FOMC Minutes
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Minutes of the Federal Open Market Committee
July 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, July 29, 2014, at 10:00 a.m. and continued on
Wednesday, July 30, 2014, at 9:00 a.m.
PRESENT:
Janet L. Yellen, Chair
William C. Dudley, Vice Chairman
Lael Brainard
Stanley Fischer
Richard W. Fisher
Narayana Kocherlakota
Loretta J. Mester
Charles I. Plosser
Jerome H. Powell
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
Thomas C. Baxter, Deputy General Counsel
Steven B. Kamin, Economist
David W. Wilcox, Economist
James A. Clouse, Thomas A. Connors, Evan F.
Koenig, Thomas Laubach, Michael P. Leahy, Paolo
A. Pesenti, Mark E. Schweitzer, and William
Wascher, Associate Economists
Simon Potter, Manager, System Open Market Account
Lorie K. Logan, Deputy Manager, System Open
Market Account
Nellie Liang, Director, Office of Financial Stability
Policy and Research, Board of Governors
Matthew J. Eichner,1 Deputy Director, Division of
Research and Statistics, Board of Governors;
Maryann F. Hunter, Deputy Director, Division of
Banking Supervision and Regulation, Board of
Governors; Stephen A. Meyer and William R.
Nelson, Deputy Directors, Division of Monetary
Affairs, Board of Governors
Jon W. Faust and Stacey Tevlin, Special Advisers 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, 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 Bowman, Associate Director, Division of
International Finance, Board of Governors; David
E. Lebow² and Michael G. Palumbo, Associate
Directors, Division of Research and Statistics,
Board of Governors; Fabio M. Natalucci1 and
Gretchen C. Weinbach,1 Associate Directors,
Division of Monetary Affairs, Board of Governors
Jane E. Ihrig, Deputy Associate Director, Division of
Monetary Affairs, Board of Governors
Eric C. Engstrom, Patrick E. McCabe,1 and Karen M.
Pence, Advisers, Division of Research and
Statistics, Board of Governors
Penelope A. Beattie,1 Assistant to the Secretary, Office
of the Secretary, Board of Governors
________________
Attended the joint session of the Federal Open Market
Committee and the Board of Governors.
² Attended the portion of the meeting following the joint
session of the Federal Open Market Committee and the Board
of Governors.
1
Secretary of the Board, Office
Robert deV.
of the Secretary, Board of Governors
Frierson,1
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Francisco Covas and Elizabeth Klee,1 Section Chiefs,
Division of Monetary Affairs, Board of Governors
David H. Small, Project Manager, Division of
Monetary Affairs, Board of Governors
Katie Ross,1 Manager, Office of the Secretary, Board of
Governors
Elmar Mertens, Senior Economist, Division of
Monetary Affairs, Board of Governors
Peter M. Garavuso, Records Project Manager, Division
of Monetary Affairs, Board of Governors
Gregory L. Stefani, First Vice President, Federal
Reserve Bank of Cleveland
David Altig, Ron Feldman, Jeff Fuhrer, and Daniel G.
Sullivan, Executive Vice Presidents, Federal
Reserve Banks of Atlanta, Minneapolis, Boston,
and Chicago, respectively
Michael Dotsey and Meg McConnell, Senior Vice
Presidents, Federal Reserve Banks of Philadelphia
and New York, respectively
Fred Furlong, Group Vice President, Federal Reserve
Bank of San Francisco
Antoine Martin,1 Douglas Tillett, David C. Wheelock,
Jonathan L. Willis, and Patricia Zoebel,1 Vice
Presidents, Federal Reserve Banks of New York,
Chicago, St. Louis, Kansas City, and New York,
respectively
Robert L. Hetzel, Senior Economist, Federal Reserve
Bank of Richmond
________________
Attended the joint session of the Federal Open Market
Committee and the Board of Governors.
1
During the interval between the June and July meetings,
Chair Yellen appointed a subcommittee on communications issues chaired by Governor Fischer and including
President Mester, Governor Powell, and President Williams. Governor Fischer indicated that the subcommittee would continue the work of previous subcommittees
in helping the Committee frame and organize the discussion of a broad range of communications issues.
Developments in Financial Markets and the Federal Reserve’s Balance Sheet
In a joint session of the Federal Open Market Committee (FOMC) and the Board of Governors of the Federal
Reserve System, the manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign financial markets. The manager also
reported on the System open market operations conducted during the period since the Committee met on
June 17–18, 2014, summarized the outcomes of recent
test operations of the Term Deposit Facility (TDF), described the results from the fixed-rate overnight reverse
repurchase agreement (ON RRP) operational exercise,
and reviewed the ongoing effects of recent foreign central bank policy actions on yields on the international
portion of the SOMA portfolio. In addition, the manager noted plans for a pilot program for increasing the
number of the Open Market Desk’s counterparties for
agency mortgage-backed securities (MBS) operations to
include a few firms that are too small to qualify as primary dealers. By unanimous vote, the Committee ratified the 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.
Monetary Policy Normalization
Meeting participants continued their discussion of issues
associated with the eventual normalization of the stance
and conduct of monetary policy, consistent with the
Committee’s intention to provide additional information
to the public later this year, well before most participants
anticipate the first steps in reducing policy accommodation to become appropriate. The staff detailed a possible
approach for implementing and communicating monetary policy once the Committee begins to tighten the
stance of policy. The approach reflected the Committee’s discussion of normalization strategies and policy
tools during the previous two meetings.
Participants expressed general support for the normalization approach outlined by the staff, though some
noted reservations about one or more of its features. Almost all participants agreed that it would be appropriate
to retain the federal funds rate as the key policy rate, and
they supported continuing to target a range of 25 basis
points for this rate at the time of liftoff and for some
time thereafter. However, one participant preferred to
use the range for the federal funds rate as a communication tool rather than as a hard target, and another pre-
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ferred that policy communications during the normalization period focus on the rate of interest on excess reserves (IOER) and the ON RRP rate in addition to the
federal funds rate. Participants agreed that adjustments
in the IOER rate would be the primary tool used to
move the federal funds rate into its target range and influence other money market rates. In addition, most
thought that temporary use of a limited-scale ON RRP
facility would help set a firmer floor under money market interest rates during normalization. Most participants anticipated that, at least initially, the IOER rate
would be set at the top of the target range for the federal
funds rate, and the ON RRP rate would be set at the
bottom of the federal funds target range. Alternatively,
some participants suggested the ON RRP rate could be
set below the bottom of the federal funds target range,
judging that it might be possible to begin the normalization process with minimal or no reliance on an ON RRP
facility and increase its role only if necessary. However,
many other participants thought that such a strategy
might result in insufficient control of money market
rates at liftoff, which could cause confusion about the
likely path of monetary policy or raise questions about
the Committee’s ability to implement policy effectively.
Participants generally agreed that the ON RRP facility
should be only as large as needed for effective monetary
policy implementation and should be phased out when
it is no longer needed for that purpose. Participants expressed their desire to include features in the facility’s
design that would limit the Federal Reserve’s role in financial intermediation and mitigate the risk that the facility might magnify strains in short-term funding markets during periods of financial stress. They discussed
options to address these concerns, including methods
for limiting the program’s size. Many participants noted
that further testing would provide additional information that could help determine the appropriate features to temper the risks that might be associated with
an ON RRP facility.
Participants also discussed approaches to normalizing
the size and composition of the Federal Reserve’s balance sheet. In general, they agreed that the size of the
balance sheet should be reduced gradually and predictably. In addition, they believed that, in the long run, the
balance sheet should be reduced to the smallest level
consistent with efficient implementation of monetary
policy and should consist primarily of Treasury securities
in order to minimize the effect of the SOMA portfolio
on the allocation of credit across sectors of the economy.
A few participants noted that the appropriate size of the
balance sheet would depend on the Committee’s future
decisions regarding its framework for monetary policy.
Most participants supported reducing or ending reinvestment sometime after the first increase in the target
range for the federal funds rate. A few, however, believed that ceasing reinvestment before liftoff was a better approach because it would lead to an earlier reduction in the size of the portfolio. Most participants continued to anticipate that the Committee would not sell
MBS, except perhaps to eliminate residual holdings.
However, a couple of participants preferred to sell MBS
in order to unwind the effect of the Federal Reserve’s
holdings on mortgage rates relative to other interest rates
more rapidly than would occur as a result of repayments
of principal alone. Some others noted that, given the
uncertainties attending the normalization process and
the outlook for the economy and financial markets, it
could be helpful to retain the option to sell some assets.
Participants agreed that the Committee should provide
additional information to the public regarding the details
of normalization well before most participants anticipate
the first steps in reducing policy accommodation to become appropriate. They stressed the importance of
communicating a clear plan while at the same time noting the importance of maintaining flexibility so that adjustments to the normalization approach could be made
as the situation changed and in light of experience. Participants requested additional analysis from the staff on
issues related to normalization as background for further
discussion at their next meeting. A few participants also
suggested that the Committee should solicit additional
information from the public regarding the possible effects of an ON RRP facility, but some others pointed
out that the Committee would continue to receive such
feedback informally in response to its ongoing communications regarding normalization. The Board meeting
concluded at the end of the discussion of approaches to
policy normalization.
Staff Review of the Economic Situation
The information reviewed for the July 29–30 meeting indicated that real gross domestic product (GDP) rebounded in the second quarter following its first-quarter
decline, but it expanded at only a modest pace, on balance, over the first half of the year. Consumer price inflation rose somewhat in the second quarter, but futures
prices for energy and agricultural commodities generally
were trending down over the next couple of years and
longer-run measures of inflation expectations remained
stable. The Bureau of Economic Analysis (BEA) released its advance estimate for second-quarter real GDP,
along with revised data for earlier periods, on the second
day of the FOMC meeting. The staff’s assessment of
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economic activity and inflation in the first half of 2014,
based on information available before the meeting began, was broadly consistent with the new information
from the BEA.
Measures of labor market conditions generally continued to improve during the intermeeting period. Total
nonfarm payroll employment increased strongly in June,
and the average monthly gain for the second quarter was
the largest since the first quarter of 2012. The unemployment rate declined to 6.1 percent in June, the labor
force participation rate was unchanged, and the employment-to-population ratio edged up. The rate of longduration unemployment moved down, and the share of
workers employed part time for economic reasons edged
up; both measures remained elevated by historical standards. Initial claims for unemployment insurance declined further in recent weeks. The rate of job openings
rose further in May, but the rate of hiring was unchanged
and remained at a modest level.
Industrial production increased in the second quarter, as
higher output from manufacturers and mines more than
offset a decline in the output of electric and natural gas
utilities. Capacity utilization also moved higher in the
second quarter. Automakers’ production schedules indicated that light motor vehicle assemblies would increase in the third quarter, and readings on new orders
from national and regional manufacturing surveys were
consistent with moderate gains in factory output in the
near term.
Real personal consumption expenditures (PCE) rose
more quickly in the second quarter than in the first,
partly reflecting higher purchases of light motor vehicles.
Key factors that tend to influence household spending
remained positive in recent months. In particular, gains
in equity values and home prices boosted household net
worth, and real disposable personal income continued to
rise in the second quarter. Consumer sentiment in the
Thomson Reuters/University of Michigan Surveys of
Consumers edged down in early July but was only
slightly below its average over the first half of the year.
Real expenditures for residential investment turned up
in the second quarter after declining for two consecutive
quarters. Starts of new single-family houses declined in
June, but they rose for the quarter as a whole, and the
level of permit issuance was consistent with increases in
starts in subsequent months. In the multifamily sector,
starts and permits also increased, on net, in the second
quarter. Existing home sales moved up during the second quarter but remained below year-earlier levels, while
new home sales declined. Home prices continued to rise
through May, though the rate of increase was less rapid
than earlier in the year.
Real private expenditures for business equipment and intellectual property products increased in the second
quarter. Nominal new orders for nondefense capital
goods were little changed, on net, in May and June; however, the level of orders was above that for shipments,
pointing to increases in shipments in subsequent
months. Other forward-looking indicators, such as national and regional surveys of business conditions, also
generally suggested moderate increases in business
equipment spending in the near term. Real business expenditures for nonresidential construction also increased in the second quarter. Meanwhile, business inventories generally appeared well aligned with sales,
apart from the energy sector, where inventories remained below year-earlier levels.
Real federal government purchases decreased over the
first half of the year, reflecting ongoing fiscal consolidation and continued declines in defense spending. In
contrast, real state and local government purchases increased in the second quarter, as payrolls expanded at a
faster pace than in the first quarter and outlays for construction moved higher.
The U.S. international trade deficit narrowed in May as
imports fell and exports rose. The rise in exports was
concentrated in petroleum products and automotive
parts. The fall in imports was led by declines in oil and
consumer goods. For the second quarter overall, net exports exerted a moderate drag on the change in U.S. real
GDP, compared with a more substantial negative contribution in the first quarter.
U.S. consumer prices, as measured by the PCE price index, increased at a faster pace in the second quarter than
in the first and were about 1½ percent higher than a year
earlier. Consumer energy price inflation rose in the second quarter, but retail gasoline prices, measured on a
seasonally adjusted basis, subsequently moved lower
through the fourth week of July. Consumer food price
inflation also increased in the second quarter, reflecting
the effects of drought and disease on crop and livestock
production; however, spot prices for crops moved down
in recent weeks, and futures prices pointed to lower
prices for livestock in the year ahead. The PCE price
index for items excluding food and energy also rose
more quickly in the second quarter than in the first and
was 1½ percent higher than a year earlier. Near-term
inflation expectations from the Michigan survey were little changed, on net, in June and early July, while longer-
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term expectations declined. Measures of labor compensation indicated that gains in nominal wages and employee benefits remained modest.
Recent indicators suggested that foreign economic activity strengthened in the second quarter: Chinese GDP
accelerated substantially, and Mexican data suggested a
pickup there. Real GDP growth remained strong in the
United Kingdom, and data for both Canada and the euro
area showed improvement relative to the first quarter.
By contrast, household spending in Japan dropped
sharply following the country’s April 1 consumption tax
increase. In many advanced foreign economies, inflation
picked up in the second quarter from very low rates in
the first, although second-quarter inflation in the euro
area remained well below the European Central Bank’s
objective.
Staff Review of the Financial Situation
Financial conditions eased somewhat, on balance, between the June and July FOMC meetings, although geopolitical risks weighed on investor sentiment at times.
On net, yields on longer-term Treasury securities fell, equity prices rose, and the foreign exchange value of the
dollar was little changed.
Market participants characterized the Federal Reserve’s
monetary policy communications over the intermeeting
period as suggesting a slightly more accommodative policy stance than had been expected. The anticipated path
of the federal funds rate shifted down modestly following the June FOMC statement and the Chair’s press conference. Policy expectations also edged down on the release of the minutes of the June FOMC meeting. Market
participants took note of the discussion of monetary policy normalization in the minutes and, particularly, the
discussion of the likely spread between the ON RRP rate
and the IOER rate.
Results from the Desk’s July Survey of Primary Dealers,
conducted shortly before the July FOMC meeting, indicated that market participants’ expectations for the timing of the first increase in the federal funds rate and the
subsequent policy path were largely unchanged from
those reported in the survey taken just before the June
meeting. The median dealer continued to see the third
quarter of 2015 as the most likely time for the liftoff of
the federal funds rate from the effective lower bound,
although, relative to the June survey, the distribution of
the modal expected time of liftoff became more concentrated around the third quarter of 2015.
On balance, 10- and 30-year nominal Treasury yields
both declined about 20 basis points over the intermeeting period. Concerns about tensions in Ukraine and the
Middle East and the release of the June minutes appeared to contribute to the declines in longer-term
Treasury yields. The decline in yields at the long end of
the curve likely also reflected a continuation of a pattern
that began last year, which some market participants attributed to a reduction in investors’ expectations for
longer-run economic growth and declines in term premiums. Measures of longer-horizon inflation compensation based on Treasury Inflation-Protected Securities
were about unchanged.
Conditions in unsecured short-term dollar funding markets remained stable over the intermeeting period. The
Federal Reserve continued its ON RRP exercise and
TDF testing. As a result of somewhat higher market
rates on repurchase agreements, ON RRP take-up, on
average, was a little lower than in the prior intermeeting
period, although participation in the ON RRP exercise
jumped to a record high at quarter-end on June 30.
Moreover, the ON RRP exercise appeared to have continued to help firm the floor under money market interest rates. In TDF testing that ran from mid-May to early
July, gradual increases in offer rates and in the maximum
individual award amounts generally resulted in higher
participation.
The S&P 500 index rose about 1½ percent over the intermeeting period, as earnings reports from a range of
companies appeared to indicate that profits in the second quarter had increased modestly relative to the first
quarter. The VIX, an index of option-implied volatility
for one-month returns on the S&P 500 index, remained
at low levels over the intermeeting period.
Credit flows to nonfinancial corporations remained
strong in the second quarter. Gross issuance of investment- and speculative-grade bonds stayed brisk. Commercial and industrial loans on banks’ balance sheets
continued to increase at a robust pace, consistent with
reports in the July Senior Loan Officer Opinion Survey
on Bank Lending Practices (SLOOS) of easier lending
standards and terms as well as stronger loan demand
from firms of all sizes. Issuance of leveraged loans by
institutional investors also remained solid.
Credit conditions in markets for commercial real estate
(CRE) improved further in the second quarter. According to the July SLOOS, banks continued to ease their
standards and report stronger demand for CRE loans
during the second quarter on balance. CRE loans on
banks’ books continued to expand moderately, and issuance of commercial mortgage-backed securities remained solid.
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Credit conditions in residential mortgage markets generally remained tight over the intermeeting period. Mortgage interest rates held steady around 4 percent, and
origination volumes continued to be low. According to
the July SLOOS, underwriting standards on prime
home-purchase loans appeared to have eased further at
banks during the second quarter but, on net, standards
on all types of residential real estate loans reportedly remained tighter than the midpoints of the respondent
banks’ longer-term ranges.
In contrast to mortgage lending, consumer credit continued to expand robustly in May, largely on the strength
of auto and student loans, though credit card debt
picked up somewhat as well. Banks responding to the
July SLOOS indicated that demand for auto loans
strengthened further in the second quarter. In addition,
demand for credit card loans increased, and a few large
banks reported having eased lending policies for such
loans.
Benchmark yields on long-term sovereign bonds in the
advanced foreign economies continued the downward
trend that began at the start of the year, with rising tensions in the Middle East and Ukraine during the intermeeting period likely adding some to the downward
pressure. Concerns about one of Portugal’s largest
banks and about litigation risks facing European banks
weighed on European financial markets, prompting
yield spreads on peripheral sovereign bonds in the euro
area to widen and equity price indexes for European
banks to decline. Intermeeting data releases on euroarea industrial production came in below market expectations, also weighing on headline equity markets in the
region. Mixed news from emerging market economies,
including better-than-expected GDP growth in China
and concerns about Argentina’s scheduled debt payments, generally had modest market effects. Changes in
emerging market equity indexes were mixed over the period, and emerging market bond yields generally declined. The broad trade-weighted dollar was little
changed, on net, over the intermeeting period.
The staff’s periodic report on potential risks to financial
stability concluded that relatively strong capital positions
of U.S. banks, subdued use of maturity transformation
and leverage within the broader financial sector, and relatively low levels of leverage for the aggregate nonfinancial sector were important factors supporting overall financial stability. However, the staff report also highlighted that low and declining risk premiums, low levels
of market volatility, and a loosening of underwriting
standards in a number of markets raised somewhat the
risk of an eventual correction in asset valuations.
Staff Economic Outlook
The data received since the staff prepared its forecast for
the June FOMC meeting suggested that real GDP
growth was even weaker in the first half of the year than
had been anticipated.3 However, the staff left its forecast for real GDP growth in the second half of the year
essentially unrevised because other indicators of economic activity appeared comparatively strong in relation
to real GDP during the first half of the year. In particular, payroll employment continued to advance at a solid
pace, the unemployment rate declined further, industrial
production posted steady gains, and readings from business surveys were strong. The staff’s medium-term forecast for real GDP growth was also little revised. The
staff continued to project that real GDP would expand
at a faster pace in the second half of this year and over
the next two years than in 2013. This forecast was predicated on a further anticipated waning of the restraint on
spending growth from changes in fiscal policy, continued improvement in credit availability, increases in consumer and business confidence, and a pickup in foreign
economic growth. In response to a further downward
surprise in the unemployment rate, the staff again lowered its forecast for the unemployment rate over the projection period. To reconcile the downward revision to
real GDP growth for the first half of year with an unemployment rate that was now closer to the staff’s estimate
of its longer-run natural rate, the staff lowered its assumed pace of potential output growth this year by more
than it marked down GDP growth. As a result, resource
slack in this projection was anticipated to be somewhat
narrower this year than in the previous forecast and to
be taken up slowly over the projection period.
The staff’s near-term forecast for inflation was revised
up a little, as recent data showed somewhat faster-thananticipated increases that were judged to be only partly
transitory. With a little less resource slack in this projection, the medium-term forecast for inflation was also revised up slightly. Nonetheless, as in the June projection,
inflation was projected to step down in the second half
of this year and to remain below the Committee’s
longer-run 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
________________
The staff’s forecast for the July FOMC meeting was prepared
prior to the July 30 release of the BEA’s advance estimate of
real GDP in the second quarter and revisions for earlier periods.
3
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product markets anticipated to diminish only slowly, inflation was forecast to rise gradually and to reach the
Committee’s objective in the longer run.
The staff continued to view uncertainty around its projections for real GDP growth, inflation, and the unemployment rate as roughly in line with the average of the
past 20 years. Although the risks to GDP growth were
still seen as tilted a little to the downside, as neither monetary policy nor fiscal policy was viewed as well positioned to help the economy withstand adverse shocks,
these risks were considered to be more nearly balanced
than in the previous projection. The staff continued to
view 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 viewed the rebound in real GDP in the second quarter and the ongoing improvement in labor market conditions as supporting their expectations for continued moderate economic
expansion with labor market indicators and inflation
moving toward levels the Committee judges consistent
with its dual mandate. Although most participants continued to view the risks to the outlook for economic activity and the labor market as nearly balanced, some
pointed to possible sources of downside risk, including
persistent weakness in the housing sector, a continued
slow rise in household income, or spillovers from developments in the Middle East and Ukraine. Participants
noted that inflation had moved somewhat closer to the
Committee’s 2 percent longer-run objective and generally saw the risks of inflation running persistently below
their objective as having diminished somewhat.
Household spending appeared to be rising moderately
and was expected to contribute to stronger economic
growth in the second half of the year than in the first
half. Business contacts in several Districts reported a
pickup in consumer spending after the weakness in the
first quarter. However, a few participants raised concerns that households might remain cautious, with the
personal saving rate staying elevated, or that the slow rise
in wages and income might be insufficient to support
stronger consumer spending.
The recovery in housing activity remained slow according to most participants. Although mortgage rates were
still low and housing appeared to be relatively affordable,
various factors were seen as restraining demand, including low expected income and high levels of student debt
as well as difficulty in obtaining mortgage credit, particularly for younger, first-time homebuyers. It was also
noted that the weakness in homebuilding along with the
continued rise in house prices suggested that supply constraints were also weighing on construction activity. A
couple of participants indicated that some demand appeared to have shifted to rental properties. The rising
demand for rentals was in part being satisfied by investors buying homes for the rental market; it was also
providing support for multifamily construction. Some
participants noted their concern that a number of the
factors restraining residential construction might persist,
damping the housing recovery for some time.
Many participants reported continued improvement in
sentiment among their business contacts and noted positive readings from recent regional and national surveys
of manufacturing and service-sector activity. In particular, participants cited strength in airlines, railroads, trucking firms, businesses supplying the motor vehicle and
aerospace industries, and those in the high-tech sector.
In addition, higher energy prices continued to provide
support for activity in the energy sector. In the agriculture sector, favorable growing conditions for crops had
lowered prices but increased the profitability of livestock
producers. The reports from their business contacts
provided support for participants’ expectation of
stronger economic growth in the second half of the year.
In some cases, the information from businesses suggested increases in spending on capital equipment or a
pickup in investment in commercial and industrial construction and transportation. Contacts in a number of
areas indicated that credit was readily available, and reports from participants’ business and financial contacts
indicated a strengthening in demand for bank credit.
However, several participants reported that businesses
remained somewhat uncertain about the economic outlook and thus were still cautious about stepping up capital spending and hiring. Federal fiscal restraint reportedly continued to depress business activity in some areas
dependent on federal spending.
Labor market conditions improved in recent months according to participants’ reports on developments in their
Districts as well as a range of national indicators. The
improvement was reflected not only in a pickup in payroll employment gains and a noticeable decline in the
overall unemployment rate, but also in reductions in
broader measures of underutilization such as longduration joblessness and the number of workers with
part-time jobs who would prefer full-time employment.
The labor force participation rate was stable, and a couple of participants pointed out that the transition rate
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from long-duration unemployment to employment had
moved up. Moreover, some participants cited positive
signs of increased hiring and turnover in the labor market, including increases in job openings and hiring plans,
higher quit rates, and apparent improvements in matching workers and jobs.
Participants generally agreed that both the recent improvement in labor market conditions and the cumulative progress over the past year had been greater than
anticipated and that labor market conditions had moved
noticeably closer to those viewed as normal in the longer
run. Participants differed, however, in their assessments
of the remaining degree of labor market slack and how
to measure it. A few argued that the unemployment rate
continues to serve as a reliable summary statistic for the
overall state of the labor market and thought that it
should be the Committee’s principal focus for evaluating
labor market conditions. However, many participants
continued to see a larger gap between current labor market conditions and those consistent with their assessments of normal levels of labor utilization than indicated
by the difference between the unemployment rate and
estimates of its longer-run normal level. These participants cited, for example, the still-elevated levels of longterm unemployment and workers employed part time
for economic reasons as well as low labor force participation. Several participants pointed out that the recent
drop in the unemployment rate had been associated with
progress in reabsorbing the long-term unemployed into
jobs and reducing part-time work, suggesting that slack
was diminishing and could be reduced further as employment opportunities expanded.
Labor compensation was still rising only modestly.
Many participants continued to attribute the subdued
rise in wages to the remaining slack in the labor market;
it was noted that the elevated level of relatively low-paid
part-time workers was holding down overall wage increases. Several other participants pointed to reports
that wage pressures had increased in some regions and
occupations that were experiencing labor shortages or
relatively low unemployment. However, a couple of participants indicated that the pass-through of labor costs
has been more attenuated since the mid-1980s and that
wage pressures might not be a reliable leading indicator
of higher inflation.
Inflation firmed in recent months, and most participants
anticipated that it would continue to move up toward
the Committee’s 2 percent objective. Many of them expected that inflation was likely to rise gradually over the
medium term, as resource slack diminished and inflation
expectations remained stable. In support of their assessments, several reported results from various statistical
models of inflation and inflation expectations. Most
now judged that the downside risks to inflation had diminished, but a few participants continued to see inflation as likely to persist below the Committee’s objective
over the medium term. Several commented that the upside risks had not increased. However, a few others argued that the recent tightening of the labor market had
increased the upside risks to inflation and inflation expectations, particularly in an environment in which the
economic expansion was expected to strengthen further.
In their discussion of financial stability issues, participants noted evidence of valuation pressures in some particular asset markets, but those pressures did not appear
to be widespread and other measures of vulnerability in
the financial system were at low to moderate levels. As
a result, they generally saw the vulnerabilities in the financial system as well contained. Some participants discussed how the Committee might better incorporate financial stability risks in its discussion of macroeconomic
risks. They also suggested that the Committee consider
how promptly various financial stability concerns could
be addressed, if need be, and which tools, including
monetary policy and regulatory responses, would be
most timely and effective in doing so.
With respect to monetary policy over the medium run,
participants generally agreed that labor market conditions and inflation had moved closer to the Committee’s
longer-run objectives in recent months, and most anticipated that progress toward those goals would continue.
Moreover, many participants noted that if convergence
toward the Committee’s objectives occurred more
quickly than expected, it might become appropriate to
begin removing monetary policy accommodation
sooner than they currently anticipated. Indeed, some
participants viewed the actual and expected progress toward the Committee’s goals as sufficient to call for a relatively prompt move toward reducing policy accommodation to avoid overshooting the Committee’s unemployment and inflation objectives over the medium
term. These participants were increasingly uncomfortable with the Committee’s forward guidance. In their
view, the guidance suggested a later initial increase in the
target federal funds rate as well as lower future levels of
the funds rate than they judged likely to be appropriate.
They suggested that the guidance should more clearly
communicate how policy-setting would respond to the
evolution of economic data. However, most participants indicated that any change in their expectations for
the appropriate timing of the first increase in the federal
Minutes of the Meeting of July 29–30, 2014
Page 9
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funds rate would depend on further information on the
trajectories of economic activity, the labor market, and
inflation. In particular, although participants generally
saw the drop in real GDP in the first quarter as transitory, some noted that it increased uncertainty about the
outlook, and they were looking to additional data on
production, spending, and labor market developments
to shed light on the underlying pace of economic
growth. Moreover, despite recent inflation developments, several participants continued to believe that inflation was likely to move back to the Committee’s objective very slowly, thereby warranting a continuation of
highly accommodative policy as long as projected inflation remained below 2 percent and longer-term inflation
expectations were well anchored.
Committee Policy Action
In their discussion of monetary policy in the period
ahead, members judged that information received since
the Federal Open Market Committee met in June indicated that economic activity rebounded in the second
quarter. Household spending appeared to be rising
moderately, and business fixed investment was advancing, while the recovery in the housing sector remained
slow. Fiscal policy was restraining economic growth, although the extent of the restraint was diminishing. The
Committee expected that, with appropriate policy accommodation, economic activity would expand at a
moderate pace with labor market indicators and inflation
moving toward levels that the Committee judges consistent with its dual mandate.
With the incoming information broadly supporting the
Committee’s expectation of ongoing improvement in labor market conditions and inflation moving back to the
Committee’s 2 percent objective, members generally
agreed that a further measured reduction in the pace of
asset purchases was appropriate at this meeting. Accordingly, the Committee agreed that, beginning in August, it would add to its holdings of agency MBS at a
pace of $10 billion per month rather than $15 billion per
month, and it would add to its holdings of Treasury securities at a pace of $15 billion per month rather than
$20 billion per month. The Committee again judged
that, if incoming data broadly supported its expectations
that labor market indicators and inflation would continue to move toward mandate-consistent levels, the
Committee would likely reduce the pace of asset purchases in further measured steps at future meetings.
However, the Committee reiterated that asset purchases
were not on a preset course and that its decisions remained contingent on the outlook for the labor market
and inflation as well as its assessment of the likely efficacy and costs of such purchases.
Members discussed their assessments of progress—both
realized and expected—toward the Committee’s objectives of maximum employment and 2 percent inflation
and considered enhancements to the statement language
that would more clearly communicate the Committee’s
view on such progress. Regarding the labor market,
many members concluded that a range of indicators of
labor market conditions—including the unemployment
rate as well as a number of other measures of labor utilization—had improved more in recent months than
they anticipated earlier. They judged it appropriate to
replace the description of recent labor market conditions
that mentioned solely the unemployment rate with a description of their assessment of the remaining underutilization of labor resources based on their evaluation of a
range of labor market indicators. In their discussion,
some members expressed reservations about describing
the extent of underutilization in labor resources more
broadly. In particular, they worried that the degree of
labor market slack was difficult to characterize succinctly
and that the statement language might prove difficult to
adjust as labor market conditions continued to improve.
Moreover, they were concerned that, despite the improvement in labor market conditions, the new language
might be misinterpreted as indicating increased concern
about underutilization of labor resources. At the conclusion of the discussion, the Committee agreed to state
that labor market conditions had improved, with the unemployment rate declining further, while also stating
that a range of labor market indicators suggested that
there remained significant underutilization of labor resources. Many members noted, however, that the characterization of labor market underutilization might have
to change before long, particularly if progress in the labor market continued to be faster than anticipated. Regarding inflation, members agreed to update the language in the statement to acknowledge that inflation had
recently moved somewhat closer to the Committee’s
longer-run objective and to convey their judgment that
the likelihood of inflation running persistently below
2 percent had diminished somewhat.
After the discussion, all members but one voted to maintain the Committee’s target range for the federal funds
rate and to reiterate its forward guidance on how it
would assess the appropriate timing of the first increase
in the target rate and the anticipated behavior of the federal funds rate after it is raised. One member, however,
objected to the guidance that it would likely be appropriate to maintain the current range for the federal funds
Page 10
Federal Open Market Committee
_____________________________________________________________________________________________
rate for a considerable time after the asset purchase program ends because it was time dependent and did not
recognize the implications for monetary policy of the
considerable progress that had been made toward the
Committee’s goals.
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 August, the Desk is directed to
purchase longer-term Treasury securities at a
pace of about $15 billion per month and to
purchase agency mortgage-backed securities
at a pace of about $10 billion per month. The
Committee also directs the Desk to engage in
dollar roll and coupon swap transactions as
necessary to facilitate settlement of the
Federal Reserve’s agency mortgage-backed
securities transactions.
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 June indicates that
growth in economic activity rebounded in the
second quarter. Labor market conditions
improved, with the unemployment rate
declining further. However, a range of labor
market indicators suggests that there remains
significant underutilization of labor resources.
Household spending appears to be rising
moderately and business fixed investment is
advancing, while the recovery in the housing
sector remains slow.
Fiscal policy is
restraining economic growth, although the
extent of restraint is diminishing. Inflation
has moved somewhat closer to the
Committee’s longer-run objective. Longerterm 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, with labor market
indicators and inflation moving toward levels
the Committee judges consistent with its dual
mandate. The Committee sees the risks to the
outlook for economic activity and the labor
market as nearly balanced and judges that the
likelihood of inflation running persistently
below 2 percent has diminished somewhat.
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 August, the
Committee will add to its holdings of agency
mortgage-backed securities at a pace of
$10 billion per month rather than $15 billion
per month, and will add to its holdings of
longer-term Treasury securities at a pace of
$15 billion per month rather than $20 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
Minutes of the Meeting of July 29–30, 2014
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_____________________________________________________________________________________________
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 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, Lael Brainard, Stanley Fischer, Richard W.
Fisher, Narayana Kocherlakota, Loretta J. Mester,
Jerome H. Powell, and Daniel K. Tarullo.
Voting against this action: Charles I. Plosser.
Mr. Plosser dissented because he objected to the statement’s guidance indicating 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.” In his view, the reference to calendar time should be replaced with language that indicates how monetary policy will respond to incoming
data. Moreover, he judged that the statement did not
acknowledge the substantial progress that had been
made toward the Committee’s economic goals and thus
risks unnecessary and disruptive volatility in financial
markets, and perhaps in the economy, if the Committee
reduces accommodation sooner or more quickly than financial markets anticipate.
It was agreed that the next meeting of the Committee
would be held on Tuesday–Wednesday, September 16–
17, 2014. The meeting adjourned at 11:55 a.m. on July
30, 2014.
Notation Vote
By notation vote completed on July 8, 2014, the
Committee unanimously approved the minutes of the
Committee meeting held on June 17–18, 2014.
_____________________________
William B. English
Secretary
Cite this document
Federal Reserve (2014, July 29). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_20140730
@misc{wtfs_fomc_minutes_20140730,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {2014},
month = {Jul},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_20140730},
note = {Retrieved via When the Fed Speaks corpus}
}