September 16–17, 2015 1 of 240 Meeting of the Federal Open Market Committee on September 16–17, 2015 A joint meeting of the Federal Open Market Committee and the Board of Governors was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Wednesday, September 16, 2015, at 1:00 p.m. and continued on Thursday, September 17, 2015, at 8:30 a.m. Those present were the following: Janet L. Yellen, Chair William C. Dudley, Vice Chairman Lael Brainard Charles L. Evans Stanley Fischer Jeffrey M. Lacker Dennis P. Lockhart Jerome H. Powell Daniel K. Tarullo John C. Williams James Bullard, Esther L. George, Loretta J. Mester, Eric Rosengren, and Michael Strine, Alternate Members of the Federal Open Market Committee Patrick Harker, Robert S. Kaplan, and Narayana Kocherlakota, Presidents of the Federal Reserve Banks of Philadelphia, Dallas, and Minneapolis, respectively Brian F. Madigan, Secretary Matthew M. Luecke, Deputy Secretary David W. Skidmore, Assistant Secretary Michelle A. Smith, Assistant Secretary Scott G. Alvarez, General Counsel Steven B. Kamin, Economist Thomas Laubach, Economist David W. Wilcox, Economist David Altig, Thomas A. Connors, Michael P. Leahy, William R. Nelson, Daniel G. Sullivan, William Wascher, and John A. Weinberg, Associate Economists Simon Potter, Manager, System Open Market Account Lorie K. Logan, Deputy Manager, System Open Market Account Robert deV. Frierson, Secretary of the Board, Office of the Secretary, Board of Governors Michael S. Gibson, Director, Division of Banking Supervision and Regulation, Board of Governors September 16–17, 2015 2 of 240 Nellie Liang, Director, Office of Financial Stability Policy and Research, Board of Governors James A. Clouse and Stephen A. Meyer, Deputy Directors, Division of Monetary Affairs, Board of Governors William B. English, Senior Special Adviser to the Board, Office of Board Members, Board of Governors David Bowman, Andrew Figura, David Reifschneider, and Stacey Tevlin, Special Advisers to the Board, Office of Board Members, Board of Governors Trevor A. Reeve, Special Adviser to the Chair, Office of Board Members, Board of Governors Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors Christopher J. Erceg, Senior Associate Director, Division of International Finance, Board of Governors; David E. Lebow and Michael G. Palumbo, Senior Associate Directors, Division of Research and Statistics, Board of Governors Ellen E. Meade and Joyce K. Zickler, Senior Advisers, Division of Monetary Affairs, Board of Governors John J. Stevens, Deputy Associate Director, Division of Research and Statistics, Board of Governors Stephanie R. Aaronson, Assistant Director, Division of Research and Statistics, Board of Governors; Francisco Covas and Elizabeth Klee, Assistant Directors, Division of Monetary Affairs, Board of Governors Eric C. Engstrom, Adviser, Division of Research and Statistics, Board of Governors Penelope A. Beattie,¹ Assistant to the Secretary, Office of the Secretary, Board of Governors Katie Ross,¹ Manager, Office of the Secretary, Board of Governors David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors Elmar Mertens, Senior Economist, Division of Monetary Affairs, Board of Governors Randall A. Williams, Information Management Analyst, Division of Monetary Affairs, Board of Governors ________________ ¹ Attended Wednesday’s session only. September 16–17, 2015 3 of 240 Gregory L. Stefani, First Vice President, Federal Reserve Bank of Cleveland Alberto G. Musalem, Executive Vice President, Federal Reserve Bank of New York Mary Daly, Troy Davig, Evan F. Koenig, Paolo A. Pesenti, Samuel Schulhofer-Wohl, Ellis W. Tallman, and Christopher J. Waller, Senior Vice Presidents, Federal Reserve Banks of San Francisco, Kansas City, Dallas, New York, Minneapolis, Cleveland, and St. Louis, respectively Giovanni Olivei, Keith Sill, and Douglas Tillett, Vice Presidents, Federal Reserve Banks of Boston, Philadelphia, and Chicago, respectively September 16–17, 2015 4 of 240 Transcript of the Federal Open Market Committee Meeting on September 16–17, 2015 September 16 Session CHAIR YELLEN. Good afternoon, everyone. I would like to welcome Rob Kaplan to his first FOMC meeting. Rob became president and CEO of the Federal Reserve Bank of Dallas just last week. In his new role, President Kaplan brings to bear 10 years of academic experience at Harvard University, where he served as a professor and a dean; a long and distinguished career in global finance; and broad experience on corporate and noncorporate boards. I have to say, you chose to join us at a very interesting time. [Laughter] We all look forward to working with you. MR. KAPLAN. Thank you, Madam Chair. I appreciate it. CHAIR YELLEN. Let me mention, as was indicated in the agenda, that the entire FOMC meeting will be conducted jointly as an FOMC and Board of Governors meeting—and this will likely be true going forward. I need a motion to close the Board meeting. MR. FISCHER. So moved. CHAIR YELLEN. Thank you. And without objection. Our first item of business is “Financial Developments and Open Market Operations.” Let me call on Simon to give us the Desk report. MR. POTTER.1 Thank you, Madam Chair. Over the intermeeting period, a sharp rise in concern about emerging market growth, particularly in China, triggered a broad decline in global risk-sensitive assets. Oil and other commodity prices fell, at times reaching levels last observed in early 2009, and inflation compensation measures in the United States and other advanced economies continued to decline. Most emerging market currencies depreciated, in some cases quite sharply. Nominal Treasury yields were relatively little changed, reportedly in part because flight-to- quality demand was offset by large-scale reserve sales by emerging market central banks, which intervened heavily in foreign exchange markets in a bid to stabilize the value of their currencies. Toward the end of the period, as U.S. markets calmed 1 The materials used by Mr. Potter and Ms. Logan are appended to this transcript (appendix 1). September 16–17, 2015 5 of 240 down, investors were intensely focused on the prospects for Federal Reserve policy firming in light of the positive news on U.S. real activity during the intermeeting period. I will begin by discussing these financial market developments. Lorie will then discuss money market developments and operational matters. The People’s Bank of China unexpectedly devalued the renminbi versus the dollar following a long period of stability and predictability in the management of that exchange rate, as shown in the top-left panel of your first exhibit. Although the devaluation was relatively small compared with the increase in China’s trade- weighted exchange rate over the past year, it came on the heels of a string of weak Chinese economic data and the unwinding, at least in part, of a bubble in Chinese equities. The devaluation appeared to intensify greatly the existing concerns among market participants about the severity of the growth slowdown in China and the ability of the Chinese authorities to address it appropriately. Sentiment toward Chinese policymaking had already been fragile, especially in light of the often heavy- handed and ultimately unsuccessful effort over the past few months to halt the selloff in equities. Following the devaluation, capital outflows from China accelerated markedly from already high levels. These outflows led, within a couple of days, to large-scale foreign exchange intervention to prevent further renminbi depreciation. The concerns raised by the devaluation, along with a number of significant developments in other emerging markets that I will discuss later, contributed to a broad selloff in global risk assets. As shown in the top-right panel, equity price indexes in both emerging and developed economies declined sharply. The S&P 500 index fell by more than 10 percent over a two-day period before recovering somewhat and is about 7 percent lower, on net, over the period. Nominal Treasury yields changed only modestly over the period, and real yields actually increased somewhat at most tenors. The middle-left panel shows a decomposition of the changes in forward nominal rates into real and inflation compensation components. Some market participants expressed surprise that nominal yields did not fall substantially and found the rise in real yields incongruous with the decline in global risk sentiment and flight-to-quality effects that are ordinarily expected to push yields down in such circumstances. Many market participants believe that this relative stability in nominal yields reflects the downward pressure of typical flight-to-quality flows being offset by upward pressure stemming from sizable sales of Treasuries by Chinese and other emerging market reserve managers intervening to support their currencies. Your middle-right panel presents information about Chinese intervention activity. PBOC official reserve data for August showed a decline in reserve holdings of about $100 billion. Many market participants believe that this figure might understate the scale of Chinese sales—for example, by omitting intervention via foreign exchange derivatives—and estimate that the PBOC’s intervention might have been up to $200 billion last month. Contacts believe that the PBOC funded outright September 16–17, 2015 6 of 240 interventions in large part via sales of shorter-dated, off-the-run nominal Treasury securities, and, as Lorie