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Minutes of the Federal Open April 27–28, 2021

A joint of the Federal Open Market Committee Ann E. Misback, Secretary, Office of the Secretary, and the Board of Governors was held by videoconfer- Board of Governors ence on Tuesday, April 27, 2021, at 9:30 a.m. and con- tinued on Wednesday, April 28, 2021, at 9:00 a.m.1 Matthew J. Eichner,2 Director, Division of Reserve Bank Operations and Payment Systems, Board of PRESENT: Governors; Michael S. Gibson, Director, Division Jerome H. Powell, Chair of Supervision and Regulation, Board of John C. Williams, Vice Chair Governors; Andreas Lehnert, Director, Division of Thomas I. Barkin Financial Stability, Board of Governors Raphael W. Bostic Michelle W. Bowman Sally Davies, Deputy Director, Division of International Finance, Board of Governors Richard H. Clarida Mary C. Daly Jon Faust, Senior Special Adviser to the Chair, Division Charles L. Evans of Board Members, Board of Governors Randal K. Quarles Christopher J. Waller Joshua Gallin, Special Adviser to the Chair, Division of Board Members, Board of Governors James Bullard, Esther L. George, Naureen Hassan, Loretta J. Mester, and Eric Rosengren, Alternate William F. Bassett, Antulio N. Bomfim, Wendy E. Members of the Federal Open Market Committee Dunn, Burcu Duygan-Bump, Jane E. Ihrig, Kurt F. Lewis, and Chiara Scotti, Special Advisers to the Patrick Harker, Robert S. Kaplan, and , Board, Division of Board Members, Board of Presidents of the Banks of Governors Philadelphia, Dallas, and Minneapolis, respectively Carol C. Bertaut, Senior Associate Director, Division James A. Clouse, Secretary of International Finance, Board of Governors; Matthew M. Luecke, Deputy Secretary David Bowman, Senior Associate Director, Michelle A. Smith, Assistant Secretary Division of Monetary Affairs, Board of Governors; Mark E. Van Der Weide, General Counsel Diana Hancock, Senior Associate Director, Michael Held, Deputy General Counsel Division of Research and Statistics, Board of Trevor A. Reeve, Governors; Elizabeth Klee, Senior Associate Stacey Tevlin, Economist Director, Division of Financial Stability, Board of Beth Anne Wilson, Economist Governors

David Altig, Kartik B. Athreya, Brian M. Doyle, Brett Berger,2 Senior Adviser, Division of Rochelle M. Edge, Eric M. Engen, Anna Paulson, International Finance, Board of Governors; Ellen and William Wascher, Associate E. Meade, Senior Adviser, Division of Monetary Affairs, Board of Governors; Jeremy B. Rudd, Lorie K. Logan, Manager, System Open Market Senior Adviser, Division of Research and Statistics, Account Board of Governors

Patricia Zobel, Deputy Manager, System Open Market Marnie Gillis DeBoer and Min Wei, Associate Account Directors, Division of Monetary Affairs, Board of Governors; Glenn Follette, Associate Director,

1 The Federal Open Market Committee is referenced as the 2 Attended through the discussion of repurchase agreement “FOMC” and the “Committee” in these minutes. arrangements. ______Page 2 Federal Open Market Committee

Division of Research and Statistics, Board of Reserve Banks of Philadelphia, Kansas City, and Governors , respectively

Ricardo Correa2 and Stephanie E. Curcuru,2 Deputy Anne Baum, Carlos Garriga, Samuel Schulhofer-Wohl,2 Associate Director, Division of International Mark L.J. Wright, and Nathaniel Wuerffel,2 Senior Finance, Board of Governors; Eric C. Engstrom, Vice Presidents, Federal Reserve Banks of New Deputy Associate Director, Division of Monetary York, St. Louis, Chicago, Minneapolis, and New Affairs, Board of Governors; Jeffrey D. Walker,2 York, respectively Deputy Associate Director, Division of Reserve Bank Operations and Payment Systems, Board of Matthew Nemeth,2 Pia Orrenius, Nicolas Petrosky- Governors Nadeau, and Matthew D. Raskin,2 Vice Presidents, Federal Reserve Bank of New York, Dallas, San Jennifer Gallagher, Special Assistant to the Board, Francisco, and New York, respectively Division of Board Members, Board of Governors Robert Lerman2 and William E. Riordan,2 Assistant Brian J. Bonis, Michiel De Pooter,2 Giovanni Favara, Vice Presidents, Federal Reserve Banks of New Laura Lipscomb,2 and Zeynep Senyuz, Assistant York and New York, respectively Directors, Division of Monetary Affairs, Board of Governors; Byron Lutz and Matthias Paustian, Mark Choi2 and Ellen Correia-Golay,2 Markets Assistant Directors, Division of Research and Officers, Federal Reserve Banks of New York and Statistics, Board of Governors New York, respectively

Penelope A. Beattie,2 Section Chief, Office of the Fatih Karahan and Jenny Tang, Senior Economists, Secretary, Board of Governors Federal Reserve Banks of New York and Boston, respectively Mark A. Carlson,2 Senior Economic Project Manager, Division of Monetary Affairs, Board of Governors Developments in Financial Markets and Open Market Operations David H. Small, Project Manager, Division of The System Open Market Account (SOMA) manager Monetary Affairs, Board of Governors first discussed developments in financial markets over the intermeeting period. Financial conditions eased Michele Cavallo, Jonathan E. Goldberg, Edward modestly as market participants continued to focus on Herbst, and Krista Schwarz, Principal Economists, progress toward economic reopening as well as support- Division of Monetary Affairs, Board of Governors ive monetary and . Equity rose, with the S&P 500 index reaching a record high, while Treas- Randall A. Williams, Lead Information Manager, ury yields, the dollar, and credit spreads declined mod- Division of Monetary Affairs, Board of Governors estly. The equity gains were broad based across sectors, though shares of small caps, as captured by the Russell Courtney Demartini,2 Lead Financial Institution Policy 2000 index, declined. News regarding losses associated Analyst, Division of Monetary Affairs, Board of with a highly levered family investment office affected Governors the equity prices of some large financial firms, but the broader financial market effects appeared limited. Anthony Sarver,2 Senior Financial Institution Policy After rising sharply in recent months, longer-term Treas- Analyst, Division of Monetary Affairs, Board of ury yields declined modestly over the intermeeting pe- Governors riod, even as market expectations for U.S. growth con-

tinued to be revised higher. Contacts reported that the Kenneth C. Montgomery, First Vice President, Federal earlier increases in yields drew in a range of investors, Reserve Bank of Boston including foreign institutions, funds, and insur-

ance . Against this backdrop, term premiums Michael Dotsey, Joseph W. Gruber, and Ellis W. as measured by term structure models and based on es- Tallman, Executive Vice Presidents, Federal ______Minutes of the Meeting of April 27–28, 2021 Page 3 timates using the Open Market Desk’s surveys of pri- could ultimately lead to a greater share of Federal Re- mary dealers and market participants moved slightly serve balance sheet expansion being channeled into lower. Nonetheless, market participants were attentive ON RRP and other Federal Reserve liabilities. Although to the potential for rising yields going forward, and, in few survey respondents expected an adjustment to ad- recent months, Desk survey respondents had increased ministered rates at the current meeting, more than half the probability they attach to higher yields at the end of expected an adjustment by the end of the June FOMC 2021. meeting. Regarding expectations for the policy outlook, the mar- The manager concluded with an update on three opera- ket- and survey-implied paths of the rate tional issues. Following the review of the ON RRP fa- were both relatively little changed over the intermeeting cility discussed at the previous meeting, the Desk period, and the modal survey path in later years contin- planned to relax counterparty eligibility criteria for ued to imply that the target range would gradually in- funds and -sponsored enterprises in crease to a level just over 2 percent in 2026. Expecta- order to allow smaller counterparties of these types to tions for the path of asset purchases were also stable, and participate. The Desk also planned to make modest ad- market participants remained focused on the Commit- justments to the allocation of Treasury outright pur- tee’s communications about progress toward its goals. chases across maturity ranges to ensure that purchases According to the median survey responses, the Federal remain roughly proportional to the outstanding amounts Reserve’s net purchases of Treasury and agency securi- of Treasury securities. These minor technical adjust- ties were expected to end three quarters after the first ments would have no implications for the effects of the reduction in the pace of asset purchases, and the first Federal Reserve’s asset purchases on overall financial increase in the target range for the was conditions. Finally, the manager requested that the expected to occur three quarters after that. Committee vote to maintain the standing U.S. dollar and foreign liquidity swap arrangements and to re- Recent financial market developments across advanced new the reciprocal currency arrangements with Canada reflected differing expectations for economic and Mexico under the North American Framework growth and . Some countries that were Agreement. expected to recoup COVID-19-related output losses earlier than others had seen larger yield increases and The Committee voted unanimously to renew the recip- more appreciation in their in recent months. rocal currency arrangements with the Bank of Canada Over the intermeeting period, the Bank of Canada an- and the Bank of Mexico; these arrangements are associ- nounced a reduction in the pace of its asset purchases ated with the Federal Reserve’s participation in the and brought forward its forecast of when conditions North American Framework Agreement of 1994. In ad- would be met for an increase in its policy rate. dition, the Committee voted unanimously to renew the dollar and foreign currency liquidity swap arrangements The manager turned next to money markets and the with the Bank of Canada, the , the Bank Federal Reserve’s balance sheet. Reserve balances in- of Japan, the European , and the Swiss Na- creased further this intermeeting period to a record level tional Bank. The votes to renew the Federal Reserve’s of $3.9 trillion. The effective federal funds rate was participation in these standing arrangements occur an- steady at 7 basis points. However, amid ongoing strong nually at the April or May FOMC meeting. demand for safe short-term investments and reduced Treasury bill supply, the Secured Overnight Financing By unanimous vote, the Committee ratified the Desk’s Rate (SOFR) stood at 1 basis point throughout the pe- domestic transactions over the intermeeting period. riod. The overnight reverse repurchase agreement There were no intervention operations in foreign curren- (ON RRP) facility continued to effectively support pol- cies for the System’s account during the intermeeting pe- icy implementation, and take-up peaked at more than riod. $100 billion. A modest amount of trading in overnight Discussion of Repurchase Agreement Arrange- repurchase agreement (repo) markets occurred at nega- ments tive rates, although this development appeared to largely The staff briefed participants on the Federal Reserve’s reflect technical factors. The SOMA manager noted that experience with the daily repo operations with primary downward pressure on overnight rates in coming dealers that have been in place since September 2019 months could result in conditions that warrant consider- and the temporary Foreign and International Monetary ation of a modest adjustment to administered rates and Authorities (FIMA) Repo Facility established in March ______Page 4 Federal Open Market Committee last year. The briefing also reviewed considerations that timely and automatic response to incipient market pres- could be relevant for policymakers’ judgments regarding sures; they remarked that such pressures can be difficult whether these arrangements should become permanent to anticipate and, as a result, might not be as promptly standing facilities. The staff noted that repo operations addressed with discretionary operations. A few partici- have been a useful tool in controlling the federal funds pants noted that a standing repo facility could provide rate by adding reserves to ensure that they remain ample counterparties with additional flexibility in managing the and by limiting pressures in repo markets that could spill composition of their holdings of high-quality liquid as- over into unsecured markets. In March 2020, repo op- sets, potentially reducing the demand for reserves. A erations worked in concert with other measures to man- few participants cautioned that establishing a standing age shocks to financial markets by stabilizing Treasury repo facility should not be viewed as a way of imple- market conditions. Since June 2020, when the rate on menting monetary policy without an ample supply of re- overnight repo operations was raised relative to the rate serves. A couple of participants remarked that most of of on excess reserves, repo operations have the benefits of a standing repo facility could be realized served as a backstop and there has been no substantive by the Federal Reserve maintaining readiness to conduct usage. Regarding considerations concerning a perma- repo operations on short notice as needed, noting that nent standing repo facility, the briefing noted that stand- such an arrangement could avoid some of the costs of a ing repo operations could be viewed as useful in fore- standing facility. A few participants mentioned that a stalling funding strains that could spill over into other standing repo facility could be perceived as a means of overnight markets and limit dealers’ intermediation ac- supporting the financing of the U.S. Treasury or as a per- tivity in financial markets. However, a standing repo fa- manent Federal Reserve liquidity backstop for nonde- cility could be seen as a form of liquidity support for pository institutions; a couple of others called out the nonbank financial institutions, and one that could create risk that such a facility could crowd out private market incentives for firms with access to the facility to take on sources of liquidity provision. more liquidity risk against eligible securities than would Participants noted that it would be important to carefully otherwise be the case. In discussing considerations for consider key design elements of a potential standing the establishment of a standing FIMA repo facility, the repo facility, including the pricing structure, counterpar- staff noted that such a facility could limit the propensity ties, and range of collateral accepted. A number of par- for foreign official institutions to execute large sales of ticipants commented that the counterparties at such a fa- U.S. Treasury securities in a stress environment that, in cility should include depository institutions. Several par- turn, could exacerbate strains in broader U.S. domestic ticipants noted the facility’s design should be targeted financial markets. The briefing also noted some poten- specifically to enhance control of the federal funds rate tial drawbacks of such a facility, including less transpar- rather than to limit volatility in the repo market. ency regarding its operations relative to other Federal Reserve facilities. In their discussion of considerations related to the estab- lishment of a permanent FIMA repo facility, a vast ma- In their discussion of considerations related to the estab- jority of participants saw the potential benefits as out- lishment of a standing repo facility as part of the Com- weighing the costs. Participants highlighted a number of mittee’s overall approach to policy implementations in benefits of a standing FIMA repo facility, with many an ample reserves regime, a substantial of par- noting that it could support smoother functioning in ticipants saw the potential benefits of an appropriately U.S. Treasury securities markets and U.S. financial mar- calibrated facility as outweighing the potential costs. kets more broadly by providing foreign official holders Nearly all participants commented that a standing repo of U.S. Treasury securities with an alternative to outright facility, by acting as a backstop, could help address pres- sales of these securities in times of market stress. A few sures in the markets for U.S. Treasury securities and participants noted that, had a FIMA repo facility been in Treasury repo that could spill over to other funding mar- place in March 2020, it likely would have significantly kets and impair the implementation and transmission of damped pressures in these markets caused by the abrupt monetary policy. In this regard, a number of participants need for dollar funding abroad. Several participants sug- noted the potential for pressures in short-term funding gested that a standing FIMA repo facility could be markets to arise from time to time, even with monetary viewed as complementing the existing dollar swap lines policy operating in an ample-reserves regime. Many par- by extending access to dollar funding for a broader range ticipants noted that a standing facility could provide a of central banks and foreign official institutions. Partic- ipants also commented on some potential risks of a ______Minutes of the Meeting of April 27–28, 2021 Page 5 standing FIMA repo facility, including less transparency ure that were not indicative of tight labor market condi- in connection with FIMA repo operations relative to tions. By contrast, a staff measure of the 12-month other Federal Reserve facilities. change in the median derived from the ADP data was 3.1 percent in March and continued to run below its Staff Review of the Economic Situation pre-pandemic pace; this measure had likely been less af- The COVID-19 pandemic and the measures undertaken fected by shifts in the composition of the workforce. to contain its spread continued to affect economic activ- ity in the and abroad. The information Total PCE was 1.6 percent over the available at the time of the April 27–28 meeting sug- 12 months ending in February and continued to be held gested that U.S. real (GDP) had down by low rates of resource utilization. Core PCE increased in the first quarter of 2021 at a pace that was price inflation, which excludes changes in consumer en- faster than in the fourth quarter of last year but had not ergy prices and many consumer food prices, was 1.4 per- yet returned to its pre-pandemic level. Labor market cent over the 12 months ending in February, while the conditions improved markedly in March, though em- trimmed mean measure of 12-month PCE inflation con- ployment remained well below its level at the start of structed by the Federal Reserve Bank of Dallas was 2020. Consumer price inflation through February—as 1.6 percent in February. In March, the 12-month change measured by the 12-month percentage change in the in the consumer price index (CPI) was 2.6 percent, price index for personal consumption expenditures boosted by increases in consumer energy prices, while (PCE)—continued to run well below 2 percent. core CPI inflation was 1.6 percent over the same period. In the first quarter of 2021, the staff’s common inflation Total nonfarm payroll surged in March, expectations index, which combines information from with a notable gain in the leisure and hospitality sector. many indicators of inflation expectations and inflation As of March, payroll employment had retraced almost compensation, had returned to the level that prevailed in two-thirds of the losses seen at the onset of the pan- 2018. demic. The rate declined to 6 percent in March, as the number of workers on temporary Real PCE declined in February; however, available indi- continued to fall and the number on permanent layoff cators—including the components of the nominal retail ticked down. Although the unemployment rates for Af- sales data used to estimate PCE—pointed to a large in- rican Americans and Hispanics fell, both rates remained crease in March and for the first quarter as a whole, with well above the national average; in addition, the Asian federal stimulus payments having likely supported the unemployment rate moved up and was equal to the na- March increase. Housing starts bounced back in March tional average in March. The labor force participation following a weather-induced decline in February. Al- rate and employment-to-population ratio increased in though existing home sales fell in February and March, March, though both measures remained below their pre- the declines appeared to reflect continued limited avail- pandemic levels. Initial claims for unemployment insur- ability of homes for sale rather than weakening demand; ance had moved down, on net, since mid-March and in addition, February’s drop in new home sales was re- were at the lowest level since the beginning of the pan- traced in March. demic, though they remained exceptionally high by pre- Available indicators suggested that equipment and intan- pandemic standards. Weekly estimates of private-sector gibles investment had increased in the first quarter of payrolls constructed by Federal Reserve Board staff us- 2021, though at a slower pace than that seen in the ing data provided by the payroll processor ADP, which fourth quarter of 2020. Likewise, drilling investment ap- were available through the first half of April, suggested peared to have moved up, boosted in part by higher en- that the rate of increase in private employment had ergy prices. However, investment in nonresidential slowed somewhat relative to its earlier robust pace. structures outside of the drilling and mining sector Average hourly earnings for all employees rose 4.2 per- looked as though it had declined further in the first quar- cent over the 12 months ending in March. The ter, likely reflecting ongoing uncertainty about the 12-month change in average hourly earnings continued longer-term effects of the pandemic on . to be influenced by the effect of the pandemic on the Manufacturing output rebounded strongly in March fol- composition of the workforce; in particular, the concen- lowing weather-related disruptions to production in tration of losses among lower-wage workers since February. The March rise in factory output occurred de- early last year had resulted in large increases in this meas- spite lingering supply constraints; for example, weather- ______Page 6 Federal Open Market Committee damaged facilities in used to produce petrochem- were measures of inflation compensation. A straight ical and plastic materials had not yet been fully repaired, read of overnight index swap quotes suggested that the and semiconductor were still weighing on mo- expected path for the federal funds rate was little tor vehicle production. changed over the intermeeting period and that the ex- pected policy rate would remain below 25 basis points Total real government purchases appeared to have until the first quarter of 2023. Market-based financing moved up in the first quarter after having declined over conditions remained accommodative, and bank lending the second half of 2020. Available data suggested that a conditions eased markedly. Despite recent improve- jump in federal nondefense purchases had offset a de- ments, lending standards for commercial and industrial cline in defense purchases; in addition, indicators of real (C&I) and consumer loans remained tighter than pre- state and local purchases pointed to a small first-quarter pandemic levels. increase. Broad stock price indexes increased over the intermeet- Data for February showed a wider nominal U.S. interna- ing period, with outperformance by technology stocks tional deficit than in January. Both imports and and stocks sensitive to consumer discretionary spending. exports fell from their January levels, the first nominal One-month option-implied volatility on the S&P 500— decline in each since last May. imports were held the VIX—declined, approaching the median level ob- back in February by weakness in imports for automotive served in the decade before the pandemic. Spreads of products and consumer goods but remained higher than yields on investment- and speculative-grade corporate their pre-pandemic level. Nominal goods exports in bonds over comparable-maturity Treasury yields nar- February were weak in most categories and were still be- rowed moderately. Spreads on municipal bonds were low their pre-pandemic level. Imports and exports of little changed, with yields on such bonds remaining close services remained depressed, weighed down by the con- to their lowest levels in more than 20 years. tinued suspension of most international travel. Domestic short-term funding markets remained stable. Incoming data were consistent with a sharp slowdown Funding rates stayed very low against the backdrop of in foreign in the first quarter, follow- continued paydowns in Treasury bills and substantial in- ing a tightening of social-distancing restrictions to con- creases in reserve balances stemming from Federal Re- tain new waves of COVID-19 infections. Nevertheless, serve asset purchases as well as the drawdown in bal- the slowdown appeared less severe than observed de- ances maintained in the Treasury General Account asso- clines in mobility would have suggested, underscoring ciated with stimulus payments and other fiscal outlays. that foreign economies continued to adapt to public Assets under management increased somewhat for gov- health restrictions. The most recent indicators showed ernment money market funds (MMFs) but declined that economic activity in many advanced foreign econo- slightly for prime MMFs. The weighted average ma- mies (AFEs) resumed expanding toward the end of the turity of government and prime MMFs remained ele- first quarter amid a partial easing of restrictions. How- vated. ever, a new surge in infections in several countries in Latin America and South Asia, notably India, under- The effective federal funds rate and the SOFR were little scored the fragility of the global recovery. Foreign head- changed, averaging 7 basis points and 1 basis point, re- line inflation rose considerably, boosted by temporary spectively, over the intermeeting period. There contin- factors, such as the fading effects of steep price declines ued to be no participation in the Fed’s repo operations. seen early last year and the pass-through of price in- Participation in the Fed’s reverse repo facility increased creases for oil and other commodities. However, under- from minimal levels to an average of $47 billion and lying inflationary pressures appeared to have remained reached $134 billion on the quarter-end date. muted. Factors that had stressed foreign financial markets ear- Staff Review of the Financial Situation lier this year—rising U.S. interest rates, resurging Investor sentiment improved over the intermeeting pe- COVID-19 cases, and renewed lockdowns in a number riod, reflecting a pickup in the pace of vaccinations, pro- of countries—appeared less concerning to global inves- spects for infrastructure spending, and stronger-than-ex- tors over the intermeeting period. Most AFE equity in- pected labor market and retail sales data. Domestic eq- dexes rose modestly, and most AFE sovereign bond uity prices increased notably amid declining equity mar- yields were little changed. In emerging market econo- ket volatility, and corporate bond spreads narrowed. mies (EMEs), market optimism was tempered in part by The nominal Treasury yield curve was little changed, as rising COVID-19 cases. The broad EME equity price ______Minutes of the Meeting of April 27–28, 2021 Page 7 index was little changed, while credit spreads widened For commercial real estate (CRE) financed through cap- somewhat in the most vulnerable EMEs. After robust ital markets, financing conditions remained accommo- inflows earlier this year, flows into EME-dedicated dative over the intermeeting period. Although overall funds continued at a moderate pace. The broad dollar delinquency rates in agency commercial mortgage- index fell modestly. backed securities (CMBS) declined in the past few months, delinquency rates on hotel and retail mortgages Financing conditions for nonfinancial businesses in cap- in CMBS pools remained high. CRE loans held by banks ital markets remained highly accommodative over the in- were little changed in March. In the April SLOOS, termeeting period, as reflected in low corporate bond changes in lending standards over the first quarter were yields and high price-to-earnings ratios in equity mar- mixed across CRE loan categories. kets. Gross corporate bond issuance and gross lever- aged loan issuance were robust in February and March. Financing conditions in the residential mortgage market Equity raised through traditional initial public offerings were little changed over the intermeeting period and re- (IPOs) and seasoned equity offerings, as well as through mained accommodative for stronger borrowers who met special purpose acquisition companies, continued to be standard conforming loan criteria. Credit remained tight substantial in March. for borrowers with lower credit scores. Mortgage rates for most borrowers were little changed on net. In the C&I loans outstanding at banks expanded in February April SLOOS, banks reported easing standards on most and March after contracting for more than half a year. types of mortgages. The share of mortgages in forbear- In the April Senior Loan Officer Opinion Survey on ance declined slightly in March. Bank Lending Practices (SLOOS), banks reported easing standards, on net, for C&I loans across firms of all sizes Financing conditions in consumer credit markets gener- over the first quarter. Banks also reported that demand ally remained accommodative for borrowers with strong for C&I loans weakened at large and middle-market credit scores but tight for those with subprime scores. firms and was basically unchanged at small firms. Consumer loans grew at a robust pace in February, re- flecting the continued expansion of auto loans and a par- The credit quality of nonfinancial corporations showed tial rebound in credit card account balances. Banks in further signs of improvement for lower-rated firms. the April SLOOS reported easing auto lending standards Following a modest uptick in February, the volume of in the first quarter but generally reported that standards nonfinancial corporate bond downgrades spiked in remained tight compared with the end of 2019, espe- March, but the spike reflected the downgrades of a few cially for nonprime borrowers. Banks also reported that large and highly rated investment-grade firms. In con- standards on credit cards eased over the first quarter of trast, for speculative-grade issuers, the volume of up- 2021 but were generally still tighter than before the pan- grades modestly exceeded that of downgrades in Febru- demic. Interest rates offered to nonprime borrowers ary and March. Nonfinancial corporate bond defaults continued to rise through February, with the fraction of remained at low levels in February and March. Market these offers with zero introductory rates continuing to indicators of future default expectations were little decline. changed and stayed low. The staff provided an update on its assessments of the Financing conditions in the municipal bond market re- stability of the financial system. The staff noted that cor- mained accommodative over the intermeeting period. porate bond spreads had declined notably since late last Issuance of municipal bonds was strong in March, and year and were at the lower ends of their historical distri- indicators of the credit quality of municipal debt were butions. In addition, measures of the equity risk pre- little changed in February and March. Financing condi- mium declined further, and nonprice measures, such as tions for small businesses appeared to have improved, high IPO volume, also indicated elevated investor appe- with demand for loans remaining subdued. Likely in tite for risk in the equity market. Valuation pressures for part because of the Paycheck Protection Program, small CRE remained high, although information related to loan originations rose notably in February, the CRE continued to be noisier than usual due to pan- most recent month for which data were available, and demic-induced declines in transactions. House price were close to pre-pandemic levels. However, even amid growth increased further, with house prices outpacing improving financing conditions, many small businesses rents. In contrast, vulnerabilities from both household remained under financial stress. and business debt had diminished, reflecting continued ______Page 8 Federal Open Market Committee government support, a slower pace of business borrow- end of 2023, supported by sustained tight levels of re- ing, and improving business earnings, although many source utilization in labor and product markets. households and businesses continued to struggle. Re- The staff continued to judge that the risks to the baseline garding financial leverage, the staff noted that bank cap- projection for economic activity were skewed to the ital ratios remained above pre-pandemic levels in the downside and that the uncertainty around the forecast fourth quarter, but risks remained. Leverage among was elevated. In particular, despite the demonstrated re- hedge funds was elevated and increased in the third silience of the to surges in the pandemic over quarter of last year for the most highly leveraged funds. the past year, the possibility that COVID-19 variants Leverage in hedge funds’ prime brokerage accounts rose that were more contagious or more resistant to existing notably through the fourth quarter of last year, reflecting vaccines would spread posed a salient downside risk. elevated hedge fund leverage related to their stock mar- The staff continued to view the risks around the inflation ket activities. The staff highlighted recent episodes un- projection as balanced. On the upside, bottlenecks, sup- derlining the opacity of risk exposures among some lev- ply disruptions, and historically high rates of resource eraged entities. With regard to funding risks, the staff utilization were seen as potential sources of greater-than- noted that MMFs and open-end mutual funds faced sig- expected inflationary pressures. Alternatively, the possi- nificant structural vulnerabilities associated with liquidity bility that inflation would be held down by low underly- transformation. Assets under management at MMFs de- ing trend inflation and a weaker-than-expected response clined during the second half of 2020, while open-end to resource utilization was seen as an important down- mutual fund holdings of corporate bonds rose during side risk. the second half of last year. Participants’ Views on Current Conditions and the Staff Economic Outlook Economic Outlook The U.S. economic projection prepared by the staff for In their discussion of current conditions, participants the April FOMC meeting was slightly stronger than the noted that the COVID-19 pandemic was causing tre- March forecast. Real GDP growth was projected to post mendous human and economic hardship across the a substantial increase this year, with a correspondingly United States and around the world. Amid progress on rapid decline in the unemployment rate, as further re- vaccinations and strong policy support, indicators of ductions in social distancing and favorable financial con- economic activity and employment had strengthened. ditions were expected to support output growth. With The sectors most adversely affected by the pandemic re- the boost to growth from continued reductions in social mained weak but had shown improvement. Inflation distancing assumed to fade after 2021, GDP growth was had risen, largely reflecting transitory factors. Overall expected to step down in 2022 and 2023. However, with financial conditions remained accommodative, in part monetary policy assumed to remain highly accommoda- reflecting policy measures to support the economy and tive, the staff continued to anticipate that real GDP the flow of credit to U.S. households and businesses. growth would outpace that of potential over much of Participants noted that the path of the economy would this period, leading to a decline in the unemployment depend significantly on the course of the virus, including rate to historically low levels. progress on vaccinations. The ongoing public health cri- The staff’s outlook for inflation was broadly unchanged. sis continued to weigh on the economy, and risks to the The 12-month changes in total and core PCE prices economic outlook remained. were expected to move above 2 percent in coming Participants observed that economic activity had picked months as the unusually low readings from the spring of up sharply this year, with robust gains in consumer 2020 dropped out of the calculation window and as a spending, housing-sector activity, business equipment recent jump in consumer energy prices pushed up the investment, and manufacturing production. They noted total measure. Core inflation was expected to ease some that the acceleration in economic activity reflected posi- later in the year but to remain above 2 percent at the end tive developments associated with the rapid pace of vac- of 2021, boosted by large increases in import prices, a cinations as well as continued support from fiscal and recovery in prices that had been especially affected by monetary policies. Nevertheless, participants generally the pandemic, and the temporary effects of supply bot- noted that the economy remained far from the Commit- tlenecks. Inflation was then projected to dip slightly be- tee’s maximum-employment and price-stability goals. low 2 percent in 2022 as the influence of these transitory factors diminished, before returning to 2 percent by the In their discussion of the household sector, participants remarked that indicators of consumer spending surged ______Minutes of the Meeting of April 27–28, 2021 Page 9 in March and expected that further gains in spending Moreover, over the medium term, participants expected would contribute significantly to the economic recovery. labor market conditions to continue to improve, sup- Many participants commented that fiscal stimulus, ac- ported by accommodative fiscal and monetary policies commodative financial conditions, the release of pent- as well as continued progress on vaccinations, unwind- up demand, progress on widespread vaccination, and the ing of social distancing, and the associated recovery in ongoing reduction of social-distancing measures were economic activity. A couple of participants remarked important factors supporting spending. Many partici- that businesses in industries severely affected by the pan- pants also noted that consumer spending would con- demic were downsizing or that some businesses were fo- tinue to be bolstered by these factors as well as by the cused on cutting costs or increasing productivity, partic- elevated level of accumulated household . Sev- ularly through automation. eral participants observed that housing market activity In their comments about inflation, participants antici- continued to be strong, supported in part by low interest pated that inflation as measured by the 12-month change rates. of the PCE price index would move above 2 percent in With respect to the business sector, participants noted the near term as very low readings from early in the pan- that business equipment investment continued to rise at demic fall out of the calculation. In addition, increases a robust pace and manufacturing activity was expanding in oil prices were expected to pass through to consumer at a strong clip. That said, many participants discussed energy prices. Participants also noted that the expected reports of shortages of materials and labor as well as sup- surge in demand as the economy reopens further, along ply chain bottlenecks as likely restraints to the pace of with some transitory supply chain bottlenecks, would recovery in manufacturing and other business sectors. contribute to PCE price inflation temporarily running Many participants also noted that their District contacts somewhat above 2 percent. After the transitory effects had reported a pickup in activity in the leisure, travel, and of these factors fade, participants generally expected hospitality sectors. Those contacts had grown increas- measured inflation to ease. Looking further ahead, par- ingly optimistic about overall business conditions, given ticipants expected inflation to be at levels consistent with ongoing progress on vaccinations, easing of restrictions achieving the Committee’s objectives over time. A num- on in-person activities, and substantial fiscal support. A ber of participants remarked that supply chain bottle- couple of participants reported improved conditions in necks and input shortages may not be resolved quickly the agricultural sector, with farmers’ income supported and, if so, these factors could put upward pressure on by higher crop prices and federal aid payments. prices beyond this year. They noted that in some indus- tries, supply chain disruptions appeared to be more per- Participants commented on the continued improvement sistent than originally anticipated and reportedly had led in labor market conditions in recent months. Job gains to higher input costs. Despite the expected short-run in the March employment report were strong, and the fluctuations in measured inflation, many participants unemployment rate fell to 6.0 percent. Even so, partic- commented that various measures of longer-term infla- ipants judged that the economy was far from achieving tion expectations remained well anchored at levels the Committee’s broad-based and inclusive maximum- broadly consistent with achieving the Committee’s employment goal. Payroll employment was 8.4 million longer-run goals. below its pre-pandemic level. Some participants noted that the labor market recovery continued to be un- Participants judged that uncertainty was elevated and even across demographic and income groups and across that the outlook was highly dependent on the course of sectors. Many participants also remarked that business the virus. Amid considerable progress on vaccinations, contacts in their Districts reported having trouble hiring the unwinding of social distancing, and strong policy workers, likely reflecting factors such as early retire- support, participants assessed that risks to the outlook ments, health concerns, childcare responsibilities, and were no longer as elevated as in previous months. Nev- expanded unemployment insurance benefits. Many par- ertheless, some participants remarked that the pandemic ticipants noted as well that these factors were depressing continued to pose downside risks to the economic out- the labor force participation rate, relative to its pre-pan- look and noted the potential for an uneven recovery in demic level. Some of these factors were seen as likely to light of new virus strains and potential hesitancy regard- remain significant while pandemic-related risks per- ing vaccination. As upside risks, some participants men- sisted. Based on reports from business contacts, some tioned that the release of pent-up demand, accumulated participants noted that the step-up in demand for labor excess household savings, and rapid progress on vac- had started to put some upward pressure on . cinations, amid continued fiscal and monetary support, ______Page 10 Federal Open Market Committee could boost economic activity and bring individuals back that the current stance of policy and policy guidance re- into the labor force more quickly than currently ex- mained appropriate to foster further economic recovery pected. Some participants mentioned upside risks as well as to achieve inflation that averages 2 percent around the inflation outlook that could arise if tempo- over time and longer-term inflation expectations that rary factors influencing inflation turned out to be more continue to be well anchored at 2 percent. persistent than expected. Participants judged that the Committee’s current guid- Participants who commented on financial stability ance for the federal funds rate and asset purchases was agreed that the financial sector had shown resilience dur- serving the economy well. Participants also noted that ing the pandemic, in large part reflecting strong policy the existing outcome-based guidance implied that the support. Some remarked that the capital positions and path of the federal funds rate and the balance sheet loan loss reserves at large banks remained high, and would depend on actual progress toward reaching the earnings were strong. A few participants noted that vul- Committee’s maximum-employment and inflation goals. nerabilities from both business and household debt were In particular, some participants emphasized that an im- at a moderate level. Nevertheless, a couple of partici- portant feature of the outcome-based guidance was that pants highlighted that forbearance programs instituted policy would be set based on observed progress toward in response to the pandemic could be masking vulnera- the Committee’s goals, not on uncertain economic fore- bilities among households and businesses. Regarding as- casts. However, a couple of participants commented on set valuations, several participants noted that risk appe- the risks of inflation pressures building up to unwelcome tite in capital markets was elevated, as equity valuations levels before they become sufficiently evident to induce had risen further, IPO activity remained high, and risk a policy reaction. spreads on corporate bonds were at the bottom of their In their discussion of the Federal Reserve’s asset pur- historical . A couple of participants re- chases, various participants noted that it would likely be marked that, should investor risk appetite fall, an associ- some time until the economy had made substantial fur- ated drop in asset prices coupled with high business and ther progress toward the Committee’s maximum-em- financial leverage could have adverse implications for ployment and price-stability goals relative to the condi- the real economy. A number of participants commented tions prevailing in December 2020 when the Committee on valuation pressures being somewhat elevated in the first provided its guidance for asset purchases. Con- housing market. Some participants mentioned the po- sistent with the Committee’s outcome-based guidance, tential risks to the financial system stemming from the purchases would continue at least at the current pace un- activities of hedge funds and other leveraged investors, til that time. Many participants highlighted the im- commenting on the limited visibility into the activities of portance of the Committee clearly communicating its as- these entities or on the prudential risk-management sessment of progress toward its longer-run goals well in practices of dealers’ prime-brokerage businesses. Some advance of the time when it could be judged substantial participants highlighted potential vulnerabilities in other enough to warrant a change in the pace of asset pur- parts of the financial system, including run-prone invest- chases. The timing of such communications would de- ment funds in short-term funding and credit markets. pend on the evolution of the economy and the pace of Various participants commented on the prolonged pe- progress toward the Committee’s goals. A number of riod of low interest rates and highly accommodative fi- participants suggested that if the economy continued to nancial market conditions and the possibility for these make rapid progress toward the Committee’s goals, it conditions to lead to reach-for-yield behavior that could might be appropriate at some point in upcoming meet- raise financial stability risks. ings to begin discussing a plan for adjusting the pace of In their consideration of the stance of monetary policy, asset purchases. participants reaffirmed the Federal Reserve’s commit- Committee Policy Action ment to using its full range of tools to support the U.S. In their discussion of monetary policy for this meeting, economy during this challenging time, thereby promot- members agreed that the COVID-19 pandemic was ing the Committee’s statutory goals of maximum em- causing tremendous human and economic hardship ployment and price stability. Participants agreed that the across the United States and around the world. They economy was still far from the Committee’s longer-run noted that amid progress on vaccinations and strong goals. Moreover, the path ahead continued to depend policy support, indicators of economic activity and em- on the course of the virus, and risks to the economic ployment had strengthened. Although the sectors most outlook remained. Consequently, participants judged ______Minutes of the Meeting of April 27–28, 2021 Page 11 adversely affected by the pandemic remained weak, they assessing the appropriate stance of monetary policy, they had shown improvement. Inflation had risen, largely re- would take into account a wide range of information, in- flecting transitory factors. Overall financial conditions cluding readings on public health, labor market condi- remained accommodative, in part reflecting policy tions, inflation pressures and inflation expectations, and measures to support the economy and the flow of credit financial and international developments. to U.S. households and businesses. Members also re- Members agreed that the postmeeting statement should marked that the path of the economy would depend sig- acknowledge that indicators of economic activity and nificantly on the course of the virus, including progress employment had strengthened but that, despite showing on vaccinations. In addition, members agreed that the improvement, the sectors of the economy most affected ongoing public health crisis continued to weigh on the by the pandemic remained weak. Members also judged economy and risks to the economic outlook remained. that, while risks to the outlook remained, continued pro- Members agreed that the Federal Reserve was commit- gress on vaccinations and accommodative monetary and ted to using its full range of tools to support the U.S. fiscal policies most likely would underpin further gains economy in this challenging time, thereby promoting its in economic activity and employment and would limit maximum-employment and price-stability goals. All risks to the outlook. As a result, they agreed to remove members reaffirmed that, in accordance with the Com- the characterization of risks as “considerable” in the mittee’s goals to achieve maximum employment and in- FOMC statement. With regard to the characterization flation at the rate of 2 percent over the longer run and of inflation, members agreed that the statement should with inflation running persistently below this longer-run note that inflation had risen but that the increase largely goal, they would aim to achieve inflation moderately reflected transitory factors. They noted that inflation as above 2 percent for some time so that inflation averages measured by the 12-month change of the PCE price in- 2 percent over time and longer-term inflation expecta- dex was expected to move above 2 percent as the very tions remain well anchored at 2 percent. Members ex- low readings from early in the pandemic fell out of the pected to maintain an accommodative stance of mone- calculation and as past increases in oil prices passed tary policy until those outcomes were achieved. through to consumer energy prices. The expected re- bound in spending as the economy continued to reopen All members agreed to keep the target range for the fed- was also likely to boost inflation temporarily, particularly eral funds rate at 0 to ¼ percent, and they expected that if supply bottlenecks limited how quickly production it would be appropriate to maintain this target range un- could respond to demand in the near term. However, til labor market conditions had reached levels consistent members also viewed these increases in prices as likely with the Committee’s assessments of maximum employ- to have only transitory effects on inflation. ment and inflation had risen to 2 percent and was on track to moderately exceed 2 percent for some time. In At the conclusion of the discussion, the Committee addition, members agreed that it would be appropriate voted to authorize and direct the Federal Reserve Bank for the Federal Reserve to continue to increase its hold- of New York, until instructed otherwise, to execute ings of Treasury securities by at least $80 billion per transactions in the SOMA in accordance with the fol- month and agency mortgage-backed securities by at least lowing domestic policy directive, for release at 2:00 p.m.: $40 billion per month until substantial further progress “Effective April 29, 2021, the Federal Open had been made toward the Committee’s maximum-em- Market Committee directs the Desk to: ployment and price-stability goals. They judged that these asset purchases would help foster smooth market  Undertake open market operations as nec- functioning and accommodative financial conditions, essary to maintain the federal funds rate in thereby supporting the flow of credit to households and a target range of 0 to ¼ percent. businesses.  Increase the System Open Market Ac- Members agreed that, in assessing the appropriate stance count holdings of Treasury securities by of monetary policy, they would continue to monitor the $80 billion per month and of agency mort- implications of incoming information for the economic gage-backed securities (MBS) by $40 bil- outlook and that they would be prepared to adjust the lion per month. stance of monetary policy as appropriate in the event that risks emerged that could impede the attainment of  Increase holdings of Treasury securities the Committee’s goals. Members also concurred that, in and agency MBS by additional amounts ______Page 12 Federal Open Market Committee

and purchase agency commercial mort- The path of the economy will depend signifi- gage-backed securities (CMBS) as needed cantly on the course of the virus, including pro- to sustain smooth functioning of markets gress on vaccinations. The ongoing public for these securities. health crisis continues to weigh on the econ- omy, and risks to the economic outlook remain.  Conduct repurchase agreement operations to support effective policy implementation The Committee seeks to achieve maximum em- and the smooth functioning of short-term ployment and inflation at the rate of 2 percent U.S. dollar funding markets. over the longer run. With inflation running per- sistently below this longer-run goal, the Com-  Conduct overnight reverse repurchase mittee will aim to achieve inflation moderately agreement operations at an offering rate of above 2 percent for some time so that inflation 0.00 percent and with a per-counterparty averages 2 percent over time and longer‑term limit of $80 billion per day; the per-coun- inflation expectations remain well anchored at terparty limit can be temporarily increased 2 percent. The Committee expects to maintain at the discretion of the Chair. an accommodative stance of monetary policy  Roll over at auction all principal payments until these outcomes are achieved. The Com- from the Federal Reserve’s holdings of mittee decided to keep the target range for the Treasury securities and reinvest all princi- federal funds rate at 0 to ¼ percent and expects pal payments from the Federal Reserve’s it will be appropriate to maintain this target holdings of agency debt and agency MBS range until labor market conditions have in agency MBS. reached levels consistent with the Committee’s assessments of maximum employment and in-  Allow modest deviations from stated flation has risen to 2 percent and is on track to amounts for purchases and reinvestments, moderately exceed 2 percent for some time. In if needed for operational reasons. addition, the Federal Reserve will continue to  Engage in dollar roll and coupon swap increase its holdings of Treasury securities by at transactions as necessary to facilitate settle- least $80 billion per month and of agency mort- ment of the Federal Reserve’s agency MBS gage‑backed securities by at least $40 billion per transactions.” month until substantial further progress has been made toward the Committee’s maximum The vote also encompassed approval of the statement employment and price stability goals. These as- below for release at 2:00 p.m.: set purchases help foster smooth market func- “The Federal Reserve is committed to using its tioning and accommodative financial condi- full range of tools to support the U.S. economy tions, thereby supporting the flow of credit to in this challenging time, thereby promoting its households and businesses. maximum employment and price stability goals. In assessing the appropriate stance of monetary The COVID-19 pandemic is causing tremen- policy, the Committee will continue to monitor dous human and economic hardship across the the implications of incoming information for United States and around the world. Amid pro- the economic outlook. The Committee would gress on vaccinations and strong policy support, be prepared to adjust the stance of monetary indicators of economic activity and employ- policy as appropriate if risks emerge that could ment have strengthened. The sectors most ad- impede the attainment of the Committee’s versely affected by the pandemic remain weak goals. The Committee’s assessments will take but have shown improvement. Inflation has into account a wide range of information, in- risen, largely reflecting transitory factors. Over- cluding readings on public health, labor market all financial conditions remain accommodative, conditions, inflation pressures and inflation ex- in part reflecting policy measures to support the pectations, and financial and international de- economy and the flow of credit to U.S. house- velopments.” holds and businesses. Voting for this action: Jerome H. Powell, John C. Williams, Thomas I. Barkin, Raphael W. Bostic, Michelle ______Minutes of the Meeting of April 27–28, 2021 Page 13

W. Bowman, Lael Brainard, Richard H. Clarida, Mary C. It was agreed that the next meeting of the Committee Daly, Charles L. Evans, Randal K. Quarles, and would be held on Tuesday–Wednesday, June 15– Christopher J. Waller. 16, 2021. The meeting adjourned at 10:20 a.m. on April 28, 2021. Voting against this action: None. Notation Vote Consistent with the Committee’s decision to leave the By notation vote completed on April 6, 2021, the Com- target range for the federal funds rate unchanged, the mittee unanimously approved the minutes of the Com- Board of Governors voted unanimously to leave the in- mittee meeting held on March 16–17, 2021. terest rates on required and excess reserve balances at 0.10 percent. The Board of Governors also voted unan- imously to approve establishment of the primary credit rate at the existing level of 0.25 percent, effective April 29, 2021. ______James A. Clouse Secretary