Federal Open Market Committee Minutes
May 2-3, 2023
A joint meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve will be held on Tuesday, May 2, 2023 at 10:00 a.m. in the Office of the Board of Governors and will continue on Wednesday, May 3, 2023 at 9:00 a.m.1
Jerome H. Powell, Chairman
John C. Williams, Vice Chair
Michelle W. Bowman
Lisa D. Cook
Austin D. Goolsby
Philip N. Jefferson
Lori K. Logan
Thomas I. Barkin, Raphael W. Bostic, Mary C. Daly, Loretta J. Mester, and Sushmita Shukla, Committee Alternate Members
James Bullard and Susan M. Collins, President of the St. Louis Federal Reserve Bank and Boston Federal Reserve Bank, respectively
Kelly J. Dubbert, Interim President of the Federal Reserve Bank of Kansas City
Joshua Garin, Secretary
Matthew M. Luecke, Deputy Secretary
Brian J. Bonis, Assistant Secretary
Michelle A. Smith, Assistant Secretary
Mark E. Van Der Weide, General Counsel
Richard Ostrander, Deputy General Counsel
Trevor A. Reeve, Economist
Stacey Tevlin, Economist
Beth Anne Wilson, Economist
Shaghil Ahmed, James A. Clouse, Anna Paulson, Andrea Raffo, Chiara Scotti and William Wascher, Associate Economists
Roberto Perli, System Open Market Account Manager
Julie Ann Remache, Associate Manager, System Open Market Accounts
Stephanie R. Aronson,2Senior Deputy Director, Research and Statistics Department, Board of Directors
Jose Acosta, Senior Communications Analyst, Board Information Technology
Andre Anderson, First Deputy Governor, Federal Reserve Bank of Atlanta
Kartik B. Athreya, Executive Vice President, Federal Reserve Bank of Richmond
Penelope A. Beatty,2Director of the Office of the Secretary of the Board of Directors
Daniel O. Beltran, Deputy Deputy Director, International Finance Division, Board of Directors
Carol C. Bertaut, Senior Advisor, International Finance Division, Board of Directors
Mark A. Carlson,2Advisor to the Monetary Affairs Department of the Board of Directors
Michele Cavallo, Chief Economist, Monetary Affairs Division, Board of Directors
Juan C. Climent, Special Advisor to the Board of Directors, Division of Board Membership, Board of Directors
Stephanie E. Curcuru, Deputy Director, International Finance Division, Board of Directors
Ahmet Degerli, Economist, Monetary Affairs Division, Board of Directors
John C. Driscoll,2Chief Economist, Board Research & Statistics
Wendy E. Dunn,2Advisor to the Board of Directors Research and Statistics
Burcu Duygan-Bump, Associate Director, Research and Statistics, Board of Directors
Rochelle M. Edge, Deputy Director, Monetary Affairs Division, Board of Directors
Matthew J. Eichner,3Director, Operations and Payment Systems, Reserve Bank of the Board
Eric C. Engstrom, Deputy Director, Monetary Affairs Division of the Board of Directors
Jon Faust, Board Member Division Chair Senior Special Advisor, Board of Directors
Giovanni Favara, Assistant Director, Monetary Affairs Division, Board of Directors
Glenn Follette, Associate Director, Research and Statistics, Board of Trustees
Jennifer Gallagher, Board Assistant, Division of Board Members, Board of Directors
Peter M. Garavuso, Senior Information Manager, Monetary Affairs Division, Board of Directors
Carlos Garriga, Senior Vice President, Federal Reserve Bank of St. Louis
Michael S. Gibson, Director, Board Oversight and Regulation
Kristen Graham,2Special Advisor to the Board, Division of Board Members, Board of Directors
Joseph W. Gruber, Executive Vice President, Federal Reserve Bank of Kansas City
Valerie S. Hinojosa, Chief, Monetary Affairs Division, Board of Directors
Jane E. Ihrig, Special Advisor to the Board, Division of Board Members, Board of Directors
Ghada M. Ijam, Chief Information Officer, Federal Reserve Bank of Richmond
Michael T. Kiley, Deputy Director, Financial Stability Division, Board of Directors
Kyungmin Kim, Senior Economist, Monetary Affairs Division, Board of Directors
David E. Lebow, Senior Associate Director, Research and Statistics, Board of Trustees
Sylvain Leduc, Director of Research, Federal Reserve Bank of San Francisco
Andreas Lehnert, Head of the Financial Stability Division of the Board of Directors
Kurt F. Lewis, Special Advisor to the Board, Division of Board Members, Board of Directors
Laura Lipscomb, Board Member Division Board Special Advisor, Board of Directors
David López-Salido, Senior Deputy Director, Monetary Affairs, Board of Directors
Kurt Lunsford, Senior Research Economist, Federal Reserve Bank of Cleveland
Patrick E. McCabe, Associate Director, Research and Statistics, Board of Trustees
Davide Melcangi, Research Economist, Federal Reserve Bank of New York
Ann E. Misback, Secretary, Office of the Board Secretary
David Na, Chief Financial Institutions and Policy Analyst, Monetary Affairs Division, Board of Directors
Makoto Nakajima, Deputy Governor, Federal Reserve Bank of Philadelphia
Michelle M. Neal, Director of Markets, Federal Reserve Bank of New York
Giovanni Olivei, Senior Vice President, Federal Reserve Bank of Boston
Michael G. Palumbo, Senior Associate Director, Research and Statistics, Board of Trustees
Marcel A. Priebsch, Chief Economist, Monetary Affairs Division of the Board of Directors
Nitish Ranjan Sinha, Board Member Division Board Special Advisor, Board of Directors
John J. Stevens, Senior Associate Director, Research and Statistics, Board of Trustees
Paula Tkac, Senior Vice President, Federal Reserve Bank of Atlanta
Clara Vega, Special Advisor to the Board, Division of Board Membership, Board of Directors
Annette Vissing-Jørgensen, Senior Advisor, Monetary Affairs, Board of Directors
Jeffrey D. Walker,3Deputy Director, Operations and Payment Systems, Reserve Bank of the Board
Min Wei,2Senior Deputy Director of Monetary Affairs Department of the Board of Directors
Paul R. Wood, Board Member Division Board Special Advisor, Board of Directors
Rebecca Zarutskie, Board Member Division Board Special Advisor, Board of Directors
Development of financial markets and open market operations
The manager begins by reviewing financial market developments. Financial market conditions eased during the meeting as investor confidence in the banking system stabilized and asset prices were less volatile. On a net basis, nominal Treasury yields have fallen, equities have appreciated, credit spreads have tightened, and the trade-weighted value of the dollar has weakened. Implied volatility measures fell across markets. However, policy-sensitive interest rates have been volatile over the period, notably in response to economic data, but also because of market perceptions of risk and liquidity conditions. Liquidity in the Treasury market has improved over the period, but challenges remain. Treasury cash and futures markets continued to function in an orderly manner despite lower-than-normal liquidity.
Regarding developments later in the session, the closure and acquisition of First Republic Bank was seen as in order, although investors remained focused on strains in the banking sector. In addition, the U.S. Treasury Department announced that if the debt ceiling is not raised or suspended, the federal government may not be able to fully meet its obligations as early as June 1, but the actual date may be several weeks later. Yields on Treasury bills and coupon securities maturing in the first half of June rose notably amid wild volatility.
In late March and April, deposit outflows from small and medium-sized banks basically stopped. While regional bank stock prices fell further during this period, for the vast majority of banks, these declines appear to reflect mainly expectations of lower profitability rather than solvency issues. Market participants are wary of the possibility of renewed pressure on banks.
Responses to the Open Market Service survey of junior dealers and surveys of market participants suggest that investors' macroeconomic outlook has changed little since March, despite continued focus on the impact of expected credit tightening. Respondents see upside inflation risks, although less than in March.
Market participants widely expect a 25 basis point hike at the May meeting and see the resulting rate as the likely peak of the current tightening cycle. Compared with March, survey respondents were much more likely to see the federal funds rate peaking between 5% and 5.25%. However, respondents still see a strong possibility that the peak rate could be higher than 5.25%. Respondents expect peak rates to remain on hold during the January 2024 FOMC meeting.
On the balance sheet and money market fronts, balance sheet reduction continues to proceed well, with overnight secured and unsecured rates continuing to trade within the target range for the federal funds rate. Respondents to the department's survey generally expect overnight reverse repurchase agreement (ON RRP) outstandings to remain elevated in the short term before falling later this year. The ON RRP facility continues to support effective policy implementation and control of the federal funds rate, providing a strong floor on money market rates. Balances at the ON RRP facility remained within recent ranges, suggesting that use of the facility was not an important factor driving deposit outflows from the banking system. Use of the ON RRP facility declined at times during the session as interest rates on overnight secured money market instruments and short-term Federal Home Loan bank debt rose.
The Committee voted unanimously to renew the reciprocal currency arrangements with the Bank of Canada and the Bank of Mexico; these arrangements are related to the Federal Reserve's participation in the 1994 North American Framework Agreement. In addition, the committee voted unanimously to renew the U.S. dollar and foreign currency liquidity swap arrangements with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank and the Swiss National Bank. Each April or May FOMC meeting votes to keep the Fed engaged in these standing arrangements.
The committee voted unanimously to approve the department's domestic deal during the session. There will be no foreign currency intervention in the system account during the meeting.
Economic Situation Staff Review
Information available at the time of the May 2-3 meeting suggested that real gross domestic product (GDP) expanded at a modest pace in the first quarter. Labor market conditions remained tight in March amid strong job growth and a low unemployment rate. Consumer price inflation -- as measured by the 12-month percentage change in the personal consumption expenditures (PCE) price index -- continued to move higher in March. Data on economic activity have been limited in the period since banking stress began in mid-March, although several recent surveys—such as the Senior Loan Officer Opinion Survey of Bank Lending Practices (SLOOS) in April, the National Banking Federation The Independent Business March survey and the New York Fed's March survey of consumer expectations suggest that bank credit conditions are tightening further.
The pace of growth in total nonfarm payrolls slowed in March but remained strong, and the unemployment rate fell to 3.5%. Unemployment fell to 5.0 percent for African Americans and 4.6 percent for Hispanics. Composite measures of the labor force participation rate and the employment-to-population ratio both edged up. The job vacancy rate in the private sector, as measured by the Job Openings and Labor Turnover Survey, fell notably between February and March but remains elevated.
Recent indicators of nominal wage growth continue to fall from last year's peak, but remain elevated. Average hourly earnings for all workers rose 4.2% in the 12 months through March, well below a peak of 5.9% a year ago. The employment cost index (ECI) for private sector workers rose 4.8% in the year to March, down from a peak of 5.5% in the year ended last June.
Consumer price inflation remained elevated in March but continued to moderate. Headline PCE price inflation was 4.2% in the 12 months ended March, and core PCE price inflation -- which excludes changes in consumer energy prices and many consumer food prices -- was 4.6%; headline inflation measures were markedly lower than January's levels, while core indicators declined only slightly. The adjusted average measure of 12-month PCE price inflation constructed by the Dallas Fed in March was 4.7%. Measures of longer-term inflation expectations based on the latest surveys from the University of Michigan Consumer Survey for April and the New York Fed's March Consumer Expectations Survey remained within the range of values reported in recent months; measures of near-term inflation expectations from these surveys rose , but still below last year's peak.
Real GDP growth was modest in the first quarter, led by PCE growth. Growth in consumer spending picked up over the quarter as a surge in January was followed by small net declines in February and March. However, light vehicle sales rebounded significantly in April. Growth in business fixed investment slowed further in the first quarter, and new orders for nondefense capital goods, excluding aircraft, continued to decline in March, pointing to recent weakness in capital goods shipments. Residential investment fell further in the first quarter, but at a slower pace than last year. Net exports made a small positive contribution to GDP growth in the first quarter, as exports rebounded more than imports from the fourth-quarter decline. U.S. manufacturing output fell in March, and recent indicators such as the national and regional new orders index point to further weakness in factory output in the coming months.
Foreign economic activity rebounded in first quarter, reflecting reopening of Chinese economy from COVID-19-related shutdowns, economic recovery in Canada and Mexico, and resilience of European economies to energy price shocks from Russia's war on Ukraine; mild winter It would also help reduce energy demand in Europe. In contrast, growth in the rest of emerging Asia was weak in the first quarter, largely due to a marked slowdown in the tech cycle.
Oil prices edged lower on concerns about the outlook for the global economy. Moderating retail energy inflation continued to help moderate headline consumer price inflation in many advanced foreign economies (AFEs). Core inflation showed signs of easing in some foreign economies but remained stubbornly high amid tight labor markets. As a result, many foreign central banks continued to tighten monetary policy. That said, some central banks have paused policy rate hikes or changed forward guidance due to uncertainty over the global economic outlook and near-term stress in the banking sector. Some also signaled a move to a more data-dependent approach in future decision-making.
Staff Review of Financial Status
Sentiment improved during the meeting, with concerns over a sharp recent slowdown in economic activity appearing to have receded as stress in the banking sector eased. The market-implied path for the federal funds rate in 2023 is modestly higher over that period. While shares of some regional banks fell and stock market volatility eased, broad stock indexes rose. Financing conditions continue to be restricted, and borrowing costs remain high.
During the meeting, markets were pricing in a modestly higher path for the federal funds rate through 2023, unwinding some of the sharp decline seen in early March amid stress in the banking sector. For 2024 and 2025, the implied policy path based on overnight index swaps fluctuates amid mixed economic data, netting a slight decline. Nominal treasury bond yields with a maturity of more than one year fell, and medium- and long-term inflation compensation fell slightly. Measures of uncertainty about the path of interest rates fell slightly, but remained sharply higher by historical standards.
A broad index of stock prices rose modestly, while the VIX - the implied volatility of one-month options on the S&P 500 - fell notably during the session. However, market players remain concerned about developments in regional banks. Share prices of the banks generally fell during the session, in part due to rising funding costs and concerns over a possible deterioration in profitability and commercial real estate (CRE) lending performance.
Risk sentiment in foreign financial markets also improved during the session as investors fretted less about the banking sector, leading to modest gains in broad stock indexes and a decline in options-implicit measures of equity volatility. Still, euro zone banks’ equity prices have fallen on net and remain well below levels seen before banking stress began in early March. Market expectations for policy rates and sovereign yields were little changed in most AFEs, but rose notably in the UK, partly on higher-than-expected wages and inflation data. The dollar continued its earlier decline as the divergence between US and AFE sovereign yields narrowed and global risk sentiment improved. Outflows earmarked for emerging markets slowed to near zero during the session, while net sovereign credit spreads in emerging market economies were little changed.
U.S. commercial paper (CP) and negotiable certificates of deposit (NCD) markets stabilized during the session. Spreads on lower-rated non-financial CPs, which surged after the collapse of Silicon Valley banks, have narrowed sharply. Outstanding levels of CPs and NCDs increased slightly during the session, while the share of short-term unsecured issuances of CPs and NCDs fell to normal levels, reflecting a net easing of stress related to regional banks.
Conditions in the overnight bank funding and repurchase agreement markets remained stable during the meeting, with a 25 basis point hike in the Fed's managed rate following the March FOMC meeting fully passed through to overnight money market rates. During this period, the effective federal funds rate posted daily was 4.83%, while the secured overnight financing rate averaged 4.81% – slightly higher than the rate issued by the ON RRP facility. Daily uptake in ON RRP instruments remains high, reflecting continued heavy use by money market mutual funds, continued uncertainty about the policy path, and limited availability of alternative investments such as Treasury bills.
In domestic credit markets, borrowing costs for businesses and households fell moderately in some markets but remained high. Corporate bond yields fell modestly during the session, while agency residential mortgage-backed securities yields and the 30-year residential mortgage rate edged lower. However, short-term small business lending rates continued to rise in March, reaching their highest level since the global financial crisis.
Credit flows to businesses and households moderated moderately, as market volatility amid high borrowing costs and banking stress appeared to weigh on funding volumes in some markets. While issuance of non-financial corporate bonds and leveraged loans slowed markedly amid banking stress in mid-March, issuance normalized during the session as the pressure subsided and broader market sentiment rebounded later in the month. Speculative-grade nonfinancial bond issuance was solid in April, while investment-grade nonfinancial bond issuance was subdued, partly due to seasonal factors. Growth in commercial and industrial (C&I) loans on banks' books is weak in the first quarter of 2023 compared to 2022.
In the April SLOOS, banks reported further tightening of standards across most loan categories over the past three months, following a general tightening in previous quarters. Banks of all sizes expect their lending standards to tighten further over the remainder of 2023. The most frequently cited reason for tightening C&I standards and terms is that the economic outlook is less favorable or more uncertain. Mid-sized banks with total consolidated assets between $50 billion and $250 billion tightened their C&I standards more than other banks and also reported that their current or expected deterioration in liquidity positions was a significant reason for their tightening. These banks account for just over a quarter of business and industrial loans. Banks of all sizes are expected to tighten C&I standards further over the remainder of the year, with smaller and mid-sized banks reporting this expectation more broadly.
While CRE loan growth on bank balance sheets remained strong in the first quarter, the April SLOOS points to a further tightening of lending standards across all CRE loan categories in the first quarter. The tightening of standards in the first quarter was reported to be particularly prevalent among mid-sized banks. Banks also reported that they expected further tightening of CRE standards over the remainder of the year, with mid-sized banks reporting this expectation very broadly. Meanwhile, issuance of commercial mortgage-backed securities (CMBS) was very slow in February and March due to increased spreads and volatility and tighter lending standards.
Credit remains widely available in the residential mortgage market to borrowers with high credit scores who meet standard compliance lending criteria, but the supply of credit to households with lower credit scores remains tight. In the April SLOOS, the net percentage of banks reporting standards tightening across all consumer loan categories rose in the first quarter relative to historical ranges, and respondents expect standards to continue tightening through the remainder of 2023. Even so, consumer loans grew strongly in the first quarter, and revolving credit balances continued to grow strongly.
Overall, credit quality remained stable for most businesses and households, but deteriorated for businesses with lower credit ratings and for households with lower credit scores. As of the end of the fourth quarter of last year, the credit quality of industrial and commercial real estate loans on banks' balance sheets remained sound. However, in the April SLOOS, banks often cited concerns over the deterioration in the quality of their loan portfolios as justification for expecting to tighten standards for the rest of the year.
Staff provided an update on its assessment of the stability of the financial system. Despite concerns about the profitability of some banks, staff see the banking system as sound and resilient. Staff judged that pressure on asset valuations remained moderate. In particular, the staff noted that equity risk premiums and corporate bond spreads have declined over the past few months, but remain close to historical medians. Valuations in the residential and commercial real estate markets remain elevated. Rising borrowing costs have helped ease price pressures in the real estate market, with year-on-year house price growth slowing. The staff noted that the CRE industry remains vulnerable to sharp price falls. Given the shift to remote working in many industries, this possibility appears to be particularly prominent for office and downtown retail properties. The staff also noted that the analysis found that while losses for CRE debt holders are likely to be modest overall, some banks and the CMBS market could come under pressure if the prices of these properties fell significantly.
Staff assesses that vulnerabilities related to household leverage remain moderate. For nonfinancial corporations, debt has declined relative to nominal GDP but remains near record highs. The ability of non-financial corporations to service their debt has kept pace with rising debt burdens and interest rates.
In terms of leverage in the financial sector, entering the recent period of banking stress, banks of all sizes demonstrated strong capacity to absorb losses, as measured by regulatory capital ratios well above pre-Great Recession prevailing levels. However, the ratio of tangible common equity to total tangible assets of banks (excluding global systemically important banks) has fallen sharply in recent quarters, partly because of a sharp decline in the value of securities held in their portfolios. Most banking systems have been able to effectively manage this interest rate exposure. However, three bank failures due to mismanagement of interest rate risk and liquidity risk have put pressure on some additional banks. For the non-bank sector, leverage at large hedge funds remained elevated in Q3 2022, a fact that has not changed, according to the latest data from a survey of senior credit officers' opinions on dealer financing terms.
With regard to vulnerabilities related to funding risk, the staff assesses that while funding stress at some banks is notable, it remains low for the banking system as a whole, especially given the official Intervention Corporation and the U.S. Treasury support bank depositors. Outflows of bank deposit funds, mostly concentrated in a few banks, had slowed in mid-March.
Employee Economic Outlook
Economic projections prepared by the staff for the May FOMC meeting continue to assume that, amid already tight financial conditions, the impact of an expected further tightening of bank credit conditions will lead to a mild recession beginning later in the year, followed by a moderately paced recession recover. Real GDP is expected to decelerate over the next two quarters, before declining moderately in the fourth quarter of this year and the first quarter of next year. Real GDP growth in 2024 and 2025 is projected to be lower than staff estimates of potential output growth. Unemployment is expected to rise this year, peak next year, and then begin to gradually decline in 2025. Resource utilization in both product and labor markets is projected to ease, with actual output levels below workers' potential estimates and unemployment rising in early 2024 above workers' estimates of their natural rate of unemployment at that time.
The staff's core inflation forecast was revised up slightly relative to the previous forecast. The latest data on core PCE commodity prices and the ECI, which measures wage growth (the latter having an important impact on staff forecasts for core non-housing services inflation), were higher than expected, with staff judging supply and demand imbalances in goods markets and labor as the pace of market easing A bit slower than expected. Based on four-quarter changes, headline PCE price inflation is expected to be 3.1 percent this year, with core inflation at 3.8 percent. Core goods inflation is expected to decline further this year before remaining subdued, housing services inflation is expected to peak in the first quarter and decline for the remainder of the year, and core non-housing services inflation is expected to moderate gradually as nominal wage growth moderates further . Reflecting the expected impact of less tight resource utilization, core inflation is expected to moderate next year, but remains slightly above 2 percent. Headline inflation is expected to undershoot core inflation this year and next, with an expected decline in consumer energy prices and a sharp slowdown in food price inflation. Both aggregate PCE price and core PCE price inflation are projected to be around 2% through 2025.
Staff continue to judge that uncertainty surrounding the baseline forecast is substantial and continue to view risks as being largely dependent on the impact of banking sector developments on macroeconomic conditions. Risks to economic activity and inflation would be tilted to the upside if banking stress abates more quickly than in the baseline assumptions or has a smaller impact on macroeconomic conditions, which the staff sees as less likely than in the baseline. Risks around the baseline are skewed towards downside risks to economic activity and inflation if banking and financial conditions and their implications for macroeconomic conditions deteriorate beyond the baseline assumption. Overall, the staff sees risks to the baseline inflation forecast as tilted to the upside, as an economic upside scenario with higher inflation is more likely than a downside scenario with lower inflation, and inflation is likely to continue to be more persistent than expected, in the long run for inflation After being elevated, inflation expectations can become volatile.
Views from participants on the current situation and economic outlook
In discussing current economic conditions, participants noted that economic activity expanded at a moderate pace in the first quarter. Still, job growth has been strong in recent months and the unemployment rate remains low. Inflation remains high. Participants agreed that the U.S. banking system is sound and resilient. They commented that tighter credit conditions for households and businesses could weigh on economic activity, hiring and inflation. However, participants agreed that the extent of these effects remains uncertain. Against this backdrop, participants agreed that they remained highly concerned about inflation risks.
Assessing the economic outlook, participants noted that despite a pick-up in consumer spending, real GDP growth in the first quarter of the year was modest due to a sharp drop in inventory investment, a volatile category. Participants generally projected real GDP growth in 2023 to be below its long-term trend rate, reflecting the impact of restrictive financial conditions. Participants assessed that the cumulative tightening of monetary policy over the past year had largely contributed to tighter financial conditions. They also judged that stress in the banking sector could further weigh on economic activity, although the extent of this remained highly uncertain. With inflation running well above the Committee's long-run objective of 2 percent and core inflation showing only some signs of easing, participants expected that it would take some time for real GDP growth to subside and labor market conditions to moderate. Bringing aggregate supply and aggregate demand into better balance over time and reducing inflationary pressures.
Participants generally noted that the actions taken by the Federal Reserve and other government agencies in response to banking developments have been largely effective in relieving pressure. Conditions in the banking sector have broadly improved since early March, with initial deposit outflows from some regional banks and smaller banks slowing sharply in subsequent weeks, they noted. Many participants commented that recent developments in the banking sector have resulted in tighter lending standards than in previous quarters, especially among small and mid-sized banks. Some participants pointed out that small businesses tend to rely on small and medium-sized banks as their main source of credit and thus may be disproportionately affected by tighter lending conditions. Several participants mentioned that access to credit did not appear to have declined significantly since the recent stress in the banking sector. In the quarters ahead, stress in the banking sector is likely to prompt banks to tighten lending standards more than they would have done alone in response to rising interest rates, participants said. However, participants generally noted that it is too early to assess with confidence the magnitude and persistence of these effects on economic activity.
Discussing the household sector, participants noted that consumer spending was strong in the first quarter, supported by an increase in personal disposable income. They also noted that the strong quarter was largely driven by very strong spending growth in January, while real spending fell modestly in February and March. Consistent with this slowdown, participants projected that consumer spending is likely to grow at a lower pace through the remainder of 2023, largely reflecting the impact of tightening financial conditions over the past year . Participants said higher interest rates would continue to depress households' rate-sensitive spending, such as housing and durable goods spending. Participants also noted that increased uncertainty related to recent developments in the banking sector could affect consumer confidence and spending. However, several participants observed that high-frequency indicators of consumer confidence have not yet shown significant changes as the banking sector has developed. Discretionary spending by consumers, especially low- and middle-income households, continued to decline in the face of rising inflation and higher borrowing rates, some participants said; some of the decline was reportedly due to a shift in purchases to lower-cost options.
In the business sector, participants observed weak growth in business fixed investment in the first quarter, reflecting relatively high borrowing costs, weak business sector output growth, and heightened business concerns about the overall economic outlook. Participants expected the tightening of bank lending standards to further affect companies' capital expenditures. Several participants noted that, based on reports from contacts in their regions, concerns related to stress in the banking sector could add further uncertainty to an already weak economic outlook, increasing caution among businesses, especially those heavily reliant on banks Credit for SMEs to finance their operations. However, some other participants mentioned that so far, developments in the banking sector appear to have had little impact on the availability of credit to firms.
Participants noted that the labor market remains very tight, with strong payroll growth in March and a near-record low unemployment rate. Nonetheless, they noted some signs that the supply-demand imbalance in the labor market is easing, with young and middle-aged labor force participation rates returning to pre-pandemic levels and job vacancy and turnover rates falling further. Additionally, some participants noted that their district contacts reported less difficulty recruiting, lower turnover rates, and some layoffs. Participants expected that job growth would likely slow further, reflecting a slowdown in aggregate demand, partly due to tighter credit conditions. Participants said that while nominal wage growth appears to be gradually slowing, given current estimates of trend productivity growth, it remains well above the longer-run level of the Committee's 2 percent inflation objective. Participants generally expected that under appropriate monetary policy, labor market imbalances would gradually decrease, thereby easing wage and price pressures.
Participants agreed that inflation was unacceptably high. They commented that data through March suggested that inflation, especially core inflation measures, had fallen more slowly than they expected. Participants observed that while core commodity inflation had moderated since the middle of last year, the deceleration in recent months had been slower than expected, although reports from multiple business contacts on supply chain constraints continued to ease. In addition, participants highlighted that core non-housing services inflation has shown little sign of slowing down over the past few months. Some participants said that further easing of labor market conditions was needed to help reduce this component of inflation. With regard to housing services inflation, participants observed that soft rent data for leases signed by new tenants was beginning to affect measured inflation. They expect this process to continue and help lead to a decline in housing services inflation this year. Discussing the likely impact of recent banking developments on inflation, several participants said that tighter credit conditions may not exert much downward pressure on inflation, in part because reduced credit availability may depress aggregate supply and demand. Several participants noted that measures of longer-term inflation expectations, as measured by surveys of households and businesses, remained stable. Participants emphasized that, with appropriate monetary policy tightening, well-anchored longer-term inflation expectations would support a return to the Committee's 2 percent long-term objective.
Participants noted that risks associated with near-term stress in the banking sector led them to raise their already high assessment of uncertainty about the economic outlook. Risks to the outlook for economic activity were skewed to the downside, participants said, although some pointed to risks running both ways. In discussing sources of downside risks to economic activity, participants raised the possibility that cumulative tightening of monetary policy could have a larger-than-expected impact on economic activity and that further pressure on the banking sector could be greater than anticipated. Some participants also noted their concern that the statutory ceiling on federal debt may not be raised in a timely manner, which could severely disrupt the financial system and lead to a tightening of financial conditions that would weaken the economy. With regard to inflation risks, participants noted that price pressures could be more persistent than expected due to factors such as stronger-than-expected consumer spending and tight labor markets, especially if bank stress has had a modest impact on economic activity. However, some participants noted that further tightening of credit conditions could slow household spending and reduce business investment and hiring, all of which would support continued supply-demand rebalancing in product and labor markets and reduce inflationary pressures.
During the discussion on financial stability, several participants commented on recent developments in the banking sector. Those participants noted that the banking system is sound and resilient, and that actions taken by the Fed in coordination with other government agencies have helped calm conditions in the sector, but stress remains. Some participants noted that the banking sector is generally well capitalized and that the most serious problems in the banking system appear to be limited to a small number of banks with poor risk management or a large number of specific vulnerabilities. These vulnerabilities include significant unrealized asset losses from rising interest rates, heavy reliance on uninsured deposits, or tight profitability from rising funding costs. Some participants also pointed to high exposure to such assets as a weakness for some banks due to CRE's weak fundamentals, such as high vacancy rates in the office sector. Participants also commented on the susceptibility of some non-bank financial institutions to runs or instability. These include money market funds that have seen significant cash inflows recently; hedge funds that often use significant leverage and may hold concentrated positions in certain assets with low or no margin; thinly capitalized non-bank mortgage servicers; and digital asset entities . Many participants mentioned that the debt ceiling must be raised in a timely manner to avoid the risk of serious adverse disruptions to the financial system and the economy as a whole. Several participants noted the importance of orderly functioning of the U.S. Treasury market, or emphasized the importance of authorities continuing to address issues related to market resilience. Several participants emphasized that the Fed should stand ready to use its liquidity facilities, as well as its microprudential and macroprudential regulatory tools, to mitigate future financial stability risks.
As they considered appropriate monetary policy action at this meeting, participants agreed that inflation remained substantially elevated relative to the Committee's 2 percent longer-run objective. Economic activity expanded at a moderate pace in the first quarter. The labor market continues to be tight, with strong job growth in recent months and unemployment remaining low. Participants also noted that recent developments in the banking sector could lead to tighter credit conditions for households and businesses, which would weigh on economic activity, employment and inflation. However, the extent of these effects remains uncertain. Against this backdrop, all participants agreed that a 25 basis point increase in the target range for the federal funds rate to 5 percent to 5-1/4 percent was appropriate. All participants agreed that it was also appropriate to continue the process of reducing the Fed's securities holdings, as outlined in its previously announced plan to reduce the size of the Fed's balance sheet.
In discussing the policy outlook, there was general agreement that additional increases in the target range might be appropriate given the lagged effects of cumulative tightening of monetary policy and the potential impact on the economy of further tightening of credit conditions becoming less favorable after this meeting OK then. Participants agreed that it is important to closely monitor the information received and assess its implications for monetary policy. In determining the degree of additional policy tightening that might be appropriate to bring inflation back to 2 percent over time, various participants pointed to specific factors that should influence decisions on future policy actions. One of these factors is the extent and timing to which cumulative policy tightening dampens economic activity and lowers inflation, with some participants commenting that they see evidence that tightening over the past few years is beginning to have the desired effect. Another factor was the extent to which tighter credit conditions for households and businesses resulting from banking events would affect economic activity and lower inflation, which participants agreed was very uncertain. Other factors include progress toward returning inflation to the Committee's 2 percent long-run objective, as well as weak labor market conditions and the pace of slower economic growth.
Participants also discussed a number of risk management considerations that could influence future policy decisions. Some assess that there are upside risks to economic growth. However, almost all participants commented that downside risks to growth and upside risks to unemployment have increased, as developments in the banking sector could lead to further tightening of credit conditions and weigh on economic activity. Nearly all participants said upside risks to the inflation outlook remained a key factor affecting the policy outlook, as inflation remained well above the Committee's longer-run objective and the labor market remained tight. Some participants noted that they also see some downside risks to inflation.
With these different considerations in mind, participants discussed their views on the appropriate degree of further policy tightening after this meeting. Participants generally expressed uncertainty about the appropriate degree of policy tightening. After this meeting, many participants emphasized the need to preserve selectivity. Some participants commented that further policy tightening may be required at future meetings, based on their expectations that progress in inflation returning to 2 percent may continue to be unacceptably slow. Several participants noted that if the economy develops according to their current outlook, further policy tightening after this meeting may not be necessary. Given the prominent risks to the Committee's objectives of maximum employment and price stability, participants generally noted the importance of paying close attention to incoming information and its implications for the economic outlook.
Participants discussed the importance and aspects of clearly explaining monetary policy actions and strategies. All participants reaffirmed their strong commitment to getting inflation back to the Committee's 2 percent objective over time and continued to be highly focused on inflation risks. Several participants commented that recent monetary policy actions and communications have served well to stabilize inflation expectations, which they believe is important to achieving the Committee's objectives. Participants emphasized the importance of communicating to the public the approach by which policymakers rely on data, with an overwhelming majority commenting that the adjusted language in the post-meeting statement was helpful in this regard. Some participants stressed that it was important to convey that language in the post-meeting statement should not be interpreted as a signal that the target range may be lowered this year or that further increases have been ruled out.
Committee Policy Action
During the monetary policy discussion at this meeting, members agreed that economic activity expanded at a moderate pace in the first quarter. They also agreed that job growth has been strong in recent months and the unemployment rate remains low. Inflation has remained high.
Members agreed that the U.S. banking system is sound and resilient. They also agreed that tighter credit conditions for households and businesses could weigh on economic activity, employment and inflation, although the extent of these effects was uncertain. Members also agreed that they remained highly concerned about inflation risks.
Members agreed that the Committee seeks to achieve maximum employment and 2 percent inflation over the long run. In support of these goals, members agreed to increase the target range for the federal funds rate to 5 percent to 5-1/4 percent. Members agreed to closely monitor the information received and assess the implications for monetary policy. In determining the extent of additional policy tightening that might be appropriate to bring inflation back to 2 percent over time, members agreed that they would take into account the cumulative tightening of monetary policy, the lag in which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, members agreed that they would continue to reduce the Federal Reserve's holdings of U.S. Treasury and agency debt and agency mortgage-backed securities, as outlined in its previously announced plans. All members affirmed their strong commitment to returning inflation to the 2% target.
Members agreed that they would continue to monitor the implications of incoming information for the economic outlook in assessing the appropriate stance of monetary policy. They will be prepared to adjust the stance of monetary policy appropriately if risks arise that could impede the achievement of the Committee's objectives. Members also agreed that their assessment would consider a wide range of information, including readings on labor market conditions, inflation pressures and expectations, and financial and international developments.
At the conclusion of the discussion, the Committee voted to instruct the Federal Reserve Bank of New York, unless otherwise directed, to execute transactions in the System Open Market Account pursuant to the following Domestic Policy Directive, issued at 2:00 p.m.:
"Effective May 4, 2023, the Federal Open Market Committee directs the Department to:
- Conduct open market operations as necessary to maintain the federal funds rate within the target range of 5 percent to 5-1/4 percent.
- Carry out the standing overnight repurchase agreement operation, the minimum winning bid rate is 5.25%, and the total operating limit is 500 billion US dollars.
- Standing overnight reverse repurchase agreement operations with an issue rate of 5.05% and a daily limit of $160 billion per counterparty.
- Rollovers exceed the monthly cap of $60 billion for principal payments on U.S. Treasury securities held by the Federal Reserve that mature each calendar month. Redemption of Treasury coupon securities up to this monthly cap and redemption of Treasury bills to the extent that coupon principal payments are below the monthly cap.
- Reinvests agency debt held by the Fed and principal payments received by agency MBS in excess of the $35 billion monthly cap each calendar month into agency mortgage-backed securities (MBS).
- Moderate deviations from the stated reinvestment amounts are allowed if required for operational reasons.
- Participate in U.S. dollar rollover and coupon swaps as necessary to facilitate settlement of Fed agency MBS transactions. "
The vote also included approval of the following statement issued at 2:00 p.m.:
"Economic activity expanded at a moderate pace in the first quarter. Job growth has been strong in recent months and the unemployment rate has been low. Inflation remains high.
The U.S. banking system is sound and resilient. Tighter credit conditions for households and businesses could weigh on economic activity, hiring and inflation. The extent of these effects remains uncertain. The Committee remains highly concerned about inflation risks.
The Committee seeks to achieve maximum employment and 2 percent inflation over the long run. In support of these objectives, the Committee decided to increase the target range for the federal funds rate to 5 percent to 5-1/4 percent. The Committee will closely monitor incoming information and assess its implications for monetary policy. In determining the extent to which additional policy tightening may be appropriate to bring inflation back to 2 percent over time, the Committee will consider the cumulative tightening of monetary policy, the lag with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue to reduce its holdings of U.S. Treasury and agency debt and agency mortgage-backed securities, as outlined in its previously announced plans. The Committee is firmly committed to returning inflation to its 2 percent objective.
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 will be prepared to adjust the stance of monetary policy appropriately if risks arise that could impede the achievement of the Committee's objectives. The Committee's assessment will consider a wide range of information, including data on labor market conditions, inflation pressures and expectations, and financial and international developments. "
Vote for this action:Jerome H. Powell、John C. Williams、Michael S. Barr、Michelle W. Bowman、Lisa D. Cook、Austan D. Goolsbee、Patrick Harker、Philip N. Jefferson、Neel Kashkari、Lorie K. Logan 和 Christopher J.沃勒。
Vote against this action:not any.
In support of the Committee's decision to raise the target range for the federal funds rate, the Board of Governors of the Federal Reserve voted unanimously to raise the interest rate on reserve balances to 5.15 percent, effective May 4, 2023. The Board of Governors of the Federal Reserve voted unanimously to approve a 1/4 percentage point increase in the base credit rate to 5.25%, effective May 4, 2023.4
It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, June 13-14, 2023. The meeting was adjourned on May 3, 2023 at 10:00 am.
By a recorded vote completed on April 11, 2023, the committee unanimously approved the minutes of the committee meeting to be held on March 21-22, 2023.
1. The Federal Open Market Committee is referred to in these minutes as the "FOMC" and the "Committee"; the Board of Governors of the Federal Reserve System is referred to in these minutes as the "Board."back to text
2. Attend Tuesday meetings only.back to text
3. Present by discussing developments in financial markets and open market operations.back to text
4. In taking this action, the Board approved Boston, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco. The vote also included the Board's approval of the remaining Federal Reserve Bank's requirement to set the primary credit rate at 5.25 percent effective May 4, 2023 or the date the Reserve Bank notifies the Secretary of the Board of Directors, whichever is later. (Secretary's Note: Subsequently, the New York Fed was informed that its Board of Directors had approved its primary credit rate of 5.25%, effective May 4, 2023.)back to text