Federal Reserve Alert! Minutes of the Federal Open Market Committee, January 31–February 1, 2023.
Source: https://www.federalreserve.gov/monetarypolicy/fomcminutes20230201.htm
Annual Organizational Matters3
The agenda for this meeting reported that advices of the election of the following members and alternate members of the Federal Open Market Committee for a term beginning January 31, 2023, were received and that these individuals executed their oaths of office.
The elected members and alternate members were as follows:
John C. Williams, President of the Federal Reserve Bank of New York, with Helen E. Mucciolo, Interim First Vice President of the Federal Reserve Bank of New York, as alternate
Patrick Harker, President of the Federal Reserve Bank of Philadelphia, with Thomas I. Barkin, President of the Federal Reserve Bank of Richmond, as alternate
Austan D. Goolsbee, President of the Federal Reserve Bank of Chicago, with Loretta J. Mester, President of the Federal Reserve Bank of Cleveland, as alternate
Lorie K. Logan, President of the Federal Reserve Bank of Dallas, with Raphael W. Bostic, President of the Federal Reserve Bank of Atlanta, as alternate
Neel Kashkari, President of the Federal Reserve Bank of Minneapolis, with Mary C. Daly, President of the Federal Reserve Bank of San Francisco, as alternate.
By unanimous vote, the following officers of the Committee were selected to serve until the selection of their successors at the first regularly scheduled meeting of the Committee in 2024:
Jerome H. PowellChairJohn C. WilliamsVice ChairJoshua GallinSecretaryMatthew M. LueckeDeputy SecretaryBrian J. BonisAssistant SecretaryMichelle A. SmithAssistant SecretaryMark E. Van Der WeideGeneral CounselRichard OstranderDeputy General CounselCharles C. GrayAssistant General CounselTrevor A. ReeveEconomistStacey TevlinEconomistBeth Anne WilsonEconomist Shaghil AhmedRoc ArmenterJames A. ClouseBrian M. DoyleEric M. EngenBeverly J. HirtleAnna PaulsonAndrea RaffoChiara Scotti4William WascherAssociate Economists
By unanimous vote, the Committee selected the Federal Reserve Bank of New York to execute transactions for the System Open Market Account (SOMA).
By unanimous vote, the Committee selected Patricia Zobel to serve at the pleasure of the Committee as deputy manager of the SOMA through February 20, 2023, and Roberto Perli and Julie Ann Remache to serve at the pleasure of the Committee as manager and deputy manager of the SOMA, respectively, effective February 21, 2023, on the understanding that these selections were subject to being satisfactory to the Federal Reserve Bank of New York.
Secretary's note: The Federal Reserve Bank of New York subsequently sent advice that the selections indicated previously were satisfactory.
As part of the annual review of the Committee's governance documents for open market operations and foreign currency transactions, the Committee unanimously approved a new governance document titled "FOMC Authorizations and Continuing Directives for Open Market Operations."3 The new document includes (1) authorizations previously in the Committee's Authorization for Foreign Currency Operations and Authorization for Domestic Open Market Operations; (2) a new "Continuing Directive for Domestic Open Market Operations," which combines direction to the Desk in the Standing Repurchase Agreement Facility and FIMA Repurchase Agreement Facility resolutions with direction to the Desk to continue to carry out other ongoing activities; (3) the Foreign Currency Directive; and (4) two other existing documents related to contingency arrangements. The new unified document improves clarity and transparency in the governance of Desk activities but does not make substantive changes to governance. The domestic policy directive released after each FOMC meeting will have modest conforming changes going forward.
Ahead of the vote on policies relating to information security, external communications, and investment and trading, the Chair commented on the critical importance of maintaining the public's trust and confidence in the Federal Reserve as an institution and indicated that these policies were very important in that regard. All participants indicated support for, and agreed to abide by the requirements of, the Program for Security of FOMC Information (Program), the FOMC Policy on External Communications of Committee Participants, the FOMC Policy on External Communications of Federal Reserve System Staff, and the Investment and Trading Policy for FOMC Officials. The Committee voted unanimously to reaffirm all four policies without revision.3
As part of the Committee's annual organizational review process, all participants indicated support for the Statement on Longer-Run Goals and Monetary Policy Strategy, and the Committee voted unanimously to reaffirm it without revision.3
Developments in Financial Markets and Open Market Operations
The manager pro tem turned first to a review of U.S. financial market developments. Market participants generally expected U.S. economic growth to moderate this year, although there was a wide dispersion in views about the extent of a potential slowdown. Market participants interpreted incoming data as pointing to moderating inflation risks. Against this backdrop, market participants judged that the FOMC would likely slow the pace of rate increases further at the current meeting, and respondents to the Desk's Survey of Primary Dealers and Survey of Market Participants widely expected the Committee to implement a 1/4 percentage point increase in the target range for the federal funds rate. Survey respondents assessed that uncertainty around the likely peak level of the policy rate narrowed relative to the comparable results from the December surveys and, on average, placed significant probability on a target federal funds rate range close to 5 percent. A significant share of survey respondents anticipated that the Committee would hold the policy rate stable for much of 2023.
Moderating inflation in the United States and improving global growth prospects lifted market sentiment. While most Desk survey respondents expected subdued growth or a mild recession in 2023, market participants continued to see notable uncertainties ahead, including prospects for a deeper downturn or the potential for more persistent inflation.
Regarding the international outlook, signs of a faster reopening in China and a less severe downturn in Europe eased concerns about global growth, contributing to a depreciation in the exchange value of the dollar and supporting optimism about emerging market economies. Narrowing interest rate differentials between the United States and other advanced foreign economies also contributed to dollar depreciation, as some foreign central bank communications suggested a need for further monetary policy tightening to address inflation pressures. In addition, the Bank of Japan unexpectedly widened its yield curve control band at its December meeting to address market functioning issues in the market for Japanese government bonds. Over the period, some other central banks communicated that they were at or near a point where it would be appropriate to pause policy rate increases and assess the effects of cumulative policy tightening.
The manager pro tem turned next to a discussion of money markets and Federal Reserve operations. Money market rates were stable over the period, with the year-end passing smoothly. As expected, balances in the overnight reverse repurchase agreement (ON RRP) facility increased at year-end but quickly retraced. Market participants generally expected usage of the ON RRP facility to continue a downward trend in 2023, moderating the decline in reserve balances as the Federal Reserve's holdings of securities continue to run off. Should transitory pressures occur in money markets over the course of the year, the manager pro tem noted that the standing repurchase agreement (repo) facility and discount window would be available to help support effective monetary policy implementation.
The manager noted that, over coming months, developments affecting the Treasury General Account (TGA) and Treasury financing could influence money market conditions. An increase in TGA balances associated with April individual tax receipts could result in a temporary decline in reserve balances. In subsequent months, uncertainties associated with the debt limit could also be important. In particular, the Treasury could increase bill issuance to rebuild TGA balances once the debt limit is lifted, reducing reserves and potentially lifting money market rates. The manager pro tem noted that in recent months, investors in the ON RRP facility had responded to small increases in money market rates by shifting balances into private investments, and that reductions in ON RRP volumes may help smooth adjustments in money markets.
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 January 31–February 1 meeting indicated that labor market conditions remained tight in December, with the unemployment rate at a historical low. Consumer price inflation—as measured by the 12-month percent change in the price index for personal consumption expenditures (PCE)—continued to step down in November and December but was still elevated. Real gross domestic product (GDP) increased at a solid pace in the fourth quarter of last year.
Total nonfarm payroll employment increased solidly in December, although at a slower pace than in the previous two months. The unemployment rate moved back down to 3.5 percent in December. The unemployment rate for African Americans was unchanged, and the unemployment rate for Hispanics ticked 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 edged up. The private-sector job openings rate, as measured by the Job Openings and Labor Turnover Survey, was flat in November and remained high.
Measures of nominal wage growth slowed at the end of last year but continued to be elevated. The three-month change in the employment cost index (ECI) of hourly compensation in the private sector slowed to a 4.0 percent annual rate in December, while the three-month change measure of average hourly earnings (AHE) for all employees eased to an annual rate of 4.1 percent. Over the 12 months ending in December, the ECI increased 5.1 percent, and AHE rose 4.6 percent.
Consumer price inflation eased in November and December but remained elevated. Total PCE price inflation was 5.0 percent over the 12 months ending in December, 1.1 percentage points lower than the October figure. Core PCE price inflation, which excludes changes in consumer energy prices and many consumer food prices, was 4.4 percent over the 12 months ending in December, down 0.7 percentage point from its October reading. The trimmed mean measure of 12-month PCE price inflation constructed by the Federal Reserve Bank of Dallas was 4.4 percent in December, 0.3 percentage point lower than in October. The latest survey-based readings on longer-term inflation expectations from the University of Michigan Surveys of Consumers 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 along with actual inflation.
Although real GDP expanded at an annual rate of 2.9 percent in the fourth quarter, real private domestic final purchases (PDFP)—which includes PCE, residential investment, and business fixed investment—increased at a subdued annual rate of 0.2 percent. Real GDP growth was bolstered especially by a large gain in inventory investment and a notable contribution from net exports, as imports fell more than exports. Both inventories and net exports are volatile categories in aggregate spending. Regarding production, U.S. manufacturing output declined sizably in both November and December.
Foreign economic growth slowed in the fourth quarter, weighed down by the COVID-19-related slowdown in China and repercussions of Russia's war against Ukraine. Weaker global demand and a rebalancing from goods to services also resulted in a pronounced slowdown in manufacturing, which weighed on activity in emerging Asia. In China, the pivot away from its zero-COVID policy appears to have resulted in a rapid surge in virus cases late in the year, but also in a rebound in activity as restrictions were rapidly removed. In Europe, the slowdown in economic growth was tempered by mild winter weather, which also prompted further declines in energy prices. A decline in retail energy as well as food prices contributed to an easing in headline consumer price inflation in many foreign economies. With core inflation remaining elevated amid tight labor markets, however, many central banks continued to tighten monetary policy.
Staff Review of the Financial Situation
Over the intermeeting period, the market-implied federal funds rate path was little changed for 2023 but moderately moved down further out. Nominal Treasury yields were little changed, while swaps-based inflation compensation measures fell notably. Stock market indexes were slightly higher, and market volatility declined but remained slightly elevated. Businesses and households continued to face elevated borrowing costs. Credit quality remained strong overall, although there were some signs of deterioration for consumer loans.
The market-implied federal funds rate path for 2023 was little changed, on net, during the intermeeting period but fell moderately beyond mid-2024. On net, nominal Treasury yields were roughly unchanged, and swaps-market-implied inflation compensation measures fell notably.
Broad stock price indexes ended the intermeeting period only slightly higher despite sizable fluctuations. Equity prices fell sharply following the December FOMC statement but recovered over the remainder of the period in response to data releases. The VIX—the one-month option-implied volatility on the S&P 500—decreased somewhat but remained slightly above the median range of its historical distribution. Spreads on investment-grade and high-yield corporate bonds narrowed somewhat, on net, over the intermeeting period, while spreads on municipal bonds narrowed substantially.
Conditions in short-term funding markets remained stable over the intermeeting period, with the December increase in the target range for the federal funds rate and the associated increases in the Federal Reserve's administered rates passing through quickly to overnight money market rates. In secured markets, repo rates were roughly the same as the ON RRP offering rate but continued to occasionally print slightly higher around days with Treasury bill and coupon settlements. Daily take-up in the ON RRP facility remained elevated, reflecting continued elevated assets under management (AUM) for money market mutual funds (MMFs), ongoing uncertainty around the policy path, and limited supply of alternative investments such as Treasury bills. Net yields on MMFs rose further over the intermeeting period, mostly passing through the increase in administered rates. Bank deposit rates gradually increased but continued to lag cumulative increases in the federal funds rate.
Over the intermeeting period, investor perceptions of an improved economic outlook in China and Europe contributed to increases in foreign risky asset prices and weighed on the exchange value of the dollar. Global equity indexes rose, supported in part by lower European natural gas prices and China's decision to abandon its zero-COVID policy. Sovereign yields increased notably in the euro area and Japan, reflecting more-restrictive-than-expected communications from the European Central Bank and the Bank of Japan's decision to widen its yield curve control target band, respectively. In contrast, yields in other major advanced foreign economies were little changed on net. The staff's broad dollar index declined over the intermeeting period, with larger declines against emerging market economy (EME) currencies amid significant inflows into EME-focused investment funds in January on improved investor sentiment. Narrowing yield differentials between the United States and some advanced foreign economies also contributed to the depreciation of the dollar.
In domestic credit markets, businesses and households continued to face elevated borrowing costs. Yields for corporate bonds declined, while borrowing costs for leveraged loans were little changed at elevated levels. Bank interest rates for commercial and industrial (C&I) loans continued to trend upward in the fourth quarter. Yields on municipal bonds declined during the intermeeting period but remained above their historical average. Residential mortgage rates were little changed over the intermeeting period and remained well above their levels in the previous tightening cycle, notwithstanding the decline from their peak in early November. Interest rates on existing credit cards continued to increase in recent months, and interest rates on new auto loans also rose through mid-January.
Credit remained broadly available for businesses and households with strong credit quality but remained tight for lower-rated borrowers. Lending standards tightened further for bank-dependent borrowers. Issuance of corporate bonds was subdued in December before picking up somewhat in January. New launches of leveraged loans were notably subdued in December and January, likely reflecting soft investor demand and higher reference rates on floating-rate loans.
In the January Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS), banks reported having tightened C&I and commercial real estate (CRE) lending standards over the previous three months. Although C&I loans at banks continued to expand through December, they decelerated relative to earlier in the year, in line with tighter lending standards and weaker demand for C&I loans over the fourth quarter. CRE loan growth on domestic banks' balance sheets remained robust in the fourth quarter. Meanwhile, issuance of commercial mortgage-backed securities remained slow in November and December, amid high base interest rates and spreads. Some tightening in lending conditions was also evident for small businesses, with the share of small firms reporting that it was more difficult to obtain credit compared with three months earlier continuing to trend up through December.
Credit was broadly available in the residential mortgage market for high-credit-score borrowers who met standard conforming loan criteria. Credit availability for households with lower credit scores was considerably tighter, though comparable to levels prevailing before the pandemic. Purchase mortgage applications and refinance applications were both little changed over the intermeeting period. Home equity line of credit (HELOC) balances at banks continued to grow through the fourth quarter, on net, potentially reflecting homeowners using HELOCs as a preferred way of extracting home equity in the presence of high current mortgage rates. In the January SLOOS, banks reported tighter standards for all consumer loans. Even so, total credit card balances increased at a solid pace in November, while auto loans grew modestly.
Overall, credit quality remained strong, although there was some deterioration for credit card and auto loan borrowers and some predictors of future credit quality worsened a bit further. The volume of corporate bond rating downgrades outpaced upgrades in December, although the level of downgrades remained moderate. Leveraged loans experienced notable net rating downgrades in December, but the pace moderated in January. Default rates on corporate bonds and leveraged loans remained low. Measures of expected default probabilities for corporate bonds and leveraged loans remained elevated relative to their historical distributions. The credit quality of businesses that borrow from banks remained sound, on balance, although, in the January SLOOS, banks reported expecting a deterioration in the quality of business loans in their portfolio over 2023. Delinquencies on small business loans continued to edge up in November but remained low relative to historical levels.
The credit quality of households also remained strong, on balance, despite some signs of deterioration. Delinquencies for Federal Housing Administration mortgages increased slightly, but overall mortgage delinquency rates were still near pre-pandemic lows. Delinquency rates for credit cards and auto loans continued to rise during the third quarter. While delinquency rates on credit cards were still relatively low, those on auto loans rose above pre-pandemic levels. In the January SLOOS, banks reported expecting a further deterioration in the quality of household loans in 2023, especially for consumer loans.
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 moderate. The staff judged that asset valuation pressures remained notable. In particular, the staff noted that measures of valuations in both residential and commercial property markets remained high, and that the potential for large declines in property prices remained greater than usual. In addition, the forward price-to-earnings ratio for S&P 500 firms remained above its median value despite the decline in equity prices over the past year. The staff assessed that valuation pressures had eased for corporate bonds and leveraged loans, as spreads in both markets had increased from recent lows.
The staff assessed that vulnerabilities associated with household and business leverage remained moderate, noting that although measures of business leverage were at or near a historically high level, the ability of firms to service their debt has kept pace with rising debt loads and interest rates. Household borrowing rose for borrowers with prime credit scores but declined for households with lower credit scores. Vulnerabilities associated with financial leverage also remained moderate. In particular, risk-based capital ratios for banks increased slightly, a staff measure of leverage at life insurance companies remained relatively flat in recent quarters, and leverage among private credit funds has remained steady for several years. While measures of hedge fund leverage have decreased since the pandemic shock, the staff noted that leverage among the largest funds was on track to return to 2019 levels.
Vulnerabilities associated with funding risks were characterized as moderate. The rising rate environment has prompted inflows into prime retail MMFs, while AUM at prime institutional funds, which have proved more sensitive to turmoil in the past, have grown much less. Assets in open-end mutual funds that invest in less liquid instruments like bank loans or high-yield corporate bonds have declined notably over the past year. In response to vulnerabilities at MMFs and open-end mutual funds, the Securities and Exchange Commission has proposed rules to make these funds more resilient.
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