FOMC Minutes

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Minutes of the Federal Open Market Committee

November 7–8, 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 Wednesday, November 7, 2018, at 1:00 p.m. and continued on Thursday,

November 8, 2018, at 9:00 a.m. 1

PRESENT:

Jerome H. Powell, Chairman

John C. Williams, Vice Chairman

Thomas I. Barkin

Raphael W. Bostic

Lael Brainard

Richard H. Clarida

Mary C. Daly

Loretta J. Mester

Randal K. Quarles

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

Eric Rosengren, and Michael Strine, Alternate

Members of the Federal Open Market Committee

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 Counsel

Steven B. Kamin, Economist

Thomas Laubach, Economist

David W. Wilcox, Economist

David Altig, Thomas A. Connors, Trevor A. Reeve,

Ellis W. Tallman, William Wascher, and Beth Anne

Wilson, Associate Economists

Simon Potter, Manager, System Open Market Account

The Federal Open Market Committee is referenced as the

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

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

1

Lorie K. Logan, Deputy Manager, System Open

Market Account

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

Board of Governors

Matthew J. Eichner, 2 Director, Division of Reserve

Bank Operations and Payment Systems, Board of

Governors; Michael S. Gibson, Director, Division

of Supervision and Regulation, Board of

Governors; Andreas Lehnert, Director, Division of

Financial Stability, Board of Governors

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

Jon Faust, Senior Special Adviser to the Chairman,

Office of Board Members, Board of Governors

Antulio N. Bomfim, Special Adviser to the Chairman,

Office of Board Members, Board of Governors

Brian M. Doyle, Joseph W. Gruber, Ellen E. Meade,

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, Senior Associate Director, Division of

Research and Statistics, Board of Governors;

Christopher J. Erceg, Senior Associate Director,

Division of International Finance, Board of

Governors

Edward Nelson, Senior Adviser, Division of Monetary

Affairs, Board of Governors; S. Wayne Passmore,

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Federal Open Market Committee

Senior Adviser, Division of Research and Statistics,

Board of Governors

William F. Bassett, Associate Director, Division of

Financial Stability, Board of Governors; Marnie

Gillis DeBoer 3 and David López-Salido, Associate

Directors, Division of Monetary Affairs, Board of

Governors; Molly E. Mahar,3 Associate Director,

Division of Supervision and Regulation, Board of

Governors; Stacey Tevlin, Associate Director,

Division of Research and Statistics, Board of

Governors

Jeffrey D. Walker,2 Deputy Associate Director,

Division of Reserve Bank Operations and Payment

Systems, Board of Governors; Min Wei, Deputy

Associate Director, Division of Monetary Affairs,

Board of Governors

Christopher J. Gust, Laura Lipscomb,3 and Zeynep

Senyuz,3 Assistant Directors, Division of Monetary

Affairs, Board of Governors; Patrick E. McCabe,

Assistant Director, Division of Research and

Statistics, Board of Governors

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

of the Secretary, Board of Governors

Andre Anderson, First Vice President, Federal Reserve

Bank of Atlanta

Jeff Fuhrer, Sylvain Leduc, Kevin Stiroh,4 Daniel G.

Sullivan, and Christopher J. Waller, Executive Vice

Presidents, Federal Reserve Banks of Boston, San

Francisco, New York, Chicago, and St. Louis,

respectively

Paolo A. Pesenti, Paula Tkac,3 Luke Woodward, Mark

L.J. Wright, and Nathaniel Wuerffel,3 Senior Vice

Presidents, Federal Reserve Banks of New York,

Atlanta, Kansas City, Minneapolis, and New York,

respectively

Roc Armenter,3 Satyajit Chatterjee, Deborah L.

Leonard,3 Pia Orrenius, Matthew D. Raskin,3 and

Patricia Zobel,3 Vice Presidents, Federal Reserve

Banks of Philadelphia, Philadelphia, New York,

Dallas, New York, New York, respectively

John P. McGowan,3 Assistant Vice President, Federal

Reserve Bank of New York

Andreas L. Hornstein, Senior Advisor, Federal Reserve

Bank of Richmond

Michiel De Pooter, Section Chief, Division of

Monetary Affairs, Board of Governors

Samuel Schulhofer-Wohl, Senior Economist and

Research Advisor, Federal Reserve Bank of

Chicago

David H. Small, Project Manager, Division of

Monetary Affairs, Board of Governors

Gara Afonso,3 Research Officer, Federal Reserve Bank

of New York

Alyssa G. Anderson3 and Kurt F. Lewis, Principal

Economists, Division of Monetary Affairs, Board

of Governors

Long-Run Monetary Policy Implementation

Frameworks

Committee participants resumed their discussion of potential long-run frameworks for monetary policy implementation, a topic last discussed at the November 2016

FOMC meeting. The staff provided briefings that described changes in recent years in banks’ uses of reserves, outlined tradeoffs associated with potential

choices of operating regimes to implement monetary

policy and control short-term interest rates, reviewed

potential choices of the policy target rate, and summarized developments in the policy implementation frameworks of other central banks.

Joshua S. Louria,3 Lead Financial Institution and Policy

Analyst, Division of Monetary Affairs, Board of

Governors

Sriya Anbil,3 Senior Economist, Division of Monetary

Affairs, Board of Governors

Randall A. Williams, Senior Information Manager,

Division of Monetary Affairs, Board of Governors

Attended through the discussion of the long-run monetary

policy implementation frameworks.

3

4

Attended Wednesday session only.

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The staff noted that banks’ liquidity management practices had changed markedly since the financial crisis,

with large banks now maintaining substantial buffers of

reserves, among other high-quality liquid assets, to meet

potential outflows and to comply with regulatory requirements. Information from bank contacts as well as

a survey of banks indicated that, in an environment in

which money market interest rates were very close to the

interest rate paid on excess reserve balances, banks

would likely be comfortable operating with much lower

levels of reserve balances than at present but would wish

to maintain substantially higher levels of balances than

before the crisis. On average, survey responses suggested that banks might reduce their reserve holdings

only modestly from those “lowest comfortable” levels if

money market interest rates were somewhat above the

interest on excess reserves (IOER) rate. Across banks,

however, individual survey responses on this issue varied

substantially.

The staff highlighted how changes in the determinants

of reserve demand since the crisis could affect the

tradeoffs between two types of operating regimes:

(1) one in which aggregate excess reserves are sufficiently limited that money market interest rates are sensitive to small changes in the supply of reserves and

(2) one in which aggregate excess reserves are sufficiently abundant that money market interest rates are not

sensitive to small changes in reserve supply. In the former type of regime, the Federal Reserve actively adjusts

reserve supply in order to keep its policy rate close to

target. This technique worked well before the financial

crisis, when reserve demand was fairly stable in the aggregate and largely influenced by payment needs and reserve requirements. However, with the increased use of

reserves for precautionary liquidity purposes following

the crisis, there was some uncertainty about whether

banks’ demand for reserves would now be sufficiently

predictable for the Federal Reserve to be able to precisely target an interest rate in this way. In the latter type

of regime, money market interest rates are not sensitive

to small fluctuations in the demand for and supply of

reserves, and the stance of monetary policy is instead

transmitted from the Federal Reserve’s administered

rates to market rates—an approach that has been effective in controlling short-term interest rates in the United

States since the financial crisis, as well as in other countries where central banks have used this approach.

The staff briefings also examined the tradeoffs between

alternative policy rates that the Committee could choose

in each of the regimes. In a regime of limited excess

reserves, the Federal Reserve’s policy tools most directly

affect overnight unsecured rates paid by banks, such as

the effective federal funds rate (EFFR) and the overnight bank funding rate (OBFR). These rates could also

be targeted with abundant excess reserves, as could interest rates on secured funding or a mixture of secured

and unsecured rates.

Participants commented on the advantages of a regime

of policy implementation with abundant excess reserves.

Based on experience over recent years, such a regime

was seen as providing good control of short-term money

market rates in a variety of market conditions and effective transmission of those rates to broader financial conditions. Participants commented that, by contrast, interest rate control might be difficult to achieve in an operating regime of limited excess reserves in view of the potentially greater unpredictability of reserve demand resulting from liquidity regulations or changes in risk appetite, or the increased variability of factors affecting reserve supply. Participants also observed that regimes

with abundant excess reserves could provide effective

control of short-term rates even if large amounts of liquidity needed to be added to address liquidity strains or

if large-scale asset purchases needed to be undertaken to

provide macroeconomic stimulus in situations where

short-term rates are at their effective lower bound.

Monetary policy operations in this regime would also not

require active management of reserve supply. In addition, the provision of sizable quantities of reserves could

enhance financial stability and reduce operational risks

in the payment system by maintaining a high level of liquidity in the banking system.

A number of participants commented that the attractive

features of a regime of abundant excess reserves should

be weighed against the potential drawbacks of such a regime as well as the potential benefits of returning to a

regime similar to that employed before the financial crisis. Potential drawbacks of an abundant reserves regime

included challenges in precisely determining the quantity

of reserves necessary in such systems, the need to maintain relatively sizable quantities of reserves and holdings

of securities, and relatively large ongoing interest expenses associated with the remuneration of reserves.

Some noted that returning to a regime of limited excess

reserves could demonstrate the Federal Reserve’s ability

to fully unwind the policies used to respond to the crisis

and might thereby increase public acceptance or effectiveness of such policies in the future. Participants noted

that the level of reserve balances required to remain in a

regime where rate control does not entail active management of the supply of reserves was quite uncertain, but

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they thought that reserve supply could be reduced substantially below its current level while remaining in such

a regime. They expected to learn more about the demand for reserves as the balance sheet continued to

shrink in a gradual and predictable manner. They also

observed that it might be possible to adopt strategies

that provide incentives for banks to reduce their demand

for reserves. Participants judged that if the level of reserves needed for a regime with abundant excess reserves turned out to be considerably higher than anticipated, the possibility of returning to a regime in which

excess reserves were limited and adjustments in reserve

supply were used to influence money market rates would

warrant further consideration.

Participants noted that lending in the federal funds market was currently dominated by the Federal Home Loan

Banks (FHLBs). Participants cited several potential benefits of targeting the OBFR rather than the EFFR: The

larger volume of transactions and greater variety of lenders underlying the OBFR could make that rate a broader

and more robust indicator of banks’ overnight funding

costs, the OBFR could become an even better indicator

after the potential incorporation of data on onshore

wholesale deposits, and the similarity of the OBFR and

the EFFR suggested that transitioning to the OBFR

would not require significant changes in the way the

Committee conducted and communicated monetary

policy. Some participants saw it as desirable to explore

the possibility of targeting a secured interest rate. Some

also expressed interest in studying, over the longer term,

approaches in which the Committee would target a mixture of secured and unsecured rates.

Participants expected to continue their discussion of

long-run implementation frameworks and related issues

at upcoming meetings. They emphasized that it would

be important to communicate clearly the rationale for

any choice of operating regime and target interest rate.

Developments in Financial Markets and Open Market Operations

The manager of the System Open Market Account

(SOMA) reviewed recent developments in domestic and

global financial markets. The equity market was quite

volatile over the intermeeting period, with U.S. stock

prices down as much as 10 percent at one point before

recovering somewhat. Investors pointed to a number of

uncertainties in the global outlook that may have contributed to the decline in stock prices, including ongoing

trade tensions between the United States and China,

growing concerns about the fiscal position of the Italian

government and its broader implications for financial

markets and institutions, and some worries about the

outcome of the Brexit negotiations. Market contacts

also noted some nervousness about corporate earnings

growth and an increase in longer-term Treasury yields

over recent weeks as factors contributing to downward

pressure on equity prices. The volatility in equity markets was accompanied by a rise in risk spreads on corporate debt, although the widening in risk spreads was not

as notable as in some past stock market downturns.

On balance, the turbulence in equity markets did not

leave much imprint on near-term U.S. monetary policy

expectations. Respondents to the Open Market Desk’s

recent Survey of Primary Dealers and Survey of Market

Participants indicated that respondents placed high odds

on a further quarter-point increase in the target range for

the federal funds rate at the December FOMC meeting;

that expectation also seemed to be embedded in federal

funds futures quotes. Further out, the median of survey

respondents’ modal expectations for the path of the federal funds rate pointed to about three additional policy

firmings next year while futures quotes appeared to be

pricing in a somewhat flatter trajectory.

The manager also reviewed recent developments in

global markets. In China, investors were concerned

about the apparent slowing of economic expansion and

the implications of continued trade tensions with the

United States. Chinese stock price indexes declined further over the intermeeting period and were off nearly

20 percent on the year to date. The renminbi continued

to depreciate, moving closer to 7.0 renminbi per dollar—a level that some market participants viewed as a

possible trigger for intensifying depreciation pressures.

Anecdotal reports suggested that Chinese authorities

had intervened to support the renminbi.

The deputy manager followed with a discussion of recent developments in money markets and Desk operations. The EFFR along with other overnight rates edged

higher over the weeks following the increase in the target

range at the previous meeting. Most recently, the EFFR

had risen to the level of the IOER rate, placing it 5 basis

points below the top of the target range. The upward

pressure on the EFFR and other money market rates reportedly stemmed partly from a sizable increase in

Treasury bill supply and a corresponding increase in

Treasury bill yields. In part reflecting that development,

FHLBs shifted the composition of their liquidity portfolios away from overnight lending in the federal funds

market in favor of the higher returns on overnight repurchase agreements and on interest-bearing deposit accounts at banks; these reallocations in their liquidity

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portfolios in turn contributed to upward pressure on the

EFFR. At the same time, anecdotal reports suggested

that some depositories were seeking to increase their

borrowing in federal funds from FHLBs, partly because

of the favorable treatment of such borrowing under liquidity regulations. In addition, rates on term borrowing

had moved higher over recent weeks, perhaps encouraging some depositories to bid up rates on overnight federal funds loans. To date, there were no clear signs that

the ongoing decline in reserve balances in the banking

system associated with the gradual normalization of the

Federal Reserve’s balance sheet had contributed meaningfully to the upward pressure on money market rates.

Indeed, banks reportedly were willing to reduce reserve

holdings in order to lend in overnight repurchase agreement (repo) markets at rates just a few basis points above

the IOER rate.

However, respondents to the Desk’s recent Survey of

Primary Dealers and Survey of Market Participants indicated that they anticipated the reduction in the supply of

reserves in the banking system could become a very important factor influencing the spread between the IOER

rate and the EFFR over the last three quarters of next

year. The deputy manager also provided an update on

plans to incorporate additional data on overnight deposits in the OBFR. Banks had begun reporting new data

on onshore overnight deposits in October. In aggregate,

the volumes reported in onshore overnight deposits

were substantial and the rates reported for these instruments were very close to rates reported on overnight Eurodollar transactions. The new data were expected to be

incorporated in the calculation of the OBFR later next

year.

Following the Desk briefings, the Chairman noted the

upward trend in the EFFR relative to the IOER rate

over the intermeeting period and suggested that it might

be appropriate to implement another technical adjustment in the IOER rate relative to the top of the target

range for the federal funds rate fairly soon. While the

funds rate seemed to have stabilized recently, there remained some risk that it could continue to drift higher

before the Committee’s next meeting. As a contingency

plan, participants agreed that it would be appropriate for

the Board to implement such a technical adjustment in

the IOER rate before the December meeting if necessary to keep the federal funds rate well within the target

range established by the FOMC.

By unanimous vote, the Committee ratified the Desk’s

domestic transactions over the intermeeting period.

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

Staff Review of the Economic Situation

The information reviewed for the November 7–8 meeting indicated that labor market conditions continued to

strengthen in recent months and that real gross domestic

product (GDP) rose at a strong rate in the third quarter,

similar to its pace in the first half of the year. Consumer

price inflation, as measured by the 12-month percentage

change in the price index for personal consumption expenditures (PCE), was 2.0 percent in September. Survey-based measures of longer-run inflation expectations

were little changed on balance.

Total nonfarm payroll employment increased at a strong

pace, on average, in September and October. The national unemployment rate decreased to 3.7 percent in

September and remained at that level in October, while

the labor force participation rate and the employmentto-population ratio moved up somewhat over those two

months. The unemployment rates for African Americans, Asians, and Hispanics in October were below their

levels at the end of the previous expansion. The share

of workers employed part time for economic reasons

continued to be close to the lows reached in late 2007.

The rates of private-sector job openings and quits both

remained at high levels in September; initial claims for

unemployment insurance benefits in late October were

close to historically low levels. Total labor compensation per hour in the nonfarm business sector increased

2.8 percent over the four quarters ending in the third

quarter, the employment cost index for private workers

increased 2.9 percent over the 12 months ending in September, and average hourly earnings for all employees

rose 3.1 percent over the 12 months ending in October.

Industrial production expanded at a solid pace again in

September, and indicators for output in the fourth quarter were generally positive. Production worker hours in

the manufacturing sector increased in October, automakers’ assembly schedules suggested that light motor

vehicle production would rise in the fourth quarter, and

new orders indexes from national and regional manufacturing surveys pointed to solid gains in factory output in

the near term.

Real PCE continued to grow strongly in the third quarter. Overall consumer spending rose steadily in recent

months, and light motor vehicle sales stepped up to a

robust pace in September and edged higher in October.

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Key factors that influence consumer spending—including solid gains in real disposable personal income and

the effects of earlier increases in equity prices and home

values on households’ net worth—continued to be supportive of solid real PCE growth in the near term. Consumer sentiment, as measured by the University of

Michigan Surveys of Consumers, remained upbeat in

October.

Real residential investment declined further in the third

quarter, likely reflecting a range of factors including the

continued effects of rising mortgage interest rates on the

affordability of housing. Starts of both new singlefamily homes and multifamily units decreased last quarter, but building permit issuance for new single-family

homes—which tends to be a good indicator of the underlying trend in construction of such homes—was little

changed on net. Sales of both new and existing homes

declined again in the third quarter, while pending home

sales edged up in September.

Growth in real private expenditures for business equipment and intellectual property moderated in the third

quarter following strong gains in these expenditures in

the first half of the year. Nominal orders and shipments

of nondefense capital goods excluding aircraft edged

down over the two months ending in September after

brisk increases in July, while readings on business sentiment remained upbeat. Real business expenditures for

nonresidential structures declined in the third quarter

both for the drilling and mining sector and outside that

sector. The number of crude oil and natural gas rigs in

operation—an indicator of business spending for structures in the drilling and mining sector—held about

steady from late May through late October.

Total real government purchases rose in the third quarter. Real federal purchases increased, mostly reflecting

higher defense expenditures. Real purchases by state

and local governments also increased, as real construction spending by these governments rose and payrolls

expanded.

The nominal U.S. international trade deficit widened in

August and September. Exports decreased in August

but more than recovered in September, reflecting the

pattern of industrial supplies exports. Imports of consumer goods led imports higher in both months. The

change in net exports was estimated to have been a sizable drag on real GDP growth in the third quarter.

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

price index, increased 2.0 percent over the 12 months

ending in September. Core PCE price inflation, which

excludes changes in consumer food and energy prices,

also was 2.0 percent over that same period. The consumer price index (CPI) rose 2.3 percent over the

12 months ending in September, while core CPI inflation was 2.2 percent. Recent readings on survey-based

measures of longer-run inflation expectations—including those from the Michigan survey, the Blue Chip Economic Indicators, and the Desk’s Survey of Primary

Dealers and Survey of Market Participants—were little

changed on balance.

Foreign economic growth appeared to pick up in the

third quarter, as a strong rebound in economic activity

in several emerging market economies (EMEs) more

than offset a slowdown in China and most advanced foreign economies (AFEs). Preliminary GDP data showed

that Mexico’s economy grew briskly, reversing its second-quarter contraction, while indicators suggested that

Brazil’s economy rebounded from a nationwide truckers’ strike. In contrast, GDP growth slowed in China

and the euro area, and indicators pointed to a step-down

in Japanese growth. Foreign inflation picked up in the

third quarter, boosted by higher oil prices and, in China,

by higher food prices. However, underlying inflation

pressures remained muted, especially in some AFEs.

Staff Review of the Financial Situation

Concerns about ongoing international trade tensions,

the global growth outlook, and rising interest rates

weighed on global equity market sentiment over the intermeeting period. Domestic stock prices declined considerably, on net, and equity market implied volatility

rose. Nominal Treasury yields ended the period higher

amid some moderate volatility, and the broad dollar index moved up. Financing conditions for nonfinancial

businesses and households remained supportive of economic activity on balance.

During the intermeeting period, broad U.S. equity price

indexes declined considerably, on net, amid somewhat

elevated day-to-day volatility. Various factors appeared

to weigh on investor sentiment including news related to

ongoing international trade tensions and investors’ concerns about the sustainability of strong corporate earnings growth. Stock prices in the basic materials and industrial sectors underperformed the broader market, reportedly reflecting an increase in trade tensions with

China. More broadly, investors seemed to reassess equity valuations that appeared elevated. Investors also reacted to some large firms raising concerns about the effect of rising costs on their future profitability in their

latest earnings reports. Option-implied volatility on the

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

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increased, though it remained below the levels seen in

early February. Despite the considerable declines in domestic stock prices, spreads of investment- and speculative-grade corporate bonds over comparable-maturity

Treasury yields widened only modestly.

FOMC communications over the intermeeting period

were viewed by market participants as consistent with a

continued gradual removal of monetary policy accommodation. Market-implied measures of monetary policy

expectations were generally little changed. Investors

continued to see virtually no odds of a further quarterpoint firming in the target range for the federal funds

rate at the November FOMC meeting and high odds of

a further firming at the December FOMC meeting. The

market-implied path for the federal funds rate beyond

2018 increased a bit.

Medium- and longer-term nominal Treasury yields

ended the period higher amid some moderate volatility

over the intermeeting period. Meanwhile, measures of

inflation compensation derived from Treasury InflationProtected Securities declined somewhat, with some of

the decline occurring following the weaker-than-expected September CPI release.

Overnight interest rates in short-term funding markets

rose in line with the increase in the target range for the

federal funds rate announced at the September FOMC

meeting. Over the intermeeting period, the spread between the EFFR and the IOER rate narrowed from

2 basis points to 0 basis points. Take-up at the Federal

Reserve’s overnight reverse repo facility remained low.

Over the intermeeting period, global investors focused

on changes in U.S. equity prices and interest rates, ongoing trade tensions between the United States and China,

and uncertainty regarding budget negotiations between

the Italian government and the European Union. Foreign equity prices posted notable net declines; optionimplied measures of foreign equity volatility spiked in

October but remained well below levels seen in February

and subsequently retraced some of those increases. Tenyear Italian sovereign bond spreads over German equivalents widened significantly, and there were moderate

spillovers to other euro-area peripheral spreads. Bond

yields in Germany and the United Kingdom fell, partly

reflecting weaker-than-expected inflation data and European political developments. In contrast, Canadian

yields increased slightly, bolstered by the announcement

of the U.S.-Mexico-Canada trade agreement and a policy

rate hike by the Bank of Canada. The dollar appreciated

against most advanced and emerging market currencies,

and EME-dedicated funds experienced small outflows.

Financing conditions for nonfinancial firms continued

to be supportive of borrowing and spending over the intermeeting period. Net debt financing of nonfinancial

firms was robust in the third quarter, as weak speculative-grade bond issuance was largely offset by rapid leveraged loan issuance. The pace of equity issuance was

solid in September but slowed somewhat in October.

The outlook for corporate earnings remained favorable

on balance.

Respondents to the October Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS) reported, on net, that their institutions had eased standards

and terms for commercial and industrial loans to large

and middle-market firms over the past three months. All

respondents that had done so cited increased competition from other lenders as an important reason. The

credit quality of nonfinancial corporations remained

solid, though there were some signs of modest deterioration. Gross issuance of municipal bonds in September

and October was strong, much of which raised new capital.

Financing conditions in the commercial real estate

(CRE) sector remained accommodative. Banks in the

October SLOOS reported, on a portfolio-weighted basis, an easing of standards on CRE loans over the third

quarter on net. Interest rate spreads on commercial

mortgage-backed securities (CMBS) remained near their

post-crisis lows, while issuance of non-agency and

agency CMBS was stable in recent months and similar to

year-earlier levels.

Most borrowers in the residential mortgage market continued to experience accommodative financing conditions, although the increase in mortgage rates since 2016

appeared to have reduced housing demand, and financing conditions remained somewhat tight for borrowers

with low credit scores. Growth in home-purchase mortgage originations slowed over the past year as mortgage

rates stayed near their highest level since 2011, and refinancing activity continued to be very muted.

Financing conditions in consumer credit markets, on

balance, remained supportive of growth in household

spending, although interest rates for consumer loans

continued to rise. Credit card loan growth showed signs

of moderating amid rising interest rates and reported

tightening of lending standards at the largest credit card

banks. Compared with the beginning of this year, respondents to the October 2018 SLOOS reported, on a

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portfolio-weighted basis, a reduced willingness to issue

credit card loans to borrowers across the credit spectrum

and, in particular, to borrowers with lower credit scores;

meanwhile, banks reported having eased standards on

auto loans.

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 continued to be elevated,

that vulnerabilities from financial-sector leverage and

maturity and liquidity transformation remained low, and

that vulnerabilities from household leverage were still in

the low-to-moderate range. Additionally, the staff

judged vulnerabilities from leverage in the nonfinancial

business sector as elevated and noted a pickup in the issuance of risky debt and the continued deterioration in

underwriting standards on leveraged loans. 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—high private or sovereign debt burdens,

external vulnerabilities, and political uncertainties.

Staff Economic Outlook

In the U.S. economic forecast prepared for the November FOMC meeting, the staff continued to project that

real GDP would increase a little less rapidly in the second half of the year than in the first half. Hurricanes

Florence and Michael had devastating effects on many

communities, but they appeared likely to leave essentially

no imprint on the national economy in the second half

of the year as a whole. Relative to the forecast prepared

for the previous meeting, the projection for real GDP

growth this year was little revised. Over the 2018–20 period, output was forecast to rise at a rate above or at the

staff’s estimate of potential growth and then slow to a

pace below it in 2021. The unemployment rate was projected to decline further below the staff’s estimate of its

longer-run natural rate but to bottom out in 2020 and

begin to edge up in 2021. The medium-term projection

for real GDP growth was only a bit weaker than in the

previous forecast, primarily reflecting a lower projected

path for equity prices, leaving the unemployment rate

forecast little revised. With labor market conditions already tight, the staff continued to assume that projected

employment gains would manifest in smaller-than-usual

downward pressure on the unemployment rate and in

larger-than-usual upward pressure on the labor force

participation rate.

The staff expected both total and core PCE price inflation to remain close to 2 percent through the medium

term. The staff’s forecasts for both total and core PCE

price inflation were little revised on net.

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 also saw the risks to the forecasts for real GDP

growth and the unemployment rate as balanced. On the

upside, household spending and business investment

could expand faster than the staff projected, supported

in part by the tax cuts enacted last year. On the downside, trade policies and foreign economic developments

could move in directions that have significant negative

effects on U.S. economic growth. Risks to the inflation

projection also were seen as balanced. The upside risk

that inflation could increase more than expected in an

economy that was projected to move further above its

potential was counterbalanced by the downside risk that

longer-term inflation expectations may be lower than

was assumed in the staff forecast.

Participants’ View 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 September indicated

that the labor market had continued to strengthen and

that economic activity had been rising at a strong rate.

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

and the unemployment rate had declined. Household

spending had continued to grow strongly, while growth

of business fixed investment had moderated from its

rapid pace earlier in the year. On a 12-month basis, both

overall inflation and core inflation, which excludes

changes in food and energy prices, had remained near

2 percent. Indicators of longer-term inflation expectations were little changed on balance.

Based on recent readings on spending, prices, and the

labor market, participants generally indicated little

change in their assessment of the economic outlook,

with above-trend economic growth expected to continue before slowing to a pace closer to trend over the

medium term. Participants pointed to several factors

supporting above-trend growth, including strong employment gains, expansionary federal tax and spending

policies, and continued high levels of consumer and

business confidence. Several participants observed that

the stimulative effects of fiscal policy would likely diminish over time, while the lagged effects of reductions in

monetary policy accommodation would show through

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Minutes of the Meeting of November 7–8, 2018

Page 9

more fully, with both factors contributing to their expectation that economic growth would slow to a pace closer

to trend.

In their discussion of the household sector, participants

generally continued to characterize consumption growth

as strong. This view was supported by reports from District contacts, which were mostly upbeat regarding consumer spending. Although household spending overall

was seen as strong, most participants noted weakness in

residential investment. This weakness was attributed to

a variety of factors, including increased mortgage rates,

building cost increases, and supply constraints.

Participants observed that growth in business fixed investment slowed in the third quarter following several

quarters of rapid growth. Some participants pointed to

anecdotal evidence regarding higher tariffs and uncertainty about trade policy, slowing global demand, rising

input costs, or higher interest rates as possible factors

contributing to the slowdown. A couple of others noted

that business investment growth can be volatile on a

quarterly basis and factors such as the recent cuts in corporate taxes and high levels of business sentiment were

expected to support investment going forward.

Reports from District contacts in the manufacturing, energy, and service sectors were generally favorable,

though growth in manufacturing activity was reportedly

moderating in a couple of Districts. Business contacts

generally remained optimistic about the outlook, but

concerns about trade policy, slowing foreign demand,

and labor shortages were reportedly weighing on business prospects. Contacts in the agricultural sector reported that conditions remain depressed, in part, due to

the effects of trade policy actions on exports and farm

incomes.

Participants agreed that labor market conditions had

strengthened further over the intermeeting period. Payrolls had increased strongly in October, and measures of

labor market tightness such as rates of job openings and

quits continued to be elevated. The unemployment rate

remained at a historically low level in October, and the

labor force participation rate moved up. A couple of

participants saw scope for further increases in the labor

force participation rate as the strong economy pulled

more workers into the labor market, while a couple of

other participants judged that there was little scope for

significant further increases.

Contacts in many Districts continued to report tight labor markets with difficulties finding qualified workers.

In some cases, firms were responding to these difficulties by increasing training for less-qualified workers, outsourcing work, or automating production, while in other

cases, firms were responding by raising wages. Contacts

in a couple of Districts indicated that labor shortages,

particularly for skilled labor, might be constraining activity in certain industries. Participants observed that, at

the national level, measures of nominal wage growth appeared to be picking up. Many participants noted that

the recent pace of aggregate wage gains was broadly consistent with trends in productivity growth and inflation.

Participants observed that both overall and core PCE

price inflation remained near 2 percent on a 12-month

basis. In general, participants viewed recent price developments as consistent with their expectation that inflation would remain near the Committee’s symmetric

2 percent objective on a sustained basis. Reports from

business contacts and surveys in a number of Districts

were consistent with some firming in inflationary pressure. Contacts in many Districts indicated that input

costs had risen and that increased tariffs were raising

costs, especially for industries relying heavily on steel

and aluminum. In a few Districts, transportation costs

had reportedly increased. Some contacts indicated that

while input costs were higher, it appeared that the passthrough of these higher costs to consumer prices was

limited.

Participants commented on a number of risks and uncertainties associated with their outlook for economic

activity, the labor market, and inflation over the medium

term. A few participants indicated that uncertainty had

increased recently, pointing to the high levels of uncertainty regarding the effects of fiscal and trade policies on

economic activity and inflation. Some participants

viewed economic and financial developments abroad,

including the possibility of further appreciation of the

U.S. dollar, as posing downside risks for domestic economic growth and inflation. A couple of participants

expressed the concern that measures of inflation expectations would remain low, particularly if economic

growth slowed more than expected. Several participants

were concerned that the high level of debt in the nonfinancial business sector, and especially the high level of

leveraged loans, made the economy more vulnerable to

a sharp pullback in credit availability, which could exacerbate the effects of a negative shock on economic activity. The potential for an escalation in tariffs or trade

tensions was also cited as a factor that could slow economic growth more than expected. With regard to upside risks, participants noted that greater-than-expected

effects of fiscal stimulus and high consumer confidence

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Federal Open Market Committee

could lead to stronger-than-expected economic outcomes. Some participants raised the concern that tightening resource utilization in conjunction with an increase in the ability of firms to pass through increases in

tariffs or in other input costs to consumer prices could

generate undesirable upward pressure on inflation. In

general, participants agreed that risks to the outlook appeared roughly balanced.

In their discussion of financial developments, participants observed that financial conditions tightened over

the intermeeting period, as equity prices declined,

longer-term yields and borrowing costs for most sectors

increased, and the foreign exchange value of the dollar

rose. Despite these developments, a number of participants judged that financial conditions remained accommodative relative to historical norms.

Among those who commented on financial stability, a

number cited possible risks related to elevated CRE

prices, narrow corporate bond spreads, or strong issuance of leveraged loans. A few participants suggested

that some of these financial vulnerabilities might not

currently represent risks to financial stability so much as

they represent downside risks to the economic outlook;

a couple of participants suggested that financial stability

risks and risks to the outlook are interconnected. A couple of participants also commented on the upcoming release of the Board’s first public Financial Stability Report

and noted that the report would increase the transparency of the Federal Reserve’s financial stability work as

well as enhance communications on this topic.

In their discussion of monetary policy, participants

agreed that it would be appropriate to maintain the current target range for the federal funds rate at this meeting. Participants generally judged that the economy had

been evolving about as they had anticipated, with economic activity rising at a strong rate, labor market conditions continuing to strengthen, and inflation running

at or near the Committee’s longer-run objective. Almost

all participants reaffirmed the view that further gradual

increases in the target range for the federal funds rate

would likely be consistent with sustaining the Committee’s objectives of maximum employment and price stability.

Consistent with their judgment that a gradual approach

to policy normalization remained appropriate, almost all

participants expressed the view that another increase in

the target range for the federal funds rate was likely to

be warranted fairly soon if incoming information on the

labor market and inflation was in line with or stronger

than their current expectations. However, a few participants, while viewing further gradual increases in the target range of the federal funds rate as likely to be appropriate, expressed uncertainty about the timing of such

increases. A couple of participants noted that the federal

funds rate might currently be near its neutral level and

that further increases in the federal funds rate could unduly slow the expansion of economic activity and put

downward pressure on inflation and inflation expectations.

Participants emphasized that the Committee’s approach

to setting the stance of policy should be importantly

guided by incoming data and their implications for the

economic outlook. They noted that their expectations

for the path of the federal funds rate were based on their

current assessment of the economic outlook. Monetary

policy was not on a preset course; if incoming information prompted meaningful reassessments of the economic outlook and attendant risks, either to the upside

or the downside, their policy outlook would change.

Various factors such as the recent tightening in financial

conditions, risks in the global outlook, and some signs

of slowing in interest-sensitive sectors of the economy

on the one hand, and further indicators of tightness in

labor markets and possible inflationary pressures, on the

other hand, were noted in this context. Participants also

commented on how the Committee’s communications

in its postmeeting statement might need to be revised at

coming meetings, particularly the language referring to

the Committee’s expectations for “further gradual increases” in the target range for the federal funds rate.

Many participants indicated that it might be appropriate

at some upcoming meetings to begin to transition to

statement language that placed greater emphasis on the

evaluation of incoming data in assessing the economic

and policy outlook; such a change would help to convey

the Committee’s flexible approach in responding to

changing economic circumstances.

Committee Policy Action

In their discussion of monetary policy for the period

ahead, members judged that information received since

the Committee met in September indicated that the labor market had continued to strengthen and that economic activity had been rising at a strong rate. Job gains

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

unemployment rate had declined. Household spending

had continued to grow strongly, while growth of business fixed investment had moderated recently from its

rapid pace earlier in the year. On a 12-month basis, both

overall inflation and inflation for items other than food

and energy remained near 2 percent. Indicators of long-

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Minutes of the Meeting of November 7–8, 2018

Page 11

term inflation expectations were little changed on balance.

Members generally judged that the economy had been

evolving about as they had anticipated at the previous

meeting. Financial conditions, although somewhat

tighter than at the time of the September FOMC meeting, had stayed accommodative overall, while the effects

of expansionary fiscal policies enacted over the past year

were expected to continue through the medium term.

Consequently, members continued to expect that further

gradual increases in the target range for the federal funds

rate would be consistent with sustained expansion of

economic activity, strong labor market conditions, and

inflation near the Committee’s symmetric 2 percent objective over the medium term. Members continued to

judge that the risks to the economic outlook were

roughly balanced.

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 2 to 2¼ percent. 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 maximum employment and

symmetric 2 percent inflation objectives. 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. More generally, members noted

that decisions regarding near-term adjustments of the

stance of monetary policy would appropriately remain

dependent on the evolution of the 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 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 November 9, 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 2 to 2¼ 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 2.00 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 per-counterparty 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 $30 billion, and to

continue reinvesting in agency mortgagebacked 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 $20 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 September indicates

that the labor market has continued to

strengthen and that economic activity has been

rising at a strong rate. Job gains have been

strong, on average, in recent months, and the

unemployment rate has declined. Household

spending has continued to grow strongly, while

growth of business fixed investment has

moderated from its rapid pace earlier in the year.

On a 12-month basis, both overall inflation and

inflation for items other than food and energy

remain near 2 percent. Indicators of longerterm 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 further gradual

increases in the target range for the federal

funds rate will be consistent with sustained

expansion of economic activity, strong labor

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Federal Open Market Committee

market conditions, and inflation 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 2 to 2¼ percent.

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

maximum employment objective and its symmetric 2 percent inflation objective. 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.”

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

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

Brainard, Richard H. Clarida, Mary C. Daly, Loretta J.

Mester, and Randal K. Quarles.

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 2.20 percent and voted unanimously to approve establishment of the primary credit rate at the existing level of 2.75 percent, effective November 9, 2018.

Update from Subcommittee on Communications

Governor Clarida presented a proposal from the subcommittee on communications to conduct a review during 2019 of the Federal Reserve’s strategic framework

for monetary policy. This assessment would consider

the strategy, tools, and communications that would best

enable the Federal Reserve to meet its statutory objectives of maximum employment and price stability. With

labor market conditions close to maximum employment

and inflation near the Committee’s 2 percent objective,

it was an opportune time for the Federal Reserve to undertake this review and assess the robustness of its strategic framework.

During the review, the Federal Reserve would engage

with a broad range of interested stakeholders across the

country and host a research conference in June 2019.

FOMC participants would discuss the strategic framework at subsequent FOMC meetings, drawing on the

lessons from the outreach efforts and on staff analysis.

The goal of these discussions would be to identify possible ways to improve the Committee’s current strategic

policy framework in order to ensure that the Federal Reserve is best positioned going forward to achieve its statutory mandate.

Notation Vote

By notation vote completed on October 16, 2018, the

Committee unanimously approved the minutes of the

Committee meeting held on September 25–26, 2018.

_______________________

James A. Clouse

Secretary