FOMC Minutes

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Minutes of the Federal Open Market Committee

May 2–3, 2017

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, May 2, 2017, at

1:00 p.m. and continued on Wednesday, May 3, 2017, at

9:00 a.m. 1

Simon Potter, Manager, System Open Market

Account

Lorie K. Logan, Deputy Manager, System Open

Market Account

Ann E. Misback, Secretary, Office of the Secretary,

Board of Governors

PRESENT:

Janet L. Yellen, Chair

William C. Dudley, Vice Chairman

Lael Brainard

Charles L. Evans

Stanley Fischer

Patrick Harker

Robert S. Kaplan

Neel Kashkari

Jerome H. Powell

Matthew J. Eichner, 3 Director, Division of Reserve

Bank Operations and Payment Systems, Board

of Governors; Michael S. Gibson, Director,

Division of Supervision and Regulation, Board

of Governors; Andreas Lehnert, Director,

Division of Financial Stability, Board of

Governors

Stephen A. Meyer, Deputy Director, Division of

Monetary Affairs, Board of Governors

Marie Gooding, Loretta J. Mester, Mark L.

Mullinix, Michael Strine, and John C. Williams,

Alternate Members of the Federal Open

Market Committee

Trevor A. Reeve, Senior Special Adviser to the

Chair, Office of Board Members, Board of

Governors

James Bullard, Esther L. George, and Eric

Rosengren, Presidents of the Federal Reserve

Banks of St. Louis, Kansas City, and Boston,

respectively

Joseph W. Gruber, David Reifschneider, and John

M. Roberts, Special Advisers to the Board,

Office of Board Members, 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

Michael Held, 2 Deputy General Counsel

Steven B. Kamin, Economist

Thomas Laubach, Economist

David W. Wilcox, Economist

Linda Robertson, Assistant to the Board, Office of

Board Members, Board of Governors

Christopher J. Erceg, Senior Associate Director,

Division of International Finance, Board of

Governors; Diana Hancock and David E.

Lebow, Senior Associate Directors, Division

of Research and Statistics, Board of

Governors; Gretchen C. Weinbach, Senior

Associate Director, Division of Monetary

Affairs, Board of Governors

James A. Clouse, Thomas A. Connors, Michael

Dotsey, Evan F. Koenig, Daniel G. Sullivan,

William Wascher, and Beth Anne Wilson,

Associate Economists

1 The Federal Open Market Committee is referenced as the

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

2 Attended Tuesday session only.

Antulio N. Bomfim, Ellen E. Meade, Edward

Nelson, and Joyce K. Zickler, Senior Advisers,

Attended the discussions on developments in financial markets and System Open Market Account reinvestment policy.

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Division of Monetary Affairs, Board of

Governors

Rochelle M. Edge, Associate Director, Division of

Financial Stability, Board of Governors; Jane

E. Ihrig 4 and David López-Salido, Associate

Directors, Division of Monetary Affairs, Board

of Governors; John J. Stevens, Associate

Director, Division of Research and Statistics,

Board of Governors

Glenn Follette, Assistant Director, Division of

Research and Statistics, Board of Governors

Patrick E. McCabe, Adviser, Division of Research

and Statistics, Board of Governors

Penelope A. Beattie,2 Assistant to the Secretary,

Office of the Secretary, Board of Governors

Dana L. Burnett, Michele Cavallo, 5 and Dan Li,

Section Chiefs, Division of Monetary Affairs,

Board of Governors

Benjamin K. Johannsen, Senior Economist,

Division of Monetary Affairs, Board of

Governors

Arsenios Skaperdas,5 Economist, Division of

Monetary Affairs, Board of Governors

Ellen J. Bromagen, First Vice President, Federal

Reserve Bank of Chicago

David Altig, Kartik B. Athreya, Geoffrey Tootell,

and Christopher J. Waller, Executive Vice

Presidents, Federal Reserve Banks of Atlanta,

Richmond, Boston, and St. Louis, respectively

Troy Davig, Julie Ann Remache,4 and Nathaniel

Wuerffel,5 Senior Vice Presidents, Federal

Reserve Banks of Kansas City, New York, and

New York, respectively

Todd E. Clark, Terry Fitzgerald, and Òscar Jordà,

Vice Presidents, Federal Reserve Banks of

Cleveland, Minneapolis, and San Francisco,

respectively

Attended the discussions on monetary policy and System

Open Market Account reinvestment policy.

4

Rania Perry,5 Assistant Vice President, Federal

Reserve Bank of New York

David Lucca, Research Officer, Federal Reserve

Bank of New York

Developments in Financial Markets and Open

Market Operations

The manager of the System Open Market Account

(SOMA) reported on developments in domestic and foreign financial markets over the period since the March

FOMC meeting. Yields on U.S. Treasury securities declined, and the broad index of the foreign exchange

value of the dollar fell modestly. These changes reportedly reflected revisions to investors’ expectations for fiscal and other economic policies; some increase in geopolitical tensions; economic and inflation indicators that,

on balance, were weaker than anticipated; and monetary

policy communications. In response to political developments abroad, spreads on some European sovereign

debt securities narrowed noticeably. Measures of implied volatility in equity markets declined, on net, to levels that were historically very low. Market pricing and

survey evidence indicated that investors anticipated no

change in the target range for the federal funds rate at

this meeting but saw a substantial probability of an increase at the June FOMC meeting; market expectations

for the path of the federal funds rate further ahead fell

somewhat. Federal funds continued to trade well within

the FOMC’s target range. Reinvestment of principal

payments from Treasury and mortgage-backed securities

held in the SOMA proceeded smoothly. The manager

updated the Committee on various small-value tests of

System operations.

The manager also briefed the Committee on developments regarding certain reference interest rates.

Changes in the practices of some domestic and foreign

banks for booking certain types of liabilities, as well as

the effects of recent changes in the regulation of money

market funds, had resulted in a reduction in the volume

of Eurodollar transactions reported on the Federal Reserve’s Report of Selected Money Market Rates

(FR 2420). The staff was in the process of analyzing

possible revisions to the report that would guard against

a further erosion of reported transactions and support

the robustness of the overnight bank funding rate calculated by the Federal Reserve Bank of New York. Such

Attended the discussion on System Open Market Account

reinvestment policy.

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Minutes of the Meeting of May 2–3, 2017

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revisions might be implemented in conjunction with the

periodic renewal of authorization for the report, which

is expected to be completed by the third quarter of 2018.

The manager also noted that aspects of plans to publish

reference interest rates for market repurchase agreements (repos) were being modified to incorporate a

newly available source of data on cleared bilateral repo

transactions; the modifications were expected to extend

the time frame for publication of the new rates by several

months.

The Committee voted unanimously to renew the reciprocal currency arrangements with the Bank of Canada

and the Bank of Mexico; these arrangements are associated with the Federal Reserve’s participation in the

North American Framework Agreement of 1994. In addition, the Committee voted unanimously to renew the

dollar and foreign currency liquidity swap arrangements

with the Bank of Canada, the Bank of England, the Bank

of Japan, the European Central Bank, and the Swiss National Bank. The votes to renew the Federal Reserve’s

participation in these standing arrangements are taken

annually at the April or May FOMC meeting.

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 during the intermeeting period.

Staff Review of the Economic Situation

The information reviewed for the May 2–3 meeting indicated that the labor market strengthened further in

March but that growth of real gross domestic product

(GDP) slowed in the first quarter, with the slowing likely

reflecting transitory factors. The 12-month change in

overall consumer prices was close to the Committee’s

longer-run objective of 2 percent in recent months; excluding food and energy, consumer prices declined in

March, and the 12-month change in core consumer

prices remained somewhat below 2 percent. Surveybased measures of inflation expectations were little

changed on balance.

Total nonfarm payroll employment rose in March, but

the gain was smaller than in recent months, likely reflecting both warmer-than-usual temperatures in February

that probably caused some hiring to be moved forward

and a major winter storm in the Northeast in March that

probably held down hiring somewhat; nevertheless, the

increase in employment for the first quarter as a whole

was solid. The unemployment rate decreased to 4.5 percent in March, and the labor force participation rate was

unchanged. The share of workers employed part time

for economic reasons declined. The rates of privatesector job openings, hiring, and quits were all little

changed in January and February. The four-week moving average of initial claims for unemployment insurance

benefits remained at a very low level through mid-April.

Measures of labor compensation accelerated modestly.

The employment cost index for private workers increased 2¼ percent over the 12 months ending in

March, and average hourly earnings for all employees increased 2¾ percent over the same period; both increases

were somewhat larger than those over the 12 months

ending in March 2016.

The average unemployment rate for whites in the first

quarter of this year was ½ percentage point lower than

its annual average for 2015, while the unemployment

rates for Hispanics and for African Americans were

about 1 percentage point and 1¾ percentage points

lower, respectively. The larger improvements in the

rates for Hispanics and for African Americans mirrored

the larger increases in those rates during the most recent

recession. As of the first quarter, the unemployment

rates for African Americans and for Hispanics remained

above the rate for whites both overall and for people

with similar educational backgrounds. Unemployment

rates for Asians remained below those for whites.

Total industrial production rose in February and March,

primarily reflecting a further expansion of mining output

as well as a net increase in the output of utilities. Manufacturing production declined in March after advancing

in each of the previous six months; about half of the decline in March was due to a decrease in the output of

motor vehicles and parts. Automakers’ assembly schedules suggested that motor vehicle production would increase in the second quarter despite somewhat elevated

levels of vehicle inventories. Broader indicators of manufacturing production, such as the new orders indexes

from national and regional manufacturing surveys,

pointed to modest gains in factory output over the near

term.

Real personal consumption expenditures (PCE) rose

only modestly in the first quarter, although monthly data

indicated some improvement late in the quarter. Indeed,

after declining in January and February, real PCE increased in March, partly reflecting a rebound in spending

on energy services, which had been held down by unseasonably warm weather through February, as well as an

increase in outlays for a variety of consumer goods. Motor vehicle sales picked up in April after declining in

March, although sales remained somewhat below their

average pace in the first quarter and noticeably below the

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high levels seen in the fourth quarter. Recent readings

on key factors that influence consumer spending pointed

to solid growth in real PCE in coming quarters, including further gains in employment, real disposable personal income, and households’ net worth. Moreover,

consumer sentiment, as measured by the University of

Michigan Surveys of Consumers, remained upbeat in

March and April.

Residential investment increased at a brisk pace in the

first quarter. Starts for both new single-family homes

and multifamily units moved up, and issuance of building permits for new single-family homes—which tends

to be a reliable indicator of the underlying trend in residential construction—also rose. Sales of both new and

existing homes in the first quarter were above their levels

in the previous quarter.

Real private expenditures for business equipment and intellectual property increased at a solid pace in the first

quarter after a moderate gain in the fourth quarter.

Nominal shipments and new orders of nondefense capital goods excluding aircraft both rose over the three

months ending in March, and the level of new orders

remained higher than that of shipments, pointing to further near-term gains in shipments. In addition, indicators of business sentiment were upbeat in recent

months. Real business expenditures for nonresidential

structures increased briskly in the first quarter, and the

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

spending for structures in the drilling and mining sector,

continued to rise through mid-April. Business inventory

investment slowed sharply last quarter and held down

real GDP growth significantly.

Real federal purchases declined in the first quarter, as

defense expenditures decreased and nondefense spending rose at a slower pace than in the final quarter of 2016.

Real state and local government purchases also declined

in the first quarter, with a sharp decrease in real construction spending by these governments more than offsetting a modest expansion in state and local government payrolls.

The U.S. international trade deficit narrowed in February. Exports rose and imports fell sharply, with imports

of automotive products and consumer goods declining

after robust increases in January. Preliminary data on

trade in goods suggested that the trade deficit was about

unchanged in March. The Bureau of Economic Analysis

estimated that real net exports added slightly to growth

of real GDP in the first quarter.

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

price index, increased 1¾ percent over the 12 months

ending in March. Core PCE price inflation, which excludes changes in food and energy prices, was about

1½ percent over those same 12 months. Over the

12 months ending in March, total consumer prices as

measured by the consumer price index (CPI) rose

2½ percent, while core CPI inflation was 2 percent. On

a month-over-month basis, both the PCE price index

and the CPI decreased in March, partly reflecting declines in some categories of prices that appeared unlikely

to be repeated. The median of longer-run inflation expectations from the Michigan survey edged down a bit,

on balance, in recent months, while the medians from

the Desk’s Survey of Primary Dealers and Survey of

Market Participants were little changed.

Foreign real GDP growth appeared to have strengthened in the first quarter after slowing somewhat in the

fourth quarter. In the advanced foreign economies

(AFEs), indicators for the first quarter pointed to faster

economic growth in Canada and solid growth in the euro

area and Japan. By contrast, real GDP growth in the

United Kingdom slowed significantly. More recent indicators were consistent with moderate economic

growth in most AFEs. In the emerging market economies (EMEs), growth picked up in China and some

Asian economies in the first quarter but slowed moderately in Mexico. Recent data also suggested that economic activity improved in parts of South America, most

notably in Brazil where positive growth likely resumed

in the first quarter. Inflation in the AFEs continued to

rise, largely because of the pass-through of earlier increases in crude oil prices into retail energy prices. In

the EMEs, inflation fell in China in the first quarter, reflecting a sharp drop in food prices, but was pushed up

in Mexico by fuel price hikes and pass-through from past

currency depreciation.

Staff Review of the Financial Situation

Domestic financial market conditions remained generally accommodative over the intermeeting period. Prices

of risky assets increased a bit on net, Treasury yields declined, and the dollar depreciated. The decline in Treasury yields reportedly was driven in part by investor expectations of a somewhat slower pace of policy rate increases following FOMC communications after the

March meeting and some waning of investor optimism

about prospects for more expansionary fiscal policies.

FOMC communications over the intermeeting period

reportedly were interpreted as indicating a somewhat

Minutes of the Meeting of May 2–3, 2017

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slower pace of policy rate increases than previously expected but an earlier change to the Committee’s reinvestment policy. Although the Committee’s decision to

raise the target range for the federal funds rate at the

March meeting was widely anticipated, some of the accompanying communications were viewed as more accommodative than expected. Investors reportedly also

took note of the discussion in the March FOMC minutes

of the Committee’s reinvestment policy as well as statements from some FOMC participants and appeared to

pull forward their expectations for when the FOMC will

either announce or start to implement a change to that

policy. Overall, however, the market reaction to news

related to potential changes in reinvestment policy appeared to be fairly limited. Quotes on overnight index

swap (OIS) rates pointed to a flattening of the expected

path of the federal funds rate through 2020, but a staff

model suggested that a reduction in term premiums accounted for about half the decline in OIS rates.

Yields on intermediate- and longer-term nominal Treasury securities decreased 20 to 35 basis points over the

intermeeting period. Investors’ interpretations of

FOMC communications, market perceptions of a reduced likelihood of domestic fiscal and regulatory policy

changes, weaker-than-expected domestic economic data

releases, and geopolitical factors and foreign political developments all reportedly placed downward pressure on

yields. A staff term structure model attributed about

one-third of the decline in the 10-year Treasury yield to

a decrease in the average expected future short-term rate

and the remaining two-thirds to a lower term premium.

While inflation compensation based on Treasury

Inflation-Protected Securities decreased at near-term

horizons, partly reflecting the lower-than-expected

March CPI release, far-term inflation compensation was

little changed on net.

Broad U.S. equity price indexes increased slightly, on

net, since the March FOMC meeting. One-monthahead option-implied volatility on the S&P 500 index—

the VIX—rose appreciably in mid-April, reflecting in

part increased investor concerns about geopolitical factors and foreign political developments, but ended the

period slightly lower, as investor concerns appeared to

ease after the first round of the French presidential election. Over the intermeeting period, spreads of yields on

investment- and speculative-grade nonfinancial corporate bonds over comparable-maturity Treasury securities

narrowed a bit on net. Private-sector analysts continued

to project robust profit growth for S&P 500 firms over

2017 even as first-quarter earnings, on a seasonally adjusted basis, were estimated to be a bit lower than in the

fourth quarter.

Conditions in short-term funding markets were stable

over the intermeeting period. Reflecting the FOMC’s

policy action in March, yields on a broad set of money

market instruments moved higher. Treasury bills outstanding, which had declined before the reimposition of

the federal debt ceiling on March 15, moved higher

thereafter, partly in connection with the Treasury’s steps

to rebuild its cash balance. Take-up at the System’s overnight reverse repurchase agreement facility, which had

risen ahead of the debt ceiling date, remained high

through March and then fell to relatively low levels after

quarter-end.

Financing conditions for large nonfinancial firms stayed

accommodative. Gross issuance of corporate bonds and

leveraged loans remained strong in March, with a large

share of lower-rated debt issued for refinancing purposes. Net debt financing by nonfinancial businesses increased in the first quarter but remained noticeably below the pace of the same time last year. According to

the April Senior Loan Officer Opinion Survey on Bank

Lending Practices (SLOOS), a modest share of domestic

banks reported weaker demand for commercial and industrial (C&I) loans, on net, in the first quarter, mainly

citing several factors that pertained to customers’ reduced needs for financing. C&I lending continued to be

soft early in the second quarter.

Financing conditions for commercial real estate (CRE)

were broadly unchanged on net. Spreads on commercial

mortgage-backed securities (CMBS) widened slightly

over the period since the March FOMC meeting but remained near the lower end of the range seen since the

financial crisis. CMBS issuance picked up in March, reportedly reflecting a return to a more normal pace after

the adoption of a credit risk retention rule in late December caused some issuance to be shifted from January

and February into the fourth quarter. Growth of CRE

loans on banks’ books slowed in the first quarter but

continued to be robust overall. Domestic respondents

to the April SLOOS generally reported tightening their

lending standards and experiencing weaker loan demand

across all major CRE loan categories during the first

quarter.

Financing conditions in the residential mortgage market

were little changed over the intermeeting period. Credit

availability continued to be relatively tight for households with low credit scores or harder-to-document in-

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comes but relatively accommodative for other households. Mortgage rates declined in line with yields on

longer-term Treasury securities and mortgage-backed

securities, but they remained elevated compared with the

very low levels of the third quarter of 2016. Consistent

with these developments, refinance originations slowed

considerably since the third quarter. In the April

SLOOS, banks reported roughly unchanged standards

on residential real estate (RRE) loans on average. Banks

also reported that demand for some categories of RRE

loans weakened during the first quarter, including those

insured or guaranteed by government agencies. In line

with lower reported demand, growth in RRE loans on

banks’ balance sheets declined.

Financing conditions in consumer credit markets remained accommodative, on balance, in early 2017. Consumer credit appeared to be broadly available even as interest rates charged on credit card balances and new auto

loans drifted up in line with their benchmark shorterterm interest rates. Growth in consumer loan balances

moderated a bit further from the relatively strong pace

seen during the past few years, although year-over-year

growth in credit card balances, student loans, and auto

loans stayed in the 6 to 7 percent range through February. In the April SLOOS, banks reported tightening

standards on auto loans and easing standards on credit

card loans; banks also reported facing weaker demand

for both auto and credit card loans.

Over the intermeeting period, movements in foreign financial markets were driven by central bank communications in the United States and abroad, geopolitical

risks, and changes in investors’ perceptions about future

U.S. fiscal and other government policies. Concerns

about the outcome of the French presidential election

and tensions in the Korean peninsula pushed down

10-year sovereign yields in the advanced economies for

several weeks. Sentiment improved following the outcome of the first round of the French presidential election on April 23, which led to a partial retracement in

yields. At their meetings on April 27, the European Central Bank and the Bank of Japan each left their policy

stance unchanged. On net, foreign yields declined somewhat less than U.S. yields, contributing to a modest depreciation of the dollar against both the AFE and EME

currencies. Equity indexes in most advanced and emerging economies rose. Flows to emerging market mutual

funds remained strong, and spreads on emerging market

debt were little changed.

The staff provided its latest report on the potential risks

to financial stability; it continued to characterize the financial vulnerabilities of the U.S. financial system as

moderate on balance. This overall assessment reflected

the staff’s judgment that leverage as well as vulnerabilities from maturity and liquidity transformation in the financial sector were low, that leverage in the nonfinancial

sector was moderate, and that asset valuation pressures

in some markets were notable. Although these assessments were unchanged from January’s assessment, vulnerabilities appeared to have increased for asset valuation pressures, though not by enough to warrant raising

the assessment of these vulnerabilities to elevated.

Staff Economic Outlook

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

the May FOMC meeting, real GDP growth was projected to bounce back in the second quarter from its

weak first-quarter reading. The staff judged that the

weakness in first-quarter real GDP was probably not attributable to residual seasonality and that it instead reflected transitorily soft consumer expenditures and inventory investment. Importantly, PCE growth was expected to pick up to a stronger pace in the spring, which

would be more consistent with ongoing gains in employment, real disposable personal income, and households’

net worth. In addition, the sharp decrease in the contribution to GDP growth from the change in inventory investment in the first quarter was not expected to be repeated. Beyond the near term, the forecast for real GDP

growth was a little stronger, on net, than in the previous

projection, mostly due to the effect of a somewhat lower

assumed path for the exchange value of the dollar. The

staff continued to project that real GDP would expand

at a modestly faster pace than potential output in

2017 through 2019, supported in part by the staff’s

maintained assumption that fiscal policy would become

more expansionary in the coming years. The unemployment rate was projected to decline gradually over the

next couple of years and to run somewhat below the

staff’s estimate of its longer-run natural rate over this period; the staff’s estimate of the natural rate was revised

down slightly in this forecast.

The staff’s forecast for consumer price inflation, as

measured by changes in the PCE price index, was revised down marginally for 2017 as a whole after incorporating the soft data on consumer prices for March, but

it was essentially unrevised thereafter. Inflation was still

expected to be somewhat higher this year than last year,

reflecting an upturn in the prices for food and

non-energy imports as well as a slightly faster increase in

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energy prices. The staff continued to project that inflation would increase gradually in 2018 and 2019 and that

it would be marginally below the Committee’s longerrun objective of 2 percent in 2019.

The staff viewed the uncertainty around its 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, primarily reflecting the staff’s assessment

that monetary policy appeared to be better positioned to

respond to large positive shocks to the economic outlook than to substantial adverse ones. However, the

staff viewed the risks to the forecast as less pronounced

than late last year, with both somewhat diminished risks

to the foreign outlook and an increase in U.S. consumer

and business confidence. 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

judged to be roughly balanced. The downside risks from

the possibility that longer-term inflation expectations

may have edged down or that the dollar could appreciate

substantially were seen as roughly counterbalanced by

the upside risk that inflation could increase more than

expected in an economy that was projected to continue

operating above its longer-run potential.

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 continued to strengthen even

as growth in economic activity slowed in the first quarter. Job gains remained solid, on average, in recent

months, and the unemployment rate declined. Household spending rose only modestly, but the fundamentals

underpinning the continued growth of consumption remained solid. Business fixed investment firmed in the

first quarter after increasing only slowly over the previous two years. Inflation measured on a 12-month basis

recently had been running close to the Committee’s

2 percent longer-run objective; consumer prices, both

including and excluding prices of energy and food items,

declined in March, and core inflation continued to run

somewhat below 2 percent. Market-based measures of

inflation compensation remained low; survey-based

measures of longer-term inflation expectations were little changed on balance.

Although the incoming data showed that aggregate

spending in the first quarter had been weaker than participants had expected, they viewed the slowing as likely

to be transitory. They continued to expect that, with

further gradual adjustments in the stance of monetary

policy, economic activity would expand at a moderate

pace, labor market conditions would strengthen somewhat further, and inflation would stabilize around 2 percent over the medium term.

Participants generally indicated that their assessments of

the medium-term economic outlook had changed little

since the March meeting, and they discussed various reasons why the softness in consumer spending in the first

quarter was likely to be transitory. Some participants

judged that the low reading on GDP growth also could

partly reflect residual seasonality and so would likely be

followed by stronger GDP growth in subsequent quarters, repeating a pattern evidenced in recent years. A few

emphasized the uncertainty with regard to the reasons

for the unexpected weakness in consumer spending but

considered it too early to judge the implications for the

outlook. Many pointed to the recent firming of the

housing market and business fixed investment as welcome developments.

Overall, participants continued to see the near-term risks

to the economic outlook as roughly balanced. Many participants saw the risks stemming from global economic

and financial developments as having receded further

over the intermeeting period. They pointed to the encouraging tone of recent data on economic growth

abroad, which suggested some upside risks to foreign

economic activity. However, several noted that downside risks to the global outlook remained, either because

of geopolitical developments and foreign political factors or because monetary policy normalization in the

United States could lead to financial strains in EMEs.

Many participants continued to view the possibility of

expansionary fiscal policy changes in the United States

as posing upside risks to their forecasts for U.S. economic growth, although they also noted that prospects

for enactment of a more expansionary fiscal program, as

well as its size, composition, and timing, remained highly

uncertain. Regarding the outlook for inflation, a couple

of participants expressed concern that a substantial undershooting of the longer-run normal rate of unemployment could pose an appreciable upside risk to inflation.

However, several others continued to see downside risks

to the inflation outlook, particularly given the low readings on inflation over the intermeeting period and the

still-low measures of inflation compensation and infla-

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tion expectations. Participants agreed that the Committee should continue to closely monitor inflation indicators and global economic and financial developments.

While recent data suggested a significant slowdown of

growth in consumption spending early in the year, participants expected to see a rebound in consumer spending in coming months in light of the solid fundamentals

underpinning household spending, including ongoing

job gains, rising household income and wealth, improved household balance sheets, and buoyant consumer sentiment. It was noted that much of the recent

slowing likely reflected transitory factors, such as low

consumer spending for energy services induced by an

unusually mild winter and a decline in motor vehicle

sales from an unsustainably high fourth-quarter pace.

Nevertheless, contacts expected that demand for motor

vehicles would be well maintained. District reports on

the service sector were generally positive, although one

District’s contacts in the tourism industry reported a

falloff in international visitors. One participant noted

that retail contacts reported upbeat projections for

online sales and associated package delivery services, in

part reflecting structural shifts in the retail industry.

Several participants discussed the pickup in residential

investment in the first quarter. Starts and permits for

single-family housing continued to post moderate increases, while sales of new homes rose strongly from

their level in the fourth quarter of 2016. Business contacts in some Districts reported that residential construction activity had not kept pace with demand, resulting in

shortages in housing supply and upward pressure on

prices.

Business fixed investment increased at a solid pace in the

first quarter, led by a rebound in drilling for oil and natural gas. Several participants noted that rising orders for

capital goods suggested further gains in business equipment investment over coming quarters. Business contacts reported increases in activity in the manufacturing

and energy sectors. Contacts in many Districts were said

to be generally optimistic about business prospects. Several participants noted that surveys of business conditions in their Districts continued to indicate expanding

activity. A few participants commented that firms engaged in international trade were benefiting from improvements in global demand conditions. Several participants reported that firms in their Districts planned to

increase capital expenditures, although in another District, uncertainty about changes in trade and regulatory

policies was said to be weighing on capital spending.

Conditions in the agricultural sector remained weak,

partly as a result of low commodity prices.

Labor market conditions strengthened further in recent

months. At 4.5 percent, the unemployment rate had

reached or fallen below levels that participants judged

likely to be normal over the longer run. Increases in

nonfarm payroll employment averaged almost

180,000 per month during the first quarter, a pace that,

if maintained, would be expected to result in further increases in labor utilization over time. Labor market conditions in many Districts were reported to have continued to improve. Contacts in several Districts reported a

pickup in wage increases, shortages of workers in selected occupations, or pressures to train workers for

hard-to-fill jobs. Even so, several other participants suggested some margins may remain along which labor market utilization could increase further without giving rise

to inflationary pressures. In that regard, they noted that

the recent rise in the labor force participation rate in the

face of a downward trend from demographic factors was

a positive development. However, a couple of participants pointed out that uncertainty about both the

longer-run normal rate of unemployment and labor

force trends made it difficult to assess the scope for additional sustainable increases in labor utilization. Generally, participants continued to expect that if economic

growth stayed moderate, as they projected, the unemployment rate would remain, for the next few years, below their estimates of its longer-run normal level. A few

participants continued to anticipate a substantial undershooting of the longer-run normal level of the unemployment rate.

Readings on headline and core PCE price inflation in

March had come in lower than expected. On a

12-month basis, headline PCE price inflation had edged

above the Committee’s 2 percent objective in February,

but this measure dropped back to 1.8 percent in March,

in part reflecting the effects of lower energy prices on

the headline index. Core PCE price inflation, which historically has been a good predictor of future headline inflation, moved down to 1.6 percent over the 12 months

ending in March. However, it was noted that some of

this slowing reflected idiosyncratic factors such as a large

drop in the measure of quality-adjusted prices for wireless telephone services. Several participants emphasized

that inflation measured on a 12-month basis had been

running very close to the Committee’s 2 percent target.

Overall, most participants viewed the recent softer inflation data as primarily reflecting transitory factors, but a

few expressed concern that progress toward the Committee’s objective may have slowed. Market-based

Minutes of the Meeting of May 2–3, 2017

Page 9

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measures of longer-term inflation compensation remained low, with five-year, five-year-forward CPI inflation compensation a bit below 2 percent—unchanged

from the time of the March FOMC meeting but somewhat above levels registered last year. In addition, the

median measure of inflation expectations over the next

5 to 10 years in the Michigan survey edged down from

2.5 percent in February to 2.4 percent in March and

April. The three-year-ahead measure of inflation expectations from the Federal Reserve Bank of New York’s

Survey of Consumer Expectations decreased from

3.0 percent to 2.7 percent in March and rose to 2.9 percent in April.

In light of these developments, participants generally

continued to expect that inflation would stabilize around

the Committee’s 2 percent objective over the medium

run as the effects of transitory factors waned and conditions in the labor market and the overall economy improved further. Participants noted that import prices

had begun to increase, supporting their expectation that

inflation would gradually rise. A few participants, however, expressed uncertainty about the reasons for the recent unexpected weakness in inflation measures and

about its implications for the inflation outlook.

In their discussion of recent developments in financial

markets, some participants commented on changes in financial conditions in the wake of the Committee’s decision to increase the target range for the federal funds rate

in March. They noted variously that the decline in

longer-term interest rates and the modest depreciation

of the dollar over the intermeeting period would provide

some stimulus to aggregate demand, that the Committee’s recent policy actions had not resulted in a tightening of financial conditions, or that some of the decline

in longer-term yields reflected investors’ perceptions of

diminished odds of significant fiscal stimulus and an increase in some geopolitical and foreign political risks.

With regard to financial stability, several participants emphasized that higher requirements for capital and liquidity in the banking system and other prudential standards

had contributed to increased resilience in the financial

system since the financial crisis. However, they expressed concerns that a possible easing of regulatory

standards could increase risks to financial stability. In

addition, it was noted that real estate values were elevated in some sectors of the CRE market, that a sharp

decline in such valuations could pose risks to financial

stability, and that potential reforms in the housing finance sector could have implications for such valuations.

In their consideration of monetary policy, participants

judged that it was appropriate to leave the target range

for the federal funds rate unchanged at this meeting. Although the data on aggregate spending and inflation received over the intermeeting period were, on balance,

weaker than participants expected, they generally saw the

outlook for the economy and inflation as little changed

and judged that a continued gradual removal of monetary policy accommodation remained appropriate. A

couple of participants indicated that increasing the target

range for the federal funds rate at the current meeting

would be warranted by their economic outlook, but they

also noted that maintaining the current stance of policy

for now would be consistent with the Committee’s gradual approach or that the Committee’s recent communications had not pointed to an increase at this meeting.

Most participants judged that if economic information

came in about in line with their expectations, it would

soon be appropriate for the Committee to take another

step in removing some policy accommodation. A number of participants pointed out that clarification of prospective fiscal and other policy changes would remove

one source of uncertainty for the economic outlook.

Participants generally agreed that the current stance of

monetary policy remained accommodative, supporting

some additional strengthening in labor market conditions and a sustained return to 2 percent inflation.

Participants generally reiterated their support for a continued gradual approach to raising the federal funds rate.

Some participants noted that core PCE price inflation

had been running below the Committee’s objective for

overall inflation for the past eight years and that it was

important to return inflation to 2 percent, or that the

public’s longer-term inflation expectations may have

fallen somewhat, and that a gradual approach to tightening could help return expectations and inflation to 2 percent. One participant cited results of a District survey

of businesses indicating that more than one-third of respondents saw the Federal Reserve as more likely to accept inflation below its 2 percent objective than above;

that participant interpreted the survey results as suggesting that the Committee’s communications about the

symmetry of its inflation objective had not completely

taken hold, a concern also mentioned by a couple of

other participants. Another participant observed that a

gradual approach was appropriate because the neutral

rate of interest had declined and considerable uncertainty prevailed about its longer-run level. Several participants, however, pointed to conditions under which

the Committee might need to consider a somewhat

more rapid removal of monetary accommodation—for

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Federal Open Market Committee

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instance, if the unemployment rate fell appreciably further than currently projected, if wages increased more

rapidly than expected, or if highly stimulative fiscal policy changes were to be enacted. In contrast, a couple of

others judged that the Committee could withdraw monetary accommodation even more gradually than reflected in the medians of forecasts in the March Summary of Economic Projections, noting that slack might

remain in the labor market or that inflation was not very

sensitive to declines in the unemployment rate below its

estimated longer-run normal level.

Committee Policy Action

In their discussion of monetary policy for the period

ahead, members judged that information received since

the Committee met in March indicated that the labor

market had continued to strengthen even as growth in

economic activity had slowed. Job gains had remained

solid, on average, in recent months, and the unemployment rate had declined. Household spending had risen

only modestly, but the fundamentals underpinning the

continued growth of consumption remained solid, while

business fixed investment had firmed.

Inflation, measured as the 12-month change in the headline PCE price index, had been running close to the

Committee’s 2 percent longer-run objective. Core inflation continued to run somewhat below 2 percent. Both

headline and core consumer price indexes fell in March.

Market-based measures of inflation compensation had

remained low, while survey-based measures of longerterm inflation expectations had changed little on balance.

With respect to the economic outlook and its implications for monetary policy, members agreed that the

slowing in growth during the first quarter was likely to

be transitory and continued to expect that, with gradual

adjustments in the stance of monetary policy, economic

activity would expand at a moderate pace, labor market

conditions would strengthen somewhat further, and inflation would stabilize around 2 percent over the medium term. Members continued to judge that there was

significant uncertainty about the effects of possible

changes in fiscal and other government policies but that

near-term risks to the economic outlook appeared

roughly balanced. A couple of members noted that the

outlook for global growth appeared to have brightened

and that downside risks from abroad had waned. Members agreed that they would continue to closely monitor

inflation indicators and global economic and financial

developments.

After assessing current conditions and the outlook for

economic activity, the labor market, and inflation, members agreed to maintain the target range for the federal

funds rate at ¾ to 1 percent. They noted that the stance

of monetary policy remained accommodative, thereby

supporting some further strengthening in labor market

conditions and a sustained return to 2 percent inflation.

Members generally judged that it would be prudent to

await additional evidence indicating that the recent slowing in the pace of economic activity had been transitory

before taking another step in removing accommodation.

Members 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. 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. Members also agreed to continue to carefully

monitor actual and expected inflation developments relative to the Committee’s symmetric inflation goal, with

one member viewing further progress of inflation toward the 2 percent objective as necessary before taking

another step to remove policy accommodation. Members expected that economic conditions would evolve in

a manner that would warrant gradual increases in the

federal funds rate. Members agreed that the federal

funds rate was likely to remain, for some time, below

levels that they expected to prevail in the longer run.

However, they noted that the actual path of the federal

funds rate would depend on the economic outlook as

informed by incoming data.

The Committee also decided to maintain its existing policy of reinvesting all 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. Members

anticipated doing so until normalization of the level of

the federal funds rate was well under way, and they 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.:

Minutes of the Meeting of May 2–3, 2017

Page 11

_____________________________________________________________________________________________

“Effective May 4, 2017, 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

¾ to 1 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 0.75 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 percounterparty 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 mortgagebacked 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 March indicates that

the labor market has continued to strengthen

even as growth in economic activity slowed.

Job gains were solid, on average, in recent

months, and the unemployment rate declined.

Household spending rose only modestly, but

the fundamentals underpinning the continued

growth of consumption remained solid. Business fixed investment firmed. Inflation measured on a 12-month basis recently has been running close to the Committee’s 2 percent longerrun objective. Excluding energy and food, consumer prices declined in March and inflation

continued to run somewhat below 2 percent.

Market-based measures of inflation compensation remain low; survey-based measures of

longer-term inflation expectations are little

changed, on balance.

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

and price stability. The Committee views the

slowing in growth during the first quarter as

likely to be transitory and continues to expect

that, with gradual adjustments in the stance of

monetary policy, economic activity will expand

at a moderate pace, labor market conditions will

strengthen somewhat further, and inflation will

stabilize around 2 percent over the medium

term. Near-term risks to the economic outlook

appear roughly balanced. The Committee continues to closely monitor inflation indicators

and global economic and financial developments.

In view of realized and expected labor market

conditions and inflation, the Committee decided to maintain the target range for the federal

funds rate at ¾ to 1 percent. The stance of

monetary policy remains accommodative,

thereby supporting some further strengthening

in labor market conditions and a sustained 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. The Committee will carefully

monitor actual and expected inflation developments relative to its symmetric inflation goal.

The Committee expects that economic conditions will evolve in a manner that will warrant

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.”

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

Dudley, Lael Brainard, Charles L. Evans, Stanley

Fischer, Patrick Harker, Robert S. Kaplan, Neel Kashkari, and Jerome H. Powell.

Voting against this action: None.

Consistent with the Committee’s decision to leave the

target range for the federal funds rate unchanged, the

Board of Governors voted unanimously to leave the interest rates on required and excess reserve balances unchanged at 1 percent and voted unanimously to approve

establishment of the primary credit rate (discount rate)

at the existing level of 1½ percent. 6

System Open Market Account Reinvestment Policy

Participants continued their discussion of issues related

to potential changes to the Committee’s policy of reinvesting principal payments from securities held in the

SOMA. The staff provided a briefing that summarized

a possible operational approach to reducing the System’s

securities holdings in a gradual and predictable manner.

Under the proposed approach, the Committee would

announce a set of gradually increasing caps, or limits, on

the dollar amounts of Treasury and agency securities that

would be allowed to run off each month, and only the

amounts of securities repayments that exceeded the caps

would be reinvested each month. As the caps increased,

reinvestments would decline, and the monthly reductions in the Federal Reserve’s securities holdings would

become larger. The caps would initially be set at low

levels and then be raised every three months, over a set

period of time, to their fully phased-in levels. The final

values of the caps would then be maintained until the

size of the balance sheet was normalized.

Nearly all policymakers expressed a favorable view of

this general approach. Policymakers noted that preannouncing a schedule of gradually increasing caps to limit

the amounts of securities that could run off in any given

month was consistent with the Committee’s intention to

reduce the Federal Reserve’s securities holdings in a

The second vote of the Board also encompassed approval of

the establishment of the interest rates for secondary and seasonal credit under the existing formulas for computing such

rates.

6

gradual and predictable manner as stated in the Committee’s Policy Normalization Principles and Plans. Limiting the magnitude of the monthly reductions in the Federal Reserve’s securities holdings on an ongoing basis

could help mitigate the risk of adverse effects on market

functioning or outsized effects on interest rates. The approach would also likely be fairly straightforward to

communicate. Moreover, under this approach, the process of reducing the Federal Reserve’s securities holdings, once begun, could likely proceed without a need for

the Committee to make adjustments as long as there was

no material deterioration in the economic outlook.

Policymakers agreed that the Committee’s Policy Normalization Principles and Plans should be augmented

soon to provide additional details about the operational

plan to reduce the Federal Reserve’s securities holdings

over time. Nearly all policymakers indicated that as long

as the economy and the path of the federal funds rate

evolved as currently expected, it likely would be appropriate to begin reducing the Federal Reserve’s securities

holdings this year. Policymakers agreed to continue in

June their discussion of plans for a change to the Committee’s reinvestment policy.

It was agreed that the next meeting of the Committee

would be held on Tuesday–Wednesday, June 13–14,

2017. The meeting adjourned at 11:45 a.m. on May 3,

2017.

Notation Vote

By notation vote completed on April 4, 2017, the Committee unanimously approved the minutes of the Committee meeting held on March 14–15, 2017.

_____________________________

Brian F. Madigan

Secretary