FOMC Minutes

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Minutes of the Federal Open Market Committee

July 25–26, 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, July 25, 2017, at 1:00

p.m. and continued on Wednesday, July 26, 2017, at 9:00

a.m. 1

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

Raphael W. Bostic, Loretta J. Mester, Mark L. Mullinix,

Michael Strine, and John C. Williams, Alternate

Members of the Federal Open Market Committee

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

Presidents of the Federal Reserve Banks of St.

Louis, Kansas City, and Boston, respectively

Brian F. Madigan, Secretary

Matthew M. Luecke, Deputy Secretary

David W. Skidmore, Assistant Secretary

Scott G. Alvarez, General Counsel

Michael Held, Deputy General Counsel

Steven B. Kamin, Economist

Thomas Laubach, Economist

David W. Wilcox, Economist

James A. Clouse, Thomas A. Connors, Michael Dotsey,

Eric M. Engen, Evan F. Koenig, Beth Anne

Wilson, and Mark L.J. Wright, Associate

Economists

Simon Potter, Manager, System Open Market Account

Lorie K. Logan, Deputy Manager, System Open

Market Account

The Federal Open Market Committee is referenced as the

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

1

Ann E. Misback, 2 Secretary, Office of the Secretary,

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

Margie Shanks, 3 Deputy Secretary, Office of the

Secretary, Board of Governors

Stephen A. Meyer, Deputy Director, Division of

Monetary Affairs, Board of Governors; Mark E.

Van Der Weide, Deputy Director, Division of

Supervision and Regulation, Board of Governors

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

Office of Board Members, Board of Governors

Joseph W. Gruber, David Reifschneider, and John M.

Roberts, Special Advisers to the Board, Office of

Board Members, Board of Governors

Linda Robertson,2 Assistant to the Board, Office of

Board Members, Board of Governors

Joshua Gallin and David E. Lebow, Senior Associate

Directors, Division of Research and Statistics,

Board of Governors; Fabio M. Natalucci, Senior

Associate Director, Division of Monetary Affairs,

Board of Governors

Antulio N. Bomfim, Ellen E. Meade, Edward Nelson,

Robert J. Tetlow, and Joyce K. Zickler, Senior

Advisers, Division of Monetary Affairs, Board of

Governors; Jeremy B. Rudd, Senior Adviser,

Division of Research and Statistics, Board of

Governors

Stephanie R. Aaronson and Glenn Follette, Assistant

Directors, Division of Research and Statistics,

Board of Governors; Elizabeth Klee, Assistant

Director, Division of Monetary Affairs, Board of

Governors

2

3

Attended Tuesday session only.

Attended Wednesday session only.

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

of the Secretary, Board of Governors

Dana L. Burnett, Section Chief, Division of Monetary

Affairs, Board of Governors

John Kandrac, Senior Economist, Division of

Monetary Affairs, Board of Governors

Mark Libell,3 Assistant Congressional Liaison, Office of

Board Members, Board of Governors

Gregory L. Stefani, First Vice President, Federal

Reserve Bank of Cleveland

David Altig, Kartik B. Athreya, Beverly Hirtle,

Glenn D. Rudebusch, Ellis W. Tallman, and

Christopher J. Waller, Executive Vice Presidents,

Federal Reserve Banks of Atlanta, Richmond, New

York, San Francisco, Cleveland, and St. Louis,

respectively

Daniel Aaronson, Joe Peek, and Jonathan L. Willis,

Vice Presidents, Federal Reserve Banks of Chicago,

Boston, and Kansas City, respectively

Selection of Committee Officer

By unanimous vote, the Committee selected Mark E.

Van Der Weide to serve as general counsel, effective at

the time he becomes the Board of Governors’ general

counsel, until the selection of his successor at the first

regularly scheduled meeting of the Committee in 2018.

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 June

FOMC meeting. The intermeeting period was relatively

uneventful. Bond yields in advanced economies increased moderately, in part reflecting evolving market

perceptions of prospects for foreign monetary policies.

U.S. bond yields rose to a smaller degree, and the value

of the dollar on foreign exchange markets decreased.

Implied volatility in fixed-income markets remained low.

Equity prices rose further, with notable advances in indexes for emerging markets.

The increase in the FOMC’s target range for the federal

funds rate at the June meeting was reflected in other

money market interest rates, and the effective federal

funds rate was near the middle of the new target range

over the intermeeting period except on quarter-end.

Take-up at the System’s overnight reverse repurchase

agreement facility averaged about $200 billion. Conditions in foreign exchange swap markets were fairly stable, and demand at central bank dollar auctions was relatively low. The manager also reported on small-value

tests of open market operations, which are conducted

routinely to promote operational readiness.

Market expectations for the path of the federal funds

rate were little changed. Survey evidence suggested that

most market participants now anticipated that the

FOMC would announce at its September meeting a date

for implementation of a change in reinvestment policy,

although a couple of survey respondents expressed the

view that the timing could be affected by developments

regarding the federal debt ceiling. The survey results

also suggested that, while views were somewhat dispersed, respondents typically expected effects on bond

yields and spreads on mortgage-backed securities from

the change in reinvestment policy to be modest.

By unanimous vote, the Committee ratified the Open

Market Desk’s domestic transactions over the intermeeting period. There were no intervention operations in

foreign currencies for the System’s account during the

intermeeting period.

Staff Review of the Economic Situation

The information reviewed for the July 25–26 meeting

showed that labor market conditions continued to

strengthen in June and that real gross domestic product

(GDP) likely expanded at a faster pace in the second

quarter than in the first quarter. The 12-month change

in overall consumer prices, as measured by the price index for personal consumption expenditures (PCE),

slowed again in May; both total consumer price inflation

and core inflation, which excludes consumer food and

energy prices, were running below 2 percent. Data from

the consumer and producer price indexes for June suggested that both total and core PCE price inflation (on a

12-month change basis) remained at a pace similar to

that seen in the previous month. Survey-based measures

of longer-run inflation expectations were little changed

on balance.

Total nonfarm payroll employment expanded solidly in

June, and the average monthly pace of private-sector job

gains over the first half of the year was essentially the

same as last year. The unemployment rate edged up to

4.4 percent in June; the unemployment rates for African

Americans and for Hispanics declined slightly but remained above the unemployment rates for Asians and

for whites. In addition, the median length of time that

unemployed African Americans had been out of work

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exceeded the comparable figures for whites and for Hispanics, a pattern that has prevailed for at least the past

two decades. The overall labor force participation rate

edged up in June, and the share of workers employed

part time for economic reasons rose a bit. The rate of

private-sector job openings decreased in May after having risen for a couple of months, while the quits rate and

the hiring rate both increased. The four-week moving

average of initial claims for unemployment insurance

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

Average hourly earnings for all employees increased

2½ percent over the 12 months ending in June, about

the same as over the comparable period a year earlier but

a little slower than the rate of increase in late 2016.

Total industrial production rose moderately, on balance,

in May and June, as an increase in the output of mines

and utilities more than offset a net decline in manufacturing production. Automakers’ assembly schedules indicated that motor vehicle production would edge down

again in the third quarter, likely reflecting a somewhat

elevated level of dealers’ inventories and a slowing in the

pace of vehicle sales last quarter. However, broader indicators of manufacturing production, such as the new

orders indexes from national and regional manufacturing surveys, pointed to moderate gains in factory output

over the near term.

Real PCE appeared to have rebounded in the second

quarter after increasing only modestly in the first quarter.

Much of the rebound looked to have been concentrated

in spending on energy services and energy goods, which

was held down by unseasonably warm weather earlier in

the year. The components of the nominal retail sales

data used by the Bureau of Economic Analysis to construct its estimate of PCE declined in June but rose, on

net, in the second quarter. Light motor vehicle sales

edged down further in June. However, recent readings

on key factors that influence consumer spending—

including continued gains in employment, real disposable personal income, and households’ net worth—

pointed to solid growth in total real PCE in the near

term. Consumer sentiment, as measured by the University of Michigan Surveys of Consumers, remained upbeat despite having moved down in early July.

Residential investment seemed to have declined in the

second quarter. Starts of both new single-family homes

and multifamily units rose in June but still decreased for

the second quarter as a whole. The issuance of building

permits for both types of housing was lower in the second quarter than in the first quarter. Sales of existing

homes decreased, on net, in May and June, and new

home sales in May partly reversed the previous month’s

decline.

Real private expenditures for business equipment and intellectual property appeared to have increased moderately in the second quarter after a solid gain in the first

quarter. Nominal shipments of nondefense capital

goods excluding aircraft rose again in May, and new orders of these goods continued to exceed shipments,

pointing to further gains in shipments in the near term.

In addition, indicators of business sentiment remained

upbeat. Investment in nonresidential structures appeared to have risen at a markedly slower pace in the

second quarter than in the first. Firms’ nominal spending for nonresidential structures excluding drilling and

mining declined further in May, and the number of oil

and gas rigs in operation, an indicator of spending for

structures in the drilling and mining sector, leveled out

in recent weeks after increasing steadily for the past year.

Nominal outlays for defense through June pointed to an

increase in real federal government purchases in the second quarter. However, real purchases by state and local

governments appeared to have declined. Payrolls for

state and local governments expanded during the second

quarter, but nominal construction spending by these

governments decreased, on net, in April and May.

The nominal U.S. international trade deficit narrowed in

May, with an increase in exports and a small decline in

imports. Export growth was led by consumer goods,

automotive products, and services. The import decline

was driven by consumer goods and automotive products. The available data suggested that net exports were

a slight drag on real GDP growth in the second quarter.

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

price index, increased 1½ percent over the 12 months

ending in May. Core PCE price inflation was also

1½ percent over that same period. Over the 12 months

ending in June, the consumer price index (CPI) rose

1½ percent, while core CPI inflation was 1¾ percent.

The median of inflation expectations over the next 5 to

10 years from the Michigan survey edged up both in June

and in the preliminary reading for July. Other measures

of longer-run inflation expectations were generally little

changed, on balance, in recent months, although those

from the Desk’s Survey of Primary Dealers and Survey

of Market Participants had ticked down recently.

Incoming data suggested that economic growth continued to firm abroad, especially among advanced foreign

economies (AFEs). The pickup in advanced-economy

demand also contributed to relatively strong growth in

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China and emerging Asia, but growth in Latin America

remained relatively weak, partly reflecting tight monetary

and fiscal policies. Despite the stronger momentum of

economic activity in the AFEs, headline inflation declined sharply in the second quarter, largely reflecting

lower retail energy prices, and core inflation stayed subdued in many AFEs. Although inflation was also low in

most emerging market economies (EMEs), it remained

elevated in Mexico because of rising food inflation and

earlier peso depreciation.

Staff Review of the Financial Situation

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

equity prices rose, longer-term Treasury yields increased

slightly, and the dollar depreciated. The Committee’s

decision to raise the target range for the federal funds

rate to 1 to 1¼ percent at the June meeting was widely

anticipated in financial markets, and market participants

reportedly viewed FOMC communications as largely in

line with expectations. Financing conditions for nonfinancial businesses and households generally remained

supportive of growth in spending.

FOMC communications over the intermeeting period

were viewed as broadly in line with investors’ expectations that the Committee would continue to remove policy accommodation at a gradual pace. Market participants generally interpreted the information on reinvestment policy provided in June in the Committee’s

postmeeting statement and its Addendum to the Policy

Normalization Principles and Plans as consistent with

their expectation that a change to reinvestment policy

was likely to occur this year. Market participants also

took note of the summary in the June minutes of the

Committee’s discussion of the progress toward the

Committee’s 2 percent longer-run inflation objective

and the extent to which recent softness in price data reflected idiosyncratic factors. Overnight index swap rates

pointed to little change in the expected path of the federal funds rate on net.

Yields on intermediate- and longer-term nominal Treasury securities increased slightly over the intermeeting period. Although yields fell following the publication of

lower-than-expected CPI data, yields were boosted by

comments from foreign central bank officials that investors read as pointing to less accommodative monetary

policies abroad than previously expected. Measures of

inflation compensation based on Treasury InflationProtected Securities ticked up since the June FOMC

meeting. Despite their intermeeting period gains,

longer-term real and nominal Treasury yields remained

very low by historical standards, apparently weighed

down by accommodative monetary policies abroad and

possibly by declines in the long-term neutral real interest

rate over recent years.

Broad U.S. equity price indexes rose. One-month-ahead

option-implied volatility of the S&P 500 index—the

VIX—remained at historically low levels. Spreads of

yields on investment- and speculative-grade nonfinancial

corporate bonds over comparable-maturity Treasury securities narrowed a bit on net.

Conditions in short-term funding markets were stable

over the intermeeting period. Reflecting the FOMC’s

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

market instruments moved about 25 basis points higher.

However, over much of the period, the net increase in

rates on shorter-dated Treasury bills was smaller, reportedly reflecting a reduction in Treasury bill supply.

Financing for large nonfinancial firms remained readily

available, although debt issuance moderated. Gross issuance of corporate bonds stepped down in June from

a strong pace in May, while issuance of institutional leveraged loans continued to be robust. Commercial and

industrial lending by banks remained quite weak in the

second quarter. Responses from the July Senior Loan

Officer Opinion Survey on Bank Lending Practices

(SLOOS) indicated that depressed demand was largely

responsible, and that banks’ lending standards were little

changed in recent months. The most cited reason for

the lackluster loan demand was subdued investment

spending by nonfinancial businesses, but banks also reported that some borrowers had shifted to other sources

of external financing or to internally generated funds.

Financing conditions for commercial real estate (CRE)

remained accommodative, although the growth of CRE

loans on banks’ books slowed somewhat. Respondents

to the July SLOOS reported tightening credit standards

for these loans. SLOOS respondents also reported that

standards on CRE loans were tight relative to their historical range, and that, on net, demand for CRE loans

weakened in recent months. The pace of issuance of

commercial mortgage-backed securities (CMBS)

through the first half of the year was similar to that seen

last year. Delinquency rates on loans in CMBS pools

originated before the financial crisis continued to increase.

Financing conditions in the residential mortgage market

were little changed, and flows of new credit continued at

a moderate pace. However, growth of mortgage loans

on banks’ books slowed somewhat in the first half of this

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year. SLOOS respondents, on net, reported that standards on most residential mortgage loan categories eased

slightly.

Consumer credit continued to grow on a year-over-year

basis, but the expansion of credit card and auto loan balances appeared to slow from the rapid pace that was evident through the end of last year. In the July SLOOS,

banks reported having tightened standards and widened

spreads for credit card and auto loans on net. Standards

for the subprime segments of these loan types were particularly tight compared with their historical ranges. Reflecting in part continued tightening of lending

standards, consumer loan growth at banks moderated

further in the second quarter; however, that weakness

was partially offset by more robust lending by credit unions.

Since the June FOMC meeting, the broad dollar depreciated 2 percent, weakening more against AFE currencies than against EME currencies. The dollar’s depreciation was driven in part by policy communications from

the central banks of several AFEs that market participants viewed as less accommodative than expected as

well as by weaker-than-expected CPI data in the United

States. The Bank of Canada raised its policy rate in July.

Sovereign yields increased notably in Canada, Germany,

and the United Kingdom. Changes in foreign equity indexes were mixed over the intermeeting period: European equities edged lower, Japanese equities were little

changed, and EME equities increased. European peripheral sovereign bond spreads narrowed over the period, reflecting in part positive sentiment related to the

outcomes of the French parliamentary election, Greek

debt negotiations, and bank resolutions in Italy. EME

sovereign spreads were little changed on net.

The staff provided its latest report on potential risks to

financial stability, indicating that it continued to judge

the vulnerabilities of the U.S financial system as moderate on balance. This overall assessment incorporated the

staff’s judgment that, since the April assessment, vulnerabilities associated with asset valuation pressures had

edged up from notable to elevated, as asset prices remained high or climbed further, risk spreads narrowed,

and expected and actual volatility remained muted in a

range of financial markets. However, the staff continued

to view vulnerabilities stemming from financial leverage

as well as maturity and liquidity transformation as low,

and vulnerabilities from leverage in the nonfinancial sector appeared to remain moderate.

Staff Economic Outlook

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

the July FOMC meeting was broadly similar to the previous forecast. In particular, real GDP growth, which

was modest in the first quarter, was still expected to have

stepped up to a solid pace in the second quarter and to

maintain roughly the same rate of increase in the second

half of the year. In this projection, the staff scaled back

its assumptions regarding the magnitude and duration of

fiscal policy expansion in the coming years. However,

the effect of this change on the projection for real GDP

over the next couple of years was largely offset by lower

assumed paths for the exchange value of the dollar and

for longer-term interest rates. Thus, as in the June projection, the staff projected that real GDP would expand

at a modestly faster pace than potential output in

2017 through 2019. The unemployment rate was projected to decline gradually over the next couple of years

and to continue running below the staff’s estimate of its

longer-run natural rate over this period.

The staff’s forecast for consumer price inflation, as

measured by the change in the PCE price index, was revised down slightly for 2017 in response to weaker-thanexpected incoming data for inflation. As a result, inflation this year was expected to be similar in magnitude to

last year, with an upturn in the prices for food and nonenergy imports offset by a slower increase in core PCE

prices and weaker energy prices. Beyond 2017, the forecast was little revised from the previous projection, as

the recent weakness in inflation was viewed as transitory.

The staff continued to project that inflation would increase in the next couple of years and that it would be

close to the Committee’s longer-run objective in 2018

and at 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. On

the one hand, many financial market indicators of uncertainty remained subdued, and the uncertainty associated

with the foreign outlook still appeared to be less than

late last year; on the other hand, uncertainty about the

direction of some economic policies was judged to have

remained elevated. The staff saw the risks to the forecasts for real GDP growth and the unemployment rate

as balanced. The risks to the projection for inflation also

were seen as balanced. Downside risks included the possibilities that longer-term inflation expectations may

have edged down, that the dollar could appreciate substantially, or that the recent run of soft inflation readings

could prove to be more persistent than the staff expected. These downside risks were seen as essentially

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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 information

received over the intermeeting period indicated that the

labor market had continued to strengthen and that economic activity had been rising moderately so far this

year. Job gains had been solid, on average, since the beginning of the year, and the unemployment rate had declined, on net, over the same period. Household spending and business fixed investment had continued to expand. On a 12-month basis, both overall inflation and

the measure excluding food and energy prices had declined and were running below 2 percent. Market-based

measures of inflation compensation remained low;

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

Participants generally saw the incoming information on

spending and labor market indicators as consistent,

overall, with their expectations and indicated that their

views of the outlook for economic growth and the labor

market were little changed, on balance, since the June

FOMC meeting. Participants continued to expect that,

with gradual adjustments in the stance of monetary policy, economic activity would expand at a moderate pace

and labor market conditions would strengthen somewhat further. In light of continued low recent readings

on inflation, participants expected that inflation on a

12-month basis would remain somewhat below 2 percent in the near term. However, most participants

judged that inflation would stabilize around the Committee’s 2 percent objective over the medium term.

Data received over the intermeeting period reinforced

earlier indications that real GDP growth had turned up

after having been slow in the first quarter of this year.

As anticipated, growth in household spending appeared

to have been stronger in the second quarter after its firstquarter weakness. Reports from District contacts on

consumer spending were generally positive. However,

sales of motor vehicles had softened, and automakers

were reportedly adjusting production and assessing

whether the underlying demand for automobiles had declined. Participants noted that the fundamentals underpinning consumption growth, including increases in payrolls, remained solid. However, the weakness in retail

sales in June offered a note of caution.

Reports from District contacts on both manufacturing

and services were also generally consistent with moderate growth in economic activity overall. Constructionsector contacts were generally upbeat. Reports on the

energy sector indicated that activity was continuing to

expand, albeit more slowly than previously; survey evidence suggested that oil drilling remained profitable in

some locations at current oil prices. The agricultural sector remained weak, and some regions were experiencing

drought conditions. A couple of participants had received indications from contacts that business investment spending in their Districts might strengthen.

Nevertheless, several participants noted that uncertainty

about the course of federal government policy, including

in the areas of fiscal policy, trade, and health care, was

tending to weigh down firms’ spending and hiring plans.

In addition, a few participants suggested that the likelihood of near-term enactment of a fiscal stimulus program had declined further or that the fiscal stimulus

likely would be smaller than they previously expected. It

was also observed that the budgets of some state and

local governments were under strain, limiting growth in

their expenditures. In contrast, the prospects for U.S.

exports had been boosted by a brighter international

economic outlook.

Participants noted that labor market conditions had

strengthened further over the intermeeting period. The

unemployment rate rose slightly to 4.4 percent in June

but remained low by historical standards. Payroll gains

picked up substantially in June. In addition, the

employment-to-population ratio increased. Participants

observed that the unemployment rate was likely close to

or below its longer-run normal rate and could decline

further if, as expected, growth in output remained somewhat in excess of the potential growth rate. A few participants expressed concerns about the possibility of

substantially overshooting full employment, with one

citing past difficulties in achieving a soft landing. District contacts confirmed tightness in the labor market

but relayed little evidence of wage pressures, although

some firms were reportedly attempting to attract workers with a variety of nonwage benefits. The absence of

sizable wage pressures also seemed to be confirmed by

most aggregate wage measures. However, a few participants suggested that, in a tight labor market, measured

aggregate wage growth was being held down by compositional changes in employment associated with the hiring of less experienced workers at lower wages than

those of established workers. In addition, a number of

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participants suggested that the rate of increase in nominal wages was not low in relation to the rate of productivity growth and the modest rate of inflation.

Participants discussed the softness in inflation in recent

months. Many participants noted that much of the recent decline in inflation had probably reflected idiosyncratic factors. Nonetheless, PCE price inflation on a

12-month basis would likely continue to be held down

over the second half of the year by the effects of those

factors, and the monthly readings might be depressed by

possible residual seasonality in measured PCE inflation.

Still, most participants indicated that they expected inflation to pick up over the next couple of years from its

current low level and to stabilize around the Committee’s 2 percent objective over the medium term. Many

participants, however, saw some likelihood that inflation

might remain below 2 percent for longer than they currently expected, and several indicated that the risks to

the inflation outlook could be tilted to the downside.

Participants agreed that a fall in longer-term inflation expectations would be undesirable, but they differed in

their assessments of whether inflation expectations were

well anchored. One participant pointed to the stability

of a number of measures of inflation expectations in recent months, but a few others suggested that continuing

low inflation expectations may have been a factor putting downward pressure on inflation or that inflation expectations might need to be bolstered in order to ensure

their consistency with the Committee’s longer-term inflation objective.

A number of participants noted that much of the analysis of inflation used in policymaking rested on a framework in which, for a given rate of expected inflation, the

degree of upward pressures on prices and wages rose as

aggregate demand for goods and services and employment of resources increased above long-run sustainable

levels. A few participants cited evidence suggesting that

this framework was not particularly useful in forecasting

inflation. However, most participants thought that the

framework remained valid, notwithstanding the recent

absence of a pickup in inflation in the face of a tightening labor market and real GDP growth in excess of their

estimates of its potential rate. Participants discussed

possible reasons for the coexistence of low inflation and

low unemployment. These included a diminished responsiveness of prices to resource pressures, a lower

natural rate of unemployment, the possibility that slack

may be better measured by labor market indicators other

than unemployment, lags in the reaction of nominal

wage growth and inflation to labor market tightening,

and restraints on pricing power from global developments and from innovations to business models spurred

by advances in technology. A couple of participants argued that the response of inflation to resource utilization

could become stronger if output and employment appreciably overshot their full employment levels,

although other participants pointed out that this hypothesized nonlinear response had little empirical support.

In assessing recent developments in financial market

conditions, participants referred to the continued low

level of longer-term interest rates, in particular those on

U.S Treasury securities. The level of such yields appeared to reflect both low expected future short-term interest rates and depressed term premiums. Asset purchases by foreign central banks and the Federal Reserve’s securities holdings were also likely contributing

to currently low term premiums, although the exact size

of these contributions was uncertain. A number of participants pointed to potential concerns about low longerterm interest rates, including the possibility that inflation

expectations were too low, that yields could rise

abruptly, or that low yields were inducing investors to

take on excessive risk in a search for higher returns.

Several participants noted that the further increases in

equity prices, together with continued low longer-term

interest rates, had led to an easing of financial conditions. However, different assessments were expressed

about the implications of this development for the outlook for aggregate demand and, consequently, appropriate monetary policy. According to one view, the easing

of financial conditions meant that the economic effects

of the Committee’s actions in gradually removing policy

accommodation had been largely offset by other factors

influencing financial markets, and that a tighter monetary policy than otherwise was warranted. According to

another view, recent rises in equity prices might be part

of a broad-based adjustment of asset prices to changes

in longer-term financial conditions, importantly including a lower neutral real interest rate, and, therefore, the

recent equity price increases might not provide much additional impetus to aggregate spending on goods and services.

Participants also considered equity valuations in their

discussion of financial stability. A couple of participants

noted that favorable macroeconomic factors provided

backing for current equity valuations; in addition, as recent equity price increases did not seem to stem importantly from greater use of leverage by investors, these

increases might not pose appreciable risks to financial

stability. Several participants observed that the banking

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system was well capitalized and had ample liquidity, reducing the risk of financial instability. It was noted that

financial stability assessments were based on current

capital levels within the banking sector, and that such assessments would likely be adjusted should these

measures of loss-absorbing capacity change. Participants underscored the need to monitor financial institutions for shifts in behavior—such as an erosion of lending standards or increased reliance on unstable sources

of funding—that could lead to subsequent problems. In

addition, participants judged that it was important to

look for signs that either declining market volatility or

heavy concentration by investors in particular assets

might create financial imbalances. A couple of participants expressed concern that smaller banks could be assuming significant risks in efforts to expand their CRE

lending. Furthermore, a couple of participants saw, as

possible sources of financial instability, the pace of increase in real estate prices in the multifamily segment

and the pattern of the lending and borrowing activities

of certain government-sponsored enterprises.

Participants agreed that the regulatory and supervisory

tools developed since the financial crisis had played an

important role in fostering financial stability. Changes

in regulation had likely helped in making the banking

system more resilient to major shocks, in promoting

more prudent balance sheet management strategies on

the part of nonbank financial institutions, and in reducing the degree to which variations in lending to the private sector intensify cycles in output and in asset prices.

Participants agreed that it would not be desirable for the

current regulatory framework to be changed in ways that

allowed a reemergence of the types of risky practices that

contributed to the crisis.

In their discussion of monetary policy, participants reaffirmed their view that a gradual approach to removing

policy accommodation was likely to remain appropriate

to promote the Committee’s objectives of maximum

employment and 2 percent inflation. Participants commented on a number of factors that would influence

their ongoing assessments of the appropriate path for

the federal funds rate. Most saw the outlook for economic activity and the labor market as little changed

from their earlier projections and continued to anticipate

that inflation would stabilize around the Committee’s

2 percent objective over the medium term. However,

some participants expressed concern about the recent

decline in inflation, which had occurred even as resource

utilization had tightened, and noted their increased uncertainty about the outlook for inflation. They observed

that the Committee could afford to be patient under current circumstances in deciding when to increase the federal funds rate further and argued against additional adjustments until incoming information confirmed that the

recent low readings on inflation were not likely to persist

and that inflation was more clearly on a path toward the

Committee’s symmetric 2 percent objective over the

medium term. In contrast, some other participants were

more worried about risks arising from a labor market

that had already reached full employment and was projected to tighten further or from the easing in financial

conditions that had developed since the Committee’s

policy normalization process was initiated in December

2015. They cautioned that a delay in gradually removing

policy accommodation could result in an overshooting

of the Committee’s inflation objective that would likely

be costly to reverse, or that a delay could lead to an intensification of financial stability risks or to other imbalances that might prove difficult to unwind. One participant stressed that the risks both to the Committee’s inflation objective and to financial stability would require

careful monitoring. This participant expressed the view

that a gradual approach to removing policy accommodation would likely strike the appropriate balance between

promoting the Committee’s inflation and full employment objectives and mitigating financial stability concerns.

A number of participants also commented that the appropriate pace of normalization of the federal funds rate

would depend on how financial conditions evolved and

on the implications of those developments for the pace

of economic activity. Among the considerations mentioned were the extent of current downward pressure on

longer-term yields arising from the Federal Reserve’s asset holdings and how this pressure would diminish over

time as balance sheet normalization proceeded, the

strength and degree of persistence of other domestic and

global factors that had contributed to the easing of financial conditions and elevated asset prices, and whether

and how much the neutral rate of interest would rise as

the economy continued to expand.

Participants also discussed the appropriate time to implement the plan for reducing the Federal Reserve’s securities holdings that was announced in June in the

Committee’s postmeeting statement and its Addendum

to the Policy Normalization Principles and Plans. Participants generally agreed that, in light of their current

assessment of economic conditions and the outlook, it

was appropriate to signal that implementation of the

program likely would begin relatively soon, absent sig-

Minutes of the Meeting of July 25–26, 2017

Page 9

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nificant adverse developments in the economy or in financial markets. Many noted that the program was expected to contribute only modestly to the reduction in

policy accommodation. Several reiterated that, once the

program was under way, further adjustments to the

stance of monetary policy in response to economic developments would be centered on changes in the target

range for the federal funds rate. Although several participants were prepared to announce a starting date for

the program at the current meeting, most preferred to

defer that decision until an upcoming meeting while accumulating additional information on the economic outlook and developments potentially affecting financial

markets.

Committee Policy Action

In their discussion of monetary policy for the period

ahead, members judged that information received since

the Committee met in June indicated that the labor market had continued to strengthen and that economic activity had been rising moderately so far this year. Job

gains had been solid, on average, since the beginning of

the year, and the unemployment rate had declined.

Household spending and business fixed investment had

continued to expand.

On a 12-month basis, overall inflation and the measure

excluding food and energy prices had declined and were

running below 2 percent. Market-based measures of inflation compensation remained low; survey-based

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

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 conditions would strengthen

somewhat further. Inflation on a 12-month basis was

expected to remain somewhat below 2 percent in the

near term but to stabilize around the Committee’s 2 percent objective over the medium term. Members saw the

near-term risks to the economic outlook as roughly balanced, but, in light of their concern about the recent

slowing in inflation, they agreed to continue to monitor

inflation developments closely.

After assessing current conditions and the outlook for

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

funds rate at 1 to 1¼ 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 agreed that the timing and size of future adjustments to the target range for the federal funds rate

would depend on their assessment of realized and expected economic conditions relative to the Committee’s

objectives of maximum employment and 2 percent inflation. They expected that economic conditions would

evolve in a manner that would warrant gradual increases

in the federal funds rate, and that the federal funds rate

was likely to remain, for some time, below levels that are

expected to prevail in the longer run. They also again

stated that the actual path of the federal funds rate would

depend on the economic outlook as informed by incoming data. In particular, they reaffirmed that they would

carefully monitor actual and expected inflation developments relative to the Committee’s symmetric inflation

goal. Some members stressed the importance of underscoring the Committee’s commitment to its inflation objective. These members emphasized that, in considering

the timing of further adjustments in the federal funds

rate, they would be evaluating incoming information to

assess the likelihood that recent low readings on inflation

were transitory and that inflation was again on a trajectory consistent with achieving the Committee’s 2 percent objective over the medium term.

Members agreed that, at this meeting, the Committee

should further clarify the time at which it expected to

begin its program for reducing its securities holdings in

a gradual and predictable manner. They updated the

postmeeting statement to indicate that while the Committee was, for the time being, maintaining its existing

reinvestment policy, it intended to begin implementing

the balance sheet normalization program relatively soon,

provided that the economy evolved broadly as anticipated. Several members observed that, in part because

of the Committee’s various communications regarding

the change, any reaction in financial markets to such a

change would likely be limited.

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 27, 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

Page 10

Federal Open Market Committee

_____________________________________________________________________________________________

1 to 1¼ 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 1.00 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 June indicates that

the labor market has continued to strengthen

and that economic activity has been rising moderately so far this year. Job gains have been

solid, on average, since the beginning of the

year, and the unemployment rate has declined.

Household spending and business fixed investment have continued to expand. On a

12-month basis, overall inflation and the measure excluding food and energy prices have declined and are running 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 continues to

expect that, with gradual adjustments in the

stance of monetary policy, economic activity

will expand at a moderate pace, and labor market conditions will strengthen somewhat further. Inflation on a 12-month basis is expected

to remain somewhat below 2 percent in the near

term but to stabilize around the Committee’s

2 percent objective over the medium term.

Near-term risks to the economic outlook appear roughly balanced, but the Committee is

monitoring inflation developments closely.

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 1 to 1¼ 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.

For the time being, the Committee is maintaining its existing policy of reinvesting principal

payments from its holdings of agency debt and

agency mortgage-backed securities in agency

mortgage-backed securities and of rolling over

maturing Treasury securities at auction. The

Committee expects to begin implementing its

balance sheet normalization program relatively

soon, provided that the economy evolves

broadly as anticipated; this program is described

in the June 2017 Addendum to the Committee’s

Policy Normalization Principles and Plans.”

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.

Minutes of the Meeting of July 25–26, 2017

Page 11

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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 1¼ percent and voted unanimously to approve establishment of the primary credit rate (discount

rate) at the existing level of 1¾ percent. 4

Notation Vote

By notation vote completed on July 3, 2017, the Committee unanimously approved the minutes of the Committee meeting held on June 13–14, 2017.

It was agreed that the next meeting of the Committee

would be held on Tuesday–Wednesday, September

19–20, 2017. The meeting adjourned at 10:00 a.m. on

July 26, 2017.

_____________________________

Brian F. Madigan

Secretary

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.

4