fomc minutes february 2015

8/9/2019 Fomc Minutes February 2015

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Minutes of the Federal Open Market Committee January 27 – 28, 2015

A meeting of the Federal Open Market Committee washeld in the offices of the Board of Governors of the

Federal Reserve System in Washington, D.C., on Tuesday, January 27, 2015, at 10:00 a.m. and continuedon Wednesday, January 28, 2015, at 9:00 a.m.

PRESENT: Janet L. Yellen, Chair William C. Dudley, Vice ChairmanLael BrainardCharles L. EvansStanley Fischer

Jeffrey M. LackerDennis P. Lockhart

Jerome H. PowellDaniel K. Tarullo

John C. Williams

James Bullard, Esther L. George, Loretta J. Mester, andEric Rosengren, Alternate Members of the FederalOpen Market Committee

Richard W. Fisher, Narayana Kocherlakota, andCharles I. Plosser, Presidents of the FederalReserve Banks of Dallas, Minneapolis, andPhiladelphia, respectively

Thomas Laubach, Secretary and EconomistMatthew M. Luecke, Deputy SecretaryMichelle A. Smith, Assistant SecretaryScott G. Alvarez, General Counsel

Thomas C. Baxter, Deputy General CounselSteven B. Kamin, EconomistDavid W. Wilcox, Economist

David Altig, Thomas A. Connors, Michael P. Leahy, Jonathan P. McCarthy, William R. Nelson, GlennD. Rudebusch, Daniel G. Sullivan, and William

Wascher, Associate Economists

Simon Potter, Manager, System Open Market Account

Lorie K. Logan, Deputy Manager, System OpenMarket Account

Robert deV. Frierson,1 Secretary of the Board, Officeof the Secretary, Board of Governors

Michael S. Gibson, Director, Division of BankingSupervision and Regulation, Board of Governors

Nellie Liang, Director, Office of Financial StabilityPolicy and Research, Board of Governors

James A. Clouse, Deputy Director, Division ofMonetary Affairs, Board of Governors

William B. English, Senior Special Adviser to theBoard, Office of Board Members, Board ofGovernors

Andrew Figura, David Reifschneider, and Stacey Tevlin, Special Advisers to the Board, Office ofBoard Members, Board of Governors

Trevor A. Reeve, Special Adviser to the Chair, Officeof Board Members, Board of Governors

David E. Lebow, Senior Associate Director, Divisionof Research and Statistics, Board of Governors

Michael T. Kiley, Senior Adviser, Division of Researchand Statistics, and Senior Associate Director,Office of Financial Stability Policy and Research,Board of Governors

Jeremy B. Rudd, Senior Adviser, Division of Researchand Statistics, Board of Governors; Joyce K.Zickler, Senior Adviser, Division of Monetary

Affairs, Board of Governors

Fabio M. Natalucci2 and Gretchen C. Weinbach,3 Associate Directors, Division of Monetary Affairs,Board of Governors

________________1 Attended the joint session of the Federal Open Market

Committee and the Board of Governors.2 Attended the portion of the meeting following the joint

session of the Federal Open Market Committee and theBoard of Governors.

3 Attended through the conclusion of the joint session of theFederal Open Market Committee and the Board ofGovernors.

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Joseph W. Gruber, Deputy Associate Director,Division of International Finance, Board ofGovernors; David López-Salido, Deputy AssociateDirector, Division of Monetary Affairs, Board ofGovernors

Jennifer Gallagher, Special Assistant to the Board,Office of Board Members, Board of Governors

Edward Nelson, Assistant Director, Division ofMonetary Affairs, Board of Governors; Shane M.Sherlund, Assistant Director, Division of Researchand Statistics, Board of Governors

Burcu Duygan-Bump and Robert J. Tetlow,21 Advisers,Division of Monetary Affairs, Board of Governors;Eric C. Engstrom, Adviser, Division of Researchand Statistics, Board of Governors

Penelope A. Beattie,12 Assistant to the Secretary, Officeof the Secretary, Board of Governors

Dana L. Burnett and Christopher J. Gust, SectionChiefs, Division of Monetary Affairs, Board ofGovernors

Katie Ross,1 Manager, Office of the Secretary, Board ofGovernors

David H. Small, Project Manager, Division ofMonetary Affairs, Board of Governors

Carlos O. Arteta, Senior Economist, Division ofInternational Finance, Board of Governors;Kimberly Bayard, Senior Economist, Division ofResearch and Statistics, Board of Governors;Elmar Mertens, Senior Economist, Division ofMonetary Affairs, Board of Governors

Bernd Schlusche and Emre Yoldas, Economists,Division of Monetary Affairs, Board of Governors

Peter M. Garavuso, Information Management Analyst,

Division of Monetary Affairs, Board of Governors

1 Attended the joint session of the Federal Open MarketCommittee and the Board of Governors.

2 Attended the portion of the meeting following the joint

session of the Federal Open Market Committee and theBoard of Governors.

Blake Prichard, First Vice President, Federal ReserveBank of Philadelphia

Jeff Fuhrer and Alberto G. Musalem, Executive VicePresidents, Federal Reserve Banks of Boston andNew York, respectively

Troy Davig, Michael Dotsey, Joshua L. Frost,4 Evan F.Koenig, Samuel Schulhofer-Wohl, and Christopher

J. Waller, Senior Vice Presidents, Federal ReserveBanks of Kansas City, Philadelphia, New York,Dallas, Minneapolis, and St. Louis, respectively

Todd E. Clark and Douglas Tillett, Vice Presidents,Federal Reserve Banks of Cleveland and Chicago,respectively

Robert L. Hetzel, Senior Economist, Federal Reserve

Bank of Richmond

Annual Organizational Matters5 In the agenda for this meeting, it was reported that ad-

vices of the election of the following members and alter-nate members of the Federal Open Market Committee(the “Committee”) for a term beginning January 27,2015, had been received and that these individuals hadexecuted their oaths of office.

The elected members and alternate members were as fol-lows:

William C. Dudley, President of the Federal ReserveBank of New York, with Christine Cumming, First VicePresident of the Federal Reserve Bank of New York, asalternate

Jeffrey M. Lacker, President of the Federal Reserve Bankof Richmond, with Eric Rosengren, President of theFederal Reserve Bank of Boston, as alternate

Charles L. Evans, President of the Federal Reserve Bank

of Chicago, with Loretta J. Mester, President of the Fed-eral Reserve Bank of Cleveland, as alternate

4 Attended through the discussion on liftoff tools and possi-ble liftoff options.

5 Versions of the current Committee documents are availableat www.federalreserve.gov/monetarypolicy/rules_au-thorizations.htm.

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Dennis P. Lockhart, President of the Federal ReserveBank of Atlanta, with James Bullard, President of theFederal Reserve Bank of St. Louis, as alternate

John C. Williams, President of the Federal Reserve Bankof San Francisco, with Esther L. George, President of

the Federal Reserve Bank of Kansas City, as alternate

By unanimous vote, the following officers of the Com-mittee were selected to serve until the selection of theirsuccessors at the first regularly scheduled meeting of theCommittee in 2016:

Janet L. Yellen Chairman William C. Dudley Vice Chairman Thomas Laubach Secretary and EconomistMatthew M. Luecke Deputy SecretaryDavid W. Skidmore Assistant Secretary 6

Michelle A. Smith Assistant SecretaryScott G. Alvarez General Counsel Thomas C. Baxter Deputy General CounselRichard M. Ashton Assistant General CounselSteven B. Kamin EconomistDavid W. Wilcox Economist

David Altig Thomas A. ConnorsEric M. EngenMichael P. Leahy

Jonathan P. McCarthy William R. NelsonGlenn D. RudebuschDaniel G. Sullivan

John A. Weinberg William Wascher Associate Economists

By unanimous vote, the Federal Reserve Bank of New York was selected to execute transactions for the SystemOpen Market Account ( “SOMA” ).

By unanimous vote, the Committee selected Simon Pot-ter and Lorie K. Logan to serve at the pleasure of theCommittee as manager and deputy manager of the

6 Effective February 2, 2015.7 To improve consistency, references to “the FOMC,” “the

Federal Open Market Committee,” and “the Committee” were standardized, where appropriate, around the con- vention of “the Committee.” This change was imple-mented in other affected documents.

SOMA, respectively, on the understanding that their se-lection was subject to their being satisfactory to the Fed-eral Reserve Bank of New York.

Secretary’s note: Advice subsequently was re-ceived that the manager and deputy manager

selections indicated above were satisfactory tothe Federal Reserve Bank of New York.

By unanimous vote, the Authorization for DomesticOpen Market Operations was approved with two sets ofamendments. The first set of amendments aimed at sim-plifying the language by defining common terms, elimi-nating duplication of language, and standardizing refer-ences to the Committee.7 The second set of amend-ments clarified or modified existing authority, in partic-ular by introducing the defined term “Selected Bank” aspart of prudent planning to simplify transfer of authority

from the Federal Reserve Bank of New York to anotherFederal Reserve Bank selected by the Committee in theevent of a significant contingency, removing the author-ization to use agents for agency mortgage-backed secu-rities (“MBS”) transactions, defining the types of collat-eral accepted in securities lending operations describedin paragraph 3, and updating the language relating to theChair’s authority to act in exceptional circumstances.8

The Guidelines for the Conduct of System Open MarketOperations in Federal-Agency Issues remained sus-pended.

AUTHORIZATION FOR DOMESTIC OPENMARKET OPERATIONS(As amended effective January 27, 2015)

1. The Federal Open Market Committee (the “Com-mittee”) authorizes and directs the Federal Reserve Bankselected by the Committee to execute open market trans-actions (the “Selected Bank”), to the extent necessary tocarry out the most recent domestic policy directiveadopted by the Committee:

A. To buy or sell in the open market securities thatare direct obligations of, or fully guaranteed as to prin-cipal and interest by, the United States, and securities

that are direct obligations of, or fully guaranteed as toprincipal and interest by, any agency of the United

8 The change regarding the introduction of the term “SelectedBank” was implemented in other affected documents, in-cluding the Authorization for Foreign Currency Opera-tions, Procedural Instructions with Respect to ForeignCurrency Operations, and Program for Security ofFOMC Information.

Minutes of the Meeting of January 27–28, 2015 Page 3 _____________________________________________________________________________________________


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States, that are eligible for purchase or sale under Sec-tion 14(b) of the Federal Reser ve Act (“Eligible Secu-rities”) for the System Open Market Account(“SOMA”):

i. As an outright operation with securities dealersand foreign and international accounts maintained

at the Selected Bank: on a same-day or deferred de-livery basis (including such transactions as are com-monly referred to as dollar rolls and coupon swaps)at market prices; orii. As a temporary operation: on a same-day ordeferred delivery basis, to purchase such Eligible Se-curities subject to an agreement to resell (“repotransactions”) or to sell such Eligible Securities sub-ject to an agreement to repurchase (“reverse repotransactions”) for a term of 65 business days or less,at rates that, unless otherwise authorized by theCommittee, are determined by competitive bidding,

after applying reasonable limitations on the volumeof agreements with individual counterparties;B. To allow Eligible Securities in the SOMA to ma-ture without replacement;C. To exchange, at market prices, in connection

with a Treasury auction, maturing Eligible Securities inthe SOMA with the Treasury, in the case of EligibleSecurities that are direct obligations of the UnitedStates or that are fully guaranteed as to principal andinterest by the United States; andD. To exchange, at market prices, maturing EligibleSecurities in the SOMA with an agency of the UnitedStates, in the case of Eligible Securities that are directobligations of that agency or that are fully guaranteedas to principal and interest by that agency.

2. The Committee authorizes the Selected Bank toundertake transactions of the type described in para-graph 1 from time to time for the purpose of testing op-erational readiness, subject to the following limitations:

A. All transactions authorized in this paragraph 2shall be conducted with prior notice to the Commit-tee;B. The aggregate par value of the transactions au-thorized in this paragraph 2 that are of the type de-scribed in paragraph 1.A.i shall not exceed $5 billion

per calendar year; andC. The outstanding amount of the transactions de-scribed in paragraph 1.A.ii shall not exceed $5 billionat any given time.

3. In order to ensure the effective conduct of openmarket operations, the Committee authorizes the Se-lected Bank to operate a program to lend Eligible Secu-rities held in the SOMA to dealers on an overnight basis

(except that the Selected Bank may lend Eligible Securi-ties for longer than an overnight term to accommodate

weekend, holiday, and similar trading conventions). A. Such securities lending must be:

i. At rates determined by competitive bidding;ii. At a minimum lending fee consistent with the

objectives of the program;iii. Subject to reasonable limitations on the totalamount of a specific issue of Eligible Securities thatmay be auctioned; andiv. Subject to reasonable limitations on theamount of Eligible Securities that each borrowermay borrow.

B. The Selected Bank may:i. Reject bids that, as determined in its sole dis-cretion, could facilitate a bidder’s ability to control asingle issue;ii. Accept Treasury securities or cash as collateral

for any loan of securities authorized in this para-graph 3; andiii. Accept agency securities as collateral only for aloan of agency securities authorized in this para-graph 3.

4. In order to ensure the effective conduct of openmarket operations, while assisting in the provision ofshort-term investments or other authorized services forforeign central bank and international accounts main-tained at a Federal Reserve Bank (the “Foreign Ac-counts”) and accounts maintained at a Federal ReserveBank as fiscal agent of the United States pursuant to sec-tion 15 of the Federal Reserve Act (together with theForeign Accounts, the “Customer Accounts”), the Com-mittee authorizes the following when undertaken onterms comparable to those available in the open market:

A. The Selected Bank, for the SOMA, to undertakereverse repo transactions in Eligible Securities held inthe SOMA with the Customer Accounts for a term of65 business days or less; andB. Any Federal Reserve Bank that maintains Cus-tomer Accounts, for any such Customer Account,

when appropriate and subject to all other necessaryauthorization and approvals, to:

i. Undertake repo transactions in Eligible Securi-

ties with dealers with a corresponding reverse repotransaction in such Eligible Securities with the Cus-tomer Accounts; andii. Undertake intraday reverse repo transactionsin Eligible Securities with Foreign Accounts.

Transactions undertaken with Customer Accounts un-der the provisions of this paragraph 4 may provide for aservice fee when appropriate. Transactions undertaken



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with Customer Accounts are also subject to the authori-zation or approval of other entities, including the Boardof Governors of the Federal Reserve System and, wheninvolving accounts maintained at a Federal ReserveBank as fiscal agent of the United States, the UnitedStates Department of the Treasury.

5. The Committee authorizes the Chairman of theCommittee, in fostering the Committee’s objectives dur-ing any period between meetings of the Committee, toinstruct the Selected Bank to act on behalf of the Com-mittee to:

A. Adjust somewhat in exceptional circumstancesthe stance of monetary policy and to take actions thatmay result in material changes in the composition andsize of the assets in the SOMA; orB. Undertake transactions with respect to EligibleSecurities in order to appropriately address temporarydisruptions of an operational or highly unusual nature

in U.S. dollar funding markets. Any such adjustment described in subparagraph A ofthis paragraph 5 shall be made in the context of theCommittee’s discussion and decision about the stance ofpolicy at its most recent meeting and the Committee’slong-run objectives to foster maximum employment andprice stability, and shall be based on economic, financial,and monetary developments since the most recent meet-ing of the Committee. The Chairman, whenever feasi-ble, will consult with the Committee before making anyinstruction under this paragraph 5.

The Committee voted to amend the Authorization forForeign Currency Operations and the Procedural In-structions with Respect to Foreign Currency Opera-tions, and to reaffirm the Foreign Currency Directive inthe form shown below. The approval of these docu-ments included approval of the System’s warehousingagreement with the U.S. Treasury. A change was madeto the Authorization for Foreign Currency Operationsto increase the duration limit of the foreign currencyportfolio to 24 months from 18 months. This change

was made to provide greater flexibility in the manage-ment of the foreign currency portfolio, in an environ-ment in which interest rates are low in many major econ-

omies. Mr. Lacker dissented in the votes on the Author-ization for Foreign Currency Operations and the For-eign Currency Directive to indicate his opposition to for-eign currency intervention by the Federal Reserve. Inhis view, such intervention would be ineffective if it didnot also signal a shift in domestic monetary policy; andif it did signal such a shift, it could potentially compro-mise the Federal Reserve’s monetary policy independ-ence.

AUTHORIZATION FOR FOREIGN CURRENCYOPERATIONS(As amended effective January 27, 2015)

1. The Federal Open Market Committee (the “Com-mittee”) authorizes and directs the Federal Reserve Bank

selected by the Committee to execute open market trans-actions (the “Selected Bank”), for the System Open Mar-ket Account, to the extent necessary to carry out theCommittee’s foreign currency directive and express au-thorizations by the Committee pursuant thereto, and inconformity with such procedural instructions as theCommittee may issue from time to time:

A. To purchase and sell the following foreign cur-rencies in the form of cable transfers through spot orforward transactions on the open market at home andabroad, including transactions with the U.S. Treasury,

with the U.S. Exchange Stabilization Fund established

by section 10 of the Gold Reserve Act of 1934, withforeign monetary authorities, with the Bank for Inter-national Settlements, and with other international fi-nancial institutions:

Australian dollarsBrazilian reaisCanadian dollarsDanish kronereuro

Japanese yenKorean wonMexican pesosNew Zealand dollarsNorwegian kronerPounds sterlingSingapore dollarsSwedish kronorSwiss francs

B. To hold balances of, and to have outstanding forward contracts to receive or to deliver, the foreign cur-rencies listed in paragraph A above.C. To draw foreign currencies and to permit foreignbanks to draw dollars under the arrangements listed in

paragraph 2 below, in accordance with the ProceduralInstructions with Respect to Foreign Currency Oper-ations.D. To maintain an overall open position in all for-eign currencies not exceeding $25.0 billion. For thispurpose, the overall open position in all foreign cur-rencies is defined as the sum (disregarding signs) of netpositions in individual currencies, excluding changes



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in dollar value due to foreign exchange rate move-ments and interest accruals. The net position in a sin-gle foreign currency is defined as holdings of balancesin that currency, plus outstanding contracts for futurereceipt, minus outstanding contracts for future deliv-ery of that currency, i.e., as the sum of these elements

with due regard to sign.2. The Committee directs the Selected Bank to main-tain for the System Open Market Account (subject to therequirements of section 214.5 of Regulation N, Rela-tions with Foreign Banks and Bankers):

A. Reciprocal currency arrangements with the fol-lowing foreign banks:

Foreign bank Amount of arrangement(millions of dollars equivalent)

Bank of Canada 2,000

Bank of Mexico 3,000

B. Standing dollar liquidity swap arrangements withthe following foreign banks:

Bank of CanadaBank of EnglandBank of JapanEuropean Central BankSwiss National Bank

C. Standing foreign currency liquidity swap arrange-ments with the following foreign banks:

Bank of CanadaBank of EnglandBank of JapanEuropean Central BankSwiss National Bank

Dollar and foreign currency liquidity swap arrangementshave no pre-set size limits. Any new swap arrangementsshall be referred for review and approval to the Commit-tee. All swap arrangements are subject to annual reviewand approval by the Committee.

3. All transactions in foreign currencies undertakenunder paragraph 1.A above shall, unless otherwise ex-pressly authorized by the Committee, be at prevailingmarket rates. For the purpose of providing an invest-ment return on System holdings of foreign currencies orfor the purpose of adjusting interest rates paid or re-ceived in connection with swap drawings, transactions

with foreign central banks may be undertaken at non-market exchange rates.

4. It shall be the normal practice to arrange with for-eign central banks for the coordination of foreign cur-rency transactions. In making operating arrangements

with foreign central banks on System holdings of foreigncurrencies, the Selected Bank shall not commit itself tomaintain any specific balance, unless authorized by the

Committee. Any agreements or understandings con-cerning the administration of the accounts maintainedby the Selected Bank with the foreign banks designatedby the Board of Governors under section 214.5 of Reg-ulation N shall be referred for review and approval tothe Committee.5. Foreign currency holdings shall be invested to en-sure that adequate liquidity is maintained to meet antici-pated needs and so that each currency portfolio shallgenerally have an average duration of no more than 24months (calculated as Macaulay duration). Such invest-ments may include buying or selling outright obligations

of, or fully guaranteed as to principal and interest by, aforeign government or agency thereof; buying such se-curities under agreements for repurchase of such securi-ties; selling such securities under agreements for the re-sale of such securities; and holding various time andother deposit accounts at foreign institutions. In addi-tion, when appropriate in connection with arrangementsto provide investment facilities for foreign currencyholdings, U.S. government securities may be purchasedfrom foreign central banks under agreements for repur-chase of such securities within 30 calendar days.6. All operations undertaken pursuant to the preced-ing paragraphs shall be reported promptly to the ForeignCurrency Subcommittee (the “Subcommittee”) and theCommittee. The Subcommittee consists of the Chair-man and Vice Chairman of the Committee, the ViceChairman of the Board of Governors, and such othermember of the Board as the Chairman may designate (orin the absence of members of the Board serving on theSubcommittee, other Board members designated by theChairman as alternates, and in the absence of the ViceChairman of the Committee, the Vice Chairman’s alter-nate). Meetings of the Subcommittee shall be called atthe request of any member, or at the request of the man-ager, System Open Market Account (“manager”), for the

purposes of reviewing recent or contemplated opera-tions and of consulting with the manager on other mat-ters relating to the manager’s responsibilities. At the re-quest of any member of the Subcommittee, questionsarising from such reviews and consultations shall be re-ferred for determination to the Committee.7. The Chairman is authorized:

A. With the approval of the Committee, to enterinto any needed agreement or understanding with the



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Secretary of the Treasury about the division of respon-sibility for foreign currency operations between theSystem and the Treasury;B. To keep the Secretary of the Treasury fully ad-

vised concerning System foreign currency operations,and to consult with the Secretary on policy matters re-

lating to foreign currency operations;C. From time to time, to transmit appropriate re-ports and information to the National Advisory Coun-cil on International Monetary and Financial Policies.

8. All Federal Reserve Banks shall participate in theforeign currency operations for System Account in ac-cordance with paragraph 3G(1) of the Board of Gover-nors’ Statement of Procedure with Respect to ForeignRelationships of Federal Reserve Banks dated January 1,1944.9. The Committee authorizes the Selected Bank toundertake transactions of the type described in para-

graphs 1, 2, and 5, and foreign exchange and investmenttransactions that it may be otherwise authorized toundertake from time to time for the purpose of testingoperational readiness. The aggregate amount of suchtransactions shall not exceed $2.5 billion per calendaryear. These transactions shall be conducted with priornotice to the Committee.

FOREIGN CURRENCY DIRECTIVE(As reaffirmed effective January 27, 2015)

1. System operations in foreign currencies shall gen-erally be directed at countering disorderly market condi-tions, provided that market exchange rates for the U.S.dollar reflect actions and behavior consistent with IMF

Article IV, Section 1.2. To achieve this end the System shall:

A. Undertake spot and forward purchases and salesof foreign exchange.B. Maintain reciprocal currency arrangements withforeign central banks in accordance with the Authori-zation for Foreign Currency Operations.C. Maintain standing dollar liquidity swap arrange-ments with foreign banks in accordance with the Au-thorization for Foreign Currency Operations.

D. Maintain standing foreign currency liquidityswap arrangements with foreign banks in accordance

with the Authorization for Foreign Currency Opera-tions.E. Cooperate in other respects with central banks ofother countries and with international monetary insti-tutions.

3. Transactions may also be undertaken:

A. To adjust System balances in light of probablefuture needs for currencies.B. To provide means for meeting System and Treas-ury commitments in particular currencies, and to facil-itate operations of the Exchange Stabilization Fund.C. For such other purposes as may be expressly au-

thorized by the Committee.4. System foreign currency operations shall be con-ducted:

A. In close and continuous consultation and coop-eration with the United States Treasury;B. In cooperation, as appropriate, with foreignmonetary authorities; andC. In a manner consistent with the obligations ofthe United States in the International Monetary Fundregarding exchange arrangements under IMF ArticleIV.

PROCEDURAL INSTRUCTIONS WITH RESPECT TO FOREIGN CURRENCY OPERATIONS(As amended effective January 27, 2015)

In conducting operations pursuant to the authoriza-tion and direction of the Federal Open Market Commit-tee (the “Committee”) as set forth in the Authorizationfor Foreign Currency Operations and the Foreign Cur-rency Directive, the Federal Reserve Bank selected bythe Committee to execute open market transactions (the“Selected Bank”), through the manager, System OpenMarket Account (“manager”), shall be guided by the fol-lowing procedural understandings with respect to con-sultations and clearances with the Committee, the For-eign Currency Subcommittee (the “Subcommittee”),and the Chairman of the Committee, unless otherwisedirected by the Committee. All operations undertakenpursuant to such clearances shall be reported promptlyto the Committee.

1. For the reciprocal currency arrangements au-

thorized in paragraphs 2.A of the Authorization for

Foreign Currency Operations:

A. Drawings must be approved by the Subcom-

mittee (or by the Chairman, if the Chairman believes

that consultation with the Subcommittee is not fea-sible in the time available) if the swap drawing pro-

posed by a foreign bank does not exceed the larger

of (i) $200 million or (ii) 15 percent of the size of the

swap arrangement.

B. Drawings must be approved by the Committee(or by the Subcommittee, if the Subcommittee be-lieves that consultation with the full Committee is



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not feasible in the time available, or by the Chair-man, if the Chairman believes that consultation withthe Subcommittee is not feasible in the time availa-ble) if the swap drawing proposed by a foreign bankexceeds the larger of (i) $200 million or (ii) 15 per-cent of the size of the swap arrangement.

C. The manager shall also consult with the Sub-committee or the Chairman about proposed swapdrawings by the System.D. Any changes in the terms of existing swap ar-

rangements shall be referred for review and ap-

proval to the Chairman. The Chairman shall keep

the Committee informed of any changes in terms,

and the terms shall be consistent with principles dis-

cussed with and guidance provided by the Commit-

tee.

2. For the dollar and foreign currency liquidity swap

arrangements authorized in paragraphs 2.B and 2.C ofthe Authorization for Foreign Currency Operations:

A. Drawings must be approved by the Chairmanin consultation with the Subcommittee. The Chair-man or the Subcommittee will consult with theCommittee prior to the initial drawing on the dollaror foreign currency liquidity swap lines if possibleunder the circumstances then prevailing; authorityto approve subsequent drawings for either the dollaror foreign currency liquidity swap lines may be del-egated to the manager by the Chairman.B. Any changes in the terms of existing swap ar-

rangements shall be referred for review and ap-proval to the Chairman. The Chairman shall keepthe Committee informed of any changes in terms,and the terms shall be consistent with principles dis-cussed with and guidance provided by the Commit-tee.

3. Any operation must be approved by: A. The Subcommittee (or by the Chairman, if theChairman believes that consultation with the Sub-committee is not feasible in the time available) if it:

i. Would result in a change in the System’soverall open position in foreign currencies ex-ceeding $300 million on any day or $600 millionsince the most recent regular meeting of the Com-mittee.ii. Would result in a change on any day in theSystem’s net position in a single foreign currencyexceeding $150 million, or $300 million when theoperation is associated with repayment of swapdrawings.

iii. Might generate a substantial volume of trad-ing in a particular currency by the System, eventhough the change in the System’s net position inthat currency (as defined in paragraph 1.D of the

Authorization for Foreign Currency Operations)might be less than the limits specified in 3.A.ii.

B. The Committee (or by the Subcommittee, ifthe Subcommittee believes that consultation withthe full Committee is not feasible in the time availa-ble, or by the Chairman, if the Chairman believesthat consultation with the Subcommittee is not fea-sible in the time available) if it would result in achange in the System’s overall open position in for-eign currencies exceeding $1.5 billion since the mostrecent regular meeting of the Committee.

4. The Committee authorizes the Selected Bank toundertake transactions of the type described in para-graphs 1, 2, and 5 of the Authorization for Foreign

Currency Operations and foreign exchange and investment transactions that it may be otherwise au-thorized to undertake from time to time for the pur-pose of testing operational readiness. The aggregateamount of such transactions shall not exceed$2.5 billion per calendar year. These transactionsshall be conducted with prior notice to the Commit-tee.

By unanimous vote, the Committee amended its Pro-gram for Security of FOMC Information with changesto how Federal Reserve Banks classify and access Com-mittee information.

In its annual reconsideration of the Statement onLonger-Run Goals and Monetary Policy Strategy, partic-ipants generally agreed that only a minor update was re-quired at this meeting. Several participants observedthat this statement had helped to increase public under-standing of the Committee’s goals and policy frame-

work. It was noted, however, that the Committeeshould continue to discuss possible enhancements to thestatement over the coming year.

Following the discussion, the Committee voted to reaf-firm the statement with an updated reference to partici-pants’ estimates of the longer-run normal unemploy-ment rate. Mr. Tarullo abstained because he did not be-lieve the statement reflects sufficient consensus in theprinciples underlying the Committee’s policy actions soas to significantly advance public understanding of itsmonetary policy strategy.



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STATEMENT ON LONGER-RUN GOALS ANDMONETARY POLICY STRATEGY(As amended effective January 27, 2015)

“The Federal Open Market Committee (FOMC) isfirmly committed to fulfilling its statutory mandate from

the Congress of promoting maximum employment, sta-ble prices, and moderate long-term interest rates. TheCommittee seeks to explain its monetary policy deci-sions to the public as clearly as possible. Such clarityfacilitates well-informed decisionmaking by householdsand businesses, reduces economic and financial uncer-tainty, increases the effectiveness of monetary policy,and enhances transparency and accountability, which areessential in a democratic society.

Inflation, employment, and long-term interest ratesfluctuate over time in response to economic and finan-cial disturbances. Moreover, monetary policy actions

tend to influence economic activity and prices with a lag. Therefore, the Committee’s policy decisions reflect itslonger-run goals, its medium-term outlook, and its as-sessments of the balance of risks, including risks to thefinancial system that could impede the attainment of theCommittee’s goals.

The inflation rate over the longer run is primarily de-termined by monetary policy, and hence the Committeehas the ability to specify a longer-run goal for inflation.

The Committee reaffirms its judgment that inflation atthe rate of 2 percent, as measured by the annual changein the price index for personal consumption expendi-tures, is most consistent over the longer run with theFederal Reserve’s statutory mandate. Communicatingthis inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored, thereby fos-tering price stability and moderate long-term interestrates and enhancing the Committee’s ability to promotemaximum employment in the face of significant eco-nomic disturbances. The maximum level of employmentis largely determined by nonmonetary factors that affectthe structure and dynamics of the labor market. Thesefactors may change over time and may not be directlymeasurable. Consequently, it would not be appropriateto specify a fixed goal for employment; rather, the Com-

mittee’s policy decisions must be informed by assess-ments of the maximum level of employment, recogniz-ing that such assessments are necessarily uncertain andsubject to revision. The Committee considers a widerange of indicators in making these assessments. Infor-mation about Committee participants’ estimates of thelonger-run normal rates of output growth and unem-ployment is published four times per year in the

FOMC’s Summary of Economic Projections. For ex-ample, in the most recent projections, FOMC partici-pants’ estimates of the longer-run normal rate of unem-ployment had a central tendency of 5.2 percent to 5.5percent.

In setting monetary policy, the Committee seeks to

mitigate deviations of inflation from its longer-run goaland deviations of employment from the Committee’s as-sessments of its maximum level. These objectives aregenerally complementary. However, under circum-stances in which the Committee judges that the objec-tives are not complementary, it follows a balanced ap-proach in promoting them, taking into account the mag-nitude of the deviations and the potentially differenttime horizons over which employment and inflation areprojected to return to levels judged consistent with itsmandate.

The Committee intends to reaffirm these principles

and to make adjustments as appropriate at its annualorganizational meeting each January.”

Developments in Financial Markets and the Fed-eral Reserve’s Balance Sheet In a joint session of the Committee and the Board ofGovernors of the Federal Reserve System, the managerof the System Open Market Account (SOMA) reportedon developments in domestic and foreign financial mar-kets. The deputy manager followed with a review of Sys-tem open market operations conducted during the pe-riod since the Committee met on December 16 – 17,2014. The deputy manager also discussed the outcomesof recent tests of term and overnight reverse repurchaseagreements (term RRPs and ON RRPs, respectively).

These tests suggested that the combination of term RRPand ON RRP operations had been effective in support-ing money market rates leading into and over year-end.

The presentation also outlined some staff recommenda-tions for further testing of Term Deposit Facility opera-tions.

By unanimous vote, the Committee ratified the OpenMarket Desk’s domestic transactions over the intermeet-ing period. There were no intervention operations inforeign currencies for the System’s account over the in-termeeting period.

Liftoff Tools and Possible Liftoff Options A staff briefing provided some background on possibleoptions for the use of supplementary tools, in additionto interest on excess reserves (IOER), that the Commit-tee could choose to use during the early stages of policynormalization. The purpose of these options was to



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help ensure sufficient control over the federal funds rateand other short-term interest rates during this period

while mitigating potential risks associated with particularpolicy tools. The presentation discussed the possibilityof establishing, on a temporary basis, an aggregate capfor ON RRP operations that was substantially above the

cap the Committee had chosen for the purposes of test-ing such operations. In addition, the presentation dis-cussed the possible use of term RRP operations, eitherbefore or after the commencement of policy firming, asa way to reinforce control of short-term interest ratesand to manage the size of the ON RRP program. Otherpossible options presented at the briefing included ad-justing the values of the IOER and ON RRP rates asso-ciated with a given target range for the federal funds rateand the use of term deposits.

In their discussion of these issues, participants generallyagreed that it was very important for the commencement

of policy firming to proceed successfully. Consequently,most were prepared to take the steps necessary to ensurethat the federal funds rate traded within the target rangeestablished by the Federal Open Market Committee(FOMC). However, a few participants noted that day-to-day volatility in the federal funds rate, potentially in-cluding temporary movements outside the target range,

would not be surprising, and that historical experiencesuggested that such temporary movements had few, ifany, implications for overall financial conditions or theaggregate economy.

With regard to the appropriate setting of the cap for ON

RRP operations at the beginning of normalization, thestaff reported that testing to date suggested that ONRRP operations have generally been successful in estab-lishing a floor on the level of the federal funds effectiverate and other short-term interest rates, as long as marketparticipants judge that the aggregate cap is quite unlikelyto bind. Against this backdrop, most meeting partici-pants indicated that a sizable ON RRP cap would be ap-propriate to support policy implementation at the timeof liftoff, and a couple of participants suggested that theaggregate cap might be suspended for a time. A coupleof participants expressed continued concerns about the

potential risks to financial stability associated with a largeON RRP facility and the possible effect of such a facilityon patterns of financial intermediation. Moreover, someparticipants were concerned that a decision to allow atemporary increase in the maximum size of the ON RRPfacility could be viewed by market participants as a signalthat a large ON RRP facility would be maintained for alonger period than those participants deemed appropri-

ate. While acknowledging these concerns, many partici-pants believed that a temporarily elevated cap on the ONRRP operations at a time when the Committee saw con-ditions as appropriate to begin normalization wouldlikely pose limited risks; another participant judged thatan ON RRP program was, in any case, unlikely to mate-

rially increase the risks to financial stability. Some par-ticipants noted that a relatively high cap could be estab-lished and then reduced fairly soon after the initial policyfirming if it was determined that it was not needed, andthat such a reduction could help underscore the Com-mittee’s intent to use such a facility only to the extentnecessary. A number of participants emphasized thatthe Committee should develop plans to ensure that sucha facility is temporary and that it can be phased out onceit is no longer needed to help control the federal fundsrate.

With regard to the possible use of term RRP operations

as an additional supplementary tool, participants notedthat recent testing showed that term RRP operationsahead of the year-end were associated with a significantdecline in the level of take-up at ON RRP operations.

The staff presentation suggested that risks to financialstability associated with term RRPs could be somewhatlower than those associated with ON RRP operationsbecause term RRP operations would be conducted onlyon selected dates, the Federal Reserve would set thequantity auctioned, and the rate on term RRPs would bedetermined by the auction process. However, a few par-ticipants expressed the view that term RRPs were un-

likely to lower risks to financial stability significantly. Inaddition, some participants noted that the use of termRRP operations could complicate communications. Afew others observed that the Committee should not de-sign its operations to reduce year-end or quarter-end vol-atility induced by financial firms’ reporting practices.Nonetheless, many participants agreed that the use ofterm RRP operations during the period of policy tight-ening could be useful in some situations.

With regard to the potential use of other tools, severalparticipants noted that the IOER and ON RRP ratesshould be set at the top and bottom, respectively, of the

target range for the federal funds rate. To deviate fromsuch a structure would complicate communicationsabout the policy framework and therefore should beavoided if possible. However, some participants judgedthat adjustments to the relationship of the IOER rateand the ON RRP rate to the target range for the federalfunds rate might, in some circumstances, be helpful forimproving control of the federal funds rate. A few par-



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ticipants noted that use of term deposits during the tight-ening phase could also be appropriate in some circum-stances.

The staff presentation also discussed a technical issue re-lated to the calculation of the payment of interest on re-serves. Under current arrangements, an increase in theIOER rate that is implemented in the middle of a reservemaintenance period is not fully reflected in interest pay-ments to depository institutions until the beginning of anew maintenance period. Participants generally sug-gested that it would be useful for the staff to investigatechanges in the method used to determine the interestpayments on reserves that could tighten the link betweenthe IOER rate in place each day and the level of reservebalances held by depository institutions each day.

At the conclusion of their discussion, participants gen-erally agreed that it would be useful to discuss further at

coming meetings specific calibrations of policy tools thatcould be used during the early stages of policy normali-zation. In addition, many noted that it would be usefulto communicate additional information to the public onthese issues to provide greater clarity about the Commit-tee’s approach to policy implementation at that time.

A staff briefing outlined two proposals that the Commit-tee could consider for further testing of term RRP oper-ations. In the first of these proposals, the Desk wouldconduct a series of preannounced term RRP operationsthat would span the end of the first quarter. In the sec-ond proposal, the Desk would conduct small term RRP

operations in February and early March, in addition tothe quarter-end option presented in the first pro-posal. In their discussion of term RRP testing, partici-pants noted that the testing could provide further infor-mation about the substitutability between the ON andterm RRP operations, including outside year-end andquarter-end periods. A number of participants empha-sized that, even if the Committee conducted additionaltests, it had not yet decided whether to use term RRPoperations as part of policy normalization.

Following the discussion of the testing of term RRPoperations, the Committee approved the following

resolution on term RRP testing over the end of the firstquarter of 2015:

“During the period of March 19, 2015, toMarch 30, 2015, the Federal Open MarketCommittee (FOMC) authorizes the FederalReserve Bank of New York to conduct a se-ries of term reverse repurchase operations in-

volving U.S. government securities. Such op-erations shall: (i) mature no later than April 9,2015; (ii) be subject to an overall size limit of$200 billion outstanding at any one time;(iii) be subject to a maximum bid rate of fivebasis points above the ON RRP offering rate

in effect on the day of the operation; (iv) beawarded to all submitters: (A) at the highestsubmitted rate if the sum of the bids receivedis less than or equal to the preannounced sizeof the operation, or (B) at the stop-out rate,determined by evaluating bids in ascendingorder by submitted rate up to the point at

which the total quantity of bids equals the pre-announced size of the operation, with all bidsbelow this rate awarded in full at the stop-outrate and all bids at the stop-out rate awardedon a pro rata basis, if the sum of the counter-

party offers received is greater than the prean-nounced size of the operation. Such opera-tions may be for forward settlement. The Sys-tem Open Market Account manager will in-form the FOMC in advance of the terms ofthe planned operations. The Chair must ap-prove the terms of, timing of the announce-ment of, and timing of the operations. Theseoperations shall be conducted in addition tothe authorized overnight reverse repurchaseagreements, which remain subject to a sepa-rate overall size limit of $300 billion per day.”

The Committee also approved the following resolutionon testing term RRP operations during February andMarch:

“During the period of February 12, 2015, toMarch 10, 2015, the Federal Open MarketCommittee (FOMC) authorizes the FederalReserve Bank of New York to conduct a se-ries of term reverse repurchase operations in-

volving U.S. government securities. Such op-erations shall: (i) mature no later thanMarch 12, 2015; (ii) be subject to an overall

size limit of $50 billion outstanding at any onetime; (iii) be subject to a maximum bid rate offive basis points above the ON RRP offeringrate in effect on the day of the operation;(iv) be awarded to all submitters: (A) at thehighest submitted rate if the sum of the bidsreceived is less than or equal to the prean-nounced size of the operation, or (B) at thestop-out rate, determined by evaluating bids



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in ascending order by submitted rate up to thepoint at which the total quantity of bids equalsthe preannounced size of the operation, withall bids below this rate awarded in full at thestop-out rate and all bids at the stop-out rateawarded on a pro rata basis, if the sum of the

counterparty offers received is greater thanthe preannounced size of the operation. Suchoperations may be for forward settlement.

The System Open Market Account manager will inform the FOMC in advance of theterms of the planned operations. The Chairmust approve the terms of, timing of the an-nouncement of, and timing of the operations.

These operations shall be conducted in addi-tion to the authorized overnight reverse re-purchase agreements, which remain subject toa separate overall size limit of $300 billion per

day.”

Mr. Lacker dissented in the votes on both resolutionsbecause he felt that the testing to date had already pro-

vided sufficient information about this tool, and that au-thorizing further testing could encourage the incorrectimpression that the Committee had already decided thatit would be engaging in term RRP operations during theperiod of policy normalization.

The Board meeting concluded at the end of the discus-sion of liftoff tools and possible liftoff options.

Staff Review of the Economic Situation

The information reviewed for the January 27 – 28 meet-ing indicated that economic activity expanded at a solidpace over the second half of 2014, and that labor marketconditions had again improved in recent months. Con-sumer price inflation moved further below the FOMC’slonger-run objective of 2 percent, held down by contin-uing large decreases in energy prices. While longer-termmarket-based measures of inflation compensation de-clined substantially in recent months, survey measures oflonger-run inflation expectations remained stable.

Total nonfarm payroll employment expanded in Decem-ber and the gains for October and November were re-

vised up, putting the increase for the fourth quarterabove that for the third quarter. The unemployment ratedeclined to 5.6 percent in December, the labor force par-ticipation rate decreased, and the employment-to-popu-lation rate was unchanged. The share of workers em-ployed part time for economic reasons declined. The

rate of private-sector job openings moved up in Novem-ber, while the rates of hiring and of quits edged downbut remained well above their year-earlier readings.

Industrial production rose at a robust pace in the fourthquarter, with a strong increase in manufacturing outputand a modest gain in mining output. Automakers’ as-sembly schedules for the first quarter and broader indi-cators of manufacturing production, such as the readingson new orders from national and regional manufacturingsurveys, generally pointed to moderate gains in factoryoutput early this year. In contrast, some indicators ofmining activity, such as counts of drilling rigs in opera-tion, weakened, presumably reflecting the recent sharpdeclines in energy prices.

Real personal consumption expenditures (PCE) ap-peared to have risen at a robust pace over the secondhalf of 2014. Data on spending in the third quarter were

revised up, and the components of nominal retail salesused to construct estimates of PCE rose briskly in thefourth quarter. Light motor vehicle sales in the fourthquarter maintained their robust third-quarter pace. Im-portant factors influencing household spending re-mained supportive of further solid gains in real PCEearly this year. Real disposable personal income in-creased in November; since then, continued declines inenergy prices likely raised the purchasing power ofhouseholds’ incomes. Households’ net worth likely in-creased as home values and equity prices advanced, andconsumer sentiment, as measured by the Thomson Reu-ters/University of Michigan Surveys of Consumers,

moved up in early January to its highest level in morethan a decade.

The pace of housing market activity improved somewhat but remained slow. Starts of new single-familyhomes increased in December to their highest level since2008, and permits for new construction also movedhigher. Starts of multifamily units were unchanged inDecember and within the range they have been in forthe past year. Sales of new homes increased, on net, inNovember and December, while sales of existing homesdeclined, on average, over those two months.

Real private expenditures for business equipment and in-tellectual property appeared to decelerate in the fourthquarter. Nominal orders and shipments of nondefensecapital goods, excluding aircraft, declined in Novemberand December. Moreover, the level of new orders forthese capital goods was only a little above that for ship-ments, which pointed to modest near-term gains in busi-ness equipment spending despite relatively positive read-ings on business conditions from national and regional



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surveys. Firms’ nominal spending for nonresidentialstructures edged down in November but remainedhigher than in the third quarter.

Real federal government purchases appeared likely tohave decreased sharply in the fourth quarter, reversingmuch of the surprisingly strong increase in the thirdquarter. Real state and local government purchases wererising modestly in the fourth quarter, as nominal con-struction expenditures for October and November werelittle changed, on net, and the payrolls of these govern-ments increased somewhat.

The U.S. international trade deficit narrowed substan-tially in November, with imports declining more thanexports. The decrease in the value of imports stemmedin large part from a reduction in the value of petroleumimports, reflecting both lower prices and volumes.However, many other categories of goods imports were

also weaker. Export declines were concentrated in cap-ital goods, particularly aircraft. Despite the narrowing ofthe nominal trade deficit in November, real net exportsappeared to be on track to decline in the fourth quarterafter adding considerably to real gross domestic product(GDP) growth in the third quarter.

Total U.S. consumer prices, as measured by the PCEprice index, increased 1¼ percent over the 12 monthsending in November, while core prices, as measured byPCE prices excluding food and energy, rose about1½ percent; consumer energy prices declined, and con-sumer food prices increased faster than overall prices.

Over the 12 months ending in December, total inflationas measured by the consumer price index (CPI) was¾ percent, while core CPI inflation was 1½ percent.Over the 3 months ending in December, the total CPIdecreased at an annual rate of 2½ percent, reflecting re-cent declines in consumer energy prices, and the coreCPI increased at a 1 percent pace. Measures of expectedlong-run inflation from a variety of surveys, includingthe Michigan survey and the Desk’s Survey of PrimaryDealers, remained stable. In contrast, market-basedmeasures of inflation compensation 5 to 10 years aheaddeclined further. Over the 12 months ending in Decem-ber, nominal average hourly earnings for all employeesincreased only slightly faster than core consumer priceinflation.

Foreign real GDP growth appeared to increase slightlyin the fourth quarter. In the euro area, retail sales, carregistrations, and industrial production through Novem-ber were above their third-quarter averages, and in Ja-pan, strengthening consumption and exports suggesteda recovery of output after two quarters of contraction.

However, growth slowed in China, partly reflecting fur-ther moderation in residential investment, and decliningconstruction activity also contributed to slowing GDPgrowth in Korea and the United Kingdom. Inflation inthe advanced foreign economies declined sharply at theend of last year, amid rapidly falling energy prices. By

contrast, inflation in the emerging market economies fellonly modestly, as several of these economies havegovernment-administered energy prices and some havebeen experiencing upward price pressures from currencydepreciations.

Staff Review of the Financial Situation Over the intermeeting period, amid trading that was vol-atile at times, longer-term sovereign yields in the UnitedStates and other advanced economies declined. Thesemoves were attributed in part to a deterioration in mar-ket sentiment associated with downward pressure on in-flation, increased concern about the global economic

outlook, and announced and anticipated foreign centralbank policies. Moreover, continued sharp declines in oilprices and U.S. economic data releases that were viewedby investors as a bit weaker than anticipated, on balance,reportedly weighed on sentiment.

Federal Reserve communications over the intermeetingperiod were apparently seen as about in line with expec-tations on balance. However, reflecting in part the dete-rioration in market sentiment, the expected path for thefederal funds rate implied by market quotes shifteddown. Results from the Desk’s January Survey of Pri-mary Dealers indicated that dealers continued to put the

highest probability on scenarios in which the FOMCchooses to commence policy firming around the middleof the year, although the average probability assigned toa commencement after June increased somewhat.

Yields on nominal Treasury securities continued tomove lower over the intermeeting period, with marketexpectations of the policy rate path being revised down-

ward, and with term premiums declining, in part reflect-ing actual and expected policy easing abroad. On bal-ance, the Treasury yield curve flattened over the inter-meeting period, while interest rate volatility increasedsomewhat. Although the measure of inflation compen-sation over the next 5 years based on Treasury Inflation-Protected Securities (TIPS) increased, inflation compen-sation 5 to 10 years ahead declined further to its lowestlevel in a decade. Yields on 5- and 10-year TIPS movedlower over the period.

Over the intermeeting period, U.S. equity markets were volatile. Option-implied volatility for the S&P 500 indexdeclined, on balance, but remained in the upper half of



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the range seen over the past year. Broad U.S. equityprice indexes moved higher, while stock prices for largedomestic banking organizations moved lower on net.Corporate bond spreads were also volatile over the in-termeeting period but were little changed, on net, for in-

vestment-grade issuers and ended the period lower for

speculative-grade issuers, particularly energy companies.

Credit flows to nonfinancial firms generally remainedstrong through the last quarter of 2014, though theyslowed somewhat for riskier firms. Gross corporatebond issuance continued to be solid, although specula-tive-grade bond issuance declined late in the year and re-mained subdued into January. Commercial and indus-trial loans on banks’ books continued to expand at a ro-bust rate in the fourth quarter of 2014, consistent withthe stronger loan demand from large and middle-marketfirms reported in the January Senior Loan Officer Opin-ion Survey on Bank Lending Practices (SLOOS). Issu-

ance of syndicated leveraged loans in the fourth quarter was at its slowest pace in two years, as spreads on newlyissued loans increased and refinancing activity declinedsignificantly. Issuance of collateralized loan obligationsdeclined but remained elevated; 2014 was the strongestyear on record for the issuance of such securities.

Financing conditions in the commercial real estate(CRE) sector stayed accommodative. In the JanuarySLOOS, banks reported that standards continued toease, on net, for CRE lending and noted stronger de-mand for all CRE loan types. Issuance of commercialmortgage-backed securities continued at a solid pace in

November and December.

Residential mortgage credit conditions, while remainingtight, showed some further signs of gradual easing. Ac-cording to the January SLOOS, lending standards easedfor a number of categories of residential mortgage loansin the fourth quarter. The price of mortgage credit forqualified borrowers declined again over the intermeetingperiod, with interest rates on 30-year fixed-rate mort-gages reaching levels close to their all-time lows. Re-finance applications rose near the end of the intermeet-ing period.

Conditions in consumer credit markets stayed largely ac-commodative over the intermeeting period. Auto andstudent loan balances continued to post significant gainsthrough November, while the expansion of credit cardloans on banks’ books remained moderate during thefourth quarter as a whole. Respondents to the JanuarySLOOS indicated that demand for auto and credit cardloans had strengthened further in the fourth quarter.Consumer credit quality has remained strong on balance.

The credit performance of auto loans, however, report-edly deteriorated a bit further for some lenders, and sev-eral banks indicated in the January SLOOS that they ex-pect the performance of subprime auto loans to worsenthis year.

The U.S. dollar strengthened against the currencies ofmost other advanced economies amid investor concernsabout growth in those economies as well as increasedmonetary accommodation in some of them; the dollar

was largely unchanged, on average, against the currenciesof emerging market economies. Sovereign yields abroadmoved lower, with euro-area yields reflecting the ex-pected and actual easing of the stance of monetary policyby the European Central Bank (ECB) and U.K. yieldsresponding to a shift in expectations toward a later startof Bank of England policy firming. Global equity mar-kets were broadly higher, rebounding from declines inmid-December.

Several central banks announced monetary policy ac-tions during the period. The ECB announced that it

would expand its asset purchase program to include thepurchase of sovereign bonds; the euro depreciated sig-nificantly against the dollar both in anticipation of andfollowing this announcement. The Swiss National Bank(SNB) ended its policy of defending the exchange ratefloor of 1.20 Swiss francs per euro, resulting in a signifi-cant appreciation of the franc. At the same time, theSNB reduced policy rates, moving the rate it pays on de-posits and its target range for Swiss franc LIBOR, orLondon interbank offered rate, further into negative ter-

ritory. The Bank of Canada, National Bank of Denmark,Reserve Bank of India, and Central Bank of Turkey alsocut policy rates in January to support their economiesand, in some cases, to foster higher inflation, while theCentral Bank of Brazil raised rates in response to con-cerns about elevated inflation.

The staff provided its latest report on potential risks tofinancial stability. Relatively high levels of capital andliquidity in the banking sector, moderate levels of ma-turity transformation in the financial sector, and a rela-tively subdued pace of borrowing by the nonfinancialsector continued to be seen as important factors limitingthe vulnerability of the financial system to adverseshocks. However, the staff report noted valuation pres-sures in some asset markets. Such pressures were mostnotable in corporate debt markets, despite some easingin recent months. In addition, valuation pressures ap-pear to be building in the CRE sector, as indicated byrising prices and the easing in lending standards on CRE



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loans. Finally, the increased role of bond and loan mu-tual funds, in conjunction with other factors, may haveincreased the risk that liquidity pressures could emergein related markets if investor appetite for such assets

wanes. The effects on the largest banking firms of thesharp decline in oil prices and developments in foreign

exchange markets appeared limited, although other in-stitutions with more concentrated exposures could facestrains if oil prices remain at current levels for a pro-longed period.

Staff Economic Outlook The staff estimated that real GDP growth in the secondhalf of 2014 was faster than in the projection preparedfor the December meeting, primarily reflecting stronger-than-expected consumer spending. Even so, real GDP

was still estimated to have risen more slowly in thefourth quarter than in the third quarter, as changes inboth net exports and federal government purchases ap-

peared likely to have subtracted from real GDP growthin the fourth quarter following large positive contribu-tions in the previous quarter.

The staff’s outlook for economic activity over the firsthalf of 2015 was revised up since December, in part re-flecting an anticipated boost to consumer spending fromdeclines in energy prices. However, the forecast for realGDP growth over the medium term was little revised, asthe greater momentum implied by recent spending gainsand the support to household spending from lower en-ergy prices was about offset by the restraint implied bythe recent appreciation of the dollar. The staff contin-

ued to forecast that real GDP would expand at a mod-estly faster pace in 2015 and 2016 than it did in 2014 andthat it would rise more quickly than potential output,supported by increases in consumer and business confi-dence and a pickup in foreign economic growth, as wellas by a U.S. monetary policy stance that was assumed toremain highly accommodative for some time. In 2017,real GDP growth was projected to begin slowing to-

ward, but to remain slightly above, the rate of growth ofpotential output. The expansion in economic activityover the medium term was anticipated to lead to a slowreduction in resource slack, and the unemployment rate

was expected to decline gradually and to move slightlybelow the staff’s estimate of its longer-run natural ratefor a time.

The staff’s forecast for inflation in the near term was revised down, as further sharp declines in crude oil pricessince the December FOMC meeting pointed toward asomewhat larger transitory decrease in the total PCEprice index early this year than was previously projected.

In addition, the incoming data on consumer prices apartfrom those for energy showed a somewhat smaller risethan anticipated. The staff’s forecast for inflation in2016 and 2017 was essentially unchanged, with inflationprojected to remain below the Committee’s 2 percentobjective. Nevertheless, inflation was projected to reach

2 percent over time, with inflation expectations in thelonger run assumed to be consistent with the Commit-tee’s objective and slack in labor and product marketsanticipated to fade.

The staff viewed the uncertainty around its projectionsfor real GDP growth, the unemployment rate, and infla-tion as similar to the average over the past 20 years. Therisks to the forecast for real GDP growth were viewedas tilted a little to the downside, reflecting the staff’s as-sessment that neither monetary policy nor fiscal policy

was well positioned to help the economy withstand adverse shocks. At the same time, the staff viewed the risks

around its outlook for the unemployment rate as roughlybalanced. The downside risks to the forecast for infla-tion were seen as having increased somewhat, partly re-flecting the recent soft monthly readings on core infla-tion.

Participants’ Views on Current Conditions and theEconomic OutlookIn their discussion of the economic situation and theoutlook, meeting participants regarded the informationreceived over the intermeeting period as indicating thateconomic activity had been expanding at a solid pace.

Although growth likely slowed from the rapid rate re-

corded for the third quarter of 2014, a variety of indica-tors suggested that real GDP continued to grow fasterthan potential GDP late in the year and during January.Labor market conditions improved further, with strongjob gains and a lower unemployment rate; participantsjudged that the underutilization of labor resources wascontinuing to diminish. Participants expected that, overthe medium term, real economic activity would increaseat a moderate pace sufficient to lead to further improve-ments in labor market conditions toward levels con-sistent with the Committee’s objective of maximum em-ployment. Inflation had declined further below the

Committee’s longer-run objective, largely reflecting de-clines in energy prices, and was anticipated to declinefurther in the near term. Market-based measures of in-flation compensation 5 to 10 years ahead had registereda further decline, while survey-based measures of longer-term inflation expectations remained stable. Participantsgenerally anticipated that inflation would rise graduallytoward the Committee’s 2 percent objective as the labormarket improved further and the transitory effects of



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lower energy prices and other factors dissipated. Therisks to the outlook for economic activity and the labormarket were seen as nearly balanced. Participants gen-erally regarded the net effect of the recent decline in en-ergy prices as likely to be positive for economic activityand employment. Many participants continued to judge

that a deterioration in the foreign economic situationcould pose downside risks to the outlook for U.S. eco-nomic growth. Several saw those risks as having dimin-ished over the intermeeting period, with lower oil pricesand actions of foreign central banks both being support-ive of growth abroad, but others pointed to heightenedgeopolitical and other risks.

With respect to the U.S. economy, participants notedthat household spending was rising moderately. Recentdeclines in oil prices, which had boosted household pur-chasing power, were among the factors likely to under-pin consumer spending in coming months; other factors

cited as supporting household spending included low in-terest rates, easing credit standards, and continued gainsin employment and income. However, it was noted thatthe recovery in the housing sector remained slow andthat tepid nominal wage growth, if continued, could be-come a significant restraining factor for householdspending.

Industry contacts pointed to generally solid businessconditions, with businesses in many parts of the countrycontinuing to express optimism about prospects for fur-ther improvement in 2015. Although manufacturing ac-tivity appeared to have slowed somewhat over the inter-

meeting period in some regions, business contacts sug-gested that this slowing was likely to prove temporary,and information from some parts of the country sug-gested that capital investment was poised to pick up.Several participants noted that there were signs of layoffsin the oil and gas industries, and that persistently low en-ergy prices might prompt a larger retrenchment of em-ployment in these industries. In addition, it was ob-served that if capital investment in energy-producing in-dustries slowed significantly, it could damp the overallexpansion of economic activity for a period, especially ifthe slowing took place after most of the positive effects

of lower energy prices on growth in household spendinghad occurred. A few participants observed that govern-ment spending was unlikely to be a major contributor tothe expansion of demand in the period ahead, with realfederal purchases projected to be fairly flat over the me-dium term.

In their discussion of the foreign economic outlook, par-ticipants noted that a number of developments over the

intermeeting period had likely reduced the risks to U.S.growth. Accommodative policy actions announced by anumber of foreign central banks had likely strengthenedthe outlook abroad. The decline in energy prices wasalso seen as potentially exerting a stronger-than-antici-pated positive effect on growth in the domestic econ-

omy and abroad. However, the increase in the foreignexchange value of the dollar was expected to be a persis-tent source of restraint on U.S. net exports, and a fewparticipants pointed to the risk that the dollar could ap-preciate further. In addition, the slowdown of growth inChina was noted as a factor restraining economic expan-sion in a number of countries, and several continuingrisks to the international economic outlook were cited,including global disinflationary pressure, tensions in theMiddle East and Ukraine, and financial uncertainty inGreece. Overall, the risks to the outlook for U.S. eco-nomic activity and the labor market were seen as nearly

balanced.Participants noted that inflation had moved further be-low the Committee’s longer-run objective, largely re-flecting declines in energy prices and other transitoryfactors. A number of participants observed that, withanchored inflation expectations, the fall in energy pricesshould not leave an enduring imprint on aggregate infla-tion. It was pointed out that the recent intensificationof downward pressure on inflation reflected price move-ments that were concentrated in a narrow range of itemsin households’ consumption basket, a pattern borne outby trimmed mean measures of inflation. Several partici-

pants remarked that inflation measures that excluded en-ergy items had also moved down in recent months, butthese declines partly reflected transitory factors, includ-ing downward pressure on import prices and the pass-through of lower energy costs to the prices of non-energy items. Nonetheless, several participants saw thecontinuing weakness of core inflation measures as a con-cern. In addition, a few participants suggested that the

weakness of nominal wage growth indicated that coreand headline inflation could take longer to return to2 percent than the Committee anticipated. In contrast,a couple of participants suggested that nominal wagegrowth provides little information about the future be-havior of price inflation. Participants also discussed thepossibility that, because of the infrequent occurrence ofreductions in nominal wages, wages may not have fullyadjusted downward in the period of high unemploy-ment, and therefore pent-up wage deflation might have

weighed on wage gains for a time during the expansion.If this was the case, nominal wage growth could be ex-pected to pick up in coming periods and to resume a



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more normal relationship with labor market slack. Mostparticipants expected that continuing reductions in re-source slack would be helpful in returning inflation overthe medium term to the Committee’s 2 percent longer-run objective, but a few participants voiced concern thatnominal wage growth might rise rapidly and inflation

might exceed 2 percent for a time.

Participants discussed the sizable decline in market-based measures of inflation compensation that had beenobserved over the past year and continued over the in-termeeting period. A number of them judged that thedecline mostly reflected a reduction in the risk premiumsembedded in nominal interest rates rather than a declinein inflation expectations; this interpretation was sup-ported by results of some analytical models used to de-compose movements in market-based measures of infla-tion compensation and also by the continuing stabilityof survey-based measures of inflation expectations.

However, other participants put some weight on thepossibility that the decline in inflation compensation re-flected a reduction in expected inflation. These partici-pants further argued that the stability of survey-basedmeasures of inflation expectations should not be takenas providing much reassurance; in particular, it wasnoted that in Japan in the late 1990s and early 2000s,survey-based measures of longer-term inflation expecta-tions had not recorded major declines even as a disinfla-tionary process had become entrenched. In addition, afew participants argued that even if the shift down in in-flation compensation reflected lower inflation risk pre-

miums rather than reductions in expected inflation, pol-icymakers might still want to take that decline into ac-count because it could reflect increased concern on thepart of investors about adverse outcomes in which lowinflation was accompanied by weak economic activity.Participants generally agreed that the behavior ofmarket-based measures of inflation compensationneeded to be monitored closely.

Participants also discussed other aspects of the substan-tial decline in nominal longer-term interest rates and itsimplications. The fall had occurred despite the strength-ening U.S. economic outlook and market expectations

that policy normalization could begin later this year.Some participants suggested that shifts of funds fromabroad into U.S. Treasury securities may have put down-

ward pressure on term premiums; the shifts, in turn, mayhave reflected in part a reaction to declines in foreignsovereign yields in response to actual and anticipatedmonetary policy actions abroad. A couple of partici-pants noted that the reduction in longer-term real inter-est rates tended to make U.S. financial conditions more

accommodative, potentially calling for a somewhathigher path for the federal funds rate going forward.Others observed that insofar as the shifts reflected con-cerns about growth prospects abroad or were accompa-nied by a stronger dollar, the implications for U.S. mon-etary policy were less clear. It was further noted that

investment flows from abroad could also be contrib-uting to the decline in TIPS-based measures of inflationcompensation, as such flows tend to be concentrated innominal Treasury securities rather than inflation-protected securities.

Participants saw broad-based improvement in labormarket conditions over the intermeeting period, includ-ing strong gains in payroll employment and a further re-duction in the unemployment rate. Some participantsbelieved that considerable labor market slack remained,especially when indicators other than the unemploymentrate were taken into account, including the unusually

large fraction of the labor force working part time foreconomic reasons. A few observed that the combina-tion of recent labor market improvements and contin-ued softness in inflation had led them to lower their es-timates of the longer-run normal rate of unemployment.However, a few others saw only a limited degree of re-maining labor underutilization or anticipated that un-derutilization would be eliminated relatively soon.

Participants’ Discussion of Policy PlanningParticipants discussed considerations related to thechoice of the appropriate timing of the initial firming inmonetary policy and pace of subsequent rate increases.

Ahead of this discussion, the staff gave a presentationthat outlined some of the key issues likely to be involved,including the extent to which similar economic out-comes could be generated by different combinations ofthe date of the initial firming of policy and the pace ofrate increases thereafter, how these combinations couldaffect the risks to economic outcomes, a review of pastepisodes in the United States and abroad in which mon-etary policy transitioned to a tightening phase after alengthy period of low policy rates, and issues related tocommunications regarding the likely timing and pace ofnormalization.

Participants discussed the tradeoffs between the risksthat would be associated with departing from the effec-tive lower bound later and those that would be associ-ated with departing earlier. Several participants notedthat a late departure could result in the stance of mone-tary policy becoming excessively accommodative, lead-ing to undesirably high inflation. It was also suggestedthat maintaining the federal funds rate at its effective



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lower bound for an extended period or raising it rapidly,if that proved necessary, could adversely affect financialstability. Some participants were concerned that a deci-sion to delay the commencement of tightening could beperceived as indicating that an overly accommodativepolicy is likely to prevail during the firming phase. In

connection with the risks associated with an early startto policy normalization, many participants observed thata premature increase in rates might damp the apparentsolid recovery in real activity and labor market condi-tions, undermining progress toward the Committee’sobjectives of maximum employment and 2 percent in-flation. In addition, an earlier tightening would increasethe likelihood that the Committee might be forced byadverse economic outcomes to return the federal fundsrate to its effective lower bound. Some participantsnoted the communications challenges associated withthe prospect of commencing policy tightening at a time

when inflation could be running well below 2 percent,and a few expressed concern that in some circumstancesthe public could come to question the credibility of theCommittee’s 2 percent goal. Indeed, one participant rec-ommended that, in light of the outlook for inflation, theCommittee consider ways to use its tools to providemore, not less, accommodation.

Many participants indicated that their assessment of thebalance of risks associated with the timing of the begin-ning of policy normalization had inclined them towardkeeping the federal funds rate at its effective lowerbound for a longer time. Some observed that, even with

these risks taken into consideration, the federal fundsrate may have already been kept at its lower bound for asufficient length of time, and that it might be appropriateto begin policy firming in the near term. Regardless ofthe particular strategy undertaken, it was noted that, pro-

vided that the data-dependent nature of the path for thefederal funds rate after its initial increase could be com-municated to financial markets and the general public inan effective manner, the precise date at which firmingcommenced would have a less important bearing on eco-nomic outcomes.

Participants discussed the economic conditions that they

anticipate will prevail at the time they expect it will beappropriate to begin normalizing policy. There was wideagreement that it would be difficult to specify in advancean exhaustive list of economic indicators and the valuesthat these indicators would need to take. Nonetheless, anumber of participants suggested that they would needto see further improvement in labor market conditionsand data pointing to continued growth in real activity ata pace sufficient to support additional labor market gains

before beginning policy normalization. Many partici-pants indicated that such economic conditions wouldhelp bolster their confidence in the likelihood of infla-tion moving toward the Committee’s 2 percent objective after the transitory effects of lower energy prices andother factors dissipate. Some participants noted that

their confidence in inflation returning to 2 percent would also be bolstered by stable or rising levels of corePCE inflation, or of alternative series, such as trimmedmean or median measures of inflation. A number ofparticipants emphasized that they would need to see ei-ther an increase in market-based measures of inflationcompensation or evidence that continued low readingson these measures did not constitute grounds for con-cern. Several participants indicated that signs of im-provements in labor compensation would be an im-portant signal, while a few others deemphasized the

value of labor compensation data for judging incipient

inflation pressures in light of the loose short-run empir-ical connection between wage and price inflation.

Participants discussed the communications challengesassociated with signaling, when it becomes appropriateto do so, that policy normalization is likely to begin rel-atively soon while remaining clear that the Committee’sactions would depend on incoming data. Many partici-pants regarded dropping the “patient” language in thestatement, whenever that might occur, as risking a shiftin market expectations for the beginning of policy firm-ing toward an unduly narrow range of dates. As a result,some expressed the concern that financial markets might

overreact, resulting in undesirably tight financial condi-tions. Participants discussed some possible communica-tions by which they might further underscore the datadependency of their decision regarding when to

fomc minutes february 2015

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