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Minutes of the Federal Open Market Committee

July 31–August 1, 2018

A joint meeting of the Federal Open Market Committee Lorie K. Logan, Deputy Manager, System Open
and the Board of Governors was held in the offices of Market Account
the Board of Governors of the Federal Reserve System
in Washington, D.C., on Tuesday, July 31, 2018, at Ann E. Misback, Secretary, Office of the Secretary,
10:00 a.m. and continued on Wednesday, August 1, Board of Governors
2018, at 9:00 a.m. 1
Matthew J. Eichner, 2 Director, Division of Reserve
PRESENT: Bank Operations and Payment Systems, Board of
Jerome H. Powell, Chairman Governors; Michael S. Gibson, Director, Division
John C. Williams, Vice Chairman of Supervision and Regulation, Board of
Thomas I. Barkin Governors; Andreas Lehnert, Director, Division of
Raphael W. Bostic Financial Stability, Board of Governors
Lael Brainard
Loretta J. Mester Rochelle M. Edge, Deputy Director, Division of
Randal K. Quarles Monetary Affairs, Board of Governors

James Bullard, Charles L. Evans, Esther L. George, Jon Faust, Senior Special Adviser to the Chairman,
Eric Rosengren, and Michael Strine, Alternate Office of Board Members, Board of Governors
Members of the Federal Open Market Committee
Antulio N. Bomfim, Special Adviser to the Chairman,
Patrick Harker, Robert S. Kaplan, and Neel Kashkari, Office of Board Members, Board of Governors
Presidents of the Federal Reserve Banks of
Philadelphia, Dallas, and Minneapolis, respectively Joseph W. Gruber and John M. Roberts, Special
Advisers to the Board, Office of Board Members,
Mark A. Gould, First Vice President, Federal Reserve Board of Governors
Bank of San Francisco
Linda Robertson, Assistant to the Board, Office of
James A. Clouse, Secretary Board Members, Board of Governors
Matthew M. Luecke, Deputy Secretary
David W. Skidmore, Assistant Secretary Christopher J. Erceg, Senior Associate Director,
Michelle A. Smith, Assistant Secretary Division of International Finance, Board of
Mark E. Van Der Weide, General Counsel Governors; Gretchen C. Weinbach, Senior
Michael Held, Deputy General Counsel Associate Director, Division of Monetary Affairs,
Steven B. Kamin, Economist Board of Governors
Thomas Laubach, Economist
David W. Wilcox, Economist Ellen E. Meade, Edward Nelson, and Robert J. Tetlow,
Senior Advisers, Division of Monetary Affairs,
Kartik B. Athreya, Thomas A. Connors, Mary Daly, Board of Governors; Jeremy B. Rudd, Senior
David E. Lebow, Trevor A. Reeve, Ellis W. Adviser, Division of Research and Statistics, Board
Tallman, William Wascher, and Beth Anne Wilson, of Governors
Associate Economists
John J. Stevens, Associate Director, Division of
Simon Potter, Manager, System Open Market Account Research and Statistics, Board of Governors

1The Federal Open Market Committee is referenced as the 2 Attended through the discussion of developments in finan-
“FOMC” and the “Committee” in these minutes. cial markets and open market operations.
Page 2 Federal Open Market Committee _

Luca Guerrieri, Deputy Associate Director, Division of A. Lee Smith, Senior Economist, Federal Reserve Bank
Financial Stability, Board of Governors of Kansas City

Glenn Follette and Shane M. Sherlund, Assistant Brent Meyer, Policy Advisor and Economist, Federal
Directors, Division of Research and Statistics, Reserve Bank of Atlanta
Board of Governors; Christopher J. Gust,
Assistant Director, Division of Monetary Affairs, Cristina Arellano, Monetary Advisor, Federal Reserve
Board of Governors Bank of Minneapolis

Penelope A. Beattie, 3 Assistant to the Secretary, Office

Monetary Policy Options at the Effective Lower
of the Secretary, Board of Governors
The staff provided a briefing that summarized its analy-
Etienne Gagnon, 4 Section Chief, Division of Monetary
sis of the extent to which some of the Committee’s mon-
Affairs, Board of Governors; Matthias Paustian,4
etary policy tools could provide adequate policy accom-
Section Chief, Division of Research and Statistics,
modation if, in future economic downturns, the policy
Board of Governors
rate were again to become constrained by the effective
lower bound (ELB). 5 The staff examined simulations
David H. Small, Project Manager, Division of
from the staff’s FRB/US model and various other eco-
Monetary Affairs, Board of Governors
nomic models to assess the likelihood of the policy rate
returning to the ELB and to evaluate how much addi-
Hess T. Chung,4 Group Manager, Division of Research
tional policy accommodation could be delivered by the
and Statistics, Board of Governors
current toolkit. This toolkit included threshold-based
forward-guidance policies, in which the Committee
Andrea Ajello, Edward Herbst, and Bernd Schlusche,4
communicates that the federal funds rate will remain at
Principal Economists, Division of Monetary
the ELB until either inflation or the unemployment rate
Affairs, Board of Governors
reaches a certain threshold, and balance sheet policies,
involving increases in the size or duration of the Federal
Randall A. Williams, Senior Information Manager,
Reserve’s asset holdings.
Division of Monetary Affairs, Board of Governors
The staff’s analysis indicated that under various policy
James M. Trevino,4 Technology Analyst, Division of rules, including those prescribing aggressive reductions
Monetary Affairs, Board of Governors in the federal funds rate in response to adverse economic
shocks, there was a meaningful risk that the ELB could
Michael Dotsey, Beverly Hirtle, and Christopher J. bind sometime during the next decade. That analysis
Waller, Executive Vice Presidents, Federal Reserve also implied that threshold-based forward guidance and
Banks of Philadelphia, New York, and St. Louis, balance sheet actions could provide additional accom-
respectively modation that could help support economic activity and
mitigate disinflationary pressures in these episodes. In
Anna Paulson, Senior Vice President, Federal Reserve the model simulations, because of unanticipated shocks
Bank of Chicago and lags in the transmission of the effects of monetary
policy actions on economic activity and inflation, the ef-
Joe Peek, Vice President, Federal Reserve Bank of fectiveness of monetary policy in general, including for-
Boston ward-guidance and balance sheet policies, was limited in
mitigating the initial downturn in the economy. The
Karel Mertens, Senior Economic Policy Advisor, staff noted that there was considerable uncertainty sur-
Federal Reserve Bank of Dallas rounding the estimated effects of those policies on the
economy; in addition, estimates of how frequently the

3Attended Tuesday session only. 5

In the analysis, the staff assumed that the ELB was 12.5 basis
4Attended through the discussion of monetary policy options points, equal to the midpoint of the target range for the federal
at the effective lower bound. funds rate from December 2008 to December 2015.
_ Minutes of the Meeting of July 31–August 1, 2018 Page 3

ELB could bind in the future differed across the models the federal funds rate. However, participants acknowl-
that the staff examined. edged that there may be limits to the effectiveness of
these tools in addressing an ELB episode. They also em-
In the discussion that followed the staff’s briefing, par-
phasized that there was considerable uncertainty about
ticipants generally agreed that their current toolkit could
the economic effects of these tools. Consistent with that
provide significant accommodation but expressed con-
view, a few participants noted that economic researchers
cern about the potential limits on policy effectiveness
had not yet reached a consensus about the effectiveness
stemming from the ELB. They viewed it as a matter of
of unconventional policies. A number of participants
prudent planning to evaluate potential policy options in
indicated that there might be significant costs associated
advance of such ELB events. Many participants com-
with the use of unconventional policies, and that these
mented on the monetary policy implications of the ap-
costs might limit, in particular, the extent to which the
parent secular decline in neutral real interest rates. That
Committee should engage in large-scale asset purchases.
decline was viewed as likely driven by various factors,
including slower trend growth of the labor force and Participants discussed the prominent role that previous
productivity as well as increased demand for safe assets. communications about forward guidance and balance
In such circumstances, those participants saw monetary sheet actions, in conjunction with those policy measures,
policy as having less scope than in the past to reduce the had in shaping public expectations about the potential
federal funds rate in response to negative shocks. Ac- future use of these tools and in determining their effec-
cordingly, in their view, spells at the ELB could become tiveness. In general, advance communications about
more frequent and protracted than in the past, con- these policies were seen as important in reinforcing pub-
sistent with the staff’s analysis. Moreover, the secular lic understanding of the Committee’s commitment to
decline in interest rates was a global phenomenon, and a achieving its dual-mandate objectives. However, several
couple of participants emphasized that this decline in- participants cautioned against being too specific about
creased the likelihood that the ELB could bind simulta- how the Committee would deploy such tools. In partic-
neously in a number of countries. A few other partici- ular, it was difficult to anticipate the forces that might
pants raised the concern that frequent or extended ELB push the economy into a recession, and thus preserving
episodes could result in expectations for inflation that some flexibility in responding to an economic downturn
were below the Committee’s symmetric 2 percent objec- could be appropriate. Moreover, although making mul-
tive, further limiting the scope for reductions in the fed- tiyear commitments regarding asset purchases or the fu-
eral funds rate to serve as a buffer for the economy and ture path of the federal funds rate could enhance the ef-
increasing the likelihood of ELB episodes. Fiscal policy fectiveness of these policies, such commitments could
was viewed as a potentially important tool in addressing unduly constrain the choices of the Committee in the
a future economic downturn in which monetary policy future.
was constrained by the ELB; however, countercyclical
While the Committee’s current toolkit was judged to be
fiscal policy actions in the United States may be con-
effective, participants agreed, as a matter of prudent
strained by the high and rising level of federal govern-
planning, to discuss their policy options further and to
ment debt. A couple of participants saw macropruden-
broaden the discussion to include the evaluation of po-
tial and regulatory policies as tools that could be used to
tential alternative policy strategies for addressing the
mitigate the risk of financial imbalances inducing an eco-
ELB. Building on their discussions at previous meet-
nomic downturn in which the ELB constrained the fed-
ings, participants suggested that a number of possible al-
eral funds rate.
ternatives might be worth consideration and agreed to
Participants generally agreed that both forward guidance return to this topic at future meetings. Several partici-
and balance sheet actions would be effective tools to use pants indicated that it would be desirable to hold peri-
if the federal funds rate were to become constrained by odic and systematic reviews in which the Committee as-
the ELB. In the Addendum to the Policy Normaliza- sessed the strengths and weaknesses of its current mon-
tion Principles and Plans statement issued in June 2017, etary policy framework.
the Committee indicated that it would be prepared to use
Developments in Financial Markets and Open Mar-
its full range of tools, including altering the size and
ket Operations
composition of its balance sheet, if future economic
The manager of the System Open Market Account
conditions were to warrant a more accommodative
(SOMA) provided a summary of developments in do-
monetary policy than can be achieved solely by reducing
Page 4 Federal Open Market Committee _

mestic and global financial markets over the intermeet- beginning in October. If principal payments followed
ing period. Asset prices were influenced by a number of this anticipated trajectory, the Desk planned to begin
factors, including reports concerning trade tensions conducting monthly small-value purchases of agency
among the United States and its major trading partners, MBS at that time to maintain operational readiness. The
foreign monetary policy developments, and data point- deputy manager also discussed the Federal Housing Fi-
ing to strong growth momentum in the United States. nance Agency’s Single Security Initiative, under which
Escalating trade tensions between China and the United Uniform Mortgage-Backed Securities (UMBS) would be
States prompted notable market moves, particularly in issued by both Fannie Mae and Freddie Mac beginning
foreign exchange markets. News on an agreement be- in June 2019. The Desk planned to develop the capabil-
tween the United States and the European Union to con- ity to conduct UMBS transactions and, to more effi-
tinue talks to resolve their trade disputes provided some ciently manage the portfolio, convert some portion of
support for global equity prices. The manager summa- the SOMA’s existing agency MBS holdings to UMBS
rized recent policy announcements by the where appropriate.
European Central Bank (ECB) and the Bank of Japan
By unanimous vote, the Committee ratified the Desk’s
(BOJ). European yields moved lower following a revi-
domestic transactions over the intermeeting period.
sion of the ECB’s forward guidance at its June meeting
There were no intervention operations in foreign curren-
concerning asset purchases and the path of short-term
cies for the System’s account during the intermeeting pe-
rates. The Japanese yield curve steepened following re-
ports that the BOJ may facilitate an increase in longer-
term interest rates. At its July meeting, the BOJ an- Staff Review of the Economic Situation
nounced a number of changes with respect to forward The information reviewed for the July 31–August 1
guidance on its policy outlook, including its intention to meeting indicated that labor market conditions contin-
keep interest rates low for an extended period. Mean- ued to strengthen in recent months and that real gross
while, expectations concerning the path of monetary domestic product (GDP) rose at a strong rate in the first
policy in the United States were little changed over the half of the year. Consumer price inflation, as measured
intermeeting period. Futures quotes indicated that mar- by the 12-month percentage change in the price index
ket participants placed high odds on a further quarter- for personal consumption expenditures (PCE), re-
point firming in the federal funds rate at the September mained near 2 percent in June. Survey-based measures
FOMC meeting. Responses to the Open Market Desk’s of longer-run inflation expectations were little changed
Survey of Primary Dealers and Survey of Market Partic- on balance.
ipants indicated that concerns about trade tensions had
Total nonfarm payroll employment expanded at a strong
not affected the outlook for U.S. monetary policy.
pace again in June. The national unemployment rate
The deputy manager followed with a discussion of moved up to 4.0 percent, but the labor force participa-
money markets and open market operations. Money tion rate rose by a similar amount, leaving the employ-
market rates had moved up in line with the 20 basis point ment-to-population ratio unchanged from May. The
increase in the interest on excess reserves (IOER) rate at three-month moving averages of the unemployment
the June meeting. Over the days following the June rates for African Americans, Asians, and Hispanics were
FOMC meeting, the effective federal funds rate (EFFR) each at or below the lows achieved during the previous
moved up relative to the IOER rate, reportedly reflect- expansion. The share of workers employed part time for
ing some special factors in the federal funds market, in- economic reasons edged down to its lowest level since
cluding increased demand for overnight funding by late 2007. The rate of private-sector job openings ticked
banks in connection with liquidity regulations and a pull- down in May but remained elevated, while the rate of
back by Federal Home Loan Banks in their lending in quits moved higher; initial claims for unemployment in-
the federal funds market. These developments proved surance benefits continued to be low through mid-July.
temporary, and the EFFR subsequently returned to a
Recent readings showed that increases in hourly labor
level about 4 basis points below the IOER rate. The
compensation stepped up modestly over the past year.
deputy manager also discussed the Desk’s plans for
The employment cost index for private workers in-
small-value purchases of agency mortgage-backed secu-
creased 2.9 percent over the 12 months ending in June
rities (MBS). The staff projected that principal payments
(compared with 2.4 percent over the same 12 months a
from the Federal Reserve’s holdings of agency MBS
year earlier), and average hourly earnings for all employ-
would fall below the FOMC’s monthly redemption cap
ees rose 2.7 percent over that period (compared with
_ Minutes of the Meeting of July 31–August 1, 2018 Page 5

2.5 percent over the same 12 months a year earlier). drilling and mining sector—decreased slightly in recent
(Data on compensation per hour that reflected the com- weeks.
prehensive revision of the national income and product
Total real government purchases rose at a faster rate in
accounts by the Bureau of Economic Analysis (BEA)
the second quarter than in the first. Real federal defense
were not available at the time of the meeting.)
and nondefense purchases both increased in the second
Total industrial production was little changed, on net, quarter. Real purchases by state and local governments
from April to June despite solid increases in the output also moved higher; state and local government payrolls
of the mining sector. Over the first half of the year, and construction spending by those governments in-
manufacturing production rose at a modest pace. creased in the second quarter.
Automakers’ assembly schedules suggested a sizable in-
The nominal U.S. international trade deficit narrowed in
crease in light motor vehicle production in the third
May, as exports, led by agricultural products (particularly
quarter, and broader indicators of manufacturing pro-
soybeans) and capital goods, increased strongly and im-
duction, such as the new orders indexes from national
ports increased only modestly. In June, however, ad-
and regional manufacturing surveys, pointed to solid
vance data suggested that nominal goods exports fell and
gains in factory output in the near term.
imports rose. All told, the BEA estimates that net ex-
Real PCE rose briskly in the second quarter after a mod- ports made a positive contribution of about
est gain in the first quarter. Light motor vehicle sales 1 percentage point to real GDP growth in the second
maintained a robust pace in June, and indicators of ve- quarter after a near-zero contribution in the first.
hicle demand were mixed but generally favorable. More
Total U.S. consumer prices, as measured by the PCE
broadly, recent readings on key factors that influence
price index, increased 2.2 percent over the 12 months
consumer spending—including gains in employment,
ending in June. Core PCE price inflation, which ex-
real disposable personal income, and households’ net
cludes changes in consumer food and energy prices, was
worth—continued to be supportive of solid real PCE
1.9 percent over that same period. The consumer price
growth in the near term. Consumer sentiment, as meas-
index (CPI) rose 2.9 percent over the 12 months ending
ured by the University of Michigan Surveys of Consum-
in June, while core CPI inflation was 2.3 percent. Recent
ers, remained upbeat in June and July.
readings on survey-based measures of longer-run infla-
Residential investment declined again in the second tion expectations—including those from the Michigan
quarter. Starts for new single-family homes were little survey and the Desk’s Survey of Primary Dealers and
changed, on average, in May and June, but starts of mul- Survey of Market Participants—were little changed on
tifamily units declined on net. The issuance of building balance.
permits for both types of housing was lower in the sec-
Incoming data suggested that foreign economic activity
ond quarter than in the first quarter, which suggested
expanded at a moderate pace in the second quarter.
that starts might move lower in coming months. Sales
Monthly indicators pointed to a pickup in the pace of
of existing homes edged down in May and June, while
economic activity in most advanced foreign economies
sales of new homes moved up on balance.
(AFEs) following a temporary dip in the first quarter.
Real private expenditures for business equipment and in- However, real GDP growth remained moderate in the
tellectual property rose at a moderate pace in the second euro area and appeared to have slowed notably in many
quarter after a strong gain in the first quarter. Nominal emerging market economies (EMEs), especially Mexico,
shipments of nondefense capital goods excluding air- from an unusually strong start to the year. Foreign in-
craft rose in May and June, and forward-looking indica- flation fell in the second quarter, largely reflecting lower
tors of business equipment spending—such as the back- retail energy and food price inflation. Underlying infla-
log of unfilled capital goods orders, along with upbeat tion pressures in most foreign economies, especially in
readings on business sentiment from national and re- some AFEs, remained subdued.
gional surveys—continued to point to robust gains in
Staff Review of the Financial Situation
equipment spending in the near term. Real business ex-
Concerns regarding international trade policy weighed
penditures for nonresidential structures expanded at a
on market sentiment at times over the intermeeting pe-
solid pace again in the second quarter. However, the
riod, prompting notable declines in some foreign equity
number of crude oil and natural gas rigs in operation—
markets but leaving only a modest imprint on domestic
an indicator of business spending for structures in the
asset prices on net. Meanwhile, FOMC communications
Page 6 Federal Open Market Committee _

were viewed by market participants as slightly less ac- The dollar appreciated against most currencies, with the
commodative than expected, and domestic economic notable exception of the Mexican peso, which appreci-
data releases were seen as mixed. On balance, market- ated on some easing of investor concerns around pro-
based measures of the expected path of the federal funds spective economic policies of the newly elected govern-
rate through the end of 2019 edged up slightly. Yields ment. Escalating trade tensions contributed to an unu-
on medium- and longer-term nominal Treasury securi- sually sharp depreciation of the Chinese renminbi.
ties were little changed. The broad dollar index moved Trade tensions also drove foreign equity prices lower,
up. Financing conditions for nonfinancial businesses but there was a modest reversal late in the intermeeting
and households remained supportive of economic activ- period following an agreement between the United
ity on balance. States and the European Union to hold off on tariff in-
creases pending further negotiations. On net, equity
Although the reactions of asset prices to FOMC com-
prices were little changed in the AFEs, while they de-
munications during the period were generally modest,
clined in the EMEs, led largely by a steep drop in China.
market participants reportedly interpreted the June
Outflows from dedicated emerging market funds
FOMC statement and Summary of Economic Projec-
slowed, and EME sovereign bond spreads narrowed
tions (SEP) as somewhat less accommodative than ex-
pected. The probability of an increase in the target range
for the federal funds rate occurring at the August FOMC On balance, longer-term bond yields in the AFEs de-
meeting, as implied by quotes on federal funds futures clined slightly over the intermeeting period. ECB com-
contracts, remained close to zero; the probability of an munications following its June meeting were perceived
increase at the September FOMC meeting rose to about as more accommodative than expected and led to a no-
90 percent by the end of the intermeeting period. Levels ticeable decline in market-based measures of policy rate
of the federal funds rate at the end of 2019 and 2020 expectations. The BOJ issued revised forward guidance
implied by overnight index swap (OIS) rates edged up at its July meeting indicating that it intends to maintain
slightly on net. current low short- and long-term interest rates for an ex-
tended period. Finally, the Bank of England held its pol-
The nominal Treasury yield curve flattened somewhat
icy rate steady at its June meeting, but U.K. yields de-
during the intermeeting period. Measures of inflation
clined slightly amid ongoing Brexit-related concerns as
compensation derived from Treasury Inflation-
well as lower-than-expected inflation data.
Protected Securities were little changed on net.
Financing conditions for nonfinancial corporations con-
Concerns about international trade disputes led to a
tinued to be favorable over the intermeeting period.
slight decline in sentiment toward some domestic risky
Gross issuance of corporate bonds and institutional lev-
assets early in the period, but sentiment was buoyed later
eraged loans picked up in May and stayed strong in June,
by positive corporate earnings releases for the second
with the rise in corporate bond issuance concentrated in
quarter. Broad U.S. equity price indexes displayed mixed
the investment-grade segment of the market. Mean-
results since the June FOMC meeting. Option-implied
while, the volume of equity issuance remained robust.
volatility on the S&P 500 index at the one-month hori-
zon—the VIX—was little changed, on net, and re- Growth of outstanding commercial and industrial (C&I)
mained only a bit above the very low levels that prevailed loans held by banks was strong, on average, in June. Re-
before early February. Over the intermeeting period, spondents to the June Senior Loan Officer Opinion Sur-
spreads of yields on nonfinancial corporate bonds over vey on Bank Lending Practices (SLOOS) reported that
those of comparable-maturity Treasury securities were their institutions had eased standards and terms on C&I
little changed, on net, for both investment- and specula- loans in the second quarter, most often citing increased
tive-grade firms. These spreads remained low by histor- competition from other lenders and increased ease of
ical standards. transacting in the secondary market as the reasons for
doing so. Although some signs of deterioration emerged
Short-term funding markets functioned smoothly, and
over the intermeeting period, the credit quality of nonfi-
spreads of unsecured rates over comparable-maturity
nancial corporations continued to be solid overall. The
OIS rates continued to narrow during the intermeeting
ratio of aggregate debt to assets in this sector stayed near
period. After the June FOMC meeting, the EFFR rose
multidecade highs. Gross issuance of municipal bonds
around 20 basis points, in line with the increase in the
in June was robust, continuing to increase from its slow
IOER rate, and traded well within the target range
start to the year.
throughout the period.
_ Minutes of the Meeting of July 31–August 1, 2018 Page 7

Financing conditions for commercial real estate (CRE) turity and liquidity transformation to be low, vulnerabil-
remained accommodative. CRE loans at banks main- ities from household leverage as being in the low-to-
tained solid growth over the past several quarters, with moderate range, and vulnerabilities from leverage in the
growth shared across all three major CRE loan catego- nonfinancial business sector as elevated.
ries. On a weighted basis across all major CRE loan cat-
Staff Economic Outlook
egories, respondents to the June SLOOS reported that
In the U.S. economic forecast prepared for this FOMC
standards and demand for CRE loans continued to be
meeting, the staff continued to project that the economy
unchanged, on the whole, over the second quarter. In-
would expand at an above-trend pace. Real GDP was
terest rate spreads on commercial mortgage-backed se-
forecast to increase in the second half of this year at a
curities (CMBS) were little changed over the intermeet-
pace that was just a little slower than in the first half of
ing period and remained near their post-crisis lows,
the year. Over the 2018–20 period, output was projected
while issuance of non-agency and agency CMBS main-
to rise further above the staff’s estimate of potential out-
tained a solid pace in the second quarter.
put, and the unemployment rate was projected to decline
Most borrowers in the residential mortgage market con- further below the staff’s estimate of the longer-run nat-
tinued to face accommodative financing conditions. For ural rate. However, with labor market conditions already
borrowers with low credit scores, credit conditions con- tight, the staff continued to assume that the projected
tinued to ease but stayed tight overall. Growth in home- decline in the unemployment rate will be attenuated by
purchase mortgages slowed a bit, and refinancing activ- a greater-than-usual cyclical improvement in the labor
ity continued to be muted over the past year, with both force participation rate. Relative to the forecast pre-
developments partly reflecting the rise in mortgage rates pared for the June meeting, the projection for real GDP
earlier this year. Relative to the June FOMC meeting, growth was revised up a little, primarily in response to
interest rates on 30-year conforming mortgages and stronger incoming data on household spending. In ad-
yields on agency MBS were little changed. dition, the staff continued to anticipate that supply con-
straints might restrain output growth somewhat in the
Financing conditions in consumer credit markets were
medium term. The unemployment rate was projected to
little changed so far this year, on balance, and remained
be a little higher over the next few quarters than in the
largely supportive of growth in household spending.
previous forecast, but it was essentially unrevised there-
Growth in consumer credit picked up in May from the
more moderate pace seen earlier this year. Despite rising
interest rates, financing rates remained low compared The staff forecast for total PCE price inflation in 2018
with historical levels, and recent household surveys indi- was revised down a little, mainly because of a slower-
cated that consumers’ assessments of buying conditions than-expected increase in consumer energy prices in the
for autos and other expensive durable goods were gen- second quarter and a downward revision to the forecast
erally positive. Credit supply conditions also continued for energy price inflation in the second half of this year.
to be largely supportive of spending. A moderate net The staff continued to project that total PCE inflation
fraction of July SLOOS respondents reported easing would remain near the Committee’s 2 percent objective
standards on auto loans over the previous three months over the medium term and that core PCE price inflation
after several quarters in which banks had reported tight- would run slightly higher than total inflation over that
ening standards. However, a significant net fraction of period because of a projected decline in consumer en-
banks reportedly continued to tighten standards for ergy prices in 2019 and 2020.
credit card accounts.
The staff viewed the uncertainty around its projections
The staff provided its latest report on potential risks to for real GDP growth, the unemployment rate, and infla-
financial stability; the report again characterized the fi- tion as similar to the average of the past 20 years. The
nancial vulnerabilities of the U.S. financial system as staff saw the risks to the forecasts for real GDP growth
moderate on balance. This overall assessment incorpo- and the unemployment rate as balanced. On the upside,
rated the staff’s judgment that vulnerabilities associated household spending and business investment could ex-
with asset valuation pressures continued to be elevated, pand faster over the next few years than the staff pro-
with no major asset class exhibiting valuations below jected, supported in part by the tax cuts enacted last year.
their historical midpoints. Additionally, the staff judged On the downside, trade policies could move in a direc-
vulnerabilities from financial-sector leverage and ma- tion that would have significant negative effects on eco-
nomic growth. Another possibility was that recent fiscal
Page 8 Federal Open Market Committee _

policy actions could produce less of a boost to aggregate scarcity of available lots in certain cities, and delays in
demand than assumed in the baseline projection, as the building approvals. However, a couple of participants
current tightness of resource utilization may result in reported vibrancy in industrial and multifamily construc-
smaller multiplier effects than would be typical at other tion activity. Business contacts in various sectors had
points in the business cycle. Risks to the inflation pro- cited labor shortages and other supply constraints as im-
jection also were seen as balanced. The upside risk that pediments to production. Furthermore, recent tariff in-
inflation could increase more than expected in an econ- creases had put upward pressure on input prices. Busi-
omy that was projected to move further above its poten- ness contacts in a few Districts reported that uncertainty
tial was counterbalanced by the downside risk that regarding trade policy had led to some reductions or de-
longer-term inflation expectations may be lower than lays in their investment spending. Nonetheless, a num-
was assumed in the staff forecast. ber of participants indicated that most businesses con-
cerned about trade disputes had not yet cut back their
Participants’ Views on Current Conditions and the
capital expenditures or hiring but might do so if trade
Economic Outlook
tensions were not resolved soon. Several participants
In their discussion of the economic situation and the
observed that the agricultural sector had been adversely
outlook, meeting participants agreed that information
affected by significant declines in crop and livestock
received since the FOMC met in June indicated that the
prices over the intermeeting period. A couple of partic-
labor market had continued to strengthen and that eco-
ipants noted that this development likely partly flowed
nomic activity had been rising at a strong rate. Job gains
from trade tensions.
had been strong, on average, in recent months, and the
unemployment rate had stayed low. Household spend- Participants agreed that labor market conditions had
ing and business fixed investment had grown strongly. strengthened further over the intermeeting period. Pay-
On a 12-month basis, both overall inflation and core in- rolls had grown strongly in June, and labor market tight-
flation, which excludes changes in food and energy ness was reflected in recent readings on rates of private-
prices, had remained near 2 percent. Indicators of sector job openings and quits and on job-to-job switch-
longer-term inflation expectations were little changed, ing by workers. Although the unemployment rate in-
on balance. creased slightly in June, this increase was accompanied
by an uptick in the labor force participation rate.
Participants generally noted that economic growth in the
second quarter had been strong; incoming data indicated Many participants commented on the fact that measures
considerable momentum in spending by households and of aggregate nominal wage growth had so far picked up
businesses. Several participants stressed the possibility only modestly. Among the factors cited as containing
that real GDP growth in the second quarter may have the pickup in wage growth were low trend productivity
been boosted by transitory factors, including an outsized growth, lags in the response of nominal wage growth to
increase in U.S. exports. For the second half of the year, resource pressures, and improvements in the terms of
participants generally expected that GDP growth would employment that were not recorded in the wage data.
likely slow from its second-quarter rate but would still Alternatively, the recent pace of nominal wage growth
exceed that of potential output. Participants noted a might indicate continued slack in the labor market.
number of favorable economic factors that were sup- However, some participants expected a pickup in aggre-
porting above-trend GDP growth; these included a gate nominal wage growth to occur before long, with a
strong labor market, stimulative federal tax and spending number of participants reporting that wage pressures in
policies, accommodative financial conditions, and con- their Districts were rising or that firms now exhibited
tinued high levels of household and business confidence. greater willingness to grant wage increases.
Participants generally viewed the risks to the economic
Participants noted that both overall inflation and infla-
outlook as roughly balanced.
tion for items other than food and energy remained near
Reports from business contacts confirmed a robust pace 2 percent on a 12-month basis. A few participants ex-
of expansion in several sectors of the economy, includ- pressed increased confidence that the recent return of
ing energy, manufacturing, and services. Crude oil pro- inflation to near the Committee’s longer-term 2 percent
duction was reported as having grown rapidly. In con- objective would be sustained. Several participants com-
trast to other sectors, residential construction activity ap- mented that increases in the prices of particular goods,
peared to have softened somewhat, possibly reflecting such as those induced by the tariff increases, would likely
declining home affordability, higher mortgage rates,
_ Minutes of the Meeting of July 31–August 1, 2018 Page 9

be one source of short-term upward pressure on the in- significant weakening in the housing sector, a sharp in-
flation rate, although offsetting influences—including crease in oil prices, or a severe slowdown in EMEs.
the negative effects that trade developments were having
Participants remarked on the extent to which financial
on agricultural prices—were also noted. Reports from
conditions remained supportive of economic expansion.
several Districts suggested that firms had greater scope
Over the intermeeting period, only a small change in
than in the recent past to raise prices in response to
overall financial conditions occurred, with modest
strong demand or increases in input costs, including
movements on net in equity prices and in the foreign
those associated with tariff increases and recent rises in
exchange value of the dollar. The yield curve had flat-
fuel and freight expenses. Many participants anticipated
tened further over the intermeeting period.
that, over the medium term, high levels of resource
utilization and stable inflation expectations would keep Participants who commented on financial stability noted
inflation near 2 percent. However, some participants that asset valuations remained elevated and corporate
observed that inflation in recent years had shown only a borrowing terms remained easy. They also noted that
weak connection to measures of resource pressures or regulatory changes introduced in the past decade had
indicated that they would like to see further evidence helped to reduce the susceptibility of the financial sector
that measures of underlying inflation or readings on in- to runs and to strengthen the capital positions of banks
flation expectations were on course to attain levels con- and other financial institutions. In discussing the capital
sistent with sustained achievement of the Committee’s positions of large banks, a few participants emphasized
symmetric 2 percent inflation objective. Although a few that financial stability risks could be reduced if these in-
participants observed that the trimmed mean measure of stitutions further boosted their capital cushions while
inflation calculated by the Federal Reserve Bank of Dal- their profits are strong and the economic outlook is fa-
las was still below 2 percent, a couple noted forecasts vorable; arguments for and against the activation of the
that this measure would reach 2 percent by the end of countercyclical capital buffer as a means of further
the year. Some participants raised the concern that a strengthening the capital positions of large banks were
prolonged period in which the economy operated be- discussed in this context.
yond potential could give rise to inflationary pressures
In their consideration of monetary policy, participants
or to financial imbalances that could eventually trigger
discussed the implications of recent economic and finan-
an economic downturn.
cial developments for the economic outlook and the as-
Participants commented on a number of risks and un- sociated risks to that outlook. Participants remarked on
certainties associated with their outlook for economic recent above-trend growth in real GDP and on indica-
activity, the labor market, and inflation over the medium tors of resource utilization. Some commented that con-
term. They generally continued to see fiscal policy and sumer spending had been quite strong in the second
the strengthening of the labor market as supportive of quarter, confirming their impressions that the first-quar-
economic growth in the near term. Some noted larger ter weakness had been temporary. Several participants
or more persistent positive effects of these factors as an also pointed to the continued strength in business fixed
upside risk to the outlook. A few participants indicated, investment, although the persistent weakness and the
however, that a faster-than-expected fading of the fiscal risk of a further slowdown in residential investment were
impetus or a greater-than-anticipated subsequent fiscal also noted. A few participants suggested there could still
tightening constituted a downside risk. In addition, all be some labor market slack, citing recent increases in la-
participants pointed to ongoing trade disagreements and bor force participation rates relative to prevailing demo-
proposed trade measures as an important source of un- graphically driven downward trends; the participation
certainty and risks. Participants observed that if a large- rate of prime-age men, in particular, was still below its
scale and prolonged dispute over trade policies devel- previous business cycle peak. Other participants judged
oped, there would likely be adverse effects on business that labor market conditions were tight, pointing to
sentiment, investment spending, and employment. other data, including job quits and openings rates, and
Moreover, wide-ranging tariff increases would also re- anecdotes from contacts.
duce the purchasing power of U.S. households. Further Participants generally characterized inflation as running
negative effects in such a scenario could include reduc- close to the Committee’s objective of 2 percent, and
tions in productivity and disruptions of supply chains. most of those who expressed a view indicated that recent
Other downside risks cited included the possibility of a readings on inflation had come in close to their expecta-
tions. Consistent with their SEP submissions in June,
Page 10 Federal Open Market Committee _

several participants remarked that inflation, measured on United States that inversions of the yield curve have of-
a 12-month basis, was likely to move modestly above the ten preceded recessions. They suggested that policy-
Committee’s objective for a time. Others pointed to makers should pay close attention to the slope of the
some indicators suggesting that long-term inflation ex- yield curve in assessing the economic and policy outlook.
pectations could be below levels consistent with the Other participants emphasized that inferring economic
Committee’s 2 percent inflation objective. causality from statistical correlations was not appropri-
ate. A number of global factors were seen as contrib-
Participants generally judged that the current stance of
uting to downward pressure on term premiums, includ-
monetary policy remained accommodative, supporting
ing central bank asset purchase programs and the strong
strong labor market conditions and inflation of around
worldwide demand for safe assets. In such an environ-
2 percent. Participants agreed that it would be appropri-
ment, an inversion of the yield curve might not have the
ate for the Committee to leave the target range for the
significance that the historical record would suggest; the
federal funds rate unchanged at this meeting.
signal to be taken from the yield curve needed to be con-
With regard to the medium term, various participants in- sidered in the context of other economic and financial
dicated that information gathered since the Committee indicators.
met in June had not significantly altered their outlook for
A couple of participants commented on issues related to
the U.S. economy. Many participants suggested that if
the operating framework for the implementation of
incoming data continued to support their current eco-
monetary policy, including, among other things, the im-
nomic outlook, it would likely soon be appropriate to
plications of changes in financial market regulations for
take another step in removing policy accommodation.
the demand for reserves and for the size and composi-
Participants generally expected that further gradual in-
tion of the Federal Reserve’s balance sheet. These par-
creases in the target range for the federal funds rate
ticipants judged that it would be important for the Com-
would be consistent with a sustained expansion of eco-
mittee to resume its discussion of operating frameworks
nomic activity, strong labor market conditions, and in-
before too long. The Chairman suggested that the Com-
flation near the Committee’s symmetric 2 percent objec-
mittee would likely resume a discussion of operating
tive over the medium term. Many participants reiterated
frameworks in the fall.
that the actual path for the federal funds rate would ulti-
mately depend on the incoming data and on how those Many participants noted that it would likely be appropri-
data affect the economic outlook. ate in the not-too-distant future to revise the Commit-
tee’s characterization of the stance of monetary policy in
Participants discussed the economic forces and risks
its postmeeting statement. They agreed that the state-
they saw as providing the rationale for gradual increases
ment’s language that “the stance of monetary policy re-
in the federal funds rate as well as scenarios that might
mains accommodative” would, at some point fairly
cause them to depart from this expected path. Among
soon, no longer be appropriate. Participants noted that
other factors, they pointed to uncertainty about the ap-
the federal funds rate was moving closer to the range of
propriate level of the federal funds rate over the longer
estimates of its neutral level. A number of participants
run and to constraints on the provision of monetary ac-
emphasized the considerable uncertainty in estimates of
commodation during ELB episodes as reasons for pro-
the neutral rate of interest, stemming from sources such
ceeding gradually in the removal of accommodation.
as fiscal policy and large-scale asset purchase programs.
Some participants noted that stronger underlying mo-
Against this background, continuing to provide an ex-
mentum in the economy was an upside risk; most ex-
plicit assessment of the federal funds rate relative to its
pressed the view that an escalation in international trade
neutral level could convey a false sense of precision.
disputes was a potentially consequential downside risk
for real activity. Some participants suggested that, in the Committee Policy Action
event of a major escalation in trade disputes, the com- In their discussion of monetary policy for the period
plex nature of trade issues, including the entire range of ahead, members judged that information received since
their effects on output and inflation, presented a chal- the FOMC met in June indicated that the labor market
lenge in determining the appropriate monetary policy re- had continued to strengthen and that economic activity
sponse. had been rising at a strong rate. Job gains had been
strong, on average, in recent months, and the unemploy-
Participants also discussed the possible implications of a
ment rate had stayed low. Household spending and
flattening in the term structure of market interest rates.
business fixed investment had grown strongly. On a
Several participants cited statistical evidence for the
_ Minutes of the Meeting of July 31–August 1, 2018 Page 11

12-month basis, both overall inflation and inflation for available for such operations and by a per-coun-
items other than food and energy remained near 2 per- terparty limit of $30 billion per day.
cent. Indicators of longer-term inflation expectations
The Committee directs the Desk to continue
were little changed, on balance.
rolling over at auction the amount of principal
Policymakers viewed the recent data as indicating that payments from the Federal Reserve’s holdings
the outlook for the economy was evolving about as they of Treasury securities maturing during each cal-
had expected. Consequently, members expected that endar month that exceeds $24 billion, and to re-
further gradual increases in the target range for the fed- invest in agency mortgage-backed securities the
eral funds rate would be consistent with sustained ex- amount of principal payments from the Federal
pansion of economic activity, strong labor market con- Reserve’s holdings of agency debt and agency
ditions, and inflation near the Committee’s symmetric mortgage-backed securities received during
2 percent objective over the medium term. Members each calendar month that exceeds $16 billion.
continued to judge that the risks to the economic out- Small deviations from these amounts for oper-
look appeared roughly balanced. ational reasons are acceptable.
After assessing the incoming data, current conditions, The Committee also directs the Desk to engage
and the outlook for economic activity, the labor market, in dollar roll and coupon swap transactions as
and inflation, members agreed to maintain the target necessary to facilitate settlement of the Federal
range for the federal funds rate at 1¾ to 2 percent. They Reserve’s agency mortgage-backed securities
noted that the stance of monetary policy remained ac- transactions.”
commodative, thereby supporting strong labor market
The vote also encompassed approval of the statement
conditions and a sustained return to 2 percent inflation.
below to be released at 2:00 p.m.:
Members agreed that the timing and size of future ad-
“Information received since the Federal Open
justments to the target range for the federal funds rate
Market Committee met in June indicates that
would depend on their assessments of realized and ex-
the labor market has continued to strengthen
pected economic conditions relative to the objectives of
and that economic activity has been rising at a
maximum employment and 2 percent inflation. They re-
strong rate. Job gains have been strong, on av-
iterated that this assessment would take into account a
erage, in recent months, and the unemployment
wide range of information, including measures of labor
rate has stayed low. Household spending and
market conditions, indicators of inflation pressures and
business fixed investment have grown strongly.
inflation expectations, and readings on financial and in-
On a 12-month basis, both overall inflation and
ternational developments.
inflation for items other than food and energy
At the conclusion of the discussion, the Committee remain near 2 percent. Indicators of longer-
voted to authorize and direct the Federal Reserve Bank term inflation expectations are little changed, on
of New York, until it was instructed otherwise, to exe- balance.
cute transactions in the SOMA in accordance with the
Consistent with its statutory mandate, the Com-
following domestic policy directive, to be released at
mittee seeks to foster maximum employment
2:00 p.m.:
and price stability. The Committee expects that
“Effective August 2, 2018, the Federal Open further gradual increases in the target range for
Market Committee directs the Desk to under- the federal funds rate will be consistent with
take open market operations as necessary to sustained expansion of economic activity,
maintain the federal funds rate in a target range strong labor market conditions, and inflation
of 1¾ to 2 percent, including overnight reverse near the Committee’s symmetric 2 percent ob-
repurchase operations (and reverse repurchase jective over the medium term. Risks to the eco-
operations with maturities of more than one day nomic outlook appear roughly balanced.
when necessary to accommodate weekend, hol-
In view of realized and expected labor market
iday, or similar trading conventions) at an offer-
conditions and inflation, the Committee de-
ing rate of 1.75 percent, in amounts limited only
cided to maintain the target range for the federal
by the value of Treasury securities held outright
funds rate at 1¾ to 2 percent. The stance of
in the System Open Market Account that are
monetary policy remains accommodative,
Page 12 Federal Open Market Committee _

thereby supporting strong labor market condi- Board of Governors voted unanimously to leave the in-
tions and a sustained return to 2 percent infla- terest rates on required and excess reserve balances un-
tion. changed at 1.95 percent and voted unanimously to ap-
prove establishment of the primary credit rate (discount
In determining the timing and size of future ad-
rate) at the existing level of 2½ percent, effective Au-
justments to the target range for the federal
gust 2, 2018. 6
funds rate, the Committee will assess realized
and expected economic conditions relative to its It was agreed that the next meeting of the Committee
maximum employment objective and its sym- would be held on Tuesday–Wednesday, September 25–
metric 2 percent inflation objective. This as- 26, 2018. The meeting adjourned at 9:45 a.m. on Au-
sessment will take into account a wide range of gust 1, 2018.
information, including measures of labor mar-
Notation Vote
ket conditions, indicators of inflation pressures
By notation vote completed on July 3, 2018, the Com-
and inflation expectations, and readings on fi-
mittee unanimously approved the minutes of the Com-
nancial and international developments.”
mittee meeting held on June 12–13, 2018.
Voting for this action: Jerome H. Powell, John C. Wil-
liams, Thomas I. Barkin, Raphael W. Bostic, Lael
Brainard, Esther L. George, Loretta J. Mester, and Ran-
dal K. Quarles.
Voting against this action: None.
Ms. George voted as alternate member at this meeting. James A. Clouse
Consistent with the Committee’s decision to leave the
target range for the federal funds rate unchanged, the

6The second vote of the Board also encompassed approval of

the establishment of the interest rates for secondary and sea-
sonal credit under the existing formulas for computing such