The Fed wants to start shrinking its $4.5 trillion balance sheet later this year
The manager of the System Open Market Account (SOMA) reported on developments in U.S. and global financial markets during the period since the Committee met on January 31 and February 1, 2017. Global equity prices generally increased further, credit spreads on corporate debt and emerging market bonds narrowed, and yields on Treasury securities rose somewhat. In survey responses, market participants again reported elevated uncertainty about the outlook for U.S. economic policies and about financial asset prices, but various measures of implied volatility nonetheless declined further. The monetary policies of other advanced-economy central banks remained quite accommodative, and some signs of progress on central banks' inflation mandates were evident. Late in the intermeeting period, market participants came to interpret U.S. monetary policy communications as implying high odds of a firming of monetary policy at this meeting, and changes in market prices suggested a slightly steeper path for the federal funds rate over the next few years than was previously anticipated. Survey results indicated that market participants saw a change in the FOMC's policy of reinvesting principal payments on its securities holdings as most likely to be announced in late 2017 or the first half of 2018. Most market participants anticipated that, once a change to reinvestment policy was announced, reinvestments would most likely be phased out rather than stopped all at once.
The staff provided several briefings that summarized issues related to potential changes to the Committee's policy of reinvesting principal payments from securities held in the SOMA. These briefings discussed the macroeconomic implications of alternative strategies the Committee could employ with respect to reinvestments, including making the timing of an end to reinvestments either date dependent or dependent on economic conditions. The briefings also considered the advantages and disadvantages of phasing out reinvestments or ending them all at once as well as whether using the same approach would be appropriate for both Treasury securities and agency mortgage-backed securities (MBS).
The information reviewed for the March 14-15 meeting suggested that the labor market strengthened further in January and February and that real gross domestic product (GDP) was continuing to expand in the first quarter, albeit at a slower pace than in the fourth quarter, with some of the slowing likely reflecting transitory factors. The 12-month change in consumer prices moved up in recent months and was close to the Committee's longer-run objective of 2 percent; excluding food and energy prices, inflation was little changed and continued to run somewhat below 2 percent.
Financial markets were generally quiet over the intermeeting period. The Committee's decision to keep the target range for the federal funds rate unchanged at the January-February FOMC meeting was well anticipated. Broad equity price indexes rose further, leaving some standard measures of valuations above historical norms. Treasury yields rose late in the intermeeting period, following monetary policy communications by several Federal Reserve officials. The broad dollar index was about unchanged. Financing conditions for nonfinancial businesses, households, and state and local governments remained generally accommodative in recent months.
employment and inflation objectives increased. Late in the period, communications from several Federal Reserve officials led to an increase in market-based measures of the probability that the target range for the federal funds rate would rise at the March meeting.
In the U.S. economic projection prepared by the staff for the March FOMC meeting, the near-term forecast for real GDP growth was a little weaker, on net, than in the previous projection. Real GDP was expected to expand at a slower rate in the first quarter than in the fourth quarter, reflecting some data for January that were judged to be transitorily weak, but growth was projected to move back up in the second quarter. The staff maintained its assumption--provisionally included starting with the December 2016 forecast--of a more expansionary fiscal policy in the coming years, but it pushed back the timing of when those policy changes were anticipated to take effect. The negative effect of this timing change on projected real GDP growth through 2019 was offset by a higher assumed path for equity prices and by a lower assumed path for the exchange value of the dollar. All told, the staff's forecast for the level of real GDP at the end of 2019 was essentially unrevised from the previous forecast, and the staff continued to project that real GDP would expand at a modestly faster pace than potential output in 2017 through 2019. The unemployment rate was forecast to edge down gradually through the end of 2019 and to run below the staff's estimate of its longer-run natural rate; the path for the unemployment rate was little changed from the previous projection.
In conjunction with this FOMC meeting, members of the Board of Governors and Federal Reserve Bank presidents submitted their projections of the most likely outcomes for real output growth, the unemployment rate, and inflation for each year from 2017 through 2019 and over the longer run, based on their individual assessments of the appropriate path for the federal funds rate.4 The longer-run projections represented each participant's assessment of the rate to which each variable would be expected to converge, over time, under appropriate monetary policy and in the absence of further shocks to the economy.5 These projections and policy assessments are described in the Summary of Economic Projections (SEP), which is an addendum to these minutes.
In their discussion of monetary policy for the period ahead, members judged that the information received since the Committee's previous meeting indicated that the labor market had continued to strengthen and that economic activity had continued to expand at a moderate pace. Job gains had remained solid, and the unemployment rate had changed little in recent months. Household spending had continued to rise moderately, while business fixed investment appeared to have firmed somewhat.
The vote also encompassed approval of the statement below to be released at 2:00 p.m.:
Voting for this action: Janet L. Yellen, William C. Dudley, Lael Brainard, Charles L. Evans, Stanley Fischer, Patrick Harker, Robert S. Kaplan, Jerome H. Powell, and Daniel K. Tarullo.
By notation vote completed on February 21, 2017, the Committee unanimously approved the minutes of the Committee meeting held on January 31-February 1, 2017.