FOMC January 2016 Minutes Notes

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Rate increase implemented smoothly

“Overall, the rate increase was implemented smoothly and money markets responded as anticipated. Take-up of overnight reverse repurchase agreement (ON RRP) operations over this period was consistent with that observed in the testing phase of operations over the second half of last year.”

Committee discussed putting a cap on Reverse Repurchase facility

” A staff presentation at this meeting reviewed broad strategies for reintroducing an aggregate cap on ON RRP operations and managing the cap subsequently. In the discussion that followed, participants reiterated that the Committee expects to phase out the facility when it is no longer needed to help control the federal funds rate, and they unanimously expressed the view that it would be appropriate to reintroduce an aggregate cap on ON RRP operations at some point. Regarding when to do so, participants held varied views, but nearly all indicated a preference for waiting a couple of months or longer before making operational adjustments to the facility, in part so that the Federal Reserve could gain additional experience with its policy implementation tools. Concerning the strategy that would be used to cap the ON RRP facility when the time came, most policymakers favored an approach in which a relatively high cap level would be imposed initially–though one that nonetheless would significantly reduce capacity relative to the current situation–with the intention of periodically making further reductions in the level of the cap as appropriate.”

Participants judged that it was premature to alter their assessment of the medium term outlook

“In assessing the medium-term outlook, participants discussed the extent to which the recent turbulence in global financial markets might restrain U.S. economic activity. While acknowledging the possible adverse effects of the tightening of financial conditions that had occurred, most policymakers thought that the extent to which tighter conditions would persist and what that might imply for the outlook were unclear, and they therefore judged that it was premature to alter appreciably their assessment of the medium-term economic outlook.”

Tightening financial markets may be roughly equivalent to further firming in monetary policy

“Participants also discussed a range of issues related to financial market developments. Almost all participants cited a number of recent events as indicative of tighter financial conditions in the United States; these events included declines in equity prices, a widening in credit spreads, a further rise in the exchange value of the dollar, and an increase in financial market volatility. Some participants also pointed to significantly tighter financing conditions for speculative-grade firms and small businesses, and to reports of tighter standards at banks for C&I and CRE loans. The effects of these financial developments, if they were to persist, may be roughly equivalent to those from further firming in monetary policy”

The decline in markets does not reconcile with economic developments. The decline in prices could be valuation adjustment. Valuations in CRE should be monitored

” a number of participants noted that the large magnitude of changes in domestic financial market conditions was difficult to reconcile with incoming information on U.S. economic developments. A couple of participants pointed out that the recent decline in equity prices could be viewed as bringing equity valuations more in line with historical norms. Additionally, a few participants cautioned that valuations in CRE markets should be closely monitored. The effects of a relatively flat yield curve and low interest rates in reducing banks’ net interest margins were also noted.”

Many saw these developments as increasing downside risks to the outlook

“Participants discussed whether their current assessments of economic conditions and the medium-term outlook warranted either increasing the target range for the federal funds rate at this meeting or altering their earlier views of the appropriate path for the target range for the federal funds rate… Participants judged that the overall implication of these developments for the outlook for domestic economic activity was unclear, but they agreed that uncertainty had increased, and many saw these developments as increasing the downside risks to the outlook.”

Several participants noted that it would be prudent to wait for additional information before taking steps to reduce policy accommodation

“Several participants noted that monetary policy was less well positioned to respond effectively to shocks that reduce inflation or real activity than to upside shocks, and that waiting for additional information regarding the underlying strength of economic activity and prospects for inflation before taking the next step to reduce policy accommodation would be prudent”