The Fed is worried that low inflation is here to stay for a while – Business Insider


janet yellen watch time
Federal
Reserve Chair Janet Yellen looks at her watch after G-20 family
photo during the IMF/World Bank spring meetings in Washington,
U.S., April 21, 2017.

Yuri
Gripas/Reuters


Many Federal Reserve officials are concerned that inflation
will remain lower for longer, according to minutes of
the policy
meeting
 they held in September. 

The textbook stipulation that low unemployment should push up
worker pay, spending, and subsequently prices, is not showing up
as obviously as it should.

“Many participants expressed concern that the low inflation
readings this year might reflect not only transitory factors, but
also the influence of developments that could prove more
persistent,” the
minutes
said. Some members debated that more
secular factors like the influence of technology on lowering
prices may suppress inflation below the Fed’s 2% target for
longer.  

This may warrant more patience in raising interest rates,
the Fed officials said, adding that they needed to preserve the
credibility of their 2% target. They were split on whether to
hike for a third time this year, likely to be considered in
December. 

“These Fed minutes are confusing and inconsistent,” said
Torsten Slok, Deutsche Bank’s chief international economist, in a
note.

“On the one hand they argue that the slowdown in inflation
may be more permanent. On the other hand the minutes argue that
more rate hikes are needed and coming. The Fed is relying on
their PhD economics inflation models but several FOMC members,
including Evans today and Bullard and Kashhari previously, are
starting to question if raising rates in December is a good
idea.”

Low inflation, even with higher energy prices and a weaker dollar
is “more of a mystery,” Fed Chair Janet Yellen said during her
post-meeting press conference in September. 

At the meeting, the Fed confirmed it would soon start
shrinking the $4.5 trillion balance sheet it grew after
the recession. The Fed bought Treasurys and mortgage-backed
securities to keep borrowing costs low, and will gradually stop
reinvesting these securities as they mature.

Fed officials expected recent hurricanes to slow the
economy and job creation in the third quarter but trigger a
rebound in the fourth amid rebuilding efforts. 

The minutes came two days before Fed Vice-Chairman
Stanley Fischer
is set to step down; he cited “personal
reasons” in a September 6 statement. And, President Donald
Trump said two weeks ago Friday that he would make an
announcement on the next Fed chair in two to three weeks.
Yellen’s first four-year term ends in February.

Here’s the full text of the minutes

Proposed Changes to Rules Regarding Availability of
Information
The Committee unanimously voted to further amend its Rules
Regarding Availability of Information (Rules) in order to
incorporate input received during the public commenting process
that followed the December 2016 publication in the Federal
Register of an earlier version of the Rules.4 The amendment
approved at this meeting indicated that if, in the course of
processing a Freedom of Information Act request, “an adverse
determination is upheld on appeal, in whole or in part,” the
requester will be informed “of the availability of dispute
resolution services from the Office of Government Information
Services as a nonexclusive alternative to litigation.” This
notice will be provided in addition to the ongoing practice of
informing the requester of the right to seek judicial review.

Secretary’s note: The amended Rules adopted at this meeting were
published in the Federal Register as a final rule on October 2,
2017, and will go into effect 30 days following
publication.
Developments in Financial Markets and Open Market
Operations
The manager of the System Open Market Account (SOMA) reported on
developments in domestic and foreign financial markets over the
period since the July FOMC meeting. Yields on longer-term
Treasury securities had fallen modestly, the foreign exchange
value of the dollar had declined, and broad equity price indexes
had increased. Survey responses suggested that the vast majority
of market participants expected the FOMC to announce a change in
SOMA reinvestment policy at this meeting and that nearly all
market participants anticipated that the FOMC would also leave
the target range for the federal funds rate unchanged.

The deputy manager followed with a report on developments in
money markets and open market operations over the intermeeting
period. The effective federal funds rate remained near the center
of the FOMC’s target range except on month-ends. Take-up at the
System’s overnight reverse repurchase agreement facility averaged
somewhat less than in the previous period. The deputy manager
provided updates on developments with respect to reference
interest rates and on small-value tests of open market
operations, which are conducted routinely to promote operational
readiness. The deputy manager also summarized the results of the
staff’s annual review of foreign reserves investment and its
recommendations to the Foreign Currency Subcommittee for key
parameters for foreign reserves investment for the forthcoming
year, and the deputy manager noted that the Subcommittee would
welcome any input from the Committee regarding those parameters.

Secretary’s note: On September 27, 2017, the Foreign Currency
Subcommittee provided to the Federal Reserve Bank selected to
conduct open market operations instructions that incorporated the
staff recommendations for key parameters for foreign reserves
investment.
Finally, the manager reviewed details of the operational approach
that the Open Market Desk planned to follow if the Committee
decided at this meeting to initiate the proposal for SOMA
reinvestment policy described in the Committee’s June 2017
Addendum to the Policy Normalization Principles and Plans.

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 September 19-20 meeting showed
that labor market conditions continued to strengthen in July and
August and that real gross domestic product (GDP) appeared to be
rising at a moderate pace in the third quarter before the
landfall of Hurricanes Harvey and Irma. Only limited data
pertaining to the economic effects of these hurricanes were
available at the time of the meeting, but it appeared likely that
the negative effects would restrain national economic activity
only in the near term.5 Total consumer price inflation, as
measured by the 12‑month change in the price index for personal
consumption expenditures (PCE), continued to run below 2 percent
in July and was lower than at the start of the year. Survey‑based
measures of longer-run inflation expectations were little changed
on balance.

Total nonfarm payroll employment rose solidly in July and August,
with strong gains in private-sector jobs and declines in
government employment. The unemployment rate dipped to 4.3
percent in July and edged back up to 4.4 percent in August. The
unemployment rates for African Americans, for Hispanics, and for
whites were lower, on average, in recent months than around the
start of the year, whereas the unemployment rate for Asians was a
little higher. The overall labor force participation rate edged
up in July and was unchanged in August, and the share of workers
employed part time for economic reasons was little changed on
net. The rate of private-sector job openings increased in June
and July, the hiring rate ticked up, and the quits rate edged
down. Initial claims for unemployment insurance benefits jumped
in early September from a very low level, and the Department of
Labor noted that Hurricane Harvey had an effect on claims.
Changes in measures of labor compensation were mixed.
Compensation per hour rose just 1-1/4 percent over the four
quarters ending in the second quarter of 2017 (partly reflecting
a significant downward revision to compensation per hour in the
second half of 2016), the employment cost index for private
workers increased 2-1/2 percent over the 12 months ending in
June, and average hourly earnings for all employees rose 2-1/2
percent over the 12 months ending in August.

Total industrial production (IP) increased for a sixth
consecutive month in July but then declined sharply in August.
The decrease in August largely reflected the temporary effects of
Hurricane Harvey on drilling, servicing, and extraction activity
for oil and natural gas and on output in several manufacturing
industries that are concentrated in the Gulf Coast region,
including petroleum refining, organic chemicals, and plastics
materials and resins. Production disruptions from Hurricane
Harvey continued into September, and the effects of Hurricane
Irma were anticipated to hold down IP in that month as well. Even
so, anecdotal reports from the hurricane-affected regions, as
well as daily data on capacity outages in selected Gulf Coast
industries, indicated that production had already started to
recover. Meanwhile, automakers’ assembly schedules suggested that
motor vehicle production would move up, on balance, over the
remainder of the year despite a somewhat elevated level of
dealers’ inventories and a slowing in the pace of vehicle sales
in recent months. Broader indicators of manufacturing production,
such as the new orders indexes from national and regional
manufacturing surveys, continued to point to moderate gains in
factory output over the near term.

Several pieces of information suggested that real PCE was likely
increasing at a slower rate in the third quarter than in the
second. First, the components of the nominal retail sales data
used by the Bureau of Economic Analysis to construct its estimate
of PCE declined in August and were revised down in June and July.
Second, the pace of light motor vehicle sales moved lower, on
net, in July and August. Third, Hurricanes Harvey and Irma
appeared likely to temporarily reduce consumer spending. However,
recent readings on key factors that influence consumer
spending–including continued gains in employment, real
disposable personal income, and households’ net worth–remained
supportive of solid growth in real PCE. Consumer sentiment, as
measured by the University of Michigan Surveys of Consumers, was
upbeat through early September.

Recent information on housing activity suggested that real
residential investment spending was decreasing in the third
quarter after declining in the second quarter. Starts for new
single-family homes edged down, on net, in July and August, and
starts for multifamily units moved lower in both months. Building
permit issuance for new single-family homes–which tends to be a
good indicator of the underlying trend in construction–declined
in July and August. Sales of both new and existing homes
decreased in July.

Real private expenditures for business equipment and intellectual
property appeared to be increasing at a solid rate in the third
quarter. Nominal orders and shipments of nondefense capital goods
excluding aircraft rose over the two months ending in July, and
readings on business sentiment remained upbeat. In contrast,
investment in nonresidential structures was poised to decline in
the third quarter. Firms’ nominal spending for nonresidential
structures excluding drilling and mining fell sharply in June and
July, and the number of oil and gas rigs in operation, an
indicator of spending for structures in the drilling and mining
sector, leveled out in the past couple of months after increasing
steadily for the past year.

Total real government purchases looked to be roughly flat, on
balance, in the third quarter. Nominal outlays for defense in
July and August pointed to a small increase in real federal
government purchases in the third quarter. However, payrolls for
state and local governments declined in July and August, and
nominal construction spending by these governments decreased in
July.

The nominal U.S. international trade deficit narrowed
substantially in June and was about unchanged in July. After
increasing in June, exports retraced a bit of this gain in July,
with lower exports of consumer goods, automotive products, and
services. Imports decreased a little in both months. The
available data suggested that net exports contributed positively
to real GDP growth in the third quarter.

Total U.S. consumer prices, as measured by the PCE price index,
increased nearly 1-1/2 percent over the 12 months ending in July.
Core PCE price inflation, which excludes consumer food and energy
prices, also was about 1-1/2 percent over that same period. Over
the 12 months ending in August, the consumer price index (CPI)
increased almost 2 percent, while core CPI inflation was 1-3/4
percent. Retail gasoline prices moved up sharply following the
landfall of Hurricane Harvey and appeared likely to put temporary
upward pressure on the 12-month change in total PCE prices. The
median of inflation expectations over the next 5 to 10 years from
the Michigan survey edged back up in the preliminary reading for
September, and the median expectation for PCE price inflation
over the next 10 years from the Survey of Professional
Forecasters edged down. The medians of longer-run inflation
expectations from the Desk’s Survey of Primary Dealers and Survey
of Market Participants were relatively little changed in
September.

Foreign economic activity continued to expand at a solid pace.
Economic growth picked up in the advanced foreign economies
(AFEs) in the second quarter, especially in Canada, and incoming
indicators suggested that growth slowed in the third quarter but
remained firm. Recent indicators from the emerging market
economies (EMEs) also pointed to continued strong economic
growth, notwithstanding some slowing in the rate of expansion of
activity in China. Headline inflation in most AFEs remained
subdued, held down in part by falling retail energy prices, but
data through August suggested that the drag from energy prices
was diminishing. Inflation also remained low in most EMEs,
although food prices continued to put upward pressure on
inflation in Mexico.

Staff Review of the Financial Situation
Domestic financial market conditions remained generally
accommodative over the intermeeting period. U.S. equity prices
increased, longer-term Treasury yields declined, and the dollar
depreciated. Investors’ interpretations of FOMC communications,
market perceptions of a reduced likelihood of U.S. fiscal policy
changes, and heightened geopolitical risks all reportedly placed
downward pressure on longer-term yields. At the same time,
financing conditions for households and nonfinancial businesses
continued to provide support for growth in spending and
investment.

FOMC communications over the intermeeting period reportedly were
interpreted as indicating a somewhat slower pace of increases in
the target range for the federal funds rate than previously
expected. Market participants were attentive to the Committee’s
assessment of recent below-expectations inflation data and the
acknowledgment in the July FOMC minutes that inflation might
continue to run below the Committee’s 2 percent objective for
longer than anticipated. Investors also took note of the
Committee’s guidance in the July FOMC statement that it expected
to begin implementing its balance sheet normalization program
relatively soon. By the end of the intermeeting period, market
participants appeared nearly certain that the Committee would
announce the implementation of its balance sheet normalization
plan at the September meeting. The probability of an increase in
the target range for the federal funds rate occurring at either
the September or the November meeting, as implied by quotes on
federal funds futures contracts, fell to essentially zero, while
the probability of a 25 basis point increase by the end of the
year stood near 50 percent and was little changed since the July
meeting. Quotes on overnight index swaps (OIS) pointed to a
slight flattening of the expected path of the federal funds rate
through 2020, with a staff model attributing most of the declines
in OIS rates to lower expected rates.

Yields on intermediate- and longer-term nominal Treasury
securities decreased modestly over the intermeeting period.
Treasury yields fell following the July FOMC meeting, reflecting
the response of investors to the postmeeting statement, and then
dropped further amid rising geopolitical tensions related to
North Korea and market perceptions of reduced prospects for
enactment of a fiscal stimulus program. Economic data releases
appeared to have little net effect on Treasury yields over most
of the period. A staff term structure model attributed about half
of the decline in the 10-year Treasury yield to a decrease in the
average expected future short-term rate and the remaining half to
a lower term premium. Measures of inflation compensation over the
next 5 years rose modestly, on net, partly in response to the
release of higher-than-expected CPI data for August, while
inflation compensation 5 to 10 years ahead was little changed.

Broad U.S. equity price indexes increased over the intermeeting
period. One-month-ahead option-implied volatility of the S&P
500 index–the VIX–remained at historically low levels despite
brief spikes associated with increased investor concerns about
geopolitical tensions and political uncertainties. Over the
intermeeting period, spreads of yields on investment- and
speculative-grade nonfinancial corporate bonds over those on
comparable-maturity Treasury securities widened a bit.

Short-dated Treasury bill yields were elevated for a time,
reflecting concerns about potential delays in raising the federal
debt limit. However, following news of an agreement to extend the
debt ceiling by three months, rates on Treasury bills maturing in
October retraced their entire increase from early in the
intermeeting period. Conditions in other domestic short-term
funding markets were stable. Yields on a broad set of money
market instruments remained in the ranges observed since the FOMC
increased the target range for the federal funds rate in June.
Daily take-up at the System’s overnight reverse repurchase
agreement facility ran somewhat lower than in the previous
intermeeting period.

Since the July FOMC meeting, asset price movements in global
financial markets were driven by geopolitical tensions in the
Korean peninsula, improving economic prospects abroad,
communications from AFE central banks, and changes in prospects
for fiscal policy legislation in the United States. The broad
index of the foreign exchange value of the dollar decreased 1-1/2
percent; the decline was widespread, led by the strengthening of
the euro and the Chinese renminbi. The Canadian dollar
appreciated following a rate hike by the Bank of Canada at its
September meeting that came sooner than market participants
expected. Similarly, sterling appreciated after the Bank of
England signaled a potential rate hike in the coming months.
Against this backdrop, longer-term yields rose slightly in Canada
and the United Kingdom. In contrast, longer-term German yields
declined moderately, despite better-than-expected economic data
releases for the euro area, as market expectations shifted toward
a more gradual withdrawal of stimulus by the European Central
Bank (ECB) even though the ECB kept its policy stance unchanged.

Despite generally better-than-expected earnings releases, AFE
equity prices were mixed over the period, with bank stocks
underperforming broader indexes. Outside South Korea, most
emerging market asset prices were little affected by the recent
escalation of geopolitical concerns. Net flows to emerging market
mutual funds briefly turned negative in early August, but they
quickly returned to near the high levels seen since early this
year. Yield spreads on EME sovereign bonds edged down.

Financing conditions for U.S. nonfinancial businesses continued
to be accommodative. Issuance of corporate debt and equity was
strong in July and August. Gross issuance of institutional
leveraged loans continued its robust pace in June but slowed
notably in July, as is typical during the summer. Meanwhile, the
growth of commercial and industrial (C&I) loans on banks’
books ticked up in July and August compared with its pace over
the first half of the year; however, C&I loan growth from the
fourth quarter of last year through August remained significantly
lower than over recent years.

Gross issuance of municipal bonds was strong in August, and
spreads of yields on municipal bonds over those on
comparable-maturity Treasury securities increased a bit over the
intermeeting period. The credit quality of state and local
governments improved overall, as the number of ratings upgrades
notably outpaced the number of downgrades in August.

The growth of commercial real estate (CRE) loans on banks’ books
continued to moderate in July and August, reflecting a slowdown
in lending both for nonfarm nonresidential units and for
construction and land development; nonetheless, CRE financing
appeared to remain broadly available. Issuance of commercial
mortgage-backed securities (CMBS) so far this year was similar to
that in the same period a year earlier. Spreads on CMBS over
Treasury securities narrowed a little over the intermeeting
period and were near the bottom of their ranges of the past
several years. Delinquency rates on loans in CMBS pools declined
slightly but remained elevated for loans that were originated
before the financial crisis.

Interest rates on 30-year fixed-rate residential mortgages moved
lower over the intermeeting period, in line with
comparable-maturity Treasury yields. Growth in mortgage lending
for home purchases picked up in July and August compared with its
pace over the second quarter. However, credit conditions remained
tight for borrowers with low credit scores or hard-to-document
incomes.

Consumer credit continued to be readily available for most
borrowers, and overall loan balances rose at a moderate pace in
the second quarter, reflecting further expansions in credit card,
auto, and student loan balances. Issuance of asset-backed
securities remained robust over the year to date and outpaced
that of the previous year, providing support for consumer
lending. However, standards and terms on auto and credit card
loans were tighter for subprime borrowers, likely in response to
rising delinquencies on such loans. Subprime auto loan balances
have declined so far this year, partly reflecting the tighter
lending standards, and the average credit score of all borrowers
who obtained an auto loan in the second quarter remained near the
upper end of its range of the past few years.

Staff Economic Outlook
The U.S. economic projection prepared by the staff for the
September FOMC meeting was broadly similar to the previous
forecast. Real GDP was expected to rise at a solid pace, on net,
in the second half of the year, and by a little more than
previously projected, reflecting data on spending that were
stronger than expected on balance. The short-term disruptions to
spending and production associated with Hurricanes Harvey and
Irma were expected to reduce real GDP growth in the third quarter
and to boost it in the fourth quarter as production returned to
its pre-hurricane path and as a portion of the lost spending was
made up. The hurricanes were also expected to depress payroll
employment in September, with a reversal over the next few
months. Beyond 2017, the forecast for real GDP growth was little
revised. In particular, the staff continued to project that real
GDP would expand at a modestly faster pace than potential output
through 2019. The unemployment rate was projected to decline
gradually over the next couple of years and to continue running
below the staff’s estimate of its longer-run natural rate over
this period. Because of continued subdued inflation readings and,
given real GDP growth, a larger-than-expected decline in the
unemployment rate over much of the past year, the staff revised
down slightly its estimate of the longer-run natural rate of
unemployment in this projection.

The staff’s forecast for consumer price inflation, as measured by
the change in the PCE price index, was revised up somewhat for
2017 in response to hurricane-related effects on gasoline prices.
The near-term forecast for core PCE price inflation was
essentially unrevised. Total PCE price inflation this year was
expected to run at the same pace as last year, with a slower
increase in core PCE prices offset by a slightly larger increase
in energy prices and an upturn in the prices for food and
non-energy imports. Beyond 2017, the inflation forecast was
little revised from the previous projection. The staff continued
to project that inflation would edge higher in the next couple of
years and that it would reach the Committee’s longer-run
objective in 2019.

The staff viewed the uncertainty around its projections for real
GDP growth, the unemployment rate, and inflation as similar to
the average of the past 20 years. On the one hand, many financial
market indicators of uncertainty remained subdued, and the
uncertainty associated with the foreign outlook still appeared to
be less than last year; on the other hand, uncertainty about the
direction of some economic policies was judged to have remained
elevated. The staff saw the risks to the forecasts for real GDP
growth and the unemployment rate as balanced. The risks to the
projection for inflation were also seen as balanced. Downside
risks included the possibilities that longer-term inflation
expectations may have edged down or that the recent run of soft
inflation readings could prove to be more persistent than the
staff expected. These downside risks were seen as essentially
counterbalanced by the upside risk that inflation could increase
more than expected in an economy that was projected to continue
operating above its longer-run potential.

Participants’ Views on Current Conditions and the Economic
Outlook
In conjunction with this FOMC meeting, members of the Board of
Governors and Federal Reserve Bank presidents submitted their
projections of the most likely outcomes for real output growth,
the unemployment rate, and inflation for each year from 2017
through 2020 and over the longer run, based on their individual
assessments of the appropriate path for the federal funds rate.6
The longer-run projections represented each participant’s
assessment of the rate to which each variable would be expected
to converge, over time, under appropriate monetary policy and in
the absence of further shocks to the economy. These projections
and policy assessments are described in the Summary of Economic
Projections, which is an addendum to these minutes.

In their discussion of the economic situation and the outlook,
meeting participants agreed that information received over the
intermeeting period indicated that the labor market had continued
to strengthen and that economic activity had been rising
moderately so far this year. Job gains had remained solid in
recent months, and the unemployment rate had stayed low.
Household spending had been expanding at a moderate rate, and
growth in business fixed investment had picked up in recent
quarters. On a 12-month basis, overall inflation and the measure
excluding food and energy prices had declined this year and were
running below 2 percent. Market-based measures of inflation
compensation remained low; survey-based measures of longer-term
inflation expectations were little changed on balance.

Participants acknowledged that Hurricanes Harvey, Irma, and Maria
would affect economic activity in the near term. They expected
growth of real GDP in the third quarter to be held down by the
severe disruptions caused by the storms but to rebound beginning
in the fourth quarter as rebuilding got under way and economic
activity in the affected areas resumed. Similarly, employment
would be temporarily depressed by the hurricanes, but,
abstracting from those effects, employment gains were anticipated
to remain solid, and the unemployment rate was expected to
decline a bit further by year-end.

Based on the estimated effects of past major hurricanes that made
landfall in the United States, participants judged that the
recent storms were unlikely to materially alter the course of the
national economy over the medium term. Moreover, they generally
viewed the information on spending, production, and labor market
activity that became available over the intermeeting period,
which was mostly not affected by the hurricanes, as suggesting
little change in the outlook for economic growth and the labor
market over the medium term. Consequently, they continued to
expect that, with gradual adjustments in the stance of monetary
policy, economic activity would expand at a moderate pace and
labor market conditions would strengthen somewhat further. In the
aftermath of the hurricanes, higher prices for gasoline and some
other items were likely to boost inflation temporarily. Apart
from that effect, inflation on a 12-month basis was expected to
remain somewhat below 2 percent in the near term but to stabilize
around the Committee’s 2 percent objective over the medium term.
Near-term risks to the economic outlook appeared roughly
balanced, but participants agreed to continue to monitor
inflation developments closely.

Consumer spending had been expanding at a moderate rate through
the summer, and reports on retail activity from participants’
contacts were generally positive. Participants expected some
fluctuations in consumer spending to result from the hurricanes,
but they generally judged that consumption growth would continue
to be supported by still-solid fundamental determinants of
household spending, including the income generated by the ongoing
strength in the labor market, improved household balance sheets,
and high levels of consumer confidence. Sales of autos and light
trucks had softened over the summer, leading producers to slow
production to address a buildup of inventories, but a couple of
participants noted that automakers expected to see a temporary
increase in demand as households and businesses replaced vehicles
damaged during the storms.

Incoming data on business spending showed that equipment
investment had picked up during 2017 after having been weak
during much of 2016. Shipments and orders of nondefense capital
goods had been on a steady uptrend over the first eight months of
2017. A number of participants reported that their business
contacts appeared to have become more confident about the
economic outlook, and it was noted that the National Federation
of Independent Business reported that greater optimism among
small businesses had contributed to a sharp increase in the
proportion of small firms planning increases in their capital
expenditures. A couple of participants commented that competitive
pressures and tight labor markets were increasing the incentives
for businesses to substitute capital for labor or to invest in
information technology. In contrast, reports on the strength of
nonresidential construction were mixed. And in energy-producing
regions, the count of drilling rigs in operation had begun to
level off before the onset of Hurricane Harvey.

Participants generally indicated that, before the recent
hurricanes, business activity in their Districts was expanding at
a moderate pace. Although industrial production in areas affected
by the storms was estimated to have declined in August, a number
of participants from other areas reported further solid gains in
manufacturing activity in their Districts. Participants from the
regions affected by the hurricanes reported that businesses in
their Districts anticipated that the disruptions to business and
sales would be relatively short lived. In the energy sector,
Hurricane Harvey had shut down drilling and refining activity,
but by the time of the meeting, these operations had
substantially resumed. And many business contacts in the affected
areas reported that they expected their operations to return to
normal before the end of the year. Farming in some parts of the
country had been affected by drought, and income in the
agricultural sector was under downward pressure because of low
crop prices.

Overall, the available information suggested that, although the
storms would likely affect the quarterly pattern of changes in
real GDP at least through the second half of the year, economic
activity would continue to expand at a moderate rate over the
medium term, supported by further gains in consumer spending and
the pickup in business investment. In addition, improving global
economic conditions and the depreciation of the dollar in recent
months were anticipated to result in a modest positive
contribution to domestic economic activity from net exports. In
contrast, most participants had not assumed enactment of a fiscal
stimulus package in their economic projections or had marked down
the expected magnitude of any stimulus.

Labor market conditions strengthened further in recent months.
The increases in nonfarm payroll employment in July and August
remained well above the pace likely to be sustainable in the
longer run. Although the unemployment rate was little changed
from March to August, it remained below participants’ estimates
of its longer-run normal level. Other indicators suggested that
labor market conditions had continued to tighten over recent
quarters. The labor force participation rate had been moving
sideways despite factors, such as demographic changes, that were
contributing to a declining longer-run trend. In addition, the
number of individuals working part time for economic reasons, as
a share of household employment, had moved lower. The job
openings rate, the quits rate, households’ assessments of job
availability, and the labor market conditions index prepared by
the Federal Reserve Bank of Kansas City had returned to
pre-recession levels. However, some participants still saw room
for further increases in labor utilization, with a couple of them
noting that the employment-to-population ratio and the
participation rate for prime-age workers had not fully recovered
to pre-recession levels.

Against the backdrop of the continued strengthening in labor
market conditions, participants discussed recent wage
developments. Increases in most aggregate measures of hourly
wages and labor compensation remained subdued, and several
participants commented that the absence of broad-based upward
wage pressures suggested that the sustainable rate of
unemployment might be lower than they currently estimated. Other
factors that may have been contributing to the subdued pace of
wage increases reported in the national data included low
productivity growth, changes in the composition of the workforce,
and competitive pressure on employers to hold down their costs.
However, reports from business contacts in several Districts
indicated that employers in labor markets in which demand was
high or in which workers in some occupations were in short supply
were raising wages noticeably to compete for workers and limit
turnover. It was noted that the expected increase in demand for
skilled construction workers for reconstruction in
hurricane-affected areas would likely exacerbate existing
shortages. Most participants expected wage increases to pick up
over time as the labor market strengthened further; a couple of
participants cautioned that a broader acceleration in wages may
already have begun, consistent with already-tight labor market
conditions.

Based on the available data, PCE price inflation over the 12
months ending in August was estimated to be about 1-1/2 percent,
remaining below the Committee’s longer-run objective. In their
review of the recent data and the outlook for inflation,
participants discussed a number of factors that could be
contributing to the low readings on consumer prices this year and
weighed the extent to which those factors might be transitory or
could prove more persistent. Many participants continued to
believe that the cyclical pressures associated with a tightening
labor market or an economy operating above its potential were
likely to show through to higher inflation over the medium term.
In addition, many judged that at least part of the softening in
inflation this year was the result of idiosyncratic or one-time
factors, and, thus, their effects were likely to fade over time.
However, other developments, such as the effects of earlier
changes to government health-care programs that had been holding
down health-care costs, might continue to do so for some time.
Some participants discussed the possibility that secular trends,
such as the influence of technological innovations on competition
and business pricing, also might have been muting inflationary
pressures and could be intensifying. It was noted that other
advanced economies were also experiencing low inflation, which
might suggest that common global factors could be contributing to
persistence of below-target inflation in the United States and
abroad. Several participants commented on the importance of
longer-run inflation expectations to the outlook for a return of
inflation to 2 percent. A number of indicators of inflation
expectations, including survey statistics and estimates derived
from financial market data, were generally viewed as indicating
that longer-run inflation expectations remained reasonably
stable, although a few participants saw some of these measures as
low or slipping.

Participants raised a number of important considerations about
the implications of persistently low inflation for the path of
the federal funds rate over the medium run. Several expressed
concern that the persistence of low rates of inflation might
imply that the underlying trend was running below 2 percent,
risking a decline in inflation expectations. If so, the
appropriate policy path should take into account the need to
bolster inflation expectations in order to ensure that inflation
returned to 2 percent and to prevent erosion in the credibility
of the Committee’s objective. It was also noted that the
persistence of low inflation might result in the federal funds
rate staying uncomfortably close to its effective lower bound.
However, a few others pointed out the need to consider the lags
in the response of inflation to tightening resource utilization
and, thus, increasing upside risks to inflation as the labor
market tightened further.

On balance, participants continued to forecast that PCE price
inflation would stabilize around the Committee’s 2 percent
objective over the medium term. However, several noted that in
preparing their projections for this meeting, they had taken on
board the likelihood that convergence to the Committee’s
symmetric 2 percent inflation objective might take somewhat
longer than they anticipated earlier. Participants generally
agreed it would be important to monitor inflation developments
closely. Several of them noted that interpreting the next few
inflation reports would likely be complicated by the temporary
run-up in energy costs and in the prices of other items affected
by storm-related disruptions and rebuilding.

In financial markets, longer-term interest rates and the foreign
exchange value of the dollar declined over the intermeeting
period, and equity prices increased. It was noted that U.S.
financial conditions recently appeared to be responding as much
or more to economic and financial news from abroad as to domestic
developments. Many participants viewed accommodative financial
conditions, which had prevailed even as the Committee raised the
federal funds rate, as likely to provide support for the economic
expansion. However, a couple of those participants expressed
concern that the persistence of highly accommodative financial
conditions could, over time, pose risks to financial stability.
In contrast, a few participants cautioned that these financial
market conditions might not deliver much impetus to aggregate
demand if they instead reflected a more pessimistic assessment of
prospects for longer-run economic growth and, accordingly, a view
that the longer-run neutral rate of interest in the United States
would remain low.

In their discussion of monetary policy, all participants agreed
that the economy had evolved broadly as they had anticipated at
the time of the June meeting and that the incoming data had not
materially altered the medium-term economic outlook. Consistent
with those assessments, participants saw it as appropriate, at
this meeting, to announce implementation of the plan for reducing
the Federal Reserve’s securities holdings that the Committee
released in June. Many underscored that the reduction in
securities holdings would be gradual and that financial market
participants appeared to have a clear understanding of the
Committee’s planned approach for a gradual normalization of the
size of the Federal Reserve’s balance sheet. Consequently,
participants generally expected that any reaction in financial
markets to the start of balance sheet normalization would likely
be limited.

With the medium-term outlook little changed, inflation below 2
percent, and the neutral rate of interest estimated to be quite
low, all participants thought it would be appropriate for the
Committee to maintain the current target range for the federal
funds rate at this meeting, and nearly all supported again
indicating in the postmeeting statement that a gradual approach
to increasing the federal funds rate will likely be warranted.
Nevertheless, many participants expressed concern that the low
inflation readings this year might reflect not only transitory
factors, but also the influence of developments that could prove
more persistent, and it was noted that some patience in removing
policy accommodation while assessing trends in inflation was
warranted. A few of these participants thought that no further
increases in the federal funds rate were called for in the near
term or that the upward trajectory of the federal funds rate
might appropriately be quite shallow. Some other participants,
however, were more worried about upside risks to inflation
arising from a labor market that had already reached full
employment and was projected to tighten further. Their concerns
were heightened by the apparent easing in financial conditions
that had developed since the Committee’s policy normalization
process was initiated in December 2015. These participants
cautioned that an unduly slow pace in removing policy
accommodation could result in an overshoot of the Committee’s
inflation objective in the medium term that would likely be
costly to reverse or could lead to an intensification of
financial stability risks or to other imbalances that might prove
difficult to unwind.

Consistent with the expectation that a gradual rise in the
federal funds rate would be appropriate, many participants
thought that another increase in the target range later this year
was likely to be warranted if the medium-term outlook remained
broadly unchanged. Several others noted that, in light of the
uncertainty around their outlook for inflation, their decision on
whether to take such a policy action would depend importantly on
whether the economic data in coming months increased their
confidence that inflation was moving up toward the Committee’s
objective. A few participants thought that additional increases
in the federal funds rate should be deferred until incoming
information confirmed that the low readings on inflation this
year were not likely to persist and that inflation was clearly on
a path toward the Committee’s symmetric 2 percent objective over
the medium term. All agreed that they would closely monitor and
assess incoming data before making any further adjustment to the
federal funds rate.

Committee Policy Action
In their discussion of monetary policy for the period ahead,
members judged that information received since the Committee met
in July indicated that the labor market had continued to
strengthen and that economic activity had been rising moderately
so far this year. Job gains had remained solid in recent months,
and the unemployment rate had stayed low. Household spending had
been expanding at a moderate rate, and growth in business fixed
investment had picked up in recent quarters. On a 12-month basis,
overall inflation and the measure excluding food and energy
prices had declined this year and were running below 2 percent.
Market-based measures of inflation compensation remained low;
survey-based measures of longer-term inflation expectations were
little changed on balance.

Members noted that Hurricanes Harvey, Irma, and Maria had
devastated many communities, inflicting severe hardship. Members
judged that storm-related disruptions and rebuilding would affect
economic activity in the near term, but past experience suggested
that the hurricanes were unlikely to materially alter the course
of the national economy over the medium term. Consequently, the
Committee continued to expect that, with gradual adjustments in
the stance of monetary policy, economic activity would expand at
a moderate pace, and labor market conditions would strengthen
somewhat further. Higher prices for gasoline and some other items
in the aftermath of the hurricanes would likely boost inflation
temporarily; apart from that effect, inflation on a 12-month
basis was expected to remain somewhat below 2 percent in the near
term but to stabilize around the Committee’s 2 percent objective
over the medium term. Members saw near-term risks to the economic
outlook as roughly balanced, but they agreed to continue to
monitor inflation developments closely.

After assessing current conditions and the outlook for economic
activity, the labor market, and inflation, members decided to
maintain the target range for the federal funds rate at 1 to
1-1/4 percent. They noted that the stance of monetary policy
remained accommodative, thereby supporting some further
strengthening in labor market conditions and a sustained return
to 2 percent inflation.

Members agreed that the timing and size of future adjustments to
the target range for the federal funds rate would depend on their
assessment of realized and expected economic conditions relative
to the Committee’s objectives of maximum employment and 2 percent
inflation. They expected that economic conditions would evolve in
a manner that would warrant gradual increases in the federal
funds rate and that the federal funds rate was likely to remain,
for some time, below levels that were expected to prevail in the
longer run. Members also again stated that the actual path of the
federal funds rate would depend on the economic outlook as
informed by incoming data. In particular, they reaffirmed that
they would carefully monitor actual and expected inflation
developments relative to the Committee’s symmetric inflation
goal. Some members emphasized that, in considering the timing of
further adjustments in the federal funds rate, they would be
evaluating incoming information to assess the likelihood that
recent low readings on inflation were transitory and that
inflation was again on a trajectory consistent with achieving the
Committee’s 2 percent objective over the medium term.

Members agreed that, in October, the Committee would initiate the
balance sheet normalization program described in the June 2017
Addendum to the Policy Normalization Principles and Plans.
Several members observed that, in part because financial market
participants appeared to have a clear understanding of the
Committee’s plan for gradually reducing the Federal Reserve’s
securities holdings, any reaction in financial markets to the
announcement and implementation of the program would likely be
limited.

At the conclusion of the discussion, the Committee voted to
authorize and direct the Federal Reserve Bank of New York, until
it was instructed otherwise, to execute transactions in the SOMA
in accordance with the following domestic policy directive, to be
released at 2:00 p.m.:

“Effective September 21, 2017, the Federal Open Market Committee
directs the Desk to undertake open market operations as necessary
to maintain the federal funds rate in a target range of 1 to
1-1/4 percent, including overnight reverse repurchase operations
(and reverse repurchase operations with maturities of more than
one day when necessary to accommodate weekend, holiday, or
similar trading conventions) at an offering rate of 1.00 percent,
in amounts limited only by the value of Treasury securities held
outright in the System Open Market Account that are available for
such operations and by a per-counterparty limit of $30 billion
per day.

The Committee directs the Desk to continue rolling over at
auction Treasury securities maturing during September, and to
continue reinvesting in agency mortgage-backed securities the
principal payments received through September from the Federal
Reserve’s holdings of agency debt and agency mortgage-backed
securities.

Effective in October 2017, the Committee directs the Desk to roll
over at auction the amount of principal payments from the Federal
Reserve’s holdings of Treasury securities maturing during each
calendar month that exceeds $6 billion, and to reinvest in agency
mortgage-backed securities the amount of principal payments from
the Federal Reserve’s holdings of agency debt and agency
mortgage-backed securities received during each calendar month
that exceeds $4 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 July indicates that the labor market has continued to
strengthen and that economic activity has been rising moderately
so far this year. Job gains have remained solid in recent months,
and the unemployment rate has stayed low. Household spending has
been expanding at a moderate rate, and growth in business fixed
investment has picked up in recent quarters. On a 12-month basis,
overall inflation and the measure excluding food and energy
prices have declined this year and are running below 2 percent.
Market-based measures of inflation compensation remain low;
survey-based measures of longer-term inflation expectations are
little changed, on balance.

Consistent with its statutory mandate, the Committee seeks to
foster maximum employment and price stability. Hurricanes Harvey,
Irma, and Maria have devastated many communities, inflicting
severe hardship. Storm-related disruptions and rebuilding will
affect economic activity in the near term, but past experience
suggests that the storms are unlikely to materially alter the
course of the national economy over the medium term.
Consequently, the Committee continues to expect that, with
gradual adjustments in the stance of monetary policy, economic
activity will expand at a moderate pace, and labor market
conditions will strengthen somewhat further. Higher prices for
gasoline and some other items in the aftermath of the hurricanes
will likely boost inflation temporarily; apart from that effect,
inflation on a 12-month basis is expected to remain somewhat
below 2 percent in the near term but to stabilize around the
Committee’s 2 percent objective over the medium term. Near-term
risks to the economic outlook appear roughly balanced, but the
Committee is monitoring inflation developments closely.

In view of realized and expected labor market conditions and
inflation, the Committee decided to maintain the target range for
the federal funds rate at 1 to 1-1/4 percent. The stance of
monetary policy remains accommodative, thereby supporting some
further strengthening in labor market conditions and a sustained
return to 2 percent inflation.

In determining the timing and size of future adjustments to the
target range for the federal funds rate, the Committee will
assess realized and expected economic conditions relative to its
objectives of maximum employment and 2 percent inflation. This
assessment will take into account a wide range of information,
including measures of labor market conditions, indicators of
inflation pressures and inflation expectations, and readings on
financial and international developments. The Committee will
carefully monitor actual and expected inflation developments
relative to its symmetric inflation goal. The Committee expects
that economic conditions will evolve in a manner that will
warrant gradual increases in the federal funds rate; the federal
funds rate is likely to remain, for some time, below levels that
are expected to prevail in the longer run. However, the actual
path of the federal funds rate will depend on the economic
outlook as informed by incoming data.

In October, the Committee will initiate the balance sheet
normalization program described in the June 2017 Addendum to the
Committee’s Policy Normalization Principles and Plans.”
Voting for this action: Janet L. Yellen, William C. Dudley, Lael
Brainard, Charles L. Evans, Stanley Fischer, Patrick Harker,
Robert S. Kaplan, Neel Kashkari, and Jerome H. Powell.

Voting against this action: None.

Consistent with the Committee’s decision to leave the target
range for the federal funds rate unchanged, the Board of
Governors voted unanimously to leave the interest rates on
required and excess reserve balances unchanged at 1-1/4 percent
and voted unanimously to approve establishment of the primary
credit rate (discount rate) at the existing level of 1-3/4
percent.7

It was agreed that the next meeting of the Committee would be
held on Tuesday-Wednesday, October 31-November 1, 2017. The
meeting adjourned at 10:05 a.m. on September 20, 2017.

Notation Vote
By notation vote completed on August 15, 2017, the Committee
unanimously approved the minutes of the Committee meeting held on
July 25-26, 2017.

The Fed is worried that low inflation is here to stay for a while – Business Insider

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