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November 1-2, 2016 Authorized for Public Release 193 of 258 Appendix 1: Materials used by Mr. Davig, Ms. Ihrig, Mr. Martin, Mr. López-Salido, Ms. Leonard, and Mr. Laubach November 1-2, 2016 Authorized for Public Release 194 of 258 Class III FOMC – Internal (FR) Material for Briefing on Long-Run Monetary Policy Implementation Framework Troy Davig, Jane Ihrig, Thomas Laubach, Deborah Leonard, David Lopez-Salido, and Antoine Martin November 1, 2016 November 1-2, 2016 Authorized for Public Release 195 of 258 INTRODUCTION Class III FOMC – Internal (FR) 2 November 1-2, 2016 Authorized for Public Release 196 of 258 Framework objectives Staff will evaluate options for a long-run monetary policy implementation framework that will best achieve a number of key goals: 1. Achieving an appropriate degree of control over short-term interest rates including during periods of financial distress and in a manner robust to structural changes in the financial system. 2. Enhancing the ability of the Federal Reserve to achieve macroeconomic and financial stability objectives at the zero bound. 3. Supporting the System’s ability to address liquidity strains in money markets and support overall financial stability. Class III FOMC – Internal (FR) 3 November 1-2, 2016 Authorized for Public Release 197 of 258 Framework objectives In addition, alternative long-run operating frameworks will be evaluated on their ability to: 1. 2. 3. Reduce burdens and deadweight losses associated with reserve requirements. Promote efficient, active, and resilient money markets and government securities markets. Promote an efficient and resilient payment system. Finally, criteria will be used in the evaluation following from the Committee’s discussion of policy normalization principles and plans: 1. 2. The framework should involve holding no more securities than necessary to implement monetary policy efficiently and effectively. The assets held by the Federal Reserve will consist primarily of Treasury securities. Class III FOMC – Internal (FR) 4 November 1-2, 2016 Authorized for Public Release 198 of 258 INTEREST RATE TARGETS & OPERATING REGIMES Class III FOMC – Internal (FR) 5 November 1-2, 2016 Authorized for Public Release 199 of 258 Purpose Analyze interest rates that the Federal Reserve may wish to use as a policy rate and operating regimes to promote money market conditions consistent with the target policy rate Illustrate tradeoffs across policy implementation frameworks Class III FOMC – Internal (FR) 6 November 1-2, 2016 Authorized for Public Release 200 of 258 Policy rates Serves function of communicating the stance of policy as well as supporting transmission Market rates Administered rates Unsecured: FFR and OBFR Secured: GC Treasury repo rate Interest on reserves ON RRP offering rate The choice of policy rate affects the selection of operating regime tools to achieve interest rate control Class III FOMC – Internal (FR) 7 November 1-2, 2016 Authorized for Public Release 201 of 258 Case 1 - similar to current framework Floor tools are main mechanism Ceiling tools could be useful to contain rate volatility Reserve requirements and fine-tuning OMOs would be unnecessary What is the appropriate level of reserves? Class III FOMC – Internal (FR) 8 November 1-2, 2016 Authorized for Public Release 202 of 258 Case 2 - similar to pre-crisis framework Key tool is reserve requirements, either mandatory or voluntary Discretionary OMOs would play an important role in offsetting volatile autonomous factors Ceiling and floor tools can limit the volatility of interest rates Class III FOMC – Internal (FR) 9 November 1-2, 2016 Authorized for Public Release 203 of 258 Case 3 - repo framework ON RP and ON RRP facilities may be desirable Counterparties and parameter settings of the facilities could affect interest rate control Level of reserve balances may impact unsecured rate volatility Reserve requirements and discretionary OMOs may not be necessary Class III FOMC – Internal (FR) 10 November 1-2, 2016 Authorized for Public Release 204 of 258 Interest rate control: normal times and zero bound In normal times, the FOMC can achieve interest rate control across wide range of potential policy rates through an appropriate choice of operating regime tools These rates will likely effectively transmit the stance of policy to the real economy Interest rate control could be maintained at the effective lower bound, albeit with changes to the operating regime in some cases Class III FOMC – Internal (FR) 11 November 1-2, 2016 Authorized for Public Release 205 of 258 Mitigate liquidity strains Regimes that operate on the flat portion of the reserve demand curve easily accommodate liquidity injections Regimes operating on the steep portion of the reserve demand curve Can be maintained by using reserve sterilization tools Alternatively, could transition to operating on the flat part of the demand curve Class III FOMC – Internal (FR) 12 November 1-2, 2016 Authorized for Public Release 206 of 258 Other LRF objectives Burdens of reserve requirements could be reduced or eliminated Reserve requirements could be set to zero in cases 1 and 3 VRTs could be considered in case 2 All regimes support active money markets Promoting payment system efficiency is achieved in different ways across the operating regimes Frameworks with high levels of reserve balances achieve this objective directly Those with low level of reserves rely on existing Payment System Risk policies Class III FOMC – Internal (FR) 13 November 1-2, 2016 Authorized for Public Release 207 of 258 A summary of considerations Case 1 Unsecured/Flat Case 2 Unsecured/Steep Case 3 Repo 1 Familiar interest rate Familiar interest rate Risk-free policy rate; less familiar 2 Robustness concerns with market rate Few robustness concerns Few robustness concerns 3 Simple to operate Familiar but complicated Less familiar but may work like current OR 4 Liquidity provision is not an issue Need sterilization tools Liquidity provision may not be an issue 5 No need to transition at ELB Need to transition at ELB No need to transition at ELB 6 Could set RRs to zero Could consider VRTs Could set RRs to zero 7 Some PE risk with large balance sheet Least amount of PE risk Some PE risk with large balance sheet Class III FOMC – Internal (FR) 14 November 1-2, 2016 Authorized for Public Release 208 of 258 Ceiling & DW stigma The Discount Window is intended to support interest rate control provide liquidity to address broad-based funding pressures provide liquidity to individual firms Stigma, perhaps most closely related to the third role, may limit discount window from performing all roles effectively Separate facilities for each type of liquidity provisioning may allow each tool to work more effectively Memo provides examples of facilities that may act as a more robust ceiling for rate control: DIRF and FIRF Class III FOMC – Internal (FR) 15 November 1-2, 2016 Authorized for Public Release 209 of 258 Liquidity provision integration The degree to which liquidity backstop tools might be incorporated into the framework has implications for the design of the framework Options Fully integrated into the operating framework Available under certain pre-announced conditions Inactive Class III FOMC – Internal (FR) 16 November 1-2, 2016 Authorized for Public Release 210 of 258 Breadth of counterparties In normal times, a narrow set of counterparties may reduce the risk of distorting markets but could be seen as providing privileges to a few institutions A broader set of counterparties for liquidity provision tools could also lead to moral hazard or political scrutiny In times of stress it might be advantageous to have broader reach in place in markets, both OMO and liquidity facilities, to help with interest rate control and transmission Class III FOMC – Internal (FR) 17 November 1-2, 2016 Authorized for Public Release 211 of 258 BALANCE SHEET Class III FOMC – Internal (FR) 18 November 1-2, 2016 Authorized for Public Release 212 of 258 Purpose Explore issues relevant to determining the appropriate size and composition of the balance sheet in the long-run What role can the balance sheet play in the long-run framework? Support interest rate control Support macroeconomic objectives Support financial stability objectives How do balance sheet objectives affect SOMA portfolio design? What fiscal and political economy issues should be considered? Class III FOMC – Internal (FR) 19 November 1-2, 2016 Authorized for Public Release 213 of 258 Support interest rate control Can be achieved with either a “small” or “large” balance sheet Operating regime choices may determine size of balance sheet Driven in particular by level of reserve balances in operating regime Decisions to use the balance sheet as an active policy tool to support macroeconomic or financial stability objectives may have implications for the operating regime Class III FOMC – Internal (FR) 20 November 1-2, 2016 Authorized for Public Release 214 of 258 Support macroeconomic objectives Macroeconomic benefits clear at the ELB, and likely also exist away from ELB Uncertainty about managing multiple tools and substitutability among them When should the balance sheet be used as an active tool? Only at the ELB? A low-duration balance sheet outside of ELB episodes may provide more room to conduct LSAPs as needed Also away from the ELB? A “new normal” may imply a greater role for balance sheet tools A high-duration balance sheet may provide more room to lower short-term rates and alleviate risk of reaching the ELB Macro effectiveness depends on public’s understanding of the use of balance sheet tools and the short-term interest rate Class III FOMC – Internal (FR) 21 November 1-2, 2016 Authorized for Public Release 215 of 258 Support financial stability objectives Use in periods of market stress to improve liquidity and market functioning Use preemptively to reduce financial sector vulnerabilities Provide safe, money-like assets to crowd out excessive private creation of runnable assets Influence yield curve to reduce private sector maturity transformation Use to expand availability of HQLA and risk-bearing capacity for financial institutions Use to mitigate boom/bust cycles in housing sector Class III FOMC – Internal (FR) 22 November 1-2, 2016 Authorized for Public Release 216 of 258 Implications of balance sheet role for portfolio design Use balance sheet actively only at ELB or in a crisis In steady state, hold lean balance sheet with low duration At ELB or in a crisis, expand size, lengthen maturity, or change asset composition Revert to prior structure when conditions warrant However, starting point depends on economic variables (not a choice) Risk of ever-growing balance sheet if normalization doesn’t conclude between ELB visits Use balance sheet actively in non-ELB/normal times In steady state, hold relatively large balance sheet Portfolio composition varies by desired objectives In some cases, steady-state portfolio structure meets desired objective In other cases, steady-state portfolio structure positions it to be used if needed Requires shifts in composition to meet desired objective Class III FOMC – Internal (FR) 23 November 1-2, 2016 Authorized for Public Release 217 of 258 Potential principles guiding portfolio design Central bank has some leeway in determining asset composition Federal Reserve Act allows only a limited universe of safe assets Pre-crisis principles might hold different weights under some long-run balance sheet objectives Safety (managing financial risk) Market neutrality (avoiding price distortions and credit allocation) Liquidity (providing balance sheet elasticity) Operational readiness might be considered a new principle Return and transparency might also be considerations Class III FOMC – Internal (FR) 24 November 1-2, 2016 Authorized for Public Release 218 of 258 Fiscal and political economy considerations Monetary policy has broad fiscal implications regardless of size and composition of the central bank’s balance sheet However, a large balance sheet accentuates important issues Role of central bank in government debt management decisions Federal Reserve and Treasury have different, at times inconsistent, goals Costs of funding a permanently large balance sheet Federal Reserve: Interest payments to counterparties vs. taxpayers Consolidated federal government: What is cheapest source of financing? Level and variability of remittances to the Treasury Credibility or independence of central bank facing possible losses Class III FOMC – Internal (FR) 25 November 1-2, 2016 Authorized for Public Release 219 of 258 DISCUSSION QUESTIONS Class III FOMC – Internal (FR) 26 November 1-2, 2016 Authorized for Public Release 220 of 258 Three broad discussion questions 1. The memo titled “Interest Rate Targets and Operating Regimes” discussed three broad types of regimes—one focused on targeting an unsecured rate in a floor system with an ample supply of reserves, another focused on targeting an unsecured rate in a corridor system with a relatively scarce supply of reserves, and a third focused on targeting repo rates. What are your views on the key design elements of these regimes, such as the choice of policy rate to be used as a focal point for setting and communicating the stance of policy (an unsecured or secured, or an administered or market rate), the choice among alternative forms of reserve requirements (required, voluntary, or none), and whether to operate on the flat or steep portion of the demand curve for reserves? Class III FOMC – Internal (FR) 27 November 1-2, 2016 Authorized for Public Release 221 of 258 Three broad discussion questions 2. The memo also discussed possible alternative arrangements for liquidity provision that could help to mitigate stigma and create a more effective ceiling on short-term rates. Do you have any views on changes in the discount window or on other vehicles for liquidity provision, such as the DIRF and FIRF standing facilities, discussed in the memo? What are your views about the appropriate level of readiness for the TAF as a tool to address broad-based funding pressures? Class III FOMC – Internal (FR) 28 November 1-2, 2016 Authorized for Public Release 222 of 258 Three broad discussion questions 3. The memo titled “Balance Sheet Considerations for the Federal Reserve’s Long-run Framework” discussed a range of issues associated with the long-run size and composition of the Federal Reserve’s balance sheet. What are your views on the appropriate future use of large-scale asset purchases to support macroeconomic objectives? Should such purchases be conducted only after rates have reached the effective lower bound (ELB), or do you see some role for purchases even when short-term rates are well above the ELB? What are your views on the use of the Federal Reserve’s balance sheet to foster financial stability goals? What are your views on the appropriate long-run composition of the balance sheet? Last page Class III FOMC – Internal (FR) 29 November 1-2, 2016 Authorized for Public Release Appendix 2: Materials used by Mr. Potter and Ms. Logan 223 of 258 November 1-2, 2016 Authorized for Public Release Class II FOMC – Restricted (FR) Material for the Briefing on Financial Developments and Open Market Operations Simon Potter and Lorie Logan November 1, 2016 224 of 258 November 1-2, 2016 Authorized for Public Release 225 of 258 Exhibit 1 Class II FOMC – Restricted (FR) (2) Implied Federal Funds Rate Path* (1) Probability of a Rate Hike by December FOMC* Dec '15 Percent 100 90 80 70 60 50 40 30 20 Market-Implied: Current Market-Implied: Before July FOMC November Survey Unconditional Path (Mean) September SEP Median Dots Dec '16 Oct.'15 FOMC Percent 3.0 2.5 2.0 1.5 1.0 0.5 73 58 43 28 0.0 10/25/16 13 Days Before Statement Release 10/25/17 10/25/18 10/25/19 *Series start day of August Employment Situation release. Assumes a current effective rate of 12 bps increasing to 35 bps for the Dec. ’15 meeting and a current effective rate of 40 bps increasing to 65 bps for the Dec. ’16 meeting. Source: Bloomberg, Desk Calculations *Market-implied paths derived from federal funds and Eurodollar futures, survey path is the average PDF-implied mean from the November Survey of Primary Dealers and Market Participants. Source: Bloomberg, Desk Calculations, Federal Reserve Board (3) Changes in Financial Conditions Since Fed Policy Actions* (4) U.S. Dollar Performance Since Sept. FOMC Mexican Peso From From 10/31/14 to 12/15/15 to 12/15/15 Current Nominal 10-Year TSY Yield Swiss Franc -7 bps -42 bps U.S. Broad T.W. Dollar +14.6 % +1.2 % S&P 500 Index +1.3 % +4.1 % MSCI EM Equity Index -23.3 % +15.9 % MBS OAS -6 bps +6 bps +252 bps -200 bps High-Yield OAS Russian Ruble Euro Canadian Dollar Onshore Chinese RMB Japanese Yen British Pound *Last month of balance sheet expansion was October 2014. Liftoff occurred on December 16, 2015. Source: Barclays, Bloomberg, Federal Reserve Board -5 USD/Bbl. 140 120 100 80 60 40 20 01/01/12 01/01/13 01/01/14 01/01/15 01/01/16 Source: Bloomberg, Federal Reserve Board -2.5 0 2.5 5 7.5 Percent Source: Bloomberg (5) Brent Crude Oil and Five-Year, Five-Year Breakeven Brent Crude Oil (LHS) Five-Year, Five-Year Breakeven (RHS) U.S. Dollar Appreciation (6) Decomposed Change in 10-Year Yields Since September FOMC BPS Percent 3.0 Real 60 Breakeven* Nominal 50 40 2.5 30 20 2.0 10 0 1.5 -10 -20 1.0 US Germany UK *Computed as the residual of nominal less real yield. Source: Bloomberg Japan November 1-2, 2016 Authorized for Public Release 226 of 258 Exhibit 2 Class II FOMC – Restricted (FR) (8) Pound Sterling and 10-Year Inflation Breakeven (7) Central Bank Policy Action GBP-USD (LHS) UK 10-Year Breakeven (RHS) BoJ: Percent GBP/USD • Committed to overshoot its inflation target 1.55 • Introduced a nominal 10-year JGB yield target of around 0 percent 1.50 o Potential tension with both a price and quantity target for asset purchases • Added a fixed-rate operation to purchase JGBs ECB: • No changes to its policy framework, but changes expected to be announced at December meeting EU Referendum 3.2 Article 50 Announcement 3.0 1.45 2.8 1.40 2.6 1.35 2.4 1.30 1.25 2.2 1.20 01/01/16 03/01/16 05/01/16 07/01/16 09/01/16 2.0 Source: Bloomberg (9) Bank CDS (10) Banking Sector Price-to-Tangible Book Ratio by Region* Credit Suisse Barclays Societe Generale JPMorgan Chase Deutsche Bank BPS 500 450 400 Ratio 300 250 200 150 100 50 0 01/01/11 01/01/12 01/01/13 01/01/14 01/01/15 01/01/16 Source: Bloomberg (11) Chinese Exchange Rate Since Start of Year Onshore RMB 1 0 -1 -2 -3 -4 -5 RMB Depreciation -6 against USD -7 -8 03/31/16 12/31/15 UK Euro Area *Price-to-tangible book ratio is market cap divided by common shareholder equity less intangibles. Source: Bloomberg (12) Onshore RMB Level and Cumulative Change in China Foreign Exchange Reserves CFETS Index* Cumulative Change in FX Reserves (LHS) Onshore RMB (RHS)* $ Billions Sept. FOMC 06/30/16 Japan 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 01/01/11 01/01/12 01/01/13 01/01/14 01/01/15 01/01/16 350 Percent Change US 09/30/16 *Onshore RMB exchange rate against a basket of 13 currencies. Computed from central parity rates for all currencies traded on CFETS. Source: Bloomberg, Desk Calculations RMB/USD 0 -100 -200 -300 -400 -500 -600 -700 -800 -900 6.8 6.7 6.6 6.5 6.4 6.3 6.2 6.1 6.0 09/14 01/15 05/15 *Average level over the month. Source: Bloomberg 09/15 01/16 05/16 09/16 November 1-2, 2016 Authorized for Public Release 227 of 258 Exhibit 3 Class II FOMC – Restricted (FR) (13) MMF AUM Prime $ Billions (14) Prime Fund WAM and Net Yield Spread 2,500 2,000 1,500 Projected* 1,000 500 0 07/01/14 07/01/15 07/01/16 07/01/17 *Dashed lines show average projections from survey results. Source: FRBNY Survey of Money Market Mutual Funds, iMoneyNet, November Surveys of Primary Dealers and Market Participants (15) Select Prime MMF Holdings $ Billions Overnight and Term Deposits 1,200 CP 800 600 400 200 01/20/16 04/20/16 07/20/16 Days 50 45 40 35 30 25 20 15 10 5 0 07/01/14 10/20/16 Source: iMoneyNet Eurodollars $ Billions BPS 50 45 40 35 30 25 20 15 10 5 0 07/01/14 Projected* 25 20 15 10 5 0 07/01/15 07/01/16 07/01/17 Fed Funds CD Financial CP LIBOR Projected** 07/01/15 07/01/16 07/01/17 *Series reflect 5-day rolling average. **Dashed lines show average projections from survey results. Source: Desk Calculations, DTCC, FR2420, FRBNY Survey of Money Market Mutual Funds, November Surveys of Primary Dealers and Market Participants $ Billions (18) Change in Government Fund Asset Allocation Since July 2014 450 400 300 350 250 300 200 250 150 200 150 100 100 50 0 10/20/15 30 *Dashed lines show average projections from survey results. Source: FRBNY Survey of Money Market Mutual Funds, iMoneyNet (17) OBFR Volumes by Transaction Type 350 BPS (16) 3-Month Unsecured Rate Spreads to OIS* 1,000 0 10/20/15 Inst. Prime WAM (LHS) Inst. Prime less Inst. Gov't 7-Day Net Yield (RHS) Government 50 0 01/20/16 Source: FR2420 04/20/16 07/20/16 10/20/16 Agencies Source: iMoneyNet FRNs Repos US Treasuries November 1-2, 2016 Authorized for Public Release 228 of 258 Exhibit 4 Class II FOMC – Restricted (FR) (19) ON RRP Take-Up by Counterparty Type Other Prime MMF Gov't MMF $ Billions 400 350 300 250 200 150 100 50 0 01/01/16 03/01/16 05/01/16 07/01/16 09/01/16 USD-JPY 08/01/14 EUR-USD 03/01/15 (21) Central Bank Liquidity Swaps Outstanding BoJ Percent 3.00 ≥ 2.75 ≥ 25 7 20 6 15 5 4 10 3 5 2 0 0.00Dec. '15 1.50Nov. '163.00 Flash 1 08/01/14 03/01/15 10/01/15 (23) Euro Portfolio Allocations 10/20/2016 Target Percent 80 70 60 50 40 30 20 10 0 Cash >0-2.5 >2.5-4.5 2.50 2.25 2.00 1.75 1.50 1.25 1.00 0.75 0.50 0.25 0.00 Dec. '151.50Nov. '16 0.00 3.00 Flash *Dots scaled by percent of respondents from the Dec. ‘15 Flash and Nov. ‘16 Surveys of Primary Dealers and Market Participants. Red dot is median. If expected time of policy change differs between Treasury and MBS, earlier is taken. Source: FRBNY 05/01/16 Source: FRBNY 9/30/2016 05/01/16 (22) Expected Timing of and Fed Funds Rate at Change in Reinvestment Policy* Months Ahead 8 0 01/01/14 10/01/15 GBP-USD *Dashed lines indicate quarter end dates. Source: Bloomberg Source: FRBNY ECB BPS 90 80 70 60 50 40 30 20 10 0 -10 01/01/14 450 $ Billions (20) Three-Month Swap Basis* >4.5 (24) Update on the Production of GC Repo Benchmark Rates Main objectives: • Improve amount and quality of information available to public • Produce rate aligned with IOSCO principles • Produce rate that is correlated with other money market rates, resilient to market evolution Staff is proposing the publication of three daily secured benchmark rates: • Tri-party transactions from BNYM • Tri-party transactions, and GCF data from DTCC • Tri-party transactions, GCF transactions, and Fed repobased OMOs Remaining Maturity as of 09/30/16 (Years) Source: FRBNY Desk statement to be published this Friday (November 4) November 1-2, 2016 Authorized for Public Release 229 of 258 Appendix (Last) Class II FOMC – Restricted (FR) Appendix: Summary of Operational Testing Summary of Operational Tests in prior period: • Domestic Authorization o October 5 and 6: Coupon swaps with unsettled agency MBS holdings for $20 million • Foreign Authorization o October 6: Liquidity swap with BoC, BoE, ECB and SNB for USD51 thousand each; USD204 thousand total o October 12: Euro-denominated overnight repo for EUR1 million* o October 18 and 19: Liquidity swap with the Bank of Japan for JPY51 thousand o October 20: Liquidity swap with the Bank of England for GBP51 thousand • TDF test operation o October 20: Conducted 7-day test with total take-up of $49 billion Upcoming Operational Tests • Tests scheduled under the Domestic Authorization o November 29: Outright MBS Sale (specified pool) for no more than $80 million o December 1: Outright MBS Sale (basket) for no more than $20 million o December 6: Treasury Outright Sale for no more than $400 million o December 7: Overnight repo for no more than $70 million * The Desk did not include this test in the list of planned upcoming operational tests at the September FOMC meeting. However, it provided advance notice that this test would take place in Q4 of 2016 in the January memo from the Desk, titled: Advance notice of 2016 small value exercises related to operational readiness testing dated January 21, 2016. November 1-2, 2016 Authorized for Public Release Appendix 3: Materials used by Mr. Engen 230 of 258 November 1-2, 2016 Authorized for Public Release Class II FOMC – Restricted (FR) Material for Briefing on The U.S. Outlook Eric M. Engen November 1, 2016 231 of 258 November 1-2, 2016 Authorized for Public Release 232 of 258 Class II FOMC - Restricted (FR) Forecast Summary Confidence Intervals for Panels 1, 3, 7, and 8 Based on FRB/US Stochastic Simulations 1. Real GDP 2. Output Gap Estimates Percent change, annual rate 10 10 Oct. TB Sept. TB 70% confidence interval Advance BEA estimate 8 6 8 6 4 0 0 0 -2 -2 -6 -4 -8 2017 2018 2019 -2 Oct. TB Sept. TB 70% confidence interval 9 7 6 6 5 5 4 Natural rate 3 2 -6 2006 2008 2010 2012 2014 2016 2018 Thousands 400 -8 400 Oct. TB Sept. TB 8 7 4 -4 4. Total Nonfarm Payrolls* Percent 8 -2 16:Q3 -4 3. Unemployment Rate 9 4 0 2 2016 6 2 2 2015 8 2 4 2014 Staff output gap Previous Staff output gap Range of four model estimates 6 4 -4 Percent 8 300 300 200 200 100 100 3 2014 2015 2016 2017 2018 2019 2 0 2014 2015 2016 2017 2018 2019 0 * Average monthly change in quarter shown. 6. Labor Force Participation Rates by Race or Ethnicity 5. Unemployment Rates by Race or Ethnicity Percent 20 Black or African-American Hispanic or Latino Aggregate White 16 20 Percent 90 Black or African-American Hispanic or Latino Aggregate White 16 85 12 85 12 8 8 80 4 0 90 Sept. 2000 2004 2008 2012 2016 80 4 Sept. 0 75 Note: Three-month moving averages. Shaded bars indicate a period of business recession as defined by the NBER. 2000 2004 2008 2012 2016 Note: Three-month moving averages. Data cover persons between the ages of 25 and 54; data by race or ethnicity are seasonally adjusted by Board staff. Shaded bars indicate a period of business recession as defined by the NBER. 1 of 3 75 November 1-2, 2016 Authorized for Public Release 233 of 258 Class II FOMC - Restricted (FR) 7. PCE Prices 8. PCE Prices Excluding Food and Energy Percent change, annual rate 6 Oct. TB Sept. TB 70% confidence interval Advance BEA estimate 5 4 3 6 4 4 3 2 1 1 0 0 -1 -1 -2 -2 2014 2015 2016 2017 2018 2019 -3 3 Percentage points Source of Revision: Food Energy Core 2016 2017 1 0 0 -1 2014 2015 2016 2017 2018 4.0 Michigan, next 5 to 10 years (median) Estimated trend Trend augmented with CPI food and energy inflation Percentage points 0.7 Source of Revision: Revisions to Projection Resource utilization Energy price passthrough Import prices Underlying inflation Other -0.3 -0.3 -0.5 -0.5 -0.7 2015 2016 2017 2018 4.0 Percent change from year earlier 6 Average hourly earnings* Employment cost index Productivity & Costs** 5 2.5 Oct. 2010 2013 2016 2.0 6 5 4 4 Sept. Sept. Q3 2 2007 -0.7 12. Measures of Labor Compensation 3 2004 0.3 -0.1 3.0 2001 0.5 -0.1 3.0 1998 0.7 0.1 3.5 2.0 -1 0.1 3.5 2.5 2019 10. Inflation Revisions Since December: Core PCE 11. Longer-Term Inflation Expectations Percent 3 1 0.5 2018 4 2 0.3 2015 5 2 9. Inflation Revisions Since December: Total PCE Revisions to Projection Oct. TB Sept. TB 70% confidence interval Advance BEA estimate 5 2 -3 Percent change, annual rate 5 3 2 1 1 0 0 -1 Note: Shaded area denotes 70 percent of the observed historical range since 1998. Augmented trend uses staff forecasts for October CPIs. 2007 2009 2011 2013 2015 2017 *All employees. **2016:Q2 and Q3 based on staff translation. 2 of 3 -1 November 1-2, 2016 Authorized for Public Release 234 of 258 Class II FOMC - Restricted (FR) Key Economic Indicators for the November, December, and January/February FOMC Meetings (Percent change at annual rate, except as noted) June July Aug. Sept. Oct. Nov. Dec. 3‐month change September Tealbook 2.5 2.5 1.3 1.1 1.2 0.9 1.6 1.3 2.5 1.6 2.4 1.4 1.8 1.0 12‐month change September Tealbook 0.9 0.9 0.8 0.8 1.0 0.9 1.2 1.1 1.4 1.1 1.4 1.1 1.6 1.3 3‐month change September Tealbook 1.8 1.8 1.6 1.4 1.6 1.2 1.8 1.3 1.7 1.4 1.4 1.4 1.4 1.3 12‐month change September Tealbook 1.6 1.6 1.6 1.6 1.7 1.6 1.7 1.6 1.7 1.6 1.7 1.6 1.8 1.6 Unemployment rate (percent) September Tealbook 4.9 4.9 4.9 4.9 4.9 4.9 5.0 4.9 4.9 4.9 4.9 4.9 4.9 4.9 Payroll employment (change in 000s) September Tealbook 271 271 252 275 167 151 156 215 164 171 184 171 174 171 Total PCE price index Core PCE price index 1st Q3 est. 2.5 2.7 Gross Domestic Product September Tealbook 2nd Q3 est. 1st Q4 est. 2.5 2.1 2.7 2.4 Key : Estimate first available at: November meeting December meeting Jan./Feb. meeting Notes: The September Tealbook projection for the September payroll employment change included an anticipated revision of 30,000 to the initially reported August figure. The January/February FOMC meeting runs from January 31, 2017 to February 1, 2017. 3 of 3 November 1-2, 2016 Authorized for Public Release Appendix 4: Materials used by Mr. Kamin 235 of 258 November 1-2, 2016 Authorized for Public Release Class II FOMC – Restricted (FR) Material for Briefing on The International Outlook Steven B. Kamin Exhibits by Meghan Letendre November 1, 2016 236 of 258 November 1-2, 2016 Authorized for Public Release 237 of 258 Exhibit 1 Class II FOMC - Restricted (FR) The International Outlook 1. Belgium 2. Foreign GDP* Percent change, annual rate 5 Sep. TB Emerging market economies (EME) 4 3 Total 2 Advanced foreign economies (AFE) 1 0 2015 Source: Wall Street Journal 2016 2017 2018 2019 * Weighted by bilateral shares in U.S. merchandise exports. 3. Expected Policy Rates 4. Real Broad Dollar Percent 2009 = 100 125 Sensitivity of Dollar to interest rate surprises: 3.5 3.0 120 Baseline: 2.2% per 100 bps Stronger Dollar: 7.5% per 100 bps 2.5 115 2.0 110 1.5 105 Staff: US 1.0 Market*: US 100 0.5 Staff: AFE Dollar Appreciation 0.0 95 Market*: AFE -0.5 2016 2017 * Based on OIS swaps. 2018 90 2014 2019 5. FOMC Announcement Dates Change in 10-year German yield 2016 2017 2018 6. ECB Announcement Dates Basis points Basis points 15 Jan. 2010 - Present 10 5 0 slope = 0.52 -5 -10 -20 -15 -10 -5 0 5 10 15 Change in 10-year US yield (basis points) -15 20 Change in 10-year US yield Jan. 2010 - Present -25 2015 8 6 4 2 0 -2 slope = 0.50 -4 -6 -8 -20 -15 -10 -5 0 5 10 Change in 10-year German yield (basis points) Page 1 of 3 -10 15 November 1-2, 2016 Authorized for Public Release 238 of 258 Exhibit 2 Class II FOMC - Restricted (FR) The International Outlook (2) 7. Japan 6.00 8. Euro Area Percent 4-quarter percent change 3 15.00 Percent 4-quarter percent change Unemployment Inflation 4.0 3.5 2 3.0 12.75 5.25 Unemployment 1 2.5 2.0 0 4.50 10.50 1.5 1.0 -1 3.75 8.25 Inflation* 0.5 -2 0.0 -3 3.00 2006 2009 2012 * Excluding effect of consumption tax hikes. 2015 -0.5 6.00 2018 2006 2009 2012 2015 2018 9. Net Interest Margins (NIMs) in Europe Regression equation: European NIM: 1.35% European NIM assuming U.S. rates and yield spread: 1.40% U.S. NIM: 2.45% European Banking Crisis Scenario: 10. Real Broad Dollar 11. U.S. Real GDP 2009 = 100 120 12. Federal Funds Rate Four-quarter percent change Annual percent 3.5 Baseline EA Banking Crisis 2.5 Baseline EA Banking Crisis 115 3.0 110 2.5 2.0 1.5 105 2.0 100 1.5 1.0 Baseline Dollar Appreciation 95 90 2014 2016 2018 0.5 1.0 EA Banking Crisis 0.5 2014 2016 2018 0.0 2014 2016 2018 Page 2 of 3 Neutral L M E M E N Italy *Assessment with Support **Standalone Assessment Extremely Subdued Neutral M M N M N M France Low Neutral ES L N ES N M Japan Neutral N M M N N M United Kingdom Moderate Positive M L ES M N M Switzerland Advanced Foreign Economies M M L N E N China Neutral Notable Negative N N E M N E Brazil Negative M M N M L M Mexico Elevated Positive N L ES E M M Hong Kong Neutral M ES L N M L South Korea Emerging Market Economies International Financial Stability Matrix (IFSM) The International Outlook (3) Negative M E M M N N Turkey Authorized for Public Release Page 3 of 3 Aggregate Matrix Impact of Institutions** Valuation Pressures** External Vulnerabilities** Sovereign Vulnerabilities** Nonfinancial Sector** Financial Sector** Net Overall Assessment* O v M e r a F i M n a n N o N n f iS o L v e rE x L t e rV a N l u aI m p Positive a c Canada Class II FOMC - Restricted (FR) Exhibit 3 November 1-2, 2016 239 of 258 November 1-2, 2016 Authorized for Public Release Appendix 5: Materials used by Mr. Palumbo 240 of 258 November 1-2, 2016 Authorized for Public Release Class II FOMC – Restricted (FR) Material for Briefing on Financial Stability Michael G. Palumbo November 1, 2016 241 of 258 November 1-2, 2016 Authorized for Public Release Class II FOMC – Restricted (FR) 242 of 258 November 1, 2016 Exhibit 1 Money Market Fund Holdings Money Market Funds, Assets Under Management Billions of dollars 2500 Billions of dollars 1400 550 Monthly Weekly Government Prime institutional Prime retail 2000 Sept. 1200 450 1000 400 1500 CD + CP + ABCP (left scale) FHLB debt (right scale) 800 350 1000 300 600 Oct. 25 500 0 Oct. 2015 Feb. June 2016 500 250 400 200 200 150 Oct. 2014 2015 2016 Source: SEC N−MFP Filings. Source: iMoneyNet. Common Equity Tier 1 Ratio Bank Net Interest Margins Percent of RWA Quarterly, SA G−SIBs Non G−SIB CCAR BHCs Other BHCs 14 Q2 Percent of interest−earning assets 16 Quarterly, SAAR Other CCAR 5.5 5.0 4.5 4.0 12 Q2 10 3.5 3.0 2.5 8 2.0 6 1.5 4 2001 2004 2007 2010 2013 2016 1.0 2001 Source: FR Y−9C. 2004 2007 2010 2013 2016 Source: FR Y−9C. Domestic 5−Year CDS Premiums Price−to−Book Ratios for Selected Firms Basis points Monthly Goldman Sachs Morgan Stanley Citigroup Bank of America JP Morgan Wells Fargo Ratio 800 Dec. 2006 Dec. 2011 Dec. 2015 Oct. 25, 2016 700 600 4.0 3.5 Foreign Banks Domestic Banks 500 4.5 3.0 2.5 400 2.0 300 Oct. 1.5 200 1.0 100 0.5 Source: FactSet. 1 of 3 UBS DB CS BCS WFC Source: Markit. MS 0 JPM 2016 GS 2013 C 2010 BAC 0 2007 November 1-2, 2016 Authorized for Public Release 243 of 258 Exhibit 2 Indicators of Asset Valuation Pressures Valuation ratio Adjusted for Treasuries Equity P/E ratio Orange Green Corporate bond prices Red Yellow Red Green CRE prices relative to rents Key: Level 0-20* Blue: percentile, Green: 20-40* percentile, 40-60* percentile, Yellow: 60-80* Orange: percentile, 80-100* percentile Red: Notes: Color assignments were made based upon location of valuation metrics relative to their historical distributions. November 1-2, 2016 Authorized for Public Release Class II FOMC – Restricted (FR) 244 of 258 November 1, 2016 Exhibit 3 Staff Judgment on Levels of Vulnerabilities Extremely subdued Key: Low Moderate Notable Elevated Notes: Heat map color assignments were made by staff judgment. In the absence of significant structural changes, we would expect vulnerabilities to spend roughly equal proportions of time in each of the colored risk buckets. October 2015 Valuation Pressures The balance of indicators suggest moderate valuation pressures in equity and corporate debt markets, down from previous assessments Term premiums remain very low CRE valuation pressures increased further July 2016 Private Nonfinancial Sector Leverage Financial Sector Leverage Maturity and Liquidity Transformation Aggregate measures of leverage for nonfinancial businesses are rising and are now slightly above their long-run averages The rapid pace of debt growth for riskier firms is showing signs of cooling, but leverage remains historically high for these firms The modest increases in household debt continues to be driven mostly by prime borrowers Regulatory capital ratios remained close to recent highs Available measures point to moderate leverage in the nonbank sector Insurance industry is well capitalized and balance sheet risk appears manageable Large BHC liquidity buffers remain robust Aggregate amount of runnable private money-like instruments remain stable relative to nominal GDP Structural vulnerabilities in MMFs persist Bond mutual funds’ outflows could cause excess volatility in bond markets October 2016 Treasury term premiums declined even further into negative territory CRE valuation pressures remain appreciable, although lending standards have tightened Equity prices have increased moderately despite weaker expected earnings Corporate bond and equity risk premiums are, on net, unchanged Aggregate leverage for the nonfinancial corporate sector stayed elevated Gross and net leverage of speculative-grade firms reached new highs even as growth of risky corporate debt continues to slow The debt-to-income ratio of households continued to inch down The results of the recent DFAST/CCAR exercise indicate sufficient capital for a severe macroeconomic shock Available measures of leverage in the nonbank sector suggest little change Following the Brexit vote, share prices and CDS spreads of large US banks were, on net, little changed Large BHCs’ holdings of liquid assets remain at high levels Prime money market funds have considerably lower AUM due to conversions in anticipation of new regulation taking effect; reports indicate further outflows are likely Large outflows from bond and loan mutual funds could exacerbate volatility in corporate debt markets Overall Assessment 3 of 3 Treasury term premiums remain well in negative territory CRE valuations continue to rise as capitalization rates reached historical lows, but sales volumes declined and lending standards tightened Corporate bond spreads and equity risk premiums are in line with historical norms Leverage for the nonfinancial corporate sector stayed elevated Growth of risky corporate debt has been modest recently, but leverage of speculative-grade firms remained elevated The debt-to-income ratio of households continued to inch down Regulatory capital ratios for banks and insurance companies remain at high levels Measures of leverage in the nonbank sector suggest little change Spillovers related to developments at DB have been limited to equity prices of weakly capitalized European banks with similar business models Large BHCs’ holdings of liquid assets remain at high levels Prime institutional money market funds have considerably lower AUM, decreasing the risks associated with a run in this sector First-mover advantage, and thus runrisk, remains at some open-end bond mutual funds November 1-2, 2016 Authorized for Public Release Appendix 6: Materials used by Mr. Laubach 245 of 258 November 1-2, 2016 Authorized for Public Release Class I FOMC – Restricted Controlled (FR) Material for the Briefing on Monetary Policy Alternatives Thomas Laubach November 1–2, 2016 246 of 258 November 1-2, 2016 Authorized for Public Release 247 of 258 Potential Implications of a Higher Inflation Outlook Probability Distribution of Average Headline CPI Inflation over the Next 10 Years Percent Potential Implications of Higher Inflation 50 October 28, 2016 September 20, 2016 40 "Higher Labor Costs" scenario features inflation that is persistently 1/2 pp above baseline 30 How would this scenario affect Assesment of current policy stance? 20 Federal funds rate path and financial conditions broadly? 10 0 −2 −1 0 1 2 3 4 5 6 Note: Model−free probability distribution implied by inflation caps and floors. Source: BGC Partners and Bloomberg. r* Estimates PCE Inflation Paths Percent Quarterly 3 One−sided LW estimate using SEP Two−sided LW estimate using SEP Two−sided estimate, Higher Labor Costs Percent Change Quarterly September SEP Median Higher Labor Costs 3.0 2.5 2 2.0 1 1.5 0 1.0 2007 2009 2011 2013 2015 2017 2019 −1 2016 2017 2018 0.5 2019 Note: Laubach−Williams estimates of r* treating real GDP, core inflation, and the federal funds rate through 2019 from either the September 2016 SEP medians or the "Higher Labor Costs" scenario as data. Source: SEP, FRB/US, and staff calculations. Note: The line "September SEP Median" shows PCE inflation from a baseline consistent with the September SEP medians. The line labeled "Higher Labor Costs" shows inflation in that scenario applied to the SEP−consistent baseline. Source: SEP, FRB/US, and staff calculations. Possible Responses of Financial Conditions 10−Year Treasury Yield and Term Premium Percent Daily 10−year Treasury Yield Kim−Wright Term Premium Federal funds rate rises to 3 percent by 2019, 1/2 pp above baseline 6 5 4 Assumes muted response of 10−year yield, term premium 3 If investors expected higher inflation path, past term premium declines could unwind rapidly 2 1 Rise in longer−term yields could be associated with dollar appreciation 0 −1 2007 2009 2011 Source: Bloomberg and staff calculations. Page 1 of 12 2013 2015 November 1-2, 2016 Authorized for Public Release 248 of 258 Class I FOMC – Restricted Controlled (FR) SEPTEMBER 2016 FOMC STATEMENT 1. Information received since the Federal Open Market Committee met in July indicates that the labor market has continued to strengthen and growth of economic activity has picked up from the modest pace seen in the first half of this year. Although the unemployment rate is little changed in recent months, job gains have been solid, on average. Household spending has been growing strongly but business fixed investment has remained soft. Inflation has continued to run below the Committee’s 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation remain low; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months. 2. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will strengthen somewhat further. Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further. Near-term risks to the economic outlook appear roughly balanced. The Committee continues to closely monitor inflation indicators and global economic and financial developments. 3. Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at ¼ to ½ percent. The Committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a 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. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data. 5. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at Page 2 of 12 November 1-2, 2016 Authorized for Public Release 249 of 258 Class I FOMC – Restricted Controlled (FR) auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions. Page 3 of 12 November 1-2, 2016 Authorized for Public Release 250 of 258 Class I FOMC – Restricted Controlled (FR) NOVEMBER 2016 ALTERNATIVE A 1. Information received since the Federal Open Market Committee met in July September indicates that the labor market has continued to strengthen and growth of economic activity has picked up from the modest pace seen in the first half of this year. Although the unemployment rate is little changed in recent months, Job gains have been solid, on average, in recent months, but the unemployment rate and other indicators of labor utilization have changed little, on balance. Growth of household spending has been growing strongly but slowed and business fixed investment has remained soft. Inflation has continued to run below the Committee’s 2 percent longer-run objective, only partly reflecting earlier declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation remain low; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months. 2. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with gradual adjustments in the stance of appropriate monetary policy, economic activity will expand at a moderate pace and labor market conditions will strengthen somewhat further. Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise gradually to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further. Near-term risks to the economic outlook appear roughly balanced. The Committee continues to closely monitor inflation indicators and global economic and financial developments. 3. Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at ¼ to ½ percent. In light of subdued pressures in the labor market and still-low levels of inflation, the Committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives will not be warranted until evidence emerges that inflation is moving closer to 2 percent on a sustained basis. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation. 4. In determining the timing and size of future when adjustments to the target range for the federal funds rate might become appropriate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation, along with risks to the economic outlook. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remaining, for some time, below levels that are Page 4 of 12 November 1-2, 2016 Authorized for Public Release 251 of 258 Class I FOMC – Restricted Controlled (FR) expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data. 5. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions. Page 5 of 12 November 1-2, 2016 Authorized for Public Release 252 of 258 Class I FOMC – Restricted Controlled (FR) NOVEMBER 2016 ALTERNATIVE B 1. Information received since the Federal Open Market Committee met in July September indicates that the labor market has continued to strengthen and growth of economic activity has picked up from the modest pace seen in the first half of this year. Although the unemployment rate is little changed in recent months, job gains have been solid, on average. Household spending has been growing strongly rising moderately but business fixed investment has remained soft. Inflation has continued to run has increased somewhat since earlier this year but is still below the Committee’s 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation have moved up but remain low; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months. 2. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will strengthen somewhat further. Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further. Near-term risks to the economic outlook appear roughly balanced. The Committee continues to closely monitor inflation indicators and global economic and financial developments. 3. Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at ¼ to ½ percent. The Committee judges that the case for an increase in the federal funds rate has strengthened continued to strengthen but decided, for the time being, to wait for some further evidence of continued progress toward its objectives. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a 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. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only 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 6 of 12 November 1-2, 2016 Authorized for Public Release 253 of 258 Class I FOMC – Restricted Controlled (FR) 5. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions. Page 7 of 12 November 1-2, 2016 Authorized for Public Release 254 of 258 Class I FOMC – Restricted Controlled (FR) NOVEMBER 2016 ALTERNATIVE C 1. Information received since the Federal Open Market Committee met in July September indicates that the labor market has continued to strengthen and growth of economic activity has picked up from the modest pace seen in the first half of this year. Although the unemployment rate is little changed in recent months, job gains have been solid, on average and, along with other indicators, suggest that labor utilization has increased. Household spending has been growing strongly rising moderately but business fixed investment has remained soft. Inflation has continued to run has increased since earlier this year but is still below the Committee’s 2 percent longer-run objective , partly reflecting earlier declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation have moved up but remain low; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months. 2. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will strengthen somewhat further. Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices continue to dissipate and the labor market strengthens further. Near-term risks to the economic outlook appear roughly balanced. The Committee continues to closely monitor inflation indicators and global economic and financial developments. 3. Against this backdrop In view of realized and expected progress toward maximum employment and 2 percent inflation, the Committee decided to maintain raise the target range for the federal funds rate at ¼ to ½ to ¾ percent. The Committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives. The stance of monetary policy remains accommodative after this increase, thereby supporting some further improvement strengthening in labor market conditions and a 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, along with risks to the economic outlook. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only 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 8 of 12 November 1-2, 2016 Authorized for Public Release 255 of 258 Class I FOMC – Restricted Controlled (FR) 5. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions. Page 9 of 12 November 1-2, 2016 Authorized for Public Release 256 of 258 Class I FOMC – Restricted Controlled (FR) Implementation Note if the Committee maintains the current target range Release Date: September 21 November 2, 2016 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 September 21 November 2, 2016: • The Board of Governors of the Federal Reserve System left unchanged the interest rate paid on required and excess reserve balances at 0.50 percent. • 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 September 22 November 3, 2016, 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 ¼ to ½ 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 0.25 percent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account that are available for such operations and by a per-counterparty limit of $30 billion per day. The Committee directs the Desk to continue rolling over maturing Treasury securities at auction and to continue reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgagebacked securities. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve’s agency mortgage-backed securities transactions.” More information regarding open market operations may be found on the Federal Reserve Bank of New York’s website. • The Board of Governors of the Federal Reserve System took no action to change the discount rate (the primary credit rate), which remains at 1.00 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. Page 10 of 12 November 1-2, 2016 Authorized for Public Release 257 of 258 Class I FOMC – Restricted Controlled (FR) Implementation Note if the Committee raises the target range to ½ to ¾ percent Release Date: September 21 November 2, 2016 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 September 21 November 2, 2016: • The Board of Governors of the Federal Reserve System left unchanged voted [ unanimously ] to raise the interest rate paid on required and excess reserve balances at 0.50 to 0.75 percent, effective November 3, 2016. • 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 September 22 November 3, 2016, 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 ¼ to ½ to ¾ 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 0.25 0.50 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 maturing Treasury securities at auction and to continue reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgagebacked securities. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve’s agency mortgage-backed securities transactions.” More information regarding open market operations may be found on the Federal Reserve Bank of New York’s website. • In a related action, the Board of Governors of the Federal Reserve System took no action to change voted [ unanimously ] to approve a ¼ percentage point increase in the discount rate (the primary credit rate), which remains at 1.00 to 1.25 percent, effective November 3, 2016. In taking this action, the Board approved requests submitted by the Boards of Directors of the Federal Reserve Banks of … Page 11 of 12 November 1-2, 2016 Authorized for Public Release 258 of 258 Class I FOMC – Restricted Controlled (FR) This information will be updated as appropriate to reflect decisions of the Federal Open Market Committee or the Board of Governors regarding details of the Federal Reserve’s operational tools and approach used to implement monetary policy. Page 12 of 12
@FedFRASER