FOMC Minutes

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Minutes of the Federal Open Market Committee

July 28–29, 2015

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 28, 2015, at 10:30 a.m. and continued on

Wednesday, July 29, 2015, at 9:00 a.m.

Robert deV. Frierson,1 Secretary of the Board, Office

of the Secretary, Board of Governors

PRESENT:

Janet L. Yellen, Chair

William C. Dudley, Vice Chairman

Lael Brainard

Charles L. Evans

Stanley Fischer

Jeffrey M. Lacker

Dennis P. Lockhart

Jerome H. Powell

Daniel K. Tarullo

John C. Williams

Nellie Liang, Director, Office of Financial Stability

Policy and Research, Board of Governors

James Bullard, Esther L. George, Loretta J. Mester,

Eric Rosengren, and Michael Strine, Alternate

Members of the Federal Open Market Committee

Michael S. Gibson, Director, Division of Banking

Supervision and Regulation, Board of Governors

James A. Clouse and Stephen A. Meyer, Deputy

Directors, Division of Monetary Affairs, Board of

Governors

Andreas Lehnert, Deputy Director, Office of Financial

Stability Policy and Research, Board of Governors

Andrew Figura, David Reifschneider, 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

Patrick Harker and Narayana Kocherlakota, Presidents

of the Federal Reserve Banks of Philadelphia and

Minneapolis, respectively

Linda Robertson, Assistant to the Board, Office of

Board Members, Board of Governors

Helen E. Holcomb, First Vice President, Federal

Reserve Bank of Dallas

David E. Lebow, Senior Associate Director, Division

of Research and Statistics, Board of Governors

Brian F. Madigan, Secretary

Matthew M. Luecke, Deputy Secretary

David W. Skidmore, Assistant Secretary

Michelle A. Smith, Assistant Secretary

Scott G. Alvarez, General Counsel

Thomas C. Baxter, Deputy General Counsel

Steven B. Kamin, Economist

Thomas Laubach, Economist

David W. Wilcox, Economist

Michael T. Kiley, Senior Adviser, Division of Research

and Statistics, and Senior Associate Director,

Office of Financial Stability Policy and Research,

Board of Governors

David Altig, Thomas A. Connors, Michael P. Leahy,

William R. Nelson, Daniel G. Sullivan, and William

Wascher, Associate Economists

Fabio M. Natalucci,3 Associate Director, Division of

Monetary Affairs, Board of Governors

Simon Potter, Manager, System Open Market Account

1

Lorie K. Logan, Deputy Manager, System Open

Market Account

Ellen E. Meade2 and Joyce K. Zickler, Senior Advisers,

Division of Monetary Affairs, Board of Governors;

Jeremy B. Rudd, Senior Adviser, Division of

Research and Statistics, Board of Governors

________________

Attended the joint session of the Federal Open Market

Committee and the Board of Governors.

2 Attended through the discussion on potential enhancements

to the Summary of Economic Projections.

3 Attended the discussion of the economic and financial

situation through the close of the meeting.

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Jane E. Ihrig,2 Deputy Associate Director, Division of

Monetary Affairs, Board of Governors

Glenn Follette and Steven A. Sharpe, Assistant

Directors, Division of Research and Statistics,

Board of Governors; Elizabeth Klee, Assistant

Director, Division of Monetary Affairs, Board of

Governors

Burcu Duygan-Bump, Adviser, Division of Monetary

Affairs, Board of Governors

Penelope A. Beattie,1 Assistant to the Secretary, Office

of the Secretary, Board of Governors

Dana L. Burnett, Section Chief, Division of Monetary

Affairs, Board of Governors

Katie Ross,1 Manager, Office of the Secretary, Board of

Governors

David H. Small, Project Manager, Division of

Monetary Affairs, Board of Governors

Etienne Gagnon, Senior Economist, Division of

Monetary Affairs, Board of Governors

Marie Gooding, First Vice President, Federal Reserve

Bank of Atlanta

Jeff Fuhrer, Executive Vice President, Federal Reserve

Bank of Boston

Troy Davig, Michael Dotsey, Evan F. Koenig, Julie

Ann Remache, Samuel Schulhofer-Wohl, and Ellis

W. Tallman, Senior Vice Presidents, Federal Reserve Banks of Kansas City, Philadelphia, Dallas,

New York, Minneapolis, and Cleveland, respectively

Todd E. Clark,2 Ayşegül Şahin, Mark Spiegel, and Stephen Williamson, Vice Presidents, Federal Reserve

Banks of Cleveland, New York, San Francisco, and

St. Louis, respectively

Matthew Nemeth,4 Assistant Vice President, Federal

Reserve Bank of New York

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Attended through the discussion on System Open Market

Account reinvestment policy.

4

Robert L. Hetzel and Carlo Rosa, Senior Economists,

Federal Reserve Banks of Richmond and New

York, respectively

In the agenda for this meeting, it was reported that Michael Strine had been elected an alternate member of the

Federal Open Market Committee and that he had executed his oath of office.

Developments in Financial Markets, Open Market

Operations, and Policy Normalization

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 deputy manager followed with a discussion of

System open market operations conducted by the Open

Market Desk during the period since the Committee met

The Desk’s overnight reverse

on June 16–17.

repurchase agreement (ON RRP) operations continued

to provide a soft floor for money market interest rates.

The deputy manager also updated the Committee on

plans for tests of the Term Deposit Facility in August

and of term RRPs at the end of the third quarter.

The staff next summarized some of the recent steps the

System had taken to prepare further for the process of

normalization of monetary policy. The staff also

proposed that future changes in the FOMC’s target

federal funds rate range as well as associated changes in

related administered interest rates—including the

interest rates on excess and required reserves, the ON

RRP rate, and the primary credit rate—all be effective

on the day after the Committee’s policy decision.

Making all such rate changes effective on the same day

would enhance the clarity of Federal Reserve

communications. It would also help promote federal

funds trading within the new target range, partly by

enabling the Desk to conduct ON RRP operations at the

new rate specified by the Committee on the same day

that the new target range becomes effective. Participants

supported the staff proposal.

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.

The Board meeting concluded at the end of the

discussion of financial markets, open market operations,

and policy normalization issues.

Minutes of the Meeting of July 28–29, 2015

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System Open Market Account Reinvestment Policy

In the Policy Normalization Principles and Plans

adopted at its September 16–17, 2014 meeting, the

Committee indicated that it expects to cease or

commence phasing out reinvestments of principal on

securities held in the SOMA after it begins increasing the

target range for the federal funds rate; the timing of this

decision will depend on how economic and financial

conditions and the economic outlook evolve. A staff

briefing at this meeting provided background on

alternative strategies the Committee could employ with

respect to reinvestments. These strategies included

either characterizing qualitatively or specifying

numerically the economic conditions under which

reinvestments would cease, or establishing a date or time

interval following the initial firming of the federal funds

rate for the new policy on reinvestments to begin. The

briefing also noted that the Committee could phase out

reinvestments gradually or end reinvestments all at once.

In their discussion, most participants expressed a

preference that the timing of the cessation of

reinvestments be based on a qualitative assessment of

economic conditions and the outlook. Participants

generally favored continuing reinvestments during the

early stages of normalization, initially using only

increases in the target range for the federal funds rate to

reduce monetary policy accommodation. This approach

was viewed as consistent with the Committee’s plans to

rely on changes in the target range for the federal funds

rate as the primary indicator of the stance of monetary

policy. Most participants thought that it might be best

either to wind down reinvestments or to manage them

in a manner that would smooth the decline in the

balance sheet in a predictable way. However, some

participants supported ceasing reinvestments all at once

at the appropriate time. Participants indicated a range of

views on various issues specific to agency mortgagebacked securities (MBS) and Treasury markets. Using

the same strategy for both agency MBS and Treasury

maturities was viewed as simpler to communicate, but a

number of market-specific considerations might suggest

employing different strategies for each asset class. No

decisions regarding the Committee’s strategy for ceasing

or phasing out reinvestments were made at this meeting.

Participants requested additional analysis from the staff

related to alternative approaches to halting or phasing

out reinvestments, including consideration of the

possible market effects, and agreed that it would be

helpful to continue to discuss these issues at upcoming

meetings.

Potential Enhancements to the Summary of

Economic Projections

Next, participants considered a proposal by the

subcommittee on communications for a few modest

modifications to the Summary of Economic Projections

(SEP) that could provide further information to the

public. A staff briefing reviewed the subcommittee’s

proposal for publishing median values of the projections

starting at the time of the September meeting, noting

that public commentary frequently focuses on the

midpoint of the central tendency of the projections and

that medians would provide a more robust summary

measure of the distribution of participants’ views. The

subcommittee also proposed the removal of the

histogram depicting participants’ preferred year of liftoff

from the SEP exhibits at the time that the Committee

decides to commence the normalization process or in

the first SEP thereafter. In their comments, participants

noted that the inclusion of medians would provide an

additional useful summary statistic of participants’

perspectives; however, they also emphasized that the

medians would not represent a collective view or

Committee forecast.

Participants unanimously

supported the addition of medians for all variables—

economic growth, the unemployment rate, total and

core inflation, and individual assessments of the

projected appropriate federal funds rate—to the

September SEP and the removal of the histogram of

preferred liftoff years following the commencement of

normalization. The briefing also raised the possibility of

eventually including graphs in the SEP that would

illustrate the uncertainty that attends participants’

macroeconomic projections, but noted that further work

was needed before a specific proposal could be

presented to the Committee. The Chair asked the

subcommittee on communications to continue to

investigate the possibility of incorporating a graphical

depiction of uncertainty into the SEP.

Staff Review of the Economic Situation

The information reviewed for the July 28–29 meeting

suggested that real gross domestic product (GDP) rose

moderately in the second quarter after edging down in

the first quarter, and that labor market conditions continued to improve. Consumer price inflation continued

to run below the FOMC’s longer-run objective of 2 percent, restrained by earlier declines in energy prices and

further decreases in non-energy import prices. Survey

measures of longer-term inflation expectations remained

stable, while market-based measures of inflation compensation were still low.

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Total nonfarm payroll employment continued to expand

at a solid pace in June. The unemployment rate declined

to 5.3 percent, its lowest reading so far this year, and the

share of workers employed part time edged lower; however, the labor force participation rate and the employment-to-population ratio both moved down. The rate

of private-sector job openings was unchanged in May at

a high level, and the rates of hiring and quits were also

little changed. On balance, labor market indicators suggested that underutilization of labor resources had diminished since early this year.

After declining for five consecutive months, industrial

production rose in June, partly reflecting an increase in

the output of mines. Nonetheless, for the second quarter as a whole, mining output contracted sharply and

manufacturing production rose only modestly; both sectors were weak over the first half of the year, likely reflecting the continuing effects of earlier increases in the

foreign exchange value of the dollar and lower crude oil

prices. Automakers’ assembly schedules pointed to a

solid gain in light motor vehicle production in the third

quarter, but broader indicators of manufacturing production, including readings on new orders from national

and regional manufacturing surveys, generally suggested

only modest increases in factory output in the coming

months.

Real personal consumption expenditures (PCE) appeared to have risen at a solid pace in the second quarter.

The components of the nominal retail sales data used by

the Bureau of Economic Analysis to construct its estimate of PCE edged down in June, but the decline for

that group of components followed a strong reading in

May. Similarly, light vehicle sales in June partly reversed

a large increase in May but remained robust. Among the

factors that influence household spending, real disposable income rose in May and gains in households’ net

worth were supported by further advances in home values. Moreover, consumer sentiment in the University of

Michigan Surveys of Consumers in early July remained

near its highest level since before the most recent recession.

Activity in the housing sector improved somewhat in recent months but remained slow. Starts of new singlefamily houses declined in June but rose for the quarter

as a whole, and the level of permit issuance pointed to

increases in starts in subsequent months. In the multifamily sector, starts and permits increased sharply in

June, likely reflecting in large part a pull-forward of activity due to an expiring tax credit in New York City.

Sales of new homes declined in June; in contrast, existing

home sales increased and pending home sales were at a

level consistent with little change in closed sales over the

next couple of months.

Real private expenditures for business equipment and intellectual property products appeared to rise at a modest

rate in the second quarter. Nominal shipments of nondefense capital goods excluding aircraft were little

changed in June. Forward-looking indicators, such as

new orders for these capital goods along with national

and regional surveys of business conditions, pointed to

further modest increases in business equipment spending in the near term. Real spending for nonresidential

structures excluding drilling and mining appeared to rise

solidly in the second quarter, as firms’ nominal outlays

for such structures increased at a robust pace again in

May. In contrast, real business spending for drilling and

mining structures likely fell sharply last quarter, consistent with the drop in the number of oil rigs in operation. However, the rig count appeared to be bottoming

out in recent weeks.

Nominal federal spending data through June indicated

that real federal government purchases likely decreased

in the second quarter. However, real state and local government purchases appeared to have risen last quarter,

as nominal construction spending rebounded following

a decline in the first quarter and payrolls for these governments were little changed.

After narrowing in April, the U.S. international trade

deficit widened in May, as exports decreased more than

imports. The decrease in exports largely reflected a fall

in aircraft shipments. The decline in imports was driven

by reductions in imports of capital goods, particularly

computers and oilfield equipment. By contrast, imports

of automotive products increased to a record level.

While real net exports made a large negative contribution to the change in real GDP in the first quarter of

2015, the available trade data indicated that the drag on

GDP growth exerted by net exports in the second quarter was considerably smaller.

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

price index, only edged up over the 12 months ending in

May, held down primarily by earlier large declines in energy prices. Core PCE inflation, which excludes food

and energy prices, was 1¼ percent over the same period,

restrained in part by declines in the prices of non-energy

imports. Over the 12 months ending in June, total consumer prices as measured by the consumer price index

(CPI) were little changed, while the core CPI increased

1¾ percent. Measures of expected longer-run inflation

from a variety of surveys, including the Michigan survey

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and the Desk’s Survey of Primary Dealers, remained stable. However, market-based measures of inflation compensation were still low, although they were somewhat

higher than early in the year. Over the 12 months ending

in June, nominal average hourly earnings for all employees increased 2 percent.

Foreign economic growth appeared to remain subdued

in the second quarter. In Canada, indicators suggested

that low oil prices weighed on investment in the energy

sector, and energy production in April was curtailed by

wildfires and maintenance shutdowns. Economic activity also weakened in some Latin American countries. By

contrast, second-quarter economic growth was strong in

China and in the United Kingdom, and euro-area indicators were consistent with continued moderate economic expansion. Headline foreign inflation remained

low, importantly reflecting past oil price declines.

Staff Review of the Financial Situation

Financial conditions were affected by developments

abroad over the intermeeting period but were little

changed on balance. Federal Reserve communications

and economic data releases, including the June employment report and retail sales data, put some downward

pressure on the path of expected future short-term interest rates. On net, 5-year and 10-year Treasury yields

were somewhat lower, measures of inflation compensation over the next 5 years based on Treasury InflationProtected Securities declined, equity prices were little

changed, and the foreign exchange value of the dollar

rose modestly.

The expected path of the federal funds rate moved down

following the June FOMC statement and the Chair’s

postmeeting press conference. Market participants reportedly saw as notable the downward revisions in the

June SEP to FOMC participants’ projections of the appropriate level of the federal funds rate at the end of

2015. Results from the Desk’s July Survey of Primary

Dealers and Survey of Market Participants indicated that

a majority of respondents to both surveys continued to

view the September 2015 meeting as the most likely time

for the first increase in the target range for the federal

funds rate; however, respondents to both surveys continued to place significant probability on scenarios in

which the first increase in the target range occurred at

subsequent meetings. As in the June survey, after the

initial increase, respondents expected the target range for

the federal funds rate to rise only gradually.

Over the intermeeting period, market yields fluctuated

in response to news about developments abroad, including Greek debt negotiations. Yields on 5- and 10-year

nominal Treasury securities fell somewhat on net.

Market-based measures of inflation compensation over

the next 5 years moved lower amid a decline in oil prices,

whereas inflation compensation 5 to 10 years ahead was

relatively stable.

On balance, broad U.S. equity price indexes were little

changed over the intermeeting period. Option-implied

volatility on the S&P 500 index over the next month increased for a time in response to foreign developments

before falling back to the lower end of its range over recent years. Based on reports from about 40 percent of

firms in the S&P 500 index, earnings per share in the

second quarter were about unchanged or slightly higher

than their first-quarter levels. Spreads on 10-year tripleB-rated and speculative-grade corporate bonds over

comparable-maturity Treasury securities widened somewhat over the period.

Financing conditions for nonfinancial firms continued

to be accommodative. Corporate bond issuance remained strong in the second quarter; issuance of institutional leveraged loans picked up noticeably, likely due in

part to tighter loan spreads as compared with the beginning of the year. Commercial and industrial loans on

banks’ balance sheets continued to expand.

Financing for commercial real estate (CRE) remained

broadly available. CRE loans on banks’ books expanded

in the second quarter, consistent with stronger loan demand reported in the July Senior Loan Officer Opinion

Survey on Bank Lending Practices (SLOOS). Issuance

of commercial mortgage-backed securities continued to

be robust.

According to available measures, residential mortgage

lending conditions stayed accommodative for many consumers. However, credit conditions remained tight for

riskier borrowers, such as those with low credit scores,

undocumented income, or high debt-to-income ratios.

Interest rates on 30-year fixed-rate mortgages were little

changed, in line with MBS yields and other longer-term

interest rates.

Outstanding balances of auto and student loans continued to expand at a robust pace through May. Banks indicated in the July SLOOS that their lending standards

for credit card loans had eased somewhat relative to the

past few years. However, a number of indicators suggested that terms on credit card loans remained tight, especially for subprime borrowers.

Credit conditions in municipal bond markets were stable

over the intermeeting period. Despite the announcement that Puerto Rico might seek to restructure at least

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part of its debt, spreads on an index of 20-year general

obligation municipal bonds over comparable-maturity

Treasury securities changed little, and the pace of issuance of long-term municipal bonds remained robust.

After having widened amid concerns about the difficult

negotiations between Greece and its creditors, Greek

and other peripheral euro-area sovereign spreads narrowed, on net, over the intermeeting period as news

emerged of progress toward an agreement. In China,

stock prices fell substantially, prompting a number of

policy and regulatory actions by Chinese officials to support the stock market. While these developments attracted investor attention, reaction in asset markets outside Greece and China was limited on balance.

Sovereign bond yields and monetary policy expectations

in the United Kingdom changed little, on net, over the

intermeeting period. By contrast, yields in Canada, New

Zealand, Norway, and Sweden decreased following

weaker-than-expected macroeconomic data releases and

additional monetary policy accommodation. The foreign exchange value of the U.S. dollar increased during

the intermeeting period against the currencies of major

U.S. trading partners. Stock markets in most advanced

foreign economies ended the period higher. Equity

prices in emerging market economies, however, generally moved lower on net.

The staff provided its latest report on potential risks to

financial stability. The strong capital position of the U.S.

banking sector, low to moderate use of leverage elsewhere in the financial system, stability in the level of maturity transformation by financial institutions, and stillmoderate rates of borrowing by the private nonfinancial

sector were seen as factors supporting overall financial

stability. However, rising debt burdens for riskier businesses as well as somewhat elevated valuations and loosening lending standards for many asset classes pointed

to some increasing concerns. The effect of financial

stresses related to Greece and China on the largest U.S.

financial firms was limited to date, perhaps reflecting the

relatively strong financial positions and low direct exposures among such firms and a view among market participants that foreign authorities would take actions to

stem spillovers.

Staff Economic Outlook

The U.S. economic forecast prepared by the staff for the

July FOMC meeting was broadly similar to that prepared

for the June FOMC meeting. Real GDP was again expected to increase faster in the second half of this year

than in the first half and to expand more rapidly than

potential output in 2016 and 2017, even as the normalization of the stance of monetary policy was assumed to

proceed. However, real GDP growth over the medium

term was revised down a small amount, in part because

of a slightly stronger forecast for the exchange value of

the dollar. The staff also made two small adjustments to

its supply-side assumptions. First, the projected rates of

productivity gains and potential output growth over the

medium term were trimmed. With actual and potential

GDP growth both a bit weaker, the projected narrowing

of the output gap over the medium term was little revised. Second, the staff lowered slightly its estimate of

the longer-run natural rate of unemployment. The unemployment rate was expected to decline gradually to

this revised estimate.

The staff’s forecast for inflation was revised down, particularly in the near term, as the decline in crude oil

prices over the intermeeting period was expected to result in lower consumer energy prices. Although energy

prices and non-oil import prices were expected to begin

rising steadily next year, the staff continued to project

that inflation would be below the Committee’s longerrun objective of 2 percent over 2016 and 2017. Inflation

was anticipated to move up gradually to 2 percent thereafter, with inflation expectations in the longer run assumed to be consistent with the Committee’s objective

and slack in labor and product markets projected to have

waned.

The staff viewed the uncertainty around its July projections for real GDP growth, the unemployment rate, and

inflation as similar to the average of the past 20 years.

The risks to the forecast for real GDP and inflation were

seen as tilted to the downside, reflecting the staff’s assessment that neither monetary nor fiscal policy was well

positioned to help the economy withstand substantial

adverse shocks. At the same time, the staff viewed the

risks around its outlook for the unemployment rate as

roughly balanced.

Participants’ Views on Current Conditions and the

Economic Outlook

In their discussion of the economic situation and the

outlook, meeting participants viewed the information received over the intermeeting period as suggesting that

economic activity had been expanding moderately in recent months. The pace of job gains had been solid and

the unemployment rate had declined, with a range of labor market indicators suggesting that underutilization of

labor resources had continued to diminish. Participants

generally viewed the incoming data as confirming their

earlier assessment that the weak report on real GDP in

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the first quarter reflected transitory factors and expected

that real economic activity would continue to expand at

a moderate pace over the balance of the year, leading to

further improvement in labor market conditions. However, a few participants observed that although GDP

growth appeared to have picked up in recent months relative to the first-quarter pace, the level of GDP remained lower than had been projected earlier in the year.

Inflation continued to run below the Committee’s 2 percent longer-run objective, partly reflecting earlier declines in energy prices and further decreases in prices of

non-energy imports. Market-based measures of inflation compensation remained low, while survey-based

measures of longer-term inflation expectations remained

stable. Participants generally anticipated that inflation

would rise gradually toward 2 percent as the labor market improved further and the transitory effects of earlier

declines in energy and import prices dissipated. Although many continued to see some downside risks arising from economic and financial developments abroad,

participants generally viewed the risks to the outlook for

domestic economic activity and the labor market as

nearly balanced.

With respect to consumer spending, the incoming data

had been uneven but participants cited reports from

contacts suggesting a pickup since the first quarter. Participants generally expected consumer spending to rise

moderately over the near term. Continued gains in employment and income, high household net worth, and

low gasoline prices were viewed as factors that should

support consumer spending in coming months. Consumer credit conditions were also seen as favorable, with

business contacts pointing to steady loan growth, especially for auto loans and credit cards. However, a couple

of participants were concerned about the outlook for

consumer spending, noting that spending had been disappointing in recent months even though real income

had already been boosted by the lower gasoline prices

and the improved labor market.

Participants viewed the recent data on housing starts and

permits as well as the higher levels of sales and prices as

indicative of continued recovery in the housing sector.

The easing of lending standards for residential mortgages evidenced in the most recent SLOOS was cited as

a factor likely to support further progress. However, a

couple of participants noted that they did not expect this

sector to be a major contributor to economic growth

over the remainder of the year.

Participants also observed that activity in other sectors

of the economy continued to be subdued. Business

fixed investment remained soft even as the drag from

the sharp contraction in drilling rigs over the first half of

this year appeared to be fading. Although investment

spending was expected to pick up over the second half

of this year, a few participants were concerned that the

further decline in oil prices that had occurred in recent

weeks might continue to hold down energy-related investment. In addition, government spending was expected to add very little to growth in aggregate spending

this year. Participants also expected net exports to continue to subtract from GDP growth over the second half

of the year, reflecting in part the damping influence of

the dollar’s earlier appreciation.

Industry contacts pointed to generally solid business

conditions, with firms in many parts of the country continuing to report positive assessments of current activity

and optimism about future sales. Manufacturing activity

had slowed somewhat over the intermeeting period, but

conditions were mixed across different industries.

Those firms connected to the auto, aerospace, and construction industries, for example, reported strong demand. However, businesses particularly exposed to the

appreciation of the dollar or falling commodity prices—

including those in the heavy equipment and steel, oil and

gas extraction, and petrochemical industries—reported

slower activity. The service sector reports were mostly

positive. Overall, most contacts viewed the recent slowdown in manufacturing as likely to prove temporary and

remained optimistic about future demand, even though

the recent decreases in oil prices and the possibility of

adverse spillovers from slower economic growth in

China raised some concerns. Regarding the agricultural

sector, a very wet spring had significantly reduced the

percentage of crops in good condition, and declining

commodity prices had further reduced expectations for

farm income.

In their discussion of the foreign economic outlook, participants generally viewed the risks from the fiscal and

financial problems in Greece as having diminished

somewhat, although it was observed that Greece still

faced many challenges and that Greek economic progress was likely to be limited over the near term. While

the recent Chinese stock market decline seemed to have

had limited implications to date for the growth outlook

in China, several participants noted that a material slowdown in Chinese economic activity could pose risks to

the U.S. economic outlook. Some participants also discussed the risk that a possible divergence in interest rates

in the United States and abroad might lead to further

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appreciation of the dollar, extending the downward pressure on commodity prices and the weakness in net exports.

Participants agreed that labor market conditions had improved further, citing increases in payroll employment

and job openings, the decrease in the unemployment

rate, and some further reduction in broader measures of

labor market underutilization. Although the labor force

participation rate declined in June and the national hiring

and quits rates were little changed in May, several participants noted that reports from business contacts in their

Districts pointed to continued job gains and relatively

strong labor markets. They cited anecdotal reports of

firms having concerns about retaining workers and facing difficulties in filling even medium- and lower-skilled

jobs. However, several participants contended that, despite the progress over the past few years, some noticeable margins of slack remained, citing as evidence the

high number of workers not actively searching for jobs

but available and interested in work as well as the high

share of employees working part time for economic reasons compared with pre-recession levels.

The ongoing rise in labor demand still appeared not to

have led to a broad-based firming of wage increases.

While business contacts in a number of Districts continued to report that the pace of wage increases had picked

up, recent national readings on hourly compensation and

average hourly earnings of employees had remained subdued. The most recent employment cost index, released

in April, had suggested an increase in wage gains. However, questions were raised about how to interpret this

reading because the pickup was concentrated in the

Northeast and might have resulted from particular factors that were not associated solely with a general tightening of labor market conditions, such as minimum

wage adjustments and market conditions in certain occupations. In addition, it was noted that considerable

uncertainty remained about when wages might begin to

accelerate and whether that development might translate

into increased price inflation.

Participants discussed how recent developments influenced their expectations for reaching the FOMC’s 2 percent inflation objective over the medium term. Total

PCE inflation continued to run below the Committee’s

longer-run objective. Core PCE price inflation, as measured on a 12-month change basis, also remained low, but

other measures, such as the trimmed mean PCE and median CPI, continued to run at higher levels than core

PCE inflation. Moreover, core CPI inflation had picked

up over recent months. Some participants cited downside risks to inflation, pointing to the absence of any noticeable response of inflation to the reduction in resource slack over the past several years, risks of further

declines in oil and commodity prices, and the possibility

of further appreciation in the dollar. Although most

readings on longer-term inflation expectations were little

changed recently, participants discussed how to interpret

downward movements in some survey and marketbased measures of inflation expectations over the past

few years. Most participants still expected that the

downward pressure on inflation from the previous declines in energy prices and the effects of past dollar appreciation would prove to be temporary. Participants

generally continued to anticipate that, with appropriate

monetary policy, inflation would move up to the Committee’s objective over the medium term, reflecting the

anticipated tightening of product and labor markets and

stable longer-term inflation expectations.

Participants discussed a range of topics associated with

financial market developments and financial stability.

They commented on issues related to the deterioration

in bond market liquidity reported by market participants,

the potential migration of leveraged loan underwriting to

the nonbank sector in light of current supervisory guidance, and the assessment of valuation risks when term

premiums were narrow while most other risk premiums

were not. In addition, it was observed that Puerto Rico

faced significant challenges servicing its debts, though

the risks of contagion to other U.S. financial markets

were judged to be low. Participants also noted the challenges associated with identifying newly emerging risks

as well as the implications for monetary policy of a hypothetical future situation in which financial imbalances

were increasing.

During their discussion of economic conditions and

monetary policy, participants mentioned a number of

considerations associated with the timing and pace of

policy normalization. Most judged that the conditions

for policy firming had not yet been achieved, but they

noted that conditions were approaching that point. Participants observed that the labor market had improved

notably since early this year, but many saw scope for

some further improvement. Many participants indicated

that their outlook for sustained economic growth and

further improvement in labor markets was key in supporting their expectation that inflation would move up

to the Committee’s 2 percent objective, and that they

would be looking for evidence that the economic outlook was evolving as they anticipated. However, some

Minutes of the Meeting of July 28–29, 2015

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participants expressed the view that the incoming information had not yet provided grounds for reasonable

confidence that inflation would move back to 2 percent

over the medium term and that the inflation outlook

thus might not soon meet one of the conditions established by the Committee for initiating a firming of policy.

Several of these participants cited evidence that the response of inflation to the elimination of resource slack

might be attenuated and expressed concern about risks

of further downward pressure on inflation from international developments. Another concern related to the

risk of premature policy tightening was the limited ability

of monetary policy to offset downside shocks to inflation and economic activity when the federal funds rate

was near its effective lower bound.

Some participants, however, emphasized that the economy had made significant progress over the past few

years and viewed the economic conditions for beginning

to increase the target range for the federal funds rate as

having been met or were confident that they would be

met shortly. A few of these participants judged that the

stance of monetary policy, including the extraordinarily

low level of the federal funds rate and the current size of

the Federal Reserve balance sheet, was very accommodative. A couple of others thought that an appreciable

delay in beginning the process of normalization might

result in an undesirable increase in inflation or have adverse consequences for financial stability. Some participants advised that progress toward the Committee’s objectives should be viewed in light of the cumulative gains

made to date without overemphasizing month-tomonth changes in incoming data. It was also noted that

a prompt start to normalization would likely convey the

Committee’s confidence in prospects for the economy.

In their discussion of the appropriate path for the federal

funds rate and associated communications at and after

the time of the first increase in the target range, participants expressed support for emphasizing that the course

of policy would remain conditional on the Committee’s

assessment of economic developments and the outlook

relative to its objectives. It was also noted that the Committee’s communications around the time of the first

rate increase should emphasize that the expected path

for policy, not the initial increase, would be the most important determinant of financial conditions and should

acknowledge that policy would continue to be accommodative to support progress toward the Committee’s

dual objectives. While monetary policy adjustments ultimately would be data dependent, some participants expressed the view that, in light of their current outlook, it

likely would be appropriate to adjust the federal funds

rate gradually after the first increase to help ensure that

the economy would be able to absorb higher interest

rates and that inflation was moving toward the Committee’s objective.

Committee Policy Action

In their discussion of monetary policy for the period

ahead, members judged that information received since

the FOMC met in June indicated that economic activity

had been expanding moderately in recent months. The

labor market had also continued to improve, with solid

job gains and declining unemployment. A range of labor

market indicators, on balance, suggested that underutilization of labor resources had diminished since early this

year. Members generally viewed these developments, together with appropriate monetary policy accommodation, as supporting their expectations for moderate economic growth in the medium term and for further improvement in labor market conditions. They also continued to see the risks to the outlook for economic activity and the labor market as nearly balanced. Inflation

had continued to run below the Committee’s longer-run

objective, but members expected it to rise gradually toward 2 percent over the medium term as the labor market improved further and the transitory effects of earlier

declines in energy and import prices dissipated.

In assessing whether economic conditions had improved sufficiently to initiate a firming in the stance of

monetary policy, the Committee noted that, on balance,

a range of labor market indicators suggested that underutilization of labor resources had diminished further.

Most members saw room for some additional progress

in reducing labor market slack, although several viewed

current labor market conditions as at or very close to

those consistent with maximum employment. Many

members thought that labor market underutilization

would be largely eliminated in the near term if economic

activity evolved as they expected. However, several were

concerned that labor market conditions consistent with

maximum employment could take longer to achieve,

noting, for example, the lack of convincing signs of accelerating wages, which might be signaling that the natural rate of unemployment could currently be lower than

they previously thought.

In considering the Committee’s criteria with respect to

inflation for beginning policy normalization, most members viewed the incoming data as reinforcing their earlier

assessment that, although inflation continued to run below the Committee’s objective, the downward pressure

on inflation from the previous decreases in energy prices

and the effects of past dollar appreciation would abate.

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However, core inflation on a year-over-year basis also

was still below 2 percent. Moreover, some members

continued to see downside risks to inflation from the

possibility of further dollar appreciation and declines in

commodity prices. In addition, several members noted

that higher rates of resource utilization appeared to have

had only very limited effects to date on wages and prices,

and underscored the uncertainty surrounding the inflation process as well as the role and dynamics of inflation

expectations. The Committee agreed to continue to

monitor inflation developments closely, with almost all

members indicating that they would need to see more

evidence that economic growth was sufficiently strong

and labor markets conditions had firmed enough for

them to feel reasonably confident that inflation would

return to the Committee’s longer-run objective over the

medium term.

The Committee concluded that, although it had seen further progress, the economic conditions warranting an increase in the target range for the federal funds rate had

not yet been met. Members generally agreed that additional information on the outlook would be necessary

before deciding to implement an increase in the target

range. One member, however, indicated a readiness to

take that step at this meeting but was willing to wait for

additional data to confirm a judgment to raise the target

range.

In their discussion of language for the postmeeting statement, members agreed that the wording should reflect

their assessment that economic conditions showed continued progress toward the Committee’s objectives. The

Committee updated the statement to indicate that economic activity had been expanding moderately in recent

months and that it had seen further improvement in labor market conditions over the intermeeting period,

pointing specifically to solid job gains and declining unemployment. In addition, the Committee agreed to state

that a range of labor market indicators suggested that

underutilization of labor resources had diminished since

early this year, acknowledging the cumulative progress

that had been made in the labor market. The Committee

also modified the discussion of inflation developments

slightly to recognize the more recent declines in energy

prices while restating the expectation that inflation

would rise gradually toward 2 percent over the medium

term as the labor market improved further and the transitory effects of earlier declines in energy and import

prices dissipated.

The Committee agreed to maintain the target range for

the federal funds rate at 0 to ¼ percent and to reaffirm

in the statement that the Committee’s decision about

how long to maintain the current target range for the

federal funds rate would depend on its assessment of actual and expected progress toward its objectives of maximum employment and 2 percent inflation. Members

also agreed that their evaluation of progress on their objectives would take into account a wide range of information, including measures of labor market conditions,

indicators of inflation pressures and inflation expectations, and readings on financial and international developments. To further reflect the Committee’s assessment

that economic conditions had continued to progress toward its objectives, the Committee slightly altered its

characterization of when it anticipates that it will be appropriate to begin the process of policy normalization.

Specifically, members agreed to indicate the Committee’s anticipation that it would be appropriate to raise the

target range for the federal funds rate when it has seen

some further improvement in the labor market and is

reasonably confident that inflation will move back to its

2 percent objective over the medium term.

The Committee also maintained its policy of reinvesting

principal payments from agency debt and agency

mortgage-backed securities in agency mortgage-backed

securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee’s

holdings of longer-term securities at sizable levels,

should help maintain accommodative financial conditions. The Committee reiterated its expectation 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.

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. The

Committee directs the Desk to maintain its

policy of rolling over maturing Treasury

Minutes of the Meeting of July 28–29, 2015

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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

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 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

economic activity has been expanding moderately in recent months. Growth in household

spending has been moderate and the housing

sector has shown additional improvement;

however, business fixed investment and net

exports stayed soft. The labor market continued to improve, with solid job gains and declining unemployment. On balance, a range

of labor market indicators suggests that underutilization of labor resources has diminished since early this year. Inflation continued

to run below the Committee’s longer-run objective, partly reflecting earlier declines in energy prices and decreasing prices of non-energy imports. Market-based measures of inflation compensation remain low; surveybased measures of 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, with labor market indicators

continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the

risks to the outlook for economic activity and

the labor market as nearly balanced. Inflation

is anticipated to remain near its recent low

level in the near term, but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects

of earlier declines in energy and import prices

dissipate. The Committee continues to monitor inflation developments closely.

To support continued progress toward maximum employment and price stability, the

Committee today reaffirmed its view that the

current 0 to ¼ percent target range for the

federal funds rate remains appropriate. In determining how long to maintain this target

range, 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 and international developments. The Committee anticipates that it will be appropriate to raise the

target range for the federal funds rate when it

has seen some further improvement in the labor market and is reasonably confident that

inflation will move back to its 2 percent objective over the medium term.

The Committee is maintaining its existing policy of reinvesting principal payments from its

holdings of agency debt and agency mortgagebacked securities in agency mortgage-backed

securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee’s holdings of longer-term

securities at sizable levels, should help maintain accommodative financial conditions.

When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run

goals of maximum employment and inflation

of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent 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.”

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

Dudley, Lael Brainard, Charles L. Evans, Stanley Fischer,

Jeffrey M. Lacker, Dennis P. Lockhart, Jerome H. Powell, Daniel K. Tarullo, and John C. Williams.

Voting against this action: None.

Long-Run Monetary Policy Implementation

Framework

At the conclusion of the meeting, the Chair noted that

the staff would soon begin an extended effort to evaluate

potential long-run monetary policy implementation

frameworks. In view of the likely time frames for normalization of the stance of monetary policy and the System’s balance sheet, the Committee probably would not

need to reach any final decisions regarding such a framework for several years. Moreover, the process of normalization will likely provide a great deal of information

about money markets and the Federal Reserve’s policy

tools that will help inform the Committee’s judgment

about a long-run implementation framework. Nonetheless, because the analysis will likely address a wide range

of topics, it seemed appropriate to begin now to organize and undertake the work.

Previous staff work on implementation frameworks was

presented to the Committee in April 2008 and focused

largely on alternative frameworks that could be used to

target the federal funds rate. Those topics would be an

important part of the current undertaking as well. However, in light of experience over recent years, policymakers agreed that a number of related issues warranted attention, including topics such as the effectiveness of alternative implementation frameworks in scenarios that

could require a return to the zero lower bound, regulatory and other structural developments that could affect

financial institutions and markets in ways that would af-

fect monetary policy implementation, and the long-run

structure of the Federal Reserve’s assets and liabilities

that best supports the System’s macroeconomic objectives and financial stability. In discussing the range of

issues contemplated for study under this project, it was

noted that the Policy Normalization Principles and Plans

reflect the Committee’s intention that, in the longer run,

the Federal Reserve will hold no more securities than

necessary to implement monetary policy efficiently and

effectively and that the Federal Reserve will hold primarily Treasury securities.

Policymakers agreed that it would be important to draw

on the perspectives of staff across the Federal Reserve

System and to consult widely with other central banks,

academics, and other experts on markets, financial institutions, and monetary policy. The project was expected

to run through the end of 2016. Policymakers will review progress and provide input as the work proceeds.

It was agreed that the next meeting of the Committee

would be held on Wednesday–Thursday, September

16–17, 2015. The meeting adjourned at 10:45 a.m. on

July 29, 2015.

Notation Vote

By notation vote completed on July 7, 2015, the

Committee unanimously approved the minutes of the

Committee meeting held on June 16–17, 2015.

_____________________________

Brian F. Madigan

Secretary