro-denominated callable term deposit with an official institution for €1
million

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Appendix 2 (Last)

Appendix 2: Desk Operational Readiness Framework
(1) Planned small value exercises for 2018 authorized under the Domestic Authorization

Operation Name
Outright operations
MBS outright sales
Coupon swaps with unsettled MBS holdings
Treasury outright purchases
Treasury outright sales
Total expected value of outright operations
Authorization limit for outright operations
Temporary operations
Overnight repo
Term repo
Overnight reverse repo (agency MBS
collateral)
Term reverse repo
Total expected value of temporary operations ²
Authorization limit for temporary operations

Anticipated
Timeframe (H: Half)

Expected Approx.
Value for Each
Exercise ($ millions)¹

Approx. Value of
2017 Exercise

H1
H2
H1
H2
H1
H2
H1
H2
-

300
200
25
25
100-200
100-200
100-200
100-200
$950-1,350
$5,000

156
168
20
20
200
200
200
200
$1,164
$5,000

H1
H2
H1
H2
H1
H2
H1
H2
-

75
75
75
75
175
175
175
175
$1,000
$5,000

62
66
62
65
21
22
112
109
$519
$5,000

($ millions)

(2) Planned small value exercises for 2018 authorized under the Foreign Authorization

Operation Name
Standing dollar and foreign currency liquidity
swaps΀
Euro-denominated repo with private
counterparties
Euro-denominated callable time deposits with
official institutions
Early liquidation of euro-denominated callable
time deposits with official institutions
Euro and yen-denominated sovereign debt sales
Total expected value:
Authorization limit:
1Each

Anticipated
Timeframe (H: Half)
Expected Approx.
(number of exercises,
Value for Each
if more than one)
Exercise³ (in millions)

Approx. Value of
2017 Exercise (in
millions)

H1 (3)

<$1each

H1 (3)

<$1 each

H2 (3)

<$1 each

H2 (3)

<$1 each

€1

H1 (2)

€1 each

€1

H2 (2)

€1 each

€1

H1(2)

€1
¥100

H2
-

¥100
$12
$2,500

$9
$2,500

exercise may consist of more than one transaction.
total expected value of temporary operations simply aggregates the value of all operations planned over the year. The Authorization for Domestic Open
Market Operations imposes a $5 billion limit on the amount of temporary open market operations outstanding at any given time.
3Each exercise may consist of more than one transaction.
΀These exercises involve the following currencies: British pound, Canadian dollar, euro, Japanese yen, and Swiss franc.
2The

January 30–31, 2018

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Appendix 2: Materials used by Ms. Peneva and Messrs. Clark and Fuhrer

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Material for Briefing on

Inflation Dynamics

Ekaterina Peneva, Todd E. Clark, and Jeff Fuhrer
January 30, 2018

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A conceptual framework for inflation dynamics
Expectations-augmented Phillips curve:
𝑒𝑒
𝜋𝜋𝑡𝑡 = 𝛼𝛼𝜋𝜋𝑡𝑡−1 + 1 − 𝛼𝛼 𝜋𝜋𝑡𝑡−1
+ 𝛽𝛽𝐺𝐺𝐺𝐺𝐺𝐺𝑡𝑡 + 𝜏𝜏𝑍𝑍𝑡𝑡 + 𝜀𝜀𝑡𝑡 , (0 < 𝛼𝛼 < 1),

(1)

where:

𝜋𝜋
𝜋𝜋 𝑒𝑒
GAP
Z
𝜀𝜀

core PCE inflation
inflation expectations relevant for wage and price setting
measure of resource utilization (e.g., the unemployment gap)
set of supply shocks (relative energy and import prices)
residual

In this framework:
• Permanent changes in expected inflation eventually pass through one-for-one
into actual inflation.
• If expectations are perfectly anchored, transitory supply shocks and temporary
changes in slack have only transitory effects on inflation.

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A conceptual framework… (continued)
Accelerationist Phillips curve:
𝑁𝑁

𝜋𝜋𝑡𝑡 = � 𝛼𝛼𝑖𝑖 𝜋𝜋𝑡𝑡−𝑖𝑖 + 𝛽𝛽𝐺𝐺𝐺𝐺𝐺𝐺𝑡𝑡 + 𝜏𝜏𝑍𝑍𝑡𝑡 + 𝜀𝜀𝑡𝑡 ,
𝑖𝑖=1

𝑁𝑁

� 𝛼𝛼𝑖𝑖 = 1
𝑖𝑖=1

(2)

In an accelerationist model:
• Inflation expectations reflect actual past inflation.
• Assuming that the coefficients on lagged inflation sum to one implies that even
transitory shocks have permanent effects on inflation.

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Observed inflation and the staff framework
An anchored-expectations framework appears to better explain observed inflation
dynamics in recent decades.
• Since the mid-1990s, core
inflation has been well
characterized empirically in
terms of transitory fluctuations
around a stable long-run
trend.
• The Great Recession appears
to have left little, if any,
permanent imprint on inflation
trend.
• Movements in long-run
expected inflation roughly
parallel those in inflation’s
long-run trend.

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Issues associated with the staff framework
The role of inflation expectations and how they are formed
• Evidence that long-run inflation
expectations drive inflation is
largely circumstantial; the idea
also has weak theoretical support.
• Not clear which inflation
expectations should be most
informative for inflation.
• Constructing a meaningful
empirical model of expectations
has become essentially
impossible.
The staff assumes that inflation’s trend, ultimately determined by
expectations, has been stable for many years at a little below 2 percent
and that it will edge up over the medium term.

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Issues associated with the staff framework (cont’d)

The effect of slack on inflation
• The Phillips curve appears relatively flat at present; hence, inflation is
not very informative about resource utilization.
• The staff could be mismeasuring slack.
• The staff could be wrong about the current or prospective effect of slack
on inflation.

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Issues associated with the staff framework (cont’d)
Coefficient stability
• Given the short sample the staff uses for our empirical inflation models,
influential observations can importantly affect the models’ estimated
coefficients.
• One example: the effect of the PCE price index for financial services.

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Issues associated with the staff framework (cont’d)
The role of wages
• Labor costs are likely very important for firms’ pricing decisions.
• Empirically, we find little evidence that independent movements in
average labor costs have had a material influence on aggregate price
inflation in recent years.

Interpreting unexplained movements in inflation
• They might reflect an incorrect assessment of the effects of
fundamental factors.
• They might reflect a missing fundamental factor.
• They might reflect idiosyncratic price shocks or simple noise.

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A model-based decomposition of
core PCE price inflation

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Alternative explanations for recent low inflation

• Greater competition.
• Foreign slack and other global factors might be putting downward pressure on
domestic prices beyond what is already captured in the staff framework
through exchange rates and import prices.
• PCE medical services prices have been held down by budgetary pressures at
both the federal and state levels.

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General forecasting model and established ﬁndings
Common speciﬁcation:
πt ´ πt˚ “ αpπt´1 ´ πt˚´1 q ` β 1 Xt´1 ` εt ,

(1)

where πt = inﬂation, πt˚ = measure of trend, Xt´1 contains the
set of economic drivers, and εt is the residual
§

Basic idea: Inﬂation contains a slow-moving trend component
and a cyclical component

Historically, forecast errors have been sizable
§

But forecasts have been more accurate since 1990 than for
most of the 1970s and 1980s

The variation of inﬂation explained by the model has fallen
over time

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General model and established ﬁndings: economic drivers

Many studies have examined the eﬃcacy of output gaps,
unemployment gaps, and other indicators for forecasting
inﬂation
Body of evidence in the forecasting literature indicates that
including economic drivers typically harms forecast accuracy
§

Drivers are sometimes, but not consistently, helpful

One possible explanation: Phillips curve relationship exists but
is weak enough to be diﬃcult to consistently see in forecast
comparisons

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General model and established ﬁndings: trend inﬂation
One common approach measures trend inﬂation with a
long-run inﬂation expectation from a survey
§

Consistent with a common econometric deﬁnition of trend as
a long-horizon forecast

The other common approach treats the trend as unobserved
and estimates it as part of a combined model for actual and
trend inﬂation:
πt ´ πt˚ “ αpπt´1 ´ πt˚´1 q ` β 1 Xt´1 ` εt
πt˚ “ πt˚´1 ` nt

Some studies add other indicators — e.g., survey-based
long-run inﬂation expectations or bond yields

(2)
(3)

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Speciﬁc estimate of trend inﬂation
Flexible model to assess the relationships among inﬂation, its
trend, and long-run expectations:
πt ´ πt˚ “ αt pπt´1 ´ πt˚´1 q ` εt
πt˚ “ πt˚´1 ` nt

SPF 10-yeart
Michigan 5-10-yeart

(4)
(5)

“ δ0,t ` δ1,t πt˚ ` ut

(6)

“

(7)

0,t

˚
1,t πt

` vt

Inﬂation and inﬂation expectations can provide useful
information on trend inﬂation

Not a structural model of inﬂation or inﬂation expectations

Historical estimates from Chan, Clark, and Koop study:
§

Survey expectations improve model ﬁt and trend precision

Expectations commonly exceed trend

Forecasting performance comparable to literature benchmarks

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Speciﬁc estimate of trend inﬂation: current PCE inﬂation
5.0
SPF
Michigan
2%

4.5

trend estimate
16th-pctile
84th-pctile

4.0

Percent

3.5

3.0

2.5

2.0

1.5

1.0
1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

Current point estimate of trend is 1.8 percent

Survey expectations exceed trend

Estimated trend edged down from 2008 to 2015 and has since
remained stable

Model forecasts 1.8 percent inﬂation in 2019-20, with 68
percent conﬁdence interval of 1.0 percent to 2.6 percent

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Model uncertainty
Model-based forecast conﬁdence bands capture uncertainty
associated with parameter estimation and the model’s error
term
Additional uncertainty surrounding the model choice is
considerable
§

Choice of any economic drivers: models including them have a
fairly poor track record, and many indicators perform
comparably
Speciﬁcation of trend: selected econometric trends and survey
expectations perform comparably on average, but can yield
very diﬀerent forecasts at a point in time
§

Updated Stock-Watson model forecast of PCE inﬂation in
2019-20: 1.6 percent
Updated Faust-Wright model forecast in 2019-20: 2 percent

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Summary

Recent challenges in forecasting inﬂation are not unusual
§

Forecast uncertainty remains sizable and consistent with
historical norms

It seems premature to conclude that something has gone
wrong with all our models
§

Models are no more limited now than before

Better models would help, but developing them remains a
challenge

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The inflation puzzle: Maintaining perspective
• We have missed our target on the low side for several years
– Although some of those years featured elevated unemployment,
which would imply below-target inflation, other things equal

• The SEP has over-predicted inflation for several years
– Perhaps due to a higher natural rate assumption, and some
unexpected dollar appreciation
SEP two-year forecasts, 4-qtr. Core PCE inflation

2.2
2
1.8
1.6
1.4

Core PCE, 4-qtr. % chg.

1.2
1

SEP 2-year-ahead forecast, Q4/Q4 % chg. ending in quarter indicated
2012:I

2013:I

2014:I

2015:I

2016:I

2017:I

2018:I

2019:I

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Explanations for low inflation
• Temporary factors (cell phone services, import prices, etc.)
– Centered in spring 2017; if temporary, should have faded by now
in high-frequency data.

• Small or zero Phillips Curve slope
• Very low natural rate of unemployment
• Unanchored long-run expectations
• A change in the mark-up of prices over unit labor costs?

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What is our model of inflation?
Model

Description

Inflation Implication

Accelerationist

Current and lagged gaps affect Inflation should have
started rising in 2017
change in inflation

New Keynesian
Phillips Curve
(NKPC) model

Current and expected future
gaps affect level of inflation
relative to trend; Short-run
expectations stand for the
effect of expected future gaps

Inflation should have
reached target in 2017
as gap closed (unless
trend no longer =
target)

Anchored
expectations
model

Current and lagged gaps affect
level of inflation, relative to
long-run expectations (=
target?)

Inflation should have
reached target in 2017
as gap closed (unless
long-run expectations
no longer = target)

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Structural versus reduced-form models of inflation
• Structural model
Committee
sets Federal
funds rate
to affect

(expected
rates and)
Asset
prices,
which
influence

• Reduced-form model
Inflation tends
to revert
toward

Long-run
expectations
(and target?)

(current and
expected)
Activity
gaps, which
move

Inflation
towards the
Committee’s

Inflation
Target

Long-run
expectations
depend on central
bank actions,
realized inflation,
and the target

• This reduced-form model describes the data reasonably well
• But it doesn’t tell monetary policymakers what to do to achieve
their desired outcome

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• Effect of gaps
on inflation is
not easy to
discern in the
data
• Coefficient small
(-0.1?), but
probably not
zero

Core PCE Inflation – long-run expectations

A shallower Phillips curve?
8

Correlation of inflation and unemployment gap
1968:1-1989:4
1990:1-2007:3
2007:4-2017:3

6
4
2
0

Slope=-0.45

Slope=-0.1

Slope=-0.09

-2
-4

-3

-2

-1

0
1
2
3
Unemployment gap

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What if there’s no role for gaps?
An expectations-only inflation model?

• Suppose the true gap coefficient is zero
LR
• Only expectations matter? π t = Eπ t
• What determines inflation expectations? How does
monetary policy influence expectations?
• Is it reasonable to assume a full de-coupling of inflation
from the real economy?
– I think it’s premature to conclude this
– But if so, what are the alternatives?
• Pure monetarist model? Set money growth = k%
• Neo-Fisherian model? Funds rate = real rate + inflation

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How low can the natural rate go?
• It appears to be lower
than we had earlier
estimated

– SEP estimates have
dropped significantly over
the past five years

• Still, compensation
growth has risen
modestly over that
period, suggesting we
may be a bit below the
natural rate
• How much lower could
the natural rate be?
– Below 4%?

6
5.5
5
4.5
4

SEP long-term unemployment rate,
median

Jan
2012

Mar
2013

Mar
2014

Mar
2015

Mar
2016

Mar
2017

Dec
2017

Date of SEP

Wage growth

2.9
AHE (private, 4-qtr.)
2.7
ECI (4-qtr., excl. incentive-paid)
2.5
2.3
2.1
1.9
1.7
1.5
2011:Q1 2013:Q1 2015:Q1 2017:Q1

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Dragging the expectations anchor?
• Some measures of
long-run expectations
have declined recently
• Empirical evidence
suggests that the
marginal predictive
power of any of
these LR expectations
measures is quite
small in recent years
– Thus it is not
apparent that LR
expectations have
dragged inflation
down of late

3.4
3.2
3.0

Long-run expectations, drifting…
Michigan 5-10 year
TIPs 5/5 breakeven
10-year (PTR)

2.8
2.6
2.4
2.2
2.0
1.8
1.6
1.4

2003:I 2005:I 2007:I 2009:I 2011:I 2013:I 2015:I 2017:I

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Nonlinearities in the response of inflation to gaps?

– For 1990-2017,
magnitude of slope
decreases as gap goes
from negative to nearzero to positive
– Risk: Response of
inflation may increase
as unemployment falls
further

A piecewise linear Phillips Curve,
1990-2017

2.9
2.7
2.5
Inflation

• Several Fed authors
have suggested that
the Phillips curve
slope differs for low,
high, and near-zero
gaps
• Evidence:

2.3
2.1
1.9
1.7
1.5

-1.5 -1 -0.5 0 0.5 1 1.5 2 2.5 3 3.5 4
Unemployment Gap

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Conclusions
• Recent low inflation does not rank terribly high in the
Ripley’s Believe-it-or-Not of Economic Puzzles
– And it may be too difficult to control inflation to within a few
tenths of a percentage point of our goal

• Critically: Inflation is probably still linked to real activity
– Coefficient small-ish, but could be larger for low unemployment
– Significant risk to assuming that inflation is decoupled from the
real economy if it is not

• Policy implications:
– Inflation likely to rise as unemployment remains low/falls further
– If so, continued removal of accommodation will likely be
appropriate

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Questions Regarding Inflation Dynamics
1. Do you subscribe to a Phillips Curve type of inflation framework? Why or
why not?
a. If the answer to (1) is “yes,” then why do you think inflation has not
increased in recent quarters?
b. If the answer to (1) is “no,” then what inflation framework do you use for
monetary policy purposes? How does monetary policy influence
inflation in this framework? Does the framework better explain recent
inflation data?
2. In your view, what role do short-run and long-run inflation expectations play
in the wage and price setting process? How are those expectations formed,
and how does monetary policy influence them? What is your current
assessment of inflation expectations?

January 30–31, 2018

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Appendix 3: Materials used by Mr. Wilcox

256 of 286

January 30–31, 2018

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Material for Briefing on

The U.S. Outlook

David W. Wilcox
January 30, 2018

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Forecast Summary
Confidence Intervals for Panels 1, 3, 5, and 6 Based on FRB/US Stochastic Simulations

2. Projected Effect of the TCJA on Real GDP

1. Real GDP
Percent change, annual rate

Jan. TB
Dec. TB
70% confidence interval
Advance BEA estimate

8
6

Cumulative effect on level of real GDP in 2020 (percent)

8
6

1. Total*
2.
Aggregate demand (direct)
3.
Multiplier
4.
Potential output
5.
Financial offsets

1.25
.95
.35
.35
-.45
1.05
.40

6. Total effect, Dec. 7 memo
7. Total effect, December TB

-2

Memo:
8. Effect on output gap**

2015

2016

2017

2018

2019

2020

.90

*Detail may not sum to total because of rounding. **Effect on output gap
in 2020:Q4 (in percentage points).

3. Unemployment Rate

4. Unemployment Rates by Race or Ethnicity
Percent

Jan. TB
Dec. TB
70% confidence interval

Percent

Black or African-American
Hispanic or Latino
Aggregate
White

7
16

4
Natural rate
3

16
12
8

4
1

2015

2016

2017

2018

2019

2020

4
Dec.

2000

2004

2008

2012

2016

Note: Three-month moving averages. Shaded bars indicate a period
of business recession as defined by the NBER.

5. Total PCE Prices

6. PCE Prices Excluding Food and Energy

Percent change, annual rate

Jan. TB
Dec. TB
70% confidence interval
Advance BEA estimate

5
4
3

4
4
3
2

-1

-2

-2
2015

2016

2017

2018

Jan. TB
Dec. TB
70% confidence interval
Advance BEA estimate

-3

Percent change, annual rate

2019

2020

-3

5
4
3

-1

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2015

2016

2017

2018

2019

2020

-1

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7. Monthly PCE Price Inflation

8. Measures of Labor Compensation

Percent change from a year ago

2.5

Total
Core

2.0

2.5
2.0

Percent change from year earlier

3
Dec.

1.5

Dec.
Sept.
2
Q4

2
1.0

1.0

0.5

0.0

2014

2015

2016

2017

2018

0.0

Atlanta Fed wage growth tracker*
Compensation per hour**
Average hourly earnings***
Employment cost index

Note: Shaded yellow region indicates forecast period.

2010

2014

2016

2018

*Three-month moving average. **Percent change of the four-quarter
moving average from a year earlier; 2017:Q4 is a staff estimate.
***All employees.

9. Unemployment Rate

10. Cumulative Changes in Nonfarm Payrolls
Percent

Millions of employees

-3

-6

-9

-12

6
Dec.

5
4
3

2002

2006

9.7

Feb. 2014

Actual
Natural rate*

2010

2014

2018

-9

-8.7

-12
Jan. 2008 to
Feb. 2010

11. Black Unemployment Rates Compared
to Those of Whites

12
9

8.0

Note: Shaded bar indicates a period of business recession as defined
by the NBER. *Staff estimate including the effect of EEB.

Black Unemployment Rate, %

2012

Feb. 2010 to
Feb. 2014

Feb. 2014 to
Dec. 2017

12. Labor Force Participation Rates
92

Percent

Feb. 2014
16
Late period (2011 to 2017)
y = 1.92 x + 0.52

14
12

77
Dec.

89
Early period (1994 to 2007)
y = 1.81 x + 1.56

75
Prime-age men (left scale)
Prime-age women (right scale)

87
2017:Q4

White Unemployment Rate, %

2002

2006

2010

2014

2018

Note: Three-month moving averages. Shaded bar indicates a period
of business recession as defined by the NBER.

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13. Prime-Age Participation Rates by
Metropolitan Status

14. Prime-Age Unemployment Rates by
Metropolitan Status

Percent

Large MSAs*
Small MSAs**
Non-metropolitan

Percent

Large MSAs*
Small MSAs**
Non-metropolitan

86
8

84
Dec.

6
Dec.

1997

2001

2005

2009

2013

2017

Note: 12-month centered moving averages. Shaded bars indicate a
period of business recession as defined by the NBER. * More than
500,000 inhabitants. ** 100,000 to 500,000 inhabitants.

2
1997

Ratio

0.30

90th/50th percentile (left scale)
10th/50th percentile (right scale)

2.8

0.28

2.6

0.26

2.4

0.24

2.2

0.22

2.0
1987

1991 1995 1999 2003

2007 2011 2015

2005

2009

2013

2017

Note: 12-month centered moving averages. Shaded bars indicate a
period of business recession as defined by the NBER. * More than
500,000 inhabitants. ** 100,000 to 500,000 inhabitants.

15. Household Income Ratios*
3.0

2001

0.20

Note: Shaded bars indicate a period of business recession as defined
by the NBER. *2013-2016 data reflect survey redesign.

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16. Labor Force Participation Rates for Prime-Age Women in OECD Countries

Country
Australia
Austria
Belgium
Canada
Denmark
Finland
France
Germany
Greece
Ireland
Italy
Japan
Luxembourg
Netherlands
New Zealand
Norway
Portugal
Spain
Sweden
Switzerland
United Kingdom
United States

1990
Level (%) Rank
66.8
71.6
60.8
75.5
87.8
86.4
72.9
63.4
51.5
45.4
53.9
64.2
49.7
58.5
69.0
79.2
68.0
46.9
90.7
73.7
73.0
74.0

13
10
16
5
2
3
9
15
19
22
18
14
20
17
11
4
12
21
1
7
8
6

2010
Level (%) Rank
75.1
82.4
80.4
82.3
85.3
84.4
83.4
81.3
72.4
71.9
64.5
71.6
76.4
82.3
76.8
84.4
84.9
78.8
86.6
81.9
78.6
75.2

18
7
12
8
2
5
6
11
19
20
22
21
16
9
15
4
3
13
1
10
14
17

2016
Level (%) Rank
76.8
84.9
79.8
82.2
83.8
82.8
83.1
82.7
77.7
73.7
66.8
76.3
81.1
82.2
80.5
83.9
86.6
82.3
88.4
85.5
80.1
74.3

18
4
16
11
6
8
7
9
17
21
22
19
13
12
14
5
2
10
1
3
15
20

Source: OECD.Stat database.
Note: Data for Austria in 1990 columns refer to 1994; data for Switzerland in 1990 columns refer to 1991.

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17. Labor Force Participation Rates for Prime-Age Men in OECD Countries

1990
Level (%) Rank
93.3
93.1
92.2
93.1
94.5
92.9
95.4
90.2
94.3
91.8
94.1
97.5
95.0
93.4
93.3
92.3
94.0
94.4
94.7
97.8
94.8
93.4

15
17
20
16
7
18
3
22
9
21
10
2
4
12
14
19
11
8
6
1
5
13

2010
Level (%) Rank
90.6
91.9
92.2
90.6
92.0
90.6
94.2
93.1
94.2
89.9
89.4
96.2
94.8
93.3
91.8
90.2
92.7
92.4
92.9
94.6
91.4
89.3

18
13
11
17
12
16
4
7
5
20
21
1
2
6
14
19
9
10
8
3
15
22

2016
Level (%) Rank
90.2
91.8
90.4
90.9
90.8
89.7
92.7
92.0
93.2
89.2
88.2
95.5
93.1
91.7
92.9
88.9
91.9
92.5
93.3
95.5
92.3
88.5

17
12
16
14
15
18
7
10
4
19
22
2
5
13
6
20
11
8
3
1
9
21

Source: OECD.Stat database.
Note: Data for Austria in 1990 columns refer to 1994; data for Switzerland in 1990 columns refer to 1991.

Page 5 of 5

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Appendix 4: Materials used by Mr. Kamin

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Material for Briefing on

The International Outlook

Steven B. Kamin

Exhibits by Meghan Letendre and Kaede Johnson
January 30, 2018

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January 30–31, 2018

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Exhibit 1

Class II FOMC - Restricted (FR)

The International Outlook
1. Broad Real Dollar

2. Net Export Contribution to U.S. GDP Growth
2014:Q1 = 100

Percentage points, a.r.

120

0.5

December
Tealbook
115

0.0

110

-0.5
Current
December TB

105
Dollar
appreciation

-1.0

100

-1.5

95
2014

2015

2017

2016

2018

2019

-2.0

2020

2015

2016

2018

2017

2019

2020

4. Commodity Prices

3. Foreign GDP*
Percent change, annual rate

150

135

120

2015:Q1 = 100

$/barrel

December Tealbook

Brent oil price

Emerging market
economies (EME)

80
70
60
50

Total
2

105
Metals index*

Advanced foreign
economies (AFE)

2015

2016

2017

2018

2019

2020

5. Central Bank Policy Rates
Percent

3.0
2.5
2.0

30
20
2015

* Weighted by bilateral shares in U.S. merchandise exports.

2016

2018

2017

2019

2020

* Metals index is comprised of Copper, Alumminum, Tin, Nickel, Zinc,
Lead, Iron Ore, and Uranium (based on IMF base metals index).

6. Headline Inflation

7. Core Inflation

4-quarter percent change

United
Kingdom

United
Kingdom
Target

Target

Canada

1.5
BOC

BOE

Canada
Euro
area

1.0

1
Euro
area

0.5

Japan*
Japan*

0.0
BOJ
ECB

-0.5
-1.0

2014

2016

2018

2020

-1
2016

2018

2020

* Excludes the effects of consumption
taxes in Japan.

1 of 2

-1
2016

2018

2020

* Excludes the effects of consumption
taxes in Japan.

January 30–31, 2018

Authorized for Public Release

266 of 286

Exhibit 2

Class II FOMC - Restricted (FR)

The International Outlook
1. Current vs. Pre-GFC Core CPI Inflation
3.5

Latest Inflation Reading

3.0
y=x

UK
AT

BE
DE

NO
DN
FR
FI

2.5
US
CA
US PCE
LU
NL

2.0

1.5
PT

1.0

0.5

IT
JA

-0.5

0.0
0

1
1.5
2
2.5
3
0.5
Pre-GFC Inflation (2000-2007 average)

2. Change in Inflation vs. Change in Unemployment
Gap
Percentage point change

-0.5
3.5

1.5

y = -0.30x - 0.26
R-squared = 0.33
T-stat = -2.80

Change in Inflation
(latest reading less 2000-2007 average)

12-month percent change

1.0
0.5
0.0
-0.5

-1.0
-1.5
-2.0
-2.5
-3.0
-2

4
6
2
Change in Unemployment Gap
(2016 less 2000-2007 average)

Note: Unemployment Gap= UE minus NAIRU.
Source: OECD.

y = 0.31x + 0.38
R-squared = 0.58
T-stat = 4.72

4. Change in Inflation vs. Change in Output
Percentage point change
Gap Since 2016

1.5
1.0
0.5
0.0

US
-0.5
-1.0
-1.5

0.5
0.0

-2.0

-0.5
y = -0.17x + 0.30
R-squared = 0.05
T-stat = -0.91

-1.0

-2.5
-10

-5
0
Change in Output Gap
(2016 less 2000-2007 average)

Note: Output Gap= 100 * [GDP minus potential GDP] / potential GDP.
Source: OECD.

1.5
1.0

Change in Inflation
(latest reading less 2016)

Change in Inflation
(latest reading less 2000-2007 average)

3. Change in Inflation vs. Change in Output
Gap Since Pre-GFC Percentage point change

-1.5
-1

1
2
Change in Output Gap
(2017 less 2016)

Note: Output Gap= 100 * [GDP minus potential GDP] / potential GDP.
Source: OECD.

Country Code Key
AL = Australia

DE = Germany

FR = France

NL = Netherlands

UK = United Kingdom

AT = Austria

DN = Denmark

IT = Italy

NO = Norway

US = United States

BE = Belgium

ES = Spain

JA = Japan

PT = Portugal

CA = Canada

FI = Finland

LU = Luxembourg

SD = Sweeden

2 of 2

January 30–31, 2018

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Appendix 5: Materials used by Mr. Lehnert

267 of 286

January 30–31, 2018

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Class II FOMC - Restricted (FR)

Material for Briefing on

Financial Stability Developments

Andreas Lehnert
January 30, 2018

268 of 286

January 30–31, 2018
Authorized for Public Release
Class II FOMC – Restricted (FR)
Exhibit 1
Valuation Pressures

269 of 286
January 30, 2018

1. QS Assessment of Valuation Pressures
Level
Elevated
Notable

5
4

Moderate

Low
Extremely
subdued

2
1

2014

2015

2016

2. Price of Bitcoin

2017

2018

3. Capitalization Rate Spreads - Multifamily Buildings
Price
Jan.
28

Daily

Feb.
2014

Percentage points
10000

3-month moving average

7
6
5

1000

4
100

Dec.

2012

2013

2014

2015

2016

2017

2018

4. High Yield Bond Spread

1
2002

2005

2008

2011

2014

2017

Monthly

18
16

Percentage points
Monthly

1.5

1.0

10
8

Jan.

6
Jan.
2006

2009

2012

2015

2018

-0.5

1 of 4

0.5
0.0

4
0

2.5
2.0

2003

5. Ten-Year Nominal Term Premium
Percentage points

2000

2003

2006

2009

2012

2015

2018

-1.0

January 30–31, 2018
Authorized for Public Release
Class II FOMC – Restricted (FR)
Exhibit 2
Leverage and Maturity Transformation
1. Net Leverage of Risky Firms

270 of 286
January 30, 2018

2. Total Net Issuance of Risky Debt
Percent

Quarterly
Q3

Billions of dollars

4-quarter moving average

30
Q4

28
26

-20

-40

20
2005

2008

2011

2014

2017

2002

3. Common Equity Tier 1 Ratio, Selected Banks
Quarterly, SA
Q3

G-SIBs
Non-G-SIB CCAR BHCs

2005

2008

2011

2014

Net percent of primary dealers

14
12
10

Quarterly

4
2
2005

2008

2011

2014

2017

2013

2015

2017

Retail prime
Institutional prime

Trillions of dollars

5.0
4.5
4.0
3.5
3.0
2.5

Stable value funds
Oﬀshore MMFs
Short-term investment funds
Ultrashort bond funds
Local government investment pools

0.5

1.5
Dec.
27

2010

2012

2014

2016

2018

1.5

1.0

2.0

2008

40
30
20
10
0
-10
-20
-30
-40
-50
-60
-70
-80

6. Assets in Potential MMF Substitutes
Trillions of dollars

Government-only
Tax-exempt

Hedge funds
Trading REITs

2011

5. Money Market Fund Assets
Weekly

Nov.
15

Decrease

2002

-60

2017

4. Use of Financial Leverage
Increase

Percent of RWA

20
0

2002

1.0
0.5
0.0

2 of 4

2008

2010

2012

2014

2016

2018

0.0

January 30–31, 2018
Authorized for Public Release
Class II FOMC – Restricted (FR)
Exhibit 3
Staff Judgment on Levels of Vulnerabilities

Extremely subdued

Key:

Low

Moderate

January 2017
•

Valuation
Pressures

•

Risky corporate bond spreads and
forward price-to-earnings ratios now
stand in the second and fifth quintiles
of their respective historical
distributions
CRE and residential prices rose
further; valuation measures stand
above their historical averages.
Treasury term premiums increased but
remain below the historical average

•

•
•

•

Financial
Sector
Leverage

•
•

•

Maturity
and
Liquidity
Transformation

•

Notable

Elevated

October 2017
•

•

Private
Nonfinancial
Sector
Leverage

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January 30, 2018

Leverage for the nonfinancial
corporate sector, particularly among
speculative-grade firms stayed elevated
Outstanding risky corporate debt edged
lower in 2016
The debt-to-income ratio of
households continued to inch down

•

Regulatory capital ratios for banks and
insurance companies remain at high
levels
Measures of leverage in the nonbank
are about unchanged
Risks associated with spillovers from
troubled Italian banks appear low as
U.S. and European banks have limited
exposures these banks

•

Large BHCs’ holdings of liquid assets
remain at high levels
Reforms have made prime MMFs less
prone to runs; AUM at prime MMFs
declined and stand at low levels
Some caution remains with regard to
the use of FHLB advances and the
potential growth of alternative and
fragile short-term funding vehicles

•

•
•

•

January 2018

The equity price-to-earnings ratio is
near its highest value outside the dotcom era and has edged up further
Corporate bond spreads to Treasury
yields have compressed a little further,
while standards and terms on leveraged
loans have deteriorated over the last
year
CRE prices have continued to rise,
although bank lending standards for
CRE loans have tightened somewhat
Asset valuations appear less excessive,
but still stretched, when compared to
current low Treasury yields

•

Leverage in the nonfinancial corporate
sector remains elevated, but risky debt
outstanding has edged down
Household borrowing has moved up
mainly for prime borrowers
Overall nonfinancial sector leverage
continues to be below trend by most
estimates

•

Capital positions at banks and insurance
companies remain at high levels
Available indicators of leverage at other
nonbank financial institutions are
mostly little changed, though there are
some signs of leverage increasing

•

Large BHCs’ holdings of liquid assets
remain at high levels
There has been little growth outside of
government funds in potential
substitutes for prime money market
funds
Insurance companies continue to grow
their nontraditional liabilities, albeit at a
slower pace in most categories

•

Overall
Assessment

3 of 4

•
•
•
•

•
•

•

•
•

The equity price-to-earnings ratio is near
its highest value outside the dot-com era
and has edged up further
Corporate bond yields remain near
historical lows
Spreads on leveraged loans stayed
compressed while nonprice terms loosened
CRE prices remain near historic highs
Asset valuations are still stretched after the
current low Treasury yields are taken into
account

Leverage in the nonfinancial corporate
sector remains high and risky debt growth
has picked up
The ratio of household debt to GDP
remains near its recent trough
Overall nonfinancial sector leverage
continues to be below trend by most
estimates
Regulatory capital ratios at banks and
insurance companies remain at high levels
Most indicators of leverage at other
nonbank financial institutions are
unchanged, though margin credit for
equity investors continues to inch up

Large BHCs’ holdings of liquid assets are
well above regulatory requirements
There has been little growth outside of
government funds in potential substitutes
for prime money market funds
Overall issuance of securitized products
remains well below pre-crisis levels
Life insurance companies continue to grow
their nontraditional liabilities from low
levels

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Notes to Exhibits

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Exhibit 1:
1: Source: July 2014 through January 2018 QS reports.
2: Source: CoinDesk.com. Vertical line indicates February 2014, when the Mt. Gox hack was discovered.
3: Source: Real Capital Analytics.
4: Spreads over 10-year Treasury yield. Source: Staff estimates of smoothed corporate yield curves based on Merrill
Lynch data and smoothed Treasury yield curve.
5: Term premiums are estimated by a three-factor term structure model combining Treasury yields with Blue Chip interest
rate forecasts. Source: Board staff estimates.
Exhibit 2:
1: Net leverage is the ratio of the book value of total debt minus cash and cash equivalents to the book value of total
assets. Source: Compustat.
2: Data are a four-quarter moving average. Total net issuance of risky debt is the sum of the net issuance of speculative
grade and unrated bonds and leveraged loans. Source: Mergent Fixed Investment Securities Database, S&P.
3: Series comprised of a balanced panel as of 2017:Q3. Prior to 2014:Q1, the numerator of the common equity tier 1 ratio
is tier 1 common capital. Beginning in 2014:Q1 for advanced approaches Bank Holding Companies (BHC) and in
2015:Q1 for all other BHCs, the numerator is common equity tier 1 capital. Shaded bars represent periods of recession as
defined by the National Bureau of Economic Research. Source: FR Y-9C.
4: Data are collected in the middle of each quarter. REITs are real estate investment trusts. Source: Senior Credit Officer
Opinion Survey (SCOOS).
5: Source: Investment Company Institute.
6: Last observations: Stable value funds, 2017:Q3, Offshore MMFs, Jan. 19, 2018; Short-term investment funds, 2017:Q3,
Ultrashort bond funds, Dec. 2017; Local government investment pools, Jan. 12, 2018. MMFs are money market funds.
Local government investment pools are rated “AAAm” or “AAm.” Source: S&P.
Exhibit 3:
Heat map color assignments were made by staff judgment. In the absence of significant structural changes, we would
expect vulnerabilities to spend roughly equal proportions of time in each of the colored risk buckets. Source: January 2018
QS report.

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Appendix 6: Materials used by Mr. Laubach

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Material for the Briefing on

Monetary Policy Alternatives

Thomas Laubach

Exhibits by Laurie Khalfan
January 30-31, 2018

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Financial Conditions and Policy Considerations
Time−Varying Neutral Real Rate (r*)

Changes in Indicators of Financial Conditions

Percent

Quarterly
Since
Dec. 2017
FOMC Meeting

4.0

Since
Dec. 2015
FOMC Meeting

−−basis points−−
10−Year Treasury Rate

+28

+33

High−Yield Bond Spread

−30

−232

Equity Risk Premium*

−21

−147

−−percent change−−
S&P 500, Index

+7.1

+39.6

Broad Nominal Dollar

−4

−5.1

3.5
3.0
2.5
2.0
1.5
1.0
0.5

LW estimate
Desk surveys, median

0.0
−0.5
1990

Note: Calculated from Dec. 17, 2017 and Dec. 15, 2015 as of Jan. 29,
2018; Equity Risk Premium is monthly, calculated to the staff estimate
for Jan. 18, 2018.

2000

2005

2010

2015

2020

Source: Laubach−Williams (2003) model with staff estimates; Federal
Reserve Bank of New York.

Market−Implied Probability Distribution of the
Federal Funds Rate, Year−End 2018
Percent

1995

Probability of a Large Increase in the
10−Year Yield
Percent

Most recent: Jan. 29, 2018
Last FOMC: Dec. 12, 2017
30

0
<=1.00%

1.01−
1.25%

1.26−
1.50%

1.51−
1.75%

1.76−
2.0%

2.01−
2.25%

2.25−
2.50%

>=2.51%

Note: Estimated from Eurodollar futures options, accounting for the differences
in the levels and option−implied volatilities of LIBOR and the federal funds rate,
but not adjusted for term premiums.
Source: CME Group; staff estimates.

Uncertainties

2003

2008

2013

2018

Note: Swaption−implied probabilities that the 10−year swap rate will be
100 basis points above its current level 1 year from now.
Source: JP Morgan, staff calculations.

Policy Considerations
B: Recognition of strong data and the
likelihood of a somewhat steeper
policy rate path.

Investors could rapidly reprice
inflation risk.
Spillovers to the U.S. from policy
normalization abroad could be greater
than anticipated.

C: Greater urgency to move growth in
economic activity and employment to
sustainable rates.

High leverage in the nonfinancial
corporate sector risks a rapid rise in
interest−expense ratios.

A: Principal concern is the persistent
shortfall in inflation, and policy needs
to remain accommodative.

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DECEMBER 2017 FOMC STATEMENT
1. Information received since the Federal Open Market Committee met in November
indicates that the labor market has continued to strengthen and that economic
activity has been rising at a solid rate. Averaging through hurricane-related
fluctuations, job gains have been solid, and the unemployment rate declined
further. Household spending has been expanding at a moderate rate, and growth
in business fixed investment has picked up in recent quarters. On a 12-month
basis, both overall inflation and inflation for items other than food and energy
have declined this year and are running below 2 percent. Market-based measures
of inflation compensation remain low; survey-based measures of longer-term
inflation expectations are little changed, on balance.
2. Consistent with its statutory mandate, the Committee seeks to foster maximum
employment and price stability. Hurricane-related disruptions and rebuilding
have affected economic activity, employment, and inflation in recent months but
have not materially altered the outlook for the national economy. Consequently,
the Committee continues to expect that, with gradual adjustments in the stance of
monetary policy, economic activity will expand at a moderate pace and labor
market conditions will remain strong. Inflation on a 12-month basis is expected
to remain somewhat below 2 percent in the near term but to stabilize around the
Committee’s 2 percent objective over the medium term. Near-term risks to the
economic outlook appear roughly balanced, but the Committee is monitoring
inflation developments closely.
3. In view of realized and expected labor market conditions and inflation, the
Committee decided to raise the target range for the federal funds rate to 1-1/4 to
1-1/2 percent. The stance of monetary policy remains accommodative, thereby
supporting strong labor market conditions and a sustained return to 2 percent
inflation.
4. In determining the timing and size of future adjustments to the target range for the
federal funds rate, the Committee will assess realized and expected economic
conditions relative to its objectives of maximum employment and 2 percent
inflation. This assessment will take into account a wide range of information,
including measures of labor market conditions, indicators of inflation pressures
and inflation expectations, and readings on financial and international
developments. The Committee will carefully monitor actual and expected
inflation developments relative to its symmetric inflation goal. The Committee
expects that economic conditions will evolve in a manner that will warrant
gradual increases in the federal funds rate; the federal funds rate is likely to
remain, for some time, below levels that are expected to prevail in the longer run.
However, the actual path of the federal funds rate will depend on the economic
outlook as informed by incoming data.

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ALTERNATIVE A FOR JANUARY 2018
1. Information received since the Federal Open Market Committee met in November
December indicates that the labor market has continued to strengthen remained
strong and that economic activity has been rising at a solid rate. Averaging
through hurricane-related fluctuations, job Gains in employment, household
spending, and business fixed investment have been solid, and the
unemployment rate declined further has stayed low. Household spending has
been expanding at a moderate rate, and growth in business fixed investment has
picked up in recent quarters. On a 12-month basis, both overall inflation and
inflation for items other than food and energy have declined this last year and are
running below 2 percent. Market-based measures of inflation compensation
remain low; survey-based measures of longer-term inflation expectations are little
changed, on balance.
2. Consistent with its statutory mandate, the Committee seeks to foster maximum
employment and price stability. Hurricane-related disruptions and rebuilding
have affected economic activity, employment, and inflation in recent months but
have not materially altered the outlook for the national economy. Consequently,
The Committee continues to expects that, with gradual adjustments in the stance
of appropriately accommodative monetary policy, inflation will gradually rise
to the Committee’s 2 percent objective over the medium term, economic
activity will expand at a moderate pace, and labor market conditions will remain
strong. Inflation on a 12-month basis is expected to remain somewhat below
2 percent in the near term but to stabilize around the Committee’s 2 percent
objective over the medium term. Near-term risks to the economic outlook appear
roughly balanced, but the Committee is monitoring inflation developments
closely.
3. In view of realized and expected labor market conditions and inflation, the
Committee decided to raise maintain the target range for the federal funds rate to
at 1-1/4 to 1-1/2 percent while continuing to assess incoming information that
bears on the outlook for inflation. The stance of monetary policy remains
accommodative, thereby supporting strong labor market conditions and a
sustained return to 2 percent inflation.
4. In determining the timing and size of future whether to 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

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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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ALTERNATIVE B FOR JANUARY 2018
1. Information received since the Federal Open Market Committee met in November
December indicates that the labor market has continued to strengthen and that
economic activity has been rising at a solid rate. Averaging through hurricanerelated fluctuations, job Gains in employment, household spending, and
business fixed investment have been solid, and the unemployment rate declined
further has stayed low. Household spending has been expanding at a moderate
rate, and growth in business fixed investment has picked up in recent quarters.
On a 12-month basis, both overall inflation and inflation for items other than food
and energy have declined this year and are continued to running 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.
2. Consistent with its statutory mandate, the Committee seeks to foster maximum
employment and price stability. Hurricane-related disruptions and rebuilding
have affected economic activity, employment, and inflation in recent months but
have not materially altered the outlook for the national economy. Consequently,
The Committee continues to 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 remain somewhat below 2 percent in the near term but 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.
3. In view of realized and expected labor market conditions and inflation, the
Committee decided to raise maintain the target range for the federal funds rate to
at 1-1/4 to 1-1/2 percent. The stance of monetary policy remains accommodative,
thereby supporting strong labor market conditions and a sustained return to
2 percent inflation.
4. 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

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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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ALTERNATIVE C FOR JANUARY 2018
1. Information received since the Federal Open Market Committee met in November
December indicates that the labor market has continued to strengthen and that
economic activity has been rising at a solid rate. Averaging through hurricanerelated fluctuations, job Gains in employment, household spending, and
business fixed investment have been solid, and the unemployment rate declined
further has stayed low. Household spending has been expanding at a moderate
rate, and growth in business fixed investment has picked up in recent quarters.
On a 12-month basis, both overall inflation and inflation for items other than food
and energy have declined this year and are continued to running below 2 percent
but have increased since last summer. Market-based measures of inflation
compensation remain low have increased in recent months; survey-based
measures of longer-term inflation expectations are little changed, on balance.
2. Consistent with its statutory mandate, the Committee seeks to foster maximum
employment and price stability. Hurricane-related disruptions and rebuilding
have affected economic activity, employment, and inflation in recent months but
have not materially altered the outlook for the national economy. Consequently,
The Committee continues to expects that, with further gradual adjustments in the
stance of monetary policy, economic activity and employment will expand at a
moderate pace and labor market conditions will remain strong sustainable rates
over the medium term. Inflation on a 12-month basis is expected to remain
somewhat below 2 percent in the near term but 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 for economic activity appear roughly
balanced, tilted to the upside but the Committee is monitoring inflation
developments closely.
3. In view of realized and expected labor market conditions and inflation, the
Committee decided to raise the target range for the federal funds rate to 1-1/4 to
1-1/2 to 1-3/4 percent. The stance of monetary policy remains accommodative,
thereby supporting strong labor market conditions and a sustained return to
2 percent inflation.
4. 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

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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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Implementation Note for January 2018 Alternatives A and B
Release Date: January 31, 2018
Decisions Regarding Monetary Policy Implementation
The Federal Reserve has made the following decisions to implement the monetary policy
stance announced by the Federal Open Market Committee in its statement on December
13, 2017 January 31, 2018:


The Board of Governors of the Federal Reserve System voted [ unanimously ] to
raise maintain the interest rate paid on required and excess reserve balances to at
1.50 percent, effective December 14, 2017 February 1, 2018.



As part of its policy decision, the Federal Open Market Committee voted to
authorize and direct the Open Market Desk at the Federal Reserve Bank of New
York, until instructed otherwise, to execute transactions in the System Open
Market Account in accordance with the following domestic policy directive:
“Effective December 14, 2017 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 1-1/4 to
1-1/2 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 1.25 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 December that exceeds $6 billion, and
to continue reinvesting in agency mortgage-backed securities the amount
of principal payments from the Federal Reserve’s holdings of agency debt
and agency mortgage-backed securities received during December that
exceeds $4 billion. Effective in January, 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 $12 billion, and to reinvest in agency mortgagebacked 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.”

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

In a related action, the Board of Governors of the Federal Reserve System voted
[ unanimously ] to approve a 1/4 percentage point increase in the establishment
of the primary credit rate to at the existing level of 2.00 percent, effective
December 14, 2017. In taking this action, the Board approved requests to
establish that rate submitted by the Boards of Directors of the Federal Reserve
Banks of . . .

This information will be updated as appropriate to reflect decisions of the Federal Open
Market Committee or the Board of Governors regarding details of the Federal Reserve’s
operational tools and approach used to implement monetary policy.
More information regarding open market operations and reinvestments may be found on
the Federal Reserve Bank of New York’s website.

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Implementation Note for January 2018 Alternative C
Release Date: January 31, 2018
Decisions Regarding Monetary Policy Implementation
The Federal Reserve has made the following decisions to implement the monetary policy
stance announced by the Federal Open Market Committee in its statement on December
13, 2017 January 31, 2018:


The Board of Governors of the Federal Reserve System voted [ unanimously ] to
raise the interest rate paid on required and excess reserve balances to 1.50 1.75
percent, effective December 14, 2017 February 1, 2018.



As part of its policy decision, the Federal Open Market Committee voted to
authorize and direct the Open Market Desk at the Federal Reserve Bank of New
York, until instructed otherwise, to execute transactions in the System Open
Market Account in accordance with the following domestic policy directive:
“Effective December 14, 2017 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 1-1/4 to
1-1/2 to 1-3/4 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 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 December that exceeds $6 billion, and
to continue reinvesting in agency mortgage-backed securities the amount
of principal payments from the Federal Reserve’s holdings of agency debt
and agency mortgage-backed securities received during December that
exceeds $4 billion. Effective in January, 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 $12 billion, and to reinvest in agency mortgagebacked 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.”

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

In a related action, the Board of Governors of the Federal Reserve System voted
[ unanimously ] to approve a 1/4 percentage point increase in the primary credit
rate to 2.00 2.25 percent, effective December 14, 2017 February 1, 2018. In
taking this action, the Board approved requests to establish that rate submitted by
the Boards of Directors of the Federal Reserve Banks of . . .

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Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, January 30-31, 2018 : Presentation Materials

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