Federal Reserve Nov 1-2 FOMC Minutes - Full Text
Federal Reserve Nov 1-2 FOMC Minutes - Full Text
November 1-2, 2022
A joint meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve System was held in the offices of the Board of Governors on Tuesday, November 1, 2022, at 10:30 a.m. and continued on Wednesday, November 2, 2022, at 9:00 a.m.1
Jerome H. Powell, Chair
John C. Williams, Vice Chair
Michael S. Barr
Michelle W. Bowman
Susan M. Collins
Lisa D. Cook
Esther L. George
Philip N. Jefferson
Loretta J. Mester
Christopher J. Waller
Charles L. Evans, Patrick Harker, Neel Kashkari, Lorie K. Logan, and Helen E. Mucciolo, Alternate Members of the Committee
Thomas I. Barkin, Raphael W. Bostic, and Mary C. Daly, Presidents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco, respectively
James A. Clouse, Secretary
Matthew M. Luecke, Deputy Secretary
Brian J. Bonis, Assistant Secretary
Michelle A. Smith, Assistant Secretary
Mark E. Van Der Weide, General Counsel
Trevor A. Reeve, Economist
Stacey Tevlin, Economist
Beth Anne Wilson, Economist
Shaghil Ahmed, Brian M. Doyle, Carlos Garriga, Joseph W. Gruber, David E. Lebow, Ellis W. Tallman, and William Wascher, Associate Economists
Patricia Zobel, Manager pro tem, System Open Market Account
Jose Acosta, Senior Communications Analyst, Division of Information Technology, Board
Gene Amromin, Vice President, Federal Reserve Bank of Chicago
Alyssa Arute,2 Manager, Division of Reserve Bank Operations and Payment Systems, Board
Kartik B. Athreya, Executive Vice President, Federal Reserve Bank of Richmond
Penelope A. Beattie, Section Chief, Office of the Secretary, Board
James P. Bergin, Deputy General Counsel, Federal Reserve Bank of New York
David Bowman, Senior Associate Director, Division of Monetary Affairs, Board
Isabel Cairó, Principal Economist, Division of Monetary Affairs, Board
Mark A. Carlson, Adviser, Division of Monetary Affairs, Board
Michele Cavallo, Principal Economist, Division of Monetary Affairs, Board
Satyajit Chatterjee, Vice President, Federal Reserve Bank of Philadelphia
Daniel Cooper, Vice President, Federal Reserve Bank of Boston
Stephanie E. Curcuru, Deputy Director, Division of International Finance, Board
Sally Davies,3 Senior Adviser, Division of International Finance, Board
Burcu Duygan-Bump, Special Adviser to the Board, Division of Board Members, Board
Rochelle M. Edge, Deputy Director, Division of Monetary Affairs, Board
Eric M. Engen, Senior Associate Director, Division of Research and Statistics, Board
Eric C. Engstrom, Associate Director, Division of Monetary Affairs, Board
Jon Faust, Senior Special Adviser to the Chair, Division of Board Members, Board
Andrew Figura, Associate Director, Division of Research and Statistics, Board
Glenn Follette, Associate Director, Division of Research and Statistics, Board
Etienne Gagnon, Assistant Director, Division of Monetary Affairs, Board
Joshua Gallin, Senior Special Adviser to the Chair, Division of Board Members, Board
Michael S. Gibson, Director, Division of Supervision and Regulation, Board
David Glancy, Principal Economist, Division of Monetary Affairs, Board
Valerie S. Hinojosa, Section Chief, Division of Monetary Affairs, Board
Matteo Iacoviello, Senior Associate Director, Division of International Finance, Board
Jane E. Ihrig, Special Adviser to the Board, Division of Board Members, Board
Michael T. Kiley, Deputy Director, Division of Financial Stability, Board
Andreas Lehnert, Director, Division of Financial Stability, Board
Kurt F. Lewis, Special Adviser to the Board, Division of Board Members, Board
Laura Lipscomb, Special Adviser to the Board, Division of Board Members, Board
Mark Meder, First Vice President, Federal Reserve Bank of Cleveland
Ann E. Misback, Secretary, Office of the Secretary, Board
Fernanda Nechio, Vice President, Federal Reserve Bank of San Francisco
Edward Nelson, Senior Adviser, Division of Monetary Affairs, Board
Michael G. Palumbo, Senior Associate Director, Division of Research and Statistics, Board
Andrea Raffo, Senior Vice President, Federal Reserve Bank of Minneapolis
Julie Ann Remache, Policy and Market Monitoring Head, Federal Reserve Bank of New York
Linda Robertson, Assistant to the Board, Division of Board Members, Board
Argia M. Sbordone, Research Department Head, Federal Reserve Bank of New York
Samuel Schulhofer-Wohl, Senior Vice President, Federal Reserve Bank of Dallas
Chiara Scotti, Special Adviser to the Board, Division of Board Members, Board
Seth Searls,2 Associate Director, Federal Reserve Bank of New York
Nitish Ranjan Sinha, Special Adviser to the Board, Division of Board Members, Board
Paul A. Smith, Deputy Associate Director, Division of Research and Statistics, Board
Gustavo A. Suarez, Assistant Director, Division of Research and Statistics, Board
Paula Tkac, Senior Vice President, Federal Reserve Bank of Atlanta
Jeffrey D. Walker,2 Associate Director, Division of Reserve Bank Operations and Payment Systems, Board
Donielle A. Winford, Information Manager, Division of Monetary Affairs, Board
Paul R. Wood, Special Adviser to the Board, Division of Board Members, Board
Rebecca Zarutskie, Special Adviser to the Board, Division of Board Members, Board
Committee Ethics Discussion
The Chair began with a discussion of ethical standards and acknowledged the great privilege and heavy responsibility that come with being entrusted to make policy decisions. There was agreement that the Federal Reserve can be effective only when there is a foundation of public trust. Participants reaffirmed the importance of holding themselves and their staffs accountable for knowing and following the high ethical standards that are set in the Committee's policies, including those on financial transactions and disclosure and on external communications.
Developments in Financial Markets and Open Market Operations
The manager pro tem turned first to a discussion of financial market developments in the United States. Over the period, financial conditions had tightened amid elevated volatility across financial markets. The market-implied path of the policy rate rose, with the median federal funds rate values in the September Summary of Economic Projections and other Federal Reserve communications being viewed by market participants as indicating a commitment to sustaining a restrictive monetary policy stance. With data received over the period also indicating higher-than-expected core inflation, market participants placed high odds on a 75 basis point increase in the target range at the current meeting. Nonetheless, contacts were increasingly focused on the question of when the Committee might slow the pace of future increases in light of the substantial tightening of financial conditions that had occurred over the year. Most respondents to the Open Market Desk's surveys viewed a 50 basis point increase in the target range for the federal funds rate at the December meeting as the most likely outcome. On net, nominal Treasury yields ended the period higher, reflecting both an upward revision in the expected path of the policy rate and higher estimated term premiums. Investment-grade bond yields and mortgage interest rates moved up as well, to the highest levels in many years.
The manager pro tem turned next to a discussion of volatility in global financial markets. In September, an expansionary budget announced by the U.K. government resulted in an extraordinary rise in yields on gilts (long-dated U.K. government securities) and reduced gilt market liquidity. Reflecting its financial stability objective, the Bank of England initiated a temporary gilt purchase program designed to address disorderly market conditions. These purchases and a subsequent cancellation of some announced expansionary U.K. budgetary measures resulted in a retracement of much of the earlier increase in gilt yields.
Elevated volatility in international financial markets contributed to volatility in U.S. core fixed-income markets. In markets for U.S. Treasury securities, some measures of market-implied volatility approached pandemic-era levels. Spreads of yields on agency mortgage-backed securities (MBS) over yields on Treasury securities widened sharply, reflecting the sensitivity of these spreads to increased volatility. The increased volatility appeared to contribute to a decline in measures of market liquidity in core fixed-income markets, in particular around the period associated with U.K. volatility, but market functioning remained orderly.
The foreign exchange value of the dollar appreciated further over the period. Market participants perceived several Asian economies as engaging in foreign exchange market interventions in response to rapid depreciations of local currencies. In the case of advanced economies, whose monetary policy tightening was well under way, market participants focused on communications perceived as signaling a potentially slower pace of policy rate increases in the period ahead.
The manager pro tem turned next to developments in money markets and Federal Reserve operations. Usage of the overnight reverse repurchase agreement (ON RRP) facility remained fairly steady other than during the period surrounding quarter-end. In the period ahead, the relative pace of decline in ON RRP facility balances and reserve balances would depend importantly on shifts in money market conditions. Recent developments, including with regard to the relationship between ON RRP facility balances and money market rates, suggested that, over time, conditions could evolve in a manner that would lead to falling usage of the ON RRP facility. However, the manager pro tem noted that money market conditions could change somewhat more quickly in the lead-up to year-end because of normal factors, such as a Treasury tax payment date in December that could increase the Treasury General Account balance, and year-end position adjustments. This prospect could require money market participants to be more responsive to shifting liquidity conditions and to plan ahead for the coming period. Current market quotes suggested expectations of limited upward pressure on domestic money market rates around year-end. In offshore dollar funding markets, the premium associated with borrowing dollars was modestly higher than at similar points in previous years. Regarding Federal Reserve net income, 11 Reserve Banks reported deferred assets totaling $6.3 billion in the latest H.4.1 statistical release, reflecting the negative net income stemming from rising interest expense. Many other central banks also faced negative net income.
By unanimous vote, the Committee ratified the Desk's domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System's account during the intermeeting period.
Staff Review of the Economic Situation
The information available at the time of the November 1-2 meeting suggested that U.S. real gross domestic product (GDP) had increased at a moderate pace in the third quarter after having declined over the first half of the year. Labor market conditions remained quite tight, and consumer price inflation-as measured by the 12?month percentage change in the price index for personal consumption expenditures (PCE)-remained elevated.
In September, total nonfarm payroll employment posted a solid gain that was somewhat slower than the pace seen in recent months, and the unemployment rate declined 0.2 percentage point to 3.5 percent. The unemployment rate for African Americans declined in September but was more than 2 percentage points above the national average; the unemployment rate for Hispanics declined to a level that was 0.3 percentage point above the national measure. The labor force participation rate edged down in September, and the employment-to-population ratio was unchanged. The private-sector job openings rate, as measured by the Job Openings and Labor Turnover Survey, moved lower, on net, from July to September but remained high. Nominal wage growth continued to be rapid: Average hourly earnings rose 5.0 percent over the 12 months ending in September, while the employment cost index (ECI) of hourly compensation in the private sector, which also includes benefit costs, rose 5.2 percent over this period. However, the three-month change in the ECI in September was noticeably lower than the average pace seen over the first half of the year.
Consumer price inflation remained elevated. Total PCE price inflation was 6.2 percent over the 12 months ending in September, and core PCE inflation, which excludes changes in consumer energy prices and many consumer food prices, was 5.1 percent over the same period. The trimmed mean measure of 12?month PCE price inflation constructed by the Federal Reserve Bank of Dallas was 4.7 percent in September. The staff's common inflation expectations index, which combines information from many indicators of inflation expectations and inflation compensation, was little changed in the third quarter but remained above pre-pandemic levels.
Real PCE rose modestly in the third quarter. Residential investment dropped further, however, and business fixed investment growth was held back by a decline in nonresidential structures investment. Government purchases rose in the third quarter after having declined over the first half of the year.
The nominal U.S. international trade deficit narrowed in the third quarter. Net exports contributed positively to real GDP growth, as real exports stepped up while real imports declined.
Data pointed to weakening foreign economic activity in recent months, weighed down by the economic fallout of Russia's war against Ukraine, headwinds in China, and tighter financial conditions. In many advanced foreign economies, high inflation and disruptions to energy supply contributed to a decline in real disposable incomes and depressed consumer and business confidence. In response, fiscal authorities in Europe and Japan announced packages intended to ease the burden of high inflation on consumers and businesses. In China, data indicated weaker momentum in economic activity and a further deterioration in the property market. Weaker global demand has also resulted in a pronounced slowdown in manufacturing, which weighed on activity in export-oriented emerging market economies in Asia. Consumer price inflation rose further in October in many foreign economies, reflecting past increases in energy and food prices, but also a continued broadening of inflationary pressure within core prices. In response to high inflation, many central banks further tightened monetary policy, albeit at a slower pace in some cases.
Staff Review of the Financial Situation
Over the intermeeting period, U.S. Treasury yields and the market-implied federal funds rate path moved substantially higher. Broad domestic equity prices were little changed, on net, amid high market volatility, while corporate bond yields increased notably. The rise in borrowing costs appeared to have slowed the volume of financing in many credit markets. Credit quality remained sound overall, al­though there are some signs of deterioration for lower-rated borrowers.
The expected path of the federal funds rate implied by a straight read of financial market quotes rose notably over the intermeeting period, largely reflecting more-restrictive-than-expected monetary policy communications and data releases that pointed to inflation moving down more slowly than previously expected. On net, nominal Treasury yields increased across the maturity spectrum. The increases in nominal yields at medium- and longer-term horizons were primarily accounted for by higher real yields, though inflation compensation measures rose as well.
Broad equity price indexes fell significantly early in the intermeeting period, with inflation news and monetary policy expectations likely being the main drivers of stock price movements. However, equity prices later rebounded and ended the period essentially unchanged on net. One-month option-implied volatility on the S&P 500-the VIX-declined slightly, on net, but remained at the upper end of its range since mid-2020.
Conditions in short-term funding markets remained stable over the intermeeting period, with the September increase in the target range for the federal funds rate and the associated increases in the Federal Reserve's administered rates passing through quickly to overnight money market rates. In secured markets, money market rates remained soft relative to the ON RRP offering rate, attributed to subdued Treasury bill supply, elevated demand for Treasury collateral, and investor demand for very short-term assets amid uncertainty over the pace of policy rate increases. Daily take-up in the ON RRP facility remained elevated amid this softness in repurchase agreement rates. Money market fund net yields rose along with the rise in administered rates, while retail bank deposit rates increased modestly on balance.
Foreign asset prices were volatile over the intermeeting period as investors grappled with the combination of a deteriorating global growth outlook and synchronous policy tightening undertaken by major central banks in response to high inflation. Fiscal and political developments in the United Kingdom added to market volatility but left little net imprint. On balance, sovereign bond yields in most advanced foreign economies rose modestly and equity prices were mixed. The U.S. dollar appreciated against most major currencies, driven by widening yield differentials between the United States and the rest of the world and further deterioration of the foreign growth outlook. The Japanese yen weakened against the dollar, on net, even though Japanese authorities intervened to support the yen. The Chinese renminbi depreciated significantly against the dollar as continuation of the zero-COVID policy and increased investor concerns about longer-term growth prospects weighed on the currency. Investors continued to withdraw from dedicated emerging market economy and European funds amid further increases in U.S. Treasury yields and concerns over foreign economic growth.
In domestic credit markets, borrowing costs continued to rise over the intermeeting period. Yields for corporate bonds and institutional leveraged loans increased. Bank interest rates for commercial and industrial (C&I) loans continued the upward trend observed since the first quarter of 2022, while a rising proportion of small businesses reported facing increased borrowing costs in September. Municipal bond yields increased across ratings categories. Residential mortgage rates rose further in the period following the September FOMC meeting, nearly reaching their highest levels since 2002. Interest rates on existing credit card accounts continued to trend upward, reflecting increases in the federal funds rate that were quickly passed through to prime rates.
Credit continued to be generally available to businesses and households despite some signs of tightening lending standards in certain segments, but high borrowing costs reduced the demand for credit in many markets. Issuance of corporate bonds, al­though quite strong in early September, slowed significantly in late September and October. Gross institutional leveraged loan issuance declined in September. Equity issuance and gross issuance of municipal bonds remained weak in September and October.
Business loans at banks continued to expand in September but at a slower pace than observed in past months. In the October Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS), banks reported having tightened C&I and commercial real estate (CRE) lending standards over the previous three months. Meanwhile, issuance of commercial mortgage-backed securities (CMBS) also slow