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July 31–August 1, 2018 Authorized for Public Release Appendix 1: Materials used by Messrs. Chung and Schlusche 173 of 219 July 31–August 1, 2018 Authorized for Public Release 174 of 219 Class I FOMC - Restricted Controlled (FR) Material for Briefing on Monetary Policy Options at the Effective Lower Bound: Assessing the Current Policy Toolkit Hess Chung and Bernd Schlusche Exhibits by Sofia Baig July 31, 2018 July 31–August 1, 2018 Authorized for Public Release 175 of 219 Class I FOMC − Restricted Controlled (FR) Exhibit 1: Some Monetary Policy Options at the ELB What is the probability of the ELB? Roughly 40 percent chance that the ELB will bind over the next 10 years (FRB/US, asymmetric rule). ELB binds around 15 percent of the time in the long run. Can forward guidance provide additional policy accommodation at the ELB? An illustrative scenario depicting a severe recession. Implementing unemployment rate thresholds near or below the natural rate or inflation thresholds near or above target can speed up the recovery. These policies lower the median unemployment rate when the ELB binds by around 1/4 percentage point and raise the median inflation rate by as much as 40 basis points. Macroeconomic outcomes in a recession scenario with thresholds Unemployment Rate Core PCE Inflation Percent 4−quarter percent change 10 No threshold Unemployment threshold (U < 3.5) Inflation threshold (π > 2) 2.5 9 8 2.0 7 6 1.5 5 1.0 4 3 2 2017 2021 2025 2029 0.5 2033 2017 Federal Funds Rate 2021 2025 Percent 4 3 2 1 0 2017 2021 2025 Page 1 of 3 2029 2033 2029 2033 July 31–August 1, 2018 Authorized for Public Release 176 of 219 Class I FOMC − Restricted Controlled (FR) Exhibit 2: Balance Sheet Policy Options at the ELB Can balance sheet policies improve macroeconomic outcomes at the ELB? Examine two balance sheet policies: a maturity extension program (MEP) and an LSAP. Balance sheet measures can help support an economic recovery. Example: An LSAP program of $85 bn/month in Treasury securities reduces the median unemployment rate when the ELB binds by about 1/4 percentage point and raises the median inflation rate by about 20 basis points. Macroeconomic outcomes in a recession scenario with balance sheet policies Federal Reserve Assets 10−year Term Premium Effect Trillions of dollars Passive MEP LSAP ($85bn Treas./month) Basis points 0 10 9 −50 8 −100 7 6 −150 5 4 −200 3 −250 2 2017 2021 2025 2029 Unemployment Rate 2033 2017 2021 Core PCE Inflation Percent 2025 2029 2033 4−quarter percent change 10 2.5 9 8 2.0 7 6 1.5 5 1.0 4 3 2 2017 2021 2025 2029 2033 0.5 2017 2021 2025 2029 Takeaways There is a material risk that the ELB will bind in the future. The current monetary policy toolkit can offset only some of the effects of a significant recession. Long lags in the transmission of policy imply that unconventional policies should be deployed rapidly in the event of an incipient recession. Estimates of the macroeconomic effects are subject to considerable uncertainty. Page 2 of 3 2033 July 31–August 1, 2018 Authorized for Public Release 177 of 219 Class I FOMC − Restricted Controlled (FR) Exhibit 3: Discussion Questions How concerned are you that the effective lower bound (ELB) could limit attainment of the Committee’s maximum employment and price stability objectives in future economic downturns? In your view, how effective would forward guidance − explicit communication about the future path of the policy rate − and balance sheet policies of the type previously used by the Committee be in providing additional policy accommodation at the ELB? Are there other existing policy tools to be considered as options for dealing with the ELB? Should the Committee communicate in advance how it would intend to use its policy toolkit when and if the ELB constrains policy? Should the Committee evaluate alternative monetary policy strategies, i.e., strategies that would require changing the Committee’s Statement on Longer−Run Goals and Monetary Policy Strategy, in order to address the risk that the ELB may prevent the attainment of its maximum employment and price stability objectives? Page 3 of 3 July 31–August 1, 2018 Authorized for Public Release Appendix 2: Materials used by Mr. Potter and Ms. Logan 178 of 219 July 31–August 1, 2018 Authorized for Public Release Class II FOMC - Restricted (FR) Material for Briefing on Financial Developments and Open Market Operations Lorie Logan and Simon Potter Exhibits by Ashley Rhodes July 31, 2018 179 of 219 July 31–August 1, 2018 Authorized for Public Release 180 of 219 Exhibit 1 Class II FOMC – Restricted (FR) (1) Asset Price Changes Equities S&P 500 Industrials Shanghai Composite Rates 2-Year Treasury 10-Year Treasury 10-Year Breakeven Commodities Soybean Futures Brent Crude FX T.W. Dollar Index Cumulative Trade Tension Days* Intermeeting Period -2.5% -5.0% -6.6% +1.1% -0.4% -6.7% -0 bps -3 bps -3 bps +13 bps -1 bps -1 bps -7.1% -8.3% -9.2% -1.8% +1.1% +0.9% (2) Proportion of Two-Word Terms Used in "Uncertain" Context from Survey Results* Trade Policy Balance Sheet Unemployment Rate Neutral Rate Funds Rate Fed Funds Monetary Policy Rate Hike 0.0 (3) U.S. Dollar Performance EUR GBP GBP KRW KRW USD ARS Appreciation ARS CNY CNY -15 -10 -5 0 5 Percent Change 10 1.0 CFETS Index* CNY Appreciation vs. USD and CFETS Basket 90 -1.5 -0.5 0.5 PPT Contribution Japan 1.5 85 01/04/15 01/04/17 01/04/18 (6) Implied Path of the Policy Rate* 3.5 3.0 5 01/04/16 *An estimation from Standard Chartered of the CFETS EER basket. Source: Bloomberg, Standard Chartered Percent 10 Jun. '18 FOMC RMB Devaluation U.S. 15 June SEP (Median) Jul./Aug. Survey Modal Path (Median) June Survey Unconditional Path (Mean) Jul./Aug. Survey Unconditional Path (Mean) June FOMC Market Path Current Market Path 2.5 0 2.0 1.5 -5 1.0 06/12/18 -10 -15 0.8 95 (5) Intermeeting Changes in Global Sovereign Bond Germany 0.6 CNYUSD 100 *Values shown indicate contribution to the Trade-Weighted Dollar Index’s appreciation since 06/12/2018. Source: Bloomberg, Desk Calculations BPS 0.4 (4) Chinese Exchange Rate Change in USD-Currency Pair Contribution to T.W. Dollar* Indexed to 01/04/15 MXN MXN 105 JPY JPY EUR 0.2 *Based on all responses to the Jul./Aug. Survey of Primary Dealers and Market Participants. Proportion of times the term appears in the same sentence as terms connoting uncertainty. Only terms appearing at least 10 times are shown. Source: FRBNY *Trade dates include days with negative headlines on U.S.-China trade relations: 6/19, 6/25, 7/11. Source: Bloomberg, Desk Calculations 2Y Source: Bloomberg 5Y 10Y 30Y 01/12/19 08/12/19 03/12/20 10/12/20 *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 July 31–August 1, 2018 Authorized for Public Release 181 of 219 Exhibit 2 Class II FOMC – Restricted (FR) (8) Distribution of Fed Funds and Eurodollar Volumes By Rate (7) EFFR Level, Spread, and Changes on Select Days Over the Intermeeting Period < IOER-5 IOER-3 IOER Fed Funds $ Billions 100 EFFR Level EFFR-IOER Spread One-Day Change 6/14/2018 1.90% -5 bps +20 bps 6/19/2018 1.91% -4 bps +1 bps 6/20/2018 1.92% -3 bps +1 bps 6/27/2018 1.91% -4 bps -1 bps July Avg. 1.91% -4 bps Unchanged Source: FRBNY (9) Spread of Key Rates to Top of Target Range* IOER EFFR ON RRP BPS 5 Top of 0 Range -5 IOER Median EFFR Median TGCR Median IOER-5 IOER-2 > IOER $ Billions 100 80 80 60 60 40 40 20 20 0 0 6/14 6/19 6/20 6/27 July Avg. Source: FRBNY IOER-4 IOER-1 Median Volume Eurodollars 6/14 6/19 6/20 6/27 July Avg. (10) Importance of Factors Influencing EFFR-IOER Spread* Reserve Balances Amount of IOER Arb. Reduction in FDIC Fees Median Rating 5 Treasury Supply Regulatory Constraints 4 -10 3 -15 Survey Projections -20 2 Bottom -25 -30 12/30/17 1 06/30/18 12/31/18 06/30/19 *Projections based on all responses from the Surveys of Primary Dealers and Market Participants. Blue shaded area represents 25th and 75th percentiles of expectations for the EFFR. Source: Federal Reserve Board, FRBNY (11) EFFR-IOER Spread, Conditional on Various Levels of Reserve Balances* BPS 15 Interquartile Range May Median $ Trillions 1.0 -5 0.5 1750 1500 Projections Median EFFR-IOER Spread: 1.5 0 2000 1250 1000 750 500 *Based on a matched sample of respondents to the Jul./Aug. and May Surveys of Primary Dealers and Market Participants. Source: FRBNY Jul./Aug.: In 2019 (12) Monthly Reserve Balances* 2.0 5 -10 Jul./Aug.: Through end-2018 *Based on a matched sample of respondents to the Jul./Aug. and May Surveys of Primary Dealers and Market Participants. Source: FRBNY Jul./Aug. Median 2.5 Positive Values = EFFR Above IOER 10 May: Through end-2019 0.0 12/30/16 -1 bps +2 bps 12/31/17 12/31/18 12/31/19 12/31/20 *Median EFFR-IOER Spread based on a matched sample of respondents to the Surveys of Primary Dealers and Market Participants. Source: Desk Calculations, FRBNY July 31–August 1, 2018 Authorized for Public Release 182 of 219 Exhibit 3 Class II FOMC – Restricted (FR) (14) Overnight Unsecured Trading Volumes (13) Treasury Bills Outstanding 2,500 350 2,400 300 2,300 2,200 250 2,100 200 2,000 Projections 1,700 1,600 10/01/17 02/01/18 06/01/18 10/01/18 Source: U.S. Treasury, Desk Calculations 100 OBFR 1,800 50 0 03/01/16 Source: FRBNY 11/01/16 07/01/17 03/01/18 (16) Upcoming SOMA Agency Debt and MBS Paydown Projections* (15) ON RRP Take-Up $ Billions Redemptions Reinvestments Redemption Cap $ Billions 450 30 400 25 350 300 Projections 20 250 15 200 150 10 100 5 50 0 06/01/17 Fed Funds 150 1,900 1,500 06/01/17 Eurodollars $ Billions $ Billions 0 09/01/17 Source: Bloomberg, FRBNY 12/01/17 03/01/18 06/01/18 07/18 10/18 01/19 04/19 07/19 10/19 *Paydowns are estimated using Desk model and market-implied rates. Source: Blackrock, FRBNY 01/20 July 31–August 1, 2018 Authorized for Public Release Class II FOMC – Restricted (FR) 183 of 219 Appendix 1 Appendix 1 (1) Summary of Operational Testing Summary of Operational Tests in prior period: • Domestic Authorization • None • Foreign Authorization • July 10: Euro-denominated repo with private counterparties for €1 million Upcoming Operational Tests: • Two tests scheduled under the Domestic Authorization • August 16: Treasury outright purchase of up to $100 million • August 20 and 21: Coupon swaps with unsettled agency MBS holdings for approximately $20 million, total • Three additional tests tentatively scheduled under the Domestic Authorization1 • Treasury rollover • Treasury maturity • Treasury outright sale • No tests scheduled under the Foreign Authorization 1 The timing of these additional tests will depend upon the maturity of the securities purchased in the August 16 operation. (2) MBS Purchases Summary Since Cap Implementation Through 07/27/18 ($ Millions) Oct-17 10/16/17 - 11/13/17 Actual Paydowns 24,353 Nov-17 * 11/14/17 - 12/13/17 28,316 4,000 Dec-17 12/14/17 - 01/12/18 24,032 4,000 Purchase Period 4,000 Actual Purchases 20,355 Cap 2 Cumulative Deviation 2 24,327 11 13 20,038 6 19 Net Deviation Jan-18 01/16/18 - 02/13/18 22,909 8,000 14,921 12 31 Feb-18 02/14/18 - 03/13/18 20,689 8,000 12,684 (5) 26 Mar-18 03/14/18 - 04/12/18 19,294 8,000 11,308 14 40 Apr-18 04/13/18 - 05/11/18 21,233 12,000 9,234 1 41 May-18 05/14/18 - 06/13/18 20,793 12,000 8,807 14 55 Jun-18 * 06/14/18 - 07/13/18 Jul-18 ** 07/16/18 - 08/13/18 24,526 12,000 12,534 8 63 N/A 16,000 3,202 *Actual paydowns include agency debt maturity. Nov-17: $2,366 million; Jun-18: $1,982 million. **Actual purchases ongoing, reflect data through 07/27/18. T arget amount for July purchase period is $6,729 million. July 31–August 1, 2018 Authorized for Public Release Class II FOMC – Restricted (FR) 184 of 219 Appendix 2 (Last) Appendix 2 (1) FX Swaps Outstanding BOJ $ Billions ECB 12 10 8 6 4 2 0 12/14/2016 3/14/2017 6/14/2017 9/14/2017 12/14/2017 3/14/2018 6/14/2018 Source: FRBNY (2) FX Intervention • There were no intervention operations in foreign currencies for the System's account during the intermeeting period July 31–August 1, 2018 Authorized for Public Release Appendix 3: Materials used by Mr. Wilcox 185 of 219 July 31–August 1, 2018 Authorized for Public Release Class II FOMC – Restricted (FR) Material for Briefing on The U.S. Outlook David W. Wilcox Exhibits by Bo Yeon Jung July 31, 2018 186 of 219 July 31–August 1, 2018 Authorized for Public Release 187 of 219 Class II FOMC - Restricted (FR) Forecast Summary Confidence Intervals for Panels 1, 5, 10, and 11 Based on FRB/US Stochastic Simulations 1. Real GDP 2. Estimates of Private Nonfarm Payroll Gains Percent change, annual rate 10 July TB June TB 70% confidence interval Advance BEA estimate 8 6 10 8 BLS FRB/ADP Pooled estimate 400 400 300 300 200 Jul. Jul. 200 Jun. 100 100 4 2 2 0 0 2015 2016 2017 2018 500 6 4 -2 Thousands of employees 500 2019 2020 -2 0 2016 2017 0 2018 Note: Shaded region denotes 90 percent confidence interval for pooled estimate. July FRB/ADP value includes data through 7/21; July pooled estimate treats July BLS observation as missing. 3. Output Gap Estimates 4. Natural Rate Estimates Percent 4 Percent 4 11 3 10 2 2 9 1 1 8 8 0 0 7 7 -1 -1 6 6 -2 -2 5 5 -3 -3 4 4 -4 3 Judgmental State-space model 3 -4 2013 2014 2015 2016 2017 2018 2005 2007 2009 2011 2013 2015 2017 3 Note: Solid lines are July TB estimates; dotted lines are June TB estimates. Shaded region denotes 70 percent confidence interval around July TB model estimate. Note: Blue shaded region denotes 70 percent confidence interval around model estimate. Gray shaded bar indicates a period of business recession as defined by the NBER. 5. Unemployment Rate 6. Unemployment Rates by Race or Ethnicity Percent 7 July TB June TB 70% confidence interval 6 5 4 11 Unemployment rate 10 Judgmental State-space model 9 Natural rate 3 Percent 7 20 6 16 5 12 4 8 8 3 4 4 Black or African-American Hispanic or Latino Aggregate White Asian 20 16 12 Jun. 2 2015 2016 2017 2018 2019 2020 2 0 2000 2004 2008 2012 2016 0 Note: Three-month moving averages. Shaded bars indicate a period of business recession as defined by the NBER. Page 1 of 2 July 31–August 1, 2018 Authorized for Public Release 8. Model-Based Decomposition of Annualized ECI Change 7. Measures of Labor Compensation Percent change from year earlier 6 Atlanta Fed wage growth tracker* Average hourly earnings** Employment cost index 5 6 Percentage points 5 4 Jun. 3 4 4 3 3 2 2 1 1 0 0 -1 -1 3 Jun. Mar. 2 2 -2 1 Expected inflation Adj. trend productivity Actual ECI change (%) 1 -3 0 -4 *Three-month moving average. **All employees. 9. Monthly PCE Price Inflation 10. Total PCE Prices 2014 2015 2016 2017 2018 Percent change from year earlier Total Core 2.5 3.0 2.5 Percent change, annual rate 6 July TB June TB 70% confidence interval Advance BEA estimate 5 4 2.0 2.0 1.5 1.5 1.0 1.0 0.5 0.5 2014 2015 2016 2017 2018 0.0 Percent change, annual rate July TB June TB 70% confidence interval Advance BEA estimate 4 2 2 1 1 2015 2016 2017 2018 2019 2020 6 5 4 2 1 1 0 0 -1 -1 -2 4 3 -4 2 5 3 -3 3 11. PCE Prices Excluding Food and Energy 5 -2 3 Note: Shaded yellow region indicates forecast period. 0 Slack Other 2002-07 2008-09 2010-11 2012-13 2014-15 2016-18Q1 Note: Contributions to annualized log difference; trend productivity contribution includes the model’s constant term. Model estimation period is 1988:Q1 to 2009:Q4. 2013 3.0 0.0 5 5 4 0 188 of 219 Class II FOMC - Restricted (FR) 0 Page 2 of 2 2015 2016 2017 2018 2019 2020 -2 July 31–August 1, 2018 Authorized for Public Release Appendix 4: Materials used by Mr. Kamin 189 of 219 July 31–August 1, 2018 Authorized for Public Release Class II FOMC - Internal (FR) Material for Briefing on The International Outlook Steve Kamin Exhibits by Mandy Bowers July 31, 2018 190 of 219 July 31–August 1, 2018 Authorized for Public Release 191 of 219 The Smoot-Hawley Tariff of 1930: overrated! • Boosted average tariff rate only 2 percentage points. • Most of upswing between 1929 and 1933 due to price deflation. Source: U.S. Census Bureau. 7/31/2018 Source: Bureau of Labor Statistics, Haver Analytics. CLASS II FOMC-RESTRICTED (FR) Page 1 of 9 July 31–August 1, 2018 Authorized for Public Release 192 of 219 Contemplated tariff hikes could be larger and more consequential Import Coverage of Tariffs Billions of dollars Implemented Steel Aluminum China (7/6) Solar & $16 Wash. Mach. $23 $34 $10 Planned & Proposed China (8/31) $16 China (9/30) $200 Autos $361 Source: U.S. Census Bureau, staff calculations using NIPA data. Other Non-Oil Merchandise Imports $1,243 China $250 Source: Staff calculations. 7/31/2018 CLASS II FOMC-RESTRICTED (FR) Page 2 of 9 July 31–August 1, 2018 Authorized for Public Release 193 of 219 Broad-based, reciprocated tariffs could substantially depress U.S. GDP 7/31/2018 CLASS II FOMC-RESTRICTED (FR) Page 3 of 9 July 31–August 1, 2018 Authorized for Public Release 194 of 219 Foreign Outlook: steady as she goes 7/31/2018 CLASS II FOMC-RESTRICTED (FR) Page 4 of 9 July 31–August 1, 2018 Authorized for Public Release 195 of 219 AFE Growth: downward revisions have been small Evolution of Staff’s AFE GDP Forecasts 7/31/2018 Estimated Probability of Recession in AFEs within 12 Months CLASS II FOMC-RESTRICTED (FR) Probability Page 5 of 9 July 31–August 1, 2018 Authorized for Public Release 196 of 219 Long-term Slope of the Yield Curve • Low spreads not strong indication of recession abroad. • Spreads a less reliable indicator of foreign recessions. • Spreads being depressed by QE, heightened demand for safe assets. 7/31/2018 CLASS II FOMC-RESTRICTED (FR) Page 6 of 9 July 31–August 1, 2018 Authorized for Public Release 197 of 219 Near-term Slope of the Yield Curve • Lower near-term spreads signal slower monetary tightening abroad than in U.S. • Does this imply greater likelihood of recession abroad than in U.S.? • Yes: Reflects more fragile foreign expansion. • No: Slow tightening abroad may reflect below-target inflation, not weak activity. 7/31/2018 CLASS II FOMC-RESTRICTED (FR) Page 7 of 9 July 31–August 1, 2018 Authorized for Public Release 198 of 219 Will rising U.S. interest rates trigger EME crisis? 7/31/2018 CLASS II FOMC-RESTRICTED (FR) Page 8 of 9 July 31–August 1, 2018 Authorized for Public Release 199 of 219 Risks from China -- discussed in latest QS report 7/31/2018 CLASS II FOMC-RESTRICTED (FR) Page 9 of 9 July 31–August 1, 2018 Authorized for Public Release Class II FOMC - Internal (FR) Material for Briefing on The International Outlook Appendix Steve Kamin Exhibits by Mandy Bowers July 31, 2018 200 of 219 July 31–August 1, 2018 Authorized for Public Release 201 of 219 Foreign GDP Effects 7/31/2018 CLASS II FOMC-RESTRICTED (FR) Page 1 of 1 July 31–August 1, 2018 Authorized for Public Release Appendix 5: Materials used by Ms. Edge 202 of 219 July 31–August 1, 2018 Authorized for Public Release Class II FOMC – Restricted (FR) Material for Briefing on Financial Stability Developments Rochelle M. Edge Exhibits by Matthew Carl and Femi Ogunrinu July 31, 2018 203 of 219 July 31–August 1, 2018 Authorized for Public Release Exhibit 1: Valuation Pressures and Nonfinancial-sector Leverage Class II FOMC - Restricted FR 1−1: Summary Measure of Valuation Pressures and Risk Appetite July 31, 2018 1−2: Aggregate House Price−to−rent Ratio Percentile Ratio 100 Q2 (e) Quarterly 204 of 219 150 Monthly 140 Price−to−rent ratio Long−run trend 80 130 120 60 110 May 40 100 90 80 20 70 0 1994 1998 2002 2006 2010 2014 1−3: Capitalization Rate at Origination for Commercial Real Estate Loans 1988 1994 2000 2006 2012 2018 1−4: Level of Standards on Syndicated Non−investment Grade C&I Loans at Domestic Banks Percent 3−month moving average 60 1982 2018 Office Industrial Retail Multifamily Percent of respondents 9.5 Tightest Midpoint Significantly tighter Somewhat tighter 9.0 8.5 Easiest Significantly easier Somewhat easier 8.0 100 7.5 7.0 75 6.5 50 6.0 May 5.5 25 5.0 4.5 2008 2010 2012 2014 2016 1−5: Total Net Issuance of Non−financial Risky Debt Billions of dollars Quarterly 0 2011 2012 2013 2014 2015 2016 2017 2018 2018 1−6: Real Household Debt Balances Trillions of dollars 90 Total Institutional leveraged loans High−yield and unrated bonds 60 Quarterly Prime Near prime Subprime 12 10 Q1 8 Q2 6 30 4 0 2 0 −30 2006 2008 2010 2012 2014 2016 2018 2000 Page 1 of 5 2003 2006 2009 2012 2015 2018 July 31–August 1, 2018 Class II FOMC - Restricted FR Authorized for Public Release Exhibit 2: Financial-sector Leverage and Maturity and Liquidity Transformation 2−1: Maximum Change in the Unemployment Rate and CRE Prices 7 Percentage points Percent change 5 July 31, 2018 2−2: Summary of Supervisory Stress Test Results % of RWA −15 Unemployment rate (left scale) CRE prices (right scale) 6 205 of 219 Pre−provision net revenue Large, internationally active banks 5 3 Total projected losses −25 7 Other CCAR banks 4 1 AOCI effects on capital 3 −1 Pre−tax net income −35 2 −3 Pre−tax net income and AOCI effects on capital 1 0 −45 −7 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 Stress test round Stress test round Stress test round 2−3: Hedge Fund Leverage 2−4: Terms on Leverage Extended to Hedge Funds Ratio Monthly Form PF gross notional leverage (average, left scale) Gross leverage in prime brokerage accounts (right scale) Net percent 2.7 2.5 7 Sep. 6 60 Quarterly Tightening 9 8 −5 Price terms Nonprice terms 40 20 2.3 May 5 0 4 1.9 3 2 Easing 2.1 Q2 1.7 2010 2012 2014 2016 2018 −40 2014 2−5: Cumulative Changes in Average 12−month Certificate of Deposit Rates −20 2015 2016 2017 2018 2−6: Assets in Potential MMF Substitutes Percent Trillions of dollars 0.5 Weekly 1.2 Monthly GSIBs Non−GSIB CCAR Other 0.4 July 13 0.3 Stable value funds Offshore MMFs Short−term investment funds Ultrashort bond funds Local government investment pools 0.9 March 0.6 0.2 June 0.1 March 0.0 −0.1 2016 2017 2018 0.0 2008 Page 2 of 5 0.3 May June 2010 2012 2014 2016 2018 July 31–August 1, 2018 206 of 219 Exhibit 3: Staff Judgment on Levels of Vulnerabilities: July 2014 to July 2018 Class II FOMC - Restricted FR Jul. ‘14 Authorized for Public Release Oct. ‘14 Jan. ‘15 Apr. ‘15 Jul. ‘15 Oct. ‘15 Jan. ‘16 Apr. ‘16 Jul. ‘16 Overall Assessment Valuation Pressures Private Nonfinancial Sector Leverage Financial Sector Leverage Maturity and Liquidity Transformation Page 3 of 5 Oct. ‘16 Jan. ‘17 Apr. ‘17 July 31, 2018 Jul. ‘17 Oct. ‘17 Jan. ‘18 Apr. ‘18 Jul. ‘18 July 31–August 1, 2018 Class II FOMC - Restricted FR Key: Authorized for Public Release 207 of 219 Exhibit 4: Staff Judgment on Levels of Vulnerabilities Extremely subdued Low Moderate Notable July 31, 2018 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. July 2017 • • Valuation Pressures • • • Private Nonfinancial Sector Leverage Financial Sector Leverage • • • • • Maturity and Liquidity Transformation • • April 2018 The equity price-to-earnings ratio is near its highest value outside of the dotcom 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 2018 Valuations are still stretched despite a reduction in pressures in equity and corporate bond markets. Treasury term premiums rebounded from previous lows, but remain subdued. Valuations in leveraged loan and CRE markets increased further from already stretched conditions. • Leverage in the nonfinancial corporate sector remains high and risky debt growth has picked up. The household sector appears resilient, with modest new borrowing concentrated among prime-rated borrowers. • Capital positions at banks and insurance companies remain at high levels. Some measures of hedge fund leverage have increased notably. • Large BHCs’ holdings of liquid assets remain at high levels. Banks’ core deposit funding remains high, while short-term funding remains low. The growth in potential substitutes for MMFs remains limited. • Overall Assessment Page 4 of 5 • • • • • • Valuation pressures remain elevated across most markets. House prices have accelerated over the past year, pushing their ratio to rents further above their estimated historical trend. Valuation pressures in CRE markets continued to increase from already stretched conditions. In the nonfinancial corporate sector, debt owed by highly-levered and lower-rated firms remains elevated. The household sector appears resilient. The amount of debt owed by borrowers with near-prime and subprime credit scores is flat and well below pre-crisis levels. Capital positions at banks and insurance companies remain at high levels. Some measures of hedge fund leverage remain high. Large BHCs’ holdings of liquid assets remain at high levels. Banks’ core deposit funding remains high, while short-term funding remains near historical lows. The growth in potential substitutes for prime MMFs remains limited. July 31–August 1, 2018 Class II FOMC - Restricted FR Authorized for Public Release Notes to Exhibits 208 of 219 July 31, 2018 Exhibit 1: 1: Note: The indicator plotted is an aggregate of valuation measures from equity, volatility, housing, corporate debt, and commercial real estate markets and of indicators of standards or risk characteristics in these markets. The values are percentiles of the historical distribution for this composite over the time period shown. Shaded bars indicate periods of recession as defined by the National Bureau of Economic Research. Data for 2018:Q2 is generated with available data and staff estimates. Source: Aikman et al. (2015). 2: Note: Trend equals 100 at the last observation. The long-run trend is estimated using data from 19782001 and includes the effect of carrying costs on the expected price-rent ratio. Source: CoreLogic, BLS. 3: Source: Real Capital Analytics. 4: Note: Banks were asked to describe their current level of standards in relation to the midpoint of the range of standards at their bank between 2005 and the present. Responses are weighted by survey respondents’ holdings of relevant loan types, as reported on the Q1 Call Reports from 2011 to 2018 where relevant. Source: Senior Loan Officer Opinion Survey. 5: Note: Total net issuance of risky debt is the sum of the net issuance of speculative grade and unrated bonds and institutional leveraged loans. Data are four-quarter moving averages. Source: S&P LCD; Mergent-FISD. 6: Note: Household debt is measured as total debt for all consumers, by credit score. Near prime is between 620 and 719, prime is greater than 719. Scores are measured contemporaneously. Student loan balances prior to 2004 were estimated. Source: Federal Reserve Bank of New York CCP/Equifax. Exhibit 2: 1: Source: Dodd-Frank Act Stress Tests 2018, 2017, 2016, 2015, 2014: Supervisory Stress Methodology and Results. 2: Source: Dodd-Frank Act Stress Tests 2018: Supervisory Stress Methodology and Results. 3: Note: Gross leverage in prime brokerage accounts is calculated as total market value in prime broker (PB) clients’ accounts (long plus short) divided by clients’ total equity. Form PF gross notional leverage is computed as the ratio of hedge funds’ gross notional exposure to net asset value, including derivative notional exposure and short positions. Source: Federal Reserve Bank of New York. SEC Form PF. 4: Source: Senior Credit Office Opinion Survey (SCOOS). 5: Note: Event lines denote Federal Funds Rate midpoint increases. Other banks are those with less than $50 billion in total assets. Source: Ratewatch. 6. Note: Local government investment pools are rated “AAAm” or “AAm.” The date of the last observation varies by series. Stable value funds ends in March, offshore MMFs ends in June, short-term investment funds ends in March, ultrashort bonds funds ends in May, and local government investing pools ends in June. Source: S&P. Exhibit 3: Note: 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: July 2014 to July 2018 QS reports. Exhibit 4: Note: See note for Exhibit 3. Source: July 2018 QS report. Page 5 of 5 July 31–August 1, 2018 Authorized for Public Release Appendix 6: Materials used by Mr. Laubach 209 of 219 July 31–August 1, 2018 Authorized for Public Release Class I FOMC – Restricted Controlled (FR) Material for the Briefing on Monetary Policy Alternatives Thomas Laubach Exhibits by Gurubala Kotta July 31-August 1, 2018 210 of 219 July 31–August 1, 2018 Authorized for Public Release 211 of 219 Monetary Policy Considerations Economic Conditions at November 2005 FOMC Meeting Q1 Core PCE Inflation (YoY) Output Gap Q2 Q3 Q4 2.16 1.97 1.94 1.91 −0.71 −0.65 −0.61 −0.50 Unemployment Gap 0.25 0.11 0.02 0.05 Note: Data and staff projections as reported in the November 2005 Greenbook. Real Federal Funds Rate and Real Rate Gap Policy Considerations: 2005 and Now 2005: All gaps appeared to be closing but signs of upside inflation pressures Percent Historical real federal funds rate Range of r* estimates 8 Real rate gap 6 7 Committee signaled "some further measured policy firming" likely needed 5 4 3 Today: Inflation and real rate gap closing, but unemployment well below longer−run rate 2 1 May wish to raise rates above neutral 0 −1 Balance risks to price and financial stability against risks of recession or persistently lower inflation −2 −3 1983 Recession Probability Based on Real Rate Gap 1988 1993 1998 2003 2008 2013 Policy Communications Percent 60 How far might funds rate be raised without increasing vulnerability of the economy? 50 In 2005, "some further measured policy firming" 40 Today, "further gradual increases in the target range" 30 How much longer is this language consistent with your intentions? 20 10 How to modify as approach end of tightening cycle? 0 1983 1988 1993 1998 2003 2008 2018 Note: Real rate gap is the difference between the real funds rate and the mean of the r* estimates from the following five models using current data: HLW, JM, K, LVG, and LW. The red data points indicate the level of the real rate gap four quarters before the onset of a recession. Source: FRBNY; BEA; various papers on r* referenced in the March 2018 Monetary Policy Strategies section of Tealbook A. 2013 2018 Note: Recession probability from a probit model using the real rate gap estimated over the period of 1960 Q1 to 2018 Q1. Real rate gap is the difference between the real funds rate and the mean of the r* estimates from the five models shown in the middle right panel. Page Source: Board staff calculations. 1 of 9 July 31–August 1, 2018 Authorized for Public Release 212 of 219 JUNE 2018 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 at a solid rate. Job gains have been strong, on average, in recent months, and the unemployment rate has declined. Recent data suggest that growth of household spending has picked up, while business fixed investment has continued to grow strongly. On a 12-month basis, both overall inflation and inflation for items other than food and energy have moved close to 2 percent. Indicators of longer-term inflation expectations are little changed, on balance. 2. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term. Risks to the economic outlook appear roughly balanced. 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 1-3/4 to 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 maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. Page 2 of 9 July 31–August 1, 2018 Authorized for Public Release 213 of 219 ALTERNATIVE A FOR JULY/AUGUST 2018 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 at a solid strong rate. Job gains have been strong, on average, in recent months, and the unemployment rate has declined stayed low. Recent data suggest that growth of Household spending has picked up, while and business fixed investment has continued to grow have grown strongly. On a 12-month basis, both overall inflation and inflation for items other than food and energy have moved close to 2 percent. Indicators of longer-term inflation expectations are little changed, on balance remain low. 2. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that further gradual increases in the target range for the federal funds rate the current stance of monetary policy will be consistent with sustained expansion of economic activity, and strong labor market conditions,. and Inflation is expected to move modestly above 2 percent for a time and then run near the Committee’s symmetric 2 percent objective over the medium term. Risks to the economic outlook appear roughly balanced. 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 1-3/4 to 2 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to period of inflation modestly above 2 percent inflation. This inflation outcome should help ensure that longer-term inflation expectations are consistent with the Committee’s symmetric objective of 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 maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. Page 3 of 9 July 31–August 1, 2018 Authorized for Public Release 214 of 219 ALTERNATIVE B FOR JULY/AUGUST 2018 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 at a solid strong rate. Job gains have been strong, on average, in recent months, and the unemployment rate has declined stayed low. Recent data suggest that growth of Household spending has picked up, while and business fixed investment has continued to grow have grown strongly. On a 12-month basis, both overall inflation and inflation for items other than food and energy have moved close to remain near 2 percent. Indicators 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 expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term. Risks to the economic outlook appear roughly balanced. 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 1-3/4 to 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 maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. Page 4 of 9 July 31–August 1, 2018 Authorized for Public Release 215 of 219 ALTERNATIVE C FOR JULY/AUGUST 2018 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 at a solid strong rate. Job gains have been strong, on average, in recent months, and the unemployment rate has declined stayed low. Recent data suggest that growth of Household spending has picked up, while and business fixed investment has continued to grow have grown strongly. On a 12-month basis, both overall inflation and inflation for items other than food and energy have moved close to remain near 2 percent. Indicators 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 expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained warranted to achieve a sustainable expansion of economic activity, maintain strong labor market conditions, and keep inflation near the Committee’s symmetric 2 percent objective over the medium term. Risks to the economic outlook appear roughly balanced, but the Committee is closely monitoring the economic and financial implications of high levels of resource utilization. 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 1-3/4 to 2 to 2-1/4 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 maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. Page 5 of 9 July 31–August 1, 2018 Authorized for Public Release 216 of 219 Implementation Note for July/August 2018 Alternatives A and B Release Date: August 1, 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 (FOMC) in its statement on June 13 August 1, 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 1.95 percent, effective June 14 August 2, 2018. Setting the interest rate paid on required and excess reserve balances 5 basis points below the top of the target range for the federal funds rate is intended to foster trading in the federal funds market at rates well within the FOMC's target range. • 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 14 August 2, 2018, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 1-3/4 to 2 percent, including overnight reverse repurchase operations (and reverse repurchase operations with maturities of more than one day when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 1.75 percent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account that are available for such operations and by a per-counterparty limit of $30 billion per day. The Committee directs the Desk to continue rolling over at auction the amount of principal payments from the Federal Reserve's holdings of Treasury securities maturing during June that exceeds $18 billion, and to continue reinvesting in agency mortgage-backed securities the amount of principal payments from the Federal Reserve's holdings of agency debt and agency mortgage-backed securities received during June that exceeds $12 billion. Effective in July, the Committee directs the Desk to roll over at auction the amount of principal payments from the Federal Reserve's holdings of Treasury securities maturing during each calendar month that exceeds $24 billion, and to reinvest in agency mortgage-backed securities the amount of principal payments from the Federal Reserve's holdings of agency debt and agency mortgage-backed securities received during each calendar month that exceeds $16 billion. Small deviations from these amounts for operational reasons are acceptable. Page 6 of 9 July 31–August 1, 2018 Authorized for Public Release 217 of 219 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.” • 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 2.50 percent, effective June 14, 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 ... 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. Page 7 of 9 July 31–August 1, 2018 Authorized for Public Release 218 of 219 Implementation Note for July/August 2018 Alternative C Release Date: August 1, 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 (FOMC) in its statement on June 13 August 1, 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 1.95 2.20 percent, effective June 14 August 2, 2018. Setting the interest rate paid on required and excess reserve balances 5 basis points below the top of the target range for the federal funds rate is intended to foster trading in the federal funds market at rates well within the FOMC's target range. • 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 14 August 2, 2018, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 1-3/4 to 2 to 2- 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 1.75 2 percent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account that are available for such operations and by a percounterparty limit of $30 billion per day. The Committee directs the Desk to continue rolling over at auction the amount of principal payments from the Federal Reserve's holdings of Treasury securities maturing during June that exceeds $18 billion, and to continue reinvesting in agency mortgage-backed securities the amount of principal payments from the Federal Reserve's holdings of agency debt and agency mortgage-backed securities received during June that exceeds $12 billion. Effective in July, the Committee directs the Desk to roll over at auction the amount of principal payments from the Federal Reserve's holdings of Treasury securities maturing during each calendar month that exceeds $24 billion, and to reinvest in agency mortgage-backed securities the amount of principal payments from the Federal Reserve's holdings of agency debt and agency mortgage-backed securities received during each calendar month that exceeds $16 billion. Small deviations from these amounts for operational reasons are acceptable. Page 8 of 9 July 31–August 1, 2018 Authorized for Public Release 219 of 219 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.” • 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 2.50 2.75 percent, effective June 14 August 2, 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 . . . 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. Page 9 of 9
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