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June 12–13, 2018 Authorized for Public Release Appendix 1: Materials used by Mr. Potter and Ms. Logan 132 of 185 June 12–13, 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 June 12, 2018 133 of 185 June 12–13, 2018 Authorized for Public Release 134 of 185 Exhibit 1 Class II FOMC – Restricted (FR) (2) 10-Year U.S. Treasury Yield (1) Asset Price Changes* Since May FOMC Current Level 2-Yr Nominal Treasury Yield -1 bps 2.50% 10-Yr Nominal Treasury Yield -2 bps 2.95% 5y5y Breakeven +0 bps 2.28% U.S. Broad T.W. Dollar +2.1% 123 S&P 500 Index +4.7% 2779 VIX Index -3 ppts 12 ppts KBW Bank Index +2.7% 110 -0.03% 99 Goldman Sachs FCI Percent Highest level since 07/07/11 3.15 3.05 2.95 2.85 2.75 05/01/18 *Red indicates tightening in financial conditions, blue indicates loosening. Source: Barclays, Bloomberg, Federal Reserve Board, Goldman Sachs 05/11/18 05/23/18 06/05/18 Source: Bloomberg (3) U.S. Dollar Performance (4) Net Speculative Mexican Peso-U.S. Dollar Position as Share of Open Interest* Change in USD-Currency Pair Contribution to T.W. Dollar* 1-Year CAD CAD USD Appreciation CNY Z-Score CNY 4 EUR 3 BRL BRL 2 MXN MXN EUR Net Long Peso vs. Dollar 1 0 TRY -1 ARS ARS 0 5 10 15 20 25 Percent Change -2 0 0.2 0.4 0.6 0.8 1 -3 PPT Contribution *Values shown indicate contribution to change in the Broad Trade-Weighted Dollar's 2.1% appreciation since 05/01/2018. TRY (Turkish lira) not included in Broad T.W. Dollar. Source: Bloomberg, Desk Calculations, Federal Reserve Board -4 2014 (5) 2-Year Italian Sovereign Bond Yield Spread to German Equivalents and Bid-Ask Spread* 400 2-Year Italy-Germany Spread (LHS) 2-Year Italy Bid-Ask Spread (RHS) 40 350 35 300 30 250 25 200 20 150 15 100 10 50 5 0 01/01/18 0 03/01/18 05/01/18 2017 European Debt Crisis 40 BPS *During the European Debt Crisis, 2-yr Italy-Germany spread reached high of 720 bps and 2-yr Italy bid-ask reached high of 76 bps. Source: Bloomberg, TradeWeb 2016 2018 (6) Changes in Italy-Germany Yield Spread and 10-Year U.S. Treasury Yield* Change in U.S. 10-Year (BPS) BPS 2015 *Weekly data through 06/05/18. Source: CFTC, Desk Calculations, Haver 05/29/18** R² = 0.1863 30 20 10 0 -150 -100 -50 -10 0 50 100 -20 -30 -40 Change in 10-Year Italy-Germany Spread (BPS) *Uses 2-day changes. European Debt Crisis defined as period from April 2011 to January 2013. **Treasury market closed on 05/28/18. Source: Bloomberg June 12–13, 2018 Authorized for Public Release 135 of 185 Exhibit 2 Class II FOMC – Restricted (FR) (7) Bank Equity Performance* Indexed to 4/30/18 110 U.S. Banks French Banks German Banks Spanish Banks Euro Area Banks Italian Banks 105 (8) Euribor Futures Curve 5/1/2018 Percent 5/29/2018 6/8/2018 1.6 1.2 100 0.8 95 90 0.4 85 0.0 80 75 04/30/18 05/10/18 05/20/18 05/30/18 *Italian Banks (FTSE Italia Bank); Spanish Banks (IBEX 35 Bank); Euro Area Banks (Euro Stoxx Bank); French Banks (Market cap-weighted average of BNP Paribas, SocGen, Credit Agricole, and Natixis); US Banks (KBW); German Banks (Market cap-weighted average of DB and Commerzbank). Source: Bloomberg -0.4 -0.8 05/01/18 BPS 20 15 10 5 0 -5 -10 -15 -20 -25 (10) Implied Path of the Policy Rate* Percent 3.5 Mar. SEP (Median) June Survey Modal Path (Median) May Survey Unconditional Path (Mean) June Survey Unconditional Path (Mean) May FOMC Market Path Current Market Path 2.0 1.5 1.0 05/01/18 (11) Differences Between Year-End 2019 Federal Funds Rate Projections over Last Year* SEP Median less Survey Mode Survey Mode less Survey Mean Survey Mean less Market SEP Median less Market 100 50 0 -50 05/01/23 2.5 Source: Bloomberg 150 02/01/22 3.0 Jul '18 Aug '18 Sep '18 Oct '18 Nov '18 Dec '18 Jan '19 BPS 11/01/20 Source: Bloomberg (9) Changes in Fed Funds Futures-Implied Rates 05/01 close through 05/23 close 05/23 close through 05/29 close 05/29 close through current Net Intermeeting Period Change 08/01/19 May Jun. Jul. Sep. Nov. Dec. Jan. Mar. May Jun. '17 '17 '17 '17 '17 '17 '18 '18 '18 '18 *Based on all responses to the Surveys of Primary Dealers and Market Participants. Source: FRBNY 12/01/18 07/01/19 02/01/20 09/01/20 *Market-implied paths derived from federal funds and Eurodollar futures. Unconditional survey paths are the average PDF-implied means from the Surveys of Primary Dealers and Market Participants. Source: Bloomberg, Desk Calculations, Federal Reserve Board, FRBNY (12) Average Probability Distribution of 2Y1Y PCE Inflation Rate* Percent 45 40 35 30 25 20 15 10 5 0 Oct./Nov. '17 Jun. '18 ≤0.75% 0.76 - 1.26 - 1.76 - 2.26 - 2.76 - ≥3.26% 1.25% 1.75% 2.25% 2.75% 3.25% *Based on a matched sample of responses to the Surveys of Primary Dealers and Market Participants. Source: FRBNY, Staff Calculations June 12–13, 2018 Authorized for Public Release 136 of 185 Exhibit 3 Class II FOMC – Restricted (FR) (13) Treasury Bills Outstanding and 3-Month Bill-OIS Bills Outstanding (LHS) Bill Projections (LHS) 3-Month Bill-OIS (RHS) $ Billions (14) 3-Month LIBOR-OIS Spread BPS BPS 15 70 2,300 10 2,200 60 5 2,400 2,100 0 2,000 -5 1,900 -10 1,800 1,700 -15 1,600 -20 1,500 06/01/17 -25 12/01/17 06/01/18 12/01/18 Source: Bloomberg, U.S. Treasury 5 IOER EFFR ON RRP 30 20 10 0 06/01/17 09/01/17 06/01/18 (16) ON RRP Take-Up $ Billions 350 300 -10 250 -15 200 -20 150 -25 100 06/01/18 50 *5-day moving average of Tri-Party General Collateral Rate (TGCR), an 0 overnight Treasury repo rate. Official TGCR data begins on April 2018, 06/01/17 indicative data used prior to that. 09/01/17 12/01/17 03/01/18 Source: FRBNY 09/01/17 12/01/17 03/01/18 06/01/18 Source: FRBNY (17) FHLB Overnight Tri-Party Repo By Rate* Above EFFR (18) Fed Funds Volume Rate Distribution At or Below EFFR 25 $ Billions 100 20 < IOER-6 IOER-5 IOER-3 > IOER IOER-6 IOER-4 IOER-3 < r ≤ IOER Median volume 80 15 60 10 40 5 0 06/01/17 03/01/18 400 -5 $ Billions 12/01/17 TGCR* 450 0 IOER -30 06/01/17 40 Source: Bloomberg (15) Effective Fed Funds and Tri-Party GC Repo Spreads to IOER, Excluding Month-ends BPS 50 20 09/01/17 12/01/17 03/01/18 06/01/18 *Based on individual FHLB lending transactions in overnight Tri-party repo compared to the effective fed funds rate each day. Source: BNYM, Desk Calculations, FRBNY, JPMC 0 05/02/18 Source: FRBNY 05/10/18 05/18/18 05/29/18 06/06/18 June 12–13, 2018 Authorized for Public Release 137 of 185 Exhibit 4 Class II FOMC – Restricted (FR) (19) Expected Average Level of FRS Assets In 2025* Median $ Billions Inter-quartile Range Number of Respondents 5,000 4,500 (20) Changes in Individual Respondents' Expectations for the Average Level of Reserves in 2025* (From Dec. 2017 to Jun. 2018; $ Billions) Avg 2017 Level Avg 2018 Level 4,000 3,500 3,000 2,500 12 10 8 6 4 2 0 2,000 December '17 Survey June '18 Survey *Based on matched sample (22 dealers, 13 buy-side respondents) from the Surveys of Primary Dealers and Market Participants. Conditional on not moving to the ZLB before end of 2025. Dots scaled by percent of respondents. Source: FRBNY (21) Projected SOMA Domestic Securities Holdings: Alternative Liabilities Scenarios* $ Billions 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 2005 Dec.: Larger Liab. Dec.: Smaller Liab. Dec.: Median *Based on matched sample (22 dealers, 13 buy-side respondents) from the Surveys of Primary Dealers and Market Participants. Conditional on not moving to the ZLB before end of 2025 Source: FRBNY (22) Projected SOMA Domestic Securities Holdings* Jun.: Larger Liab. Jun.: Smaller Liab. Jun.: Median Liability Date of Portfolio Level of Scenario Normalization Size Reserves June 2018 December 2017 2008 2011 2014 2017 2020 2023 *Figures in shaded area are historical settled holdings. Smaller and larger liab. are based, respectively, on 25th and 75th percentile responses to a question in Desk surveys about the size and composition of the Fed's bal. sheet in 2025 conditional on not returning to ZLB in the Surveys of Primary Dealers and Market Participants. Projected figures are rounded. Source: Desk Calculations, FRBNY (23) SOMA MBS Purchases* Larger 06/2019 3,640 1185 Median 12/2020 3,087 750 Smaller 01/2022 2,753 625 Larger 02/2020 3,269 750 Median 01/2021 2,970 600 Smaller 08/2022 2,518 412 *Smaller and larger liab. are based, respectively, on 25th and 75th percentile responses to a question in Desk surveys about the size and composition of the Fed's bal. sheet in 2025 conditional on not returning to ZLB.in the Surveys of Primary Dealers and Market Participants. Source: Desk Calculations, FRBNY (24) MBS Operational Readiness $ Billions 30 Projections 25 • Desk model projects MBS reinvestment purchases will cease in October 2018 • Models indicate nontrivial likelihood principal payments will exceed cap again 20 15 • To maintain readiness, Desk intends to conduct monthly small value purchases of up to $300 million 10 5 • Desk intends to communicate plan prior to principal payments falling below cap 0 • June FOMC minutes could provide a summary, with Desk Statement and updated FAQs later this summer Purchase Period *FRBNY Markets model calculations based on June survey-implied rates. June reinvestment cycle includes $1.98 billion of agency debt maturities. Source: Desk Calculations, FRBNY June 12–13, 2018 Authorized for Public Release 138 of 185 Exhibit 5 Class II FOMC – Restricted (FR) (25) Reference Rate Updates x x x A Federal Register Notice was issued in mid-May requesting public comment on revised instructions to the FR 2420 report to capture onshore overnight wholesale borrowing activity in the Overnight Bank Funding Rate, or OBFR. o Over the last couple of years, a few large Eurodollar borrowers changed the way that some of their overnight wholesale borrowing activity is booked, from offshore to onshore. o As a result, at least $35 billion, or about 47 percent of current FR 2420 Eurodollar activity, is no longer captured. o We anticipate the data collection will begin in October, with the new data included in the OBFR calculations in 2019. On May 7, the CME launched 1-month and 3-month futures based on the Secured Overnight Financing Rate (SOFR), one of the Fed’s new overnight Treasury repo rates and the rate the Alternative Reference Rates Committee selected as its recommended alternative to U.S. dollar LIBOR for use in certain derivatives contracts. o The combination of SOFR futures, SOFR-linked OIS and term rates linked to SOFR is expected to help facilitate reduced reliance on US dollar LIBOR. o Thus far, trading activity in futures has been modest but in line with expectations. Over the next intermeeting period, the New York Fed plans to update its Statement of Compliance with the IOSCO Principles for Financial Benchmarks to include the three overnight Treasury repo reference rates. This statement was initially issued in January to cover the EFFR and OBFR. o The IOSCO Principles represent a set of international best practices for all aspects of Benchmark administration, which have been endorsed by the Financial Stability Board. o The purpose of releasing such a statement is to increase transparency surrounding our administration of these rates. June 12–13, 2018 Authorized for Public Release Class II FOMC – Restricted (FR) 139 of 185 Appendix 1 (Last) Appendix 1 (1) Summary of Operational Testing Summary of Operational Tests in prior period: • Domestic Authorization • May 9: Term repo for $64 million • May 14: Term reverse repo for $87 million • May 16: Overnight repo for $65 million • May 22 and 24: Outright MBS sales (specified pool) for $120 million, total • May 23: Overnight reverse repo (with MBS collateral) for $67 million • Foreign Authorization • None • TDF Test Operation • May 17: 7-day operation with total take-up of $3.7 billion Upcoming Operational Tests: • No tests scheduled under the Domestic Authorization • One test scheduled under the Foreign Authorization • July 10: Euro-denominated repo with private counterparties for €1 million (2) MBS Purchase Summary Since Cap Implementation Through June 08, 2018 ($ Millions) Oct 10/16/17 11/13/17 Actual Paydowns 24,353 Nov* 11/14/17 12/13/17 28,316 4,000 Dec 12/14/17 01/12/18 24,032 4,000 Jan 01/16/18 02/13/18 22,909 8,000 Feb 02/14/18 03/13/18 20,689 8,000 Mar 03/14/18 04/12/18 19,294 Apr 04/13/18 05/11/18 21,233 May** 05/14/18 06/13/18 20,793 12,000 7,509 Purchase Period 4,000 Actual Purchases 20,355 2 Cumulative Deviation 2 24,327 11 13 20,038 6 19 14,921 12 31 12,684 (5) 26 8,000 11,308 14 40 12,000 9,234 1 41 Cap Net Deviation *November included agency debt maturity of $2,366 million. **Actual purchases ongoing, reflect data through 06/08/18. Target amount for M ay purchase period is $8,793 million. (3) FX Swaps Outstanding $ Billions BOJ 12 ECB 10 8 6 4 2 0 12/14/2016 Source: FRBNY 3/14/2017 6/14/2017 9/14/2017 12/14/2017 3/14/2018 (4) FX Intervention • There were no intervention operations in foreign currencies for the System's account during the intermeeting period 6/14/201 June 12–13, 2018 Authorized for Public Release Appendix 2: Materials used by Messrs. Morin and Kamin 140 of 185 June 12–13, 2018 Authorized for Public Release Class II FOMC - Restricted (FR) Material for Staff Presentation on the Economic and Financial Situation Steven B. Kamin and Norman J. Morin Exhibits by Mandy Bowers and Bo Yeon Jang June 12, 2018 141 of 185 June 12–13, 2018 Authorized for Public Release 142 of 185 Economy Expanding at Above-Trend Pace • GDP expands at an above-trend rate • Upward revisions since the December Tealbook are more than accounted for by the net effects of the TCJA and BBA • We expect the Thursday’s retail sales report to support our view of a rebound in PCE growth from its Q1 lull 6/12/2018 CLASS II FOMC-RESTRICTED (FR) Page 1 of 24 June 12–13, 2018 Authorized for Public Release 143 of 185 Labor Market Tightens Further • Overall unemployment rate is lowest since 1969 • Continued improvement across most races and ethnicities • Prime-age LFPR has been rising, on net • Combining ADP company-level data and the BLS data provides our best estimate of pace of private job gains—around 175,000 in recent months • Compared with December, the unemployment rate is a tenth lower through 2020 6/12/2018 CLASS II FOMC-RESTRICTED (FR) Page 2 of 24 June 12–13, 2018 Authorized for Public Release 144 of 185 Inflation Running Near 2 Percent PCE Prices, 12-month Percent Changes Apr. Jun. Sept. Total PCE 2.0 2.4 2.0 April TB 2.1 2.5 2.2 Core PCE 1.8 1.9 1.9 April TB 1.9 2.1 2.1 • The 12-month changes in April for total PCE prices, 2.0 percent, and for core PCE prices, 1.8 percent, were a tenth lower than expected • We expect both measures to move up a bit over the next few months • This morning’s CPI release… 6/12/2018 CLASS II FOMC-RESTRICTED (FR) Page 3 of 24 June 12–13, 2018 Authorized for Public Release 145 of 185 Inflation Projected to Remain Near 2 Percent Core PCE price inflation edges above 2.0 percent by 2020 • PCE inflation rises above its underlying trend, reflecting tighter resource utilization • Supply constraints in 2020 • Some offsetting drag from import prices Inflation outlook little revised compared to December • Total PCE inflation up in 2018 on energy prices • Core PCE inflation just a touch higher 6/12/2018 CLASS II FOMC-RESTRICTED (FR) Page 4 of 24 June 12–13, 2018 Authorized for Public Release 146 of 185 Fiscal Stability Debt Dynamics Equation ο݀௧ = ௧ + (݅௧ - ݃௧ )݀௧ିଵ ݀௧ : public debt-to-GDP ratio ௧ : primary deficit-to-GDP ratio ݅௧ : average Treasury borrowing rate ݃௧ : nominal GDP growth rate •Federal debt as percent of GDP continues to increase through the medium term (and much more thereafter) •The forecast assumes the debt-to-GDP ratio stabilizes in the longer run •The debt-to-GDP ratio stabilizes when the primary deficit is roughly zero and the difference between borrowing rate and nominal GDP growth is small •Eliminating the primary deficit will require reductions approximately equal to deficit effects from the BBA plus two times the TCJA 6/12/2018 CLASS II FOMC-RESTRICTED (FR) Page 5 of 24 June 12–13, 2018 Authorized for Public Release 147 of 185 Capacity Utilization (CU) Has Diverged from Other Resource Utilization Measures • From the early 1960s to the early 1990s, manufacturing CU closely tracked other measures of resource utilization, but then trended far below them and remains well below its long-run average • Since 2012, CU moved roughly sideways even as the broad measures tightened well past their estimated sustainable levels—the largest “gap in the gaps” 6/12/2018 CLASS II FOMC-RESTRICTED (FR) Page 6 of 24 June 12–13, 2018 Authorized for Public Release 148 of 185 Labor in Manufacturing Appears Stretched… Even as reported utilization rates are low… • Workers are working longer hours (LHS chart) • Managers increasingly report a lack of available labor/skills (RHS chart) • Even so, manufacturing employment is just half way to pre-recession levels 6/12/2018 CLASS II FOMC-RESTRICTED (FR) Page 7 of 24 June 12–13, 2018 Authorized for Public Release 149 of 185 …But Capital Not So Much • The “workweek of capital”, weekly plant hours, remains low • For durables producers (ex. Transportation equipment), it is as if half the plants dropped a shift during the Great Recession, and have only recovered modestly • The CU responses in the SPC are based on assuming “normal” shift patterns Æ Reduced plant hours may be contributing to low reported CU and less than full recovery in jobs at many plants 6/12/2018 CLASS II FOMC-RESTRICTED (FR) Page 8 of 24 June 12–13, 2018 Authorized for Public Release 150 of 185 Main Culprit for Low CU: Manufacturing Production Has Been Anemic… Annual Growth (percent) 19602007 20112017 GDP 3.4 2.1 Manufacturing IP 3.4 1.0 Manuf. capacity 3.5 0.4 • GDP and IP trended upward at a remarkably similar pace until the Great Recession • However, post-recession GDP growth has been sub-par • And manufacturing IP has grown half as fast as GDP 6/12/2018 CLASS II FOMC-RESTRICTED (FR) Page 9 of 24 June 12–13, 2018 Authorized for Public Release 151 of 185 Manufacturing Output Weak Partly Because of …Weak Domestic Demand for Domestic Goods • A smaller share of private domestic final demand goes towards goods and structures (LHS chart), more toward services • … and a smaller share of those goods consumed domestically is produced here at home (RHS chart) 6/12/2018 CLASS II FOMC-RESTRICTED (FR) Page 10 of 24 June 12–13, 2018 Authorized for Public Release 152 of 185 …While Exports Have Been a Silver Lining Cumulative Contributions to Manufacturing IP 2011-2017 Percentage points Domestic demand 2.5 Export demand 4.2 • Exports have supported the recovery in manufacturing (such as it is) • From 2011-2017, exports accounted for nearly 2/3 of the growth in manufacturing output 6/12/2018 CLASS II FOMC-RESTRICTED (FR) Page 11 of 24 June 12–13, 2018 Authorized for Public Release 153 of 185 The Weakness in Capacity Utilization… …Perhaps masks a “short-run” CU a bit higher than published CU • Average labor workweek at post-War highs plus growing shortages of skilled labor • Plant hours (capital workweek) below pre-recession levels, but “new normal” may suggest more intense use than reported. …Principally reflects a historically weak manufacturing recovery • Largely explained by tepid recovery in GDP and by the composition and sourcing of demand • The manufacturing recovery has been supported by exports …Could represent additional factors, such as • A lower target utilization rate by plant managers • A reduction in business dynamism 6/12/2018 CLASS II FOMC-RESTRICTED (FR) Page 12 of 24 June 12–13, 2018 Authorized for Public Release 154 of 185 Still-Solid Foreign Outlook Despite the Chaos 6/12/2018 CLASS II FOMC-RESTRICTED (FR) Page 13 of 24 June 12–13, 2018 Authorized for Public Release 155 of 185 Trade Policies • The U.S. rescinded exemptions for the EU, Canada, and Mexico from its steel and aluminum tariffs. • Tariffs on Chinese imports (Section 301, worth $50bn) to be finalized on June 15, investment restrictions on China on June 30. • A new national security investigation (Section 232) on automobile and auto part imports. • Negotiations on NAFTA stalled. 6/12/2018 CLASS II FOMC-RESTRICTED (FR) Page 14 of 24 June 12–13, 2018 Authorized for Public Release 156 of 185 Financial Stresses Emerge in Emerging Markets 1. Exchange Rate Changes vs. Vulnerability Ranking 6/12/2018 2. EME Exchange Rate & U.S. Interest Rate CLASS II FOMC-RESTRICTED (FR) 3. EMBI Global Credit Spreads Page 15 of 24 June 12–13, 2018 Authorized for Public Release 157 of 185 Arrivederci Roma 6/12/2018 CLASS II FOMC-RESTRICTED (FR) Page 16 of 24 June 12–13, 2018 Authorized for Public Release 158 of 185 Low Interest Rates and their Implications for Financial Stability • Might a further prolonged period of extremely low rates reduce bank profitability, incentivize risk-taking, and threaten financial stability? • BIS Committee on the Global Financial System (CGFS) study group. • 19 Central banks, led by Ulrich Bindseil (ECB) and me. 6/12/2018 CLASS II FOMC-RESTRICTED (FR) Page 17 of 24 June 12–13, 2018 Authorized for Public Release 159 of 185 Low Rates Study Group: 3 Scenarios • Baseline: rates gradually rise to more normal levels. • Low-for-long (L4L): continued weakness in demand and inflation keep rates low. • Snapback: rates later rise sharply in response to higher inflation. United Kingdom 1. Nominal 3-month yield Percent Baseline Projection L4LScenario Scenario Snapback Scenario Scenario 2002 2005 2008 2011 2014 2017 2020 2023 3. GDP Growth 6 Percent 4 2 2 0 0 2002 6 2005 2008 2011 2014 2017 2020 2023 4. CPI Inflation 2026 Percent 2005 6/12/2018 2008 2011 2014 2017 2020 2023 2026 6 4 5 2 4 0 3 -2 2 -4 1 0 -6 2002 6 4 2026 Percent 2. Nominal 10-year yield 2002 2005 2008 CLASS II FOMC-RESTRICTED (FR) 2011 2014 2017 2020 2023 2026 Page 18 of 24 June 12–13, 2018 Authorized for Public Release 160 of 185 Estimated Effects of Rates on Bank Profitability • Panel regression: • Dependent Variables: net interest margin (NIM), return on assets (ROA). • Explanatory Variables: short rate, yield-curve slope, GDP growth, inflation, lagged dependent variable. • 2,442 banks in 24 foreign countries and 6,993 U.S. banks, 2005-2015. • Both short rate and yield-curve slope positively affect net interest margin (NIM). • But effects of rates on ROA are small. • Suggests banks offset lower NIMs by cutting costs and increasing fee-based activities. 1. NIMs: Short Rates Short-run Sensitivity 2. NIMs: Yield-Curve Slope Short-run Sensitivity 0.50 *** 0.30 *** Short-run Sensitivity 0.50 0.50 Short-run Sensitivity U.S. AFEs -0.10 0.30 0.30 0.10 0.10 0.10 U.S. -0.10 AFEs U.S. *** U.S. *** -0.10 Significance: * p<0.10, **p<0.05, ***p<0.01 6/12/2018 0.50 0.30 AFEs AFEs 4. ROAs: Yield-Curve Slope ** 0.10 * 3. ROAs: Short Rates CLASS II FOMC-RESTRICTED (FR) Page 19 of 24 -0.10 June 12–13, 2018 Authorized for Public Release 161 of 185 NIM and ROA Projections under Scenarios • Simulations imply that net interest margins (NIMs) would fall materially in a low-for-long scenario. • But return on assets (ROAs) would not. 1. NIMs Percentage Points United States 4 2. ROAs Percentage Points United States 3 1.5 1.0 2 0.5 1 AFEs AFEs 0 0 0 0 Baseline 6/12/2018 0 0 0 0 Low-for-Long L4L projectionScenario 0.0 2001 2005 2009 2013 2017 2021 2025 Baseline L4L projectionScenario Low-for-Long CLASS II FOMC-RESTRICTED (FR) Page 20 of 24 June 12–13, 2018 Authorized for Public Release 162 of 185 Limited Signs of Low Rates Encouraging Risk-Taking • Banks have shifted assets toward longer maturities (panel 1); also increased concentration in real estate loans in some economies. • But credit-to-deposit ratios have declined (panel 2), and bank credit-toGDP ratios are subdued in euro area and Japan (panel 3). • Extensive panel analysis revealed little correlation between rates and risk-taking. 1. Weighted-Average Maturity of Bank Assets Years GFC United States Advanced Foreign Economies 2000 2003 2006 2009 2012 2015 6/12/2018 2. Credit-to-Deposit Ratio 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 3. Bank Credit to Private Sector Percent GFC Percent of GDP 140 Japan 120 120 Advanced Foreign Economies 130 GFC 110 100 100 80 90 United States Euro area 80 60 70 40 2000 2003 2006 2009 2012 2015 CLASS II FOMC-RESTRICTED (FR) 60 1990 1994 1998 2002 2006 2010 2014 Page 21 of 24 June 12–13, 2018 Authorized for Public Release 163 of 185 Caveat 1: Rate Sensitivity Stronger for Some Banks Stronger effect on bank profits: • In countries with already low yields. • Where banking markets are more competitive. • For banks that depend on deposit funding, such as retail banks. Small retail banks in Europe and Japan are most at risk. 6/12/2018 CLASS II FOMC-RESTRICTED (FR) Page 22 of 24 June 12–13, 2018 Authorized for Public Release 164 of 185 Caveat 2: Subdued Risk-Taking May Not Continue • Recent experience reflects de-risking and tightening of prudential standards and other regulations in wake of the GFC. • Restraint might erode if rates remain low and depress returns and profitability. • Heightened risk-taking might be most likely where growth picks up, but low inflation restrains policy tightening. 6/12/2018 CLASS II FOMC-RESTRICTED (FR) Page 23 of 24 June 12–13, 2018 Authorized for Public Release 165 of 185 Caveat 3: Future Snapback in Interest Rates • Snapback could lead to valuation and credit losses. • Effects could be exacerbated if banks responded to prior low rates by extending durations and shifting loans to real estate sector. • Simulation analysis for Swiss retail banks: • Net earnings fall more in Snapback than Low-for-Long. • With 30 percent fall in real estate prices, earnings fall still more. • Recent U.S. stress tests also show adverse impact of snapback. Net Earnings Projection - Switzerland 2016 = 100 250 200 Baseline Low-for-Long 150 100 50 0 Snapback + Real Estate Shock Snapback -50 -100 -150 2016 6/12/2018 2017 2018 2019 CLASS II FOMC-RESTRICTED (FR) 2020 2021 Page 24 of 24 June 12–13, 2018 Authorized for Public Release Appendix 3: Materials used by Ms. Li 166 of 185 June 12–13, 2018 Authorized for Public Release Class I FOMC - Restricted Controlled (FR) Material for Briefing on Summary of Economic Projections Dan Li Exhibits and support by Melanie Josselyn and Zack Saravay June 12, 2018 167 of 185 June 12–13, 2018 Authorized for Public Release Class I FOMC - Restricted Controlled (FR) 168 of 185 Exhibit 1. Medians, central tendencies, and ranges of economic projections, 2018–20 and over the longer run Percent Change in real GDP Median of projections Central tendency of projections Range of projections 3 Actual 2 1 2013 2014 2015 2016 2017 2018 2019 2020 Longer run Percent Unemployment rate 7 6 5 4 3 2013 2014 2015 2016 2017 2018 2019 2020 Longer run Percent PCE inflation 3 2 1 2013 2014 2015 2016 2017 2018 2019 2020 Longer run Percent Core PCE inflation 3 2 1 2013 2014 2015 2016 2017 2018 2019 2020 Longer run Note: The data for the actual values of the variables are annual. The percent changes in real GDP and infation are measured Q4/Q4. Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated. One participant did not submit longer-run projections for the change in real GDP or the unemployment rate. Page 1 of 7 June 12–13, 2018 Authorized for Public Release Class I FOMC - Restricted Controlled (FR) 169 of 185 Exhibit 2. Economic projections for 2018–20 and over the longer run (percent) Change in real GDP 2018 Median . . . . . . . . . . . . . . . . . . . 2.8 March projection . . . . . . 2.7 Range . . . . . . . . . . . . . . . . . . . . . 2.5 – 3.0 March projection . . . . . . 2.5 – 3.0 Memo: Tealbook . . . . . . . . . . 2.8 March projection . . . . . . 2.9 2019 2020 2.4 2.4 2.1 – 2.7 2.0 – 2.8 2.4 2.6 2.0 2.0 1.5 – 2.2 1.5 – 2.3 1.8 2.1 Longer run 1.8 1.8 1.7 – 2.1 1.7 – 2.2 1.7 1.7 Unemployment rate 2018 Median . . . . . . . . . . . . . . . . . . . 3.6 March projection . . . . . . 3.8 Range . . . . . . . . . . . . . . . . . . . . . 3.5 – 3.8 March projection . . . . . . 3.6 – 4.0 Memo: Tealbook . . . . . . . . . . 3.6 March projection . . . . . . 3.5 2019 2020 3.5 3.6 3.3 – 3.8 3.3 – 4.2 3.4 3.1 3.5 3.6 3.3 – 4.0 3.3 – 4.4 3.4 3.1 Longer run 4.5 4.5 4.1 – 4.7 4.2 – 4.8 4.7 4.7 PCE infation 2018 2.1 Median . . . . . . . . . . . . . . . . . . . 1.9 March projection . . . . . . Range . . . . . . . . . . . . . . . . . . . . . 2.0 – 2.2 March projection . . . . . . 1.8 – 2.1 Memo: Tealbook . . . . . . . . . . 2.0 March projection . . . . . . 1.8 2019 2020 2.1 2.0 1.9 – 2.3 1.9 – 2.3 1.9 2.0 2.1 2.1 2.0 – 2.3 2.0 – 2.3 2.0 2.1 Longer run 2.0 2.0 2.0 2.0 2.0 2.0 Core PCE infation 2018 2.0 Median . . . . . . . . . . . . . . . . . . . 1.9 March projection . . . . . . Range . . . . . . . . . . . . . . . . . . . . . 1.9 – 2.1 March projection . . . . . . 1.8 – 2.1 Memo: Tealbook . . . . . . . . . . 1.9 March projection . . . . . . 1.9 2019 2020 2.1 2.1 2.0 – 2.3 1.9 – 2.3 2.0 2.1 2.1 2.1 2.0 – 2.3 2.0 – 2.3 2.1 2.2 Note: Updated June Tealbook values are reported. The percent changes in real GDP and infation are measured Q4/Q4. Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated. One participant did not submit longer-run projections for the change in real GDP, the unemployment rate, or the federal funds rate in conjunction with the March 20–21, 2018, meeting, and one participant did not submit such projections in conjunction with the June 12–13, 2018, meeting. Page 2 of 7 June 12–13, 2018 Authorized for Public Release Class I FOMC - Restricted Controlled (FR) 170 of 185 Exhibit 3. Overview of FOMC participants’ assessments of appropriate monetary policy Percent June projections Target federal funds rate or midpoint of target range at year-end 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 June projections Median prescription based on Non−Inertial Taylor (1999) rule Median of projections Median prescription based on Inertial Taylor (1999) rule 2018 2019 0.5 0.0 2020 Longer run Percent March projections Target federal funds rate or midpoint of target range at year-end 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 March projections Median prescription based on Non−Inertial Taylor (1999) rule Median of projections Median prescription based on Inertial Taylor (1999) rule 2018 2019 0.5 0.0 2020 Longer run Note: In these two panels, each blue dot indicates the value (rounded to 1/8 percentage point) of an individual participant’s judgment of the midpoint of the appropriate target range for the federal funds rate, or the appropriate target level for that rate, at the end of the specifed year or over the longer run. Each red diamond is the median value, for the indicated year, of the set of prescriptions for the federal funds rate that are generated by inserting into the non-inertial Taylor (1999) rule each participant’s projections of core PCE infation and the unemployment rate along with the participant’s projections of the longer-run nominal federal funds rate and longer-run unemployment rate. The green squares are the medians of prescriptions generated using the inertial Taylor (1999) rule. The red and green whiskers show the central tendency, for each year, of the prescriptions that result from using the non-inertial Taylor (1999) rule and the inertial Taylor (1999) rule, respectively. One participant did not submit longer-run projections for the federal funds rate or unemployment rate. Page 3 of 7 June 12–13, 2018 Authorized for Public Release Class I FOMC - Restricted Controlled (FR) 171 of 185 Exhibit 4.A. Uncertainty and risks in projections of GDP growth Median projection and confidence interval based on historical forecast errors Percent Change in real GDP Median of projections 70% confidence interval 4 3 2 Actual 1 0 2013 2014 2015 2016 2017 2018 2019 2020 FOMC participants’ assessments of uncertainty and risks around their economic projections Number of participants Uncertainty about GDP growth Risks to GDP growth June projections March projections Lower Number of participants 18 16 14 12 10 8 6 4 2 Broadly similar Higher June projections March projections Weighted to downside 18 16 14 12 10 8 6 4 2 Broadly balanced Weighted to upside Note: The blue and red lines in the top panel show actual values and median projected values, respectively, of the percent change in real gross domestic product (GDP) from the fourth quarter of the previous year to the fourth quarter of the year indicated. The confdence interval around the median projected values is assumed to be symmetric and is based on root mean squared errors of various private and government forecasts made over the previous 20 years; more information about these data is available in table 2 of the Summary of Economic Projections (SEP). Because current conditions may di er from those that prevailed, on average, over the previous 20 years, the width and shape of the confdence interval estimated on the basis of the historical forecast errors may not refect FOMC participants’ current assessments of the uncertainty and risks around their projections; these current assessments are summarized in the lower panels. Generally speaking, participants who judge the uncertainty about their projections as “broadly similar” to the average levels of the past 20 years would view the width of the confdence interval shown in the historical fan chart as largely consistent with their assessments of the uncertainty about their projections. Likewise, participants who judge the risks to their projections as “broadly balanced” would view the confdence interval around their projections as approximately symmetric. For defnitions of uncertainty and risks in economic projections, see the box “Forecast Uncertainty” in the SEP. Page 4 of 7 June 12–13, 2018 Authorized for Public Release Class I FOMC - Restricted Controlled (FR) 172 of 185 Exhibit 4.B. Uncertainty and risks in projections of the unemployment rate Median projection and confidence interval based on historical forecast errors Percent Unemployment rate 10 Median of projections 70% confidence interval 9 8 7 6 Actual 5 4 3 2 1 2013 2014 2015 2016 2017 2018 2019 2020 FOMC participants’ assessments of uncertainty and risks around their economic projections Number of participants Uncertainty about the unemployment rate June projections March projections Lower Number of participants Risks to the unemployment rate 18 16 14 12 10 8 6 4 2 Broadly similar Higher June projections March projections Weighted to downside 18 16 14 12 10 8 6 4 2 Broadly balanced Weighted to upside Note: The blue and red lines in the top panel show actual values and median projected values, respectively, of the average civilian unemployment rate in the fourth quarter of the year indicated. The confdence interval around the median projected values is assumed to be symmetric and is based on root mean squared errors of various private and government forecasts made over the previous 20 years; more information about these data is available in table 2 of the Summary of Economic Projections (SEP). Because current conditions may di er from those that prevailed, on average, over the previous 20 years, the width and shape of the confdence interval estimated on the basis of the historical forecast errors may not refect FOMC participants’ current assessments of the uncertainty and risks around their projections; these current assessments are summarized in the lower panels. Generally speaking, participants who judge the uncertainty about their projections as “broadly similar” to the average levels of the past 20 years would view the width of the confdence interval shown in the historical fan chart as largely consistent with their assessments of the uncertainty about their projections. Likewise, participants who judge the risks to their projections as “broadly balanced” would view the confdence interval around their projections as approximately symmetric. For defnitions of uncertainty and risks in economic projections, see the box “Forecast Uncertainty” in the SEP. Page 5 of 7 June 12–13, 2018 Authorized for Public Release Class I FOMC - Restricted Controlled (FR) 173 of 185 Exhibit 4.C. Uncertainty and risks in projections of PCE infation Median projection and confidence interval based on historical forecast errors Percent PCE inflation Median of projections 70% confidence interval 3 2 1 Actual 0 2013 2014 2015 2016 2017 2018 2019 2020 FOMC participants’ assessments of uncertainty and risks around their economic projections Number of participants Uncertainty about PCE inflation Risks to PCE inflation June projections March projections Lower Number of participants June projections March projections 18 16 14 12 10 8 6 4 2 Broadly similar Higher Weighted to downside 18 16 14 12 10 8 6 4 2 Broadly balanced Number of participants Uncertainty about core PCE inflation Number of participants Risks to core PCE inflation June projections March projections Lower 18 16 14 12 10 8 6 4 2 Broadly similar Weighted to upside Higher June projections March projections Weighted to downside 18 16 14 12 10 8 6 4 2 Broadly balanced Weighted to upside Note: The blue and red lines in the top panel show actual values and median projected values, respectively, of the percent change in the price index for personal consumption expenditures (PCE) from the fourth quarter of the previous year to the fourth quarter of the year indicated. The confdence interval around the median projected values is assumed to be symmetric and is based on root mean squared errors of various private and government forecasts made over the previous 20 years; more information about these data is available in table 2 of the Summary of Economic Projections (SEP). Because current conditions may di er from those that prevailed, on average, over the previous 20 years, the width and shape of the confdence interval estimated on the basis of the historical forecast errors may not refect FOMC participants’ current assessments of the uncertainty and risks around their projections; these current assessments are summarized in the lower panels. Generally speaking, participants who judge the uncertainty about their projections as “broadly similar” to the average levels of the past 20 years would view the width of the confdence interval shown in the historical fan chart as largely consistent with their assessments of the uncertainty about their projections. Likewise, participants who judge the risks to their projections as “broadly balanced” would view the confdence interval around their projections as approximately symmetric. For defnitions of uncertainty and risks in economic projections, see the box “Forecast Uncertainty” in the SEP. Page 6 of 7 June 12–13, 2018 Authorized for Public Release Class I FOMC - Restricted Controlled (FR) 174 of 185 Exhibit 5. Uncertainty in projections of the federal funds rate Median projection and confidence interval based on historical forecast errors Percent Federal funds rate Midpoint of target range Median of projections 70% confidence interval* 6 5 4 3 2 1 Actual 0 2013 2014 2015 2016 2017 2018 2019 2020 Note: The blue and red lines are based on actual values and median projected values, respectively, of the Committee’s target for the federal funds rate at the end of the year indicated. The actual values are the midpoint of the target range; the median projected values are based on either the midpoint of the target range or the target level. The confdence interval around the median projected values is based on root mean squared errors of various private and government forecasts made over the previous 20 years. The confdence interval is not strictly consistent with the projections for the federal funds rate, primarily because these projections are not forecasts of the likeliest outcomes for the federal funds rate, but rather projections of participants’ individual assessments of appropriate monetary policy. Still, historical forecast errors provide a broad sense of the uncertainty around the future path of the federal funds rate generated by the uncertainty about the macroeconomic variables as well as additional adjustments to monetary policy that may be appropriate to o set the e ects of shocks to the economy. The confdence interval is assumed to be symmetric except when it is truncated at zero—the bottom of the lowest target range for the federal funds rate that has been adopted in the past by the Committee. This truncation would not be intended to indicate the likelihood of the use of negative interest rates to provide additional monetary policy accommodation if doing so was judged appropriate. In such situations, the Committee could also employ other tools, including forward guidance and large-scale asset purchases, to provide additional accommodation. Because current conditions may di er from those that prevailed, on average, over the previous 20 years, the width and shape of the confdence interval estimated on the basis of the historical forecast errors may not refect FOMC participants’ current assessments of the uncertainty and risks around their projections. * The confdence interval is derived from forecasts of the average level of short-term interest rates in the fourth quarter of the year indicated; more information about these data is available in table 2 of the Summary of Economic Projections. The shaded area encompasses less than a 70 percent confdence interval if the confdence interval has been truncated at zero. Page 7 of 7 June 12–13, 2018 Authorized for Public Release Appendix 4: Materials used by Mr. Laubach 175 of 185 June 12–13, 2018 Authorized for Public Release Class I FOMC – Restricted Controlled (FR) Material for the Briefing on Monetary Policy Alternatives Thomas Laubach Exhibits by Mark Wilkinson June 12-13, 2018 176 of 185 June 12–13, 2018 Authorized for Public Release 177 of 185 Monetary Policy Considerations Near− versus Long−Term Spreads Alternative B Percentage points 2−to−10−year (long−term) spread 1−to−5−quarter (near−term) spread Slope of Blue Chip fed funds expectations Gradual increases in the funds rate consistent with 4 3 sustaining strong labor market and inflation near 2 percent 2 balancing risks 1 Policy path will move from accommodative to somewhat restrictive 0 −1 Slope of expected policy path will likely be negative −2 1970 1980 1990 2000 2010 2018 Note: Slope of Blue Chip federal funds rate expectations is computed as 4 quarter − 1 quarter ahead. Gray areas are recessions; hatched blue area is the effective lower bound period. Source: Board staff calculations; Blue Chip Financial Forecasts. Near−Term Slope of the Yield Curve Implied Probabilities of Recession Percentage points Long−term spread model Recession starting in 1973 1980 1981 Probability Near−term spread model 1.0 1990 2001 2008 2.0 0.8 1.0 0.6 0.0 0.4 −1.0 0.2 −2.0 −12 −10 −8 −6 −4 −2 0 1 2 0.0 1970 1980 1990 2000 2010 2018 Note: The near−term slope is the difference between 5−quarter−ahead and 1−quarter−ahead forward interest rates. Source: Board staff calculations. Note: Horizontal black line denotes unconditional probability. Gray areas are recessions; hatched blue area is the effective lower bound period. Source: Board staff calculations. Near−Term Spread and Probability of Recession Policy Implications Quarters to start of recession Probability 1972:Q1−2017:Q4 2018:Q1 Slope = −25 basis points 1.0 Treat models with caution 0.8 The near−term spread model suggests 0.6 Mean 0.4 0.2 0.0 −2.5 −1.5 −0.5 0.5 1.5 2.5 Near−term spread (percentage points) Source: Board staff calculations. Page 1 of 9 an elevated risk associated with a modest funds rate overshoot gradually raising the funds rate then gradually lowering it would reduce recession risk June 12–13, 2018 Authorized for Public Release 178 of 185 Class I FOMC – Restricted Controlled (FR) MAY 2018 FOMC STATEMENT 1. Information received since the Federal Open Market Committee met in March indicates that the labor market has continued to strengthen and that economic activity has been rising at a moderate rate. Job gains have been strong, on average, in recent months, and the unemployment rate has stayed low. Recent data suggest that growth of household spending moderated from its strong fourthquarter pace, while business fixed investment continued to grow strongly. On a 12-month basis, both overall inflation and inflation for items other than food and energy have moved close to 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance. 2. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with further gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in the medium term and labor market conditions will remain strong. Inflation on a 12-month basis is expected to run near the Committee's symmetric 2 percent objective over the medium term. Risks to the economic outlook appear roughly balanced. 3. In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1-1/2 to 1-3/4 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation. 4. In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate; the federal funds rate is likely 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. Page 2 of 9 June 12–13, 2018 Authorized for Public Release 179 of 185 Class I FOMC – Restricted Controlled (FR) ALTERNATIVE A FOR JUNE 2018 1. Information received since the Federal Open Market Committee met in March May indicates that the labor market has continued to strengthen and that economic activity has been rising at a moderate rate. Job gains have been strong, on average, in recent months, and the unemployment rate has stayed low declined. Recent data suggest that growth of household spending moderated from its strong fourth-quarter pace 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 recently have moved close to 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance. 2. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with further gradual adjustments in the stance of appropriate monetary policy accommodation, economic activity will expand at a moderate pace in the medium term and labor market conditions will remain strong. Inflation on a 12-month basis is expected to move 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 maintain the target range for the federal funds rate at 1-1/2 to 1-3/4 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to period of inflation modestly above 2 percent inflation. This inflation outcome should help ensure that longer-term inflation expectations rise to a level consistent with the Committee’s symmetric objective for 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. Page 3 of 9 June 12–13, 2018 Authorized for Public Release 180 of 185 Class I FOMC – Restricted Controlled (FR) ALTERNATIVE B FOR JUNE 2018 1. Information received since the Federal Open Market Committee met in March May indicates that the labor market has continued to strengthen and that economic activity has been rising at a moderate solid rate. Job gains have been strong, on average, in recent months, and the unemployment rate has stayed low declined. Recent data suggest that growth of household spending moderated from its strong fourth-quarter pace 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. Market-based measures of inflation compensation remain low; surveybased measures 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, with further gradual adjustments in the stance of monetary policy, increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, will expand at a moderate pace in the medium term and strong labor market conditions, will remain strong. and inflation on a 12-month basis is expected to run near the Committee's symmetric 2 percent objective over the medium term. Risks to the economic outlook appear roughly balanced. 3. In view of realized and expected labor market conditions and inflation, the Committee decided to maintain raise the target range for the federal funds rate at 1-1/2 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 objectives of 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. 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. Page 4 of 9 June 12–13, 2018 Authorized for Public Release 181 of 185 Class I FOMC – Restricted Controlled (FR) ALTERNATIVE C FOR JUNE 2018 1. Information received since the Federal Open Market Committee met in March May indicates that the labor market has continued to strengthen and that economic activity has been rising at a moderate solid rate. Job gains have been strong, on average, in recent months, and the unemployment rate has stayed low declined. Recent data suggest that growth of household spending moderated from its strong fourth-quarter pace has strengthened, 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 remain close to 2 percent. Market-based measures of inflation compensation remain low; survey-based measures 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, with further gradual adjustments in the stance of monetary policy, increases in the target range for the federal funds rate will be warranted to achieve a sustainable expansion of economic activity and employment will expand at a moderate pace in the medium term and labor market conditions will remain strong. and to maintain inflation on a 12-month basis is expected to run near the Committee's symmetric 2 percent objective over the medium term. Risks to the economic outlook appear roughly balanced, but the Committee is closely monitoring the implications of high levels of resource utilization. 3. In view of realized and expected labor market conditions and inflation, the Committee decided to maintain raise the target range for the federal funds rate at 1-1/2 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 objectives of 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. 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. Page 5 of 9 June 12–13, 2018 Authorized for Public Release 182 of 185 Class I FOMC – Restricted Controlled (FR) Implementation Note for June 2018 Alternative A Release Date: June 13, 2018 Decisions Regarding Monetary Policy Implementation The Federal Reserve has made the following decisions to implement the monetary policy stance announced by the Federal Open Market Committee in its statement on May 2 June 13, 2018: The Board of Governors of the Federal Reserve System voted [ unanimously ] to maintain the interest rate paid on required and excess reserve balances at 1.75 percent, effective May 3 June 14, 2018. As part of its policy decision, the Federal Open Market Committee voted to authorize and direct the Open Market Desk at the Federal Reserve Bank of New York, until instructed otherwise, to execute transactions in the System Open Market Account in accordance with the following domestic policy directive: “Effective May 3 June 14, 2018, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 1-1/2 to 1-3/4 percent, including overnight reverse repurchase operations (and reverse repurchase operations with maturities of more than one day when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 1.50 percent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account that are available for such operations and by a 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 each calendar month June that exceeds $18 billion, and to continue reinvesting in agency mortgagebacked securities the amount of principal payments from the Federal Reserve’s holdings of agency debt and agency mortgage-backed securities received during each calendar month 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 June 12–13, 2018 Authorized for Public Release 183 of 185 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.” In a related action, the Board of Governors of the Federal Reserve System voted [ unanimously ] to approve the establishment of the primary credit rate at the existing level of 2.25 percent. 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 June 12–13, 2018 Authorized for Public Release 184 of 185 Class I FOMC – Restricted Controlled (FR) Implementation Note for June 2018 Alternatives B and C Release Date: June 13, 2018 Decisions Regarding Monetary Policy Implementation The Federal Reserve has made the following decisions to implement the monetary policy stance announced by the Federal Open Market Committee in its statement on May 2 June 13, 2018: The Board of Governors of the Federal Reserve System voted [ unanimously ] to maintain raise the interest rate paid on required and excess reserve balances at to 1.75 1.95 percent, effective May 3 June 14, 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 May 3 June 14, 2018, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 1-1/2 to 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 1.50 1.75 percent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account that are available for such operations and by a percounterparty limit of $30 billion per day. The Committee directs the Desk to continue rolling over at auction the amount of principal payments from the Federal Reserve’s holdings of Treasury securities maturing during each calendar month June that exceeds $18 billion, and to continue reinvesting in agency mortgagebacked securities the amount of principal payments from the Federal Reserve’s holdings of agency debt and agency mortgage-backed securities received during each calendar month 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 Page 8 of 9 June 12–13, 2018 Authorized for Public Release 185 of 185 Class I FOMC – Restricted Controlled (FR) $16 billion. Small deviations from these amounts for operational reasons are acceptable. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve’s agency mortgage-backed securities transactions.” In a related action, the Board of Governors of the Federal Reserve System voted [ unanimously ] to approve the establishment of a 1/4 percentage point increase in the primary credit rate at the existing level of 2.25 to 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 9 of 9
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