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July 25–26, 2017 Authorized for Public Release Appendix 1: Materials used by Mr. Potter 118 of 152 July 25–26, 2017 Authorized for Public Release Class II FOMC – Restricted (FR) Material for the Briefing on Financial Developments and Open Market Operations Simon Potter July 25, 2017 119 of 152 July 25–26, 2017 Authorized for Public Release 120 of 152 Class II FOMC – Restricted (FR) Exhibit 1 (1) Asset Price Changes Since June FOMC* Since President Draghi's Comments Since June FOMC Nominal 10-Year TSY Yield +10 bps +12 bps Nominal 10-Year Bund Yield +26 bps +28 bps S&P 500 Index +1.4 % +1.4 % MSCI E.M. Local +3.3 % E.M. Bond Spread Index Bloomberg Dollar Index U.S. Percent 1.25 “Bund Tantrum” 2.25 0.75 2.00 0.50 +4.5 % 1.75 0.25 -5 bps +7 bps 1.50 -2.9 % -2.0 % 1.25 01/01/15 Euro-Area Draghi's Comments 100 0.00 -0.25 10/01/15 07/01/16 04/01/17 (4) Importance of Factors Explaining Change to Respondents’ PDFs for Year-End 2017 10-Yr TSY Yield (Jul. ’17 vs. Dec. ’16)* Rating 5 4 80 3 70 Draghi's Comments *Dashed lines indicate 5-year average. Source: Bloomberg 90 2 60 1 50 40 “Bund Tantrum” 30 01/01/15 08/01/15 03/01/16 10/01/16 05/01/17 *Dashed lines indicate 5-year average. Source: Bloomberg (5) Average PDF of 2-Year, 1-Year PCE Inflation Rate* Probability 50 30 20 10 ≤1.50% 1.51 2.00% 2.01 2.50% Infl. Fisc. Econ. Mon. Gr., Bal. Rxn. r-star Policy Gr. Pol. Infl. Sheet Fn. Changes in U.S. Outlook Changes in Changes in Fed Policy Outlook Abroad *Based on all responses from the July Surveys of Primary Dealers and Market Participants. Red diamonds indicate average; blue rectangles indicate interquartile range. Source: FRBNY (6) Decomposition of the Level of the 10-Year Treasury Yield* BPS 225 200 175 150 125 100 75 50 25 0 -25 -50 December 2016 Survey July 2017 Survey 40 0 Germany (RHS) 1.00 (3) 3-Month, 10-Year Swaption Volatility* 110 U.S. (LHS) Percent 2.75 2.50 *Changes from 1:55 PM on June 14, 2017, except for MSCI E.M. Local and E.M. Bond Spread Index which show changes from COB June 13, 2017. Source: Bloomberg, J.P. Morgan, MSCI BPS (2) 10-Year Sovereign Yields* ≥2.51% *Based on all responses from the December 2016 and July 2017 Surveys of Primary Dealers and Market Participants. Source: FRBNY ACM KW Real Policy Rate Avg. Infl. Rate Nom. T.P. *Based on all responses from the July Surveys of Primary Dealers and Market Participants. 10-year level decomposed was 2.32%. Term premium measures are as of 07/17/17, day survey received. Red dot indicates median. Source: FRBNY July 25–26, 2017 Authorized for Public Release 121 of 152 Class II FOMC – Restricted (FR) Exhibit 2 (7) Global Equity Prices (8) RMB Level and Net Capital Flows S&P 500 Stoxx Europe 600 MSCI E.M. Local Index* 140 $ Billions 130 120 110 100 90 80 01/01/16 05/01/16 09/01/16 01/01/17 05/01/17 *Indexed to 01/04/16. Source: Bloomberg, MSCI 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 07/21/17 Current Market Path June FOMC Market Path June Survey Unconditional Path (Mean) July Survey Unconditional Path (Mean) June SEP *Reflects financial account balance plus errors and omissions. **Month-end level, except July 2017 which reflects 07/21. Source: Bloomberg, IIF, Desk estimate for June ‘17 (10) Average PDF of Time of First Announced Change in Reinvestment Policy* Percent 07/21/18 01/21/19 07/21/19 *Market-implied paths derived from federal funds and Eurodollar futures. Survey path is the average PDF-implied means from the June and July Surveys of Primary Dealers and Market Participants. Source: Bloomberg, Desk Calculations, Federal Reserve Board, FRBNY 400 350 25 Q1 ‘18 Q2 ‘18 250 200 150 10-Yr TSY 30-Yr MBS Yield OAS 10-Yr TSY 30-Yr MBS Yield OAS Impact up to June Survey Impact over 2-yr period following implementation *Red dot indicates median. Based on all responses from the Surveys of Primary Dealers and Market Participants. Source: FRBNY ≥H2 ‘18 No Chg. Sum of TGA and Remaining Measures Remaining Measures Estimate TGA Actual 300 0 -25 Oct. Dec. Nov. ‘17 ‘17 (12) FRBNY Estimate of Exhaustion of Extraordinary Measures and TGA Depletion* $ Billions 50 ≥50 Sep. ‘17 July Survey *Based on all responses from the June and July Surveys of Primary Dealers and Market Participants. **Unconditional PDF computed for each respondent based on the minimum probability assigned to no change in reinvestment policy across MBS and TSY. Source: FRBNY (11) Impact of Changes to Fed Reinvestment Policy* BPS June Survey** 70 60 50 40 30 20 10 0 Jul. ‘17 01/21/18 RMB/USD 80 RMB Appreciation 60 40 20 0 -20 -40 -60 -80 -100 -120 -140 01/12 11/12 09/13 07/14 05/15 03/16 01/17 (9) Implied Path of Policy* Percent Net Capital Flows (LHS)* Onshore RMB (RHS)** 100 50 0 05/01/17 07/01/17 *Dotted lines represent estimates. Source: Staff Calculations, U.S. Treasury 09/01/17 7.0 6.9 6.8 6.7 6.6 6.5 6.4 6.3 6.2 6.1 6.0 5.9 July 25–26, 2017 Authorized for Public Release 122 of 152 Class II FOMC – Restricted (FR) Exhibit 3 (13) Overnight Unsecured Rates* EFFR BPS (14) Overnight Treasury Tri-Party GC Repo Rates* ON RRP GCF Tri-Party ex. GCF Median** OBFR 125 BPS 150 100 75 100 50 50 25 0 07/01/16 10/01/16 01/01/17 04/01/17 07/01/17 *Grey dashed line indicates quarter-end. Shaded area reflects target range for the federal funds rate. Source: FRBNY 0 07/01/16 10/01/16 01/01/17 (15) ON RRP Take-up (16) 3-Month FX Swap-Implied Basis 500 USD-JPY EUR-USD GBP-USD BPS 450 400 350 300 250 200 150 100 50 05/04/16 09/04/16 01/04/17 05/04/17 100 90 80 70 60 50 40 30 20 10 0 01/01/16 (17) Net Acquisition of Foreign Medium- and LongTerm Debt Securities by Japanese Investors* Japanese Banks Monthly Net Acquisition of Foreign Bonds Rolling 4-Week Sum (All Japanese Investors) $ Billions +60 +40 +20 +0 -20 -40 05/20/16 05/01/16 09/01/16 01/01/17 05/01/17 Source: Bloomberg Source: FRBNY -60 01/01/16 07/01/17 *Grey dashed line indicates quarter-end. **Excludes intrabank transactions. Source: Bloomberg, FRBNY $ Billions 0 01/04/16 04/01/17 10/07/16 02/24/17 07/14/17 *Converted to U.S. dollars using average dollar-yen exchange rate over each week. Source: Bloomberg, Japan MOF (18) 3-Month LIBOR and Trimmed Mean CP/CD Rates BPS 160 140 120 100 80 60 40 20 0 12/01/15 LIBOR DTCC CP* FR2420 CD* LIBOR-OIS MMF Reform Implementation 04/01/16 08/01/16 12/01/16 04/01/17 *Calculated based on 5-day moving average, the bottom 24% and top 24% of rates on a day are removed before calculating the average. Source: Bloomberg, DTCC, FR2420 July 25–26, 2017 Authorized for Public Release 123 of 152 Class II FOMC – Restricted (FR) Appendix (Last) Appendix (1) Summary of Operational Testing Summary of Operational Tests in prior period: • Foreign Authorization • June 18: Yen-denominated sovereign debt sale for ¥100 million • July 11: Euro-denominated overnight repo for €1 million Upcoming Operational Tests • Two tests scheduled under the Domestic Authorization • August 10: Contingency securities lending operation for no more than $115 million • September 6: Treasury outright purchase for no more than $200 million • No tests scheduled under the Foreign Authorization (2) FX Swaps Outstanding $ Billions BOJ 7 ECB 6 5 4 3 2 1 0 12/14/2016 1/14/2017 2/14/2017 3/14/2017 4/14/2017 5/14/2017 6/14/2017 7/14/2017 Source: FRBNY (3) FX Intervention • There were no intervention operations in foreign currencies for the System's account during the intermeeting period July 25–26, 2017 Authorized for Public Release Appendix 2: Materials used by Mr. Wilcox 124 of 152 July 25–26, 2017 Authorized for Public Release Class II FOMC – Restricted (FR) Material for Briefing on The U.S. Outlook David W. Wilcox July 25, 2017 125 of 152 July 25–26, 2017 Authorized for Public Release 126 of 152 Class II FOMC - Restricted (FR) Forecast Summary Confidence Intervals for Panels 1, 4, 5, and 6 Based on FRB/US Stochastic Simulations 1. Real GDP 2. Average and Range of Five R* Estimates Percent change, annual rate 10 July TB June TB 70% confidence interval 8 10 8 6 6 4 4 2 2 0 0 -2 -2 -4 2014 2015 2016 2017 2018 -4 2019 Source: Williams, "Three Questions on R-star," FRBSF Economic Letter 2017-05. 3. Tealbook Update 4. Unemployment Rate Percent 9 July TB June TB 70% confidence interval 2017 H1 H2 Change at AR, % 2018 2019 Q4-over-Q4 change, % Real GDP July TB 2.0 1.9 2.6 2.7 2.2 2.2 1.9 1.9 Unempl. rate* July TB 4.4 4.4 4.2 4.2 4.0 4.0 3.8 3.8 Total PCE prices July TB 1.2 1.3 1.5 1.5 1.9 1.9 2.0 2.0 8 9 8 7 7 6 6 5 5 4 4 Natural rate 3 3 2 2014 2015 2016 2017 2018 2019 2 * Percent, final quarter of period indicated. 5. Total PCE Prices 6. PCE Prices Excluding Food and Energy Percent change, annual rate 6 July TB June TB 70% confidence interval 5 4 6 4 4 3 2 2 1 1 0 0 -1 -1 -2 -2 2014 2015 2016 2017 July TB June TB 70% confidence interval 5 3 -3 Percent change, annual rate 5 2018 2019 -3 5 4 3 3 2 2 1 1 0 0 -1 Page 1 of 3 2014 2015 2016 2017 2018 2019 -1 July 25–26, 2017 Authorized for Public Release 7. Monthly PCE Price Inflation 8. Inflation Memo Highlights Percent change from a year ago 2.5 Total Core 2.5 2.0 2.0 1.5 1.5 1.0 1.0 0.5 0.5 0.0 2014 2015 2016 127 of 152 Class II FOMC - Restricted (FR) 2017 0.0 1 "Other factors" are an important source of inflation variability, and can often obscure the influence of more-fundamental factors. We could be wrong about fundamentals, or missing some other key determinant(s) of inflation, but haven’t (yet) found a smoking gun. 0 Note: Shaded yellow region indicates forecast period. 9. Contribution of Unemployment Gap to Detrended Inflation (VAR model) Percentage points 1.5 Detrended inflation Gap contribution 1.0 10. Contribution of Own Shocks to Detrended Inflation (VAR model) 1.5 Percentage points 1.5 Detrended inflation Contribution of own shocks 1.5 1.0 1.0 0.5 0.5 0.5 0.5 0.0 0.0 0.0 0.0 -0.5 -0.5 -0.5 -0.5 -1.0 -1.0 -1.0 -1.0 -1.5 -1.5 -1.5 2006 2008 2010 2012 2014 2016 Percent Black or African-American Hispanic or Latino Aggregate White 16 20 2010 2012 2014 2016 Percent 90 Black or African-American Hispanic or Latino Aggregate White 16 85 12 2008 90 85 12 8 8 80 4 80 4 June 0 -1.5 12. Labor Force Participation Rates by Race or Ethnicity 11. Unemployment Rates by Race or Ethnicity 20 2006 1.0 2000 2004 2008 2012 2016 June 0 Note: Three-month moving averages. Shaded bars indicate a period of business recession as defined by the NBER. 75 2000 2004 2008 2012 2016 Note: Three-month moving averages. Data cover persons between the ages of 25 and 54; data by race or ethnicity are seasonally adjusted by Board staff. Shaded bars indicate a period of business recession as defined by the NBER. Page 2 of 3 75 July 25–26, 2017 Authorized for Public Release 128 of 152 Class II FOMC - Restricted (FR) Unemployment Duration and Flows by Race/Ethnicity 13. Median Duration of Unemployment by Race/Ethnicity* 30 25 Weeks Black/African American White Hispanic/Latino 30 25 20 20 15 15 10 10 June 5 5 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 0 *12-month moving averages. 14. Flows from Unemployment to Employment* 40 35 Percent of unemployed persons Hispanic/Latino White Black/African American 40 35 30 30 25 25 June 20 20 15 15 10 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 10 *12-month moving averages. 15. Flows from Employment to Unemployment* 3.0 2.5 Percent of employed persons Black/African American Hispanic/Latino White 3.0 2.5 2.0 2.0 1.5 1.5 June 1.0 1.0 0.5 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 *12-month moving averages. Page 3 of 3 0.5 July 25–26, 2017 Authorized for Public Release Appendix 3: Materials used by Mr. Kamin 129 of 152 July 25–26, 2017 Authorized for Public Release Class II FOMC – Restricted (FR) Material for Briefing on The International Outlook Steven B. Kamin July 25, 2017 130 of 152 July 25–26, 2017 Authorized for Public Release Class II FOMC - Restricted (FR) Exhibit 1 131 of 152 The International Outlook 1. Foreign GDP* 2. Headline Inflation Percent change, annual rate 4-quarter percent change 5 3 United Kingdom June Tealbook Emerging market economies (EME) 4 Target 2 3 Euro area Canada Total 1 2 Advanced foreign economies (AFE) Japan* 0 1 0 2015 2016 2017 2018 -1 2019 2015 2016 2017 2018 * Weighted by bilateral shares in U.S. merchandise exports. * Excludes the effects of consumption taxes in Japan. 3. Core Inflation 4. Euro Area (2000 to 2017) 4-quarter percent change Percent 3 ’01 2 Canada 1 Euro area Japan* Q4/Q4 Core Inflation ’07 ’08 United Kingdom ’02 2.0 ’03 ’06 ’11 ’00 ’10 ’13 ’17 (proj.) ’09 1.0 ’15 -2 -1.5 -1 2017 2018 * Excludes the effects of consumption taxes in Japan. 2019 5. Central Bank Policy Rates ’14 -1 -0.5 0 0.5 1 1.5 2 Unemployment Gap (UE-NAIRU, percentage points) 0.5 2.5 3 6. Cumulative Central Bank Asset Purchases* Percent Forecast Period 1.5 ’12 ’05 ’16 2016 Percent of GDP 3.5 Forecast Extension 100 2.5 BOJ** 80 2.0 1.5 ECB 60 1.0 BOE 40 0.5 BOE BOJ 20 0.0 ECB -0.5 2013 2015 2017 2019 2021 2023 120 Forecast Period Forecast Extension 3.0 BOC 2.5 ’04 0 2015 2019 2025 0 2009 2013 2017 2021 2025 * Sovereign bonds purchased and held for monetary policy purposes. ** For BOJ, includes only purchases since April 2013, the start of QQE. July 25–26, 2017 Authorized for Public Release 132 of 152 Exhibit 2 (last) Class II FOMC - Restricted (FR) The International Outlook (2) 8. U.S. Yield Changes Around ECB Announcements (2010 - 2017) 7. Rolling Correlation of 5-to-10 Year Forward Term Premiums 0.6 0.4 0.2 0.0 2007 2009 2011 2013 2015 Change in 10-year Treasury yield (basis points) 0.8 2005 10 1.0 Dec. 2015 FOMC United States-Germany 2017 5 0 -15 Note: Three-month moving average of one-year rolling correlation of weekly changes. Source: Staff calculation; Thomson Reuters; BrokerTec. -5 Slope: 0.47 T-Stat for Slope: 7.9 R-squared : 0.45 -10 -5 0 5 10 Change in 10-year Bund yield (basis points) -10 15 Source: Staff calculation; Thomson Reuters. 9. Estimated Effect of Foreign QE on U.S. Term Premia Cumulative Asset Purchases as percent of GDP* (2008-2017:Q2) (1) Impact on Term Premium per 1% of GDP in purchases (in bp) (2) Total Impact on Foreign Premium (in bp) (3) Passthrough Coefficient to U.S. Term Premium (4) Impact on U.S. Term Premium (in bp) (5) ECB 14.9 -4 -59 1/2 -30 BOE 21.7 -4.8 -103 1/8 -13 BOJ 55.9 -1 -56 1/2 -28 Cumulative Impact on Term Premium in 10-Year U.S. Treasury Yields -71 * Sovereign bonds purchased and held for monetary policy purposes. 10. U.S. 10-Year Yields Percent Dec. 2015 Realized FOMC Without Foreign QE 4.5 4.0 11. Estimated Foreign Pressure on U.S. Yields Percentage points 0.0 Dec. 2015 FOMC 12. Term Premia on 10-Year Percent Yields* 4 Projected 3 -0.2 United Kingdom 3.5 3.0 2 -0.4 1 2.5 Japan -0.6 0 2.0 -0.8 1.5 1.0 2009 2011 2013 2015 2017 -1.0 2009 2013 2017 2021 2025 Germany -1 -2 2009 2011 2013 2015 2017 * Model uses staff-calculated zero coupon yields based on parameters from the Bundesbank for German yields, the BOE for U.K. yields, and Thomson Reuters for Japanese yields. July 25–26, 2017 Authorized for Public Release Appendix 4: Materials used by Ms. Klee 133 of 152 July 25–26, 2017 Authorized for Public Release Class II FOMC – Restricted (FR) Material for the Briefing on Financial Stability Developments Elizabeth Klee July 25, 2017 134 of 152 July 25–26, 2017 Authorized for Public Release Class II FOMC - Restricted FR 135 of 152 Exhibit 1 Risk Appetite July 25, 2017 Chart 1−1 Valuation Pressures and Risk Appetite in Selected Asset Markets Percentile Quarterly 100 Q2 e 17Q1 80 60 40 20 0 1993 1997 2001 2005 2009 2013 2017 Source: See Aikman et al. (2015). Chart 1−2 Level of VIX During Recent Monetary Policy Tightening Cycles Chart 1−3 10−Year High Yield Corporate Bond Spreads Percent Percentage points 30 Days from first rate increase 16 Monthly 1994−95 2004−07 2015−17 14 25 12 10 20 8 15 6 Jul. 21 10 4 2 5 0 100 200 300 400 0 1999 2002 2005 2008 2011 2014 2017 Source: Staff estimates. Source: Chicago Board Options Exchange and Staff Analysis. Chart 1−5 Non−Price Measures Chart 1−4 Capitalization Rate at Origination Percent 11 3−month moving average Office Industrial Retail Multifamily 10 Deep junk share of corporate bond issuance is in line with history. 9 8 Banks are tightening terms on CRE loans. 7 6 Apr. 5 4 2002 2005 2008 2011 2014 2017 Source: Real Capital Analytics. Page 2 of 4 Underwriting terms in newly issued CMBS pools have become more stringent. July 25–26, 2017 Authorized for Public Release Class II FOMC - Restricted FR 136 of 152 Exhibit 2 Leverage and Maturity/Liquidity Transformation July 25, 2017 Chart 2−1 Private Nonfinancial Sector Credit−to−GDP Ratio and Trend Ratio Quarterly Actual ratio HP filter trend Ratio forecast Confidence band 17Q1 2.0 21Q4 1.6 1.2 0.8 1985 1991 1997 2003 2009 2015 2021 Source: Financial Accounts of the United States, NIPA, and staff calculations. Chart 2−2 Net Leverage for Nonfinancial Business Sector Chart 2−3 Common Equity Tier 1 Ratio, by BHC size Percent Quarterly All firms 75th percentile Percent of RWA 55 50 14 Quarterly, SA Q1 12 45 Q1 40 10 35 8 30 6 25 G−SIBs Non−G−SIB CCAR BHCs Other BHCs 20 15 10 5 1999 2002 2005 2008 2011 2014 2017 2005 2008 2011 2014 2017 Source: FR Y−9C. Chart 2−4 SCOOS Respondents Reporting Increased Use of Leverage by Hedge Funds Net percentage Chart 2−5 Maturity and Liquidity Transformation 40 Quarterly 20 Banking sector holds high levels of liquid assets. Q2 0 Little evidence of worrisome increases in alternative money fund assets. −20 −40 −60 2011 2013 2015 2017 Source: Senior Credit Officer Opinion Survey. Page 3 of 4 2 0 2002 Source: Compustat. 4 Insurance companies continue to boost reliance on nontraditional liabilities. July 25–26, 2017 Authorized for Public Release 137 of 152 Class II FOMC - Restricted FR July 25, 2017 Staff Judgment on Levels of Vulnerabilities Key: Extremely subdued Low Moderate Notable Elevated Notes: 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. H1 2004 • • • Valuation pressures in corporate bonds and some equity segments Real and implied volatility is low Building valuation pressures in housing markets Valuation Pressures April 2017 • • • • • Private Nonfinancial Sector Leverage • • Financial Sector Leverage • • Maturity and Liquidity Transformation • • • Credit-to-GDP ratio above estimated trend Bank lending standards had been loosening for most loan categories since 2003:H1 • • With hindsight, banks were undercapitalized for risks that were undertaken and overly reliant on low quality capital Moderate use of leverage by nonbanks • Maturity transformation at banks is moderate but growing Short-term wholesale funding in financial markets is high (including via money funds) Limited liquidity transformation through open-end mutual funds High securitization issuance • • • • July 2017 Equity price-to-earnings ratios have reached levels not seen since the early 2000s The high-yield corporate bond risk premium declined a bit from an already low level CRE prices continued to rise despite slowing rent growth, though there are signs of tightening credit conditions Treasury term premiums remained low • Leverage in the nonfinancial corporate sector ticked down but remained elevated The debt-to-income ratio of households has yet to turn up, and new borrowing was driven primarily by households with high credit scores • Capital positions at banks and insurance companies remained at high levels Available indicators of leverage at other nonbank institutions were little changed • To date, money market reforms appear to have reduced run risk Large BHCs’ holdings of liquid assets remained at high levels Large BHCs continued to replace short-term wholesale funding with core deposits • Overall Assessment Page 4 of 4 • • • • • • • • The equity price-to-earnings ratio is near its highest value outside of the dot-com era High-yield corporate bond spreads to Treasury yields have decreased further, while issuance of bonds and leveraged loans has been robust CRE prices are at historic highs, and capitalization rates are historically low and declining Treasury term premiums remain subdued. Asset valuations appear less excessive, but still stretched, when compared to the current low Treasury yields Leverage in the nonfinancial corporate sector remains elevated The growth of corporate debt is contributing to slight increases in the credit-to-GDP ratio However, overall nonfinancial sector leverage continues to be well 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 little changed 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 have seen growth in nontraditional liabilities and their securities lending programs July 25–26, 2017 Authorized for Public Release Appendix 5: Materials used by Mr. Laubach 138 of 152 July 25–26, 2017 Authorized for Public Release Class I FOMC – Restricted Controlled (FR) Material for the Briefing on Monetary Policy Alternatives Thomas Laubach Exhibits by Laurie Krmpotich July 25–26, 2017 139 of 152 July 25–26, 2017 Authorized for Public Release 140 of 152 Class I FOMC – Restricted Controlled (FR) Potential Policy Implications of Lower Longer−Term Yields Equity Premium Blue Chip Projections for the 10−year Treasury Yield Percent Percentage points 9.0 10−year Treasury quarterly average yield* June 2017 8.5 8.0 7.5 Dec 2015 5 Dec 2015 7.0 6 4 6.5 3 6.0 5.5 5.0 2 4.5 4.0 1 3.5 3.0 2012 2013 2014 2015 2016 2012 2017 2014 2016 2018 2020 2022 0 Note: Shaded area represents current forecast period. * The second quarter of 2017 is calculated using only months April and May to reflect the data available at the time of the Blue Chip Financial Forecast Survey. Source: Blue Chip Financial Forecast Survey; FRBNY. Source: Staff calculations. U.S. Yield Changes Around ECB Announcements (2010−2017) Change in 10−year Treasury yield 5y5y Forward Term Premium (basis points) 10 Percentage points 4.0 United States United Kingdom Germany 3.5 3.0 5 2.5 Dec 2015 2.0 0 1.5 1.0 0.5 −5 Slope: 0.47 R−squared: 0.45 −15 −10 −5 0 5 10 Change in 10−year Bund yield (basis points) 0.0 −0.5 −10 −1.0 15 2012 2013 2014 2015 2016 Source: Staff calculations; Thomson Reuters; BrokerTec. Source: Staff calculations; Thomson Reuters. Longer−run Federal Funds Rate Projections Percent Primary Dealers (median) SEP (median) Blue Chip (mean) Policy Implications 5.0 Spillovers from abroad cut both ways: 4.5 Dec 2015 4.0 3.5 Further accommodation abroad may create need to be less gradual here; Once policy abroad turns less accommodative, spillovers diminish. 3.0 2.5 2.0 2012 2013 2014 2015 2016 2017 Source: FRBNY Primary Dealer survey; Blue Chip Financial Forecast Survey; SEP. Page 1 of 13 If lower longer−term yields reflect lower r*, not much further need to remove accommodation. 2017 July 25–26, 2017 Authorized for Public Release 141 of 152 Class I FOMC – Restricted Controlled (FR) JUNE 2017 FOMC STATEMENT 1. Information received since the Federal Open Market Committee met in May indicates that the labor market has continued to strengthen and that economic activity has been rising moderately so far this year. Job gains have moderated but have been solid, on average, since the beginning of the year, and the unemployment rate has declined. Household spending has picked up in recent months, and business fixed investment has continued to expand. On a 12-month basis, inflation has declined recently and, like the measure excluding food and energy prices, is running somewhat below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance. 2. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, and labor market conditions will strengthen somewhat further. Inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee’s 2 percent objective over the medium term. 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 to 1-1/4 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation. 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. 5. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee currently expects to begin implementing a balance sheet normalization program this year, provided that the economy evolves broadly as anticipated. This program, which would gradually reduce the Federal Reserve’s securities holdings by decreasing reinvestment of principal payments from those Page 2 of 13 July 25–26, 2017 Authorized for Public Release 142 of 152 Class I FOMC – Restricted Controlled (FR) securities, is described in the accompanying addendum to the Committee’s Policy Normalization Principles and Plans. Page 3 of 13 July 25–26, 2017 Authorized for Public Release 143 of 152 Class I FOMC – Restricted Controlled (FR) JULY 2017 ALTERNATIVE A 1. Information received since the Federal Open Market Committee met in May June indicates that the labor market has continued to strengthen and that economic activity has been rising moderately so far this year. While job gains have moderated but have been solid, on average, since the beginning of the year, and the unemployment rate has declined changed little in recent months, wage gains have remained subdued. Household spending has picked up in recent months, and business fixed investment has have continued to expand. On a 12-month basis, overall inflation has declined recently and, like the measure excluding food and energy prices, is have declined and are running somewhat below 2 percent. Market-based measures of inflation compensation remain are low and have declined this year; 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. The Committee continues to expects that, with gradual only modest further adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, and labor market conditions will strengthen somewhat further. Inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around rise to 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 Against this backdrop, the Committee decided to raise maintain the target range for the federal funds rate to at 1 to 1-1/4 percent while assessing the likelihood that recent low readings on inflation will persist. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in 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 only modest further 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. 5. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency Page 4 of 13 July 25–26, 2017 Authorized for Public Release 144 of 152 Class I FOMC – Restricted Controlled (FR) mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee currently expects to begin implementing a its balance sheet normalization program later this year, provided that the economy evolves broadly as anticipated.; this program, which would gradually reduce the Federal Reserve’s securities holdings by decreasing reinvestment of principal payments from those securities, is described in the accompanying June 2017 Addendum to the Committee’s Policy Normalization Principles and Plans. Page 5 of 13 July 25–26, 2017 Authorized for Public Release 145 of 152 Class I FOMC – Restricted Controlled (FR) JULY 2017 ALTERNATIVE B 1. Information received since the Federal Open Market Committee met in May June indicates that the labor market has continued to strengthen and that economic activity has been rising moderately so far this year. Job gains have moderated but have been solid, on average, since the beginning of the year, and the unemployment rate has declined. Household spending has picked up in recent months, and business fixed investment has have continued to expand. On a 12-month basis, overall inflation has declined recently and, like the measure excluding food and energy prices, is have declined and are running somewhat below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance. 2. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, and labor market conditions will strengthen somewhat further. Inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee’s 2 percent objective over the medium term. 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 to 1-1/4 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation. 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. 5. [ For the time being, ] the Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee currently expects to begin implementing a its balance sheet normalization program this year relatively soon, provided that the economy evolves broadly as anticipated.; this program, which Page 6 of 13 July 25–26, 2017 Authorized for Public Release 146 of 152 Class I FOMC – Restricted Controlled (FR) would gradually reduce the Federal Reserve’s securities holdings by decreasing reinvestment of principal payments from those securities, is described in the accompanying June 2017 Addendum to the Committee’s Policy Normalization Principles and Plans. Page 7 of 13 July 25–26, 2017 Authorized for Public Release 147 of 152 Class I FOMC – Restricted Controlled (FR) JULY 2017 ALTERNATIVE C 1. Information received since the Federal Open Market Committee met in May June indicates that the labor market has continued to strengthen tighten and that growth of economic activity has been rising moderately so far this year rebounded in recent months. Job gains have moderated but have been solid, on average, since the beginning of the remained strong this year, and the unemployment rate has declined to a low level by historical standards. Household spending has picked up in recent months, and business fixed investment has have continued to expand. On a 12-month basis, overall inflation has declined recently and, like the measure excluding food and energy prices, is have been running somewhat below 2 percent. Market-based measures of inflation compensation remain low; and 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. The Committee continues to expects that, with further gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace rate, and labor market conditions will strengthen somewhat further employment will rise at a sustainable pace. Inflation on a 12month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee’s 2 percent objective over the medium term. Nearterm risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely. 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 to 1-1/4 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation. 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 run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data. 5. On September 1, the Committee currently expects to will begin implementing a its balance sheet normalization program this year, provided that the economy evolves broadly as anticipated. This program, which would gradually reduce the Federal Reserve’s securities holdings by decreasing reinvestment of principal payments from Page 8 of 13 July 25–26, 2017 Authorized for Public Release 148 of 152 Class I FOMC – Restricted Controlled (FR) those securities, which is described in the accompanying June 2017 Addendum to the Committee’s Policy Normalization Principles and Plans. Until then, the Committee is maintaining its existing reinvestment policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. N.B. In FOMC statements that follow the one that announces the beginning of balance sheet normalization, paragraph 5 could become: “Balance sheet normalization is proceeding in accordance with the program that the Committee initiated in [ September ] 2017; that program is described in the June 2017 Addendum to the Committee’s Policy Normalization Principles and Plans.” Page 9 of 13 July 25–26, 2017 Authorized for Public Release 149 of 152 Class I FOMC – Restricted Controlled (FR) Implementation Note for July 2017 Alternatives A and B Release Date: July 26, 2017 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 June 14 July 26, 2017: • 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 1.25 percent, effective June 15, 2017. • 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 June 15 July 27, 2017, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 1 to 1-1/4 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 1.00 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 per-counterparty limit of $30 billion per day. The Committee directs the Desk to continue rolling over maturing Treasury securities at auction and to continue reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve’s agency mortgage-backed securities transactions.” More information regarding open market operations may be found on the Federal Reserve Bank of New York’s website. • 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 1.75 percent, effective June 15, 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 Boston, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, Kansas City, Dallas, and San Francisco. Page 10 of 13 July 25–26, 2017 Authorized for Public Release 150 of 152 Class I FOMC – Restricted Controlled (FR) 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. Page 11 of 13 July 25–26, 2017 Authorized for Public Release 151 of 152 Class I FOMC – Restricted Controlled (FR) Implementation Note for July 2017 Alternative C Release Date: July 26, 2017 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 June 14 July 26, 2017: • 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 1.25 percent, effective June 15, 2017. • 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 June 15 July 27, 2017, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 1 to 1-1/4 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 1.00 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 per-counterparty limit of $30 billion per day. The Committee directs the Desk to continue rolling over maturing Treasury securities at auction Treasury securities maturing during July and August, and to continue reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities the principal payments received during July and August from the Federal Reserve’s holdings of agency debt and agency mortgage-backed securities. Effective September 1, 2017, the Committee directs the Desk to roll over at auction the amount of principal payments from the Federal Reserve’s holdings of Treasury securities maturing during each calendar month that exceeds $6 billion, and to reinvest in agency mortgage-backed securities the amount of principal payments from the Federal Reserve’s holdings of agency debt and agency mortgagebacked securities received during each calendar month that exceeds $4 billion.” Page 12 of 13 July 25–26, 2017 Authorized for Public Release 152 of 152 Class I FOMC – Restricted Controlled (FR) 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. More information regarding open market operations may be found on the Federal Reserve Bank of New York’s website. • 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 1.75 percent, effective June 15, 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 Boston, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, Kansas City, Dallas, and San Francisco. 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. Page 13 of 13
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