The Federal Reserve, the central bank of the United States, provides
          the nation with a safe, flexible, and stable monetary and financial
          system.
Federal Open Market Committee
Monetary Policy Principles and Practice
Policy Implementation
Reports
Review of Monetary Policy Strategy, Tools, and Communications
Institution Supervision
Reports
Reporting Forms
Supervision & Regulation Letters
Banking Applications & Legal Developments
Regulatory Resources
Banking & Data Structure
Financial Stability Assessments
Financial Stability Coordination & Actions
Reports
Regulations & Statutes
Payment Policies
Reserve Bank Payment Services & Data
Financial Market Utilities & Infrastructures
Research, Committees, and Forums
Working Papers and Notes
Data, Models and Tools
Bank Assets and Liabilities
Bank Structure Data
Business Finance
Dealer Financing Terms
Exchange Rates and International Data
Financial Accounts
Household Finance
Industrial Activity
Interest Rates
Micro Data Reference Manual (MDRM)
Money Stock and Reserve Balances
Other
Regulations
Supervision & Enforcement
Community Development
Research & Analysis
Consumer Resources
July 25-26, 2023
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, July 25, 2023, at 10:00 a.m. and continued on Wednesday, July 26, 2023, at 9:00 a.m.1
Attendance
Jerome H. Powell, Chair
John C. Williams, Vice Chair
Michael S. Barr
Michelle W. Bowman
Lisa D. Cook
Austan D. Goolsbee
Patrick Harker
Philip N. Jefferson
Neel Kashkari
Lorie K. Logan
Christopher J. Waller
Thomas I. Barkin, Raphael W. Bostic, Mary C. Daly, and Loretta J. Mester, Alternate Members of the Committee
Susan M. Collins, President of the Federal Reserve Bank of Boston
Kelly J. Dubbert and Kathleen O'Neill Paese, Interim Presidents of the Federal Reserve Banks of Kansas City and St. Louis, respectively
Joshua Gallin, 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, Eric M. Engen, Anna Paulson, Andrea Raffo, and William Wascher, Associate Economists
Roberto Perli, Manager, System Open Market Account
Julie Ann Remache, Deputy Manager, System Open Market Account
David Altig, Executive Vice President, Federal Reserve Bank of Atlanta
Penelope A. Beattie,2 Section Chief, Office of the Secretary, Board
Brent Bundick, Senior Research and Policy Advisor, Federal Reserve Bank of Kansas City
Juan C. Climent, Special Adviser to the Board, Division of Board Members, Board
Stephanie E. Curcuru,3 Deputy Director, Division of International Finance, Board
Rochelle M. Edge, Deputy Director, Division of Monetary Affairs, Board
Matthew J. Eichner,4 Director, Division of Reserve Bank Operations and Payment Systems, Board
Eric C. Engstrom, Associate Director, Division of Monetary Affairs and Division of Research and Statistics, Board
Huberto M. Ennis, Group Vice President, Federal Reserve Bank of Richmond
Erin E. Ferris, Principal Economist, Division of Monetary Affairs, Board
Glenn Follette, Associate Director, Division of Research and Statistics, Board
Jennifer Gallagher, Assistant to the Board, Division of Board Members, Board
Peter M. Garavuso, Senior Information Manager, Division of Monetary Affairs, Board
Carlos Garriga, Senior Vice President, Federal Reserve Bank of St. Louis
Michael S. Gibson, Director, Division of Supervision and Regulation, Board
Christine Graham,5 Special Adviser to the Board, Division of Board Members, Board
Luca Guerrieri, Associate Director, Division of International Finance, Board
Christopher J. Gust, Associate Director, Division of Monetary Affairs, Board
Valerie S. Hinojosa, Section Chief, Division of Monetary Affairs, Board
Jane E. Ihrig, Special Adviser to the Board, Division of Board Members, Board
Callum Jones, Senior Economist, Division of Monetary Affairs, Board
Michael T. Kiley, Deputy Director, Division of Financial Stability, Board
David E. Lebow, Senior Associate Director, Division of Research and Statistics, Board
Sylvain Leduc, Director of Research, Federal Reserve Bank of San Francisco
Andreas Lehnert, Director, Division of Financial Stability, Board
Kurt F. Lewis, Special Adviser to the Board, Division of Board Members, Board
Dan Li, Assistant Director, Division of Monetary Affairs, Board
Laura Lipscomb, Special Adviser to the Board, Division of Board Members, Board
David López-Salido, Senior Associate Director, Division of Monetary Affairs, Board
Ann E. Misback, Secretary, Office of the Secretary, Board
Juan M. Morelli, Economist, Division of Monetary Affairs, Board
Norman J. Morin, Deputy Associate Director, Division of Research and Statistics, Board
Michelle M. Neal, Head of Markets, Federal Reserve Bank of New York
Edward Nelson, Senior Adviser, Division of Monetary Affairs, Board
Paolo A. Pesenti, Director of Monetary Policy Research, Federal Reserve Bank of New York
Damjan Pfajar, Group Manager, Division of Monetary Affairs, Board
Samuel Schulhofer-Wohl, Senior Vice President, Federal Reserve Bank of Dallas
Donald Keith Sill, Senior Vice President, Federal Reserve Bank of Philadelphia
Nitish Ranjan Sinha, Special Adviser to the Board, Division of Board Members, Board
Dafina Stewart, Special Adviser to the Board, Division of Board Members, Board
Gustavo A. Suarez, Assistant Director, Division of Research and Statistics, Board
Brett Takacs, Senior Communications Analyst, Division of Information Technology, Board
Jenny Tang, Vice President, Federal Reserve Bank of Boston
Willem Van Zandweghe, Assistant Vice President, Federal Reserve Bank of Cleveland
Annette Vissing-Jørgensen, Senior Adviser, Division of Monetary Affairs, Board
Jeffrey D. Walker,4 Associate Director, Division of Reserve Bank Operations and Payment Systems, 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
Developments in Financial Markets and Open Market Operations
The manager turned first to a review of developments in financial markets over the intermeeting period. Market participants interpreted data releases as generally demonstrating economic resilience and a further easing of inflation pressures. The market-implied peak for the federal funds rate rose in response to data pointing to a robust economy but retraced part of that move after the June consumer price index (CPI) release was interpreted by market participants as softer than anticipated. Even as market prices shifted to indicate a slightly more restrictive expected policy path, broader financial conditions eased a bit, reflecting in large part gains in equity prices and tighter credit spreads. Notably, share prices for bank equity also appreciated over the intermeeting period as concerns about the banking sector continued to dissipate. Spot and forward measures of inflation compensation based on Treasury Inflation-Protected Securities were little changed over the intermeeting period at levels broadly consistent with the Committee's 2 percent longer-run goal, and longer-term survey- and market-based measures continued to point to inflation expectations being firmly anchored. Market-implied peak policy rates in most advanced foreign economies (AFEs) rose further this period, and the dollar depreciated modestly.
Respondents to the Open Market Desk's Survey of Primary Dealers and Survey of Market Participants in July continued to place significant probability of a recession occurring by the end of 2024. However, the timing of a recession expected by survey respondents was again pushed later, and the probability of avoiding a recession through 2024 grew noticeably. Survey respondents anticipated that both headline and core personal consumption expenditures (PCE) inflation will decline to 2 percent by the end of 2025.
There was a strong anticipation, evident in both market-based measures and responses to the Desk's surveys, that the Committee would raise the target range 25 basis points at the July FOMC meeting. Most survey respondents had a modal expectation that a July rate hike would be the last of this tightening cycle, although most respondents also perceived that additional monetary policy tightening after the July FOMC meeting was possible. As inferred from their responses, survey respondents expected real rates to increase through the first half of 2024 and to remain above their expectations for the long-run neutral levels for a few years.
The manager then turned to money market developments and policy implementation. The overnight reverse repurchase agreement (ON RRP) facility continued to work as intended over the intermeeting period and had been instrumental in providing an effective floor under the federal funds rate and supporting other money market rates; those rates remained stable over the period. Following the suspension of the debt ceiling in early June, the Treasury Department issued securities, notably Treasury bills, to replenish the Treasury General Account (TGA). The resulting greater availability of Treasury bills, which were priced at rates slightly above the current and expected ON RRP rates, induced a net decline in ON RRP balances for the period. A further decline in ON RRP balances was deemed probable amid sustained projected Treasury bill issuance, further reductions in the size of the Federal Reserve's balance sheet in accordance with the previously announced Plans for Reducing the Size of the Federal Reserve's Balance Sheet, and a possible further reduction in policy uncertainty that could incentivize money funds to extend the duration of their portfolios. In the July Desk Survey of Primary Dealers, respondents expected lower ON RRP balances and higher bank reserves by the end of the year, compared with the June survey.
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 July 25–26 meeting suggested that real gross domestic product (GDP) rose at a moderate pace over the first half of the year. The labor market remained very tight, though the imbalance between demand and supply in the labor market was gradually diminishing. Consumer price inflation—as measured by the 12-month percent change in the price index for PCE—remained elevated in May, and available information suggested that inflation declined but remained elevated in June.
In the second quarter, total nonfarm payroll employment posted its slowest average monthly increase since the recovery began in mid-2020, though payroll gains remained robust compared with those seen before the pandemic. Similarly, the private-sector job openings rate, as measured by the Job Openings and Labor Turnover Survey, fell in May to its lowest level since March 2021 but remained well above pre-pandemic levels. The unemployment rate edged down to 3.6 percent in June, while the labor force participation rate and the employment-to-population ratio were both unchanged. The unemployment rates for African Americans and Hispanics, however, both rose and were well above the national average. Average hourly earnings rose 4.4 percent over the 12 months ending in June, compared with a year-earlier increase of 5.4 percent.
Consumer price inflation continued to show signs of easing but remained elevated. Total PCE price inflation was 3.8 percent over the 12 months ending in May, and core PCE price inflation, which excludes changes in energy prices and many consumer food prices, was 4.6 percent over the same period. The trimmed mean measure of 12-month PCE price inflation constructed by the Federal Reserve Bank of Dallas was 4.6 percent in May. In June, the 12‑month change in the CPI was 3.0 percent, while core CPI inflation was 4.8 percent over the same period. Measures of short-term inflation expectations had moved down alongside actual inflation but remained above pre-pandemic levels. In contrast, measures of medium- to longer-term inflation expectations were in the range seen in the decade before the pandemic.
Available indicators suggested that real GDP rose in the second quarter at a pace similar to the one posted in the first quarter. However, private domestic final purchases—which includes PCE, residential investment, and business fixed investment and which often provides a better signal of underlying economic momentum than does GDP—appeared to have decelerated in the second quarter. Manufacturing output rose in the second quarter, supported by a robust increase in motor vehicle production.
After falling sharply in April, real exports of goods picked up in May, led by higher exports of industrial supplies and automotive products. Real goods imports fell, as lower imports of consumer goods and industrial supplies more than offset higher imports of capital goods. The nominal U.S. international trade deficit narrowed, as a sharp decline in nominal imports of goods and services outpaced a decline in exports. The available data suggested that net exports subtracted from U.S. GDP growth in the second quarter.
Indicators of economic activity, such as purchasing managers indexes (PMIs), pointed to a step-down in the pace of foreign growth in the second quarter, reflecting fading of the impetus from China's reopening, continued anemic growth in Europe, some weakening of activity in Canada and Mexico, as well as weak external demand and the slump in the high-tech industry weighing on many Asian economies. Incoming data also indicated that global manufacturing activity remained weak during the intermeeting period.
Foreign headline inflation continued to fall, reflecting, in part, the pass-through of previous declines in commodity prices to retail energy and food prices. Core inflation edged down in many countries but generally remained high. In this context, and amid tight labor market conditions, many AFE central banks raised policy rates and underscored the need to raise rates further, or hold them at sufficiently restrictive levels, to bring inflation in their countries back to their targets. In contrast, central banks of emerging market economies largely remained on hold, and some indicated that a rate cut is possible at their next meeting.
Staff Review of the Financial Situation
Over the intermeeting period, market participants interpreted domestic economic data releases as indicating continued resilience of economic activity and some easing of inflationary pressures, and they viewed monetary policy communications as pointing to somewhat more restrictive policy than expected. The market-implied path for the federal funds rate rose modestly, and nominal Treasury yields increased somewhat at shorter maturities. Meanwhile, broad equity prices increased, and spreads on investment- and speculative-grade corporate bonds narrowed moderately. Financing conditions continued to be generally restrictive, and borrowing costs remained elevated.
Over the intermeeting period, the market-implied path for the federal funds rate rose modestly, while the timing of the path's slightly higher peak moved a little later, to just after the November meeting. Beyond this year, the policy rate path implied by overnight index swap (OIS) quotes ended the period modestly higher. Yields on Treasury securities increased modestly at shorter maturities but only a bit at longer maturities. Measures of inflation compensation rose only slightly for near-term and longer maturities. Measures of uncertainty about the path of the policy rate derived from interest rate options remained very elevated by historical standards.
Broad stock price indexes increased and spreads on investment- and speculative-grade corporate bonds narrowed moderately over the intermeeting period. The VIX—the one-month option-implied volatility on the S&P 500—edged down and ended the period near the 25th percentile of its historical distribution. Bank equity prices increased and outperformed the S&P 500 modestly. Stock prices for the largest banks fully recovered from their declines in the immediate wake of the failure of Silicon Valley Bank, while those for regional banks remained below the levels seen in early March.
Short-term interest rates in the AFEs increased modestly, on net, over the intermeeting period as foreign central banks continued to raise policy rates and signal the potential for further tightening. Increases in yields were tempered, however, by downside surprises to both inflation and PMIs from some economies. Risk sentiment in foreign markets improved somewhat, with most foreign equity indexes increasing and foreign corporate and emerging market sovereign bond spreads narrowing. The staff's trade-weighted broad dollar index declined moderately, with the largest moves following releases of weaker-than-expected U.S. labor market data and lower-than-expected U.S. inflation data.
Conditions in domestic short-term funding markets remained generally stable over the intermeeting period. Spreads in unsecured markets narrowed modestly amid slight increases in OIS rates. Following the suspension of the debt limit, the Treasury Department partly replenished the TGA via a large net increase in bill issuance. Auctions of Treasury bills were met with robust demand, as shorter-term bill yields increased relative to other money market rates. Money market funds increased their holdings of Treasury bills and reduced their investments with the ON RRP facility. ON RRP take-up declined notably—about $390 billion—over the intermeeting period, reflecting more attractive rates on some alternatives to investing in the ON RRP facility. Despite reduced ON RRP take-up, money funds maintained relatively high asset allocations in overnight repurchase agreement investments amid still-elevated uncertainty about the future path of policy.
In domestic credit markets, borrowing costs for businesses, households, and municipalities were little changed over the intermeeting period and remained elevated by historical standards. Yields on agency commercial mortgage-backed securities (CMBS) were little changed.
The banking sector's ability to fund loans to businesses and consumers was generally stable during the intermeeting period. Core deposit volumes at both large and other domestic banks held steady at the levels that they reached in early May, after having declined sharply in March and April amid the banking-sector turmoil. Banks continued to attract inflows of large time deposits, reflecting higher interest rates offered on new certificates of deposit. Meanwhile, wholesale borrowing—which primarily consists of advances from Federal Home Loan Banks, loans from the Bank Term Funding Program, and other credit extended by the Federal Reserve—had fallen since May by domestic banks of all sizes, partially reversing the surge at the onset of the bank turmoil in March.
Credit availability for businesses appeared to tighten somewhat in recent months. Credit from capital markets was somewhat subdued but overall remained accessible for larger corporations. Issuance of leveraged loans remained limited, reflecting low levels of leveraged buyout and merger and acquisition activity as well as weak investor demand. In the municipal bond market, gross issuance was solid in June, as both refundings and new capital issuance picked up from a somewhat subdued May. Commercial and industrial (C&I) loan balances contracted modestly in the second quarter, and commercial real estate (CRE) loan growth on banks' books continued to moderate.
In the July Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS), banks reported having tightened standards and terms on C&I loans to firms of all sizes in the second quarter. The most cited reason for tightening C&I standards and terms continued to be concerns about the economic outlook. Banks also reported expecting to tighten C&I standards further over the remainder of the year.
The July SLOOS also indicated that standards across all CRE loan categories tightened further in the second quarter and that banks expected to tighten CRE standards further over the second half of the year. Meanwhile, CMBS issuance picked up a bit in May and then ticked down in June after recording low volumes earlier in the year.
Credit in the residential mortgage market remained broadly available for high-credit-score borrowers who met standard conforming loan criteria. Only modest net percentages of banks in the July SLOOS reported tightening standards for mortgage loans eligible to be purchased by government-sponsored enterprises, while a moderate net percentage of banks reported expecting to tighten lending standards further for these loans over the second half of the year. Meanwhile, the availability of mortgage credit remained tighter for households with lower credit scores, at levels close to those prevailing before the pandemic. Banks reported in the SLOOS that they had tightened standards for certain categories of residential real estate loans to be held on their balance sheets, such as jumbo loans and home equity lines of credit. In addition, banks reported expecting to tighten standards for jumbo loans during the remainder of 2023.
Conditions remained generally accommodative in consumer credit markets, with credit available for most borrowers. Credit card balances increased in the second quarter, though at a somewhat slower pace than in previous months. In the July SLOOS, banks reported expecting to continue tightening lending standards for credit card loans.
Overall, the credit quality of most businesses and households remained solid. While there were signs of deterioration in credit quality in some sectors, such as the office segment of CRE, delinquency rates generally remained near their pre-pandemic lows. The credit quality of C&I and CRE loans on banks' balance sheets remained sound as of the end of the first quarter of 2023. However, in the July SLOOS, banks frequently cited concerns about the credit quality of both CRE and other loans as reasons for expecting to tighten their lending standards over the remainder of the year. Aggregate delinquency rates on pools of commercial mortgages backing CMBS increased in May and June.
The staff provided an update on its assessment of the stability of the financial system and, on balance, characterized the financial vulnerabilities of the U.S. financial system as notable. The staff judged that asset valuation pressures remained notable. In particular, measures of valuations in both residential and commercial property markets remained high relative to fundamentals. House prices, while having cooled earlier this year, started to rise again, and price-to-rent ratios remained at elevated levels and near those seen in the mid-2000s. Although commercial property prices moved down, developments in the CRE sector following the pandemic may have produced a permanent shift away from traditional working patterns. If so, fundamentals in the sector could decline notably and contribute to a deterioration in credit quality.
The staff assessed that vulnerabilities associated with household and nonfinancial business leverage remained moderate overall. Aggregate household debt growth remained in line with income growth. While nonfinancial businesses remained highly leveraged and thus vulnerable to shocks, firms' debt growth has been relatively subdued recently, and their ability to service that debt has been quite high, even among lower-rated firms. Leverage in the financial sector was characterized as notable. In the banking sector, regulatory risk-based capital ratios showed the system remained well capitalized. However, while the overall banking system retained ample loss-bearing capacity, some banks experienced sizable declines in the fair value of their assets as a consequence of rising interest rates. Vulnerabilities associated with funding risks were also characterized as notable. Although a small number of banks saw notable outflows of deposits late in the first quarter and early in the second quarter, deposit flows later stabilized.
Staff Economic Outlook
The economic forecast prepared by the staff for the July FOMC meeting was stronger than the June projection. Since the emergence of stress in the banking sector in mid-March, indicators of spending and real activity had come in stronger than anticipated; as a result, the staff no longer judged that the economy would enter a mild recession toward the end of the year. However, the staff continued to expect that real GDP growth in 2024 and 2025 would run below their estimate of potential output growth, leading to a small increase in the unemployment rate relative to its current level.
The staff continued to project that total and core PCE price inflation would move lower in coming years. Much of the step-down in core inflation was expected to occur over the second half of 2023, with forward-looking indicators pointing to a slowing in the rate of increase of housing services prices and with core nonhousing services prices and core goods prices expected to decelerate over the remainder of 2023. Inflation was anticipated to ease further over 2024 as demand–supply imbalances continued to resolve; by 2025, total PCE price inflation was expected to be 2.2 percent, and core inflation was expected to be 2.3 percent.
The staff continued to judge that the risks to the baseline projection for real activity were tilted to the downside. Risks to the staff's baseline inflation forecast were seen as skewed to the upside, given the possibility that inflation dynamics would prove to be more persistent than expected or that further adverse shocks to supply conditions might occur. Moreover, the additional monetary policy tightening that would be necessitated by higher or more persistent inflation represented a downside risk to the projection for real activity.
Participants' Views on Current Conditions and the Economic Outlook
In their discussion of current economic conditions, participants noted that economic activity had been expanding at a moderate pace. Job gains had been robust in recent months, and the unemployment rate remained low. Inflation remained elevated. Participants agreed that the U.S. banking system was sound and resilient. They commented that tighter credit conditions for households and businesses were likely to weigh on economic activity, hiring, and inflation. However, participants agreed that the extent of these effects remained uncertain. Against this background, the Committee remained highly attentive to inflation risks.
In assessing the economic outlook, participants noted that real GDP growth had continued to exhibit resilience in the first half of the year and that the economy had been showing considerable momentum. A gradual slowdown in economic activity nevertheless appeared to be in progress, consistent with the restraint placed on demand by the cumulative tightening of monetary policy since early last year and the associated effects on financial conditions. Participants remarked on the uncertainty about the lags in the effects of monetary policy on the economy and discussed the extent to which the effects on the economy stemming from the tightening that the Committee had undertaken had already materialized. Participants commented that monetary policy tightening appeared to be working broadly as intended and that a continued gradual slowing in real GDP growth would help reduce demand–supply imbalances in the economy. Participants assessed that the ongoing tightening of credit conditions in the banking sector, as evidenced in the most recent surveys of banks, also would likely weigh on economic activity in coming quarters. Participants noted the recent reduction in total and core inflation rates. However, they stressed that inflation remained unacceptably high and that further evidence would be required for them to be confident that inflation was clearly on a path toward the Committee's 2 percent objective. Participants continued to view a period of below-trend growth in real GDP and some softening in labor market conditions as needed to bring aggregate supply and aggregate demand into better balance and reduce inflation pressures sufficiently to return inflation to 2 percent over time.
Participants noted that consumer spending had recently exhibited considerable resilience, underpinned by, in aggregate, strong household balance sheets, robust job and income gains, a low unemployment rate, and rising consumer confidence. Nevertheless, tight financial conditions, primarily reflecting the cumulative effect of the Committee's shift to a restrictive policy stance, were expected to contribute to slower growth in consumption in the period ahead. Participants cited other factors that were likely leading to, or appeared consistent with, a slowdown in consumption, including the declining stock of excess savings, softening labor market conditions, and increased price sensitivity on the part of customers. Some participants observed that recent increases in home prices suggested that the housing sector's response to monetary policy restraint may have peaked.
In their discussion of the business sector, participants cited various improvements in firms' cost structures. These included better-functioning supply chains, lower input costs, and an increased ability to hire and retain workers. Participants also discussed conditions that could lead to higher economic activity—such as leaner inventories and reduced expectations of a sharp economic slowdown—and factors that could lead to lower economic activity—such as continuing economic uncertainty, the vulnerabilities of the CRE market, and the ongoing weakness of manufacturing output. Participants judged that, over coming quarters, firms would reduce the pace of their investment spending and hiring in response to tight financial conditions and the slowing of economic activity.
Participants remarked that the labor market continued to be very tight but pointed to signs that demand and supply were coming into better balance. They noted evidence that labor demand was easing—including declines in job openings, lower quits rates, more part-time work, slower growth in hours worked, higher unemployment insurance claims, and more moderate rates of nominal wage growth. In addition, they remarked on indications of increasing labor supply, including a further rise in the prime-age participation rate to a post-pandemic high. Participants also observed, however, that although growth in payrolls had slowed recently, it continued to exceed values consistent over time with an unchanged unemployment rate, and that nominal wages were still rising at rates above levels assessed to be consistent with the sustained achievement of the Committee's 2 percent inflation objective. Participants judged that further progress toward a balancing of demand and supply in the labor market was needed, and they expected that additional softening in labor market conditions would take place over time.
Participants cited a number of tentative signs that inflation pressures could be abating. These signs included some softening in core goods prices, lower online prices, evidence that firms were raising prices by smaller amounts than previously, slower increases in shelter prices, and recent declines in survey estimates of shorter-term inflation expectations and of inflation uncertainty. Various participants discussed the continued stability of longer-term inflation expectations at levels consistent with 2 percent inflation over time and the role that the Committee's policy tightening had played in delivering this outcome. Nonetheless, several participants commented that significant disinflationary pressures had yet to become apparent in the prices of core services excluding housing.
Participants observed that, notwithstanding recent favorable developments, inflation remained well above the Committee's 2 percent longer-term objective and that elevated inflation was continuing to harm businesses and households—low-income families in particular. Participants stressed that the Committee would need to see more data on inflation and further signs that aggregate demand and aggregate supply were moving into better balance to be confident that inflation pressures were abating and that inflation was on course to return to 2 percent over time.
Participants generally noted a high degree of uncertainty regarding the cumulative effects on the economy of past monetary policy tightening. Participants cited upside risks to inflation, including those associated with scenarios in which recent supply chain improvements and favorable commodity price trends did not continue or in which aggregate demand failed to slow by an amount sufficient to restore price stability over time, possibly leading to more persistent elevated inflation or an unanchoring of inflation expectations. In discussing downside risks to economic activity and inflation, participants considered the possibility that the cumulative tightening of monetary policy could lead to a sharper slowdown in the economy than expected, as well as the possibility that the effects of the tightening of bank credit conditions could prove more substantial than anticipated.
In their discussion of financial stability, participants observed that the banking system was sound and resilient and that banking stress had calmed in recent months. Participants also noted that the most recent stress-test results indicated that large banks appeared to be well positioned to withstand a severe recession. Various participants commented on risks that could affect some banks, including unrealized losses on assets resulting from rising interest rates, significant reliance on uninsured deposits, and increased funding costs. Participants also commented on risks associated with a potential sharp decline in CRE valuations that could adversely affect some banks and other financial institutions, such as insurance companies, that are heavily exposed to CRE. Several participants noted the susceptibility of some nonbank financial institutions, such as money market funds or digital asset entities, to runs or instability. In addition, several participants emphasized the need for banks to establish readiness to use Federal Reserve liquidity facilities and for the Federal Reserve to ensure its own readiness to provide liquidity during periods of stress.
In their consideration of appropriate monetary policy actions at this meeting, participants concurred that economic activity had been expanding at a moderate pace. The labor market remained very tight, with robust job gains in recent months and the unemployment rate still low, but there were continuing signs that supply and demand in the labor market were coming into better balance. Participants also noted that tighter credit conditions facing households and businesses were a source of headwinds for the economy and would likely weigh on economic activity, hiring, and inflation. However, the extent of these effects remained uncertain. Although inflation had moderated since the middle of last year, it remained well above the Committee's longer-run goal of 2 percent, and participants remained resolute in their commitment to bring inflation down to the Committee's 2 percent objective. Amid these economic conditions, almost all participants judged it appropriate to raise the target range for the federal funds rate to 5-1/4 to 5-1/2 percent at this meeting. Participants noted that this action would put the stance of monetary policy further into restrictive territory, consistent with reducing demand–supply imbalances in the economy and helping to restore price stability. A couple of participants indicated that they favored leaving the target range for the federal funds rate unchanged or that they could have supported such a proposal. They judged that maintaining the current degree of restrictiveness at this time would likely result in further progress toward the Committee's goals while allowing the Committee time to further evaluate this progress. All participants agreed that it was appropriate to continue the process of reducing the Federal Reserve's securities holdings, as described in its previously announced Plans for Reducing the Size of the Federal Reserve's Balance Sheet. A number of participants noted that balance sheet runoff need not end when the Committee eventually begins to reduce the target range for the federal funds rate.
In discussing the policy outlook, participants continued to judge that it was critical that the stance of monetary policy be sufficiently restrictive to return inflation to the Committee's 2 percent objective over time. They noted that uncertainty about the economic outlook remained elevated and agreed that policy decisions at future meetings should depend on the totality of the incoming information and its implications for the economic outlook and inflation as well as for the balance of risks. Participants expected that the data arriving in coming months would help clarify the extent to which the disinflation process was continuing and product and labor markets were reaching a better balance between demand and supply. This information would be valuable in determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time. Participants also emphasized the importance of communicating as clearly as possible about the Committee's data-dependent approach to policy and its firm commitment to bring inflation down to its 2 percent objective.
Participants discussed several risk-management considerations that could bear on future policy decisions. With inflation still well above the Committee's longer-run goal and the labor market remaining tight, most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy. Some participants commented that even though economic activity had been resilient and the labor market had remained strong, there continued to be downside risks to economic activity and upside risks to the unemployment rate; these included the possibility that the macroeconomic effects of the tightening in financial conditions since the beginning of last year could prove more substantial than anticipated. A number of participants judged that, with the stance of monetary policy in restrictive territory, risks to the achievement of the Committee's goals had become more two sided, and it was important that the Committee's decisions balance the risk of an inadvertent overtightening of policy against the cost of an insufficient tightening.
Committee Policy Actions
In their discussion of monetary policy for this meeting, members agreed that economic activity had been expanding at a moderate pace. They also concurred that job gains had been robust in recent months, and the unemployment rate had remained low. Inflation had remained elevated.
Members concurred that the U.S. banking system was sound and resilient. They also agreed that tighter credit conditions for households and businesses were likely to weigh on economic activity, hiring, and inflation but that the extent of these effects was uncertain. Members also concurred that they remained highly attentive to inflation risks.
In support of the Committee's objectives to achieve maximum employment and inflation at the rate of 2 percent over the longer run, members agreed to raise the target range for the federal funds rate to 5-1/4 to 5-1/2 percent. They also agreed that they would continue to assess additional information and its implications for monetary policy. In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, members concurred that they will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, members agreed to continue to reduce the Federal Reserve's holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. All members affirmed that they are strongly committed to returning inflation to their 2 percent objective.
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. They 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. Members also agreed that their assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.
At the conclusion of the discussion, the Committee voted to direct the Federal Reserve Bank of New York, until instructed otherwise, to execute transactions in the System Open Market Account in accordance with the following domestic policy directive, for release at 2:00 p.m.:
"Effective July 27, 2023, 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.:
"Recent indicators suggest that economic activity has been expanding at a moderate pace. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated.
The U.S. banking system is sound and resilient. Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks.
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 5-1/4 to 5-1/2 percent. The Committee will continue to assess additional information and its implications for monetary policy. In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly 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 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 labor market conditions, inflation pressures and inflation expectations, and financial and international developments."
Voting 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, and Christopher J. Waller.
Voting against this action: None.
To support the Committee's decision to raise the target range for the federal funds rate, the Board of Governors of the Federal Reserve System voted unanimously to raise the interest rate paid on reserve balances to 5.4 percent, effective July 27, 2023. The Board of Governors of the Federal Reserve System voted unanimously to approve a 1/4 percentage point increase in the primary credit rate to 5.5 percent, effective July 27, 2023.6
It was agreed that the next meeting of the Committee would be held on Tuesday–Wednesday, September 19–20, 2023. The meeting adjourned at 10:05 a.m. on July 26, 2023.
Notation Vote
By notation vote completed on July 3, 2023, the Committee unanimously approved the minutes of the Committee meeting held on June 13–14, 2023.
_______________________
Joshua Gallin
Secretary
1. The Federal Open Market Committee is referenced as the "FOMC" and the "Committee" in these minutes; the Board of Governors of the Federal Reserve System is referenced as the "Board" in these minutes. Return to text
2. Attended through the discussion of the economic and financial situation and all of Wednesday's session. Return to text
3. Attended Tuesday's session only. Return to text
4. Attended through the discussion of developments in financial markets and open market operations. Return to text
5. Attended through the discussion of the economic and financial situation. Return to text
6. In taking this action, the Board approved requests to establish that rate submitted by the Boards of Directors of the Federal Reserve Banks of Boston, Philadelphia, Cleveland, Richmond, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco. The vote also encompassed approval by the Board of Governors of the establishment of a 5.5 percent primary credit rate by the remaining Federal Reserve Banks, effective on the later of July 27, 2023, or the date such Reserve Banks inform the Secretary of the Board of such a request. (Secretary's note: Subsequently, the Federal Reserve Banks of New York and Atlanta were informed of the Board's approval of their establishment of a primary credit rate of 5.5 percent, effective July 27, 2023.) Return to text
Board of Governors of the Federal Reserve System
20th Street and Constitution Avenue N.W., Washington, DC 20551


The Federal Reserve, the central bank of the United States, provides
          the nation with a safe, flexible, and stable monetary and financial
          system.
Federal Open Market Committee
Monetary Policy Principles and Practice
Policy Implementation
Reports
Review of Monetary Policy Strategy, Tools, and Communications
Institution Supervision
Reports
Reporting Forms
Supervision & Regulation Letters
Banking Applications & Legal Developments
Regulatory Resources
Banking & Data Structure
Financial Stability Assessments
Financial Stability Coordination & Actions
Reports
Regulations & Statutes
Payment Policies
Reserve Bank Payment Services & Data
Financial Market Utilities & Infrastructures
Research, Committees, and Forums
Working Papers and Notes
Data, Models and Tools
Bank Assets and Liabilities
Bank Structure Data
Business Finance
Dealer Financing Terms
Exchange Rates and International Data
Financial Accounts
Household Finance
Industrial Activity
Interest Rates
Micro Data Reference Manual (MDRM)
Money Stock and Reserve Balances
Other
Regulations
Supervision & Enforcement
Community Development
Research & Analysis
Consumer Resources
March 21–22, 2023
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, March 21, 2023, at 10:00 a.m. and continued on Wednesday, March 22, 2023, at 9:00 a.m.1
Attendance
Jerome H. Powell, Chair
John C. Williams, Vice Chair
Michael S. Barr
Michelle W. Bowman
Lisa D. Cook
Austan D. Goolsbee
Patrick Harker
Philip N. Jefferson
Neel Kashkari
Lorie K. Logan
Christopher J. Waller
Thomas I. Barkin, Raphael W. Bostic, Mary C. Daly, Loretta J. Mester, and Sushmita Shukla,2 Alternate Members of the Committee
James Bullard and Susan M. Collins, Presidents of the Federal Reserve Banks of St. Louis and Boston, respectively
Kelly J. Dubbert, Interim President of the Federal Reserve Bank of Kansas City
Joshua Gallin, 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,3 Economist
Shaghil Ahmed,4 Roc Armenter, James A. Clouse, Brian M. Doyle, Andrea Raffo, Chiara Scotti, and William Wascher, Associate Economists
Roberto Perli, Manager, System Open Market Account
Julie Ann Remache, Deputy Manager, System Open Market Account
Jose Acosta, Senior Communications Analyst, Division of Information Technology, Board
David Altig, Executive Vice President, Federal Reserve Bank of Atlanta
Kartik B. Athreya, Executive Vice President, Federal Reserve Bank of Richmond
Becky C. Bareford, First Vice President, Federal Reserve Bank of Richmond
Penelope A. Beattie,5 Section Chief, Office of the Secretary, Board
Daniel O. Beltran, Deputy Associate Director, Division of International Finance, Board
Jennifer J. Burns,5 Deputy Director, Division of Supervision and Regulation, Board
Mark A. Carlson, Adviser, Division of Monetary Affairs, Board
Todd E. Clark, Senior Vice President, Federal Reserve Bank of Cleveland
Daniel Cooper, Vice President, Federal Reserve Bank of Boston
Stephanie E. Curcuru, Deputy Director, Division of International Finance, Board
Wendy E. Dunn, Adviser, Division of Research and Statistics, Board
Burcu Duygan-Bump, Special Adviser to the Board, Division of Board Members, Board
Rochelle M. Edge, Deputy Director, Division of Monetary Affairs, Board
Matthew J. Eichner,5 Director, Division of Reserve Bank Operations and Payment Systems, Board
Ozge Akinci Emekli, Economic Research Advisor, Federal Reserve Bank of New York
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
Michael S. Gibson, Director, Division of Supervision and Regulation, Board
Christine Graham,5 Special Adviser to the Board, Division of Board Members, Board
Joseph W. Gruber, Executive Vice President, Federal Reserve Bank of Kansas City
Valerie S. Hinojosa, Section Chief, Division of Monetary Affairs, Board
Jane E. Ihrig, Special Adviser to the Board, Division of Board Members, Board
Michael T. Kiley, Deputy Director, Division of Financial Stability, Board
Don H. Kim, Senior Adviser, Division of Monetary Affairs, Board
Spencer Krane, Senior Vice President, Federal Reserve Bank of Chicago
Andreas Lehnert, Director, Division of Financial Stability, Board
Paul Lengermann, Assistant Director, Division of Research and Statistics, 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
David López-Salido, Senior Associate Director, Division of Monetary Affairs, Board
Francesca Loria, Senior Economist, Division of Monetary Affairs, Board
Byron Lutz, Deputy Associate Director, Division of Research and Statistics, Board
Fernando M. Martin, Assistant Vice President, Federal Reserve Bank of St. Louis
Thomas Mertens, Vice President, Federal Reserve Bank of San Francisco
Ann E. Misback, Secretary, Office of the Secretary, Board
Giovanni Nicolò, Senior Economist, Division of Monetary Affairs, Board
Michael G. Palumbo, Senior Associate Director, Division of Research and Statistics, Board
Marcel A. Priebsch, Principal Economist, Division of Monetary Affairs, Board
Linda Robertson, Assistant to the Board, Division of Board Members, Board
Achilles Sangster II, Senior Information Manager, Division of Monetary Affairs, Board
Krista Schwarz, Principal Economist, Division of Monetary Affairs, Board
Nitish Ranjan Sinha, Special Adviser to the Board, Division of Board Members, Board
Yannick Timmer, Senior Economist, Division of Monetary Affairs, Board
Clara Vega, Special Adviser to the Board, Division of Board Members, Board
Annette Vissing-Jørgensen, Senior Adviser, Division of Monetary Affairs, Board
Jeffrey D. Walker,5 Associate Director, Division of Reserve Bank Operations and Payment Systems, Board
Min Wei, Senior Associate Director, 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
Recent Developments in the Banking Sector
Before turning to other agenda items, the Chair asked the Vice Chair for Supervision to provide an update on recent developments in the banking sector. The Vice Chair for Supervision described the developments, including those at Silicon Valley Bank, Signature Bank, and Credit Suisse. He also described actions taken by the Federal Reserve and other regulatory agencies in response. He noted that the U.S. banking system is sound and resilient. He also noted that he will be leading a review of the supervision and regulation of Silicon Valley Bank, and that the Federal Reserve System will apply what is learned from the review to strengthen its supervisory and regulatory practices as appropriate.
Developments in Financial Markets and Open Market Operations
The manager turned first to a review of U.S. financial market developments over the intermeeting period. Early in the period, firmer-than-expected data and policy communications pushed interest rates higher and equity prices lower. Developments in the banking sector later in the period were met with sharp reductions in Treasury yields, particularly at shorter tenors. Treasury market liquidity was poor and implied volatility was high, but the market remained functional amid substantial trading activity. Higher Treasury market volatility contributed to wider spreads for household and business borrowing.
Financial conditions tightened considerably over the intermeeting period as a whole. Market contacts observed that the recent developments in the banking system will likely result in a pullback in bank lending, which would not be reflected in most common financial conditions indexes. Following the banking-sector developments, equity prices for large U.S. banks underperformed the broad market; equity prices for U.S. regional banks generally underperformed by relatively more.
Regarding the outlook for inflation in the United States, market-based measures of inflation compensation over shorter horizons rose over the period, although compensation retraced a good portion of its increase later in the period as markets reacted to the developments in the banking sector. Forward inflation compensation measures continued to indicate that longer-term inflation expectations remained well anchored. Measures of inflation expectations from the Open Market Desk's Survey of Primary Dealers and Survey of Market Participants moved higher at shorter horizons and were little changed at longer horizons.
Regarding the outlook for monetary policy, market-based measures of policy expectations suggested that the federal funds rate would reach a peak in May 2023 and that the target range would then move lower. However, the medians of respondents' modal expectations of the federal funds rate from the Desk surveys did not show any declines in the target range through the end of 2023. Risk and liquidity premiums embedded in market prices may have driven a good part of the difference between survey and market measures. The median respondent expected the Summary of Economic Projections (SEP) projections for the federal funds rate at the end of 2023 and 2024 to shift 25 basis points higher. However, information gathered after the Desk surveys closed suggests that those expectations had declined some, to a level comparable with the December SEP. Survey responses suggested only modest changes in expectations for balance sheet policy.
The manager turned next to a discussion of operations and money markets. Federal funds volumes fell sharply for a few days late in the period as Federal Home Loan Banks (FHLBs) sought to maintain liquidity in order to meet increased demand for advances by member banks. Money market rates remained broadly stable, and secured and unsecured money market rates, including the effective fed funds rate, traded well within the target range. Use of U.S. dollar liquidity swap lines with foreign central banks had been minimal, indicating that market participants did not face significant difficulties in obtaining dollar funding from private sources.
Borrowing from the new Bank Term Funding Program had been small relative to discount window borrowing, which had increased to record levels. Use of the overnight reverse repurchase agreement (ON RRP) facility fell, especially for money market mutual funds (MMFs), as the supply of short-term securities at attractive rates increased.
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 March 21–22 meeting indicated that labor market conditions remained tight in January and February, with robust job gains and the unemployment rate near a historical low. Consumer price inflation—as measured by the 12-month percent change in the price index for personal consumption expenditures (PCE)—was still elevated in January. Real gross domestic product (GDP) appeared to be expanding at a modest pace in the first quarter. Although financial market data had shown reactions to developments in the banking sector late in the intermeeting period, there were essentially no economic data available that covered this period.
Total nonfarm payroll employment increased at a faster monthly pace in January and February than in the fourth quarter of last year. The unemployment rate was little changed and stood at 3.6 percent in February. Over the past two months, the unemployment rate for African Americans was unchanged, on net, and the unemployment rate for Hispanics moved up; the unemployment rates for both groups remained above the aggregate measure. The aggregate measures of both the labor force participation rate and the employment-to-population ratio increased slightly. The private-sector job openings rate in January—as measured by the Job Openings and Labor Turnover Survey—was little changed, on balance, since November and remained high.
Recent indicators of nominal wage growth had slowed but continued to be elevated. In February, the 3-month change in average hourly earnings for all employees was at an annual rate of 3.6 percent, slower than its 12-month pace of 4.6 percent. Over the four quarters of 2022, total labor compensation per hour in the business sector—as measured by the Productivity and Costs data—increased 4.5 percent, below its pace in the previous year.
Consumer price inflation remained elevated early in the year. Total PCE price inflation was 5.4 percent over the 12 months ending in January, and core PCE price inflation—which excludes changes in consumer energy prices and many consumer food prices—was 4.7 percent. The trimmed mean measure of 12-month PCE price inflation constructed by the Federal Reserve Bank of Dallas was 4.6 percent in January. In February, the 12-month change in the consumer price index (CPI) was 6.0 percent, and core CPI inflation was 5.5 percent. The CPI, along with data from the producer price index, pointed to some slowing in PCE price inflation in February. The latest survey-based measures of longer-term inflation expectations from the University of Michigan Surveys of Consumers, the Survey of Professional Forecasters, and the Federal Reserve Bank of New York's Survey of Consumer Expectations remained within the range of their values reported in recent months, while near-term measures of inflation expectations from these surveys moved down.
Real GDP growth seemed to be expanding at a modest pace in the first quarter. Gains in consumer spending had picked up in recent months, but growth in business fixed investment was slowing and residential investment was continuing to decline. After contracting over the second half of last year, manufacturing output expanded moderately, on average, over January and February, but near-term indicators—such as national and regional indexes for new orders—pointed to softening factory output in the coming months.
The nominal U.S. international trade deficit registered a record high in 2022. The trade deficit had been narrowing since March of last year but resumed widening in December and January. Real goods imports rose in December and January, led by increases in imports of consumer goods and automotive products. Real goods exports also increased, but by less than imports.
Indicators suggested that foreign economic growth rebounded in the first quarter of 2023 as China reopened rapidly from its COVID-19-related shutdowns and Europe's economy proved to be resilient to the energy price shock stemming from Russia's war against Ukraine and benefited from a mild winter that reduced energy demand. Manufacturing activity in emerging Asia showed signs of a turnaround from its pronounced slowdown since mid-2022. The recent developments in the banking sector led to some tightening of financial conditions abroad. Oil prices edged down despite China's rapid reopening and the implementation of the European Union's embargo on Russian refined oil products. Retail energy inflation continued to slow, contributing to an easing of headline consumer price inflation in many advanced foreign economies (AFEs). In contrast, core inflation has shown little sign of easing in most foreign economies amid tight labor markets. In response, many foreign central banks continued their monetary policy tightening, although some have either paused or indicated that a pause soon was possible, citing the importance of assessing the cumulative effects of past policy rate increases.
Staff Review of the Financial Situation
Over the first several weeks of the intermeeting period, incoming economic data and FOMC communications appeared to refocus market participants on upside risks to inflation and policy rates, with the market-implied policy rate path steepening, nominal Treasury yields rising, near-term inflation compensation measures increasing, and broad stock market price indexes declining. Financing conditions for businesses, households, and municipalities had tightened during this period and were moderately restrictive overall, as borrowing costs increased notably with the expected path of policy rates and Treasury yields and as some lenders appeared to tighten nonprice borrowing terms. Nonetheless, lending volumes were generally solid. Credit quality was strong overall, although it had worsened a bit for some borrowers. Expectations for future credit quality continued to deteriorate in some markets.
Pricing in financial markets changed notably in the latter part of the intermeeting period, amid developments in the banking sector. Treasury yields and policy rate expectations moved down significantly, while broad stock price indexes rose somewhat. The market-implied policy rate path shifted down sizably, with the federal funds rate expected to peak in May before decreasing afterward. Further out, OIS (overnight index swap) quotes at the end of the intermeeting period indicated that the expected federal funds rate at year-end 2024 was 3.28 percent, about 50 basis points lower than before the closures of Silicon Valley Bank and Signature Bank but somewhat higher than at the time of the February FOMC meeting. Treasury yields declined, especially at shorter maturities, reflecting downward revisions in policy rate expectations and the effects of flight to safety. Inflation compensation declined, especially at short maturities, likely reflecting, in part, a relatively larger decline in risk premiums on nominal Treasury securities relative to Treasury Inflation-Protected Securities due to strong safe-haven demands.
Late in the intermeeting period, U.S. bank stock prices declined notably. Regional banks with unusually large reliance on uninsured deposits and holdings of securities with significant unrealized mark-to-market losses experienced larger declines in stock prices. Broad equity prices rose somewhat after the closures of Silicon Valley Bank and Signature Bank, reportedly driven by investors' reassessment of the outlook for interest rates, and after the announcement that UBS had agreed to buy Credit Suisse. The VIX—the one-month option-implied volatility on the S&P 500—increased to about 26.5 percent following the closures of Silicon Valley Bank and Signature Bank, but it subsequently declined to 21 percent—around the 70th percentile of its historical distribution. Swaption-implied volatilities of short-term interest rates increased notably during this period, reflecting increased uncertainty about the interest rate outlook. Some of the pricing moves in asset markets may have been amplified by impaired liquidity conditions. Despite deteriorating liquidity conditions in Treasury, bond, and equity markets, market functioning remained orderly.
Over the intermeeting period, foreign financial markets were volatile as investors' focus shifted from resilience in economic activity and stubbornly high core inflation across advanced economies earlier in the period to stresses in the global banking sector more recently. Earlier in the period, yields and market-based measures of inflation expectations in the AFEs increased notably, driven by spillovers from U.S. Treasury yields as well as upside surprises in economic and inflation data for AFEs. Later in the period, developments in the banking sector led to large declines in advanced-economy yields, and, on net, AFE yields declined slightly. Additionally, for the intermeeting period overall, the staff's dollar index rose moderately, corporate and emerging market economy sovereign credit spreads widened, and foreign equity indexes generally moved lower, with bank equities falling notably.
U.S. unsecured funding markets showed some signs of pressure later in the intermeeting period. Issuance of commercial paper (CP) and negotiable certificates of deposit (NCDs) dropped a touch over the entire period, and the fraction of CP issuance with overnight maturities increased but remained within normal ranges. Spreads of term CP and NCDs widened some, and spreads for issuers with lower credit ratings rose more, but other unsecured spreads remained within normal ranges. Prime MMFs experienced outflows, while government MMFs had inflows.
The effective federal funds rate was little changed after the closures of Silicon Valley Bank and Signature Bank. Amid these developments, federal funds volumes initially declined sharply as the FHLBs reduced their activity in the federal funds market in order to meet increased demand for advances by member banks; market volume subsequently rebounded partially. Activity in the repurchase agreement market was robust, and trading volume remained within recent ranges. ON RRP take-up remained within recent ranges as well.
Borrowing costs for businesses, households, and municipalities rose notably in the early part of the intermeeting period, mostly in line with increases in the federal funds rate and Treasury yields. Since the closures of Silicon Valley Bank and Signature Bank, spreads on corporate bonds, municipal bonds, and leveraged loans rose, with speculative-grade corporate bond spreads registering the largest moves; spreads remained at moderate levels relative to their historical distributions. Investment-grade corporate yields and municipal yields were down moderately, whereas speculative-grade corporate yields and leveraged loan yields were up modestly. Mortgage rates were unchanged amid an increase in mortgage-backed securities (MBS) spreads.
Based on data that do not cover the period following the closures of Silicon Valley Bank and Signature Bank, nonprice terms and standards appeared to tighten somewhat in a number of markets. Nevertheless, generally solid funding flows suggest that most firms and households had remained broadly able to access funding. Data on credit conditions following the developments in the banking sector were limited. After the two bank closures, issuance of municipal bond and leveraged loans was sluggish, and gross issuance of corporate bonds fell to near zero. Mortgage loans to households remained available.
The credit quality of businesses and households was largely stable over the intermeeting period. However, measures of credit performance showed some signs of weakening. Leveraged loan credit quality deteriorated somewhat after the closures of Silicon Valley Bank and Signature Bank. Credit quality for residential mortgages remained unchanged.
Staff Economic Outlook
For some time, the forecast for the U.S. economy prepared by the staff had featured subdued real GDP growth for this year and some softening in the labor market. Given their assessment of the potential economic effects of the recent banking-sector developments, the staff's projection at the time of the March meeting included a mild recession starting later this year, with a recovery over the subsequent two years. Real GDP growth in 2024 was projected to remain below the staff's estimate of potential output growth, and then GDP growth in 2025 was expected to be above that of potential. Resource utilization in both product and labor markets was forecast to be much less tight than in the January projection. The level of real output was projected to move below the staff's estimate of potential output in early 2024, more than a year sooner than in the previous projection. Likewise, the unemployment rate was projected to rise above the staff's estimate of its natural rate early next year.
On a four-quarter change basis, total PCE price inflation was forecast to be 2.8 percent this year, with core inflation at 3.5 percent. Core goods inflation was projected to move down further this year and then remain subdued; housing services inflation was expected to peak later this year and then move down, while core nonhousing services inflation was forecast to slow gradually as nominal wage growth eased further. Reflecting the effects of less projected tightness in product and labor markets, core inflation was forecast to slow sharply next year. With steep declines in consumer energy prices and a substantial moderation in food price inflation expected for this year, total inflation was projected to step down markedly this year and then to track core inflation over the following two years. In 2024 and 2025, both total and core PCE price inflation were expected to be near 2 percent.
The staff judged that the uncertainty around the baseline projection was much greater than at the time of the previous forecast. In particular, the staff viewed the risks around the baseline projection as determined importantly by banking conditions and the implications for financial conditions. If the effects of the recent developments in the banking sector on macroeconomic conditions were to abate quickly, then the risks around the baseline would be tilted to the upside for both economic activity and inflation. If banking and financial conditions and their effects on macroeconomic conditions were to deteriorate more than assumed in the baseline, then the risks around the baseline would be skewed to the downside for both economic activity and inflation, particularly because historical recessions related to financial market problems tend to be more severe and persistent than average recessions.
Participants' Views on Current Conditions and the Economic Outlook
In conjunction with this FOMC meeting, participants submitted their projections of the most likely outcomes for real GDP growth, the unemployment rate, and inflation for each year from 2023 through 2025 and over the longer run. The projections were based on their individual assessments of appropriate monetary policy, including the path of the federal funds rate. 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. An SEP was released to the public following the conclusion of the meeting.
In their discussion of current economic conditions, participants noted that recent indicators pointed to modest growth in spending and production. At the same time, though, participants noted that job gains had picked up in recent months and were running at a robust pace; the unemployment rate had remained low. Inflation remained elevated. Participants agreed that the U.S. banking system remained sound and resilient. They commented that recent developments in the banking sector were likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation. Participants agreed that the extent of these effects was uncertain. Against this background, participants continued to be highly attentive to inflation risks.
In assessing the economic outlook, participants noted that since they met in February, data on inflation, employment, and economic activity generally came in stronger than expected. They also noted, however, that the developments in the banking sector that had occurred late in the intermeeting period affected their views of the economic and policy outlook and the uncertainty surrounding that outlook. Based on incoming economic data, participants' assessments of the effects of cumulative policy firming, and their initial views on the likely economic effect of the recent banking-sector developments, participants generally expected real GDP to grow this year at a pace well below its long-run trend rate. With inflation remaining unacceptably high, participants expected that a period of below-trend growth in real GDP would be needed to bring aggregate demand into better balance with aggregate supply and thereby reduce inflationary pressures. Many participants remarked that the incoming data before the onset of the banking-sector stresses had led them to see the appropriate path for the federal funds rate as somewhat higher than their assessment at the time of the December meeting. After incorporating the banking-sector developments, participants indicated that their policy rate projections were now about unchanged from December.
Participants agreed that the actions taken so far by the Federal Reserve in coordination with other government agencies, as well as actions taken by foreign authorities to address banking and financial stresses outside the U.S., had helped calm conditions in the banking sector. Even with the actions, participants recognized that there was significant uncertainty as to how those conditions would evolve. Participants assessed that the developments so far would likely lead to some weakening of credit conditions, as some banks were likely to tighten lending standards amid rising funding costs and increased concerns about liquidity. Participants noted that it was too early to assess with confidence the magnitude of the effect of a credit tightening on economic activity and inflation, and that it was important to continue to closely monitor developments and update assessments of the actual and expected effects of credit tightening. Several participants noted that regional and community banks, a small number of which had come under significant stress, were important in small business and middle-market lending and were providing critical and unique financial services to many communities and industries.
In their discussion of the household sector, participants noted that incoming data on real consumer expenditures showed a pickup in spending in January and February. They attributed the pickup to strong job gains, rising real disposable income, and households continuing to run down excess savings accumulated during the pandemic. They also noted that an atypically warm start to this year, along with challenges in seasonally adjusting data, likely contributed to the pickup in the reported data. A few participants observed that credit card delinquencies, particularly for lower-income households, had risen in the face of elevated inflation and higher nominal interest rates. Participants noted that recent developments in the banking sector and the associated rise in uncertainty would likely weigh on consumer sentiment and that increased caution on the part of consumers could restrain spending. A couple of participants observed that high-frequency measures of consumer sentiment had not yet shown a significant change following the recent developments in the banking sector, although they also acknowledged that the situation was fluid.
Regarding the business sector, participants observed that growth in business fixed investment was being restrained by tighter financial conditions that reflected cumulative policy firming to date. Participants expected the likely tightening of credit conditions due to the recent developments in the banking sector to further weigh on investment spending. In addition, the banking-sector developments could damp business confidence and increase firms' caution, reducing their willingness to hire new workers. However, a few participants mentioned that their nonbank business contacts reported that the banking-sector developments so far had not resulted in significant changes in their hiring and capital spending plans or sales expectations, though their contacts also acknowledged increased uncertainties around their outlooks.
Participants agreed that the labor market remained very tight. Job gains had picked up to a robust pace in January and February, and the unemployment rate remained low. Participants noted some signs of improvement in the imbalances between demand and supply in the labor market, including further declines in the quits rate as well as an increase in the overall labor force participation rate and the return of the prime-age participation rate to pre-pandemic levels. Furthermore, participants observed that wage growth appeared to be slowing gradually amid this apparent easing in labor demand and increase in labor supply. However, participants assessed that labor demand continued to substantially exceed labor supply, and several participants pointed out that wage growth was still well above the rates that would be consistent over the longer run with the 2 percent inflation objective, given current estimates of trend productivity growth. Participants expected that, under appropriate monetary policy, supply and demand conditions in the labor market will come into better balance over time, easing upward pressures on wages and prices.
With inflation still well above the Committee's longer-run goal of 2 percent, participants agreed that inflation was unacceptably high. Participants commented that recent inflation data indicated slower-than-expected progress on disinflation. In particular, they noted that revisions to the price data had indicated less disinflation at the end of last year than had been previously reported and that inflation was still quite elevated. Participants noted that, on a 12-month basis, core goods price inflation declined as supply chains continued to improve, but the pace of the decline had slowed, highlighting the still uncertain nature of the disinflationary process. Participants expected that housing services inflation would likely begin to slow in coming months, reflecting continued smaller increases, or potentially declines, in rents on new leases. Regarding prices for core services excluding housing, participants agreed that there was little evidence pointing to disinflation in this component. Participants generally judged that some more easing in labor market tightness and slowing in nominal wage growth would be necessary for sustained disinflation. Additionally, participants observed that indicators of short-term inflation expectations from surveys of households and businesses had come down further, while longer-term inflation expectations remained well anchored. Participants also discussed the potential effect on inflation of the developments in the banking sector. They noted that a tightening of credit conditions was likely to weigh on aggregate demand, which in turn could help reduce inflationary pressures. However, participants observed that the size of such an effect was highly uncertain.
Participants generally observed that the recent developments in the banking sector had further increased the already-high level of uncertainty associated with their outlooks for economic activity, the labor market, and inflation. Participants saw risks to economic activity as weighted to the downside. As a source of downside risk to activity, they noted the possibility that banks would reduce the supply of credit by more than expected, which could restrain economic activity significantly. Participants mentioned potential intensification of Russia's war against Ukraine as an additional source of downside risk to the economic outlook. Participants generally saw risks to inflation as weighted to the upside, though they also recognized some downside risks to inflation. As a source of upside risk to inflation, participants cited the possibility of more-persistent-than-anticipated price pressures, due to, for example, surprisingly resilient labor demand. As a source of downside risk to inflation, participants noted that if banks reduce the supply of credit by more than expected, the likely restraint on economic activity and hiring could put additional downward pressure on inflation.
In their consideration of appropriate monetary policy actions at this meeting, participants concurred that inflation remained well above the Committee's longer-run goal of 2 percent and that the recent data on inflation provided few signs that inflation pressures were abating at a pace sufficient to return inflation to 2 percent over time. Participants also noted that recent developments in the banking sector would likely result in tighter credit conditions for households and businesses and weigh on economic activity, hiring, and inflation, though the extent of these effects was highly uncertain. Against this backdrop, all participants agreed that it was appropriate to raise the target range for the federal funds rate 25 basis points to 4-3/4 to 5 percent. All participants also agreed that it was appropriate to continue the process of reducing the Federal Reserve's securities holdings, as described in its previously announced Plans for Reducing the Size of the Federal Reserve's Balance Sheet.
Several participants noted that, in their policy deliberations, they considered whether it would be appropriate to hold the target range steady at this meeting. They noted that doing so would allow more time to assess the financial and economic effects of recent banking-sector developments and of the cumulative tightening of monetary policy. However, these participants also observed that the actions taken by the Federal Reserve in coordination with other government agencies helped calm conditions in the banking sector and lessen the near-term risks to economic activity and inflation. Consequently, these participants judged it appropriate to increase the target range 25 basis points because of elevated inflation, the strength of the recent economic data, and their commitment to bring inflation down to the Committee's 2 percent longer-run goal.
Some participants noted that given persistently high inflation and the strength of the recent economic data, they would have considered a 50 basis point increase in the target range to have been appropriate at this meeting in the absence of the recent developments in the banking sector. However, due to the potential for banking-sector developments to tighten financial conditions and to weigh on economic activity and inflation, they judged it prudent to increase the target range by a smaller increment at this meeting. These participants noted that doing so would also allow the Committee time to better assess the effects of banking-sector developments on credit conditions and the economy as the Committee moved toward a sufficiently restrictive stance of monetary policy.
Participants observed that the actions taken by the Federal Reserve in coordination with other government agencies in the days preceding the meeting had served to calm conditions in the banking sector. Participants noted that the most significant issues appeared to have been limited to a small number of banks with poor risk-management practices and that the banking system remained sound and resilient. Participants emphasized that the Federal Reserve should use its liquidity and lender-of-last-resort tools, as well as its microprudential and macroprudential regulatory and supervisory tools, to address stress in the banking sector and to mitigate future financial stability risks. Participants agreed that recent banking developments would factor into the Committee's monetary policy decisions to the extent that these developments affect the outlook for employment and inflation and the risks surrounding the outlook. Participants reaffirmed their strong commitment to returning inflation to the Committee's 2 percent objective.
In discussing the policy outlook, participants observed that inflation remained much too high and that the labor market remained tight; as a result, they anticipated that some additional policy firming may be appropriate to attain a sufficiently restrictive policy stance to return inflation to 2 percent over time. Many participants noted that the likely effects of recent banking-sector developments on economic activity and inflation had led them to lower their assessments of the federal funds rate target range that would be sufficiently restrictive compared with assessments based solely on the recent economic data. In determining the extent of future increases in the target range, participants judged that it would be appropriate to take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.
In light of the highly uncertain economic outlook, participants underscored the importance of closely monitoring incoming information and assessing the implications for future monetary policy decisions. Participants noted that it would be particularly important to review incoming information regarding changes in credit conditions and credit flows as well as broader changes in financial conditions and to assess the implications for economic activity, labor markets, and inflation. Several participants emphasized the need to retain flexibility and optionality in determining the appropriate stance of monetary policy given the highly uncertain economic outlook.
Participants emphasized a number of risk-management considerations related to the conduct of monetary policy. Some participants observed that downside risks to growth and upside risks to unemployment had increased because of the risk that banking-sector developments could lead to further tightening of credit conditions and weigh on economic activity. Some participants also noted that, with inflation still well above the Committee's longer-run goal and the recent economic data remaining strong, upside risks to the inflation outlook remained a key factor shaping the policy outlook, and that maintaining a restrictive policy stance until inflation is clearly on a downward path toward 2 percent would be appropriate from a risk-management perspective. Several participants noted the importance of longer-term inflation expectations remaining anchored and remarked that the longer inflation remained elevated, the greater the risk of inflation expectations becoming unanchored. Participants generally agreed on the importance of closely monitoring incoming information and its implications for the economic outlook, and that they were prepared to adjust their views on the appropriate stance of monetary policy in response to the incoming data and emerging risks to the economic outlook.
Committee Policy Actions
In their discussion of monetary policy for this meeting, members agreed that recent indicators pointed to modest growth in spending and production. They also concurred that job gains had picked up in recent months and were running at a robust pace, that the unemployment rate had remained low, and that inflation remains elevated. Members concurred that the U.S. banking system is sound and resilient. They also agreed that recent developments were likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation, but that the extent of these effects was uncertain. Members also concurred that they remained highly attentive to inflation risks.
Members agreed that the Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, members agreed to raise the target range for the federal funds rate to 4-3/4 to 5 percent. Members agreed that they would closely monitor incoming information and assess the implications for monetary policy. Given recent developments, members anticipated that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time. Members concurred that, in determining the extent of future increases in the target range, they would take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, members agreed that they would continue reducing the Federal Reserve's holdings of Treasury securities and agency debt and agency MBS, as described in its previously announced plans. All members affirmed that they remained strongly committed to returning inflation to its 2 percent objective.
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. They 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. Members agreed that their assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.
At the conclusion of the discussion, the Committee voted to direct the Federal Reserve Bank of New York, until instructed otherwise, to execute transactions in the System Open Market Account in accordance with the following domestic policy directive, for release at 2:00 p.m.:
"Effective March 23, 2023, 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.:
"Recent indicators point to modest growth in spending and production. Job gains have picked up in recent months and are running at a robust pace; the unemployment rate has remained low. Inflation remains elevated.
The U.S. banking system is sound and resilient. Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation. The extent of these effects is uncertain. The Committee remains highly attentive to inflation risks.
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 4-3/4 to 5 percent. The Committee will closely monitor incoming information and assess the implications for monetary policy. The Committee anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time. In determining the extent of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly 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 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 labor market conditions, inflation pressures and inflation expectations, and financial and international developments."
Voting 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, and Christopher J. Waller.
Voting against this action: None.
To support the Committee's decision to raise the target range for the federal funds rate, the Board of Governors of the Federal Reserve System voted unanimously to raise the interest rate paid on reserve balances to 4.9 percent, effective March 23, 2023. The Board of Governors of the Federal Reserve System voted unanimously to approve a 1/4 percentage point increase in the primary credit rate to 5 percent, effective March 23, 2023.6
It was agreed that the next meeting of the Committee would be held on Tuesday–Wednesday, May 2–3, 2023. The meeting adjourned at 10:15 a.m. on March 22, 2023.
Notation Vote
By notation vote completed on February 21, 2023, the Committee unanimously approved the minutes of the Committee meeting held on January 31–February 1, 2023.
_______________________
Joshua Gallin
Secretary
1. The Federal Open Market Committee is referenced as the "FOMC" and the "Committee" in these minutes; the Board of Governors of the Federal Reserve System is referenced as the "Board" in these minutes. Return to text
2. Elected as an Alternate by the Federal Reserve Bank of New York, effective March 2, 2023. Return to text
3. Attended through the discussion of the economic and financial situation. Return to text
4. Attended from the discussion of the economic and financial situation through the end of Wednesday's session. Return to text
5. Attended through the discussion of developments in financial markets and open market operations. Return to text
6. In taking this action, the Board approved requests to establish that rate submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Richmond, Atlanta, Kansas City, Dallas, and San Francisco. The vote also encompassed approval by the Board of Governors of the establishment of a 5 percent primary credit rate by the remaining Federal Reserve Banks, effective on the later of March 23, 2023, or the date such Reserve Banks inform the Secretary of the Board of such a request. (Secretary's note: Subsequently, the Federal Reserve Banks of Cleveland, Chicago, St. Louis, and Minneapolis were informed of the Board's approval of their establishment of a primary credit rate of 5 percent, effective March 23, 2023.) Return to text
Board of Governors of the Federal Reserve System
20th Street and Constitution Avenue N.W., Washington, DC 20551