FOMC Minutes

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Minutes of the Federal Open Market Committee

April 29–30, 2014

A meeting of the Federal Open Market Committee was

held in the offices of the Board of Governors of the

Federal Reserve System in Washington, D.C., on

Tuesday, April 29, 2014, at 10:30 a.m. and continued

on Wednesday, April 30, 2014, at 9:00 a.m.

PRESENT:

Janet L. Yellen, Chair

William C. Dudley, Vice Chairman

Richard W. Fisher

Narayana Kocherlakota

Sandra Pianalto

Charles I. Plosser

Jerome H. Powell

Jeremy C. Stein

Daniel K. Tarullo

Charles L. Evans, Jeffrey M. Lacker, Dennis P.

Lockhart, and John C. Williams, Alternate

Members of the Federal Open Market Committee

James Bullard, Esther L. George, and Eric Rosengren,

Presidents of the Federal Reserve Banks of St.

Louis, Kansas City, and Boston, respectively

William B. English, Secretary and Economist

Matthew M. Luecke, Deputy Secretary

Michelle A. Smith, Assistant Secretary

Scott G. Alvarez, General Counsel

Steven B. Kamin, Economist

David W. Wilcox, Economist

James A. Clouse, Thomas A. Connors,1 Evan F.

Koenig, Thomas Laubach, Michael P. Leahy,

Loretta J. Mester, Samuel Schulhofer-Wohl, Mark

E. Schweitzer, and William Wascher, Associate

Economists

Simon Potter, Manager, System Open Market Account

Nellie Liang, Director, Office of Financial Stability

Policy and Research, Board of Governors

Matthew J. Eichner, Deputy Director, Division of

Research and Statistics, Board of Governors;

Stephen A. Meyer and William Nelson, Deputy

Directors, Division of Monetary Affairs, Board of

Governors

Jon W. Faust, Special Adviser to the Board, Office of

Board Members, Board of Governors

Trevor A. Reeve, Special Adviser to the Chair, Office

of Board Members, Board of Governors

Linda Robertson,3 Assistant to the Board, Office of

Board Members, Board of Governors

Ellen E. Meade and Joyce K. Zickler, Senior Advisers,

Division of Monetary Affairs, Board of Governors

David Bowman4 and Beth Anne Wilson, Associate

Directors, Division of International Finance, Board

of Governors; Daniel M. Covitz, David E. Lebow,

and Michael G. Palumbo, Associate Directors,

Division of Research and Statistics, Board of

Governors; Fabio M. Natalucci2 and Gretchen C.

Weinbach,2 Associate Directors, Division of

Monetary Affairs, Board of Governors

Marnie Gillis DeBoer2 and Jane E. Ihrig,2 Deputy

Associate Directors, Division of Monetary Affairs,

Board of Governors

Brian J. Gross,1 Special Assistant to the Board, Office

of Board Members, Board of Governors

Stacey Tevlin, Assistant Director, Division of Research

and Statistics, Board of Governors

Lorie K. Logan, Deputy Manager, System Open

Market Account

Robert J. Tetlow, Adviser, Division of Monetary

Affairs, Board of Governors

________________

Robert deV. Frierson,2 Secretary of the Board, Office

of the Secretary, Board of Governors

1

Michael S. Gibson, Director, Division of Banking

Supervision and Regulation, Board of Governors

Attended Wednesday’s session only.

Attended the discussion of monetary policy normalization.

3 Attended Tuesday’s session only.

4 Attended Tuesday’s session following the discussion of

monetary policy normalization.

2

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Dana L. Burnett, Section Chief, Division of Monetary

Affairs, Board of Governors

Patrick McCabe,2 Senior Economist, Division of

Research and Statistics, Board of Governors

Penelope A. Beattie,2 Assistant to the Secretary, Office

of the Secretary, Board of Governors

Randall A. Williams, Records Project Manager,

Division of Monetary Affairs, Board of Governors

James M. Lyon, First Vice President, Federal Reserve

Bank of Minneapolis

David Altig, James J. McAndrews, and Alberto G.

Musalem, Executive Vice Presidents, Federal

Reserve Banks of Atlanta, New York, and New

York, respectively

Joshua L. Frost and Spencer Krane, Senior Vice

Presidents, Federal Reserve Banks of New York

and Chicago, respectively

George A. Kahn, Antoine Martin, Joe Peek, Keith Sill,

Daniel L. Thornton, and Douglas Tillett, Vice

Presidents, Federal Reserve Banks of Kansas City,

New York, Boston, Philadelphia, St. Louis, and

Chicago, respectively

Andreas L. Hornstein, Senior Advisor, Federal Reserve

Bank of Richmond

John Fernald, Senior Research Adviser, Federal

Reserve Bank of San Francisco

Sean Savage, Senior Associate, Federal Reserve Bank of

New York

________________

2 Attended the discussion of monetary policy normalization.

Monetary Policy Normalization

In a joint session of the Federal Open Market Committee (FOMC) and the Board of Governors of the Federal Reserve System, meeting participants discussed issues

associated with the eventual normalization of the

stance and conduct of monetary policy. The Committee’s discussion of this topic was undertaken as part of

prudent planning and did not imply that normalization

would necessarily begin sometime soon. A staff

presentation outlined several approaches to raising

short-term interest rates when it becomes appropriate

to do so, and to controlling the level of short-term interest rates once they are above the effective lower

bound, during a period when the Federal Reserve will

have a very large balance sheet. The approaches differed in terms of the combination of policy tools that

might be used to accomplish those objectives. In addition to the rate of interest paid on excess reserve balances, the tools considered included fixed-rate overnight reverse repurchase (ON RRP) operations, term

reverse repurchase agreements, and the Term Deposit

Facility (TDF). The staff presentation discussed the

potential implications of each approach for financial

intermediation and financial markets, including the federal funds market, and the possible implications for

financial stability. In addition, the staff outlined options for additional operational testing of the policy

tools.

Following the staff presentation, meeting participants

discussed a wide range of topics related to policy normalization. Participants generally agreed that starting

to consider the options for normalization at this meeting was prudent, as it would help the Committee to

make decisions about approaches to policy normalization and to communicate its plans to the public well

before the first steps in normalizing policy become appropriate. Early communication, in turn, would enhance the clarity and credibility of monetary policy and

help promote the achievement of the Committee’s

statutory objectives. It was emphasized that the tools

available to the Committee will allow it to reduce policy

accommodation when doing so becomes appropriate.

Participants considered how various combinations of

tools could have different implications for the degree

of control over short-term interest rates, for the Federal Reserve’s balance sheet and remittances to the

Treasury, for the functioning of the federal funds market, and for financial stability in both normal times and

in periods of stress. Because the Federal Reserve has

not previously tightened the stance of policy while

holding a large balance sheet, most participants judged

that the Committee should consider a range of options

and be prepared to adjust the mix of its policy tools as

warranted. Participants generally favored the further

testing of various tools, including the TDF, to better

assess their operational readiness and effectiveness. No

decisions regarding policy normalization were taken;

participants requested additional analysis from the staff

and agreed that it would be helpful to continue to review these issues at upcoming meetings. The Board

meeting concluded at the end of the discussion.

Minutes of the Meeting of April 29–30, 2014

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Developments in Financial Markets and the Federal Reserve’s Balance Sheet

The manager of the System Open Market Account

(SOMA) reported on developments in domestic and

foreign financial markets as well as the System open

market operations during the period since the

Committee met on March 18–19, 2014. By unanimous

vote, the Committee ratified the Open Market Desk’s

domestic transactions over the intermeeting period.

There were no intervention operations in foreign

currencies for the System’s account over the

intermeeting period.

By unanimous vote, the Committee agreed to renew

the reciprocal currency arrangements with the Bank of

Canada and the Bank of Mexico; these arrangements

are associated with the Federal Reserve’s participation

in the North American Framework Agreement of

1994. In addition, by unanimous vote, the Committee

agreed to renew the dollar and foreign currency liquidity swap arrangements with the Bank of Canada, the

Bank of England, the Bank of Japan, the European

Central Bank, and the Swiss National Bank. The votes

to renew the Federal Reserve’s participation in these

arrangements were taken at this meeting because provisions in the arrangements specify that the Federal Reserve provide six months’ prior notice of an intention

to terminate its participation.

Staff Review of the Economic Situation

The information reviewed for the April 29–30 meeting

indicated that growth in economic activity paused in

the first quarter as a whole, but that activity stepped up

late in the quarter; this pattern reflected, in part, the

temporary effects of the unusually cold and snowy

weather earlier in the quarter and the unwinding of

those effects later in the quarter. In March, payroll

employment increased further, although the unemployment rate held steady and was still elevated. Consumer price inflation continued to run below the

Committee’s longer-run objective, but measures of

longer-run inflation expectations remained stable.

The unemployment rate stayed at 6.7 percent in March,

but both the labor force participation rate and the employment-to-population ratio increased slightly. The

rate of long-duration unemployment declined somewhat, but the share of workers employed part time for

economic reasons moved up; both of these measures

were still well above their pre-recession levels. Initial

claims for unemployment insurance remained low over

the intermeeting period. Although the rate of job

openings moved up in February, the hiring rate was flat

and continued to be subdued.

Following a rebound in February that was partly

weather related, manufacturing production rose further

in March and the rate of manufacturing capacity utilization increased. The production of motor vehicles and

parts declined in March, but factory output outside of

the motor vehicle sector expanded. Automakers’

schedules indicated that the pace of motor vehicle assemblies in the coming months would be similar to the

level in March. However, broad indicators of manufacturing production, such as the new orders indexes from

the national and regional manufacturing surveys, were

at levels consistent with moderate increases in factory

output in the near term.

Real personal consumption expenditures (PCE) expanded slightly less rapidly in the first quarter than in

the fourth quarter. After moving roughly sideways, on

net, in January and February, the component of nominal retail sales used by the Bureau of Economic Analysis (BEA) to construct its monthly estimate of PCE

rose briskly in March, in part because the weather returned to more seasonal norms. Recent information

on several important factors that influence household

spending was positive. Real disposable income continued to increase in the first quarter, further gains in

house prices likely bolstered household net worth, and

consumer sentiment in the Thomson Reuters/University of Michigan Surveys of Consumers

improved, on balance, in March and April.

The pace of activity in the housing sector remained

soft, as real expenditures for residential investment decreased again in the first quarter. Starts of new singlefamily homes increased in March. However, permits

for single-family homes—which are typically less sensitive to fluctuations in the weather and a better indicator

of the underlying pace of construction—remained below their fourth-quarter level and had not shown a sustained improvement since last spring, when mortgage

rates began to rise. Sales of both new and existing

homes decreased in March of this year, but pending

home sales rose.

Real private expenditures on business equipment and

intellectual property products declined in the first quarter. However, nominal shipments of nondefense capital goods excluding aircraft rose in February and in

March, and new orders were somewhat above the level

of shipments, pointing to modest gains in shipments in

the near term. Other forward-looking indicators, such

as surveys of business conditions and capital spending

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plans, were also consistent with increased outlays for

business equipment in the coming months. Real

spending for nonresidential construction was about flat

in the first quarter after declining in the fourth quarter,

while real inventory investment moved lower. Business

inventories in most industries appeared to be broadly

aligned with sales in recent months.

Real federal government purchases rose slightly in the

first quarter, as the increase from the reversal of the

government shutdown in the fourth quarter was mostly

offset by the ongoing downtrend in purchases. Real

state and local government purchases decreased somewhat in the first quarter, as state and local construction

expenditures declined.

The U.S. international trade deficit widened in February

as exports fell and imports rose. The export declines

were concentrated in aircraft and petroleum products,

while exports of consumer goods rose. Rising imports

of services and automotive products offset declines in

imports of oil and capital goods. In the advance release

of the national income and product accounts, the BEA

estimated that net exports subtracted substantially from

real gross domestic product (GDP) growth in the first

quarter.

U.S. consumer prices, as measured by the PCE price

index, rose at a slow rate in the first quarter, though

somewhat faster than the pace posted in the fourth

quarter, and were about 1 percent higher than a year

earlier. After falling in the fourth quarter, consumer

energy prices increased markedly in the first quarter as

natural gas prices moved higher on a sharp decline in

inventories during the unusually cold winter months.

The PCE price index for items excluding food and energy rose at the same rate in the first quarter as in the

previous one and was around 1¼ percent higher than

four quarters earlier. Both near- and longer-term inflation expectations from the Michigan survey were unchanged in March and April. Over the 12 months ending in March, both the employment cost index for

private-sector workers and average hourly earnings for

all employees increased only a little more than consumer price inflation.

Indicators of foreign economic activity suggested continued expansion in the first quarter but at a rate

somewhat below that in the fourth quarter. The deceleration was concentrated in emerging market economies (EMEs). Real GDP growth slowed markedly in

China, largely reflecting lower investment growth and

exports. Weaker exports also restrained economic activity in other emerging Asian economies. In Mexico,

indicators of activity suggested some improvement

from a lackluster fourth quarter. By contrast, economic

growth remained near its solid fourth-quarter pace in

the advanced foreign economies (AFEs). In the euro

area, the United Kingdom, and Canada, average industrial production in the first two months of the year was

up moderately from the fourth quarter; in Japan, industrial production rose robustly, and consumer demand

was boosted by anticipation of the April increase in the

consumption tax. Inflation developments were mixed.

Inflation rebounded in Canada but remained very low

in the euro area. In China and India, inflation fell in

the first quarter, largely because of lower food prices.

Monetary policy remained highly accommodative during the intermeeting period in the AFEs and also in

many EMEs, although monetary policy in Brazil was

tightened to contain inflation pressures.

Staff Review of the Financial Situation

Despite some volatility in certain asset prices, financial

conditions did not change appreciably, on net, over the

intermeeting period. Asset prices moved in response

to economic data releases that were, on balance, a little

stronger than expected and to Federal Reserve communications. The anticipated path of the federal funds

rate moved up somewhat, as did intermediate-dated

Treasury yields, while corporate bond spreads narrowed and the S&P 500 increased slightly. The foreign

exchange value of the dollar was little changed.

Federal Reserve communications garnered significant

attention from market participants over the period but

appeared to have only a modest net effect on their expectations for monetary policy. The communications

following the conclusion of the March FOMC meeting

were interpreted as somewhat less accommodative than

expected. However, subsequent communications—

including the release of the minutes of the March

FOMC meeting—appeared to mostly reverse the earlier change in expectations.

Yields on short- and medium-term nominal Treasury

securities rose, on balance, over the intermeeting period. In contrast, yields at the long end of the curve declined, continuing a downward trend evident over

much of this year. Market participants cited a number

of factors as contributing to the drop in long-term

yields so far this year, including portfolio reallocation

by large institutional investors, the trading strategies

pursued by some investors, and safe-haven flows.

Some market participants reportedly also revised down

their estimate of the average real federal funds rate over

the longer term, reflecting in part changes in their as-

Minutes of the Meeting of April 29–30, 2014

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sessments of long-run economic conditions. Measures

of longer-horizon inflation compensation based on

Treasury Inflation-Protected Securities were little

changed.

Conditions in short-term funding markets remained

fairly stable over the intermeeting period. Take-up in

the Federal Reserve’s fixed-rate ON RRP exercise continued to be sensitive to the spread between market

rates and the rate offered in the exercise, with higher

take-up occurring on days when the market rate on

repurchase agreements was close to or below the ON

RRP rate. As has been the case since the ON RRP

exercise began, money market funds increased their

usage at quarter-end; take-up reached a record level of

about $240 billion at the end of March. Part of the

increase in ON RRP usage at the end of March relative

to the end of December likely reflected higher counterparty allotment limits, which were raised from $3 billion to $7 billion during the first quarter. The allotment

limit was subsequently increased to $10 billion per

counterparty in early April. The seasonal paydown of

short-term Treasury debt following the April tax date

was accompanied by a notable pickup in participation

at ON RRP operations, but Treasury repo rates generally remained very close to the ON RRP rate of 5 basis

points.

The S&P 500 increased a bit, on net, over the intermeeting period, but broader stock market indexes

edged down. The prices of social media and biotechnology stocks, which had risen substantially faster than

the broader market over the previous year, fell sharply

over the intermeeting period, leaving the gains on these

shares about in line with those on broader indexes over

the past 12 months. Some initial public offerings were

reportedly put on hold as prices of small-capitalization

stocks declined. By contrast, stocks that generally have

more stable dividends, such as those of utility and telecommunications companies, advanced. First-quarter

earnings reports for large banking organizations were

mixed, and the stock prices of such firms generally underperformed broad equity indexes.

Credit flows to nonfinancial corporations remained

robust, on balance, notwithstanding subdued bond issuance in April that was attributed to typical constraints

on issuance during the period when many firms are

reporting their earnings. The growth in commercial

and industrial loans on banks’ balance sheets remained

robust, consistent with the increase in loan demand by

large and middle-market firms reported in the April

Senior Loan Officer Opinion Survey on Bank Lending

Practices (SLOOS). Institutional issuance of leveraged

loans continued at a brisk pace amid reports of an ongoing gradual easing of credit terms and deal structures.

Financing conditions in the commercial real estate

(CRE) sector improved further. In the first quarter,

commercial mortgage loans held on banks’ books continued to grow solidly. According to the April SLOOS,

banks again eased standards on CRE loans during the

first quarter; they also reported an increase in loan demand, especially for construction and land development loans. In contrast, issuance of commercial

mortgage-backed securities in 2014 has been a bit slower than last year’s pace.

Mortgage credit conditions generally remained tight

over the intermeeting period, though signs of easing

continued to emerge amid further gains in house prices.

In particular, the April SLOOS indicated a net easing

of banks’ credit standards for home-purchase loans to

prime customers in the first quarter. Mortgage interest

rates and their spreads over Treasury yields were little

changed over the intermeeting period, and applications

for refinancing and purchase mortgages remained

tepid.

Conditions in consumer credit markets continued to be

mixed. Student and auto loans expanded at a robust

pace, while credit card debt outstanding stayed flat, as it

had been in recent months. Financing conditions in

the consumer asset-backed securities market remained

favorable, and issuance continued to be solid.

Most foreign equity indexes rose over the period despite a global selloff of technology-related stocks, and

10-year sovereign bond yields in Canada, Germany, and

the United Kingdom were nearly unchanged on net.

Yield spreads on peripheral euro-area debt over German bonds of similar maturity continued to narrow.

The broad nominal exchange rate index for the dollar

was about unchanged, as the dollar appreciated against

the euro, yen, and renminbi but depreciated against

most other currencies. Investor sentiment toward

EMEs continued to improve over the period despite

incoming data that were somewhat weaker than expected. Increasing tensions between Ukraine and Russia, as well as the lowering of Russia’s sovereign debt

rating by Standard & Poor’s, contributed to a rise in

Russia’s 10-year sovereign bond yield and a sharp decline in its main equity index. Outside of that region,

however, these building tensions left little imprint on

global financial markets.

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The staff’s periodic report on potential risks to financial stability concluded that the vulnerability of the financial system to adverse shocks remained at moderate

levels overall. Relatively strong capital profiles of large

domestic banking firms, low levels of aggregate leverage in the nonfinancial sector, and moderate use of

short-term wholesale funding across the financial sector were seen as the primary factors supporting overall

financial stability. However, the staff report also highlighted valuation pressures in some segments of the

equity market, continued strong demand for corporate

debt instruments and associated pressures on underwriting standards, and liquidity risks associated with

fixed-income mutual funds.

Staff Economic Outlook

In the economic forecast prepared by the staff for the

April FOMC meeting, real GDP growth in the first half

of this year was somewhat slower than in the projection

for the March meeting. The available readings on net

exports and, to a lesser extent, residential investment

pointed to less spending growth in the first quarter

than the staff previously expected. However, the staff’s

assessment was that the unanticipated weakness in economic activity in the first quarter would be largely transitory and implied little revision to its projection for

second-quarter output growth.

In addition, the

medium-term forecast for real GDP growth was essentially unrevised. The staff continued to project that real

GDP would expand at a faster pace over the next few

years than it did last year, and that it would rise more

quickly than the growth rate of potential output. The

faster pace of real GDP growth was expected to be

supported by an easing in the restraint from changes in

fiscal policy, increases in consumer and business confidence, further improvements in credit availability and

financial conditions, and a pickup in the rate of foreign

economic growth. The expansion in economic activity

was anticipated to slowly reduce resource slack over the

projection period, and the unemployment rate was expected to decline gradually to the staff’s estimate of its

longer-run natural rate.

The staff’s forecast for inflation was basically unchanged from the projection prepared for the previous

FOMC meeting. The staff continued to forecast that

inflation would remain below the Committee’s longerrun objective of 2 percent over the next few years.

With longer-run inflation expectations assumed to remain stable, changes in commodity and import prices

expected to be subdued, and slack in labor and product

markets anticipated to diminish slowly, inflation was

projected to rise gradually toward the Committee’s objective.

The staff viewed the extent of uncertainty around its

April projections for real GDP growth, inflation, and

the unemployment rate as roughly in line with the average over the past 20 years. Nonetheless, the risks to

the forecast for real GDP growth were viewed as tilted

a little to the downside, especially because the economy

was not well positioned to withstand adverse shocks

while the target for the federal funds rate was at its effective lower bound. At the same time, the staff

viewed the risks around its outlook for the unemployment rate and for inflation as roughly balanced.

Participants’ Views on Current Conditions and the

Economic Outlook

In their discussion of the economic situation and the

outlook, meeting participants generally indicated that

their assessment of the economic outlook had not

changed materially since the March meeting. Severe

winter weather had contributed to a sharp slowing in

activity during the first quarter, but recent indicators

pointed to a rebound and suggested that the economy

had returned to a trajectory of moderate growth.

However, some participants remarked that it was too

early to confirm that the bounceback in economic activity would put the economy on a path of sustained

above-trend economic growth. In general, participants

continued to view the risks to the outlook for the

economy and the labor market as nearly balanced.

However, a number of participants pointed to possible

sources of downside risk to growth, including a persistent slowdown in the housing sector or potential international developments, such as a further slowing of

growth in China or an increase in geopolitical tensions

regarding Russia and Ukraine.

Participants noted that business contacts in many parts

of the country were generally optimistic about economic prospects, with reports of increased sales of automobiles, higher production in the aerospace industry, and

increased usage of industrial power; in addition, a couple of firms with a global presence reported a notable

increase in demand from customers in Europe. Contacts in several Districts pointed to plans for increasing

capital expenditures or to stronger demand for commercial and industrial loans. In the agricultural sector,

the planting season was under way, but there were concerns about the effects of drought on production in

some areas.

Most participants commented on the continuing weakness in housing activity. They saw a range of factors

Minutes of the Meeting of April 29–30, 2014

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affecting the housing market, including higher home

prices, construction bottlenecks stemming from a scarcity of labor and harsh winter weather, input cost pressures, or a shortage in the supply of available lots.

Views varied regarding the outlook for the multifamily

sector, with the large increase in multifamily units coming to market potentially putting downward pressure on

prices and rents, but the demand for this type of housing expected to rise as the population ages. A couple

of participants noted that mortgage credit availability

remained constrained and lending standards were tight

compared with historical norms, especially for purchase

mortgages. However, reports from some Districts indicated that real estate and housing-related business

activity had strengthened recently, consistent with the

solid gains in consumer spending registered in March.

Conditions in the labor market continued to improve

over the intermeeting period and participants generally

expected further gradual improvement. Participants

discussed a range of research and analysis bearing on

the amount of available slack remaining in the labor

market. A number of them argued that several indicators of labor underutilization—including the low labor

force participation rate and the still-elevated rates of

longer-duration unemployment and of workers employed part time for economic reasons—suggested that

there is more slack in the labor market than is captured

by the unemployment rate alone. Low nominal wage

inflation was also viewed as consistent with slack in

labor markets. However, some participants reported

that labor markets were tight in their Districts or that

contacts indicated some sectors or occupations were

experiencing shortages of workers. Another participant

observed that labor underutilization, as measured by an

index that takes employment transition rates into account, was consistent with past periods in which the

official unemployment rate had reached its current level, and had declined about as much relative to the official unemployment rate as it had in previous economic

recoveries.

In discussing the effect of labor market conditions on

inflation, a number of participants expressed skepticism

about recent studies suggesting that long-term unemployment provides less downward pressure on wage

and price inflation than short-term unemployment

does. A couple of participants cited other research

findings that both short- and long-term unemployment

rates exert pressure on wages, with the effects of longterm unemployment increasing as the level of shortterm unemployment declines. Moreover, a few participants pointed out that because of downward nominal

wage rigidity during the recession, wage increases are

likely to remain relatively modest for some time during

the recovery, even as the labor market strengthens. It

was also noted that because inflation was expected to

remain well below the Committee’s 2 percent objective

and the unemployment rate was still above participants’

estimates of its longer-run normal level, the Committee

did not, at present, face a tradeoff between its employment and inflation objectives, and an expansion of aggregate demand would result in further progress relative to both objectives.

Inflation continued to run below the Committee’s

2 percent longer-run objective over the intermeeting

period. Many participants saw the recent behavior of

the prices of food, energy, shelter, and imports as consistent with a stabilization in inflation and judged that

the transitory factors that had reduced inflation, such as

declines in administered prices for medical services,

were fading. Most participants expected inflation to

return to 2 percent within the next few years, supported by highly accommodative monetary policy, stable

inflation expectations, and a continued gradual recovery in economic activity. However, a few others expressed the concern that the return to 2 percent inflation could be even more gradual.

In their discussion of financial stability, participants

generally did not see imbalances that posed significant

near-term risks to the financial system and the broader

economy, but they nevertheless reviewed some financial developments that pointed to potential future risks.

A couple of participants noted that conditions in the

leveraged loan market had become stretched, although

equity cushions on new deals remained above levels

seen prior to the financial crisis. Two others saw declining credit spreads, particularly on speculative-grade

corporate bonds, as consistent with an increase in investors’ appetite for risk. In addition, several participants noted that the low level of expected volatility

implied by some financial market prices might also signal an increase in risk appetite. Some stated that it

would be helpful to continue to explore the appropriate

regulatory, supervisory, and monetary policy responses

to potential risks to financial stability.

It was noted that the changes to the Committee’s forward guidance at the March FOMC meeting had been

well understood by investors. However, a number of

participants emphasized the importance of communicating still more clearly about the Committee’s policy

intentions as the time of the first increase in the federal

funds rate moves closer. Some thought it would be

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helpful to clarify the reasoning underlying the language

in the FOMC’s postmeeting statement indicating that

even after employment and inflation are near mandateconsistent levels, economic conditions may, for some

time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer

run. In addition, a few participants judged that additional clarity about the Committee’s reaction function

could be particularly important in the event that future

economic conditions necessitate a more rapid rise in

the target federal funds rate than the Committee currently anticipates. A number of participants suggested

that it would be useful to provide additional information regarding how long the Committee would continue its policy of rolling over maturing Treasury securities at auction and reinvesting principal payments on

all agency debt and agency mortgage-backed securities

in agency mortgage-backed securities.

in the economic outlook since the March meeting and

decided that it would be appropriate to make a further

measured reduction in the pace of asset purchases at

this meeting. Accordingly, the Committee agreed that,

beginning in May, it would add to its holdings of agency mortgage-backed securities at a pace of $20 billion

per month rather than $25 billion per month, and

would add to its holdings of longer-term Treasury securities at a pace of $25 billion per month rather than

$30 billion per month. Members again judged that, if

the economy continued to develop as anticipated, the

Committee would likely reduce the pace of asset purchases in further measured steps at future meetings.

However, members underscored that the pace of asset

purchases was not on a preset course and would remain

contingent on the Committee’s outlook for the labor

market and inflation as well as its assessment of the

likely efficacy and costs of purchases.

Committee Policy Action

Members viewed the information received over the

intermeeting period as indicating that economic growth

had picked up recently, following a sharp slowdown

during the winter due in part to unusually severe

weather conditions. Although labor market indicators

were mixed, on balance they showed further improvement. The unemployment rate, however, remained

elevated. While household spending appeared to be

rising more rapidly, business fixed investment had

edged down and the recovery in the housing sector

remained slow. Fiscal policy was restraining economic

growth, but the extent of that restraint had diminished.

The Committee expected that, with appropriate policy

accommodation, economic activity would expand at a

moderate pace and labor market conditions would continue to improve gradually, moving toward those the

Committee judges to be consistent with its dual mandate. Moreover, members continued to see risks to the

outlook for the economy and the labor market as nearly

balanced. Inflation was running below the Committee’s longer-run objective and was seen as posing possible risks to economic performance, but members anticipated that stable inflation expectations and strengthening economic activity would, over time, return inflation to the Committee’s 2 percent target. However, in

light of their concerns about the possible persistence of

low inflation, members agreed that inflation developments should be monitored carefully for evidence that

inflation was moving back toward the Committee’s

longer-run objective.

The Committee agreed that no changes to its target

range for the federal funds rate or its forward guidance

were warranted at this meeting, aside from removing a

short paragraph that was added when the forward

guidance was updated at the March meeting and which

noted that the change in the Committee’s guidance did

not signal a change in the Committee’s policy intentions; members deemed this language no longer necessary.

In their discussion of monetary policy in the period

ahead, members noted that there had been little change

At the conclusion of the discussion, the Committee

voted to authorize and direct the Federal Reserve Bank

of New York, until it was instructed otherwise, to

execute transactions in the SOMA in accordance with

the following domestic policy directive:

“Consistent with its statutory mandate, the

Federal Open Market Committee seeks

monetary and financial conditions that will

foster maximum employment and price

stability. In particular, the Committee seeks

conditions in reserve markets consistent with

federal funds trading in a range from 0 to

¼ percent. The Committee directs the Desk

to undertake open market operations as

necessary to maintain such conditions.

Beginning in May, the Desk is directed to

purchase longer-term Treasury securities at a

pace of about $25 billion per month and to

purchase agency mortgage-backed securities

at a pace of about $20 billion per month.

The Committee also directs the Desk to

engage in dollar roll and coupon swap

transactions as necessary to facilitate

Minutes of the Meeting of April 29–30, 2014

Page 9

_____________________________________________________________________________________________

settlement of the Federal Reserve’s agency

mortgage-backed securities transactions.

The Committee directs the Desk to maintain

its policy of rolling over maturing Treasury

securities into new issues and its policy of

reinvesting principal payments on all agency

debt and agency mortgage-backed securities

in agency mortgage-backed securities. The

System Open Market Account Manager and

the Secretary will keep the Committee

informed

of

ongoing

developments

regarding the System’s balance sheet that

could affect the attainment over time of the

Committee’s objectives of maximum

employment and price stability.”

The vote encompassed approval of the statement

below to be released at 2:00 p.m.:

“Information received since the Federal

Open Market Committee met in March

indicates that growth in economic activity

has picked up recently, after having slowed

sharply during the winter in part because of

adverse weather conditions. Labor market

indicators were mixed but on balance

showed further improvement.

The

unemployment rate, however, remains

elevated. Household spending appears to be

rising more quickly.

Business fixed

investment edged down, while the recovery

in the housing sector remained slow. Fiscal

policy is restraining economic growth,

although the extent of restraint is

diminishing. Inflation has been running

below the Committee’s longer-run objective,

but longer-term inflation expectations have

remained stable.

Consistent with its statutory mandate, the

Committee seeks to foster maximum

employment and price stability.

The

Committee expects that, with appropriate

policy accommodation, economic activity

will expand at a moderate pace and labor

market conditions will continue to improve

gradually, moving toward those the

Committee judges consistent with its dual

mandate. The Committee sees the risks to

the outlook for the economy and the labor

market as nearly balanced. The Committee

recognizes that inflation persistently below

its 2 percent objective could pose risks to

economic performance, and it is monitoring

inflation developments carefully for evidence

that inflation will move back toward its

objective over the medium term.

The Committee currently judges that there is

sufficient underlying strength in the broader

economy to support ongoing improvement

in labor market conditions. In light of the

cumulative progress toward maximum

employment and the improvement in the

outlook for labor market conditions since the

inception of the current asset purchase

program, the Committee decided to make a

further measured reduction in the pace of its

asset purchases. Beginning in May, the

Committee will add to its holdings of agency

mortgage-backed securities at a pace of

$20 billion per month rather than $25 billion

per month, and will add to its holdings of

longer-term Treasury securities at a pace of

$25 billion per month rather than $30 billion

per month. The Committee is maintaining

its existing policy of reinvesting principal

payments from its holdings of agency debt

and agency mortgage-backed securities in

agency mortgage-backed securities and of

rolling over maturing Treasury securities at

auction. The Committee’s sizable and stillincreasing holdings of longer-term securities

should maintain downward pressure on

longer-term interest rates, support mortgage

markets, and help to make broader financial

conditions more accommodative, which in

turn should promote a stronger economic

recovery and help to ensure that inflation,

over time, is at the rate most consistent with

the Committee’s dual mandate.

The Committee will closely monitor

incoming information on economic and

financial developments in coming months

and will continue its purchases of Treasury

and agency mortgage-backed securities, and

employ its other policy tools as appropriate,

until the outlook for the labor market has

improved substantially in a context of price

stability. If incoming information broadly

supports the Committee’s expectation of

ongoing improvement in labor market

conditions and inflation moving back toward

its longer-run objective, the Committee will

likely reduce the pace of asset purchases in

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Federal Open Market Committee

_____________________________________________________________________________________________

further measured steps at future meetings.

However, asset purchases are not on a preset

course, and the Committee’s decisions about

their pace will remain contingent on the

Committee’s outlook for the labor market

and inflation as well as its assessment of the

likely efficacy and costs of such purchases.

To support continued progress toward

maximum employment and price stability,

the Committee today reaffirmed its view that

a highly accommodative stance of monetary

policy remains appropriate. In determining

how long to maintain the current 0 to

¼ percent target range for the federal funds

rate, the Committee will assess progress—

both realized and expected—toward 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 developments. The Committee

continues to anticipate, based on its

assessment of these factors, that it likely will

be appropriate to maintain the current target

range for the federal funds rate for a

considerable time after the asset purchase

program ends, especially if projected

inflation continues to run below the

Committee’s 2 percent longer-run goal, and

provided

that

longer-term

inflation

expectations remain well anchored.

When the Committee decides to begin to

remove policy accommodation, it will take a

balanced approach consistent with its longerrun goals of maximum employment and

inflation of 2 percent. The Committee

currently anticipates that, even after

employment and inflation are near mandateconsistent levels, economic conditions may,

for some time, warrant keeping the target

federal funds rate below levels the

Committee views as normal in the longer

run.”

Voting for this action: Janet L. Yellen, William C.

Dudley, Richard W. Fisher, Narayana Kocherlakota,

Sandra Pianalto, Charles I. Plosser, Jerome H. Powell,

Jeremy C. Stein, and Daniel K. Tarullo.

Voting against this action: None.

It was agreed that the next meeting of the Committee

would be held on Tuesday–Wednesday, June 17–18,

2014. The meeting adjourned at 10:55 a.m. on

April 30, 2014.

Notation Vote

By notation vote completed on April 8, 2014, the

Committee unanimously approved the minutes of the

Committee meeting held on March 18–19, 2014.

_____________________________

William B. English

Secretary