FOMC Minutes

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Minutes of the Federal Open Market Committee

July 28–29, 2020

A joint meeting of the Federal Open Market Committee

and the Board of Governors was held by videoconference on Tuesday, July 28, 2020, at 10:00 a.m. and continued on Wednesday, July 29, 2020, at 9:00 a.m. 1

PRESENT:

Jerome H. Powell, Chair

John C. Williams, Vice Chair

Michelle W. Bowman

Lael Brainard

Richard H. Clarida

Patrick Harker

Robert S. Kaplan

Neel Kashkari

Loretta J. Mester

Randal K. Quarles

Thomas I. Barkin, Raphael W. Bostic, Mary C. Daly,

Charles L. Evans, and Michael Strine, Alternate

Members of the Federal Open Market Committee

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

Presidents of the Federal Reserve Banks of St.

Louis, Kansas City, and Boston, respectively

James A. Clouse, Secretary

Matthew M. Luecke, Deputy Secretary

Michelle A. Smith, Assistant Secretary

Mark E. Van Der Weide, General Counsel

Michael Held, Deputy General Counsel

Stacey Tevlin, Economist

Beth Anne Wilson, Economist

Shaghil Ahmed, 2 Michael Dotsey, Beverly Hirtle,

Trevor A. Reeve, Ellis W. Tallman, William

Wascher, and Mark L.J. Wright, Associate

Economists

Lorie K. Logan, Manager, System Open Market

Account

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

Board of Governors

1 The Federal Open Market Committee is referenced as the

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

2 Attended through the discussion of economic developments

and the outlook, and all of Wednesday’s session.

Eric Belsky, 3 Director, Division of Consumer and

Community Affairs, Board of Governors; Matthew

J. Eichner, 4 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; Brian

M. Doyle, Deputy Director, Division of

International Finance, Board of Governors;

Rochelle M. Edge, Deputy Director, Division of

Monetary Affairs, Board of Governors

Jon Faust, Senior Special Adviser to the Chair, Division

of Board Members, Board of Governors

Joshua Gallin, Special Adviser to the Chair, Division of

Board Members, Board of Governors

William F. Bassett, Antulio N. Bomfim, Wendy E.

Dunn, Ellen E. Meade, Chiara Scotti, and Ivan

Vidangos, Special Advisers to the Board, Division

of Board Members, Board of Governors

Linda Robertson, Assistant to the Board, Division of

Board Members, Board of Governors

Eric M. Engen and David E. Lebow, Senior Associate

Directors, Division of Research and Statistics,

Board of Governors; Gretchen C. Weinbach,

Senior Associate Director, Division of Monetary

Affairs, Board of Governors

Edward Nelson and Robert J. Tetlow, Senior Advisers,

Division of Monetary Affairs, Board of Governors

David López-Salido,3 Associate Director, Division of

Monetary Affairs, Board of Governors; Paul R.

Wood, Associate Director, Division of

International Finance, Board of Governors

Attended through the discussion of the review of monetary

policy strategy, tools, and communication practices.

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

3

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Eric C. Engstrom and Christopher J. Gust,3 Deputy

Associate Directors, Division of Monetary Affairs,

Board of Governors; Luca Guerrieri, Deputy

Associate Director, Division of Financial Stability,

Board of Governors; Norman J. Morin, Deputy

Associate Director, Division of Research and

Statistics, Board of Governors; Jeffrey D. Walker,4

Deputy Associate Director, Division of Reserve

Bank Operations and Payment Systems, Board of

Governors

Brian J. Bonis and Etienne Gagnon,3 Assistant

Directors, Division of Monetary Affairs, Board of

Governors; Viktors Stebunovs, 5 Assistant Director,

Division of International Finance, Board of

Governors

Brett Berger, 6 Adviser, Division of International

Finance, Board of Governors

Penelope A. Beattie, 7 Section Chief, Office of the

Secretary, Board of Governors; Dana L. Burnett,

Section Chief, Division of Monetary Affairs, Board

of Governors

David H. Small, Project Manager, Division of

Monetary Affairs, Board of Governors

Michele Cavallo and Kurt F. Lewis, Principal

Economists, Division of Monetary Affairs, Board

of Governors

Marcelo Ochoa, Senior Economist, Division of

Monetary Affairs, Board of Governors

Randall A. Williams, Senior Information Manager,

Division of Monetary Affairs, Board of Governors

James Narron, First Vice President, Federal Reserve

Bank of Philadelphia

David Altig, Kartik B. Athreya, Joseph W. Gruber,

Daleep Singh, and Christopher J. Waller, Executive

Vice Presidents, Federal Reserve Banks of Atlanta,

Richmond, Kansas City, New York, and St. Louis,

respectively

Attended the discussion of economic developments and the

outlook.

5

Michael Schetzel,6 Senior Vice President, Federal

Reserve Bank of New York

Eugene Amromin, Kathryn B. Chen,6 Matthew

Nemeth,6 Joe Peek, and Patricia Zobel, Vice

Presidents, Federal Reserve Banks of Chicago,

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

respectively

Robert Lerman,6 Assistant Vice President, Federal

Reserve Bank of New York

Karel Mertens, Senior Economic Policy Advisor, Federal Reserve Bank of Dallas

Mark Spiegel, Senior Policy Advisor, Federal Reserve

Bank of San Francisco

Review of Monetary Policy Strategy, Tools, and

Communication Practices

Participants continued their discussion related to the ongoing review of the Federal Reserve’s monetary policy

strategy, tools, and communication practices. At this

meeting, they discussed potential changes to the Committee’s Statement on Longer-Run Goals and Monetary

Policy Strategy. Participants agreed that, in light of fundamental changes in the economy over the past decade—including generally lower levels of interest rates

and persistent disinflationary pressures in the United

States and abroad—and given what has been learned

during the monetary policy framework review, refining

the statement could be helpful in increasing the transparency and accountability of monetary policy. Such refinements could also facilitate well-informed decisionmaking by households and businesses, and, as a result, better position the Committee to meet its maximum-employment and price-stability objectives. Participants noted that the Statement on Longer-Run Goals

and Monetary Policy Strategy serves as the foundation

for the Committee’s policy actions and that it would be

important to finalize all changes to the statement in the

near future.

Developments in Financial Markets and Open Market Operations

The System Open Market Account (SOMA) manager

turned first to a review of U.S. financial market developments. Over the intermeeting period, overall financial

conditions eased slightly. Broad equity price indexes

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

7 Attended Tuesday’s session only.

6

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were roughly flat even as concerns about the resurgence

in the coronavirus (COVID-19) in the United States

grew. At the same time, Treasury yields and other sovereign yields declined, and the U.S. dollar weakened.

Overall, volatility remained subdued relative to recent

periods.

ket functioning indicators had returned to levels prevailing before the pandemic, and, as a result, purchases were

conducted at the minimum pace directed by the Committee. Importantly, with conditions in MBS markets

continuing to stabilize, primary mortgage rates fell to

historically low levels over the intermeeting period.

While the S&P 500 index was little changed, the effect

of renewed outbreaks was evident in the differentiated

performance across S&P industry sectors. Virus-sensitive sectors and firms with weaker fundamentals underperformed over the period, as they had over the broader

pandemic episode. Airline and hotel share prices declined sharply, and share prices of banks—which faced

earnings pressures from large loan loss provisions and

compressed net interest margins—continued to underperform. As the SOMA manager highlighted, the S&P

500 index has been supported by its significant share of

technology firms, many of which have been relatively resilient to virus containment measures. In contrast,

smaller firms not well represented in the S&P 500 may

be experiencing greater effects on their businesses due

to the virus—a possibility consistent with the underperformance of the broader Russell 2000 index over the intermeeting period.

Conditions in short-term dollar funding markets were

also stable, with overnight rates close to the interest on

excess reserves (IOER) rate. In broader dollar funding

markets, term unsecured rates and foreign exchange

swap spreads were also steady. Federal Reserve repurchase agreements (repos) outstanding fell from $185 billion to zero over the intermeeting period. With the timing of the overnight operations now having shifted to

the afternoon when most trading activity in the repo

market is complete and with minimum bid rates above

the IOER rate, repo operations had been effectively positioned in a backstop role for the time being. As term

U.S. dollar liquidity swaps matured, the amounts outstanding fell to around $120 billion, less than a third of

the peak reached in late May.

The market-implied path of the federal funds rate shifted

down modestly over the intermeeting period. The corresponding path implied by responses to the Open Market Desk’s Survey of Primary Dealers and Survey of

Market Participants also fell, as the probabilities placed

on rate hikes next year and in 2022 declined. Market

pricing suggested that the federal funds rate was expected to first rise above the current target range in 2024.

That timing was broadly consistent with survey respondents’ expectations regarding the timing of the first increase in the target range, although the range of survey

responses was wide. The SOMA manager noted that

survey responses suggested that the dispersion in views

about the timing of a rate increase might be related to

differing views about the economic conditions that

would prevail when the FOMC first lifted the target

range, as survey respondents’ views about those conditions were also dispersed.

The SOMA manager reported that market functioning

across a number of market segments remained stable at

significantly improved levels. In Treasury and agency

mortgage-backed securities (MBS) markets, many mar8 The approved FIMA Desk Resolution, which updates the

March 2020 resolution with a new expiration date, is available

with other Committee organizational documents at

In light of improved conditions across these markets,

the Federal Reserve’s balance sheet declined over the intermeeting period from $7.2 trillion to $7.0 trillion. The

decline was driven by the reductions in repo and U.S.

dollar liquidity swaps outstanding. These reductions

more than offset ongoing purchases of Treasury securities and agency MBS.

The manager discussed a proposal to extend the temporary U.S. dollar liquidity swap arrangements as well as

the temporary FIMA (Foreign and International Monetary Authorities) Repo Facility through March of next

year. Keeping these arrangements in place would help

sustain recent improvements in global dollar funding

markets and support smooth functioning of the U.S.

Treasury market. Under the proposal, provided that the

Committee had no objections, the Chair would approve

the extension of the temporary liquidity swap lines following the meeting. The extensions of the swap and

FIMA repo arrangements would be announced following this meeting.

By unanimous vote, the Committee voted to approve a

resolution that extended through March 31, 2021, the

expiration of a temporary repo facility for foreign and

international monetary authorities (FIMA Repo Facility). 8

https://www.federalreserve.gov/monetarypolicy/rules_authorizations.htm.

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Secretary’s note: The Chair subsequently provided approval to the Desk, following the procedures in the Authorization for Foreign Currency Operations, to extend the expiration of

the temporary U.S. dollar liquidity swap lines

through March 31, 2021.

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 coronavirus outbreak and the measures undertaken

to contain its spread continued to have substantial effects on economic activity in the United States and

abroad. The information available at the time of the

July 28–29 meeting suggested that U.S. economic activity had picked up in May and June following sharp declines in March and April. Measured on a quarterly basis,

however, it appeared that real gross domestic product

(GDP) had decreased at a historically rapid rate in the

second quarter. Labor market conditions improved considerably in June, but the improvements over May and

June were modest relative to the substantial deterioration seen in March and April. Consumer price inflation—as measured by the 12-month percentage change

in the price index for personal consumption expenditures (PCE) through May—remained well below the

rates that prevailed early in the year.

Total nonfarm payroll employment expanded robustly

in June, as it did in May, but the gains in those two

months offset only about one-third of the jobs lost in

March and April. The unemployment rate moved down

further to 11.1 percent, but it continued to be far above

its level at the beginning of the year. The unemployment

rates for African Americans, Asians, and Hispanics declined, on balance, over the past two months but remained well above the national average. Both the labor

force participation rate and the employment-to-population ratio increased further in June. Initial claims for unemployment insurance benefits continued to decrease,

on net, through the middle of July, but the pace of declines had slowed in recent weeks. In addition, weekly

estimates of private-sector payrolls constructed by the

Board’s staff using data provided by the payroll processor ADP, along with some other high-frequency

measures—such as employment at small businesses and

job postings—suggested that employment gains had

slowed since mid-June but likely were still strong.

Total PCE price inflation was 0.5 percent over the

12 months ending in May, reflecting both weak aggregate demand and a considerable drop in consumer energy prices. Core PCE price inflation, which excludes

changes in consumer food and energy prices, was

1.0 percent over the same 12-month period. In contrast,

the trimmed mean measure of 12-month PCE price inflation constructed by the Federal Reserve Bank of Dallas was 2.0 percent in May. The consumer price index

(CPI) increased 0.6 percent over the 12 months ending

in June, while core CPI inflation was 1.2 percent over

the same period. On a monthly basis, the available data

indicated that consumer prices—as measured by the

PCE price index in May and the CPI in June—had

turned up after having fallen in March and April; this rebound was evident in many price categories that were

most affected by social-distancing measures. Recent

readings on survey-based measures of longer-run inflation expectations were little changed on balance. The

University of Michigan Surveys of Consumers measure

for the next 5 to 10 years was unchanged, on net, from

May to early July; the three-year-ahead measure from the

Federal Reserve Bank of New York’s Survey of Consumer Expectations edged down in June but remained

within its recent range.

Real PCE rebounded robustly in May, with particularly

strong growth in spending for consumer goods but more

moderate gains in expenditures for consumer services.

In June, the components of retail sales used by the Bureau of Economic Analysis to estimate PCE, along with

light motor vehicle sales, increased further. Overall,

however, real consumer spending remained well below

the levels that prevailed at the beginning of the year.

Moreover, recent high-frequency indicators of spending

on many consumer services—such as restaurant dining,

hotel accommodations, and air travel—remained very

subdued. Real disposable personal income fell back in

May, primarily reflecting the waning of the substantial

boost that federal stimulus payments had provided in

April. However, wage and salary income increased

strongly in May, though to a level still below its February

value, and unemployment insurance benefits continued

to be substantial, leaving the personal saving rate quite

elevated. The consumer sentiment measures from both

the Michigan survey and the Conference Board survey

improved notably in June but fell back somewhat in July.

Housing-sector activity bounced back strongly in recent

months, likely boosted in part by the effects of low interest rates. Starts and building permit issuance for single-family homes, along with starts of multifamily units,

increased significantly over May and June; however,

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these construction measures were still below their prepandemic levels. Sales of existing homes rose substantially over those two months, and new home sales also

moved up on net.

Indicators of business fixed investment suggested that

investment had generally not begun to recover but that

the pace of declines had moderated, on balance, in recent months. Nominal new orders and shipments of

nondefense capital goods excluding aircraft increased in

May and June, but they remained below their levels at

the beginning of the year, while some measures of business sentiment improved. Nominal business spending

on nonresidential structures outside of the drilling and

mining sector declined further in May, and the number

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

mining sector—continued to decrease through late July.

Industrial production expanded briskly in May and June,

as many factories reopened or ramped up production.

The surge in manufacturing production was led by appreciable gains in the output of motor vehicles and related parts following extended automaker shutdowns

from mid-March through April. In contrast, output in

the mining sector—which includes crude oil extraction—decreased further, reflecting the effects of stilllow crude oil prices.

Total real government purchases appeared to have increased moderately, on balance, in the second quarter.

Federal defense spending continued to rise through

June, and nondefense purchases were likely boosted in

the second quarter by fiscal policy measures taken in response to the coronavirus. In contrast, state and local

purchases looked to have declined markedly, as the payrolls of these governments shrank further in June, and

nominal state and local construction expenditures decreased, on net, over April and May.

The nominal U.S. international trade deficit widened in

May relative to April, as exports decreased more than

imports. The fall in exports was broad based across

goods categories, while lower imports of automotive

products more than offset higher imports of consumer

goods and industrial supplies. Following April’s historic

plunge, exports and imports of services fell a bit further

in May, driven by the continued suspension of most international travel. Preliminary data for June showed

some recovery in nominal goods exports and imports.

Altogether, the available data suggested that net exports

were a significant drag on the rate of change in real GDP

in the second quarter.

Incoming data suggested that foreign economic activity

plunged in the second quarter as a result of the coronavirus pandemic and the measures undertaken to contain

it. There were also signs that many foreign economies

started to recover over the past few months as restrictions were gradually eased. In China, where economic activity had collapsed in the first quarter and restrictions were rolled back earlier than elsewhere, the

preliminary GDP release showed that the economy

bounced back strongly in the second quarter. In the

euro area and other advanced foreign economies, recent

data on industrial production and, to a lesser extent, consumer spending showed a partial recovery in May and

June. However, continued uncertainty about the course

of the virus was underscored by the fact that some

emerging market economies were struggling to control

the pandemic, while some other countries that previously contained the virus were experiencing flare-ups of

new infections. Inflation rates continued to fall in most

foreign economies through June because of low energy

prices and weak demand, and measures of inflation expectations remained subdued.

Staff Review of the Financial Situation

Amid sizable fluctuations, changes in asset prices over

the intermeeting period were mixed on net. Financial

market sentiment was boosted by better-than-expected

economic data for the United States, China, and Europe.

However, the boost to sentiment appeared to have been

offset by concerns about the domestic spread of the

coronavirus and its uncertain effects on the future

course of the economy. On balance, broad equity price

indexes were roughly unchanged, Treasury yields declined and the yield curve flattened, corporate and municipal bond spreads narrowed, and the dollar weakened

somewhat. Liquidity conditions continued to normalize

but had not returned to their pre-pandemic levels in several markets.

Over the intermeeting period, yields on nominal Treasury securities fell and the yield curve flattened on net.

Yields declined somewhat at the start of the intermeeting

period following the more-accommodative-than-expected June FOMC communications. The further decline in yields that occurred over subsequent weeks likely

reflected concerns about the surge in confirmed coronavirus cases across many parts of the United States.

Measures of inflation compensation based on Treasury

Inflation Protected Securities maturing over the next few

years continued to rebound from their sharp drop in

mid-March. The rebound was reportedly driven primarily by investors’ interpretation of recent economic data,

which suggested that the risk of deflation had abated

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somewhat, as well as by some improvement in market

liquidity. Despite the uptick, both the 5-year and 10-year

measures of inflation compensation remained below

their pre-pandemic levels. The expected path of the federal funds rate based on a straight read of overnight index swap quotes declined modestly and stayed close to

the effective lower bound at least through the first half

of 2024. Market-implied forward rates referring to 2021

and 2022 remained slightly negative; however, market

commentary suggested that investors generally did not

expect the FOMC to lower the federal funds target range

below zero.

Broad stock price indexes fluctuated substantially,

largely in reaction to news about the pandemic and economic activity, and ended the intermeeting period

roughly unchanged. Technology stocks continued to

outperform the broader market, whereas equity prices in

the bank and energy sectors fell notably over the period.

One-month option-implied volatility on the S&P 500 index—the VIX—rose markedly earlier in the period but

subsequently declined and ended the period lower. Equity market volatility remained elevated relative to its

normal range over the past several years. Spreads of investment- and speculative-grade corporate bond yields

over comparable-maturity Treasury yields narrowed

somewhat and had retraced most of their pandemic-related surge.

Conditions in short-term funding markets were generally

stable over the intermeeting period. Spreads for negotiable certificates of deposit and most types of commercial paper were little changed, on net, and spreads and

issuance volumes for both types of instruments reached

pre-pandemic levels. In light of the stable market conditions, there was little activity in the emergency liquidity

facilities. Since the June FOMC meeting, assets under

management for prime money market funds (MMFs)

were little changed, whereas government MMFs experienced moderate outflows. Amid heavy issuance of securities by the Treasury, government MMFs continued

to increase their holdings of Treasury securities while reducing their holdings of repos.

The effective federal funds rate (EFFR) and Secured

Overnight Financing Rate (SOFR) increased, on average, 4 basis points and 5 basis points, respectively, from

the previous intermeeting period. The EFFR fluctuated

between 8 and 10 basis points, and the SOFR fluctuated

between 7 and 13 basis points, throughout the intermeeting period. The decline in total outstanding Federal

Reserve repo operations from $185 billion to zero

largely reflected an increase in minimum bid rates at the

Federal Reserve’s overnight and term repo operations.

Over the intermeeting period, the Federal Reserve maintained the purchases of Treasury securities and agency

MBS at the pace prevailing at the end of the previous

intermeeting period.

Risk sentiment abroad fluctuated over the intermeeting

period as market participants weighed increasing coronavirus cases in a number of countries against improving

economic data releases and ongoing fiscal and monetary

policy support. Foreign equity prices generally declined

on net. A resurgence of geopolitical tensions between

the United States and China weighed on investor sentiment late in the period and prompted a partial retracement of earlier gains for the Shanghai Composite Index.

Long-term sovereign yields in most advanced foreign

economies (AFEs) ended the period moderately lower.

The yield spreads of long-term Italian bonds over their

German counterparts narrowed further, reaching the

lowest level since March following agreement on the European Union (EU) Recovery Fund.

The staff’s broad dollar index declined slightly, on net,

with moderate depreciation against AFE currencies.

The EU Recovery Fund agreement supported the euro,

which appreciated about 3 percent against the dollar

over the intermeeting period. In contrast, the Brazilian

real depreciated about 5 percent against the dollar, amid

continued policy rate cuts by the Central Bank of Brazil,

escalating coronavirus cases, and political turmoil in Brazil.

Capital market financing conditions for nonfinancial

firms eased somewhat further over the intermeeting period, with yields on corporate bonds remaining near historical lows. Investment-grade corporate bond issuance

was solid in June, and speculative-grade issuance remained robust. Gross institutional leveraged loan issuance picked up in June from its subdued levels in previous months. Gross equity issuance hit a record level in

June, as the volume of seasoned equity offerings reached

a new record, while initial public offerings rebounded

from their very low levels of the previous three months.

In the July Senior Loan Officer Opinion Survey on Bank

Lending Practices (SLOOS), banks reported a notable

tightening of lending standards on commercial and industrial (C&I) loans to firms of all sizes in the second

quarter. Standards were reported to be at the tighter end

of their range since 2005, a marked change from a year

ago. C&I loans on banks’ balance sheets contracted significantly in June, reflecting paydowns of the record

draws on credit lines seen in previous months, as well as

low originations.

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Credit quality of nonfinancial corporations deteriorated

further over the intermeeting period, with a sizable volume of speculative-grade debt downgraded in June. Defaults in May reached their highest single-month volume

since 2009, and June defaults were high as well. Market

indicators of future default expectations also deteriorated somewhat. Municipal market financing conditions

remained accommodative, although the credit quality of

municipal debt continued to show signs of weakness.

Financing conditions for small businesses remained

tight. Banks reported in the July SLOOS that the level

of standards for small businesses was at the tighter end

of the range since 2005. At the same time, the credit

needs of small businesses remained high, as the prospect

arose of many businesses having to shut down operations again in response to rising coronavirus cases. Small

business loan performance deteriorated significantly;

short-term delinquencies were comparable with levels

seen in early 2008. Amid tighter lending standards and

high credit demand, advances via the Paycheck Protection Program Lending Facility continued to grow over

the intermeeting period. In early July, the Main Street

Lending Program became fully operational.

Financing conditions for commercial real estate (CRE),

particularly those in capital markets, recovered further

over the intermeeting period. Spreads on non-agency

commercial mortgage-backed securities (CMBS) continued to decline in June, while issuance of non-agency

CMBS continued to show signs of moderate recovery in

May and June. Spreads on agency CMBS remained at

pre-pandemic levels, and agency CMBS issuance was

strong. In contrast, bank lending standards for CRE

loans tightened further, according to the July SLOOS,

and CRE loan growth at banks slowed. The credit quality of existing CRE loans continued to deteriorate as further signs of repayment difficulties emerged, most notably in the lodging and retail sectors.

Financing conditions in the residential mortgage market

were generally unchanged over the intermeeting period.

The spread between the primary mortgage rate and MBS

yields remained wide, reflecting capacity constraints at

loan originators, increased origination costs, and decreases in the value of servicing rights. Credit continued

to flow to borrowers with higher credit scores seeking

mortgages that met standard conforming loan criteria,

and low mortgage interest rates supported elevated refinancing activity. Financing conditions remained tight,

however, for borrowers with relatively low credit scores

and for those seeking nonconforming mortgages. The

July SLOOS and other surveys of mortgage market conditions suggested that both bank and nonbank lenders

tightened standards in the second quarter. The credit

quality of mortgages did not appear to deteriorate further over the period.

Financing conditions for consumer credit tightened a bit

further during the intermeeting period. In the credit

card market, lending standards at commercial banks

tightened further according to the July SLOOS. In contrast, conditions in the auto loan market appeared to be

little changed, on balance, with those for subprime borrowers remaining tight. Conditions in the consumer asset-backed securities (ABS) markets were stable during

the intermeeting period. Yield spreads for certain highly

rated credit card and auto loan ABS stabilized at prepandemic levels, while student and auto loan ABS issuance recovered to a pre-pandemic pace. Consumer

credit quality remained stable, partly due to forbearance

programs.

The staff provided an update on its assessment of the

stability of the financial system, and, on balance, characterized the financial vulnerabilities of the U.S. financial

system as notable, while noting an unusually high level

of uncertainty associated with this assessment. The staff

judged that asset valuation pressures were notable. In

particular, high-yield and investment-grade corporate

bond spreads were within historical norms, and commercial real estate prices were continuing to increase despite rising vacancy rates. The staff assessed vulnerabilities due to nonfinancial leverage to have risen from

moderate to notable, reflecting declines in household incomes and business profits; such declines implied less

resilient borrowers. The expected sharp decline in second-quarter real GDP would likely result in a rise in the

ratio of household debt to nominal GDP. The ratio of

business debt to nominal GDP rose in the first quarter

from levels that were already historically high—amid declining profits and deteriorating credit quality—although

low interest rates had helped ease firms’ debt servicing

burdens. The staff assessed vulnerabilities arising from

financial leverage to have increased from low to moderate, citing uncertainty about losses connected to business

loans for banks and a higher weight on vulnerabilities

connected to leverage at nonbank financial institutions.

Vulnerabilities associated with maturity and liquidity

transformation were characterized as moderate, and the

staff noted that Federal Reserve facilities reduced these

vulnerabilities at nonbanks.

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Staff Economic Outlook

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

for the July FOMC meeting, the estimated level of real

GDP in the second quarter was marked up compared

with the June meeting forecast, reflecting the betterthan-expected data through June. Nevertheless, economic activity still appeared to have declined at a historically rapid rate in the second quarter. The projected rate

of recovery in real GDP, and the pace of declines in the

unemployment rate, over the second half of this year

were expected to be somewhat less robust than in the

previous forecast. Although the staff assumed that additional fiscal stimulus measures would be enacted beyond those anticipated in the June forecast, the positive

effect on the economic outlook was outweighed somewhat by the staff’s assessment of the likely effects of several other factors. Those factors included the increasing

spread of the coronavirus in the United States since midJune; the reactions of many states and localities in slowing or scaling back the reopening of their economies, especially for businesses, such as restaurants and bars,

providing services that entail personal interactions; and

some high-frequency indicators that pointed to a deceleration in economic activity. Substantial fiscal policy

measures—both enacted and anticipated—along with

appreciable support from monetary policy and the Federal Reserve’s liquidity and lending facilities were expected to continue bolstering the economic recovery,

although a complete recovery was not expected by yearend. Inflation was projected to remain subdued this

year, reflecting the substantial amount of slack in resource utilization and the sizable declines in consumer

energy prices earlier this year. The staff’s baseline assumptions were that the current restrictions on social interactions and business operations, along with voluntary

social distancing by individuals, would ease gradually

through next year. As a result, the rate of real GDP

growth was projected to exceed potential output growth,

the unemployment rate was expected to decline considerably, and inflation was forecast to pick back up over

2021 and 2022.

The staff continued to observe that the uncertainty related to the economic effects of the pandemic was extremely elevated and that the unusual nature of the pandemic-related shock made assessments about how the

economy might evolve in the future more challenging

than usual. In light of the significant uncertainty and

downside risks associated with the course of the pandemic and how long it would take the economy to recover, the staff still judged that a more pessimistic projection was no less plausible than the baseline forecast.

In this alternative scenario, an acceleration of the coronavirus outbreak, with another round of strict limitations on social interactions and business operations, was

assumed to begin later this year, leading to a decrease in

real GDP, a jump in the unemployment rate, and renewed downward pressure on inflation next year. Compared with the baseline, the disruption to economic activity was more severe and protracted in this scenario,

with real GDP and inflation lower and the unemployment rate higher by the end of the medium-term projection.

Participants’ Views on Current Conditions and the

Economic Outlook

Participants noted that the coronavirus pandemic was

causing tremendous human and economic hardship

across the United States and around the world. Following sharp declines, economic activity and employment

had picked up somewhat in recent months but remained

well below levels at the beginning of the year. Weaker

demand and significantly lower oil prices were holding

down consumer price inflation. Overall financial conditions had improved in recent months, in part reflecting

policy measures to support the economy and the flow of

credit to U.S. households and businesses. Participants

agreed that the path of the economy would depend on

the course of the virus, which was seen as highly uncertain.

Participants noted that the rebound in consumer spending from its trough in April had been particularly strong.

Resumption in economic activity, as well as payments to

households under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, had supported household

income and consumer expenditures. Participants observed that with this rebound, household spending likely

had recovered about half of its previous decline. Consumers’ purchases of goods—including motor vehicles,

other durables, and especially goods sold online—had

bounced back much more than their purchases of services, such as air travel, hotel accommodations, and restaurant meals, which were disrupted significantly by social distancing and other effects of the virus. With regard to the behavior of household spending in recent

weeks, participants pointed to information from District

contacts and high-frequency indicators (such as credit

and debit card transactions and mobility indicators based

on cellphone location tracking) as suggesting that increases in some consumer expenditures had likely

slowed in reaction to the further spread of the virus.

Participants noted that households’ spending on discre-

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Minutes of the Meeting of July 28–29, 2020

Page 9

tionary services—such as leisure, travel, and hospitality—would likely be subdued for some time and thus

would be a factor restraining the pace of recovery.

turn, such a reopening would depend in large part on the

efficacy of health measures taken to limit the spread of

the virus.

In contrast to the sizable rebound in consumer spending, participants saw less improvement in the business

sector in recent months, and they noted that their District business contacts continued to report extraordinarily high levels of uncertainty and risks. Several participants relayed examples of some operational difficulties

their business contacts were reportedly facing in the current environment. These difficulties included managing

disruptions in supply chains, challenges associated with

closure and reopening, and elevated employee absenteeism in some cases. Furthermore, some participants

noted that small businesses were under significant strain.

Also, further near-term fiscal support was uncertain.

Participants noted that, in light of conditions in the business sector, business investment spending continued to

be subdued. Participants generally agreed that actions of

consumers and businesses in taking steps to slow the

spread of the virus, along with developments in public

health, would be critical in ensuring a durable reopening

of businesses. In addition, monetary policy and particularly fiscal policy would also play important roles in supporting business activity.

Participants also discussed the nature of the current situation in the labor market. They noted that the downturn in employment was concentrated among lowerwage and service-sector workers, many of whom were

employed in industries most adversely affected by socialdistancing measures. And with lower-wage and servicesector jobs disproportionately held by African Americans, Hispanics, and women, these portions of the population were bearing a disproportionate share of the economic hardship caused by the pandemic. Participants

noted that the fiscal support initiated in the spring

through the CARES Act had been very important in

granting some financial relief to millions of families. A

number of participants observed that, with some provisions of the CARES Act set to expire shortly against the

backdrop of a still-weak labor market, additional fiscal

aid would likely be important for supporting vulnerable

families, and thus the economy more broadly, in the period ahead.

Several participants also commented on ongoing challenges facing the energy or farm sector despite recent

improvements. In the energy sector, these challenges included still-low oil demand, excess inventories, and low

oil prices, while in the farm sector they included low

prices of some farm commodities, pandemic-related disruptions in some food processing plants, and a significant decline in demand for ethanol.

Regarding the labor market, many participants commented that the pace of employment gains, which was

quite strong in May and June, had likely slowed. The

increasing number of virus cases in many parts of the

country had led to delays in some business reopenings

and to some reclosures as well. The pace of declines in

initial unemployment insurance claims had slowed in recent weeks, and claims remained at an elevated level. In

addition, participants emphasized that the labor market

was a long way from a full recovery even after the positive May and June employment reports; these reports indicated that, through June, only about one-third of the

roughly 22 million loss in jobs that occurred over March

and April had been offset by subsequent gains. Participants generally agreed that prospects for further substantial improvement in the labor market would depend

on a broad and sustained reopening of businesses. In

In their comments about inflation, participants generally

judged that the negative effect of the pandemic on aggregate demand was more than offsetting upward pressures on some prices stemming from supply constraints

or from higher demand for certain products, so that the

overall effect of the pandemic on prices was seen as disinflationary. Recent low monthly readings of PCE prices

suggested that the 12-month change measure of PCE

price inflation would likely continue to run well below

the Committee’s 2 percent objective for some time.

Against this backdrop, a few participants noted a risk

that longer-term inflation expectations might move below levels consistent with the Committee’s symmetric

2 percent objective. Participants also noted that a highly

accommodative stance of monetary policy would likely

be needed for some time to support aggregate demand

and achieve 2 percent inflation over the longer run.

Participants observed that many measures of financial

market functioning were indicating that improvements

achieved since the extreme turbulence in March had

been sustained. Actions by the Federal Reserve, including emergency lending facilities established with approval of (and, in many cases, financial support from)

the Treasury, had helped ease the strains in some financial markets seen earlier in the year and were supporting

the flow of credit to households, businesses, and communities. Participants observed that the volume of bor-

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Federal Open Market Committee

rowing in recent months at many of the Federal Reserve’s liquidity facilities had stayed low, reflecting improved availability of funding from market sources. And

participants agreed that the Federal Reserve’s ongoing

provision of backstop credit in various forms continued

to be important to sustain the market improvements already achieved.

Participants observed that uncertainty surrounding the

economic outlook remained very elevated, with the path

of the economy highly dependent on the course of the

virus and the public sector’s response to it. Several risks

to the outlook were noted, including the possibility that

additional waves of virus outbreaks could result in extended economic disruptions and a protracted period of

reduced economic activity. In such scenarios, banks and

other lenders could tighten conditions in credit markets

appreciably and restrain the availability of credit to

households and businesses. Other risks cited included

the possibility that fiscal support for households, businesses, and state and local governments might not provide sufficient relief of financial strains in these sectors

and that some foreign economies could come under

greater pressure than anticipated as a result of the spread

of the pandemic abroad. Several participants noted potential longer-run effects of the pandemic associated

with possible restructuring in some sectors of the economy that could slow the growth of the economy’s productive capacity for some time.

A number of participants commented on various potential risks to financial stability. Banks and other financial

institutions could come under significant stress, particularly if one of the more adverse scenarios regarding the

spread of the virus and its effects on economic activity

was realized. Nonfinancial corporations had carried

high levels of indebtedness into the pandemic, increasing their risk of insolvency. There were also concerns

that the anticipated increase in Treasury debt over the

next few years could have implications for market functioning. There was general agreement that these institutions, activities, and markets should be monitored

closely, and a few participants noted that improved data

would be helpful for doing so. Several participants observed that the Federal Reserve had recently taken steps

to help ensure that banks remain resilient through the

pandemic, including by conducting additional sensitivity

analysis in conjunction with the most recent bank stress

tests and imposing temporary restrictions on shareholder payouts to preserve banks’ capital. A couple of

participants noted that they believed that restrictions on

shareholder payouts should be extended, while another

judged that such a step would be premature.

In their consideration of monetary policy at this meeting,

participants reaffirmed their commitment to using the

Federal Reserve’s full range of tools to support the U.S.

economy during this challenging time, thereby promoting its maximum employment and price stability goals.

They noted that the path of the economy would depend

significantly on the course of the virus and that the ongoing public health crisis would weigh heavily on economic activity, employment, and inflation in the near

term and posed considerable risks to the economic outlook over the medium term. In light of this assessment,

all participants considered it appropriate to maintain the

target range for the federal funds rate at 0 to ¼ percent.

Furthermore, participants continued to judge that it

would be appropriate to maintain this target range until

they were confident that the economy had weathered recent events and was on track to achieve the Committee’s

maximum employment and price stability goals.

Participants also judged that, in order to continue to support the flow of credit to households and businesses, it

would be appropriate over coming months for the Federal Reserve to increase its holdings of Treasury securities and agency residential mortgage-backed securities

(RMBS) and CMBS at least at the current pace. These

actions would be helpful in sustaining smooth market

functioning, thereby fostering the effective transmission

of monetary policy to broader financial conditions. In

addition, participants noted that it was appropriate that

the Desk would continue to offer large-scale overnight

and term repo operations. Participants observed that it

would be important to continue to monitor developments closely and that the Committee would be prepared to adjust its plans as appropriate.

Participants discussed the current stance of monetary

policy and the circumstances under which they might increase monetary policy accommodation or clarify their

intentions regarding policy. Participants generally

judged that the Committee’s policy actions over the past

several months had provided substantial accommodation; several of them observed that the Committee’s asset purchases, which were designed to support financial

market functioning and the smooth flow of credit, were

likely also providing a degree of policy accommodation.

Noting the increase in uncertainty about the economic

outlook over the intermeeting period, several participants suggested that additional accommodation could be

required to promote economic recovery and return inflation to the Committee’s 2 percent objective. Some

participants observed that, due to the nature of the

shock that the U.S. economy was experiencing, strong

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Minutes of the Meeting of July 28–29, 2020

Page 11

fiscal policy support would be necessary to encourage

expeditious improvements in labor market conditions.

With regard to the outlook for monetary policy beyond

this meeting, a number of participants noted that providing greater clarity regarding the likely path of the target

range for the federal funds rate would be appropriate at

some point. Concerning the possible form that revised

policy communications might take, these participants

commented on outcome-based forward guidance—under which the Committee would undertake to maintain

the current target range for the federal funds rate at least

until one or more specified economic outcomes was

achieved—and also touched on calendar-based forward

guidance—under which the current target range would

be maintained at least until a particular calendar date. In

the context of outcome-based forward guidance, various

participants mentioned using thresholds calibrated to inflation outcomes, unemployment rate outcomes, or

combinations of the two, as well as combinations with

calendar-based guidance. In addition, many participants

commented that it might become appropriate to frame

communications regarding the Committee’s ongoing asset purchases more in terms of their role in fostering accommodative financial conditions and supporting economic recovery. More broadly, in discussing the policy

outlook, a number of participants observed that completing a revised Statement on Longer-Run Goals and

Monetary Policy Strategy would be very helpful in

providing an overarching framework that would help

guide the Committee’s future policy actions and communications.

A majority of participants commented on yield caps and

targets—approaches that cap or target interest rates

along the yield curve—as a monetary policy tool. Of

those participants who discussed this option, most

judged that yield caps and targets would likely provide

only modest benefits in the current environment, as the

Committee’s forward guidance regarding the path of the

federal funds rate already appeared highly credible and

longer-term interest rates were already low. Many of

these participants also pointed to potential costs associated with yield caps and targets. Among these costs, participants noted the possibility of an excessively rapid expansion of the balance sheet and difficulties in the design

and communication of the conditions under which such

a policy would be terminated, especially in conjunction

with forward guidance regarding the policy rate. In light

of these concerns, many participants judged that yield

caps and targets were not warranted in the current environment but should remain an option that the Committee could reassess in the future if circumstances changed

markedly. A couple of participants remarked on the

value of yield caps and targets as a means of reinforcing

forward guidance on asset purchases, thereby providing

insurance against adverse movements in market expectations regarding the path of monetary policy, and as a

tool that could help limit the amount of asset purchases

that the Committee would need to make in pursuing its

dual-mandate goals.

Committee Policy Action

In their discussion of monetary policy for this meeting,

members agreed that the coronavirus outbreak was causing tremendous human and economic hardship across

the United States and around the world. Following

sharp declines, economic activity and employment had

picked up somewhat in recent months but remained well

below their levels at the beginning of the year. Consumer price inflation was being held down by weaker demand and significantly lower oil prices. Overall financial

conditions had improved, in part reflecting policy

measures to support the economy and the flow of credit

to U.S. households, businesses, and communities. Members agreed that the Federal Reserve was committed to

using its full range of tools to support the U.S. economy

in this challenging time, thereby promoting its maximum

employment and price stability goals.

Members stated that the path of the economy would depend significantly on the course of the virus. In addition, members agreed that the ongoing public health crisis would weigh heavily on economic activity, employment, and inflation in the near term and was posing considerable risks to the economic outlook over the medium term. In light of these developments, members

decided to maintain the target range for the federal funds

rate at 0 to ¼ percent. Members stated that they expected to maintain this target range until they were confident that the economy had weathered recent events

and was on track to achieve the Committee’s maximum

employment and price stability goals.

Members agreed that they would continue to monitor

the implications of incoming information for the economic outlook—including information related to public

health—as well as global developments and muted inflation pressures, and that they would use the Committee’s

tools and act as appropriate to support the economy. In

determining the timing and size of future adjustments to

the stance of monetary policy, members noted that they

would assess realized and expected economic conditions

relative to the Committee’s maximum-employment objective and its symmetric 2 percent inflation objective.

This assessment would take into account a wide range of

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Federal Open Market Committee

information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international

developments.

To support the flow of credit to households and businesses, members agreed that over coming months it

would be appropriate for the Federal Reserve to increase

its holdings of Treasury securities and agency RMBS and

CMBS at least at the current pace to sustain smooth market functioning, thereby fostering effective transmission

of monetary policy to broader financial conditions. In

addition, members agreed that the Desk would continue

to offer large-scale overnight and term repo operations.

Members noted that they would closely monitor developments and be prepared to adjust their plans as appropriate.

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, for release at 2:00 p.m.:

“Effective July 30, 2020, 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 0 to ¼ percent.

Increase the System Open Market Account

holdings of Treasury securities, agency

mortgage-backed securities (MBS), and

agency commercial mortgage-backed securities (CMBS) at least at the current pace to

sustain smooth functioning of markets for

these securities, thereby fostering effective

transmission of monetary policy to broader

financial conditions.

Conduct term and overnight repurchase

agreement operations to support effective

policy implementation and the smooth

functioning of short-term U.S. dollar funding markets.

Conduct overnight reverse repurchase

agreement operations at an offering rate of

0.00 percent and with a per-counterparty

limit of $30 billion per day; the per-counterparty limit can be temporarily increased at

the discretion of the Chair.

Roll over at auction all principal payments

from the Federal Reserve’s holdings of

Treasury securities and reinvest all principal

payments from the Federal Reserve’s holdings of agency debt and agency MBS in

agency MBS and all principal payments

from holdings of agency CMBS in agency

CMBS.

• Allow modest deviations from stated

amounts for purchases and reinvestments,

if needed for operational reasons.

• Engage in dollar roll and coupon swap

transactions as necessary to facilitate settlement of the Federal Reserve’s agency MBS

transactions.”

The vote also encompassed approval of the statement

below for release at 2:00 p.m.:

“The Federal Reserve is committed to using its

full range of tools to support the U.S. economy

in this challenging time, thereby promoting its

maximum employment and price stability goals.

The coronavirus outbreak is causing tremendous human and economic hardship across the

United States and around the world. Following

sharp declines, economic activity and employment have picked up somewhat in recent

months but remain well below their levels at the

beginning of the year. Weaker demand and significantly lower oil prices are holding down consumer price inflation. Overall financial conditions have improved in recent months, in part

reflecting policy measures to support the economy and the flow of credit to U.S. households

and businesses.

The path of the economy will depend significantly on the course of the virus. The ongoing

public health crisis will weigh heavily on economic activity, employment, and inflation in the

near term, and poses considerable risks to the

economic outlook over the medium term. In

light of these developments, the Committee decided to maintain the target range for the federal

funds rate at 0 to ¼ percent. The Committee

expects to maintain this target range until it is

confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.

The Committee will continue to monitor the

implications of incoming information for the

economic outlook, including information related to public health, as well as global developments and muted inflation pressures, and will

use its tools and act as appropriate to support

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Minutes of the Meeting of July 28–29, 2020

Page 13

the economy. In determining the timing and

size of future adjustments to the stance of monetary policy, 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.

To support the flow of credit to households and

businesses, over coming months the Federal

Reserve will increase its holdings of Treasury securities and agency residential and commercial

mortgage-backed securities at least at the current pace to sustain smooth market functioning,

thereby fostering effective transmission of

monetary policy to broader financial conditions.

In addition, the Open Market Desk will continue to offer large-scale overnight and term repurchase agreement operations. The Committee will closely monitor developments and is

prepared to adjust its plans as appropriate.”

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

Williams, Michelle W. Bowman, Lael Brainard, Richard

H. Clarida, Patrick Harker, Robert S. Kaplan, Neel

Kashkari, 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 at

0.10 percent. The Board of Governors also voted unanimously to approve establishment of the primary credit

rate at the existing level of 0.25 percent, effective July 30,

2020.

It was agreed that the next meeting of the Committee

would be held on Tuesday–Wednesday, September 15–16, 2020. The meeting adjourned at 10:55 a.m.

on July 29, 2020.

Notation Vote

By notation vote completed on June 30, 2020, the Committee unanimously approved the minutes of the Committee meeting held on June 9–10, 2020.

_______________________

James A. Clouse

Secretary