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October 31–November 1, 2017 Authorized for Public Release Appendix 1: Materials used by Mr. Potter and Ms. Logan 132 of 171 October 31–November 1, 2017 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 October 31, 2017 133 of 171 October 31–November 1, 2017 Authorized for Public Release 134 of 171 Exhibit 1 Class II FOMC – Restricted (FR) (1) Pricing of 25-BPS Rate Hike by FOMC Meeting* Percent 100 Dec. '15 Jun. '17 Dec. '16 Dec. '17 90 Percent 80 3.0 70 Sep. SEP (Median) Sep. Survey Unconditional Path (Mean) Oct./Nov. Survey Unconditional Path (Mean) Oct./Nov. Survey Modal Path (Median) Sep. FOMC Market Path Current Market Path 2.5 60 50 2.0 40 30 1.5 20 10 (2) Implied Path of the Policy Rate* Mar. '17 60 50 40 30 20 Business Days Prior to Meeting 10 0 *Assumes federal funds futures contracts price in an EFFR decline on monthend dates equivalent to the six-month rolling average of month-end declines. Source: Bloomberg, Desk Calculations 1.0 10/23/17 (3) Asset Price Changes Since Sep. FOMC* Since Sep. FOMC Current Level 250 S&P 500 Index +3.0% 2581 200 Russell 2000 Index +4.7% 1508 150 High Yield Credit Spread -24 bps 334 100 Investment Grade Credit Spread -13 bps 94 50 U.S. Broad T.W. Dollar +3.0% 122 0 Nominal 2-Year TSY Yield +19 bps 1.59% Nominal 10-Year TSY Yield +16 bps 2.41% *Red indicates tightening of financial conditions, blue indicates loosening of financial conditions. Source: Barclays, Bloomberg, Federal Reserve Board (5) E.M. Asset Price Changes Since Sep. FOMC 10/23/20 BoJ Fed ECB Total Change** -50 01/01/13 01/01/14 01/01/15 01/01/16 01/01/17 01/01/18 *Shaded area indicates projections. ECB data show securities held for monetary policy purposes. BoJ data includes long-term Japanese government bonds, ETFs, and REITS. **Three-month rolling average of total change. Source: Haver, BoJ, ECB, Federal Reserve Board (6) Ratio of 1-Day Changes in S&P 500 ≥ +0.5 Percent to ≤ -0.5 Percent* Ratio 2.5 E.M. Bond Spread Index -5 bps 2.0 E.M. Equity Index +0.1% 1.5 T.W. Other Important Trading Partners Dollar Index (E.M.)* +2.5% 1.0 Contribution from Mexican Peso +1.7% 0.5 +7.5% 0.0 *Positive value indicates U.S. dollar appreciation. Source: Bloomberg, Federal Reserve Board, J.P. Morgan, MSCI 10/23/19 (4) Month-to-Month Changes in Securities Held Outright* $ Billions Since Sep. FOMC U.S. Dollar - Mexican Peso* 10/23/18 *Market-implied paths derived from federal funds and Eurodollar futures. Unconditional survey path is the average PDF-implied means from the Surveys of Primary Dealers and Market Participants. Source: Bloomberg, Desk Calculations, Federal Reserve Board, FRBNY 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 *Ratios are for full year except for 2017, which reflects YTD data. Source: Bloomberg, Desk Calculations October 31–November 1, 2017 Authorized for Public Release 135 of 171 Exhibit 2 Class II FOMC – Restricted (FR) (7) Upcoming SOMA Agency Debt and MBS Paydown Projections* $ Billions 80 70 60 Projections Current Proj. w. +/- 100 bps Shock** Reinvestments Redemptions Redemption Cap (8) SOMA Treasury Rollovers 80 70 60 50 50 40 40 30 30 20 20 10 0 Jun-17 Dec-17 Jun-18 Dec-18 Jun-19 Dec-19 Jun-20 Dec-20 *Based on baseline market-implied scenario. **Projections are based on forward rates. Source: FRBNY Rollovers Redemptions Redemption Cap $ Billions Projections 10 0 Jun-17 Dec-17 Jun-18 Dec-18 Jun-19 Dec-19 Jun-20 Dec-20 Source: FRBNY (9) Estimates for Cumulative Net Bill Issuance $ Billions 150 100 50 Cumulative Issuance Estimate 4 Weeks Prior to 3/15/17 Reinstatement Date; Max Change: -$133 Bln (10) ON RRP Take-Up $ Billions 500 450 400 350 0 300 -50 250 -100 200 150 -150 4 Weeks Prior to 12/11/17 Reinstatement Date; Est. Max Change: -$74 Bln -200 -250 12/01/16 03/01/17 06/01/17 09/01/17 12/01/17 Source: Desk Calculations, U.S. Treasury 100 50 0 12/01/16 BPS OBFR 100 75 50 25 03/01/17 06/01/17 09/01/17 (12) Euro Portfolio Allocation* 09/01/17 *Grey dashed lines indicates quarter-ends. Shaded area reflects target range for the federal funds rate. Source: FRBNY '16/'17 Target Percent 50 45 40 35 30 25 20 15 10 5 0 125 0 12/01/16 06/01/17 Source: FRBNY (11) Overnight Unsecured Rates* EFFR 03/01/17 Cash '17/'18 Target >0-4 Years Remaining Maturity *Remaining maturity at the start of each investment period. Source: FRBNY >4-10 Years October 31–November 1, 2017 Authorized for Public Release 136 of 171 Appendix (Last) Class II FOMC – Restricted (FR) Appendix (1) Summary of Operational Testing Summary of Operational Tests in prior period: • Domestic Authorization • October 24 and 25: Coupon swaps with unsettled agency MBS holdings for approximately $20 million, total • Foreign Authorization • October 10: Euro-denominated overnight repo for €1 million • TDF Test Operation • October 19: Conducted 7-day test with total take-up of $14.1 billion Upcoming Operational Tests: • Six tests scheduled under the Domestic Authorization • November 8: Term repo for no more than $75 million • November 13: Term reverse repo for no more than $175 million • November 16: Overnight reverse repo (with MBS collateral) for no more than $25 million • November 20: Overnight repo for no more than $75 million • November 28 and 29: Outright MBS sales (specified pool) for no more than $180 million, total • December 6: Treasury outright sale of up to $200 million par • Four tests scheduled under the Foreign Authorization • November 7: Euro-denominated overnight reverse repo for €1 million • November 13: Liquidity swap with the Bank of Japan for ¥51 thousand • November 16: Liquidity swaps with the Bank of Canada, Bank of England, European Central Bank, and Swiss National Bank for $51 thousand, each • November 28: Liquidity swap with the Bank of England for £51 thousand (2) FX Swaps Outstanding $ Billions BOJ 7 ECB 6 5 4 3 2 1 0 12/14/2016 2/14/2017 4/14/2017 6/14/2017 8/14/2017 10/14/2017 Source: FRBNY (3) FX Intervention • There were no intervention operations in foreign currencies for the System's account during the intermeeting period October 31–November 1, 2017 Authorized for Public Release Appendix 2: Materials used by Mr. Lebow 137 of 171 October 31–November 1, 2017 Authorized for Public Release Class II FOMC – Restricted (FR) Material for the Briefing on The U.S. Outlook David E. Lebow October 31, 2017 138 of 171 October 31–November 1, 2017 Authorized for Public Release 139 of 171 Class II FOMC - Restricted (FR) Forecast Summary Confidence Intervals for Panels 1, 3, 7, and 8 Based on FRB/US Stochastic Simulations 2. Hurricane-Related Effects 1. Real GDP Percent change, annual rate 8 8 Oct. TB Sept. TB 70% confidence interval Advance BEA estimate 6 6 -------2017------- --2017-- 2018 Sept. Oct. Nov. Q3 Q4 Q1 -.5 -.5 .7 .7 .1 .1 -67 67 0 4 4 1. Real GDP* 2. Sept. TB 2 2 3. Total payrolls** 0 0 * Percentage point contribution at annual rate. ** Contribution to change in month shown or to average monthly change in quarter shown, in thousands. -2 2015 2016 2017 2018 2019 2020 -2 3. Unemployment Rate 4. Unemployment Rates by Race or Ethnicity Percent 7 Oct. TB Sept. TB 70% confidence interval 6 -200 150 50 5 4 7 20 6 16 5 12 4 8 3 4 Percent Black or African-American Hispanic or Latino Aggregate White 20 16 12 8 Natural rate 3 4 Sept. 2 2015 2016 2017 2018 2019 2020 2 0 2000 2004 2008 2012 2016 0 Note: Three-month moving averages. Shaded bars indicate a period of business recession as defined by the NBER. 5. Measures of Labor Compensation 6. Monthly PCE Price Inflation Percent change from a year ago 4 4 Percent change from a year ago 2.5 Total Core Sept. 3 Sept. 3 Sept. 2 Atlanta Fed wage growth tracker* Compensation per hour** Average hourly earnings*** Employment cost index 1 0 2010 2012 2014 2016 2.5 2.0 2.0 1.5 1.5 1.0 1.0 0.5 0.5 2 Q3 1 0 *Three-month moving average. **Percent change of the four-quarter moving average from a year ago; 2017:Q3 is a staff estimate. ***All employees. 0.0 2014 2015 2016 2017 Note: Shaded yellow region indicates forecast period. Page 1 of 2 0.0 October 31–November 1, 2017 Authorized for Public Release 140 of 171 Class II FOMC - Restricted (FR) 7. Total 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 6 4 3 2 2 1 1 0 0 -1 -1 2015 2016 2017 2018 2019 2020 -2 4 Q4/Q4 percent change Core PCE prices Underlying trend 2.0 2 2 1 1 0 2015 2.0 0.5 Contributions to Q4/Q4 percent change Lagged Energy Prices Relative Import Prices 0.5 -0.3 1.2 -0.5 -0.5 1.0 -0.7 2013 2014 2015 2016 2017 f 2018 f 2019 f 2020 f 11. Core PCE Price Inflation and Its Estimated Common Component 2.5 2.0 2.0 1.5 1.5 Sept. 1.0 1.0 0.5 0.5 2016 0.7 -0.3 f. Staff forecast. 2014 Resource Utilization Other Factors Total Deviation -0.1 f. Staff forecast. 2012 0 -0.1 1.2 2010 2020 0.1 1.4 0.0 2019 0.1 1.4 Actual core inflation Common component 2018 0.3 1.6 Percent change from a year ago 2017 0.3 1.6 2.5 2016 10. Decomposition of Deviations of Core Inflation from Trend 0.7 1.8 2013 2014 2015 2016 2017f 2018f 2019f 2020f 4 3 2.2 1.8 1.0 5 3 9. Core PCE Price Inflation and Its Underlying Trend 2.2 Oct. TB Sept. TB 70% confidence interval Advance BEA estimate 5 3 -2 Percent change, annual rate 5 0.0 Page 2 of 2 -0.7 October 31–November 1, 2017 Authorized for Public Release Appendix 3: Materials used by Ms. Wilson 141 of 171 October 31–November 1, 2017 Authorized for Public Release Class II FOMC – Restricted (FR) Material for the Briefing on The International Outlook Beth Anne Wilson Exhibits by Meghan Letendre October 31, 2017 142 of 171 October 31–November 1, 2017 Authorized for Public Release 143 of 171 Spillovers from Positive Foreign Environment • Since last Halloween • Foreign growth has surprised on the upside • Almost ½ ppt higher in 2016 and 2017 • And the dollar on the downside. • Level of the dollar is roughly 4¾ percent lower 10/31/2017 CLASS II FOMC-RESTRICTED (FR) Page 1 of 11 October 31–November 1, 2017 Authorized for Public Release 144 of 171 Boosting U.S. Net Exports • Consistent with firmer conditions abroad and a weaker dollar, exports have come in stronger • While imports have been surprisingly weak. • Leading to a sizable boost in the contribution of net exports to GDP. 10/31/2017 CLASS II FOMC-RESTRICTED (FR) Page 2 of 11 October 31–November 1, 2017 Authorized for Public Release 145 of 171 Supporting Domestic Markets • Benign foreign conditions have boosted foreign equities • And contributed to strong performance of U.S. firms, especially those with a relatively high share of foreign sales. 10/31/2017 CLASS II FOMC-RESTRICTED (FR) Page 3 of 11 October 31–November 1, 2017 Authorized for Public Release 146 of 171 Supporting Domestic Markets • Also contributed to low volatility in the United States. • Positive correlation between probability of foreign recessions and option-implied volatility in U.S. equity markets. • Models of the VIX that include foreign factors account much better for its current low level than do models relying only on U.S. variables. 10/31/2017 CLASS II FOMC-RESTRICTED (FR) Page 4 of 11 October 31–November 1, 2017 Authorized for Public Release 147 of 171 Accommodative Policy Abroad • Policy rates in the AFEs have remained low and balance sheets continue to rise. • Anticipate only a very gradual reduction in AFE policy accommodation. 10/31/2017 CLASS II FOMC-RESTRICTED (FR) Page 5 of 11 October 31–November 1, 2017 Authorized for Public Release 148 of 171 Likely Lowers U.S. Rates • Event-study analysis around ECB announcements finds positive relationship between changes in German and U.S. 10-year yields. • Comparable exercises for other AFEs suggests average pass-through of ½. • This finding, combined with estimates of impact of foreign QE on owncountry rates, suggests foreign purchases have likely pushed U.S. 10year yields down noticeably relative to where they would be otherwise. 10/31/2017 CLASS II FOMC-RESTRICTED (FR) Page 6 of 11 October 31–November 1, 2017 Authorized for Public Release 149 of 171 Global Inflation Effect Less Clear • Do low inflation readings in the U.S. reflect the influence of a common global factor? • First principal component of core inflation across 9 advanced economies has explained a significant fraction of the variance of national inflation rates. • However, little evidence that low level of global inflation is responsible for the latest downtick in U.S. inflation. 10/31/2017 CLASS II FOMC-RESTRICTED (FR) Page 7 of 11 October 31–November 1, 2017 Authorized for Public Release 150 of 171 We Could Still be Tricked: Bounceback in AFE Inflation • AFE inflation could jump and central banks respond aggressively. • If that happens, we think sovereign bond yields would rise, credit spreads widen, and the dollar fall as market participants quickly reposition. • Financial stresses and lower growth abroad would weigh on U.S. growth and inflation, despite weaker dollar. 10/31/2017 CLASS II FOMC-RESTRICTED (FR) Page 8 of 11 October 31–November 1, 2017 Authorized for Public Release 151 of 171 Political Instability in Europe • Rise of populist and anti-establishment parties—as well as the Catalan independence movement—could cause political instability. • Could cause weakening of investor confidence in European institutions, leading to sizable flight-to-safety flows to dollar assets. • U.S. growth and inflation take a moderate hit. 10/31/2017 CLASS II FOMC-RESTRICTED (FR) Page 9 of 11 October 31–November 1, 2017 Authorized for Public Release 152 of 171 Other International Risks: International Financial Stability Matrix • Overall assessment remained “moderate.” • Some improvements: • Recovery in Brazilian growth. • Remaining concerns: • Debt levels in China. • New category, “Prominence of Risks”-- salient risks not well captured in standard matrix categories: • Geopolitical tensions in Korean peninsula. • NAFTA and elections in Mexico. Country IFSM Assessment October IFSM Assessment April Prominence of Risks Canada France Germany Italy Japan Switzerland United Kingdom Moderate Moderate Low Notable Moderate Moderate Moderate Moderate Moderate Low Notable Moderate Moderate Moderate Low Medium Medium High Medium Low High Brazil China Hong Kong Mexico South Korea Turkey Notable Notable Moderate Notable Low Elevated Elevated Notable Moderate Notable Low Elevated High Medium Medium High High High IFSM Assessment Key: Extremely Subdued Low 10/31/2017 Low Moderate Notable Elevated Prominence of Risks Key: CLASS II FOMC-RESTRICTED (FR) Medium High Page 10 of 11 October 31–November 1, 2017 Authorized for Public Release 153 of 171 Transmission of Stress to United States • New tool based on myriad of • judgmental and • quantitative assessments. •Transmission to the U.S. is stronger from AFEs • Bigger markets, more GSIFIs. • The EME exception is China. • Good news • AFEs tend to have lower vulnerabilities and prominence of risks. • But EMEs could still strike fear in global markets. 10/31/2017 Country Transmission to U.S. Judgmental Quantitative Canada France Germany Italy Japan Switzerland United Kingdom Moderate Strong Strong Moderate Moderate Strong Strong Moderate Strong Strong Moderate Moderate Strong Strong Brazil China Hong Kong Mexico South Korea Turkey Weak Strong Weak Weak Weak Weak Weak Moderate Moderate Weak Weak Weak CLASS II FOMC-RESTRICTED (FR) Page 11 of 11 October 31–November 1, 2017 Authorized for Public Release Appendix 4: Materials used by Mr. Covitz 154 of 171 October 31–November 1, 2017 Authorized for Public Release Class II FOMC – Restricted (FR) Material for the Briefing on Financial Stability Developments Daniel M. Covitz October 31, 2017 155 of 171 October 31–November 1, 2017 Authorized for Public Release 156 of 171 Valuation Pressures Class II FOMC - Restricted FR October 31, 2017 Equity Price to Forward Earnings Ratios Summary Ratio (logged scale) Monthly 30 25 Valuation pressures have increased a bit further from elevated levels. Oct. 20 15 Valuations appear somewhat stretched, even controlling for low interest rates. S&P 500 Small cap. 2000 1987 1992 1997 2002 10 2007 2012 2017 Source: Staff calculations using data from Thomson Reuters Financial. Equity Risk Premium Risk Premium on High−Yield Bonds Percentage points Monthly 1992 16 12 14 Expected real yield on 10−year Treasury 10 12 8 10 6 8 4 6 2 4 1997 2002 2007 2012 2017 0 −2 Source: Staff estimate. Percentage points 3−month moving average 4 Office Industrial Retail Multifamily Source: Real Capital Analytics. 1997 2001 2005 2009 2013 2017 7 5 2008 1993 Empirical Estimates of Potential Price Drops 6 2005 Q3 Source: Staff estimates using BofA Merrill Lynch data. Spread of Capitalization Rate at Origination to Treasury Yield 2002 Percentage Points Quarter−end Expected 10−year real equity return Oct. 1987 14 2011 2014 Aug. 2017 3 2 1 0 Page 1 of 3 Estimated distributions of two−year−ahead asset−price changes, unconditionally and conditional on valuations. Results suggest negative moves could be larger now. Equities: Unconditional 10th percentile is −16 percent, conditional is −36 percent. High−yield corporate bonds: Unconditional 90th percentile of yield changes is 175 bps, conditional is 300 bps. 2 0 October 31–November 1, 2017 Authorized for Public Release 157 of 171 Leverage and Maturity/Liquidity Transformation Class II FOMC - Restricted FR October 31, 2017 Private Nonfinancial Sector Credit−to−GDP Summary Ratio Quarterly Business corporate Business non−corporate Household Nonfinancial leverage remained moderate, on balance. 2.0 1.6 1.2 Financial leverage continued to be low. Q2 Maturity and liquidity transformation remained low. 0.8 0.4 1981 1987 1993 1999 2005 2011 0.0 2017 Source: Financial Accounts of the United States and NIPA. Net Business Leverage Financial Leverage and Liquidity Percent 55 Quarterly All firms 75th percentile 50 Banks substantially increased capital and liquidity cushions with post−crisis reforms. 45 40 Insurance companies well capitalized, though pockets of vulnerabilities exist related to FABS and securities lending programs. 35 Q2 30 25 20 September Senior Credit Officer Opinion Survey showed a modest net fraction of dealers reported hedge funds increased leverage. 15 10 1999 2005 2011 5 2017 Source: Compustat. Private Label Securitization Issuance Asset Backed Commercial Paper Outstanding Billions of dollars Quarterly CDOs RE−REMICS (RMBS) First lien RMBS Home equity Subprime mortgages RE−REMICS (CMBS) CMBS (non−Agency) Consumer Credit Other 600 Weekly* Billions of dollars 1200 500 1000 400 800 300 600 200 Q3 2005 2007 2009 2011 2013 2015 2017 Source: Asset−Backed Alert, Commercial Mortgage. 1400 400 Oct. 23 100 0 Page 2 of 3 2002 2005 2008 2011 2014 2017 * Four−week moving average. Source: Federal Reserve Board using data from DTCC. 200 0 October 31–November 1, 2017 Authorized for Public Release 158 of 171 October 31, 2017 Class II FOMC - Restricted FR Staff Judgment on Levels of Vulnerabilities Key: Extremely subdued Low Moderate Notable Elevated Notes: Heat map color assignments were made by staff judgment. In the absence of significant structural changes, we would expect vulnerabilities to spend roughly equal proportions of time in each of the colored risk buckets. October 2016 • • Valuation Pressures • 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 July 2017 • • • • • Private Nonfinancial Sector Leverage • • • Financial Sector Leverage • • • Maturity and Liquidity Transformation Overall Assessment • • 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 continues 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 run-risk, remains at some openend bond mutual funds • • • • • • October 2017 The equity price-to-earnings ratio is near its highest value outside of the dot-com era High-yield corporate bond spreads to Treasury yields have decreased further, while issuance of bonds and leveraged loans has been robust CRE prices are at historic highs, and capitalization rates are historically low and declining Treasury term premiums remain subdued. Asset valuations appear less excessive, but still stretched, when compared to the current low Treasury yields • Leverage in the nonfinancial corporate sector remains elevated The growth of corporate debt is contributing to slight increases in the credit-to-GDP ratio However, overall nonfinancial sector leverage continues to be well below trend by most estimates • Capital positions at banks and insurance companies remain at high levels Available indicators of leverage at other nonbank financial institutions are little changed • Large BHCs’ holdings of liquid assets remain at high levels There has been little growth outside of government funds in potential substitutes for prime money market funds Insurance companies have seen growth in nontraditional liabilities and their securities lending programs • Page 3 of 3 • • • • • • • • The equity price-to-earnings ratio is near its highest value outside the dotcom era and has edged up further Corporate bond spreads to Treasury yields have compressed a little further, while standards and terms on leveraged loans have deteriorated over the last year CRE prices have continued to rise, although bank lending standards for CRE loans have tightened somewhat Asset valuations appear less excessive, but still stretched, when compared to current low Treasury yields Leverage in the nonfinancial corporate sector remains elevated, but risky debt outstanding has edged down Household borrowing has moved up mainly for prime borrowers Overall nonfinancial sector leverage continues to be below trend by most estimates Capital positions at banks and insurance companies remain at high levels Available indicators of leverage at other nonbank financial institutions are mostly little changed, though there are some signs of leverage increasing Large BHCs’ holdings of liquid assets remain at high levels There has been little growth outside of government funds in potential substitutes for prime money market funds Insurance companies continue to grow their nontraditional liabilities, albeit at a slower pace in most categories October 31–November 1, 2017 Authorized for Public Release Appendix 5: Materials used by Mr. Laubach 159 of 171 October 31–November 1, 2017 Authorized for Public Release Class I FOMC – Restricted Controlled (FR) Material for the Briefing on Monetary Policy Alternatives Thomas Laubach Exhibits by Laurie Khalfan October 31–November 1, 2017 160 of 171 October 31–November 1, 2017 Authorized for Public Release 161 of 171 Uncertainty, Risks, and Policy Choices Current Areas of Uncertainty Uncertainty and Policy Strategies * Is u * lower than you currently estimate? Level of u consistent with stable inflation. How much resource pressure will be required to return inflation to 2 percent? Two key parameters of the Phillips curve: Resource utilization−inflation link. Could prolonged, tight resource utilization lead to financial instability or a rapid increase in inflation? Persistence of movements in inflation. Three policy strategies. What is the probability of achieving a "soft landing"? Tradeoffs depend on prevalence of supply shocks. Uncertainty and Misperception about u * Steeper Phillips Curve Previous research: if u * is uncertain, appropriate to focus more strongly on stabilizing inflation. Under any strategy, unemployment undershooting generates a larger shift up in inflation. This strategy has less force in current circumstances; baseline outlook has: Inflation below 1 percent or above 4 percent unlikely. But moving inflation closer to target is costly in terms of unemployment. Significant undershooting of unemployment and inflation. A balanced−approach rule outperforms a rule that responds strongly to inflation. A very flat short−run Phillips curve. Additional Considerations Policy Implications Alternative B: Acknowledges downside inflation miss; With a strong labor market and stable inflation expectations, gradual path of rate hikes remains appropriate. Alternative A: More forceful policy response to low inflation appropriate. Alternative C: Need to slow employment and real activity to sustainable rates. Could inflation expectations erode? Is the loss function symmetric? Is undershooting unemployment less costly than overshooting? Could low unemployment lead to the emergence of financial stability risks or hysteresis effects? Page 1 of 11 October 31–November 1, 2017 Authorized for Public Release 162 of 171 SEPTEMBER 2017 FOMC STATEMENT 1. Information received since the Federal Open Market Committee met in July indicates that the labor market has continued to strengthen and that economic activity has been rising moderately so far this year. Job gains have remained solid in recent months, and the unemployment rate has stayed low. Household spending has been expanding at a moderate rate, and growth in business fixed investment has picked up in recent quarters. On a 12-month basis, overall inflation and the measure excluding food and energy prices have declined this year and are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longerterm inflation expectations are little changed, on balance. 2. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Hurricanes Harvey, Irma, and Maria have devastated many communities, inflicting severe hardship. Storm-related disruptions and rebuilding will affect economic activity in the near term, but past experience suggests that the storms are unlikely to materially alter the course of the national economy over the medium term. Consequently, the Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, and labor market conditions will strengthen somewhat further. Higher prices for gasoline and some other items in the aftermath of the hurricanes will likely boost inflation temporarily; apart from that effect, inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee’s 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely. 3. In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1 to 1- 1/4 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation. 4. In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data. Page 2 of 11 October 31–November 1, 2017 Authorized for Public Release 163 of 171 5. In October, the Committee will initiate the balance sheet normalization program described in the June 2017 Addendum to the Committee’s Policy Normalization Principles and Plans. Page 3 of 11 October 31–November 1, 2017 Authorized for Public Release 164 of 171 OCTOBER-NOVEMBER 2017 ALTERNATIVE A 1. Information received since the Federal Open Market Committee met in July September indicates that, apart from hurricane-related disruptions, the labor market has continued to strengthen and that economic activity has been rising moderately so far this year. Job gains have remained solid in recent months Although the hurricanes caused a drop in payroll employment in September, and the unemployment rate has stayed low declined further. Household spending has been expanding at a moderate rate, and growth in business fixed investment has picked up in recent quarters. Gasoline prices rose in the aftermath of the hurricanes, boosting overall inflation in September; however, inflation for items other than food and energy remained soft. On a 12-month basis, overall inflation and the measure excluding food and energy prices both inflation measures have declined this year and are running below 2 percent. Market-based measures of inflation compensation remain low; surveybased 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. Hurricanes Harvey, Irma, and Maria have devastated many communities, inflicting severe hardship. Storm Hurricanerelated disruptions and rebuilding will continue to affect economic activity, employment, and inflation in the near term, but past experience suggests that the storms are unlikely to materially alter the course of the national economy over the medium term. Consequently, The Committee continues to expects that, with gradual adjustments in the stance of appropriate monetary policy accommodation, economic activity will expand at a moderate pace, and labor market conditions will strengthen somewhat further. Higher prices for gasoline and some other items in the aftermath of the hurricanes will likely boost inflation temporarily; apart from that effect, Inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee’s 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely. 3. In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1 to 1-1/4 percent while assessing incoming information that bears on the outlook for inflation. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation. 4. In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures Page 4 of 11 October 31–November 1, 2017 Authorized for Public Release 165 of 171 and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data. 5. In October, the Committee will initiate the balance sheet normalization program described in the June 2017 Addendum to the Committee’s Policy Normalization Principles and Plans. [ The balance sheet normalization program initiated in October 2017 is proceeding. ] Page 5 of 11 October 31–November 1, 2017 Authorized for Public Release 166 of 171 OCTOBER-NOVEMBER 2017 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 that economic activity has been rising moderately so far this year at a solid rate despite hurricane-related disruptions. Job gains have remained solid in recent months Although the hurricanes caused a drop in payroll employment in September, and the unemployment rate has stayed low declined further. Household spending has been expanding at a moderate rate, and growth in business fixed investment has picked up in recent quarters. Gasoline prices rose in the aftermath of the hurricanes, boosting overall inflation in September; however, inflation for items other than food and energy remained soft. On a 12-month basis, overall inflation and the measure excluding food and energy prices both inflation measures have declined this year and are running below 2 percent. Market-based measures of inflation compensation remain low; surveybased 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. Hurricanes Harvey, Irma, and Maria have devastated many communities, inflicting severe hardship. Storm Hurricanerelated disruptions and rebuilding will continue to affect economic activity, employment, and inflation in the near term, but past experience suggests that the storms are unlikely to materially alter the course of the national economy over the medium term. Consequently, the Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, and labor market conditions will strengthen somewhat further. Higher prices for gasoline and some other items in the aftermath of the hurricanes will likely boost inflation temporarily; apart from that effect, Inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee’s 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely. 3. In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1 to 1-1/4 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation. 4. In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures Page 6 of 11 October 31–November 1, 2017 Authorized for Public Release 167 of 171 and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data. 5. In October, the Committee will initiate the balance sheet normalization program described in the June 2017 Addendum to the Committee’s Policy Normalization Principles and Plans. [ The balance sheet normalization program initiated in October 2017 is proceeding. ] Page 7 of 11 October 31–November 1, 2017 Authorized for Public Release 168 of 171 OCTOBER-NOVEMBER 2017 ALTERNATIVE C 1. Information received since the Federal Open Market Committee met in July September indicates that the labor market has continued to strengthen tighten and that economic activity has been rising moderately so far this year at a solid rate despite hurricane-related disruptions. Job gains have remained solid in recent months Although the hurricanes caused a drop in payroll employment in September, and the unemployment rate has stayed low declined further. Household spending has been expanding at a moderate rate, and growth in business fixed investment has picked up in recent quarters. Gasoline prices rose in the aftermath of the hurricanes, boosting overall inflation in September. On a 12-month basis, overall inflation and the measure excluding food and energy prices have declined this year and are running below 2 percent. Market-based measures of inflation compensation remain low; and survey-based measures of longer-term inflation expectations are little changed, on balance. 2. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Hurricanes Harvey, Irma, and Maria have devastated many communities, inflicting severe hardship. Storm Hurricane-related disruptions and rebuilding will continue to affect economic activity, employment, and inflation in the near term, but past experience suggests that the storms are unlikely to materially alter the course of the national economy over the medium term. Consequently, The Committee continues to expects that, with further gradual adjustments in the stance of reductions in monetary policy accommodation, growth in economic activity and employment will expand at a moderate pace to sustainable rates in the medium term, and labor market conditions will strengthen somewhat further. Higher prices for gasoline and some other items in the aftermath of the hurricanes will likely boost inflation temporarily; apart from that effect, Inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee’s 2 percent objective over the medium term. Nearterm risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely. 3. In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1 to 1¼ percent for the time being. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation. 4. In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Page 8 of 11 October 31–November 1, 2017 Authorized for Public Release 169 of 171 Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data. 5. In October, the Committee will initiate the balance sheet normalization program described in the June 2017 Addendum to the Committee’s Policy Normalization Principles and Plans. [ The balance sheet normalization program initiated in October 2017 is proceeding. ] Page 9 of 11 October 31–November 1, 2017 Authorized for Public Release 170 of 171 Implementation Note for October-November 2017 Alternatives A, B, and C Release Date: November 1, 2017 Decisions Regarding Monetary Policy Implementation The Federal Reserve has made the following decisions to implement the monetary policy stance announced by the Federal Open Market Committee in its statement on September 20 November 1, 2017: The Board of Governors of the Federal Reserve System voted [ unanimously ] to maintain the interest rate paid on required and excess reserve balances at 1.25 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 21 November 2, 2017, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 1 to 1-1/4 percent, including overnight reverse repurchase operations (and reverse repurchase operations with maturities of more than one day when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 1.00 percent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account that are available for such operations and by a percounterparty limit of $30 billion per day. The Committee directs the Desk to continue rolling over at auction Treasury securities maturing during September, and to continue reinvesting in agency mortgage-backed securities the principal payments received through September from the Federal Reserve’s holdings of agency debt and agency mortgage-backed securities. Effective in October 2017, 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 that exceeds $6 billion, and to continue reinvesting in agency mortgage-backed securities the amount of principal payments from the Federal Reserve’s holdings of agency debt and agency mortgage-backed securities received during each calendar month that exceeds $4 billion. Small deviations from these amounts for operational reasons are acceptable. Page 10 of 11 October 31–November 1, 2017 Authorized for Public Release 171 of 171 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 1.75 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 the details of operational plans for reducing reinvestments may be found on the Federal Reserve Bank of New York’s website. Page 11 of 11
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