FOMC Minutes

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Minutes of the Federal Open Market Committee

July 26–27, 2016

A joint meeting of the Federal Open Market Committee

and the Board of Governors was held in the offices of

the Board of Governors of the Federal Reserve System

in Washington, D.C., on Tuesday, July 26, 2016, at

10:00 a.m. and continued on Wednesday, July 27, 2016,

at 9:00 a.m. 1

PRESENT:

Janet L. Yellen, Chair

William C. Dudley, Vice Chairman

Lael Brainard

James Bullard

Stanley Fischer

Esther L. George

Loretta J. Mester

Jerome H. Powell

Eric Rosengren

Daniel K. Tarullo

Charles L. Evans, Patrick Harker, Robert S. Kaplan,

Neel Kashkari, and Michael Strine, Alternate

Members of the Federal Open Market Committee

Jeffrey M. Lacker, Dennis P. Lockhart, and John C.

Williams, Presidents of the Federal Reserve Banks

of Richmond, Atlanta, and San Francisco,

respectively

Brian F. Madigan, Secretary

Matthew M. Luecke, Deputy Secretary

David W. Skidmore, Assistant Secretary

Michelle A. Smith, Assistant Secretary

Scott G. Alvarez, General Counsel

Steven B. Kamin, Economist

Thomas Laubach, Economist

David W. Wilcox, Economist

Thomas A. Connors, Troy Davig, Michael P. Leahy,

David E. Lebow, Stephen A. Meyer, Ellis W.

Tallman, Christopher J. Waller, and William

Wascher, Associate Economists

The Federal Open Market Committee is referenced as the

“FOMC” and the “Committee” in these minutes.

2 Attended the discussions of the long-run monetary policy

implementation framework and financial developments.

1

Simon Potter, Manager, System Open Market Account

Lorie K. Logan, Deputy Manager, System Open

Market Account

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

the Secretary, Board of Governors

Matthew J. Eichner, 2 Director, Division of Reserve

Bank Operations and Payment Systems, Board of

Governors; Michael S. Gibson, Director, Division

of Banking Supervision and Regulation, Board of

Governors; Nellie Liang, Director, Division of

Financial Stability, Board of Governors

James A. Clouse, Deputy Director, Division of

Monetary Affairs, Board of Governors; Daniel M.

Covitz, Deputy Director, Division of Research and

Statistics, 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

Linda Robertson, Assistant to the Board, Office of

Board Members, Board of Governors

Fabio M. Natalucci and Gretchen C. Weinbach, 3 Senior

Associate Directors, Division of Monetary Affairs,

Board of Governors; Michael G. Palumbo, Senior

Associate Director, Division of Research and

Statistics, Board of Governors; Beth Anne Wilson,

Senior Associate Director, Division of

International Finance, Board of Governors

Michael T. Kiley, Senior Adviser, Division of Research

and Statistics, and Senior Associate Director,

Division of Financial Stability, Board of Governors

Attended the discussion of the long-run monetary policy implementation framework.

3

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Antulio N. Bomfim and Joyce K. Zickler, Senior

Advisers, Division of Monetary Affairs, Board of

Governors; Brian M. Doyle,3 Senior Adviser,

Division of International Finance, Board of

Governors

Jane E. Ihrig,3 Associate Director, Division of

Monetary Affairs, Board of Governors

John J. Stevens, Deputy Associate Director, Division of

Research and Statistics, Board of Governors

Glenn Follette and Steven A. Sharpe, Assistant

Directors, Division of Research and Statistics,

Board of Governors; Elizabeth Klee,3 Assistant

Director, Division of Monetary Affairs, Board of

Governors

David H. Small, Project Manager, Division of

Monetary Affairs, Board of Governors

Elmar Mertens, Principal Economist, Division of

Monetary Affairs, Board of Governors

Valerie Hinojosa, Information Manager, Division of

Monetary Affairs, Board of Governors

Marie Gooding, First Vice President, Federal Reserve

Bank of Atlanta

David Altig and Ron Feldman, Executive Vice

Presidents, Federal Reserve Banks of Atlanta and

Minneapolis, respectively

Tobias Adrian, Michael Dotsey, Stephanie Heller,

Susan McLaughlin,3 Julie Ann Remache,3 and John

A. Weinberg, Senior Vice Presidents, Federal

Reserve Banks of New York, Philadelphia, New

York, New York, New York, and Richmond,

respectively

John Duca, Jonas D. M. Fisher, Deborah L. Leonard,3

Antoine Martin,3 Ed Nosal,3 Anna Paulson,3 Joe

Peek, and Patricia Zobel,3 Vice Presidents, Federal

Reserve Banks of Dallas, Chicago, New York, New

York, Chicago, Chicago, Boston, and New York,

respectively

John Fernald, Senior Research Advisor, Federal

Reserve Bank of San Francisco

Long-Run Monetary Policy Implementation

Framework

The staff provided several briefings that reviewed progress on a long-term effort begun in July 2015 to evaluate potential long-run frameworks for monetary policy

implementation. The briefings highlighted some foundational considerations that are relevant for such an

evaluation. The staff described the recent experience of

several central banks of advanced foreign economies

(AFEs) in implementing monetary policy, noting that

they use a wide variety of frameworks to control shortterm interest rates and that their approaches have

evolved over time. For example, foreign central banks

vary in their choice of the interest rate used to communicate monetary policy; in their approach to the provision

of reserve balances; and in their use of policies, such as

large-scale asset purchases, various funding programs,

and negative interest rates, to supplement more traditional means of policy implementation. The staff also

described the Federal Reserve’s experience in implementing monetary policy during the recent financial crisis. Before the financial crisis, traditional implementation tools—relatively small-sized open market operations and discount window lending—were adequate for

interest rate control even during periods of stress. But

the evidence from the period of the crisis and its aftermath suggested that the Federal Reserve’s pre-crisis

framework did not enable close control over the federal

funds rate when liquidity programs were expanded significantly and subsequently was unable to generate sufficiently accommodative financial conditions to support

economic recovery without the use of new policy tools.

Finally, the staff noted that various aspects of U.S.

money markets, which determine short-term interest

rates and are important for transmitting monetary policy,

have changed since the financial crisis. The differences

include changes the Federal Reserve has made to its policy tools and balance sheet, changes in market participants’ business practices, and the regulatory changes

made around the globe to strengthen the financial system. Taken together, these factors may, for example,

raise the long-run demand for safe assets, including reserve balances, and they should help make U.S. money

markets more stable than they were before and during

the financial crisis.

In the discussion that followed the staff presentations,

policymakers agreed that decisions regarding an appropriate long-run implementation framework would not

be necessary for some time. Furthermore, their judgments regarding a future framework would benefit from

accruing additional experience with recently developed

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policy tools, such as the payment of interest on reserves,

and accumulating more information about some important considerations that are still evolving, including

financial regulations and market participants’ responses

to them.

One key consideration discussed by policymakers was

the appropriate amount of flexibility that an implementation framework might have—for example, the extent

to which a framework could readily enable interest rate

control under a wide range of economic and financial

circumstances. With neutral interest rates potentially remaining quite low, policymakers also observed that, in

order to promote the Federal Reserve’s policy objectives, the framework should have the capacity to supplement conventional policy accommodation with other

measures when short-term nominal interest rates are

near zero. Policymakers emphasized that the relationship between the monetary policy implementation

framework and financial stability considerations would

require careful attention. Importantly, the policy implementation framework would need to be consistent with

recent changes in regulation designed to enhance the stability of the financial system. Also, because episodes of

financial stress can arise with little warning, policymakers

noted the advantage of being operationally ready for

such situations; however, they also recognized that such

operational readiness could entail some costs. Participants observed that various choices associated with policy implementation frameworks—such as the selection

of counterparties or types of collateral to accept, and the

overall size and composition of the Federal Reserve’s

balance sheet—may both be influenced by, and themselves influence, incentives and activity in financial markets. Moreover, they indicated that the implications of

the implementation framework for the efficiency of the

financial system needed to be taken into account.

Meeting participants commented on several other considerations that they saw as being relevant for evaluating

possible implementation frameworks. Other major central banks have successfully employed a range of policy

rates, including both administered rates and market

rates, suggesting that either type of rate can be effective

in communicating and implementing policy. However,

the factors affecting market rates, as well as the relationships between the policy interest rate and other shortterm interest rates, would need to be well understood in

deciding on a particular policy rate. The potential benefits of improving the functioning of certain policy tools

were noted; for example, approaches to reducing the

perceived stigma associated with borrowing at the discount window, particularly in periods of financial strain,

would need further careful consideration. In addition, it

was noted that the dollar is a principal reserve currency

and that monetary transmission in the United States occurs through funding markets that are quite globally connected. At the conclusion of the discussion, the Chair

asked the staff to continue its work and noted that policymakers would review further analysis at a future meeting.

Developments in Financial Markets and Open

Market Operations

The deputy manager of the System Open Market Account (SOMA) reported on developments in financial

markets and open market operations during the period

since the Committee met on June 14–15, 2016. Following the outcome of the June 23 referendum in the United

Kingdom in which a majority indicated a preference to

leave the European Union (EU), yields on U.S. Treasury

securities fell sharply, U.S. equity prices declined, and the

foreign exchange value of the dollar increased. However, these changes generally reversed in subsequent

weeks. On balance, Treasury yields were down only

slightly over the intermeeting period, equity prices were

higher, and the foreign exchange value of the dollar was

little changed. Although the expected path of the federal

funds rate implied by market prices was about unchanged on net, the Open Market Desk’s Survey of Primary Dealers and Survey of Market Participants indicated that the median responses for the most likely path

of the federal funds rate over coming quarters had declined.

During the intermeeting period, federal funds continued

to trade at rates well within the FOMC’s ¼ to ½ percent

target range. However, the average effective federal

funds rate was modestly higher than in the previous intermeeting period. The slightly firmer conditions in the

federal funds market were supported by higher rates in

money markets for secured transactions, which appeared

to reflect at least in part more cautious liquidity management by some money market participants in the wake of

the U.K. referendum. Take-up at the System’s overnight

reverse repurchase agreement facility rose somewhat.

The increase seemed to be in part the result of shifts in

investments by money market funds in advance of the

scheduled implementation in October of changes to the

regulation of the money market fund industry.

By unanimous vote, the Committee ratified the Desk’s

domestic transactions over the intermeeting period.

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There were no intervention operations in foreign currencies for the System’s account during the intermeeting period.

new orders diffusion indexes from national and regional

manufacturing surveys, suggested only modest gains in

factory output over the next few months.

Staff Review of the Economic Situation

The information reviewed for the July 26–27 meeting indicated that labor market conditions generally improved

in June and that growth in real gross domestic product

(GDP) was moderate in the second quarter. Consumer

price inflation continued to run below the Committee’s

longer-run objective of 2 percent, restrained in part by

earlier decreases in energy prices and in prices of nonenergy imports. Most survey-based measures of longerrun inflation expectations were little changed, on balance, while market-based measures of inflation compensation remained low.

Growth in real personal consumption expenditures

(PCE) appeared to have picked up 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 continued to rise at a solid pace in June.

Although sales of light motor vehicles declined in June,

the average pace for the second quarter as a whole was

essentially the same as in the first quarter. The apparent

pickup in real PCE growth was consistent with recent

readings on key factors that influence consumer spending, including continued gains in real disposable personal

income and in households’ net worth. Also, consumer

sentiment as measured by the University of Michigan

Surveys of Consumers remained reasonably upbeat in

the second quarter and in early July.

Total nonfarm payroll employment increased briskly in

June, but the increase for the second quarter as a whole

was noticeably slower than in the first quarter. The unemployment rate rose to 4.9 percent in June, partly reversing its decline in the previous month. The labor

force participation rate edged up in June, while the

employment-to-population ratio edged down. The

share of workers employed part time for economic reasons declined in June after a similarly sized increase in

May. The rate of private-sector job openings declined in

May, albeit from an elevated level, and the rates of hires

and of quits were both unchanged. The four-week moving average of initial claims for unemployment insurance

benefits remained low through mid-July. Average

hourly earnings for all employees increased 2½ percent

over the 12 months ending in June.

The unemployment rates for African Americans and for

Hispanics stayed above the rate for whites, although the

differentials in jobless rates across the different groups

were similar to those before the most recent recession.

A similar pattern among demographic groups held for a

broader measure of labor underutilization that also includes persons who were marginally attached to the labor force and those who were employed part time for

economic reasons.

Total industrial production rose modestly, on net, in

May and June, primarily reflecting an increase in the output of utilities in June related to unseasonably warm

weather during that month. Manufacturing production

was little changed, on balance, in May and June, and mining output edged up following a string of steep declines.

Automakers’ assembly schedules pointed to an increase

in motor vehicle production during the third quarter, but

other indicators of manufacturing production, such as

Recent information on housing activity suggested that

the pace of the gradual recovery in the sector had slowed

in recent months. Starts for new single-family homes

were little changed, on average, in May and June at a level

below that in the first quarter, while starts for multifamily units moved up, on net, and were above their firstquarter average. Building permit issuance for both

single-family and multifamily units remained essentially

flat in the second quarter and pointed to little improvement in the rate of starts over the next few months.

Sales of new and existing homes both increased, on net,

in May and June.

Real private expenditures for business equipment and intellectual property appeared to have declined for a third

consecutive quarter. Nominal shipments of nondefense

capital goods excluding aircraft decreased in May and

June, and orders for these goods also declined on balance. However, recent readings from national and regional surveys of business conditions suggested some

pickup in business equipment spending in the near term.

Firms’ nominal spending for nonresidential structures

excluding drilling and mining declined in May. The

number of oil and gas rigs in operation, an indicator of

spending for structures in the drilling and mining sector,

fell through late May but edged up through mid-July.

Nominal outlays for defense through June pointed to a

decline in real federal government purchases in the second quarter. Real state and local government purchases

also appeared to have declined. Although payrolls for

state and local governments expanded over the quarter,

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nominal construction spending by these governments

declined noticeably in April and May.

The U.S. international trade deficit widened in May, as

imports rose and exports declined slightly. The export

decline was led by decreased exports of capital goods

and automotive products. For imports, increased imports of industrial supplies and consumer goods more

than offset decreased imports of capital goods. These

recent indicators, combined with data from earlier in the

year, suggested that net exports made a near-neutral contribution to the growth of real GDP in the first half of

2016.

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

price index, increased about 1 percent over the

12 months ending in May, partly restrained by earlier declines in consumer energy prices. Core PCE price inflation, which excludes changes in food and energy prices,

was a little above 1½ percent over the same 12-month

period, held down in part by decreases in the prices of

non-energy imports over much of this period and the

pass-through of the declines in energy prices to the

prices of other goods and services. Over the 12 months

ending in June, total consumer prices as measured by the

consumer price index (CPI) rose 1 percent, while core

CPI inflation was about 2¼ percent. The Michigan survey measure of longer-run inflation expectations edged

up in June and was unchanged in early July. Other

measures of longer-run inflation expectations—including those from the Desk’s Survey of Primary Dealers and

Survey of Market Participants—were generally little

changed, on balance, in recent months.

The pace of foreign real GDP growth appeared to slow

in the second quarter, driven in large part by temporary

factors such as wildfires in Canada and, to a lesser extent,

by a deceleration of activity in the euro area. In the

emerging market economies (EMEs), a pickup in growth

in China in the second quarter, supported by policy stimulus, appeared to be more than offset by slower growth

in Latin America. In the United Kingdom, early indicators following the June 23 referendum on exit from the

EU (“Brexit”) pointed to a slowdown in economic

growth. Inflation in the AFEs picked up in the second

quarter, largely reflecting some increase in energy prices,

but generally remained low. Inflation also remained subdued in the EMEs.

Staff Review of the Financial Situation

Domestic financial conditions remained accommodative

over the intermeeting period. Equity price indexes increased, on net, despite an initial sharp decline following

the Brexit vote, and corporate bond spreads declined on

balance. Conditions in business and consumer credit

markets were about unchanged. The expected policy

path of the federal funds rate implied by market quotes

was little changed, on net, but fluctuated notably over

the intermeeting period.

In the days immediately following the Brexit vote, asset

prices were volatile, and some financial markets, particularly certain foreign exchange markets, experienced

brief periods of strained liquidity. Global stock indexes

fell notably, credit spreads widened, and safe-haven assets appreciated substantially. However, broad-based

market dislocations did not develop, apparently because

market participants had prepared for a significant risk

event. Market analysts also pointed to the communications and actions by advanced-economy authorities both

before and after the vote as helping to reassure investors.

Overall, negative sentiment surrounding the Brexit outcome early in the intermeeting period was subsequently

alleviated by expectations for greater policy accommodation in some AFEs, some resolution of near-term political uncertainty in the United Kingdom, and positive

U.S. economic data releases. Nevertheless, several

longer-term global risks related to Brexit remained.

Federal Reserve communications released in conjunction with the June FOMC meeting were interpreted by

market participants as more accommodative than expected. The expected path of the federal funds rate implied by market quotes declined in response to the release of forecasts collected for the June Summary of

Economic Projections, which showed larger-thanexpected downward revisions to projections of the federal funds rate. The expected policy path implied by

market quotes fell further in the aftermath of the Brexit

vote, but it later retraced most of the earlier declines,

supported by better-than-expected domestic data releases—particularly the employment and retail sales reports for June—as well as improved sentiment regarding

the possible near-term implications of Brexit. The median respondents to the Desk’s Survey of Primary Dealers and Survey of Market Participants saw one rate hike

in 2016 as most likely, the same as in the June surveys.

The nominal Treasury yield curve flattened slightly, on

net, over the intermeeting period. Longer-term nominal

Treasury yields fell sharply in the two weeks following

the Brexit vote. Market participants attributed the decline in Treasury yields to a variety of factors, including

expectations for a more accommodative stance of monetary policy by major central banks; an intensification of

demand for safe-haven assets immediately following the

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Brexit vote; and strong demand by global institutional

investors for higher-yielding U.S. fixed-income assets

following decreases in sovereign yields in Europe and

Japan, in some cases further into negative territory.

Most of the decline in nominal Treasury yields was reversed later in the period. The small net decline in

longer-term nominal Treasury yields over the period was

attributable to a comparable drop in real yields, as

longer-term inflation compensation measures based on

Treasury Inflation-Protected Securities and inflation

swaps were little changed on net. Spreads of yields on

agency mortgage-backed securities over yields on Treasury securities narrowed slightly.

Broad stock price indexes increased, on net, over the intermeeting period. One-month-ahead option-implied

volatility on the S&P 500 index—the VIX—fell, returning to the lower end of its distribution of the past few

years. U.S. bank stock prices dropped sharply after the

Brexit vote but then retraced that decrease, buoyed by

better-than-expected earnings reports from some of the

largest domestic banks. Declines in European bank

stock prices following the Brexit vote also reversed later

in the intermeeting period. Spreads of yields on

investment-grade corporate bonds over those on

comparable-maturity Treasury securities ended the period somewhat lower, on net, and spreads on

speculative-grade corporate bonds declined notably.

Near-term forward spreads on speculative-grade issues

dropped substantially more than their far-term forward

counterparts, suggesting that the overall decline in

speculative-grade spreads was due in part to a less negative credit outlook and not just an increase in investors’

risk appetite.

Overall financing conditions for nonfinancial firms remained accommodative. Gross issuance of corporate

bonds stayed robust in June, particularly in the

investment-grade sector. Issuance slowed significantly

in early July for both investment- and speculative-grade

bonds, in part reflecting seasonal factors. The growth of

commercial and industrial (C&I) lending on banks’

books slowed in June, but expansion of such loans continued through early July. This pattern was consistent

with the responses to the July 2016 Senior Loan Officer

Opinion Survey on Bank Lending Practices (SLOOS), in

which modest net fractions of respondents indicated

that they had tightened their C&I lending standards and

experienced weaker demand for such loans during the

second quarter.

On balance, the credit quality of nonfinancial corporations continued to weaken in recent months, although

some indicators suggested that the pace of deterioration

was subsiding. The net volume of bonds downgraded in

the second quarter was notably smaller than in the previous quarter. Even so, default rates on bonds issued by

nonfinancial corporations and expected year-ahead default rates for nonfinancial firms both remained elevated

relative to the ranges that typically prevail during expansions.

Financing conditions for commercial real estate (CRE)

stayed fairly accommodative, on balance, and bank lending in all major CRE categories was strong through June.

Spreads on U.S. commercial mortgage-backed securities

(CMBS) did not appear to have been affected by the

Brexit vote. They remained elevated, however, a factor

that likely contributed to depressed CMBS issuance so

far this year. Meanwhile, CMBS delinquency rates edged

up for the third consecutive month. A significant net

fraction of respondents to the July SLOOS indicated

that, during the second quarter, they had tightened their

CRE lending standards for construction and land development loans and loans secured by multifamily residential properties, and a moderate net fraction of respondents reported tightening their lending standards for loans

secured by nonfarm nonresidential properties.

Credit conditions in municipal bond markets remained

solid. Gross issuance of municipal bonds in June was

strong, credit quality continued to be stable overall, and

the ratio of yields on general obligation bonds to those

on comparable-maturity Treasury securities was little

changed on net. The default by Puerto Rico and the

downgrade of the general obligation bonds of Illinois

both appeared to have only a limited effect on the

broader municipal bond market.

Financing conditions in the residential mortgage market

became more accommodative, on balance, since the

June FOMC meeting. Interest rates on 30-year fixedrate mortgages decreased further, partly reflecting the

declines in yields on Treasury securities. A number of

large banks noted in the July SLOOS an easing of standards for home-purchase loans eligible for purchase by

the government-sponsored enterprises (GSEs). Banks

also reported a broad-based pickup in demand across

most major categories of home-purchase loans. Indicators suggested a pickup in refinancing activity in response to the drop in mortgage rates.

Financing conditions in consumer credit markets were

little changed and remained largely accommodative

against a backdrop of stable credit performance across

debt categories. Growth of auto loans remained robust

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even though a modest net fraction of respondents to the

July SLOOS indicated that they had tightened their

standards for such loans. Credit card balances continued

to grow moderately on balance. Yield spreads for securities backed by credit card and auto loans over Treasury

securities remained largely stable, and market participants reportedly expected asset-backed security issuance

to pick up in the coming weeks.

As in the United States, global financial market developments during the intermeeting period were driven, in

large part, by reactions to the U.K. referendum on EU

membership on June 23 and to the release of U.S. economic data. Immediately after the Brexit vote, the British pound depreciated sharply against other major currencies, while the U.S. dollar and the Japanese yen

strengthened on what appeared to be safe-haven flows.

Prices of risky assets and advanced-economy bond yields

also fell in response to the heightened uncertainty and

expectations of slower economic growth. Later in the

period, however, investors’ concerns eased substantially

on the resolution of some of the near-term political uncertainty in the United Kingdom, increased expectations

for additional policy stimulus in Europe and Japan, and

U.S. data on employment and retail sales in June that exceeded market expectations. Some AFE sovereign

yields recovered partially from their post-Brexit lows,

but U.K. long-term yields remained low on expectations

of slower growth there and further monetary policy accommodation. Global equity indexes ended higher, on

net, over the intermeeting period. However, European

bank equities, especially those of Italian banks, underperformed, reflecting investor fears that lower interest

rates will continue to weigh on profitability. Emerging

market asset prices were generally resilient over the intermeeting period; the dollar was weaker against most

emerging market currencies, and flows into emerging

market assets surged. Although the Chinese renminbi

depreciated against both the U.S. dollar and the broader

currency basket referenced by the Chinese government,

this development elicited little market reaction. The unsuccessful coup attempt in Turkey on July 15 left little

imprint on global financial markets.

In its latest report on potential risks to the stability of the

U.S. financial system, the staff continued to judge that

vulnerabilities overall remained at a moderate level and

noted that the financial system had been resilient to the

Brexit vote. While vulnerabilities stemming from

financial-sector leverage were assessed as still low, those

from maturity and liquidity transformation were judged

by the staff to be somewhat higher in the near term than

in the previous assessment. Although upcoming regulatory changes were expected to improve the stability of

money market funds in the longer run, the staff noted

the potential for large withdrawals by investors in anticipation of those changes to lead to some disruptions in

the short run. Vulnerabilities emanating from leverage

in the nonfinancial private sector remained moderate:

While business debt ratios stayed elevated, household

debt-to-income ratios continued to inch down. Valuation pressures also remained at a moderate level. Although term premiums on Treasury securities became

more deeply negative and CRE valuation pressures remained appreciable, corporate bond and equity risk premiums were unchanged on net.

Staff Economic Outlook

In the U.S. economic projection prepared by the staff

for the July FOMC meeting, real GDP growth was estimated to have picked up in the second quarter, consistent with the forecast in June. However, the projected

step-up in real GDP growth over the second half of this

year was marked down a little, partly reflecting softer

news on construction. The forecast for real GDP

growth in 2017 and 2018 was little revised, as the positive effects of a slightly lower assumed path for interest

rates and a stronger trajectory for household wealth were

mostly offset by the restraint from a weaker outlook for

foreign GDP growth and a slightly stronger path for the

foreign exchange value of the dollar. The staff continued to forecast that real GDP would expand at a modestly faster pace than potential output in 2016 through

2018, supported primarily by increases in consumer

spending and, to a lesser degree, by a projected pickup

in business and residential investment. The unemployment rate was expected to remain flat over the second

half of this year and then to gradually decline through

the end of 2018. Over this period, the unemployment

rate was projected to run somewhat below the staff’s estimate of its longer-run natural rate.

The staff’s forecast for consumer price inflation over the

second half of 2016 was a little lower than in the previous projection, as recent declines in crude oil prices were

expected to hold down consumer energy prices. Thereafter, the forecast for inflation was essentially unrevised.

The staff continued to project that inflation would increase over the next several years, as energy prices and

the prices of non-energy imports were expected to begin

steadily rising this year and as resource utilization was

expected to tighten further. However, inflation was still

projected to be slightly below the Committee’s longerrun objective of 2 percent in 2018.

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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 were seen as tilted

to the downside, reflecting the staff’s assessment that

both monetary and fiscal policy appeared to be better

positioned to offset large positive shocks than adverse

ones. In addition, the staff continued to see the risks to

the forecast from developments abroad as skewed to the

downside. Consistent with the downside risks to aggregate demand, the staff viewed the risks to its outlook for

the unemployment rate as tilted to the upside. The risks

to the projection for inflation were still judged as

weighted to the downside, reflecting the possibility that

longer-term inflation expectations may have edged

lower.

Participants’ Views on Current Conditions and the

Economic Outlook

In their discussion of the economic situation and the

outlook, meeting participants agreed that the information received over the intermeeting period indicated

that the labor market had strengthened and that economic activity had been expanding at a moderate rate.

Job gains were strong in June following weak growth in

May. On balance, payrolls and other labor market indicators pointed to some increase in labor utilization in recent months. Household spending had been growing

strongly, but business fixed investment had been soft.

Inflation had continued to run below the Committee’s

2 percent longer-run objective, partly reflecting earlier

declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation remained low; most survey-based measures of

longer-run inflation expectations were little changed, on

balance, in recent months. Domestic and global asset

prices were volatile early in the intermeeting period following the vote by the United Kingdom to leave the EU,

but they subsequently recovered their earlier declines,

and, on net, U.S. financial conditions eased over the intermeeting period.

Participants generally indicated that their economic forecasts had changed little over the intermeeting period.

They continued to anticipate that, with gradual adjustments in the stance of monetary policy, economic activity would expand at a moderate pace and labor market

indicators would strengthen. Inflation was expected to

remain low in the near term, in part because of earlier

declines in energy prices, but to rise to 2 percent over

the medium term as the transitory effects of past de-

clines in energy and import prices dissipated and the labor market strengthened further. Participants viewed

the near-term risks to the U.S. economic outlook as having diminished. However, some noted that the Brexit

vote had created uncertainty about the medium- to

longer-run outlook for foreign economies that could affect economic and financial conditions in the United

States. Participants generally agreed that the Committee

should continue to closely monitor inflation indicators

and global economic and financial developments.

Growth in consumer spending was estimated to have rebounded in the second quarter from the slow pace in the

first quarter, as monthly gains in retail sales were strong

through June. Sales of new motor vehicles remained at

a high level, on average, in the second quarter, although

sales appeared to be supported by substantial incentives

for consumers and by business fleet purchases. With the

second-quarter pickup in spending, real PCE appeared

to have risen over the first half of the year at a rate consistent with the positive trends in fundamental determinants of household spending. Participants cited a number of factors that had likely been supporting household

spending, including solid real income growth, gains in

house and equity values, low gasoline prices, and favorable levels of consumer confidence.

Residential investment posted a strong increase in the

first quarter of the year, but data on starts of new singlefamily homes indicated that outlays likely edged down in

the second quarter. Data on permit issuance through

June suggested that new-home building activity might

rise only slowly in the near term. However, participants

commented on a number of factors suggesting that the

housing sector was likely to continue to improve, albeit

gradually: Rising sales of existing homes, responses to

the July SLOOS pointing to stronger demand for residential mortgage loans, and the steady increase in house

prices were seen as evidence of rising demand. In addition, credit conditions remained favorable: Mortgage

rates had fallen further, and the SLOOS reported easier

terms for loans eligible for purchase by the GSEs.

Moreover, several participants noted positive reports on

residential construction activity from business contacts

in their Districts, with a few suggesting that shortages of

lots and skilled labor, rather than low demand, might be

contributing to the recent slowing.

Business fixed investment appeared to have declined

further during the second quarter, with broad-based

weakness in equipment and another steep drop in drilling and mining structures. Participants noted that the

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recent rise in energy prices had spurred an uptick in drilling activity, suggesting that if energy prices firm over

time as expected, the drag on investment from declining

energy-sector activity should diminish. In addition, it

was pointed out that the upward trend in investment in

intellectual property products was a positive in the outlook for investment. Several participants commented on

favorable reports from their business contacts on commercial construction. Based on conversations with their

contacts, participants discussed a number of factors that

may have been contributing to businesses’ cautious approach to investment spending, including concern about

the likelihood of an extended period of slow economic

growth, both in the United States and abroad; narrowing

profit margins; and uncertainty about prospects for government policies.

In their discussion of business conditions in their Districts, many participants reported that their contacts anticipated that the U.K. referendum would have little effect on their businesses. Activity in the manufacturing

sector continued to be mixed: Several participants indicated that manufacturing in their Districts was still quite

weak, while several others reported that their Banks’

June surveys showed that manufacturing activity had

picked up or stabilized. The available surveys indicated

that service-sector activity continued to expand. However, economic activity continued to be depressed in areas affected by the downturn in the energy sector and

falling agricultural commodity prices, although several

participants noted that the recent firming in crude oil

prices had led to a modest increase in drilling activity.

Businesses in the energy industry were reported to be

highly leveraged, and additional restructurings and bankruptcies were seen as likely. Farm loans continued to

increase, and banks had seen some rise in delinquencies

on such credits.

The labor market report for June appeared to confirm

participants’ earlier assessments that the small gain in

payroll employment in May likely had substantially understated its underlying pace. The sharp rebound in payroll employment gains put the average monthly increase

in jobs over the three months ending in June at about

150,000. Although this pace was noticeably slower than

the average rate during 2015 and the first quarter of

2016, many participants viewed it as consistent with continued strengthening in labor market conditions and

with a further gradual decline in the unemployment rate.

The unemployment rate rose in June after having declined in May, but the labor force participation rate

ticked up, the rate of involuntary part-time employment

more than reversed its increase in May, and the broader

U-6 measure of labor underutilization continued to

move down. Some participants noted that recent signs

of a moderate step-up in wage increases provided further

evidence of improving labor market conditions. Although most participants judged that labor market conditions were at or approaching those consistent with

maximum employment, their views on the implications

for progress on the Committee’s policy objectives varied. Some of them believed that a convergence to a

more moderate, sustainable pace of job gains would

soon be necessary to prevent an unwanted increase in

inflationary pressures. Other participants continued to

judge that labor utilization remained below that consistent with the Committee’s maximum-employment

objective. These participants noted that progress in reducing slack in the labor market had slowed, citing relatively little change, on net, since the beginning of the year

in the unemployment rate, the number of persons working part time for economic reasons, the employment-topopulation ratio, labor force participation, or rates of job

openings and quits.

Available information on inflation suggested that the

change in headline PCE prices for the 12 months ending

in June continued to run well below the Committee’s

longer-run objective and that the 12-month change in

core PCE prices likely remained near its May level of

1.6 percent. On a 12-month-change basis, core PCE inflation had risen from 1.3 percent a year earlier, but it

continued to be held down by the pass-through of earlier

declines in energy prices and by soft prices of imports.

Core PCE inflation over the first half of 2016 was expected to have been close to an annual rate of 2 percent,

but it was noted that some of the increase likely reflected

transitory effects that would be in part reversed during

the second half of the year. Longer-run inflation expectations, as reported in the Michigan survey, were little

changed in June and early July. The reading from the

Federal Reserve Bank of New York’s Survey of Consumer Expectations for inflation three years ahead

moved up further in June, returning to near its level of a

year earlier. Most market-based measures of longer-run

inflation compensation remained low.

Participants also discussed recent developments in financial markets and issues related to financial stability.

The vote by the United Kingdom to leave the EU led to

sharp declines in risk asset prices and a spike in volatility

in financial markets early in the intermeeting period. But

those price moves were subsequently reversed, likely in

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response to expectations for policy actions by some major central banks, the resolution of some of the political

uncertainty in the United Kingdom, and better-thanexpected data on U.S. economic activity. Financial markets and institutions were generally resilient in the aftermath of the vote, apparently reflecting in part advance

preparations by key market participants and communications from advanced-economy central banks before

and after the vote that they would take the steps necessary to provide liquidity to support the orderly functioning of markets. Overall, U.S. financial conditions eased

during the intermeeting period: Major equity indexes

rose, longer-term interest rates fell, credit spreads narrowed, and the broad index of the foreign exchange

value of the dollar was little changed.

In the discussion of developments related to financial

stability, it was noted that while the capital and liquidity

positions of U.S. banks remained strong, European

banks, particularly Italian banks, were under pressure—

as evidenced by the sharp declines in their equity

prices—from a weaker economic outlook for that region, thin interest margins, and concerns about the quality of their loan portfolios. In U.S. markets, overall financial vulnerabilities were judged to remain moderate,

as nonfinancial debt had continued to increase roughly

in line with nominal GDP and valuation pressures were

not widespread. However, during the discussion, several

participants commented on a few developments, including potential overvaluation in the market for CRE, the

elevated level of equity values relative to expected earnings, and the incentives for investors to reach for yield

in an environment of continued low interest rates. Regarding CRE, it was noted that the recent SLOOS reported that a significant fraction of banks tightened

lending standards in the first and second quarters of the

year and that overvaluation did not appear to be widespread across markets. It was also pointed out that investors potentially were becoming more comfortable

locking in current yields in an environment in which low

interest rates were expected to persist, rather than engaging in the type of speculative behavior that could pose

financial stability concerns.

Participants discussed the implications of recent economic and financial developments for the economic outlook and the risks attending the outlook. They indicated

that their forecasts for economic growth, the labor market, and inflation had changed little over the intermeeting period. Regarding the near-term outlook, participants generally agreed that the prompt recovery in financial markets following the Brexit vote and the pickup in

job gains in June had alleviated two key uncertainties

about the outlook that they had faced at the June meeting. Brexit now appeared likely to have little effect on

the U.S. economic outlook in the near term. Moreover,

the employment report for June, along with other recent

information that suggested that real GDP rose at a moderate rate in the second quarter, provided some reassurance that a sharp slowdown in employment and economic activity was not under way. Participants judged

that the incoming information, on the whole, had lowered the downside risks to the near-term economic outlook. Most participants anticipated that economic

growth would move up to a rate somewhat above its

longer-run trend during the second half of 2016 and that

the labor market would strengthen further. However,

several noted that while the outlook for consumer

spending remained positive, continued weakness in business investment and the possibility of slower improvement in the housing sector posed some downside risks

to their forecasts.

Although the near-term risks to the outlook associated

with Brexit had diminished over the intermeeting period,

participants generally agreed that they should continue

to closely monitor economic and financial developments

abroad. As a consequence of Brexit, economic growth

in the United Kingdom and, to a lesser extent, in the

euro area would likely be slower than previously anticipated. Moreover, the exit process was expected to entail

an extended period of negotiations that, in the view of

most participants, had the potential to increase the political and economic uncertainties in that region; several

also saw the possibility that complications during the exit

process could result in spells of elevated volatility in

global financial markets. Some participants noted that

the weak capital positions and high levels of nonperforming loans at some European banks could also weigh

on economic growth in the region. In addition to the

situation in Europe, some participants continued to see

a number of other downside risks to the medium-term

economic and financial outlook from abroad, including

weakness in the global economy more broadly, uncertainty about the outlook for China’s foreign exchange

policy, and the implications of China’s run-up in debt to

support its economy. A few others noted uncertainty

about the strength of domestic economic activity going

forward. However, some other participants indicated

that they did not view the uncertainties attending the

outlook to be unusually elevated and continued to see

the risks to their economic forecasts as balanced.

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In discussing the outlook for the labor market, most participants viewed some further strengthening in labor

market indicators as consistent with achieving the Committee’s maximum-employment objective. With inflation still below the Committee’s longer-run objective

and likely to continue to respond only slowly to somewhat tighter labor markets, most also saw relatively low

risk that a further gradual strengthening of the labor

market would generate an unwanted increase in inflationary pressures. Nevertheless, a few participants continued to caution about the risks to the inflation outlook

from overshooting the natural rate of unemployment.

Some indicated that a step-down in monthly job gains

seemed appropriate as labor market conditions approached those consistent with the Committee’s

maximum-employment objective and that a more moderate pace of hiring could still be consistent with further

increases in labor utilization. However, several others

were concerned that if labor market slack diminished

more slowly than they had previously anticipated, progress on the Committee’s maximum-employment and

inflation objectives could be delayed.

Regarding the outlook for inflation, incoming information appeared to be broadly in line with most participants’ earlier expectations that inflation would gradually

rise to 2 percent over the medium term. Most noted that

the firming in various indicators of core inflation over

the past year, together with signs that the direct and indirect effects of earlier declines in energy prices and

prices of non-oil imports had begun to fade, provided

support for their forecasts. Several added that recent indications of a pickup in wage increases were evidence of

the effect of tightening resource utilization. However,

other participants expressed greater uncertainty about

the trajectory of inflation. They saw little evidence that

inflation was responding much to higher levels of resource utilization and suggested that the natural rate of

unemployment, and the responsiveness of inflation to

labor market conditions, may be lower than most current

estimates. Several viewed the risks to their inflation

forecasts as weighted to the downside, particularly in

light of the still-low level of measures of longer-run inflation expectations and inflation compensation and the

likelihood that disinflationary pressures from abroad

would persist.

Against the backdrop of their views of the economic

outlook, participants discussed the conditions that could

warrant taking another step in removing monetary policy

accommodation. With inflation continuing to run below

the Committee’s 2 percent objective, many judged that

it was appropriate to wait for additional information that

would allow them to evaluate the underlying momentum

in economic activity and the labor market and whether

inflation was continuing to rise gradually to 2 percent as

expected. Several suggested that the Committee would

likely have ample time to react if inflation rose more

quickly than they currently anticipated, and they preferred to defer another increase in the federal funds rate

until they were more confident that inflation was moving

closer to 2 percent on a sustained basis. In addition, although near-term downside risks to the outlook had diminished over the intermeeting period, some participants stressed that the Committee needed to consider

the constraints on the conduct of monetary policy associated with proximity to the effective lower bound on

short-term interest rates. These participants concluded

that the Committee should wait to take another step in

removing accommodation until the data on economic

activity provided a greater level of confidence that economic growth was strong enough to withstand a possible downward shock to demand. However, some other

participants viewed recent economic developments as

indicating that labor market conditions were at or close

to those consistent with maximum employment and expected that the recent progress in reaching the Committee’s inflation objective would continue, even with further steps to gradually remove monetary policy accommodation. Given their economic outlook, they judged

that another increase in the federal funds rate was or

would soon be warranted, with a couple of them advocating an increase at this meeting. A few participants

pointed out that various benchmarks for assessing the

appropriate stance of monetary policy supported taking

another step in removing policy accommodation. A few

also emphasized the risk to the economic expansion that

would be associated with allowing labor market conditions to tighten to an extent that could lead to an unwanted buildup of inflation pressures and thus eventually require a rapid increase in the federal funds rate. In

addition, several expressed concern that an extended period of low interest rates risked intensifying incentives

for investors to reach for yield and could lead to the misallocation of capital and mispricing of risk, with possible

adverse consequences for financial stability.

Committee Policy Action

In their discussion of monetary policy for the period

ahead, members judged that the information received

since the Committee met in June indicated that the labor

market had strengthened and that economic activity had

been expanding at a moderate rate. They noted that the

most recent employment report showed that job gains

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had been strong in June following weak growth in May,

and, on balance, payrolls and other labor market indicators pointed to some increase in labor utilization in recent months. Members agreed that household spending

had been growing strongly but business fixed investment

had been soft. Inflation continued to run below the

Committee’s 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of

non-energy imports. Market-based measures of inflation compensation remained low over the intermeeting

period, and most survey-based measures of longer-term

inflation expectations were, on balance, little changed.

With respect to the economic outlook and its implications for monetary policy, members continued to expect

that, with gradual adjustments in the stance of monetary

policy, economic activity would expand at a moderate

pace and labor market indicators would strengthen.

Members saw developments during the intermeeting period as reducing near-term uncertainty along two dimensions discussed at the June meeting. The first was about

the outlook for the labor market. They agreed that the

strong rebound in job gains in June—together with a rise

in the labor force participation rate and a decline in the

number of individuals who were working part time for

economic reasons—suggested that, despite the very soft

employment report for May, labor market conditions remained solid and slack had continued to diminish. Many

members commented on the somewhat slower average

pace of improvement in labor market conditions in recent months. Several of these members observed that

the recent pace of job gains remained well above that

consistent with stable rates of labor utilization. A couple

of members indicated that, in light of their judgment that

labor market conditions were at or close to the Committee’s objectives, some moderation in employment gains

was to be expected. In contrast, several other members

expressed concern about the likelihood of a further reduction in the pace of job gains, and it was noted that if

that slowing turned out to be persistent, the case for increasing the target range for the federal funds rate in the

near term would be less compelling.

A second source of near-term uncertainty that members

had discussed at the June meeting pertained to the potential economic and financial market consequences of

the U.K. referendum on membership in the EU. At the

current meeting, most members pointed to the quick recovery of financial market conditions since the “leave”

vote as an encouraging sign of resilience in global financial markets that helped reduce near-term uncertainty

about the outlook for the U.S. economy.

While members judged that near-term risks to the domestic outlook had diminished, some noted that the

U.K. vote, along with other developments abroad, still

imparted significant uncertainty to the medium- to

longer-term outlook for foreign economies, with possible consequences for the U.S. outlook. As a result,

members agreed to indicate that they would continue to

closely monitor global economic and financial developments.

Members continued to expect inflation to remain low in

the near term, in part because of earlier declines in energy prices, but most anticipated that inflation would rise

to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipated and the labor market strengthened further. Nonetheless, in light of the current shortfall of inflation from

2 percent, members agreed that they would continue to

carefully monitor actual and expected progress toward

the Committee’s inflation goal.

After assessing the outlook for economic activity, the labor market, and inflation, as well as the risks around that

outlook, members decided to maintain the target range

for the federal funds rate at ¼ to ½ percent at this meeting. Members generally agreed that, before taking another step in removing monetary accommodation, it was

prudent to accumulate more data in order to gauge the

underlying momentum in the labor market and economic activity. A couple of members preferred also to

wait for more evidence that inflation would rise to 2 percent on a sustained basis. Some other members anticipated that economic conditions would soon warrant taking another step in removing policy accommodation.

One member preferred to raise the target range for the

federal funds rate at the current meeting, citing the easing of financial conditions since the U.K. referendum,

the return to trend economic growth, solid job growth,

and inflation moving toward 2 percent.

Members again agreed that, in determining the timing

and size of future adjustments to the target range for the

federal funds rate, the Committee would assess realized

and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation.

They noted that this assessment 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. The Committee expected

that economic conditions would evolve in a manner that

would warrant only gradual increases in the federal funds

rate, and that the federal funds rate was likely to remain,

Minutes of the Meeting of July 26–27, 2016

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for some time, below levels that are expected to prevail

in the longer run. However, members emphasized that

the actual path of the federal funds rate would depend

on the economic outlook as informed by incoming data.

In that regard, members judged it appropriate to continue to leave their policy options open and maintain the

flexibility to adjust the stance of policy based on incoming information and its implications for the Committee’s

assessment of the outlook for economic activity, the labor market, and inflation, as well as the risks to the outlook. Most members noted that effective communications from the Committee would help the public understand how monetary policy might respond to incoming

data and developments.

The Committee also decided to maintain 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, and it anticipated doing so until normalization of the level of the

federal funds rate is well under way. Members noted

that this policy, by keeping the Committee’s holdings of

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

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, to be released at

2:00 p.m.:

“Effective July 28, 2016, the Federal Open

Market Committee directs the Desk to

undertake open market operations as necessary

to maintain the federal funds rate in a target

range of ¼ to ½ percent, including overnight

reverse repurchase operations (and reverse

repurchase operations with maturities of more

than one day when necessary to accommodate

weekend, holiday, or similar trading

conventions) at an offering rate of 0.25 percent,

in amounts limited only by the value of Treasury

securities held outright in the System Open

Market Account that are available for such

operations and by a per-counterparty limit of

$30 billion per day.

The Committee directs the Desk to continue

rolling over maturing Treasury securities at auction and to continue 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 vote also 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

the labor market strengthened and that economic activity has been expanding at a moderate rate. Job gains were strong in June following

weak growth in May. On balance, payrolls and

other labor market indicators point to some increase in labor utilization in recent months.

Household spending has been growing strongly

but business fixed investment has been soft. Inflation has continued to run below the Committee’s 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in

prices of non-energy imports. Market-based

measures of inflation compensation remain low;

most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment

and price stability. The Committee currently expects that, with gradual adjustments in the

stance of monetary policy, economic activity

will expand at a moderate pace and labor market

indicators will strengthen. Inflation is expected

to remain low in the near term, in part because

of earlier declines in energy prices, but to rise to

2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market

strengthens further. Near-term risks to the economic outlook have diminished. The Committee continues to closely monitor inflation indicators and global economic and financial developments.

Against this backdrop, the Committee decided

to maintain the target range for the federal

funds rate at ¼ to ½ percent. The stance of

monetary policy remains accommodative,

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thereby supporting further improvement in labor market conditions and a return to 2 percent

inflation.

In determining the timing and size of future adjustments to the target range for the federal

funds rate, the Committee will assess realized

and expected economic conditions relative to its

objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including

measures of labor market conditions, indicators

of inflation pressures and inflation expectations,

and readings on financial and international developments. In light of the current shortfall of

inflation from 2 percent, the Committee will

carefully monitor actual and expected progress

toward its inflation goal. The Committee expects that economic conditions will evolve in a

manner that will warrant only gradual increases

in the federal funds rate; the federal funds rate

is likely to remain, for some time, below levels

that are expected to prevail in the longer run.

However, the actual path of the federal funds

rate will depend on the economic outlook as informed by incoming data.

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, and it anticipates doing so

until normalization of the level of the federal

funds rate is well under way. This policy, by

keeping the Committee’s holdings of longerterm securities at sizable levels, should help

maintain accommodative financial conditions.”

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

Dudley, Lael Brainard, James Bullard, Stanley Fischer,

Loretta J. Mester, Jerome H. Powell, Eric Rosengren,

and Daniel K. Tarullo.

Voting against this action: Esther L. George.

Ms. George dissented because she believed that a 25 basis point increase in the target range for the federal funds

rate was appropriate at this meeting. Information available since the June FOMC meeting showed solid employment growth, economic growth near its trend, and

inflation outcomes aligning with the Committee’s objective. Domestic financial conditions had eased since the

U.K. referendum. She believed that monetary policy

should respond to these developments by gradually removing accommodation, consistent with the prescriptions of several frameworks for assessing the appropriate stance of monetary policy. She believed that by waiting longer to adjust the policy stance and deviating from

the appropriate path to policy normalization, the Committee risked eroding the credibility of its policy communications.

Consistent with the Committee’s decision to leave the

target range for the federal funds rate unchanged, the

Board of Governors took no action to change the

interest rates on reserves or discount rates.

Secretary’s note: The following statement

regarding the June 14–15, 2016, FOMC meeting

was inadvertently omitted from minutes of that

meeting: “Consistent with the Committee’s

decision to leave the target range for the federal

funds rate unchanged, the Board of Governors

took no action to change the interest rates on

reserves or discount rates.”

It was agreed that the next meeting of the Committee

would be held on Tuesday–Wednesday, September 20–21, 2016. The meeting adjourned at 10:30 a.m.

on July 27, 2016.

Notation Vote

By notation vote completed on July 5, 2016, the

Committee unanimously approved the minutes of the

Committee meeting held on June 14–15, 2016.

_____________________________

Brian F. Madigan

Secretary