FOMC Minutes

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Minutes of the Federal Open Market Committee

May 1–2, 2018

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 1, 2018, at

1:00 p.m. and continued on Wednesday, May 2, 2018, at

9:00 a.m.1

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

PRESENT:

Jerome H. Powell, Chairman

William C. Dudley, Vice Chairman

Thomas I. Barkin

Raphael W. Bostic

Lael Brainard

Loretta J. Mester

Randal K. Quarles

John C. Williams

Margie Shanks, Deputy Secretary, Office of the

Secretary, Board of Governors

James Bullard, Charles L. Evans, Esther L. George,

Eric Rosengren, and Michael Strine, Alternate

Members of the Federal Open Market Committee

Antulio N. Bomfim, Special Adviser to the Chairman,

Office of Board Members, Board of Governors

Patrick Harker, Robert S. Kaplan, and Neel Kashkari,

Presidents of the Federal Reserve Banks of

Philadelphia, Dallas, and Minneapolis, respectively

James A. Clouse, Secretary

Matthew M. Luecke, Deputy Secretary

David W. Skidmore, Assistant Secretary

Michelle A. Smith, Assistant Secretary

Mark E. Van Der Weide, General Counsel

Michael Held, Deputy General Counsel2

Steven B. Kamin, Economist

Thomas Laubach, Economist

David W. Wilcox, Economist

Kartik B. Athreya, Thomas A. Connors, Mary Daly,

Trevor A. Reeve, Ellis W. Tallman, William

Wascher, and Beth Anne Wilson, 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.

2 Attended Tuesday session only.

1

Daniel M. Covitz, Deputy Director, Division of

Research and Statistics, Board of Governors;

Rochelle M. Edge, Deputy Director, Division of

Monetary Affairs, Board of Governors; Michael T.

Kiley, Deputy Director, Division of Financial

Stability, Board of Governors

Joseph W. Gruber and John M. Roberts, Special

Advisers to the Board, Office of Board Members,

Board of Governors

Linda Robertson, Assistant to the Board, Office of

Board Members, Board of Governors

Eric M. Engen and Joshua Gallin, Senior Associate

Directors, Division of Research and Statistics,

Board of Governors

Stephen A. Meyer 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

Jane E. Ihrig and David López-Salido, Associate

Directors, Division of Monetary Affairs, Board of

Governors

Stephanie R. Aaronson and Norman J. Morin, Assistant

Directors, Division of Research and Statistics,

Board of Governors; Robert Vigfusson, Assistant

Attended through the discussion of developments in financial markets and open market operations.

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Federal Open Market Committee

Director, Division of International Finance, Board

of Governors

Eric C. Engstrom, Adviser, Division of Monetary

Affairs, and Adviser, Division of Research and

Statistics, Board of Governors

Penelope A. Beattie,4 Assistant to the Secretary, Office

of the Secretary, Board of Governors

Dana L. Burnett and Rebecca Zarutskie, Section

Chiefs, Division of Monetary Affairs, Board of

Governors

Marcelo Rezende, Principal Economist, Division of

Monetary Affairs, Board of Governors

Ron Feldman, First Vice President, Federal Reserve

Bank of Minneapolis

Michael Dotsey, Geoffrey Tootell, and Christopher J.

Waller, Executive Vice Presidents, Federal Reserve

Banks of Philadelphia, Boston, and St. Louis,

respectively

Spencer Krane, Paula Tkac, and Mark L.J. Wright,

Senior Vice Presidents, Federal Reserve Banks of

Chicago, Atlanta, and Minneapolis, respectively

George A. Kahn, Vice President, Federal Reserve Bank

of Kansas City

Richard K. Crump, Assistant Vice President, Federal

Reserve Bank of New York

Anthony Murphy, Senior Economic Policy Advisor,

Federal Reserve Bank of Dallas

Developments in Financial Markets and Open Market Operations

The manager of the System Open Market Account

(SOMA) provided a summary of domestic and global financial developments over the intermeeting period.

Broad measures of financial conditions had tightened

somewhat in recent weeks, with U.S. equity prices lower,

the foreign exchange value of the dollar moderately

higher, and longer-term Treasury yields up a little. Market participants pointed to a range of factors contributing to the decline in stock prices, including concerns

about the outlook for trade policy both in the United

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Attended through the discussion on financial stability issues.

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States and abroad, the potential for increased regulatory

oversight of U.S. technology companies, and incoming

data suggesting some moderation in global economic

growth. The rise in nominal U.S. Treasury yields was

associated with an increase in inflation compensation

that, in turn, seemed to reflect a firming in inflation data

as well as a notable rise in crude oil prices. Judging from

federal funds futures quotes, the expected path of the

federal funds rate changed relatively little over the intermeeting period. While term LIBOR (London interbank

offered rates) had widened relative to comparablematurity OIS (overnight index swap) rates in recent

months, the cost of dollar funding through the foreign

exchange swap market had not risen to the same degree.

Recent usage of standing U.S. dollar liquidity swap lines

had been low, consistent with a view that the recent widening in LIBOR–OIS spreads did not reflect increased

funding pressures or rising concerns about the condition

of financial institutions.

The manager discussed the role of standing liquidity

swap lines in supporting financial stability and recommended that these swap lines be renewed at this meeting

following the usual annual schedule. The manager also

discussed current projections for principal payments received from mortgage-backed securities (MBS) held in

the SOMA. These projections suggested that, under the

Committee’s plan for balance sheet normalization, reinvestments of MBS principal would likely cease later this

year, although the timing is uncertain.

The deputy manager followed with a briefing focused on

recent developments in the federal funds market, noting

that the effective federal funds rate had increased in recent weeks and had moved toward the top of the target

range for the federal funds rate. In large part, this development seemed to reflect a firming in rates on repurchase agreements (repos) that, in turn, had resulted from

an increase in Treasury bill issuance and the associated

higher demands for repo financing by dealers and others.

Higher rates had reportedly made repos a more attractive alternative investment for major lenders in the federal funds market, thus reducing the availability of funding in that market and putting some upward pressure on

the federal funds rate. While some of the recent pressure

on the federal funds rate could be expected to fade over

coming weeks as the market adjusts to higher levels of

Treasury bills, the gradual normalization of the Federal

Reserve’s balance sheet and the accompanying decline in

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Minutes of the Meeting of May 1–2, 2018

reserves was anticipated to continue putting some upward pressure on the federal funds rate relative to the

interest on excess reserves (IOER) rate.

The deputy manager then discussed the possibility of a

small technical realignment of the IOER rate relative to

the top of the target range for the federal funds rate.

Since the target range was established in December

2008, the IOER rate has been set at the top of the target

range to help keep the effective federal funds rate within

the range. Lately the spread of the IOER rate over the

effective federal funds rate had narrowed to only 5 basis

points. A technical adjustment of the IOER rate to a

level 5 basis points below the top of the target range

could keep the effective federal funds rate well within

the target range. This could be accomplished by implementing a 20 basis point increase in the IOER rate at a

time when the Committee raised the target range for the

federal funds rate by 25 basis points. Alternatively, the

IOER rate could be lowered 5 basis points at a meeting

in which the Committee left the target range for the federal funds rate unchanged.

In their discussion of this issue, participants generally

agreed that it could become appropriate to make a small

technical adjustment in the Federal Reserve’s approach

to implementing monetary policy by setting the IOER

rate modestly below the top of the target range for the

federal funds rate. Such an adjustment would be consistent with the Committee’s statement in the Policy

Normalization Principles and Plans that it would be prepared to adjust the details of the approach to policy implementation during the period of normalization in light

of economic and financial developments. Many participants judged that it would be useful to make such a technical adjustment sooner rather than later. Participants

generally agreed that it would be desirable to make that

adjustment at a time when the FOMC decided to increase the target range for the federal funds rate; that

timing would simplify FOMC communications and emphasize that the IOER rate is a helpful tool for implementing the FOMC’s policy decisions but does not, in

itself, convey the stance of policy. While additional technical adjustments in the IOER rate could become necessary over time, these were not expected to be frequent.

A number of participants also suggested that, before too

long, the Committee might want to further discuss how

it can implement monetary policy most effectively and

efficiently when the quantity of reserve balances reaches

a level appreciably below that seen in recent years.

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

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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 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 May 1–2 meeting indicated that labor market conditions continued to

strengthen in the first quarter, while real gross domestic

product (GDP) rose at a moderate pace. Consumer

price inflation, as measured by the 12‐month percentage

change in the price index for personal consumption expenditures (PCE), was 2 percent in March. Survey‐

based measures of longer-run inflation expectations

were, on balance, little changed.

Total nonfarm payroll employment rose less in March

than in the previous two months, but the increase for

the first quarter as a whole was solid. The labor force

participation rate edged down in March but moved up a

little, on net, in the first quarter. The national unemployment rate remained at 4.1 percent for a sixth consecutive

month. Similarly, the unemployment rates for African

Americans, Asians, and Hispanics were roughly flat, on

balance, in recent months. The share of workers employed part time for economic reasons was little changed

at a rate close to that prevailing before the previous recession. The rate of private-sector job openings stayed

at an elevated level in February, the rate of quits remained high, and initial claims for unemployment insurance benefits continued to be low through mid-April.

Recent readings showed that increases in labor compensation stepped up modestly over the past year. The employment cost index for private workers rose 2.8 percent

over the 12 months ending in March, and average hourly

earnings for all employees increased 2.7 percent over

that period. Both increases were larger than those reported for the 12 months ending in March 2017.

Total industrial production increased in March and rose

at a solid pace for the first quarter as a whole, with gains

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Federal Open Market Committee

in the output of manufacturers, mines, and utilities. Automakers’ schedules suggested that assemblies of light

motor vehicles would edge down in the second quarter

from the average pace in the first quarter, but broader

indicators of manufacturing production, such as the new

orders indexes from national and regional manufacturing surveys, continued to point to further gains in factory

output in the near term.

Consumer expenditures rose at a modest pace in the first

quarter following a strong gain in the preceding quarter.

Monthly data pointed to some improvement toward the

end of the quarter, as real PCE moved up in March after

declining in January and February. However, the recent

movements might have partly reflected the effects of a

delay in many federal tax refunds, which could have

shifted some consumer spending from February to

March. Light motor vehicle sales stepped down in the

first quarter after a strong fourth-quarter pace that was

partly boosted by replacement sales following the fall

hurricanes; sales declined in April, but indicators of vehicle demand remained upbeat. More broadly, key factors that influence consumer spending—including gains

in employment and real disposable personal income,

along with households’ elevated net worth—should continue to support solid real PCE growth in the near term.

In addition, the lower tax withholding resulting from the

tax cuts enacted late last year was likely to provide some

impetus to spending in coming months. Consumer sentiment, as measured by the University of Michigan Surveys of Consumers, remained elevated in April.

Real residential investment was unchanged in the first

quarter after a strong increase in the fourth quarter.

Starts for new single-family homes decreased in March,

but the average pace in the first quarter was little

changed from the fourth quarter. In contrast, starts of

multifamily units moved up in March after contracting

in February, and they were higher in the first quarter

than in the fourth. Sales of both new and existing homes

increased in February and March.

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

first quarter after rising briskly in the second half of last

year. Nominal shipments of nondefense capital goods

excluding aircraft edged down in March. However,

forward-looking indicators of business equipment

spending—such as the backlog of unfilled capital goods

orders, along with upbeat readings on business sentiment from national and regional surveys—continued to

point to robust gains in equipment spending in the near

term. Real business expenditures for nonresidential

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structures rose at a robust pace in the first quarter, and

the number of crude oil and natural gas rigs in operation—an indicator of business spending for structures in

the drilling and mining sector—continued to move up

through mid-April.

Total real government purchases rose at a slower rate in

the first quarter than in the fourth quarter. Real federal

purchases increased in the first quarter, with gains in

both defense and nondefense spending. Real purchases

by state and local governments also moved higher; state

and local government payrolls were unchanged in the

first quarter, but nominal construction spending by these

governments rose somewhat.

The nominal U.S. international trade deficit widened in

February as imports rose briskly, outpacing the increase

in exports. Preliminary data on trade in goods suggested

that the trade deficit narrowed sharply in March, with

exports continuing to grow robustly but imports retracing earlier gains. The Bureau of Economic Analysis estimated that the change in 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 2 percent over the 12 months ending in March. Core PCE price inflation, which excludes

changes in consumer food and energy prices, was

1.9 percent over that same period. The consumer price

index (CPI) rose 2.4 percent over the 12 months ending

in March, while core CPI inflation was 2.1 percent. Recent readings on survey-based measures of longer-run

inflation expectations—including those from the Michigan survey, the Survey of Professional Forecasters, and

the Desk’s Survey of Primary Dealers and Survey of

Market Participants—were little changed on balance.

Incoming data suggested that foreign economic activity

continued to expand at a solid pace. Real GDP growth

picked up in the first quarter in several emerging market

economies (EMEs), including Mexico, China, and some

other parts of emerging Asia. However, incoming data

in a number of advanced foreign economies (AFEs)—

in particular, real GDP in the United Kingdom—

showed somewhat slower growth than market participants were expecting, partly because of transitory factors

such as severe weather. Overall, inflation in most AFEs

and EMEs continued to be subdued, increasing in the

AFEs in the first quarter on higher energy prices but

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Minutes of the Meeting of May 1–2, 2018

stepping down some in the EMEs, partly reflecting

lower food prices in some Asian economies.

Staff Review of the Financial Situation

Early in the intermeeting period, uncertainty over trade

policy and negative news about the technology sector reportedly contributed to lower prices for risky assets, but

these concerns subsequently seemed to recede amid

stronger-than-expected corporate earnings reports. Equity prices declined, nominal Treasury yields increased

modestly, and market-based measures of inflation compensation ticked up on net. Meanwhile, financing conditions for nonfinancial businesses and households

largely remained supportive of spending.

FOMC communications over the intermeeting period

were generally viewed by market participants as reflecting an upbeat outlook for economic growth and as consistent with a continued gradual removal of monetary

policy accommodation. The FOMC’s decision to raise

the target range for the federal funds rate 25 basis points

at the March meeting was widely anticipated. Market reaction to the release of the March FOMC minutes later

in the intermeeting period was minimal. The probability

of an increase in the target range for the federal funds

rate occurring at the May FOMC meeting, as implied by

quotes on federal funds futures contracts, remained

close to zero; the probability of an increase at the June

FOMC meeting rose to about 90 percent by the end of

the intermeeting period. Expected levels of the federal

funds rate at the end of 2019 and 2020 implied by OIS

rates rose modestly.

The nominal Treasury yield curve continued to flatten

over the intermeeting period, with yields on 2-year and

10-year Treasury securities up 17 basis points and 7 basis

points, respectively. Measures of inflation compensation derived from Treasury Inflation-Protected Securities increased 4 basis points and 7 basis points at the

5- and 5-to-10-year horizons, respectively, against a

backdrop of rising oil prices. Option-implied measures

of volatility of longer-term interest rates continued to

decline over the intermeeting period after their marked

increase earlier this year.

The S&P 500 index decreased over the period on net.

Equity prices declined early in the intermeeting period,

reportedly in response to trade tensions between the

United States and China as well as negative news about

the technology sector. However, equity prices subsequently retraced some of the earlier declines as concerns

about trade policy seemed to ease and corporate earnings reports for the first quarter of 2018 generally came

in stronger than expected. Option-implied volatility on

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the S&P 500 index at the one-month horizon—the

VIX—declined but remained at elevated levels relative

to 2017, ending the period at approximately 15 percent.

On net, spreads of yields of investment-grade corporate

bonds over comparable-maturity Treasury securities

widened a bit, while spreads for speculative-grade corporate bonds were unchanged.

Conditions in short-term funding markets remained

generally stable over the intermeeting period. Spreads on

term money market instruments relative to comparablematurity OIS rates were still larger than usual in some

segments of the money market. Reflecting the FOMC’s

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

market instruments moved about 25 basis points higher.

Bill yields also stayed high relative to OIS rates as cumulative Treasury bill supply remained elevated. Money

market dynamics over quarter-end were muted relative

to previous quarter-ends.

Foreign equity markets were mixed over the intermeeting period, with investors attuned to developments related to U.S. and Chinese trade policies and to news

about the U.S. technology sector. Broad Japanese and

European equity indexes outperformed their U.S. counterparts, ending the period somewhat higher. Marketbased measures of policy expectations and longer-term

yields were little changed in the euro area and Japan but

declined modestly in the United Kingdom on weakerthan-expected economic data. Longer-term yields in

Canada moved up moderately amid notably higher oil

prices. In EMEs, sovereign bond spreads edged up; capital continued to flow into EME mutual funds, although

at a slower pace lately.

On net, the broad nominal dollar index appreciated

moderately over the intermeeting period. In the early

part of the period, the index depreciated slightly, as relatively positive news about the current round of NAFTA

(North American Free Trade Agreement) negotiations

led to appreciation of the Mexican peso and Canadian

dollar, two currencies with large weights in the index.

Later in the period, there was a broad-based appreciation

of the dollar against most currencies as U.S. yields increased relative to those in AFEs and as the Mexican

peso declined amid uncertainty associated with the upcoming presidential elections.

Growth in banks’ commercial and industrial (C&I) loans

strengthened in March and the first half of April following relatively weak growth in January and February. Respondents to the April Senior Loan Officer Opinion

Survey on Bank Lending Practices (SLOOS) reported

that their institutions had eased standards and terms on

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Federal Open Market Committee

C&I loans in the first quarter, most often citing increased competition from other lenders as the reason for

doing so. Gross issuance of corporate bonds and leveraged loans was strong in March, and equity issuance was

robust. The credit quality of nonfinancial corporations

was stable over the intermeeting period, and the ratio of

aggregate debt to assets remained near multidecade

highs.

Commercial real estate (CRE) financing conditions remained accommodative over the intermeeting period.

CRE loan growth at banks strengthened in March but

edged down in the first half of April. Spreads on commercial mortgage-backed securities (CMBS) were little

changed over the intermeeting period and remained near

their post-crisis lows. CMBS issuance continued to be

strong in March but slowed somewhat in April. Respondents to the April SLOOS reported easing standards on nonfarm nonresidential loans and tightening

standards on multifamily loans, whereas standards on

construction and land development loans were little

changed in the first quarter. Meanwhile, respondents indicated weaker demand for loans across these three CRE

loan categories.

Financing conditions in the residential mortgage market

remained accommodative for most borrowers in March

and April. For borrowers with low credit scores, conditions continued to ease, but credit remained relatively

tight and the volume of mortgage loans extended to this

group remained low. Banks responding to the April

SLOOS reported weaker loan demand across most residential real estate (RRE) loan categories, while standards

were reportedly about unchanged for most RRE loan

types in the first quarter.

Consumer credit growth moderated in March and the

first half of April. Respondents to the April SLOOS reported that standards and terms on auto and credit card

loans tightened, and that demand for these loans weakened in the first quarter. On balance, credit remained

readily available to prime-rated borrowers, but tight for

subprime borrowers, over the intermeeting period.

The staff provided its latest report on potential risks to

financial stability; the report again characterized the financial vulnerabilities of the U.S. financial system as

moderate on balance. This overall assessment incorporated the staff’s judgment that vulnerabilities associated

with asset valuation pressures, while having come down

a little in recent months, nonetheless continued to be elevated. The staff judged vulnerabilities from financialsector leverage and maturity and liquidity transformation

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to be low, vulnerabilities from household leverage as being in the low-to-moderate range, and vulnerabilities

from leverage in the nonfinancial business sector as elevated. The staff also characterized overall vulnerabilities

to foreign financial stability as moderate while highlighting specific issues in some foreign economies, including—depending on the country—elevated asset valuation pressures, high private or sovereign debt burdens,

and political uncertainties.

Staff Economic Outlook

The staff projection for U.S. economic activity prepared

for the May FOMC meeting continued to suggest that

the economy was expanding at an above-trend pace.

Real GDP growth, which slowed in the first quarter, was

expected to pick up in the second quarter and to outpace

potential output growth through 2020. The unemployment rate was projected to decline further over the next

few years and to continue to run below the staff’s estimate of its longer-run natural rate over this period. Relative to the forecast prepared for the March meeting, the

projection for real GDP growth in 2018 was revised

down a little, primarily in response to incoming consumer spending data that were somewhat softer than the

staff had expected. Beyond 2018, the projection for

GDP growth was essentially unrevised. With real GDP

rising a little less, on balance, over the forecast period,

the projected decline in the unemployment rate over the

next few years was also a touch smaller than in the previous forecast.

The near-term projection for consumer price inflation

was revised up slightly in response to incoming data on

prices. Beyond the near term, the forecast for inflation

was a bit lower than in the previous projection, reflecting

the slightly higher unemployment rate in the new forecast. The rates of both total and core PCE price inflation were projected to be faster in 2018 than in 2017.

The staff projected that total PCE inflation would be

near the Committee’s 2 percent objective over the next

several years. Total PCE inflation was expected to run

slightly below core inflation in 2019 and 2020 because of

a projected decline in energy prices.

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

staff saw the risks to the forecasts for real GDP growth

and the unemployment rate as balanced. On the upside,

recent fiscal policy changes could lead to a greater expansion in economic activity over the next few years

than the staff projected. On the downside, those fiscal

policy changes could yield less impetus to the economy

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Minutes of the Meeting of May 1–2, 2018

than the staff expected if the economy was already operating above its potential level and resource utilization

continued to tighten, as the staff projected. Risks to the

inflation projection also were seen as balanced. An upside risk was that inflation could increase more than expected in an economy that was projected to move further above its potential. Downside risks included the

possibilities that longer-term inflation expectations may

be lower than was assumed or that the run of low core

inflation readings last year could prove to be more persistent than the staff expected.

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 since the FOMC met in March indicated that

the labor market had continued to strengthen and that

economic activity had been rising at a moderate rate. Job

gains had been strong, on average, in recent months, and

the unemployment rate had stayed low. Recent data suggested that growth of household spending had moderated from its strong fourth-quarter pace, while business

fixed investment had continued to grow strongly. On a

12-month basis, both overall inflation and inflation for

items other than food and energy had moved close to

2 percent. Market-based measures of inflation compensation remained low; survey-based measures of longerterm inflation expectations were little changed, on balance.

Participants viewed recent readings on spending, employment, and inflation as suggesting little change, on

balance, in their assessments of the economic outlook.

Real GDP growth slowed somewhat less in the first

quarter than anticipated at the time of the March meeting, and participants expected that the moderation in the

growth of consumer spending early in the year would

prove temporary. They noted a number of economic

fundamentals were currently supporting continued

above-trend economic growth; these included a strong

labor market, federal tax and spending policies, high levels of household and business confidence, favorable financial conditions, and strong economic growth abroad.

Participants generally expected that further gradual increases in the target range for the federal funds rate

would be consistent with solid expansion of economic

activity, strong labor market conditions, and inflation

near the Committee’s symmetric 2 percent objective

over the medium term. Participants generally viewed the

risks to the economic outlook to be roughly balanced.

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Participants generally reported that their business contacts were optimistic about the economic outlook.

However, in a number of Districts, contacts expressed

concern about the possible adverse effects of tariffs and

trade restrictions, including the potential for postponing

or pulling back on capital spending. Labor markets were

generally strong, and contacts in a number of Districts

reported shortages of workers in specific industries or

occupations. In some cases, labor shortages were contributing to upward pressure on wages. In many Districts, business contacts experienced rising costs of

nonlabor inputs, particularly trucking, rail, and shipping

rates and prices of steel, aluminum, lumber, and

petroleum-based commodities. Reports on the ability of

firms to pass through higher costs to customers varied

across Districts. Activity in the energy sector remained

strong, and crude oil production was expected to continue to expand in response to rising global demand. In

contrast, in agricultural areas, low crop prices continued

to weigh on farm income. It was noted that the potential

for higher Chinese tariffs on key agricultural products

could, in the longer run, hurt U.S. competitiveness.

Participants generally agreed that labor market conditions strengthened further during the first quarter of the

year. Nonfarm payroll employment posted strong gains,

averaging 200,000 per month. The unemployment rate

was unchanged, but at a level below most estimates of

its longer-run normal rate. Both the overall labor force

participation rate and the employment-to-population ratio moved up. The first-quarter data from the employment cost index indicated that the strength in the labor

market was showing through to a gradual pickup in wage

increases, although the signal from other wage measures

was less clear. Many participants commented that overall wage pressures were still moderate or were strong

only in industries and occupations experiencing very

tight labor supply; several of them noted that recent

wage developments provided little evidence of general

overheating in the labor market. With economic growth

anticipated to remain above trend, participants generally

expected the unemployment rate to remain below, or to

decline further below, their estimates of its longer-run

normal rate. Several participants also saw scope for a

strong labor market to continue to draw individuals into

the workforce. However, a few others questioned

whether tight labor markets would have a lasting positive

effect on labor force participation.

The 12-month changes in overall and core PCE prices

moved up in March, to 2 percent and 1.9 percent, respectively. Most participants viewed the recent firming

in inflation as providing some reassurance that inflation

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was on a trajectory to achieve the Committee’s symmetric 2 percent objective on a sustained basis. In particular,

the recent readings appeared to support the view that the

downside surprises last year were largely transitory.

Some participants noted that inflation was likely to modestly overshoot 2 percent for a time. However, several

participants suggested that the underlying trend in inflation had changed little, noting that some of the recent

increase in inflation may have represented transitory

price changes in some categories of health care and financial services, or that various measures of underlying

inflation, such as the 12-month trimmed mean PCE inflation rate from the Federal Reserve Bank of Dallas, remained relatively stable at levels below 2 percent. In discussing the outlook for inflation, many participants emphasized that, after an extended period of low inflation,

the Committee’s longer-run policy objective was to return inflation to its symmetric 2 percent goal on a sustained basis. Many saw tight resource utilization, the

pickup in wage increases and nonlabor input costs, and

stable inflation expectations as supporting their projections that inflation would remain near 2 percent over the

medium term. But a few cautioned that, although

market-based measures of inflation compensation had

moved up over recent months, in their view these

measures, as well as some survey-based measures, remained at levels somewhat below those that would be

consistent with an expectation of sustained 2 percent inflation as measured by the PCE price index.

Participants commented on a number of risks and uncertainties associated with their expectations for economic activity, the labor market, and inflation over the

medium term. Some participants saw a risk that, as resource utilization continued to tighten, supply constraints could develop that would intensify upward wage

and price pressures, or that financial imbalances could

emerge, which could eventually erode the sustainability

of the economic expansion. Alternatively, some participants thought that a strengthening labor market could

bring a further increase in labor supply, allowing the unemployment rate to decline further with less upward

pressure on wages and prices. Another area of uncertainty was the outlook for fiscal and trade policies. Several participants continued to note the challenge of assessing the timing and magnitude of the effects of recent

fiscal policy changes on household and business spending and on labor supply over the next several years. In

addition, they saw the trajectory of fiscal policy thereafter as difficult to forecast. With regard to trade policies,

a number of participants viewed the range of possible

_

outcomes for economic activity and inflation to be particularly wide, depending on what actions were taken by

the United States and how U.S trading partners responded. And some participants observed that while

these policies were being debated and negotiations continued, the uncertainty surrounding trade issues could

damp business sentiment and spending. In their discussion of the outlook for inflation, a few participants also

noted the risk that, if global oil prices remained high or

moved higher, U.S. inflation would be boosted by the

direct effects and pass-through of higher energy costs.

Financial conditions tightened somewhat over the intermeeting period but remained accommodative overall.

The foreign exchange value of the dollar rose modestly,

but this move retraced only a bit of the depreciation of

the dollar since its 2016 peak. With their decline over

the intermeeting period, equity prices were about unchanged, on net, since the beginning of the year but were

still near their historical highs. Longer-term Treasury

yields rose, but somewhat less than shorter-term yields,

and the yield curve flattened somewhat further.

In commenting on the staff’s assessment of financial stability, a couple of participants noted that after the bout

of financial market volatility in early February, the use of

investment strategies predicated on a low-volatility environment may have become less prevalent, and that some

investors may have become more cautious. However,

asset valuations across a range of markets and leverage

in the nonfinancial corporate sector remained elevated

relative to historical norms, leaving some borrowers vulnerable to unexpected negative shocks. With regard to

the ability of the financial system to absorb such shocks,

several participants commented that regulatory reforms

since the crisis had contributed to appreciably stronger

capital and liquidity positions in the financial sector. In

this context, a few participants emphasized the need to

build additional resilience in the financial sector at this

point in the economic expansion.

In their consideration of monetary policy over the near

term, participants discussed the implications of recent

economic and financial developments for the outlook

for economic growth, labor market conditions, and inflation and, in turn, for the appropriate path of the federal funds rate. All participants expressed the view that

it would be appropriate for the Committee to leave the

target range for the federal funds rate unchanged at the

May meeting. Participants concurred that information

received during the intermeeting period had not materially altered their assessment of the outlook for the economy. Participants commented that above-trend growth

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Minutes of the Meeting of May 1–2, 2018

in real GDP in recent quarters, together with somewhat

higher recent inflation readings, had increased their confidence that inflation on a 12-month basis would continue to run near the Committee’s longer-run 2 percent

symmetric objective. That said, it was noted that it was

premature to conclude that inflation would remain at

levels around 2 percent, especially after several years in

which inflation had persistently run below the Committee’s 2 percent objective. In light of subdued inflation

over recent years, a few participants observed that adjustments in the stance of policy should take account of

the possibility that longer-term inflation expectations

have drifted a bit below levels consistent with the Committee’s 2 percent inflation objective. Most participants

judged that if incoming information broadly confirmed

their current economic outlook, it would likely soon be

appropriate for the Committee to take another step in

removing policy accommodation. Overall, participants

agreed that the current stance of monetary policy remained accommodative, supporting strong labor market

conditions and a return to 2 percent inflation on a sustained basis.

With regard to the medium-term outlook for monetary

policy, all participants reaffirmed that adjustments to the

path for the policy rate would depend on their assessments of the evolution of the economic outlook and

risks to the outlook relative to the Committee’s statutory

objectives. Participants generally agreed with the assessment that continuing to raise the target range for the federal funds rate gradually would likely be appropriate if

the economy evolves about as expected. These participants commented that this gradual approach was most

likely to be conducive to maintaining strong labor market conditions and achieving the symmetric 2 percent inflation objective on a sustained basis without resulting in

conditions that would eventually require an abrupt policy tightening. A few participants commented that recent news on inflation, against a background of continued prospects for a solid pace of economic growth, supported the view that inflation on a 12-month basis would

likely move slightly above the Committee’s 2 percent objective for a time. It was also noted that a temporary

period of inflation modestly above 2 percent would be

consistent with the Committee’s symmetric inflation objective and could be helpful in anchoring longer-run inflation expectations at a level consistent with that objective.

Meeting participants also discussed the recent flatter

profile of the term structure of interest rates. Participants pointed to a number of factors contributing to the

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flattening of the yield curve, including the expected gradual rise of the federal funds rate, the downward pressure

on term premiums from the Federal Reserve’s still-large

balance sheet as well as asset purchase programs by

other central banks, and a reduction in investors’ estimates of the longer-run neutral real interest rate. A few

participants noted that such factors could make the

slope of the yield curve a less reliable signal of future

economic activity.

However, several participants

thought that it would be important to continue to monitor the slope of the yield curve, emphasizing the historical regularity that an inverted yield curve has indicated

an increased risk of recession.

Participants commented on how the Committee’s communications in its postmeeting statement might need to

be revised in coming meetings if the economy evolved

broadly as expected. A few participants noted that if increases in the target range for the federal funds rate continued, the federal funds rate could be at or above their

estimates of its longer-run normal level before too long.

In addition, a few observed that the neutral level of the

federal funds rate might currently be lower than their estimates of its longer-run level. In light of this, some participants noted it might soon be appropriate to revise the

forward-guidance language in the statement indicating

that the “federal funds rate is likely to remain, for some

time, below levels that are expected to prevail in the

longer run” or to modify the language stating that “the

stance of monetary policy remains accommodative.”

Participants expressed a range of views on the amount

of further policy firming that would likely be required

over the medium term to achieve the Committee’s goals.

Participants indicated that the Committee, in making

policy decisions over the next few years, should conduct

policy with the aim of keeping inflation near its longerrun symmetric objective while sustaining the economic

expansion and a strong labor market. Participants

agreed that the actual path of the federal funds rate

would depend on the economic outlook as informed by

incoming information.

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 and that economic

activity had been rising at a moderate rate. Job gains had

been strong, on average, in recent months, and the unemployment rate had stayed low. Recent data suggested

that growth of household spending had moderated from

its strong fourth-quarter pace, while business fixed investment continued to grow strongly. On a 12-month

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Federal Open Market Committee

basis, both overall inflation and inflation for items other

than food and energy had moved close to 2 percent. In

particular, in March the 12-month percent increase in

PCE prices was equal to the Committee’s longer-run objective of 2 percent, while the measure excluding food

and energy prices was only slightly below 2 percent.

Market-based measures of inflation compensation remained low, and survey-based measures of longer-term

inflation expectations were little changed, on balance.

All members viewed the recent data as indicating that

the outlook for the economy had changed little since the

previous meeting. In addition, financial conditions, although somewhat tighter than at the time of the March

FOMC meeting, had stayed accommodative overall,

while fiscal policy was likely to provide sizable impetus

to the economy over the next few years. Consequently,

members expected that, with further gradual adjustments to the stance of monetary policy, economic activity would expand at a moderate pace in the medium term

and labor market conditions would remain strong.

Members agreed that inflation on a 12-month basis is

expected to run near the Committee’s symmetric 2 percent objective over the medium term. Members judged

that the risks to the economic outlook appeared to be

roughly balanced.

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 1½ to 1¾ 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 assessments of realized and expected economic conditions relative to the Committee’s

objectives of maximum employment and 2 percent inflation. They reiterated that this assessment would take

into account a wide range of information, including

measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings

on financial and international developments. Members

also agreed that they would carefully monitor actual and

expected developments in inflation in relation to the

Committee’s symmetric inflation goal. Members expected that economic conditions would evolve in a manner that would warrant further 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.

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 May 3, 2018, 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

1½ to 1¾ 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 1.50 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 at auction the amount of principal

payments from the Federal Reserve’s holdings

of Treasury securities maturing during each calendar month that exceeds $18 billion, and to reinvest in agency mortgage-backed securities the

amount of principal payments from the Federal

Reserve’s holdings of agency debt and agency

mortgage-backed securities received during

each calendar month that exceeds $12 billion.

Small deviations from these amounts for operational reasons are acceptable.

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

and that economic activity has been rising at a

moderate rate. Job gains have been strong, on

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Minutes of the Meeting of May 1–2, 2018

average, in recent months, and the unemployment rate has stayed low. Recent data suggest

that growth of household spending moderated

from its strong fourth-quarter pace, while business fixed investment continued to grow

strongly. On a 12-month basis, both overall inflation and inflation for items other than food

and energy have moved close to 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 expects that,

with further gradual adjustments in the stance

of monetary policy, economic activity will expand at a moderate pace in the medium term

and labor market conditions will remain strong.

Inflation on a 12-month basis is expected to run

near the Committee’s symmetric 2 percent objective over the medium term. Risks to the economic outlook appear roughly balanced.

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 1½ to 1¾ percent. The stance of

monetary policy remains accommodative,

thereby supporting strong 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,

5 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.

Page 11

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

further 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.”

Voting for this action: Jerome H. Powell, William C.

Dudley, Thomas I. Barkin, Raphael W. Bostic, Lael

Brainard, Loretta J. Mester, Randal K. Quarles, and John

C. Williams.

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

rate) at the existing level of 2¼ percent.5

It was agreed that the next meeting of the Committee

would be held on Tuesday–Wednesday, June 12–13,

2018. The meeting adjourned at 10:00 a.m. on May 2,

2018.

Notation Vote

By notation vote completed on April 10, 2018, the Committee unanimously approved the minutes of the Committee meeting held on March 20–21, 2018.

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James A. Clouse

Secretary