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Developments in Financial Markets and Open Market Operations The manager turned first to a discussion of financial market developments. The evolving outlooks for the path of the virus and for fiscal policy were the main drivers of financial markets over the intermeeting period. Progress on vaccinations had been slower than expected, and the near-term trajectory of the pandemic worsened, weighing on economic activity. However, even with the appearance of new strains of the virus, market confidence in the ultimate efficacy of the vaccination efforts seemed to remain high. The emergence of a narrow Democratic majority in the Senate bolstered investor expectations for additional fiscal stimulus, prompting upward revisions to forecasts for economic growth this year. In the Open Market Desk Survey of Primary Dealers, the median 2021 gross domestic product (GDP) growth forecast rose about 1 percentage point.
Against this backdrop, longer-term Treasury yields rose notably over the period. Longer-dated real yields were lifted by expectations for improved growth and increased Treasury issuance, but remained deeply negative. Measures of inflation compensation increased over the period, with the five-year, five-year-forward measure rising to a level of around 2 percent. Overall financial conditions eased further, on net, as the recent rally in risk assets continued. Gains in U.S. equities again centered on cyclical sectors and smaller-capitalization firms most sensitive to growth. Credit spreads narrowed further, especially for riskier borrowers.
Expectations for the path of the target federal funds rate over the next several years, as implied by interest rate futures and by the Desk Survey of Primary Dealers and Survey of Market Participants, were relatively little changed from December. The stability in near-term policy rate expectations amid an improving growth outlook appeared consistent with the Committee's new framework and forward interest rate guidance. Although the median Desk survey respondent continued to expect 12‑month personal consumption expenditure (PCE) inflation of 2.3 percent when the FOMC first lifts the target range, the median expectation for the unemployment rate prevailing at that time was modestly lower than in December. The Desk survey results indicated that a majority of market participants anticipated that the pace of net asset purchases would remain stable for the remainder of the year and slow around the first quarter of 2022.
The manager next discussed conditions in funding markets. Over the year-end, overnight secured and unsecured rates were little changed at rates just below the interest on excess reserves (IOER) rate even as financial firms managed their balance sheets for the reporting date. Going forward, reserves were projected to rise rapidly through the summer, reflecting ongoing Federal Reserve asset purchases as well as expected declines in balances held in the Treasury General Account. Market pricing suggested that the effective federal funds rate was expected to decline modestly through the second quarter. Even if more notable downward pressure on money market rates emerged, the manager anticipated that the Federal Reserve's tools, including the IOER rate and overnight reverse repurchase agreement facility, would continue to provide effective control over the federal funds rate and other overnight money market rates.
Finally, the manager discussed Desk operations. A range of indicators suggested that both fixed-income and funding markets continued to function smoothly over the period. The manager noted that, in the coming period, the Desk anticipated implementing two adjustments to continue to normalize operations. First, given the sustained stability in term repurchase markets, the Desk proposed discontinuing the weekly one-month term repurchase operations, beginning in mid-February. In addition, the Desk planned to reduce the frequency of agency commercial mortgage-backed securities (CMBS) operations in light of the sustained improvement in market conditions for these securities.
By unanimous vote, the Committee ratified the Desk's domestic transactions over the intermeeting period. No intervention operations occurred in foreign currencies for the System's account during the intermeeting period.
Staff Review of the Economic Situation The COVID‑19 pandemic and the measures undertaken to contain its spread continued to affect economic activity in the United States and abroad. The information available at the time of the January 26–27 meeting suggested that U.S. real GDP had continued to advance in the fourth quarter of 2020, albeit at a pace that was markedly slower than the rapid rate seen in the third quarter, while the level of real GDP had not yet returned to the level seen before the onset of the pandemic. Labor market conditions deteriorated, on balance, in December, and employment continued to be well below its level at the start of 2020. Consumer price inflation through November—as measured by the 12‑month percentage change in the PCE price index—remained considerably lower than the rates seen in early 2020.
Total nonfarm payroll employment fell in December, with especially sharp declines in the leisure and hospitality sector. As of December, payroll employment had retraced a little more than half of the losses seen at the onset of the pandemic. The unemployment rate held steady at 6.7 percent in December. The unemployment rate for African Americans declined and the Hispanic unemployment rate rose; both rates remained well above the national average. However, the Asian unemployment rate moved below the national average in December. Both the labor force participation rate and employment-to-population ratio were unchanged in December. Initial claims for unemployment insurance in mid-January were higher than their early December level. Weekly estimates of private-sector payrolls constructed by Federal Reserve Board staff using data provided by the payroll processor ADP indicated that the four-week average change in private employment in mid-January was slightly lower than it had been in early December; however, the most recent week-to-week changes in this measure of payrolls had been highly volatile.
Average hourly earnings for all employees rose 5.1 percent over the 12 months ending in December, a gain that was noticeably higher than the measure's year‑earlier 12‑month change. The 12‑month change in average hourly earnings continued to be dominated by changes in the composition of the workforce, with the concentration of job losses among lower-wage workers over the pandemic period resulting in outsized increases in this measure of earnings that were not indicative of tight labor market conditions. By contrast, a staff measure of the 12‑month change in the median wage derived from the ADP data—a measure likely to have been less affected by changes in workforce composition—was 3-1/2 percent in December and remained well below its pre‑pandemic pace.
Total PCE price inflation was 1.1 percent over the 12 months ending in November and continued to be held down by relatively weak aggregate demand and the declines in consumer energy prices seen over the first part of 2020. Core PCE price inflation, which excludes changes in consumer energy prices and many consumer food prices, was 1.4 percent over the 12 months ending in November, while the trimmed mean measure of 12‑month PCE inflation constructed by the Federal Reserve Bank of Dallas was 1.7 percent in November. In December, the 12‑month change in the consumer price index (CPI) was 1.4 percent, while core CPI inflation was 1.6 percent over the same period. The latest readings on survey-based measures of longer-run inflation expectations ticked higher. In the first part of January, the University of Michigan Surveys of Consumers measure for the next 5 to 10 years moved back up to its late‑summer level, while in December, the 3‑year‑ahead measure of inflation expectations produced by the Federal Reserve Bank of New York moved back up to its August level.
Real PCE fell in November, and available indicators—including the components of the nominal retail sales data used to estimate PCE—pointed to a further decline in December. Housing starts and construction permits moved up in November and December and finished the year well above their pre‑pandemic levels. Although home sales turned down in November, the decline appeared to reflect limited availability of homes for sale rather than weakening demand.
Available indicators pointed to a strong increase in investment in equipment and intangibles in the fourth quarter of 2020, as this component of capital spending recovered from its sharp decline over the first half of the year. Likewise, drilling investment appeared to have turned up sharply, albeit from a low level, as oil prices moved higher. By contrast, investment in nonresidential structures outside of the drilling and mining sector appeared to have declined further in the fourth quarter and had likely been restrained by firms' continued hesitation to commit to projects with lengthy times to completion and uncertain future returns.
Industrial production advanced further in the fourth quarter, led by a solid gain in manufacturing output, but had not yet overtaken its pre‑pandemic level. The low level of export demand since the onset of the pandemic had likely continued to restrain the recovery in the manufacturing sector; in addition, production of motor vehicles and parts was a small drag on manufacturing output in the fourth quarter as automotive producers appeared to have had difficulty getting assemblies fully under way for the new model year.
Total real government purchases appeared to have fallen further in the fourth quarter, though at a slower pace than in the third quarter. Available data suggested that real federal purchases had posted a modest gain, as an increase in defense purchases offset a reduction in nondefense purchases; however, indicators of real state and local purchases, including state and local government employment, pointed to a fourth-quarter decline similar in size to what had been seen in the third quarter.
The nominal U.S. international trade deficit widened further in November. Both imports and exports continued to rebound from their collapse in the first half of the year. Goods imports rose in November to a level well above that of the previous January, with gains in most major categories. Although exports also grew in November, they had not yet recovered to their January 2020 level. Services trade continued a gradual rise but remained depressed, driven by the continued suspension of most international travel. Taken together, these data suggested that net exports made a significant negative contribution to real GDP growth in the fourth quarter.
Recent data pointed to a sharp slowing in foreign economic growth in the fourth quarter, after a strong rebound in the third quarter. Amid a further intensification of the pandemic, many foreign governments tightened social-distancing restrictions. In a few countries, the emergence of new and more contagious virus strains was accompanied by a surge in COVID-19 cases and deaths. The increased virus spread and restrictions appeared to take a toll on foreign economic activity, particularly in Europe. The global slowdown was most notable for services, with further declines in purchasing managers indexes for this sector through January in many advanced foreign economies. By contrast, manufacturing output in both advanced and emerging foreign economies continued to expand at a solid pace, supported by resilient demand for durable goods, high-tech goods, and medical supplies. Amid the generally weak economic situation, inflationary pressures remained subdued in most foreign economies.
Staff Review of the Financial Situation Investor sentiment improved and risk asset prices moved higher over the intermeeting period on greater prospects for additional fiscal stimulus. Domestic and foreign equity prices increased notably, and spreads on corporate and municipal bonds narrowed. The nominal Treasury yield curve steepened, partly reflecting an increase in inflation compensation. Market-based financing conditions remained accommodative, while bank lending conditions continued to be tight. However, a smaller net share of banks tightened lending standards than in previous quarters.
A straight read of overnight index swap (OIS) quotes suggested that the expected path of the federal funds rate beyond mid-2023 rose moderately over the intermeeting period, with the increases reportedly associated largely with greater investor optimism regarding the expected speed of the economic recovery. OIS quotes suggested that the expected policy rate would remain below 25 basis points until the third quarter of 2023, little changed from the time of the December meeting.
The yield on 2-year nominal Treasury securities was little changed over the intermeeting period, while the 10-year yield rose notably. Most of the steepening of the Treasury yield curve occurred following the outcome of the Georgia runoff elections, which reportedly bolstered market participants' expectations for additional fiscal stimulus. The FOMC's updated guidance around asset purchases was seen as broadly in line with expectations and did not elicit noticeable financial market reaction. Measures of inflation compensation based on Treasury Inflation-Protected Securities increased moderately, on net, continuing the upward trend observed over recent months, with the increase over the intermeeting period reportedly reflecting greater prospects for additional fiscal stimulus and an associated improvement in the longer-run economic outlook.
Broad stock price indexes increased, on net, over the intermeeting period, boosted by gains in the share prices of banks and companies in more cyclically sensitive sectors, reportedly reflecting, in part, increased expectations of fiscal stimulus. One-month option-implied volatility on the S&P 500—the VIX—was little changed, on net, remaining modestly elevated relative to its range over the past several years. Consistent with the optimism driving stock prices, spreads on corporate bond yields over comparable-maturity Treasury yields narrowed somewhat. Spreads on municipal bond yields narrowed notably in January, reportedly reflecting increased expectations of additional fiscal stimulus and aid to state and local governments.
Conditions in short-term funding markets remained stable over the intermeeting period, including over the year-end. Spreads for commercial paper and negotiable certificates of deposit across tenors were largely unchanged at historically low levels. Commercial paper outstanding declined somewhat in late December but quickly rebounded in early January to the levels observed before year-end. Amid stable market conditions, there was no take-up at the Commercial Paper Funding Facility or the Money Market Mutual Fund Liquidity Facility over the intermeeting period. Assets under management (AUM) of government money market funds (MMFs) remained stable over the intermeeting period. AUM of prime MMFs continued to decline, reaching the lowest level since late 2018, likely reflecting the compressed net yield advantage for prime funds relative to yields for government funds. The net yields of both prime and government MMFs remained near historically low levels.
The effective federal funds rate and the Secured Overnight Financing Rate were little changed, averaging 9 basis points and 8 basis points, respectively, over the intermeeting period. There continued to be no participation in the Fed's repurchase agreement (repo) operations, and participation in the Fed's reverse repo facility was minimal.
In foreign financial markets, the prospect of additional U.S. fiscal stimulus and the passage of key risk events such as the Brexit trade agreement largely outweighed investor concerns around new virus strains and the sluggish global vaccine rollout. On balance, foreign equity prices increased moderately, with notable outperformance in some Asian indexes, and capital inflows into mutual funds dedicated to emerging markets continued at a robust pace. Longer-term sovereign yields in most advanced foreign economies rose slightly on improved investor sentiment even while several major central banks reaffirmed their commitment to continue or possibly expand accommodative policies. The broad dollar index was little changed, on net, over the intermeeting period, while the Chinese renminbi appreciated notably against the dollar as data showed a robust economic recovery in China. Dollar funding conditions were generally stable around year-end.
Financing conditions in capital markets remained broadly accommodative, supported by low interest rates and high equity valuations. Gross corporate bond issuance was fairly strong in November and December, and seasoned and initial public offerings in the equity markets were robust. Gross institutional leveraged loan issuance was also strong in December, as issuance volumes excluding refinancing topped their averages for previous months of 2020 and were above those observed during the same period of 2019.
Commercial and industrial (C&I) loan balances at banks continued to decline in December, albeit at a slower pace than in the fall. C&I loans declined in the fourth quarter because of weak origination activity, loan forgiveness at the Paycheck Protection Program, and continued repayments of bank debt. In the January Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS), banks, on net, reported weaker demand and tightened lending standards for C&I loans, with notable differences in reported changes across bank sizes. Large banks reported having eased standards to large and middle-market firms, while, on net, banks of all sizes reported having tightened standards to small firms. However, a smaller net percentage of banks tightened lending standards to firms of all sizes than in previous quarters.
The credit quality of nonfinancial corporations remained stable in recent months after deteriorating substantially for several months following the onset of the pandemic. The volume of nonfinancial corporate bond downgrades continued to slightly outpace upgrades in November and December, and the monthly volume of nonfinancial corporate bond defaults remained relatively low. Market indicators of future default expectations moved slightly lower, essentially returning to their pre-pandemic levels.
Financing conditions for small businesses remained tight, but small business loan originations in November, the most recent month for which data were available, were at roughly the level seen a year earlier, likely supported by the refinancing of existing loans. Meanwhile, liquidity needs of small businesses remained high as businesses continued to operate at reduced capacity. Small business delinquency and default rates were little changed but remained elevated relative to the levels of recent years. Financing conditions in the municipal bond market remained generally accommodative over the intermeeting period, and the credit quality of municipal debt remained roughly stable.
For commercial real estate (CRE) financed through capital markets, financing conditions remained generally accommodative, easing further over the intermeeting period. Spreads on agency CMBS ticked down, on net, and issuance remained elevated through December, although below its recent historical high in October. Risk spreads on triple-B non-agency CMBS declined, and spreads on triple-A non-agency CMBS stayed close to their historical lows. Issuance of non-agency CMBS remained somewhat below its pre-pandemic level. CRE bank loan growth remained weak in the fourth quarter amid depressed property transaction volumes. On net, in the January SLOOS, banks reported a further tightening of lending standards and further weakening in demand for CRE loans.
Financing conditions in the residential mortgage market were little changed over the intermeeting period. Mortgage rates ticked up slightly but stayed near historically low levels, supporting strong loan origination activity. Credit remained broadly available to higher-score borrowers seeking conforming mortgages but tightened further, from already tight levels, for borrowers with lower credit scores and those seeking nonconforming mortgages. The January SLOOS suggested that for most types of residential mortgages, banks' lending standards remained unchanged, while loan demand was either little changed or somewhat stronger. Mortgage forbearance rates plateaued in December and early January after having gradually declined over the previous six months, and the rate of new delinquencies stayed at low, pre-pandemic levels.
Financing conditions in consumer credit markets generally remained accommodative for borrowers with strong credit scores but tight for those with subprime scores. Banks in the January SLOOS reported easing standards for all consumer loan types and experiencing weaker demand for auto loans and little-changed demand for other consumer loans. Conditions in the asset-backed securities market appeared supportive of lending. Credit card balances edged down further for both prime and nonprime borrowers, likely reflecting weak consumer spending. However, the volume of new cards and available credit continued to rise for both prime and nonprime borrowers. Interest rates on new credit card offers for nonprime borrowers stayed elevated, and financing conditions remained tight for those borrowers. Auto loan balances continued to increase solidly for prime and near-prime borrowers but declined further for subprime borrowers. Auto loan interest rates were about flat over the past few months and remained significantly below their pre-pandemic levels. Delinquency rates for nonprime auto and credit card borrowers ticked up, albeit from very low levels.
The staff provided an update on its assessments of the stability of the financial system and, on balance, characterized the financial vulnerabilities of the U.S. financial system as notable. The staff assessed asset valuation pressures as elevated. In particular, corporate bond spreads had declined to pre-pandemic levels, which were at the lower ends of their historical distributions. In addition, measures of the equity risk premium declined further, returning to pre-pandemic levels. Prices for industrial and multifamily properties continued to grow through 2020 at about the same pace as in the past several years, while prices of office buildings and retail establishments started to fall. The staff assessed vulnerabilities associated with household and business borrowing as notable, reflecting increased leverage and decreased incomes and revenues in 2020. Small businesses were hit particularly hard. The staff judged that vulnerabilities stemming from financial leverage were moderate, noting that capital ratios at the largest bank holding companies rose over the course of last year; leverage among hedge funds was elevated but it did decline last spring for the most highly leveraged funds. The staff characterized vulnerabilities stemming from funding risks as moderate. Banks continued to maintain significant levels of high-quality liquid assets and stable sources of funding. In contrast, money market funds and open-ended mutual funds were characterized by significant vulnerabilities associated with liquidity transformation.
Staff Economic Outlook The U.S. economic projection prepared by the staff for the January FOMC meeting implied a considerably stronger outlook for activity in 2021 relative to the December forecast. Although incoming data had been weaker than expected, the staff's January projection incorporated the effects of the stimulus in the recently enacted Consolidated Appropriations Act, 2021 (CAA), together with an assumption that an additional sizable tranche of fiscal support would be put into place in coming months. Taken together, these stimulus measures were expected to partly offset the substantial drag on aggregate demand that would result from the unwinding of the fiscal stimulus enacted in the spring of 2020. The staff's projection continued to anticipate that widespread vaccination would allow for an easing in social distancing in 2021. With the boost to growth from the reduction in social distancing assumed to be largely completed by the end of 2021, GDP growth was expected to step down over the remainder of the medium term. Even so, the staff continued to project that real GDP growth would outpace that of potential over this period, leading to a considerable further decline in the unemployment rate.
The 12‑month changes in total and core PCE prices in coming months were projected to briefly move above 2 percent in the second quarter of 2021 as the unusually low observations from the spring of 2020 drop out of the 12-month calculation. Following these swings, inflation was expected to finish the year at just below 2 percent. Thereafter, inflation was projected to gradually edge up to 2 percent by the end of the medium term as labor and product markets tightened. With monetary policy assumed to remain accommodative, inflation was projected to moderately overshoot 2 percent for some time in the years beyond 2023.
The staff viewed the possibility that a larger-than-anticipated fiscal package would be enacted in coming months as a modest upside risk to the baseline economic outlook. However, the further rise in COVID‑19 cases in the United States, coupled with developments such as the emergence of more-contagious strains of the virus in the United States and elsewhere, led the staff to continue to judge that the risks to the baseline projection were skewed to the downside and that the uncertainty around the forecast was elevated.
Participants' Views on Current Conditions and the Economic Outlook Participants noted that the COVID-19 pandemic was causing tremendous human and economic hardship across the United States and around the world. The pace of the recovery in economic activity and employment had moderated in recent months, with weakness concentrated in the sectors of the economy most adversely affected by the resurgence of the virus and by greater social distancing. Weaker demand and earlier declines in oil prices were holding down consumer price inflation. Overall financial conditions remained accommodative, in part reflecting the Federal Reserve's actions to support the economy and the flow of credit to U.S. households and businesses. Participants agreed that the path of the economy would depend significantly on the course of the virus, including progress on vaccinations, and that the ongoing public health crisis would continue to weigh on economic activity, employment, and inflation and posed considerable risks to the economic outlook.
Participants observed that the resurgence in COVID-19 infections and associated social-distancing measures were restraining activity in some sectors, particularly in industries such as travel and leisure and hospitality. Most participants expected that the stimulus provided by the passage of the CAA in December, the likelihood of additional fiscal support, and anticipated continued progress in vaccinations would lead to a sizable boost in economic activity. Even so, participants noted that economic activity and employment were currently well below levels consistent with achieving maximum employment.
Participants commented on improved prospects for household spending over the course of the year, in part reflecting fiscal support. They saw progress on vaccinations as essential for supporting further gains in aggregate consumer spending and for the economic recovery more generally. In commenting on recent data for household spending, most participants discussed the composition of expenditures, with strong spending on many goods, especially durables, and weakness in spending on some services, especially in travel and in leisure and hospitality. The relative strength in consumer spending on goods was supported by fiscal programs such as federal stimulus payments and expanded unemployment benefits as well as by accommodative monetary policy. The weakness in services spending was largely attributed to the pandemic and associated social-distancing measures, which limited spending on services that depend heavily on in-person contact. Increased government transfers to households, combined with reduced outlays on some services, had contributed to a historically large increase in aggregate household savings last year. Participants also observed that residential investment and home sales remained robust; low interest rates were viewed as an important factor supporting the strength in housing activity.
Most participants noted that the economic downturn had not fallen equally on all Americans and that those least able to shoulder the burden—in particular, lower-income and Black and Hispanic households—had been the hardest hit by the pandemic. Many participants stressed that sustained support from fiscal policy would help address the hardships faced by these groups and that monetary policy could also help by promoting the economy's return to maximum employment and price stability.
In their remarks on the business sector, participants commented that business equipment investment had continued to show strength while nonresidential construction remained weak. Participants also discussed the recent strong performance of the manufacturing sector. Many discussed supply chain issues in manufacturing, including those associated with acquiring material inputs and pandemic-related worker shortages and absenteeism. Business contacts reported that firms in goods-producing industries, particularly larger firms and those in the durable goods or housing sectors, were adapting to the pandemic; in contrast, smaller firms and those in industries most adversely affected by the pandemic were finding it more difficult to adapt. Many participants stated that their business contacts were optimistic that continued progress on vaccinations, together with further fiscal support, would result in more improvement in overall business conditions. Several participants noted the increase in agricultural crop prices over 2020 and the associated improvement in farm revenues.
As with overall economic activity, the pace of improvement in the labor market had slowed in recent months. Payroll employment fell in December, as continued job gains in many industries were outweighed by significant layoffs in industries where the resurgence of the virus had weighed heavily on activity. While labor market conditions had improved significantly, on balance, since the spring, some participants noted that if the sizable number of workers who reported having left the labor force since the beginning of the pandemic were to be counted as unemployed, the unemployment rate would be substantially higher. Participants judged that the current low level of labor force participation likely reflected a number of factors, including health concerns and additional childcare responsibilities. Over the medium term, participants expected strong growth in employment, driven by continued progress on vaccinations and an associated rebound of economic activity and of consumer and business confidence, as well as accommodative fiscal and monetary policy. However, participants observed that the economy was far from achieving the Committee's broad-based and inclusive goal of maximum employment and that even with a brisk pace of improvement in the labor market, achieving this goal would take some time.
In their comments about inflation, participants noted that headline PCE price inflation in December, measured on a 12-month basis, was poised to come in well below the Committee's 2 percent longer-term objective. In the relatively near term, a number of participants suggested that there could be increases in the prices of some goods whose production has been subject to supply chain constraints, or soon could be; others anticipated that a possibly abrupt return to normal levels of activity could result in one-time increases in certain prices. Many participants stressed the importance of distinguishing between such one-time changes in relative prices and changes in the underlying trend for inflation, noting that changes in relative prices could temporarily raise measured inflation but would be unlikely to have a lasting effect. Some participants further observed that 12-month PCE inflation was likely to move somewhat above 2 percent for a brief period in the spring as the unusually low monthly observations from last spring roll out of the 12-month calculation. Outside of such near-term fluctuations, participants generally anticipated that inflation would move up along a trajectory consistent with achieving the Committee's objectives over time, supported by stronger economic activity, widespread vaccinations and the associated reduction in social distancing, and accommodative fiscal and monetary policy. Some participants pointed to the continued increase in market-based measures of inflation compensation from the very low levels recorded in the spring as consistent with the view that inflation was likely to move up gradually over time; others noted that survey-based measures were little changed, on net, over the year as a whole.
Participants noted that overall financial conditions remained highly accommodative, in part reflecting investors' optimism about the economic outlook along with the accommodative stance of monetary policy and recent and expected future fiscal policy measures. However, a few participants remarked that credit conditions were relatively tight for borrowers with low credit scores and for some small and medium-sized businesses that rely on bank lending rather than capital markets to meet their financing needs.
While generally acknowledging that the medium-term outlook for real GDP growth and employment had improved, participants continued to see the uncertainty surrounding that outlook as elevated. Participants agreed that the path of the economy depended significantly on the course of the virus and progress on vaccinations. Many participants remarked that the pandemic continued to pose considerable risks to the economic outlook, including risks associated with new virus strains, potential public resistance to vaccination, and potential difficulties in the production and distribution of vaccines. With regard to upside risks, some participants pointed to the possibility that fiscal policy could turn out to be more expansionary than anticipated, that households could display greater willingness to spend out of accumulated savings than expected, or that widespread vaccinations and easing of social distancing could result in a more rapid boost to spending and employment than anticipated. Participants generally viewed the risks to the outlook for inflation as having become more balanced than was the case over most of 2020, although most still viewed the risks as weighted to the downside. As an upside risk to inflation, several participants noted the potential for pandemic-related supply constraints to affect price inflation somewhat more than anticipated or for price increases among industries most adversely affected by the pandemic to be more pronounced than projected.
A number of participants commented on issues related to financial stability. Several participants noted areas of strength. For example, the banking system had shown considerable resilience since the onset of the pandemic. Banks' capital positions had generally remained solid, and earnings were strong. In addition, results from the most recent stress tests indicated that the largest banks could withstand very stressed economic conditions. That said, a few participants stated that it would be important to stay vigilant to ensure that the banking system remained strong and resilient. In addition, several participants noted that the pandemic had highlighted structural vulnerabilities in other parts of the financial system. These included run-prone investment funds in short-term funding and credit markets as well as fragilities in Treasury market functioning; stresses stemming from these vulnerabilities had required substantial intervention by the Federal Reserve in the turbulent market conditions at the onset of the pandemic. A couple of participants commented that it would be important for the appropriate regulatory bodies to address these financial stability vulnerabilities. Regarding asset valuations, some participants commented that equity valuations had risen further, that initial public offering activity was elevated, or that valuations might have been affected by retail investors trading through electronic platforms. In addition, risk spreads on corporate bonds and loans were generally low, even with corporate indebtedness having risen to high levels. A few participants noted that some CRE in sectors that had been most directly affected by the pandemic—such as those involving retail establishments and hotels—faced the prospect of falling prices and increased stress.
In their consideration of monetary policy at this meeting, participants reaffirmed the Federal Reserve's commitment to using its full range of tools to support the U.S. economy during this challenging time, thereby promoting the Committee's statutory goals of maximum employment and price stability. Participants agreed that the path of the economy would depend significantly on the course of the virus, including progress on vaccinations, and that the ongoing public health crisis had continued to weigh on economic activity, employment, and inflation. Participants noted that as the pandemic had worsened across the country in recent months, the pace of the recovery had moderated, with weakness concentrated in the sectors most adversely affected by the pandemic. In contrast, participants remarked that the prospect of an effective vaccine program, the recently enacted fiscal support, and the potential for additional fiscal actions had led them to judge that the medium-term outlook had improved. That said, participants agreed that the economy remained far from the Committee's longer-run goals and that the path ahead remained highly uncertain, with the pandemic continuing to pose considerable risks to the outlook.
In their discussion of the outlook for monetary policy, participants judged that maintaining a highly accommodative stance of policy was essential to foster further economic recovery and to achieve an average inflation rate of 2 percent over time. Participants noted that economic conditions were currently far from the Committee's longer-run goals and that the stance for policy would need to remain accommodative until those goals were achieved. Consequently, all participants supported maintaining the Committee's current settings and outcome-based guidance for the federal funds rate and the pace of asset purchases.
Participants noted that the Committee's current guidance was well suited to the current environment because it describes how policy would respond based on the path of the economy. For example, if progress toward the Committee's goals proved slower than anticipated, the outcome-based guidance would convey the Committee's intention to respond by increasing monetary policy accommodation through maintaining the current level of the target range of the federal funds rate for longer and raising the expected path of the Federal Reserve's balance sheet. In addition, participants noted that the Committee's current outcome-based guidance for both the federal funds rate and balance sheet appeared to be well understood by the public. In that context, participants emphasized that it was important to abstract from temporary factors affecting inflation—such as low past levels of prices dropping out of measures of annual price changes or relative price increases in some sectors brought about by supply constraints or disruptions—in judging whether inflation was on track to moderately exceed 2 percent for some time.
Participants noted that the increase in the Federal Reserve's balance sheet since last March had materially eased financial conditions and was providing substantial support to the economy. The Committee's guidance for asset purchases indicated that asset purchases would continue at least at the current pace until substantial further progress toward its employment and inflation goals had been achieved. With the economy still far from those goals, participants judged that it was likely to take some time for substantial further progress to be achieved. Various participants noted the importance of the Committee clearly communicating its assessment of progress toward its longer-run goals well in advance of the time when it could be judged substantial enough to warrant a change in the pace of purchases.
Committee Policy Action In their discussion of monetary policy for this meeting, members agreed that the COVID-19 pandemic was causing tremendous human and economic hardship across the United States and around the world. They noted that the pace of recovery in economic activity and employment had moderated in recent months, with weakness concentrated in sectors most adversely affected by the pandemic. Weaker demand and earlier declines in oil prices had been holding down consumer price inflation. Overall financial conditions remained accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses. Members also stated that the path of the economy would depend significantly on the course of the virus, including progress on vaccinations. In addition, members agreed that the ongoing public health crisis had continued to weigh on economic activity, employment, and inflation and was posing considerable risks to the economic outlook.
Members agreed that the pandemic continued to pose considerable risks to the outlook. Nonetheless, in light of the expected progress on vaccinations and the change in the outlook for fiscal policy, the medium-term prospects for the economy had improved enough that members decided that the reference in previous post-meeting statements to risks to the economic outlook over the medium term was no longer warranted.
Members agreed that the Federal Reserve was committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum-employment and price-stability goals. All members reaffirmed that, in accordance with the Committee's goals to achieve maximum employment and inflation at the rate of 2 percent over the longer run and with inflation running persistently below this longer-run goal, they would aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent. Members expected to maintain an accommodative stance of monetary policy until those outcomes were achieved.
All members agreed to maintain the target range for the federal funds rate at 0 to 1/4 percent, and they expected that it would be appropriate to maintain this target range until labor market conditions had reached levels consistent with the Committee's assessments of maximum employment and inflation had risen to 2 percent and was on track to moderately exceed 2 percent for some time.
In addition, members agreed that it would be appropriate for the Federal Reserve to continue to increase its holdings of Treasury securities by at least $80 billion per month and agency mortgage-backed securities by at least $40 billion per month until substantial further progress had been made toward the Committee's maximum-employment and price-stability goals. They judged that these asset purchases would help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.
Members agreed that, in assessing the appropriate stance of monetary policy, they would continue to monitor the implications of incoming information for the economic outlook and that they would be prepared to adjust the stance of monetary policy as appropriate in the event that risks emerged that could impede the attainment of the Committee's goals. Members also agreed that, in assessing the appropriate stance of monetary policy, they would take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.
At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until instructed otherwise, to execute transactions in the SOMA in accordance with the following domestic policy directive, for release at 2:00 p.m.:
"Effective January 28, 2021, the Federal Open Market Committee directs the Desk to:
The vote also encompassed approval of the statement below for release at 2:00 p.m.:
"The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals.
The COVID-19 pandemic is causing tremendous human and economic hardship across the United States and around the world. The pace of the recovery in economic activity and employment has moderated in recent months, with weakness concentrated in the sectors most adversely affected by the pandemic. Weaker demand and earlier declines in oil prices have been holding down consumer price inflation. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.
The path of the economy will depend significantly on the course of the virus, including progress on vaccinations. The ongoing public health crisis continues to weigh on economic activity, employment, and inflation, and poses considerable risks to the economic outlook.
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved. The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee's assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. In addition, the Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage-backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee's maximum employment and price stability goals. These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.
In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments."
Voting for this action: Jerome H. Powell, John C. Williams, Thomas I. Barkin, Raphael W. Bostic, Michelle W. Bowman, Lael Brainard, Richard H. Clarida, Mary C. Daly, Charles L. Evans, Randal K. Quarles, and Christopher J. Waller.
Voting against this action: None.
Consistent with the Committee's decision to leave the target range for the federal funds rate unchanged, the Board of Governors voted unanimously to leave the interest rates on required and excess reserve balances at 0.10 percent. The Board of Governors also voted unanimously to approve establishment of the primary credit rate at the existing level of 0.25 percent, effective January 28, 2021.
It was agreed that the next meeting of the Committee would be held on Tuesday–Wednesday, March 16–17, 2021. The meeting adjourned at 10:25 a.m. on January 27, 2021.
Notation Vote By notation vote completed on January 5, 2021, the Committee unanimously approved the minutes of the Committee meeting held on December 15–16, 2020.
_______________________ James A. Clouse Secretary
Source: Board of Governors of the Federal Reserve System · Original release Feb 17, 2021.
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