Minutes of the Federal Open Market Committee July 27-28, 2021

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Minutes of the Federal Open Market Committee July 27–28, 2021

A joint meeting of the Federal Open Market Committee Patricia Zobel, Deputy Manager, System Open Market and the Board of Governors of the Federal Reserve Sys- Account tem was held by videoconference on Tuesday, July 27, 2021, at 9:00 a.m. and continued on Wednesday, July 28, Ann E. Misback, Secretary, Office of the Secretary, 2021, at 9:00 a.m.1 Board

PRESENT: Matthew J. Eichner,2 Director, Division of Reserve Jerome H. Powell, Chair Bank Operations and Payment Systems, Board; Mi- John C. Williams, Vice Chair chael S. Gibson, Director, Division of Supervision Thomas I. Barkin and Regulation, Board; Andreas Lehnert, Director, Raphael W. Bostic Division of Financial Stability, Board Michelle W. Bowman Lael Brainard Jon Faust3 and Joshua Gallin, Senior Special Advisers Richard H. Clarida to the Chair, Division of Board Members, Board Mary C. Daly Charles L. Evans William F. Bassett, Antulio N. Bomfim, Burcu Duygan- Randal K. Quarles Bump, Jane E. Ihrig, Kurt F. Lewis, Chiara Scotti, Christopher J. Waller and Nitish R. Sinha, Special Advisers to the Board, Division of Board Members, Board James Bullard, Esther L. George, Naureen Hassan, Loretta J. Mester, and Eric Rosengren, Alternate Elizabeth Klee, Senior Associate Director, Division of Members of the Committee Financial Stability, Board; David E. Lebow, Michael G. Palumbo, and John J. Stevens, Senior Patrick Harker, Robert S. Kaplan, and Neel Kashkari, Associate Directors, Division of Research and Presidents of the Federal Reserve Banks of Statistics, Board; Min Wei, Senior Associate Philadelphia, Dallas, and Minneapolis, respectively Director, Division of Monetary Affairs, Board

James A. Clouse, Secretary Brett Berger,2 Senior Adviser, Division of International Matthew M. Luecke, Deputy Secretary Finance, Board; Ellen E. Meade and Edward Michelle A. Smith, Assistant Secretary Nelson, Senior Advisers, Division of Monetary Mark E. Van Der Weide, General Counsel Affairs, Board Michael Held, Deputy General Counsel Trevor A. Reeve, Economist Christopher J. Gust, Associate Director, Division of Stacey Tevlin, Economist Monetary Affairs, Board; Paul R. Wood, Associate Beth Anne Wilson, Economist Director, Division of International Finance, Board

Shaghil Ahmed, Kartik B. Athreya, Brian M. Doyle, Stephanie E. Curcuru2 and Andrea Raffo, Deputy Rochelle M. Edge, Beverly Hirtle, and William Associate Directors, Division of International Wascher, Associate Economists Finance, Board; Laura Lipscomb2 and Zeynep Senyuz, Deputy Associate Directors, Division of Lorie K. Logan, Manager, System Open Market Monetary Affairs, Board; Norman J. Morin and Account Karen M. Pence, Deputy Associate Directors, Division of Research and Statistics, Board; Jeffrey

1 In these minutes, the Federal Open Market Committee is 2 Attended through the discussion of asset purchases. referenced as the “FOMC” and the “Committee”; the Board 3 Attended Wednesday’s session only. of Governors of the Federal Reserve System is referenced as the “Board.” ______Page 2 Federal Open Market Committee

D. Walker,2 Deputy Associate Director, Division Chicago, St. Louis, Minneapolis, and New York, of Reserve Bank Operations and Payment Systems, respectively Board Dina Marchioni,2 Thomas Mertens, Jon Willis, and Jennifer Gallagher, Special Assistant to the Board, Mark A. Wynne, Vice Presidents, Federal Reserve Division of Board Members, Board Banks of New York, San Francisco, Atlanta, and Dallas, respectively Brian J. Bonis and Etienne Gagnon,2 Assistant Direc- tors, Division of Monetary Affairs, Board Jeffrey Moore2 and Brett Rose,2 Assistant Vice Presidents, Federal Reserve Bank of New York Alyssa G. Anderson2 and Andrew Meldrum,2 Section Chiefs, Division of Monetary Affairs, Board; Daniel Cooper, Senior Economist and Policy Advisor, Penelope A. Beattie,4 Section Chief, Office of the Federal Reserve Bank of Boston Secretary, Board Ellen Correia-Golay2 and Brian Greene,2 Markets Mark A. Carlson, Senior Economic Project Manager, Officers, Federal Reserve Bank of New York Division of Monetary Affairs, Board Developments in Financial Markets and Open David H. Small, Project Manager, Division of Market Operations Monetary Affairs, Board The manager turned first to a discussion of developments in financial markets. Although there were notable Erin E. Ferris2 and Andrei Zlate, Principal Economists, moves in some asset prices over the intermeeting period, Division of Monetary Affairs, Board overall financial conditions ended the period little changed at historically accommodative levels. Market Randall A. Williams, Lead Information Manager, participants seemed to interpret communications associ- Division of Monetary Affairs, Board ated with the June FOMC meeting as signaling a less accommodative path of monetary policy than had been an- Isabel Cairó, Senior Economist, Division of Monetary ticipated. Implied rates on interest rate futures initially Affairs, Board rose following the meeting but subsequently retraced, and expectations regarding the path of the target federal James M. Trevino,2 Senior Economic Modeler, funds rate over the next few years ended the period only Division of Monetary Affairs, Board modestly changed.

Longer-term yields fell notably over the period, with the Isaiah C. Ahn, Senior Staff Assistant, Division of declines concentrated in far-forward rates. A significant Monetary Affairs, Board portion of these movements seemed to reflect changes

in term premiums. Market participants pointed to a Kathleen O. Paese, First Vice President, Federal number of factors as driving the movement in longer- Reserve Bank of St. Louis term yields, most prominently including Federal Reserve

policy communications, investor positioning, and Michael Dotsey, Joseph W. Gruber, and Ellis W. changes in expectations regarding the course of the pan- Tallman, Executive Vice Presidents, Federal demic. Reserve Banks of Philadelphia, Kansas City, and Cleveland, respectively With respect to the path of net asset purchases, respondents to the Open Market Desk’s surveys of primary deal- Anne Baum, Spencer Krane, David C. Wheelock, Mark ers and market participants expected communications L.J. Wright, and Nathaniel Wuerffel,2 Senior Vice on asset purchases to evolve gradually, with signals an- Presidents, Federal Reserve Banks of New York, ticipated over coming months regarding both the Com- mittee’s assessment of conditions constituting “substan-

4 Attended through the discussion of economic developments and the outlook.

______Minutes of the Meeting of July 27–28, 2021 Page 3 tial further progress” and details on tapering plans. Al- supported the proposed terms, although a few partici- most 60 percent of respondents anticipated the first re- pants raised questions, including whether the proposed duction in the pace of net asset purchases to come in aggregate cap of $500 billion was necessary, whether the January, though, on average, respondents placed some- collateral eligible in SRF operations should be limited to what more weight than in the June surveys on the possi- Treasury securities only, and how the setting of the min- bility of tapering beginning somewhat earlier. With re- imum bid rate in SRF operations would be expected to spect to the pace of tapering, respondents continued to evolve over time relative to the primary credit rate and anticipate that the Committee would take a gradual ap- the interest on reserve balances rate. In general, partici- proach. While market participants discussed the possi- pants viewed the SRF and FIMA Repo Facility as im- bility of an earlier or faster-than-proportional reduction portant new tools, serving in backstop roles, that would in the pace of net purchases of agency mortgage-backed support effective policy implementation and smooth securities (MBS), most survey respondents appeared to market functioning. Participants anticipated that the expect the timing and pace of tapering of net purchases Committee would learn more about how these facilities of agency MBS and Treasury securities to be similar. operate over time and noted that it could adjust some parameters of the facilities on the basis of that experi- The manager turned next to a discussion of develop- ence. ments in operations and money markets over the period. Following the June meeting, overnight rates rose in line The Committee voted unanimously to approve the es- with the technical adjustment in administered rates and tablishment of the SRF. All but one member of the were relatively stable for the remainder of the period. Committee voted to approve the FIMA Repo Facility. Overnight reverse repurchase agreement (ON RRP) Governor Bowman abstained from voting on the FIMA take-up jumped by over $200 billion after the technical Repo Facility and noted that she would have preferred adjustment took effect, as government-sponsored enter- that the liquidity arrangements accessible to foreign of- prises moved balances held in unremunerated Federal ficial institutions be maintained only during periods of Reserve deposit accounts into the higher-yielding ON extraordinary financial market stress rather than through RRP investments. Government money market funds a standing facility. also increased their participation in the facility amid a Standing Repurchase Agreement Facility Resolu- continued decline in Treasury bills outstanding and tion downward pressure on overnight rates. Overall, market The Federal Open Market Committee (the “Commit- participants reported that the technical adjustment went tee”) authorizes and directs the Open Market Desk at smoothly and that, with overnight rates having moved the Federal Reserve Bank of New York (the “Selected further away from zero, concerns about the functioning Bank”), for the System Open Market Account of short-term funding markets had diminished. (“SOMA”), to conduct operations in which it offers to Looking ahead, market participants were beginning to purchase securities, subject to an agreement to resell focus on the potential effects of changes in the Treasury (“repurchase agreement transactions”). The repurchase General Account at the Federal Reserve and Treasury agreement transactions hereby authorized and directed bill issuance over coming months in connection with the shall (i) include only U.S. Treasury securities, agency debt ceiling. The manager noted that, if a number of debt securities, and agency mortgage-backed securities; counterparties reached the per-counterparty limit on (ii) be conducted as open market operations with pri- their ON RRP investments and downward pressure on mary dealers and depository institutions as participants; overnight rates emerged, it may become appropriate to (iii) be conducted with a minimum bid rate of 0.25 per- lift the limit. cent; (iv) be offered on an overnight basis (except that the Open Market Desk at the Selected Bank may extend Establishment of Standing Repurchase Agreement the term for longer than an overnight term to accommo- Facilities date weekend, holiday, and similar trading conventions); Finally, the manager summarized the proposed terms for and (v) be subject to an aggregate operation limit of the standing repurchase agreement (repo) facility (SRF) $500 billion. The aggregate operation limit can be tem- and the Foreign and International Monetary Authorities porarily increased at the discretion of the Chair. These (FIMA) Repo Facility. In questions and comments fol- operations shall be conducted by the Open Market Desk lowing the manager’s briefing, participants expressed at the Selected Bank until otherwise directed by the broad support for the establishment of the SRF and Committee. FIMA Repo Facility. The vast majority of participants

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Standing FIMA Repurchase Agreement Resolution The participants’ discussion was preceded by staff The Federal Open Market Committee (the “Commit- presentations that reviewed the principal channels tee”) authorizes and directs the Open Market Desk at through which asset purchases exert effects on financial the Federal Reserve Bank of New York (the “Selected conditions and the economy, with a focus on the impli- Bank”), for the System Open Market Account cations of these channels for the Committee’s delibera- (“SOMA”), to offer to purchase U.S. Treasury securities tions regarding future adjustments to the Federal Re- subject to an agreement to resell (“repurchase agreement serve’s asset purchases. The presentations noted that, in transactions”) with foreign central bank and interna- the staff’s standard empirical modeling framework, the tional accounts maintained at a Federal Reserve Bank effect of asset purchases on financial and economic con- (the “Foreign Accounts”). The repurchase agreement ditions occurred primarily via their influence on the ex- transactions hereby authorized and directed shall (i) in- pected path of private-sector holdings of longer-term as- clude only U.S. Treasury securities; (ii) be conducted sets. In that framework, larger Federal Reserve holdings with Foreign Accounts approved in advance by the For- of these assets reduced private-sector holdings, exerting eign Currency Subcommittee (the “Subcommittee”); (iii) downward pressure on term premiums and, conse- be conducted at an offering rate of 0.25 percent; (iv) be quently, keeping longer-term interest rates and overall fi- offered on an overnight basis (except that the Open nancial conditions more accommodative than they oth- Market Desk at the Selected Bank may extend the term erwise would be. The staff noted that, because plausible for longer than an overnight term to accommodate alternative approaches to the tapering of asset purchases weekend, holiday, and similar trading conventions); and would likely not lead to significant differences in the ex- (v) be subject to a per-counterparty limit of $60 billion pected path of the Federal Reserve’s balance sheet, these per day. The Subcommittee may approve changes in the approaches would have similar financial and economic offering rate, the maturity of the transactions, eligible effects in the staff’s standard framework. The presenta- Foreign Accounts counterparties (either by approving or tions highlighted, however, that alternative tapering ap- removing account access), and the counterparty limit; proaches could have significant financial and economic and the Subcommittee shall keep the Committee in- effects not fully captured in the staff’s standard empirical formed of any such changes. These transactions shall be framework. In particular, changes in asset purchases undertaken by the Open Market Desk at the Selected could be interpreted by the public as signaling a shift in Bank until otherwise directed by the Committee. The the Committee’s view of the economic outlook or in its Open Market Desk at the Selected Bank will also report overall policy strategy, with implications for the ex- at least annually to the Committee on facility usage and pected path of the federal funds rate. Changes in the the list of approved account holders. flow of asset purchases could also influence yields, but this influence would likely be modest outside of periods By unanimous vote, the Committee ratified the Desk’s of stressed financial market conditions. domestic transactions over the intermeeting period. There were no intervention operations in foreign curren- In their discussion of considerations related to asset pur- cies for the System’s account during the intermeeting pe- chases, various participants noted that these purchases riod. were an important part of the monetary policy toolkit and a critical aspect of the Federal Reserve’s response to Discussion of Asset Purchases the economic effects of the pandemic, supporting Participants discussed aspects of the Federal Reserve’s smooth financial market functioning and accommoda- asset purchases, including progress made toward the tive financial conditions, which aided the flow of credit Committee’s maximum-employment and price-stability to households and businesses and supported the recov- goals since the adoption of the asset purchase guidance ery. Participants discussed a broad range of labor market in December 2020. They also considered the question and inflation indicators. All participants assessed that of how asset purchases might be adjusted once eco- the economy had made progress toward the Commit- nomic conditions met the standards of that guidance. tee’s maximum-employment and price-stability goals Participants agreed that their discussion at this meeting since the adoption of the guidance on asset purchases in would be helpful background for the Committee’s future December. Most participants judged that the Commit- decisions about modifying asset purchases. No deci- tee’s standard of “substantial further progress” toward sions regarding future adjustments to asset purchases the maximum-employment goal had not yet been met. were made at this meeting. At the same time, most participants remarked that this standard had been achieved with respect to the price-

______Minutes of the Meeting of July 27–28, 2021 Page 5 stability goal. A few participants noted, however, that the Committee’s understanding that purchases of Treas- the transitory nature of this year’s rise in inflation, as well ury securities and agency MBS had similar effects on as the recent declines in longer-term yields and in mar- broader financial conditions and played similar roles in ket-based measures of inflation compensation, cast the transmission of monetary policy, or that these pur- doubt on the degree of progress that had been made to- chases were not intended as credit allocation. Some of ward the price-stability goal since December. Looking these participants remarked, however, that they wel- ahead, most participants noted that, provided that the comed further discussion of the appropriate composi- economy were to evolve broadly as they anticipated, they tion of asset purchases during the tapering process. Sev- judged that it could be appropriate to start reducing the eral participants commented on the benefits that they pace of asset purchases this year because they saw the saw in reducing agency MBS purchases more quickly Committee’s “substantial further progress” criterion as than Treasury securities purchases, noting that the hous- satisfied with respect to the price-stability goal and as ing sector was exceptionally strong and did not need ei- close to being satisfied with respect to the maximum- ther actual or perceived support from the Federal Re- employment goal. Various participants commented that serve in the form of agency MBS purchases or that such economic and financial conditions would likely warrant purchases could be interpreted as a type of credit alloca- a reduction in coming months. Several others indicated, tion. however, that a reduction in the pace of asset purchases Participants commented on other factors that were rele- was more likely to become appropriate early next year vant for their consideration of future adjustments to the because they saw prevailing conditions in the labor mar- pace of asset purchases. Many participants noted that, ket as not being close to meeting the Committee’s “sub- when a reduction in the pace of asset purchases became stantial further progress” standard or because of uncer- appropriate, it would be important that the Committee tainty about the degree of progress toward the price-sta- clearly reaffirm the absence of any mechanical link be- bility goal. Participants agreed that the Committee tween the timing of tapering and that of an eventual in- would provide advance notice before making changes to crease in the target range for the federal funds rate. A its balance sheet policy. few participants suggested that the Committee would Participants expressed a range of views on the appropri- need to be mindful of the risk that a tapering announce- ate pace of tapering asset purchases once economic con- ment that was perceived to be premature could bring ditions satisfied the criterion laid out in the Committee’s into question the Committee’s commitment to its new guidance. Many participants saw potential benefits in a monetary policy framework. With respect to the effects pace of tapering that would end net asset purchases be- of the pandemic, several participants indicated that they fore the conditions currently specified in the Commit- would adjust their views on the appropriate path of asset tee’s forward guidance on the federal funds rate were purchases if the economic effects of new strains of the likely to be met. At the same time, participants indicated virus turned out to be notably worse than currently an- that the standards for raising the target range for the fed- ticipated and significantly hindered progress toward the eral funds rate were distinct from those associated with Committee’s goals. tapering asset purchases and remarked that the timing of Staff Review of the Economic Situation those actions would depend on the course of the econ- The information available at the time of the July 27–28 omy. Several participants noted that an earlier start to meeting suggested that U.S. real gross domestic product tapering could be accompanied by more gradual reduc- (GDP) had increased in the second quarter at a faster tions in the purchase pace and that such a combination pace than in the first quarter of the year. Indicators of could mitigate the risk of an excessive tightening in fi- labor market conditions were mixed in June, though la- nancial conditions in response to a tapering announce- bor demand remained strong. Consumer price inflation ment. through May—as measured by the 12-month percentage Participants exchanged views on what the composition change in the personal consumption expenditures (PCE) of asset purchases should be during the tapering process. price index—had picked up notably, largely reflecting Most participants remarked that they saw benefits in re- transitory factors. ducing the pace of net purchases of Treasury securities Total nonfarm payroll employment rose sharply in June, and agency MBS proportionally in order to end both sets with job gains widespread across industries and espe- of purchases at the same time. These participants ob- cially strong job growth in the leisure and hospitality sec- served that such an approach would be consistent with tor. As of June, total payroll employment had retraced

______Page 6 Federal Open Market Committee more than two-thirds of the losses seen at the onset of dicators of inflation expectations and inflation compen- the pandemic. The unemployment rate edged higher sation, had more than reversed the moderate decline rec- and stood at 5.9 percent in June, and the unemployment orded in the middle of last year and had returned to the rates for African Americans and Hispanics remained level that prevailed in 2014, when actual inflation was well above the national average. The labor force partic- relatively modest. ipation rate and employment-to-population ratio were Real PCE appeared to have risen in the second quarter unchanged in June. May private-sector job openings, as at a pace similar to that seen in the first quarter, sup- measured by the Job Openings and Labor Turnover Sur- ported by previous rounds of federal stimulus payments vey, remained at the highest recorded level since the sur- and reductions in social distancing. Even so, consumer vey’s inception in 2000. Initial claims for regular state spending appeared to have been held back some as pro- unemployment insurance were little changed, on net, ducers struggled to meet demand. Similarly, despite very since mid-June. Weekly estimates of private-sector pay- strong demand for housing, incoming data suggested rolls constructed by Federal Reserve Board staff using that residential investment spending had declined in the data provided by the payroll processor ADP that were second quarter as materials shortages and limited stocks available through the first part of July suggested that the of homes for sale temporarily restrained activity in that pace of private employment gains had remained strong. sector. Average hourly earnings for all employees rose further Available indicators suggested that growth in business in June. Recent monthly increases in average hourly fixed investment had slowed sharply in the second quar- earnings appeared to reflect a combination of strong la- ter, reflecting disruptions to motor vehicle production bor demand and increased difficulties in hiring that had and aircraft deliveries and a faster rate of decline in non- more than offset the downward pressure on average residential structures investment. earnings from disproportionately large employment gains in lower-wage industries. Information from com- Growth in manufacturing output had picked up mod- pensation measures that were judged to be less affected estly in the second quarter. Although production in the by shifts in the composition of the workforce was mixed: chemicals industry had rebounded from the weather-re- A staff measure of the 12-month change in the median lated disruptions earlier in the year, the supply chain is- wage derived from the ADP data had stepped up notice- sues faced by a number of other industries, particularly ably in June relative to earlier in the year; by contrast, the the motor vehicle industry, continued to weigh on over- Wage Growth Tracker measure constructed by the Fed- all factory output. eral Reserve Bank of Atlanta had not shown a similar Total real government purchases appeared to have pickup. moved lower in the second quarter after having risen in Recent 12-month change measures of inflation, using ei- the first quarter. Available data suggested that federal ther PCE prices or the consumer price index (CPI), had nondefense purchases had dropped following a first- been boosted by base effects as the extremely low infla- quarter surge in pandemic-related expenditures and that tion readings from the spring of 2020 rolled out of the defense purchases were little changed. However, indica- calculation. In addition, a surge in demand as the econ- tors of real state and local purchases pointed to a modest omy reopened further, combined with production bot- second-quarter increase in this component of govern- tlenecks and supply constraints, had pushed up recent ment spending. monthly price increases. Total PCE price inflation was The nominal U.S. international trade deficit remained 3.9 percent over the 12 months ending in May, and core high in May. Real goods imports in May retraced only a PCE price inflation, which excludes changes in con- bit of their April decline, but they were still at the sec- sumer energy prices and many consumer food prices, ond-highest level on record. Real goods exports edged was 3.4 percent over the 12 months ending in May. In down in May and remained below pre-COVID-19 lev- contrast, the trimmed mean measure of 12-month PCE els. Bottlenecks in the global semiconductor industry inflation constructed by the Federal Reserve Bank of continued to weigh on exports and imports of automo- Dallas was 1.9 percent in May. In June, the 12-month tive products, and shipping congestion likely continued change in the CPI was 5.4 percent, while the core CPI to restrain trade overall. Although international travel rose 4.5 percent over the same period. In the second recovered further in May, exports and imports of ser- quarter of 2021, the staff’s common inflation expecta- vices remained depressed relative to pre-pandemic lev- tions index, which combines information from many in- els.

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Incoming data suggested that, after a weak start to the Broad stock market prices rose moderately over the in- year, foreign economic activity accelerated in the second termeeting period, supported in part by some strong sec- quarter. The improvements were concentrated in the ond-quarter earnings reports that bolstered investor risk advanced foreign economies and China, supported by sentiment. However, some prices declined for stocks vaccine rollouts, the unwinding of public health re- that historically have moved more closely with economic strictions, economic adaptation to the virus, and the re- conditions—such as stocks for smaller companies and opening of the services sector. The situation was quite for firms in cyclical industries—as did stock prices for different in some emerging market economies (EMEs) firms in sectors such as airlines and hotels that were neg- whose low vaccination rates left them vulnerable to new atively affected by the pandemic. Bank stock prices also waves of infections. Although new COVID-19 cases fell fell. One-month option-implied volatility on the dramatically in India after the surge in May and June, the S&P 500—the VIX—spiked to reach a two-month high. situation deteriorated markedly in several Southeast For the intermeeting period as a whole, however, the Asian countries, whose cases and deaths rose to all-time VIX was little changed, on net, and remained somewhat highs. In addition, the increased prevalence of new virus above its average pre-pandemic levels. Spreads of yields variants, particularly the Delta variant, underscored the on corporate bonds over those on comparable-maturity continued uncertainty about the foreign outlook. Infla- Treasury securities were little changed, and spreads of tion rose further in most foreign economies, reflecting a benchmark municipal bond indexes increased moder- reversal of price declines seen in the spring of 2020, ately, although both remained below their pre-pandemic higher energy and commodity prices, and supply bottle- levels. necks. Short-term funding markets were stable over the inter- Staff Review of the Financial Situation meeting period. Following the actions at the June Over the intermeeting period, fluctuations in financial FOMC meeting to increase both the interest rate on ex- markets appeared to be driven by less-accommodative- cess reserves and the ON RRP rate by 5 basis points, the than-expected June FOMC communications, a reduc- effective federal funds rate rose 4 basis points, reaching tion in investor perceptions of the risk of persistently 10 basis points, while the Secured Overnight Financing high inflation, increased concerns about the rapid spread Rate rose 4 basis points, reaching 5 basis points. These of the Delta variant, and stronger-than-anticipated infla- funding rates remained at these levels for most of the tion data. Longer-dated Treasury yields fell, largely re- period. Participation in the Federal Reserve’s ON RRP flecting declines in real yields, while longer-horizon for- operations continued to increase to its highest level since ward measures of inflation compensation also declined. the facility was put in place, from an average of $340 bil- Domestic equity prices rose moderately, and corporate lion in the previous intermeeting period to an average of bond spreads remained near the low end of their histor- around $800 billion over the current intermeeting pe- ical ranges. Short-term funding markets were stable, riod, and reached almost $1 trillion on the June quarter- while participation in the ON RRP facility increased fur- end. The increase in participation was driven in part by ther, to its highest level since the facility was put in place. larger investments from money market funds, as ongo- Market-based financing conditions were accommoda- ing reductions in net Treasury bill issuance contributed tive, and bank lending standards eased for most loan cat- to downward pressure on yields of other investment op- egories. tions available to these funds. The Treasury yield curve flattened, on net, with the Concerns about the worldwide spread of the Delta vari- 2-year yield about unchanged, the 5-year yield declining ant weighed somewhat on risk sentiment in global finan- a bit, and the 10- and 30-year yields each decreasing cial markets over the intermeeting period. The dollar about 30 basis points. The decline in longer-term Treas- broadly appreciated, longer-term yields in major ad- ury yields was associated with a drop in real yields im- vanced foreign economies decreased notably, and most plied by Treasury Inflation-Protected Securities (TIPS), major foreign equity indexes declined moderately. Eq- with the 10-year real yield down about 25 basis points. uity markets in China and Hong Kong underperformed Meanwhile, shorter-horizon measures of inflation com- notably amid increased regulatory uncertainty in China. pensation ended the period modestly higher, but longer- In addition, EME sovereign credit spreads widened term forward measures fell notably. On net, the market- slightly, but capital flows into dedicated EME funds re- implied path of the policy rate was little changed for ho- mained modestly positive. rizons up to late 2023, while it shifted lower beyond those horizons.

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Several foreign central banks scaled back their asset pur- higher-rated bonds, while it was still below pre-pan- chase programs. The Bank of Canada and the Reserve demic levels for speculative-grade and unrated securities. Bank of Australia reduced the pace of their asset pur- The credit quality of municipal debt appeared stable, al- chases, and the Reserve Bank of New Zealand unexpect- though pandemic-related risks to state and local govern- edly announced that it would halt its asset purchases in ment finances remained. July. In emerging markets, the central banks of Brazil Financing conditions facing small businesses remained and Mexico raised rates in order to reduce inflationary relatively tight, and their loan demand was generally pressures. In contrast, the People’s Bank of China cut weak. Although the July SLOOS banks reported, on net, the broad reserve requirement ratio for banks to support easier lending standards for C&I loans to small firms economic growth. The European Central Bank com- over the second quarter, industry commentary suggested pleted its strategy review, adopting a 2 percent symmet- that the lending standards of community banks and of ric inflation target, and revised forward guidance on its other lenders not included in the SLOOS remained rel- policy rate. atively tight. Furthermore, the results of a separate sur- Financing conditions faced by nonfinancial firms in cap- vey suggested that the share of firms that did not want ital markets continued to be broadly accommodative to borrow remained near its all-time high. Meanwhile, over the intermeeting period, as corporate bond spreads loan performance for small businesses continued to im- remained near the low end of their historical distribu- prove, with delinquency rates continuing to decline in tions. Gross issuance of corporate bonds slowed from May. its brisk pace in May but remained solid, and gross issu- For commercial real estate (CRE) financed through cap- ance of leveraged loans was also robust. Equity raised ital markets, financing conditions remained accommo- through traditional initial public offerings rebounded dative. Spreads of agency and non-agency commercial noticeably, while equity raised through seasoned equity mortgage-backed securities (CMBS) were generally at or offerings continued to be moderate in June. Meanwhile, below pre-pandemic levels. Issuance of agency CMBS equity issuance through special purpose acquisition remained robust and issuance of non-agency CMBS companies remained subdued. strengthened notably in June. Delinquency rates on Commercial and industrial (C&I) loans outstanding at mortgages in CMBS pools were little changed but con- banks continued to decline in June, with forgiveness of tinued to be elevated on hotel and retail mortgages. Paycheck Protection Program loans more than offset- Meanwhile, bank-based financing conditions for CRE ting the volumes of new loan originations. In the July remained relatively tight. CRE loan growth at banks re- Senior Loan Officer Opinion Survey on Bank Lending mained weak in the second quarter in comparison with Practices (SLOOS), banks reported easing standards and pre-pandemic levels. In the July SLOOS, banks re- nearly all terms, on net, for C&I loans over the second ported that, despite some easing over the second quar- quarter. The July SLOOS also indicated that the level of ter, the levels of CRE lending standards were still tight standards on C&I loans returned to the easier end of the relative to the midpoint of the range of standards that range that had prevailed since 2005. Banks surveyed in had prevailed since 2005. the July SLOOS reported that demand for C&I loans Financing conditions in the residential real estate market had improved over the second quarter; however, market remained accommodative. This was particularly true for commentary suggested that demand was still generally stronger borrowers who met standard conforming loan weak. criteria. In addition, according to the July SLOOS, bank The credit quality of large nonfinancial corporations re- lending standards for jumbo loans eased over the second mained stable over the intermeeting period. The volume quarter to near their pre-pandemic levels. However, al- of credit rating upgrades for nonfinancial corporate though broad financing conditions for lower-score Fed- bonds and leveraged loans moderately outpaced down- eral Housing Administration borrowers also continued grades in June. Corporate bond and leveraged loan de- to ease, their credit standards remained tighter than be- faults also remained low. fore the pandemic. Mortgage rates ticked down over the intermeeting period, in line with rates on MBS and Financing conditions in the municipal bond market re- 10-year Treasury securities. Furthermore, the spread of mained accommodative over the intermeeting period, mortgage rates to MBS yields was close to pre-pandemic with municipal bond yields edging down to record lows. levels after having widened significantly at the start of Issuance of municipal bonds was solid in the case of

______Minutes of the Meeting of July 27–28, 2021 Page 9 the pandemic. Mortgage originations for home pur- Staff Economic Outlook chases and refinancing were fairly robust through June. The projection for U.S. economic activity prepared by the staff for the July FOMC meeting was little changed, Financing conditions for consumer credit remained ac- on balance, from the June forecast. In the second half commodative. Consumer credit jumped in May and re- of 2021, an easing of the surge in demand seen over the mained strong in June, reflecting a rebound in credit card first part of the year was expected to be largely offset by balances and continued robust growth in auto loans. a reduction in the effects of supply constraints on pro- Banks in the July SLOOS reported stronger demand and duction, thereby allowing real GDP growth to continue easier standards for both credit cards and auto loans over at a rapid pace. For the year as a whole, therefore, real the second quarter. GDP was projected to post a substantial increase, with a The staff provided an update on its assessments of the correspondingly large decline in the unemployment rate. stability of the financial system and, on balance, charac- With the boost to spending growth from continued re- terized the financial vulnerabilities of the U.S. financial ductions in social distancing assumed to fade after 2021 system as notable. The staff judged that asset valuation and with a further unwinding of the effects of fiscal stim- pressures were elevated. In particular, the forward price- ulus, GDP growth was expected to step down in 2022 to-earnings ratio for the S&P 500 index stood at the up- and 2023. However, with monetary policy assumed to per end of its historical distribution; high-yield corporate remain highly accommodative, the staff continued to an- bond spreads tightened further and were near the low ticipate that real GDP growth would outpace growth in end of their historical range; and house prices continued potential output over most of this period, leading to a to increase rapidly, leaving valuation measures stretched. decline in the unemployment rate to historically low lev- That said, the staff did not see signs of loose mortgage els. underwriting standards or excessive credit growth that The staff’s near-term outlook for inflation was revised could potentially amplify a shock arising from falling up further in response to incoming data, but the staff house prices. The staff assessed vulnerabilities associ- continued to expect that this year’s rise in inflation ated with nonfinancial leverage as lower than in January would prove to be transitory. The 12-month change in but still notable. For households, the mortgage debt-to- total and core PCE prices was well above 2 percent in income ratio was moderate, and mortgage borrowing May, and available data suggested that PCE price infla- was concentrated among prime borrowers, though some tion would remain high in June. The staff continued to uncertainty remained regarding the outlook for mort- judge that the surge in demand that had resulted as the gages in non-payment status. While measures of corpo- economy reopened further had combined with produc- rate-sector leverage fell since January, particularly at the tion bottlenecks and supply constraints to boost recent most levered firms, the debt of firms that had relatively monthly inflation rates. The staff expected the low earnings-to-interest payment ratios remained high. 12-month change in PCE prices to move down gradually The staff judged that vulnerabilities arising from finan- over the second part of 2021, reflecting an anticipated cial leverage were moderate. The aggregate common eq- moderation in monthly inflation rates and the waning of uity tier 1 capital ratio of the largest banks significantly base effects; even so, PCE price inflation was projected exceeded regulatory requirements. However, some to be running well above 2 percent at the end of the year. available measures of hedge fund leverage were elevated, Over the following year, the boost to consumer prices and significant data gaps continued to obscure risks at caused by supply issues was expected to partly reverse, hedge funds and other nonbank financial institutions. and import prices were expected to decelerate sharply; Vulnerabilities associated with funding risks were char- as a result, PCE price inflation was expected to step acterized as moderate. Domestic banks held significant down to a little below 2 percent in 2022 before addi- quantities of high-quality liquid assets and had only lim- tional increases in resource utilization raised it to 2 per- ited reliance on short-term wholesale funding. None- cent in 2023. theless, significant structural vulnerabilities remained at entities such as prime money funds, and new financial The staff continued to judge that the risks to the baseline arrangements such as stablecoins appeared to have the projection for economic activity were skewed to the same structural maturity and liquidity transformation downside and that the uncertainty around the forecast vulnerabilities but with less transparency and an under- was elevated. In particular, the probability that the developed regulatory framework. course of the pandemic would turn out to be more ad- verse than the staff’s baseline assumption was viewed to

______Page 10 Federal Open Market Committee be higher than the probability that a more favorable out- With respect to the business sector, participants ob- come would occur. However, the staff judged that the served that activity in the service industries most ad- risks around the inflation projection were now tilted to versely affected by the pandemic, such as in the leisure the upside, as recent data pointed to a greater risk that and hospitality sector, was rebounding as the economy the upward pressure on inflation that had resulted from reopened further but had not fully recovered. Partici- supply-related issues would unwind more slowly than pants noted that growth in manufacturing activity con- the staff’s baseline projection assumed. tinued to be solid but was restrained by production bottlenecks and supply constraints, particularly in the motor Participants’ Views on Current Economic Condi- vehicle sector. Citing reports received from contacts in tions and the Economic Outlook a broad range of industries, participants indicated that In their discussion of current conditions, participants shortages of materials and labor as well as supply chain noted that, with progress on vaccinations and strong challenges remained widespread and continued to limit policy support, indicators of economic activity and em- the ability of firms to keep up with strong demand. Even ployment had continued to strengthen. The sectors though their outlook for demand had improved further, most adversely affected by the pandemic had shown im- many business contacts had expressed uncertainty and provement but had not fully recovered. Inflation had pessimism over prospects regarding the easing of supply risen, largely reflecting transitory factors. Overall finan- constraints over the near term. cial conditions remained accommodative, in part reflecting policy measures to support the economy and the Participants commented on the continued improvement flow of credit to U.S. households and businesses. Par- in labor market conditions in recent months driven by ticipants noted that the path of the economy would con- strong demand for workers. The monthly pace of job tinue to depend on the course of the virus. Progress on gains had picked up, with employment expanding vaccinations would likely continue to reduce the effects 850,000 in June and with notable increases in the leisure of the public health crisis on the economy, but risks to and hospitality sector. Nevertheless, the household sur- the economic outlook remained. vey showed that the unemployment rate remained elevated at 5.9 percent in June, and the labor force partici- Participants observed that economic activity continued pation rate and employment-to-population ratio were lit- to expand at a rapid pace through the middle of the year tle changed in recent months. Participants indicated that even though capacity constraints were restraining the in- the economy had not yet achieved the Committee’s crease in output in some sectors. Economic growth was broad-based and inclusive maximum-employment goal. expected to remain strong over the second half of the Several participants remarked that the labor market re- year, supported by the further reopening of the econ- covery continued to be uneven across demographic and omy, accommodative financial conditions, and easing of income groups and across sectors. Participants generally supply constraints. Nevertheless, participants generally noted that supply-side factors related to the pandemic— saw supply disruptions and labor shortages as likely to such as caregiving needs, ongoing fears of the virus, in- persist over the second half of the year. creased retirements, and expanded unemployment in- In their discussion of the household sector, participants surance payments—continued to weigh on labor force remarked that consumer spending had continued to in- participation and employment growth. A majority of crease at a very rapid pace, supported by the ongoing participants anticipated that most of these factors would reopening of the economy along with the accommoda- ease in the coming months. They also noted, however, tion provided by fiscal policy and monetary policy. In that the spread of the Delta variant may temporarily de- addition, the accumulated stock of savings and further lay the full reopening of the economy and restrain hiring progress on vaccination were cited as important factors and labor supply. lifting household spending. Some participants noted Participants observed that recent wage increases had that they expected consumer spending to continue to be been moderate on average. However, District contacts bolstered by these factors. Participants generally ex- had continued to report having trouble hiring workers pected housing demand to remain strong but noted that and had indicated that this difficulty was putting upward construction had been restrained by shortages of mate- pressure on wages in some sectors or leading employers rials and other inputs and that home sales had been held to provide additional incentives to attract and retain back by limited supplies of available homes. workers. Several participants noted that their District contacts expected that difficulties finding workers would likely extend into the fall.

______Minutes of the Meeting of July 27–28, 2021 Page 11

In their discussion of inflation, participants observed larger or more persistent effects on prices and wages that the inflation rate had increased notably and ex- than they currently assumed. pected that it would likely remain elevated in coming Participants who commented on financial stability em- months before moderating. Participants remarked that phasized the risks associated with elevated valuations inflation had increased generally more than expected this across many asset classes. A few participants highlighted year and attributed this increase to supply constraints in scenarios in which a prolonged period of low interest product and labor markets and a surge in consumer de- rates and broadly elevated asset valuations could gener- mand as the economy reopened. They noted that many ate imbalances, which could increase financial stability of their District contacts had reported that higher input risks. Some participants commented on the housing costs were also putting upward pressure on prices. Many market and noted that ongoing rapid house price in- participants pointed out that the largest contributors to creases reflected both demand and supply factors. Sev- recent increases in measures of inflation were a handful eral participants noted that the lack of evidence of dete- of sectors most affected by temporary supply bottle- riorating mortgage underwriting standards could miti- necks or sectors in which price levels were rebounding gate risks associated with high housing valuations; a cou- from depressed levels as the economy continued to reo- ple of other participants, however, expressed concern pen. Looking ahead, while participants generally ex- that a home price reversal could pose risks to financial pected inflation pressures to ease as the effect of these stability. Some participants cited various potential risks transitory factors dissipated, several participants re- to financial stability including the risks associated with marked that larger-than-anticipated supply chain disrup- expanded use of cryptocurrencies or the risks associated tions and increases in input costs could sustain upward with collateral liquidity at central counterparties during pressure on prices into 2022. In their comments on in- episodes of market stress. In connection with the for- flation expectations, some participants noted that mer set of risks, a few of these participants highlighted measures of longer-term inflation expectations had re- the fragility and the general lack of transparency associ- mained in ranges that were viewed as broadly consistent ated with stablecoins, the importance of monitoring with the Committee’s longer-run inflation goal. Several them closely, and the need to develop an appropriate participants indicated that the recent increases in survey- regulatory framework to address any risks to financial based measures signaled a risk that longer-term inflation stability associated with such products. expectations might be moving up above levels consistent with the Committee’s goals. Other participants pointed In their consideration of the stance of monetary policy, to the substantial decline in TIPS-based longer-term in- participants reaffirmed the Federal Reserve’s commit- flation compensation since June as suggesting that inves- ment to using its full range of tools to support the tors perceived reduced risks that inflation could run per- U.S. economy during this challenging time, thereby pro- sistently above the Committee’s 2 percent goal. A cou- moting the Committee’s statutory goals of maximum ple of participants noted that recent readings on forward employment and price stability. Participants judged that inflation compensation could be read as suggesting in- the current stance of monetary policy remained appro- vestor concern that inflation over the longer term could priate to promote maximum employment as well as to run persistently below the Committee’s 2 percent infla- achieve inflation that averages 2 percent over time and tion goal. longer-term inflation expectations that are well anchored at 2 percent. Participants also reiterated that the existing In discussing the uncertainty and risks associated with outcome-based guidance implied that the paths of the the economic outlook, many participants remarked that federal funds rate and the balance sheet would depend uncertainty was quite high, with slowing in progress on on actual progress toward reaching the Committee’s vaccinations and developments surrounding the Delta maximum-employment and inflation goals. variant posing downside risks to the economic outlook. A number of participants judged that the effects of sup- Participants discussed the progress toward the Commit- ply chain disruptions and labor shortages would likely tee’s goals since December 2020, when the Committee complicate the task of interpreting the incoming data adopted its guidance for asset purchases. They generally and assessing the speed at which these supply-side fac- judged that the Committee’s standard of “substantial tors would dissipate. Some participants noted that there further progress” toward the maximum-employment were upside risks to inflation associated with concerns and inflation goals had not yet been met, particularly that supply disruptions and labor shortages might linger with respect to labor market conditions, and that risks to for longer than currently anticipated and might have

______Page 12 Federal Open Market Committee the economic outlook remained. Most participants an- prudent for the Committee to prepare for starting to re- ticipated that the economy would continue to make pro- duce its pace of asset purchases relatively soon, in light gress toward those goals and, provided that the economy of the risk that the recent high inflation readings could evolved broadly as they anticipated, they judged that the prove to be more persistent than they had anticipated standard set out in the Committee’s guidance regarding and because an earlier start to reducing asset purchases asset purchases could be reached this year. With regard would most likely enable additions to securities holdings to the labor market, participants noted that the demand to be concluded before the Committee judged it appro- for workers had been strong in recent months, while the priate to raise the federal funds rate. A few participants level of employment had been constrained by labor sup- expressed concerns that maintaining highly accommo- ply shortages and hiring difficulties. Several participants dative financial conditions might contribute to a further emphasized that employment remained well below its buildup in risk to the financial system that could impede pre-pandemic level and that a robust labor market, sup- the attainment of the Committee’s dual-mandate goals. ported by a continuation of accommodative monetary In contrast, a few other participants suggested that prep- policy, would allow further progress toward the Com- arations for reducing the pace of asset purchases should mittee’s broad and inclusive maximum-employment encompass the possibility that the reductions might not goal and a return over time to labor market conditions occur for some time and highlighted the risks that rising as strong as those prevailing before the pandemic. A few COVID-19 cases associated with the spread of the Delta other participants judged that monetary policy had lim- variant could cause delays in returning to work and ited ability to address the labor supply shortages and hir- school and so damp the economic recovery. Several par- ing difficulties currently constraining the level of em- ticipants also remained concerned about the medium- ployment. Several participants also commented that the term outlook for inflation and the possibility of the pandemic might have caused longer-lasting changes in reemergence of significant downward pressure on infla- the labor market and that the pre-pandemic labor market tion, especially in light of the recent decline in longer- conditions may not be the right benchmark against term inflation compensation. In addition, several partic- which the Committee should assess the progress toward ipants emphasized that there was considerable uncer- its maximum-employment objective. tainty about the likely resolution of the labor market shortages and supply bottlenecks and about the influ- With regard to inflation, participants commented that re- ence of pandemic-related developments on longer-run cent inflation readings had been boosted by the effects labor market and inflation dynamics. Those participants of supply bottlenecks and labor shortages and were likely stressed that the Committee should be patient in as- to be transitory. A few participants noted that, while the sessing progress toward its goals and in announcing specific results depended on the period used in the cal- changes to its plans on asset purchases. culation, some measures of average inflation were al- ready moving above, or would soon move above, the Some participants emphasized that a decision to reduce Committee’s 2 percent goal, supported by strong de- the Committee’s pace of asset purchases once the “sub- mand, a tight labor market, and firming inflation expec- stantial further progress” benchmark had been achieved tations. Some other participants emphasized that recent would be fully consistent with the Committee’s new high inflation readings had largely been driven by price monetary policy framework and would help foster the increases in a handful of categories. These participants achievement of the Committee’s longer-run objectives pointed out that there was no evidence of broad-based over time. A couple of participants also noted that a ta- price pressures or of inappropriately high longer-term pering of asset purchases did not amount to a tightening inflation expectations. Several participants also com- of the stance of monetary policy and instead only im- mented that price increases concentrated in a small num- plied that additional monetary accommodation would be ber of categories were unlikely to change underlying in- provided at a slower rate. Several participants empha- flation dynamics sufficiently to overcome the possibility sized that an announcement of a reduction in the Com- of a persistent downward bias in inflation, as might be mittee’s pace of asset purchases should not be inter- associated with the effective lower bound on the policy preted as the beginning of a predetermined course for rate. raising the federal funds rate from its current level. Those participants stressed that the Committee’s assess- Many participants remarked upon risk-management ment regarding the appropriate timing of an increase in considerations when contemplating how and when to the target range for the federal funds rate was separate make changes to the Committee’s pace of asset pur- from its current deliberations on asset purchases and chases. Some participants suggested that it would be

______Minutes of the Meeting of July 27–28, 2021 Page 13 would be subject to the higher standard, as laid out in by at least $80 billion per month and agency mortgage- the Committee’s outcome-based guidance on the federal backed securities by at least $40 billion per month until funds rate. Nonetheless, a couple of participants cau- substantial further progress had been made toward its tioned that it could be challenging for the public to dis- maximum-employment and price-stability goals. The entangle deliberations about the two tools and that any members commented that, since then, the economy had decisions the Committee made on its asset purchases made progress toward these goals, and they agreed to would likely influence the public’s understanding of the continue to assess progress in coming meetings. They Committee’s other policy intentions, including with re- judged that these asset purchases would help foster gard to future decisions concerning the target range for smooth market functioning and accommodative finan- the federal funds rate. cial conditions, thereby supporting the flow of credit to households and businesses. Committee Policy Action In their discussion of monetary policy for this meeting, Members agreed that, in assessing the appropriate stance members agreed that with progress on vaccinations and of monetary policy, they would continue to monitor the strong policy support, indicators of economic activity implications of incoming information for the economic and employment had continued to strengthen. They outlook and that they would be prepared to adjust the noted that the sectors most adversely affected by the stance of monetary policy as appropriate in the event pandemic had shown improvement but had not fully re- that risks emerged that could impede the attainment of covered. Inflation had risen, largely reflecting transitory the Committee’s goals. Members also concurred that, in factors. Overall financial conditions remained accom- assessing the appropriate stance of monetary policy, they modative, in part reflecting policy measures to support would take into account a wide range of information, in- the economy and the flow of credit to U.S. households cluding readings on public health, labor market condi- and businesses. Members also acknowledged that the tions, inflation pressures and inflation expectations, and path of the economy continued to depend on the course financial and international developments. of the virus. Progress on vaccinations would likely con- Members agreed that the postmeeting statement should tinue to reduce the effects of the public health crisis on acknowledge the economy’s continued recovery as well the economy, but risks to the economic outlook re- as its progress toward the Committee’s maximum-em- mained. ployment and price-stability goals set forth in the Com- Members agreed that the Federal Reserve was commit- mittee’s asset purchase guidance in December. In light ted to using its full range of tools to support the U.S. of these developments, members decided to remove the economy in this challenging time, thereby promoting its characterization of sectors most adversely affected by maximum-employment and price-stability goals. All the pandemic as being in a “weak” condition and to re- members reaffirmed that, in accordance with the Com- place it with the judgment that those sectors “have not mittee’s goals to achieve maximum employment and in- fully recovered.” They also agreed to remove the word flation at the rate of 2 percent over the longer run and “significantly” when characterizing the dependence of with inflation having run persistently below this longer- the path of the economy on the course of the virus. In run goal, they would aim to achieve inflation moderately addition, members agreed to insert the assessment that above 2 percent for some time so that inflation averages “the economy has made progress” toward the Commit- 2 percent over time and longer-term inflation expecta- tee’s longer-run goals since the guidance on asset pur- tions remain well anchored at 2 percent. Members ex- chases was first issued in December and to indicate that pected to maintain an accommodative stance of mone- the assessment of progress would continue in coming tary policy until those outcomes were achieved. meetings. Members agreed that the addition of this lan- guage was appropriate to acknowledge the Committee’s All members agreed to keep the target range for the fed- ongoing deliberations in assessing the economy’s pro- eral funds rate at 0 to ¼ percent, and they expected that gress toward the Committee’s goals and the implications it would be appropriate to maintain this target range un- for the pace of asset purchases. til labor market conditions had reached levels consistent with the Committee’s assessments of maximum employ- At the conclusion of the discussion, the Committee ment and inflation had risen to 2 percent and was on voted to authorize and direct the Federal Reserve Bank track to moderately exceed 2 percent for some time. of New York, until instructed otherwise, to execute Last December, the Committee indicated that it would transactions in the SOMA in accordance with the fol- continue to increase its holdings of Treasury securities lowing domestic policy directive, for release at 2:00 p.m.:

______Page 14 Federal Open Market Committee

“Effective July 29, 2021, the Federal Open Mar- With progress on vaccinations and strong policy ket Committee directs the Desk to: support, indicators of economic activity and employment have continued to strengthen. The • Undertake open market operations as nec- sectors most adversely affected by the pandemic essary to maintain the federal funds rate in have shown improvement but have not fully re- a target range of 0 to ¼ percent. covered. Inflation has risen, largely reflecting • Increase the System Open Market Ac- transitory factors. Overall financial conditions count holdings of Treasury securities by remain accommodative, in part reflecting policy $80 billion per month and of agency mort- measures to support the economy and the flow gage-backed securities (MBS) by $40 bil- of credit to U.S. households and businesses. lion per month. The path of the economy continues to depend • Increase holdings of Treasury securities on the course of the virus. Progress on vaccina- and agency MBS by additional amounts tions will likely continue to reduce the effects of and purchase agency commercial mort- the public health crisis on the economy, but gage-backed securities (CMBS) as needed risks to the economic outlook remain. to sustain smooth functioning of markets The Committee seeks to achieve maximum em- for these securities. ployment and inflation at the rate of 2 percent • Conduct overnight repurchase agreement over the longer run. With inflation having run operations with a minimum bid rate of persistently below this longer-run goal, the 0.25 percent and with an aggregate opera- Committee will aim to achieve inflation moder- tion limit of $500 billion; the aggregate op- ately above 2 percent for some time so that in- eration limit can be temporarily increased flation averages 2 percent over time and at the discretion of the Chair. longer-term inflation expectations remain well anchored at 2 percent. The Committee expects • Conduct overnight reverse repurchase to maintain an accommodative stance of mone- agreement operations at an offering rate of tary policy until these outcomes are achieved. 0.05 percent and with a per-counterparty The Committee decided to keep the target range limit of $80 billion per day; the per- for the federal funds rate at 0 to ¼ percent and counterparty limit can be temporarily in- expects it will be appropriate to maintain this creased at the discretion of the Chair. target range until labor market conditions have • Roll over at auction all principal payments reached levels consistent with the Committee’s from the Federal Reserve’s holdings of assessments of maximum employment and in- Treasury securities and reinvest all princi- flation has risen to 2 percent and is on track to pal payments from the Federal Reserve’s moderately exceed 2 percent for some time. holdings of agency debt and agency MBS Last December, the Committee indicated that it in agency MBS. would continue to increase its holdings of Treasury securities by at least $80 billion per • Allow modest deviations from stated month and of agency mortgage-backed securi- amounts for purchases and reinvestments, ties by at least $40 billion per month until sub- if needed for operational reasons. stantial further progress has been made toward • Engage in dollar roll and coupon swap its maximum employment and price stability transactions as necessary to facilitate settle- goals. Since then, the economy has made pro- ment of the Federal Reserve’s agency MBS gress toward these goals, and the Committee transactions.” will continue to assess progress in coming meetings. These asset purchases help foster smooth The vote also encompassed approval of the statement market functioning and accommodative finan- below for release at 2:00 p.m.: cial conditions, thereby supporting the flow of “The Federal Reserve is committed to using its credit to households and businesses. full range of tools to support the U.S. economy In assessing the appropriate stance of monetary in this challenging time, thereby promoting its policy, the Committee will continue to monitor maximum employment and price stability goals.

______Minutes of the Meeting of July 27–28, 2021 Page 15

the implications of incoming information for Board voted unanimously to establish the interest rate the economic outlook. The Committee would paid on reserve balances at 0.15 percent, effective be prepared to adjust the stance of monetary July 29, 2021.5 The Board also voted unanimously to policy as appropriate if risks emerge that could approve establishment of the primary credit rate at the impede the attainment of the Committee’s existing level of 0.25 percent, effective July 29, 2021. goals. The Committee’s assessments will take into account a wide range of information, in- It was agreed that the next meeting of the Committee cluding readings on public health, labor market would be held on Tuesday–Wednesday, September 21– conditions, inflation pressures and inflation ex- 22, 2021. The meeting adjourned at 10:35 a.m. on pectations, and financial and international de- July 28, 2021. velopments.” Notation Vote Voting for this action: Jerome H. Powell, John C. By notation vote completed on July 6, 2021, the Com- Williams, Thomas I. Barkin, Raphael W. Bostic, Michelle mittee unanimously approved the minutes of the Com- W. Bowman, Lael Brainard, Richard H. Clarida, Mary C. mittee meeting held on June 15–16, 2021. Daly, Charles L. Evans, Randal K. Quarles, and Christopher J. Waller.

Voting against this action: None. ______Consistent with the Committee’s decision to leave the James A. Clouse target range for the federal funds rate unchanged, the Secretary

5 As announced on June 2, 2021, the Board approved a final ing and will continue to do so going forward. The Federal Reg- rule, effective July 29, amending Regulation D to eliminate ref- ister notice, “Regulation D: Reserve Requirements of Deposi- erences to an interest on required reserves (IORR) rate and to tory Institutions,” is available at www.federalregis- an interest on excess reserves (IOER) rate and replace them ter.gov/documents/2021/06/04/2021-11758/regulation-d- with a single interest on reserve balances (IORB) rate. There- reserve-requirements-of-depository-institutions fore, the Board voted on one rate, the IORB rate, at this meet-