FOMC meeting minutes: 2018-01-31

Historical release narrative reproduced from the official public-domain source. Statistical tables, standard technical appendices, administrative material and attendance rosters are omitted; formatting is adapted for reading. Figures retain the release's historical context and may have been revised. Consult the linked source for the complete document.

Developments in Financial Markets and Open Market Operations The manager of the System Open Market Account (SOMA) provided a summary of developments in domestic and global financial markets over the intermeeting period. Financial conditions eased further over recent weeks with market participants pointing to increasing appetites for risk and perceptions of diminished downside risks as factors buoying market sentiment. In this environment, yields on safe assets such as U.S. Treasury securities moved up some while corporate risk spreads narrowed and equity prices recorded further significant gains. Breakeven measures of inflation compensation derived from Treasury Inflation Protected Securities (TIPS) moved up but remained low. Survey measures of longer-term inflation expectations showed little change. Judging from interest rate futures, the expected path of the federal funds rate shifted up over the period but continued to imply a gradual expected pace of policy firming. The deputy manager followed with a discussion of recent developments in money markets and FOMC operations. Year-end pressures were evident in the market for foreign exchange basis swaps, but conditions returned to normal early in 2018. Yields on Treasury bills maturing in early March were elevated, reflecting investors' concerns about the possibility that a failure to raise the federal debt ceiling could affect the timing of principal payments for these securities. The Open Market Desk continued to execute reinvestment operations for Treasury and agency securities in the SOMA in accordance with the procedure specified in the Committee's directive to the Desk. The deputy manager also reported on the volume of overnight reverse repurchase agreement operations over the intermeeting period and discussed the Desk's plans for small-value operational tests of various types of open market operations over the coming year.

By unanimous vote, the Committee ratified the Open Market Desk's domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System's account during the intermeeting period.

Inflation Analysis and Forecasting The staff presented three briefings on inflation analysis and forecasting. The presentations reviewed a number of commonly used structural and reduced-form models. These included structural models in which the rate of inflation is linked importantly to measures of resource slack and a measure of expected inflation relevant for wage and price setting--so-called Phillips curve specifications--as well as statistical models in which inflation is primarily determined by a time-varying inflation trend or longer-run inflation expectations. The briefings noted several factors beyond those captured in the models that appeared to have put downward pressure on prices in recent years. These included structural changes in price setting for some items, such as medical care, and the effects of idiosyncratic price shocks, such as the unusual drop in prices of wireless telephone services in 2017. The staff found little compelling evidence for the possible influence of other factors such as a more competitive pricing environment or a change in the markup of prices over unit labor costs. Overall, for the set of models presented, the prediction errors in recent years were larger than those observed during the 2001-07 period but were consistent with historical norms and, in most models, did not appear to be biased.

The staff presentations considered two key channels by which monetary policy influences inflation--the response of inflation to changes in resource utilization and the role of inflation expectations, or trend inflation, in the price-setting process. In part because inflation was importantly influenced by a number of short-lived factors, the effects of current and expected resource utilization gaps on inflation were not easy to discern empirically. Estimates of the strength of those effects had diminished noticeably in recent years. The briefings highlighted a number of other challenges associated with estimating the strength and timing of the linkage between resource utilization and inflation, including the reliability of and changes over time in estimates of the natural rate of unemployment and potential output and the ability to adequately account for supply shocks. In addition, some research suggested that the relationship between resource utilization and inflation may be nonlinear, with the response of inflation increasing as rates of utilization rise to very high levels.

With regard to inflation expectations, two of the briefings presented findings that the longer-run trend in inflation, absent cyclical disturbances or transitory fluctuations, had been stable in recent years at a little below 2 percent. The briefings reported that the average forecasting performance of models employing either statistical estimates of inflation trends or survey-based measures of inflation expectations as proxies for inflation expectations appeared comparable, even though different versions of such models could yield very different forecasts at any given point in time. Moreover, al­though survey-based measures of longer-run inflation expectations tended to move in parallel with estimated inflation trends, the empirical research provided no clear guidance on how to construct a measure of inflation expectations that would be the most useful for inflation forecasting. The staff noted that al­though reduced-form models in which inflation tends to revert toward longer-run inflation trends described the data reasonably well, those models offered little guidance to policymakers on how to conduct policy so as to achieve their desired outcome for inflation.

Following the staff presentations, participants discussed how the inflation frameworks reviewed in the briefings informed their views on inflation and monetary policy. Almost all participants who commented agreed that a Phillips curve-type of inflation framework remained useful as one of their tools for understanding inflation dynamics and informing their decisions on monetary policy. Policymakers pointed to a number of possible reasons for the difficulty in estimating the link between resource utilization and inflation in recent years. These reasons included an extended period of low and stable inflation in the United States and other advanced economies during which the effects of resource utilization on inflation became harder to identify, the shortcomings of commonly used measures of resource gaps, the effects of transitory changes in relative prices, and structural factors that had made business pricing more competitive or prices more flexible over time. It was noted that research focusing on inflation across U.S. states or metropolitan areas continued to find a significant relationship between price or wage inflation and measures of resource gaps. A couple of participants questioned the usefulness of a Phillips curve-type framework for policymaking, citing the limited ability of such frameworks to capture the relationship between economic activity and inflation.

Participants generally agreed that inflation expectations played a fundamental role in understanding and forecasting inflation, with stable inflation expectations providing an important anchor for the rate of inflation over the longer run. Participants acknowledged that the causes of movements in short- and longer-run inflation expectations, including the role of monetary policy, were imperfectly understood. They commented that various proxies for inflation expectations--readings from household and business surveys or from economic forecasters, estimates derived from market prices, or estimated trends--were imperfect measures of actual inflation expectations, which are unobservable. That said, participants emphasized the critical need for the FOMC to maintain a credible longer-run inflation objective and to clearly communicate the Committee's commitment to achieving that objective. Several participants indicated that they viewed the available evidence as suggesting that longer-run inflation expectations remained well anchored; one cited recent research finding that inflation expectations had become better anchored following the Committee's adoption of a numerical inflation target. However, a few saw low levels of inflation over recent years as reflecting, in part, slippage in longer-run inflation expectations below the Committee's 2 percent objective. In that regard, a number of participants noted the importance of continuing to emphasize that the Committee's 2 percent inflation objective is symmetric. A couple of participants suggested that the Committee might consider expressing its objective as a range rather than a point estimate. A few other participants suggested that the FOMC could begin to examine whether adopting a monetary policy framework in which the Committee would strive to make up for past deviations of inflation from target might address the challenge of achieving and maintaining inflation expectations consistent with the Committee's inflation objective, particularly in an environment in which the neutral rate of interest appeared likely to remain low.

Staff Review of the Economic Situation The information reviewed for the January 30-31 meeting indicated that labor market conditions continued to strengthen through December and that real gross domestic product (GDP) expanded at about a 2-1/2 percent pace in the fourth quarter of last year. Growth of real final domestic purchases by households and businesses, generally a good indicator of the economy's underlying momentum, was solid. Consumer price inflation, as measured by the 12-month percentage change in the price index for personal consumption expenditures (PCE), remained below 2 percent in December. Survey-based measures of longer-run inflation expectations were little changed on balance.

Total nonfarm payroll employment increased solidly in December, and the national unemployment rate remained at 4.1 percent. The unemployment rates for Hispanics, for Asians, and for African Americans were lower than earlier in the year and close to the levels seen just before the most recent recession. The national labor force participation rate held steady in December; relative to the declining trend suggested by an aging population, this sideways movement in the participation rate represented a further strengthening in labor market conditions. The participation rate for prime-age (defined as ages 25 to 54) men edged up in December, while the rate for prime-age women declined slightly. The share of workers who were employed part time for economic reasons was little changed in December and was close to its pre-recession level. The rates of private-sector job openings and quits were little changed in November, and the four-week moving average of initial claims for unemployment insurance benefits continued to be at a low level in mid-January. Recent readings showed that gains in hourly labor compensation remained modest. Both the employment cost index for private-sector workers and average hourly earnings for all employees rose about 2-1/2 percent over the 12 months ending in December.

Total industrial production increased over the two months ending in December, with broad-based gains in manufacturing, mining, and utilities output. Automakers' schedules indicated that assemblies of light motor vehicles would likely move up over the coming months. Broader indicators of manufacturing production, such as the new orders indexes from national and regional manufacturing surveys, pointed to further solid increases in factory output in the near term.

Real PCE increased strongly in the fourth quarter. Recent readings on key factors that influence consumer spending--including gains in employment, real disposable personal income, and households' net worth--continued to be supportive of further solid growth of real PCE in the near term. Consumer sentiment in early January, as measured by the University of Michigan Surveys of Consumers, remained upbeat.

Real residential investment rose briskly in the fourth quarter after having declined in the previous two quarters. Both starts and issuance of building permits for new single-family homes increased in the fourth quarter as a whole, and starts for multifamily units also moved up. Moreover, sales of both new and existing homes rose in the fourth quarter.

Real private expenditures for business equipment and intellectual property increased at a solid pace in the fourth quarter. Recent indicators of business equipment spending--such as rising new orders of nondefense capital goods excluding aircraft and upbeat readings on business sentiment from national and regional surveys--pointed to further gains in equipment spending in the near term. Firms' real spending for nonresidential structures rose modestly in the fourth quarter, as an increase in outlays for drilling and mining structures was largely offset by a decline in expenditures for other business structures. The number of crude oil and natural gas rigs in operation--an indicator of spending for structures in the drilling and mining sector--continued to edge up through late January.

Total real government purchases rose modestly in the fourth quarter. Increased federal government purchases mostly reflected a rise in defense spending, and the gains in purchases by state and local governments were led by an increase in construction spending in this sector.

The nominal U.S. international trade deficit widened further in November after widening sharply in October. Exports of goods and services picked up in November, while imports, particularly of consumer goods, increased robustly. Available data for goods trade in December suggested that import growth again outpaced export growth. All told, real net exports were estimated to be a substantial drag on real GDP growth in the fourth quarter.

Total U.S. consumer prices, as measured by the PCE price index, increased about 1-3/4 percent over the 12 months ending in December. Core PCE price inflation, which excludes changes in consumer food and energy prices, was 1-1/2 percent over that same period. The consumer price index (CPI) rose around 2 percent over the same period, while core CPI inflation was 1-3/4 percent. Recent readings on survey-based measures of longer-run inflation expectations--including those from the Michigan survey and the Desk's Survey of Primary Dealers and Survey of Market Participants--were little changed on balance.

Incoming data suggested that economic activity abroad continued to expand at a solid pace and that this expansion was broad based across countries. In the advanced foreign economies (AFEs), real GDP in the euro area and the United Kingdom expanded at a moderate pace in the fourth quarter. In the emerging market economies (EMEs), Mexico's economy rebounded after being held back by natural disasters in the third quarter. Economic growth remained solid in China but cooled off a bit in some emerging Asian economies after a very strong third-quarter performance. Inflation in both AFEs and EMEs picked up significantly in the fourth quarter, largely reflecting a boost from rising oil prices. Inflation excluding food and energy prices remained well below central bank targets in several economies, including the euro area and Japan.

Staff Review of the Financial Situation Domestic financial market conditions eased considerably further over the intermeeting period. A strengthening outlook for economic growth in the United States and abroad, along with recently enacted tax legislation, appeared to boost investor sentiment. U.S. equity prices, Treasury yields, and market-based measures of inflation compensation rose, and spreads of yields on investment- and speculative-grade nonfinancial corporate bonds over those for comparable-maturity Treasury securities narrowed further. In addition, the dollar depreciated broadly amid strong foreign economic data and monetary policy communications by some foreign central banks that investors reportedly viewed as less accommodative than expected.

FOMC communications over the intermeeting period were generally characterized by market participants as consistent with their expectations for continued gradual removal of monetary policy accommodation. The Committee's decision to raise the target range for the federal funds rate at the December meeting was widely expected, and the probability of an increase in the target range for the federal funds rate occurring at the January meeting, as implied by quotes on federal funds futures contracts, remained essentially zero. Over the intermeeting period, the futures-implied probability of policy firming at the March meeting rose to about 85 percent; respondents to the Desk's Survey of Primary Dealers and Survey of Market Participants assigned, on average, similarly high odds to a rate increase at the March meeting. Levels of the federal funds rate at the end of 2018 and 2019 implied by overnight index swap rates moved up moderately.

The nominal Treasury yield curve shifted up over the intermeeting period amid an improved outlook for domestic and foreign economic growth. Yields on both 2- and 10-year Treasury securities moved up about 30 basis points. Measures of inflation compensation based on TIPS fell in response to the soft reading on core inflation in the November CPI release but subsequently moved up against the backdrop of an improving global growth outlook, higher commodity prices, depreciation of the dollar, and the stronger-than-expected reading on core inflation in the December CPI release. On net, inflation compensation moved up at both the 5-year and the 5-to-10-year horizons, and both measures returned to levels seen in early 2017 before the string of generally weaker-than-expected inflation readings.

Broad equity price indexes rose substantially over the intermeeting period, with investors pointing to a stronger global economic outlook and the supportive effect of the recently enacted tax legislation on risk sentiment. The VIX, an index of option-implied volatility for one-month returns on the S&P 500 index, increased but remained low by historical standards. Spreads of both investment- and speculative-grade corporate bond yields over comparable-maturity Treasury yields declined slightly and remained well below their historical averages.

The FOMC's decision at its December meeting to raise the target range for the federal funds rate was transmitted smoothly to money market rates. The effective federal funds rate held steady at a level near the middle of the target range except at year-end. While borrowing costs moved up briefly in offshore dollar funding markets over year-end, conditions in money markets were reported to be orderly. In line with recent year-end experiences, rates and volumes in the federal funds and Eurodollar markets declined, while in secured markets, rates on Treasury repurchase agreements increased. After year-end, pressures in money markets abated quickly and rates and volumes returned to recent ranges.

The broad nominal dollar index declined nearly 4 percent relative to its value at the time of the December FOMC meeting; the decline was most pronounced against AFE currencies, but the dollar depreciated notably against most EME currencies as well. EME equity prices registered substantial gains, in part supported by a significant rise in commodity prices; emerging market bond spreads narrowed moderately, and flows into EME equity and bond funds strengthened substantially.

Market-based measures of policy expectations and longer-term sovereign yields moved up in most AFEs. The Bank of Canada raised its policy rate at its January meeting, largely in response to better-than-expected economic data. The Bank of England, the Bank of Japan, and the European Central Bank (ECB) left their monetary policy stances unchanged, as expected. Nonetheless, the ECB president's optimistic assessment of the euro-area economy at the press conference following the January meeting was interpreted by market participants as a signal that monetary policy would be less accommodative than expected. Following those remarks, the euro appreciated notably against the dollar and core euro-area sovereign yields moved higher. That said, market-based measures of policy expectations continued to indicate that investors anticipate a gradual pace of monetary policy normalization in the euro area.

Financing conditions for nonfinancial businesses and households remained generally accommodative over the intermeeting period and continued to be supportive of economic activity. Respondents to the January Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS) reported easing standards and narrowing loan spreads for large and middle-market firms and attributed this easing to more aggressive competition from other bank or nonbank lenders. Net debt financing by investment-grade nonfinancial corporations turned negative in December, but the weakness appeared to reflect a softening in the demand for credit, possibly related to the anticipation of higher after-tax cash flows and repa­triation of foreign earnings. In contrast, gross issuance of speculative-grade bonds and institutional leveraged loans remained strong. Credit market conditions for small businesses remained relatively accommodative despite sluggish credit growth among these firms. Credit conditions in municipal bond markets also remained accommodative.

In commercial real estate (CRE) markets, growth of loans held by banks slowed further in the fourth quarter, though CRE loans held by small banks and some types of CRE loans held by large banks--construction and land development loans in particular--expanded at a more robust pace. Financing conditions in the commercial mortgage-backed securities (CMBS) market remained accommodative as issuance continued at a robust pace and spreads on CMBS remained near their lowest levels since the financial crisis. Credit conditions in the residential mortgage market remained accommodative for most borrowers, though credit standards remained tight for borrowers with low credit scores or hard-to-document incomes. Mortgage rates increased in tandem with rates on longer-term Treasury securities but remained quite low by historical standards.

Conditions in consumer credit markets remained largely supportive of economic activity. Consumer credit increased notably in November, exceeding the more moderate volume of borrowing observed earlier in the year. Revolving credit expanded in November, while nonrevolving credit grew robustly, mainly driven by expansion in student and other consumer loans. In contrast, growth of auto lending slowed in recent months, consistent with the weakening demand for such loans in the fourth quarter as reported in the January SLOOS. For subprime borrowers, conditions remained tight, particularly in the market for credit cards and auto loans.

The staff provided its latest report on the potential risks to financial stability; the report continued to characterize the financial vulnerabilities of the U.S. financial system as moderate on balance. This overall assessment incorporated the staff's judgment that vulnerabilities associated with asset valuation pressures continued to be elevated; asset valuation pressures apparently reflected, in part, a broad-based appetite for risk among investors. The staff judged that vulnerabilities from leverage in the nonfinancial sector appeared to remain moderate, while vulnerabilities stemming from financial-sector leverage and from maturity and liquidity transformation continued to be viewed as low.

Staff Economic Outlook The U.S. economic projection prepared by the staff for the January FOMC meeting was stronger than the staff forecast at the time of the December meeting. Real GDP was estimated to have risen in the fourth quarter of last year by somewhat more than the staff had previously expected, as gains in both household and business spending were larger than anticipated. Beyond 2017, the forecast for real GDP growth was revised up, reflecting a reassessment of the recently enacted tax cuts, along with higher projected paths for equity prices and foreign economic growth and a lower assumed path for the foreign exchange value of the dollar. Real GDP was projected to increase at a somewhat faster pace than potential output through 2020; the staff continued to assume that the recently enacted tax cuts would boost real GDP growth moderately over the medium term. The unemployment rate was projected to decline further over the next few years and to continue to run well below the staff's estimate of its longer-run natural rate over this period.

Estimates of total and core PCE price inflation for 2017 were in line with the staff's previous forecast. The projection for inflation over the medium term was revised up slightly, primarily reflecting tighter resource utilization in the January forecast. Total PCE price inflation in 2018 was projected to be somewhat faster than in 2017 despite a slower projected pace of increases in consumer energy prices; core PCE prices were forecast to rise notably faster in 2018, importantly reflecting both the expected waning of transitory factors that held down 12-month measures of inflation in 2017 as well as the projected further tightening in resource utilization. The staff projected that core inflation would reach 2 percent in 2019 and that total inflation would be at the Committee's 2 percent objective in 2020.

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 indicators of uncertainty about the macroeconomic outlook remained subdued; on the other hand, considerable uncertainty remained about a number of federal government policies relevant for the economic outlook. 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 also were seen as balanced. Downside risks included the possibilities that longer-term inflation expectations may have edged lower or that the run of soft core inflation readings this year 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 move further above its potential.

Participants' Views on Current Conditions and the Economic Outlook In their discussion of the economic situation and the outlook, meeting participants agreed that information received since the FOMC met in December indicated that the labor market continued to strengthen and that economic activity expanded at a solid rate. Gains in employment, household spending, and business fixed investment were solid, and the unemployment rate stayed low. On a 12-month basis, both overall inflation and inflation for items other than food and energy continued to run below 2 percent. Market-based measures of inflation compensation increased in recent months but remained low; survey-based measures of longer-term inflation expectations were little changed, on balance.

Participants generally saw incoming information on economic activity and the labor market as consistent with continued above-trend economic growth and a further strengthening in labor market conditions, with the recent solid gains in household and business spending indicating substantial underlying economic momentum. They pointed to accommodative financial conditions, the recently enacted tax legislation, and an improved global economic outlook as factors likely to support economic growth over coming quarters. Participants expected that with further gradual adjustments in the stance of monetary policy, economic activity would expand at a moderate pace and labor market conditions would remain strong. Near-term risks to the economic outlook appeared roughly balanced. Inflation on a 12-month basis was expected to move up this year and to stabilize around the Committee's 2 percent objective over the medium term. However, participants judged that it was important to continue to monitor inflation developments closely.

Participants expected the recent solid growth in consumer spending to continue, supported by further gains in employment and income, increased household wealth resulting from higher asset prices, and high levels of consumer confidence. It was noted that spending on durable goods to replace those damaged during the hurricanes in September may have provided a temporary boost to consumer spending. In connection with solid growth in consumer spending, a couple of participants noted that the household saving rate had declined to its lowest level since 2005, likely driven by buoyant consumer sentiment or expectations that the rise in household wealth would be sustained.

Participants characterized their business contacts as generally upbeat about the economy; their contacts cited the recent tax cuts and notable improvements in the global economic outlook as positive factors. Manufacturers in a number of Districts had responded to increased orders by boosting production. Against a backdrop of higher energy prices and increased global demand for crude oil, a couple of participants revised up their forecasts for energy production in their respective Districts. Businesses in a number of Districts reported plans to further increase investment in coming quarters in order to expand capacity. Even so, several participants expressed considerable uncertainty about the degree to which changes to corporate taxes would support business investment and capacity expansion; according to these participants, firms may be only just beginning to determine how they might allocate their tax savings among investment, worker compensation, mergers and acquisitions, returns to shareholders, or other uses.

The labor market had strengthened further in recent months, as indicated by continued solid payroll gains, a small increase in average hours worked, and a labor force participation rate that had held steady despite the longer-run declining trend implied by an aging population. Many participants reported that labor market conditions were tight in their Districts, evidenced by low unemployment rates, difficulties for employers in filling open positions or retaining workers, or some signs of upward pressure on wages. The unemployment rate, at 4.1 percent, had remained near the lowest level seen in the past 20 years. It was noted that other labor market indicators--such as the U-6 measure of unemployment or the share of involuntary part-time employment--had returned to their pre-recession levels. A few participants judged that while the labor market was close to full employment, some margins of slack remained; these participants pointed to the employment-to-population ratio or the labor force participation rate for prime-age workers, which remained below pre-recession levels, as well as the absence to date of clear signs of a pickup in aggregate wage growth.

During their discussion of labor market conditions, participants expressed a range of views about recent wage developments. While some participants heard more reports of wage pressures from their business contacts over the intermeeting period, participants generally noted few signs of a broad-based pickup in wage growth in available data. With regard to how firms might use part of their tax savings to boost compensation, a few participants suggested that such a boost could be in the form of onetime bonuses or variable pay rather than a permanent increase in wage structures. It was noted that the pace of wage gains might not increase appreciably if productivity growth remains low. That said, a number of participants judged that the continued tightening in labor markets was likely to translate into faster wage increases at some point.

In their discussion of inflation developments, many participants noted that inflation data in recent months had generally pointed to a gradual rise in inflation, as the 12-month core PCE price inflation rose to 1.5 percent in December, up 0.2 percentage point from the low recorded in the summer. Meanwhile, total PCE price inflation was 1.7 percent over the same 12-month period. Participants anticipated that inflation would continue to gradually rise as resource utilization tightened further and as wage pressures became more apparent; several expected that declines in the foreign exchange value of the dollar in recent months would also likely help return inflation to 2 percent over the medium term. Business contacts in a few Districts reported that they had begun to have some more ability to raise prices to cover higher input costs. That said, a few participants posited that the recently enacted corporate tax cuts might lead firms to cut prices in order to remain competitive or to gain market share, which could result in a transitory drag on inflation.

With regard to inflation expectations, available readings from surveys had been steady and TIPS-based measures of inflation compensation had moved up, al­though they remained low. Many participants thought that inflation expectations remained well anchored and would support the gradual return of inflation to the Committee's 2 percent objective over the medium term. However, a few other participants pointed to the record of inflation consistently running below the Committee's 2 percent objective over recent years and expressed the concern that longer-run inflation expectations may have slipped below levels consistent with that objective.

Many participants noted that financial conditions had eased significantly over the intermeeting period; these participants generally viewed the economic effects of the decline in the dollar and the rise in equity prices as more than offsetting the effects of the increase in nominal Treasury yields. One participant reported that financial market contacts did not see the relatively flat slope of the yield curve as signaling an increased risk of recession. A few others judged that it would be important to continue to monitor the effects of policy firming on the slope of the yield curve, noting the strong association between past yield curve inversions and recessions.

Regulatory actions and improved risk management in recent years had put the financial system in a better position to withstand adverse shocks, such as a substantial decline in asset prices, than in the past. However, amid elevated asset valuations and an increased use of debt by nonfinancial corporations, several participants cautioned that imbalances in financial markets may begin to emerge as the economy continued to operate above potential. In this environment, increased use of leverage by nonbank financial institutions might be difficult to detect in a timely manner. It was also noted that the Committee should regularly reassess risks to the financial system and their implications for the economic outlook in light of the potential for changes in regulatory policies over time.

In their consideration of monetary policy, participants discussed the implications of recent economic and financial developments for the outlook for economic growth, labor market conditions, and inflation and, in turn, for the appropriate path of the federal funds rate. Participants agreed that a gradual approach to raising the target range for the federal funds rate remained appropriate and reaffirmed that adjustments to the policy path would depend on their assessments of how the economic outlook and risks to the outlook were evolving relative to the Committee's policy objectives. While participants continued to expect economic activity to expand at a moderate pace over the medium term, they anticipated that the rate of economic growth in 2018 would exceed their estimates of its sustainable longer-run pace and that labor market conditions would strengthen further. A number of participants indicated that they had marked up their forecasts for economic growth in the near term relative to those made for the December meeting in light of the strength of recent data on economic activity in the United States and abroad, continued accommodative financial conditions, and information suggesting that the effects of recently enacted tax changes--while still uncertain--might be somewhat larger in the near term than previously thought. Several others suggested that the upside risks to the near-term outlook for economic activity may have increased. A majority of participants noted that a stronger outlook for economic growth raised the likelihood that further gradual policy firming would be appropriate.

Almost all participants continued to anticipate that inflation would move up to the Committee's 2 percent objective over the medium term as economic growth remained above trend and the labor market stayed strong; several commented that recent developments had increased their confidence in the outlook for further progress toward the Committee's 2 percent inflation objective. A couple noted that a step-up in the pace of economic growth could tighten labor market conditions even more than they currently anticipated, posing risks to inflation and financial stability associated with substantially overshooting full employment. However, some participants saw an appreciable risk that inflation would continue to fall short of the Committee's objective. These participants saw little solid evidence that the strength of economic activity and the labor market was showing through to significant wage or inflation pressures. They judged that the Committee could afford to be patient in deciding whether to increase the target range for the federal funds rate in order to support further strengthening of the labor market and allow participants to assess whether incoming information on inflation showed that it was solidly on a track toward the Committee's objective.

Some participants also commented on the likely evolution of the neutral federal funds rate. By most estimates, the neutral level of the federal funds rate had been very low in recent years, but it was expected to rise slowly over time toward its longer-run level. However, the outlook for the neutral rate was uncertain and would depend on the interplay of a number of forces. For example, the neutral rate, which appeared to have fallen sharply during the Global Financial Crisis when financial headwinds had restrained demand, might move up more than anticipated as the global economy strengthened. Alternatively, the longer-run level of the neutral rate might remain low in the absence of fundamental shifts in trends in productivity, demographics, or the demand for safe assets.

Committee Policy Action In their discussion of monetary policy for the period ahead, members judged that information received since the Committee met in December indicated that the labor market had continued to strengthen and that economic activity had been rising at a solid rate. Gains in employment, household spending, and business fixed investment had been solid, and the unemployment rate had stayed low. On a 12-month basis, both overall inflation and inflation for items other than food and energy had continued to run below 2 percent. Market-based measures of inflation compensation had increased in recent months but remained low; survey-based measures of longer-term inflation expectations were little changed, on balance.

Members expected that, with further gradual adjustments in the stance of monetary policy, economic activity would expand at a moderate pace and labor market conditions would remain strong. In their discussion of the economic outlook, most members viewed the recent data bearing on real economic activity as suggesting a modestly stronger near-term outlook than they had anticipated at their meeting in December. In addition, financial conditions had remained accommodative, and the details of the tax legislation suggested that its effects on consumer and business spending--while still uncertain--might be a bit greater in the near term than they had previously thought. Al­though several saw increased upside risks to the near-term outlook for economic activity, members generally continued to judge the risks to that outlook as remaining roughly balanced.

Most members noted that recent information on inflation along with prospects for a continued solid pace of economic activity provided support for the view that inflation on a 12-month basis would likely move up in 2018 and stabilize around the Committee's 2 percent objective over the medium term. However, a couple of members expressed concern about the outlook for inflation, seeing little evidence of a meaningful improvement in the underlying trend in inflation, measures of inflation expectations, or wage growth. Several members commented that they saw both upside and downside risks to the inflation outlook, and members agreed to continue to monitor inflation developments closely.

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

Members agreed that the timing and size of future adjustments to the target range for the federal funds rate would depend on their assessments of realized and expected economic conditions relative to the Committee's objectives of maximum employment and 2 percent inflation. They reiterated that this assessment would take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. Members also agreed to carefully monitor actual and expected inflation developments relative to the Committee's symmetric inflation goal. Members expected that economic conditions would evolve in a manner that would warrant further gradual increases in the federal funds rate. They judged that a gradual approach to raising the target range would sustain the economic expansion and balance the risks to the outlook for inflation and unemployment. Members agreed that the strengthening in the near-term economic outlook increased the likelihood that a gradual upward trajectory of the federal funds rate would be appropriate. They therefore agreed to update the characterization of their expectation for the evolution of the federal funds rate in the postmeeting statement to point to "further gradual increases" while maintaining the target range at the current meeting. Members continued to anticipate that the federal funds rate would likely remain, for some time, below levels that were expected to prevail in the longer run. Nonetheless, they again stated that the actual path for the federal funds rate would depend on the economic outlook as informed by the incoming data.

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

"Effective February 1, 2018, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 1-1/4 to 1-1/2 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 1.25 percent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account that are available for such operations and by a per-counterparty limit of $30 billion per day.

The Committee directs the Desk to continue rolling over at auction the amount of principal payments from the Federal Reserve's holdings of Treasury securities maturing during each calendar month that exceeds $12 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 $8 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 December indicates that the labor market has continued to strengthen and that economic activity has been rising at a solid rate. Gains in employment, household spending, and business fixed investment have been solid, and the unemployment rate has stayed low. On a 12-month basis, both overall inflation and inflation for items other than food and energy have continued to run below 2 percent. Market-based measures of inflation compensation have increased in recent months but remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with further gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will remain strong. Inflation on a 12-month basis is expected to move up this year and 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 1-1/4 to 1-1/2 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.

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

Voting for this action: Janet L. Yellen, William C. Dudley, Thomas I. Barkin, Raphael W. Bostic, Lael Brainard, Loretta J. Mester, Jerome H. Powell, Randal K. Quarles, and John C. Williams.

Voting against this action: None.

Consistent with the Committee's decision to leave the target range for the federal funds rate unchanged, the Board of Governors voted unanimously to leave the interest rates on required and excess reserve balances unchanged at 1-1/2 percent and voted unanimously to approve establishment of the primary credit rate (discount rate) at the existing level of 2 percent.5

It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, March 20-21, 2018. The meeting adjourned at 10:50 a.m. on January 31, 2018.

Notation Vote By notation vote completed on January 2, 2018, the Committee unanimously approved the minutes of the Committee meeting held on December 12-13, 2017.

_____________________________ James A. Clouse Secretary