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Minutes of the Federal Open Market Committee

May 2–3, 2023
A joint meeting of the Federal Open Market Committee Julie Ann Remache, Deputy Manager, System Open
and the Board of Governors of the Federal Reserve Sys- Market Account
tem was held in the offices of the Board of Governors
Stephanie R. Aaronson, 2 Senior Associate Director,
on Tuesday, May 2, 2023, at 10:00 a.m. and continued
Division of Research and Statistics, Board
on Wednesday, May 3, 2023, at 9:00 a.m. 1
Jose Acosta, Senior Communications Analyst,
Attendance Division of Information Technology, Board
Jerome H. Powell, Chair
John C. Williams, Vice Chair Andre Anderson, First Vice President, Federal Reserve
Michael S. Barr Bank of Atlanta
Michelle W. Bowman
Lisa D. Cook Kartik B. Athreya, Executive Vice President, Federal
Austan D. Goolsbee Reserve Bank of Richmond
Patrick Harker Penelope A. Beattie,2 Section Chief, Office of the
Philip N. Jefferson Secretary, Board
Neel Kashkari
Lorie K. Logan Daniel O. Beltran, Deputy Associate Director,
Christopher J. Waller Division of International Finance, Board
Thomas I. Barkin, Raphael W. Bostic, Mary C. Daly, Carol C. Bertaut, Senior Adviser, Division of
Loretta J. Mester, and Sushmita Shukla, Alternate International Finance, Board
Members of the Committee
Mark A. Carlson,2 Adviser, Division of Monetary
James Bullard and Susan M. Collins, Presidents of the Affairs, Board
Federal Reserve Banks of St. Louis and Boston,
respectively Michele Cavallo, Principal Economist, Division of
Monetary Affairs, Board
Kelly J. Dubbert, Interim President of the Federal
Reserve Bank of Kansas City Juan C. Climent, Special Adviser to the Board,
Joshua Gallin, Secretary Division of Board Members, Board
Matthew M. Luecke, Deputy Secretary Stephanie E. Curcuru, Deputy Director, Division of
Brian J. Bonis, Assistant Secretary International Finance, Board
Michelle A. Smith, Assistant Secretary
Mark E. Van Der Weide, General Counsel Ahmet Degerli, Economist, Division of Monetary
Richard Ostrander, Deputy General Counsel Affairs, Board
Trevor A. Reeve, Economist
John C. Driscoll,2 Principal Economist, Division of
Stacey Tevlin, Economist
Research and Statistics, Board
Beth Anne Wilson, Economist
Shaghil Ahmed, James A. Clouse, Anna Paulson, Wendy E. Dunn,2 Adviser, Division of Research and
Andrea Raffo, Chiara Scotti, and William Statistics, Board
Wascher, Associate Economists Burcu Duygan-Bump, Associate Director, Division of
Roberto Perli, Manager, System Open Market Research and Statistics, Board
Account Rochelle M. Edge, Deputy Director, Division of
Monetary Affairs, Board

1The Federal Open Market Committee is referenced as the of Governors of the Federal Reserve System is referenced as
“FOMC” and the “Committee” in these minutes; the Board the “Board” in these minutes.
2 Attended Tuesday’s session only.
Page 2 Federal Open Market Committee
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Matthew J. Eichner, 3 Director, Division of Reserve Andreas Lehnert, Director, Division of Financial
Bank Operations and Payment Systems, Board Stability, Board
Eric C. Engstrom, Associate Director, Division of Kurt F. Lewis, Special Adviser to the Board, Division
Monetary Affairs, Board of Board Members, Board
Jon Faust, Senior Special Adviser to the Chair, Laura Lipscomb, Special Adviser to the Board,
Division of Board Members, Board Division of Board Members, Board
Giovanni Favara, Assistant Director, Division of David López-Salido, Senior Associate Director,
Monetary Affairs, Board Division of Monetary Affairs, Board
Glenn Follette, Associate Director, Division of Kurt Lunsford, Senior Research Economist, Federal
Research and Statistics, Board Reserve Bank of Cleveland
Jennifer Gallagher, Assistant to the Board, Division of Patrick E. McCabe, Deputy Associate Director,
Board Members, Board Division of Research and Statistics, Board
Peter M. Garavuso, Senior Information Manager, Davide Melcangi, Research Economist, Federal
Division of Monetary Affairs, Board Reserve Bank of New York
Carlos Garriga, Senior Vice President, Federal Reserve Ann E. Misback, Secretary, Office of the Secretary,
Bank of St. Louis Board
Michael S. Gibson, Director, Division of Supervision David Na, Lead Financial Institution and Policy
and Regulation, Board Analyst, Division of Monetary Affairs, Board
Christine Graham,2 Special Adviser to the Board, Makoto Nakajima, Vice President, Federal Reserve
Division of Board Members, Board Bank of Philadelphia
Joseph W. Gruber, Executive Vice President, Federal Michelle M. Neal, Head of Markets, Federal Reserve
Reserve Bank of Kansas City Bank of New York
Valerie S. Hinojosa, Section Chief, Division of Giovanni Olivei, Senior Vice President, Federal
Monetary Affairs, Board Reserve Bank of Boston
Jane E. Ihrig, Special Adviser to the Board, Division Michael G. Palumbo, Senior Associate Director,
of Board Members, Board Division of Research and Statistics, Board
Ghada M. Ijam, System Chief Information Officer, Marcel A. Priebsch, Principal Economist, Division of
Federal Reserve Bank of Richmond Monetary Affairs, Board
Michael T. Kiley, Deputy Director, Division of Nitish Ranjan Sinha, Special Adviser to the Board,
Financial Stability, Board Division of Board Members, Board
Kyungmin Kim, Senior Economist, Division of John J. Stevens, Senior Associate Director, Division of
Monetary Affairs, Board Research and Statistics, Board
David E. Lebow, Senior Associate Director, Division Paula Tkac, Senior Vice President, Federal Reserve
of Research and Statistics, Board Bank of Atlanta
Sylvain Leduc, Director of Research, Federal Reserve Clara Vega, Special Adviser to the Board, Division of
Bank of San Francisco Board Members, Board

3 Attended through the discussion of developments in finan-

cial markets and open market operations.
 Minutes of the Meeting of May 2–3, 2023 Page 3
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Annette Vissing-Jørgensen, Senior Adviser, Division Responses to the Open Market Desk’s Survey of Pri-
of Monetary Affairs, Board mary Dealers and Survey of Market Participants suggest
that investors’ macroeconomic outlooks were little
Jeffrey D. Walker,3 Associate Director, Division of changed from March despite ongoing focus on the im-
Reserve Bank Operations and Payment Systems, plications of the expected tightening of credit. Re-
Board spondents saw upside inflation risks, albeit less than in
Min Wei,2 Senior Associate Director, Division of March.
Monetary Affairs, Board Market participants broadly expected a 25 basis point
rate increase at the May meeting and saw the resulting
Paul R. Wood, Special Adviser to the Board, Division
rate as the likely peak for the current tightening cycle.
of Board Members, Board Survey respondents assigned a much higher probability
Rebecca Zarutskie, Special Adviser to the Board, to the peak federal funds rate being between 5 and
Division of Board Members, Board 5.25 percent than they did in March. However, re-
spondents still assigned a substantial probability that the
Developments in Financial Markets and Open peak rate may turn out to be above 5.25 percent. Re-
Market Operations spondents expected the peak rate to be maintained
The manager turned first to a review of developments through the January 2024 FOMC meeting.
in financial markets. Asset prices were less volatile and
financial market conditions eased somewhat over the Regarding the balance sheet and money markets, bal-
intermeeting period as investor sentiment around the ance sheet runoff continued to proceed smoothly and
banking system stabilized. On net, nominal Treasury overnight secured and unsecured rates continued to
yields declined, equities appreciated, credit spreads trade well within the target range for the federal funds
tightened, and the trade-weighted value of the dollar de- rate. Respondents to the Desk’s surveys generally ex-
preciated. Measures of implied volatility declined pected that overnight reverse repurchase agreement
across markets. Policy-sensitive rates, however, fluctu- (ON RRP) balances will remain elevated in the near
ated a fair amount over the period, particularly in re- term before declining later this year. The ON RRP fa-
sponse to economic data but also because of market cility continued to support effective policy implementa-
perceptions of risk and liquidity conditions. Treasury tion and control over the federal funds rate, providing
market liquidity improved somewhat over the period a strong floor for money market rates. Balances at the
but remained challenged. Treasury cash and futures ON RRP facility remained within their recent range, in-
markets continued to function in an orderly manner de- dicating that use of the facility was not an important
spite the lower-than-normal liquidity. factor driving outflows of deposits from the banking
system. Use of the ON RRP facility declined at times
Regarding developments late in the intermeeting pe- over the intermeeting period in response to increases in
riod, the closure and acquisition of First Republic Bank rates on overnight secured money market instruments
were seen as orderly, though investors remained fo- and on short-term Federal Home Loan Bank debt.
cused on stresses in the banking sector. In addition, the
U.S. Treasury Department announced it may not be The Committee voted unanimously to renew the
able to fully satisfy the federal government’s obligations reciprocal currency arrangements with the Bank of
as early as June 1 if the debt limit is not raised or sus- Canada and the Bank of Mexico; these arrangements
pended, but that the actual date this event would occur are associated with the Federal Reserve’s participation
might come a number of weeks later. Yields on Treas- in the North American Framework Agreement of 1994.
ury bills and coupon securities maturing in the first half In addition, the Committee voted unanimously to
of June increased notably amid significant volatility. renew the dollar and foreign currency liquidity swap
arrangements with the Bank of Canada, the Bank of
Deposit outflows from small and mid-sized banks England, the Bank of Japan, the European Central
largely stopped in late March and April. Although eq- Bank, and the Swiss National Bank. The votes to renew
uity prices for regional banks fell further over the pe- the Federal Reserve’s participation in these standing
riod, for the vast majority of banks these declines ap- arrangements occur annually at the April or May
peared primarily to reflect expectations for lower prof- FOMC meeting.
itability rather than solvency concerns. Market partici-
pants remained alert to the possibility of another inten- By unanimous vote, the Committee ratified the Desk’s
sification of banking stress. domestic transactions over the intermeeting period.
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There were no intervention operations in foreign measure of 12-month PCE price inflation constructed
currencies for the System’s account during the by the Federal Reserve Bank of Dallas was 4.7 percent
intermeeting period. in March. The latest survey-based measures of longer-
term inflation expectations from the University of
Staff Review of the Economic Situation
Michigan Surveys of Consumers in April and the Fed-
The information available at the time of the
eral Reserve Bank of New York’s Survey of Consumer
May 2–3 meeting indicated that real gross domestic
Expectations in March remained within the range of
product (GDP) had expanded at a modest pace in the
their values reported in recent months; near-term
first quarter. Labor market conditions remained tight
measures of inflation expectations from these surveys
in March, as job gains were robust and the unemploy-
moved up but were still below their peaks seen last year.
ment rate was low. Consumer price inflation—as meas-
ured by the 12-month percent change in the price index Real GDP growth was modest in the first quarter, led
for personal consumption expenditures (PCE)—con- by an increase in PCE. Gains in consumer spending
tinued to be elevated in March. Limited data were avail- picked up for the quarter as a whole, driven by a surge
able on economic activity during the period after the in January that was followed by a small net decline over
onset of banking-sector stress in mid-March, although February and March. Light motor vehicle sales, how-
several recent surveys—such as the Senior Loan Officer ever, picked up notably in April. Growth in business
Opinion Survey on Bank Lending Practices (SLOOS) fixed investment slowed further in the first quarter, and
in April, the National Federation of Independent Busi- new orders for nondefense capital goods excluding air-
ness’s survey in March, and the Federal Reserve Bank craft continued to decline in March, pointing to weak-
of New York’s Survey of Consumer Expectations in ness in capital goods shipments in the near term. Resi-
March—indicated that bank credit conditions were dential investment declined further in the first quarter
tightening further. but at a slower pace than last year. Net exports made a
small positive contribution to GDP growth in the first
The pace of increases in total nonfarm payroll employ-
quarter, as exports rebounded more strongly than im-
ment slowed in March but was still robust, and the un-
ports from their fourth-quarter declines. U.S. manufac-
employment rate ticked down to 3.5 percent. The un-
turing output fell in March, and near-term indicators—
employment rate for African Americans fell to 5.0 per-
such as national and regional indexes for new orders—
cent, and the jobless rate for Hispanics dropped to
pointed to more softening in factory output in the com-
4.6 percent. The aggregate measures of both the labor
ing months.
force participation rate and the employment-to-popula-
tion ratio edged up. The private-sector job openings Foreign economic activity rebounded in the first quar-
rate—as measured by the Job Openings and Labor ter, reflecting the reopening of China’s economy from
Turnover Survey—moved down markedly during Feb- its COVID-19-related shutdowns, a pickup in the econ-
ruary and March but remained high. omies of Canada and Mexico, and the resilience of Eu-
rope’s economy to the energy price shock from Russia’s
Recent measures of nominal wage growth continued to
war on Ukraine; a mild winter also helped reduce energy
ease from their peaks recorded last year but were still
demand in Europe. In contrast, economic growth else-
elevated. Over the 12 months ending in March, average
where in emerging Asia was weak in the first quarter
hourly earnings for all employees rose 4.2 percent, well
mainly due to a pronounced tech-cycle slowdown.
below its peak of 5.9 percent a year earlier. Over the
year ending in March, the employment cost index (ECI) Oil prices edged down amid concerns about the global
for private-sector workers increased 4.8 percent, down economic outlook. A slowing of retail energy inflation
from its peak of 5.5 percent over the year ending in June continued to contribute to an easing of headline con-
of last year. sumer price inflation in many advanced foreign econo-
mies (AFEs). Core inflation showed signs of easing in
Consumer price inflation remained elevated in March
some foreign economies but remained persistently ele-
but continued to slow. Total PCE price inflation was
vated amid tight labor markets. Accordingly, many for-
4.2 percent over the 12 months ending in March, and
eign central banks continued their monetary policy
core PCE price inflation—which excludes changes in
tightening. That said, some central banks paused their
consumer energy prices and many consumer food
policy rate increases or altered their forward guidance
prices—was 4.6 percent; the total inflation measure was
amid uncertainty about the global economic outlook
down markedly from its level in January, while the core
measure was only slightly lower. The trimmed mean
 Minutes of the Meeting of May 2–3, 2023 Page 5
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and the recent banking-sector stress. Some also sig- AFE sovereign yields narrowed and global risk senti-
naled a shift toward a more data-dependent approach ment improved. Outflows from funds dedicated to
in future decisions. emerging markets slowed to near zero over the inter-
meeting period, while sovereign credit spreads for
Staff Review of the Financial Situation
emerging market economies were little changed on net.
Market sentiment improved over the intermeeting pe-
riod, with concerns about a sharp near-term decelera- U.S. markets for commercial paper (CP) and negotiable
tion in economic activity appearing to recede as stress certificates of deposit (NCDs) stabilized over the inter-
in the banking sector declined. The market-implied meeting period. Spreads for lower-rated nonfinancial
path for the federal funds rate in 2023 increased mod- CP, which spiked following Silicon Valley Bank’s clo-
estly over the period. Broad equity price indexes in- sure, narrowed significantly. Outstanding levels of CP
creased, although equity prices of some regional banks and NCDs increased modestly over the intermeeting
were lower, and equity market volatility declined. Fi- period, while the share of short-maturity unsecured is-
nancing conditions continued to be restrictive, and bor- suance of CP and NCDs fell to normal levels, reflecting
rowing costs remained elevated. a net easing of stress associated with regional banks.
Over the intermeeting period, the market-implied path Conditions in overnight bank funding and repurchase
for the federal funds rate in 2023 rose modestly, par- agreement markets remained stable over the intermeet-
tially unwinding the sharp decline observed in early ing period, and the increase of 25 basis points in the
March due to the banking-sector stress. For 2024 and Federal Reserve’s administered rates following the
2025, the implied policy path based on overnight index March FOMC meeting fully passed through to over-
swaps fluctuated amid mixed economic data releases, night money market rates. The effective federal funds
and declined slightly on net. Yields on nominal Treas- rate printed at 4.83 percent every day during the period,
ury securities with maturities greater than one year while the Secured Overnight Financing Rate averaged
moved lower, and inflation compensation at medium- 4.81 percent—slightly above the offering rate at the
and long-term horizons edged down slightly. Measures ON RRP facility. Daily take-up in the ON RRP facility
of uncertainty about the path of interest rates declined remained elevated, reflecting continued significant us-
modestly but remained substantially elevated by histor- age by money market mutual funds, ongoing uncer-
ical standards. tainty around the policy path, and limited supply of al-
ternative investments such as Treasury bills.
Broad stock price indexes increased moderately, and the
VIX—the one-month option-implied volatility on the In domestic credit markets, borrowing costs for busi-
S&P 500—decreased notably over the intermeeting pe- nesses and households eased modestly in some markets
riod. However, market participants remained attentive but remained at elevated levels. Over the intermeeting
to developments at regional banks. Equity prices at period, yields on corporate bonds declined moderately,
such banks broadly declined over the intermeeting pe- and yields on agency residential mortgage-backed secu-
riod in part because of higher funding costs, as well as rities and 30-year conforming residential mortgage rates
concerns about profitability and a possible deterioration moved a little lower. However, interest rates on short-
in the performance of commercial real estate (CRE) term small business loans continued to rise through
loans. March and reached their highest levels since the Global
Financial Crisis.
Risk sentiment in foreign financial markets also im-
proved, on net, over the intermeeting period amid re- Credit flows for businesses and households slowed
duced investor concerns about the banking sector, lead- moderately, as high borrowing costs and market volatil-
ing to moderate increases in broad equity indexes and ity amid stress in the banking sector appeared to weigh
declines in option-implied measures of equity volatility. on financing volumes in some markets. While issuance
That said, equity prices for euro-area banks declined of nonfinancial corporate bonds and leveraged loans
somewhat, on net, and remained significantly lower slowed notably in mid-March amid stress in the banking
than their levels before the onset of banking stresses in sector, issuance normalized over the intermeeting pe-
early March. Market expectations of policy rates and riod as that stress abated later in the month and broader
sovereign yields were little changed in most AFEs but market sentiment rebounded. In April, speculative-
rose notably in the U.K., in part because of higher-than- grade nonfinancial bond issuance was solid, while in-
expected wage and inflation data. The dollar continued vestment-grade nonfinancial bond issuance was sub-
its earlier depreciation as differentials between U.S. and
Page 6 Federal Open Market Committee
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dued, in part due to seasonal factors. Growth in com- C&I and CRE loans on banks’ balance sheets remained
mercial and industrial (C&I) loans on banks’ books was sound as of the end of the fourth quarter of last year.
weak in the first quarter of 2023 relative to its pace in However, in the April SLOOS, banks frequently cited
2022. concerns about a deterioration in the quality of their
loan portfolios as a reason for expecting to tighten
In the April SLOOS, banks reported further tightening
standards over the remainder of the year.
of standards for most loan categories over the past
three months, following widespread tightening in pre- The staff provided an update on its assessment of the
vious quarters. Banks of all sizes expected their lending stability of the financial system. The staff judged that
standards to tighten further for the rest of 2023. The the banking system was sound and resilient despite con-
most cited reason for tightening C&I standards and cerns about profitability at some banks. The staff
terms was a less favorable or more uncertain economic judged that asset valuation pressures remained moder-
outlook. Mid-sized banks—those that have total con- ate. In particular, the staff noted that the equity risk
solidated assets in the range of $50 billion to $250 bil- premium and corporate bond spreads declined over the
lion—tightened C&I standards more than other banks past few months but remained near historical medians.
and additionally reported that a deterioration in their Valuations in both residential and commercial property
current or expected liquidity position was an important markets remained elevated. Rising borrowing costs had
reason for their tightening. Such banks account for a contributed to a moderation of price pressures in hous-
bit over one-fourth of C&I lending. Banks of all sizes ing markets, and year-over-year house price increases
expected to tighten C&I standards further over the re- had decelerated. The staff noted that the CRE sector
mainder of the year, with small and mid-sized banks remained vulnerable to large price declines. This possi-
more widely reporting this expectation. bility seemed particularly salient for office and down-
town retail properties given the shift toward telework in
Although CRE loan growth on banks’ balance sheets
many industries. The staff also noted analysis that
remained robust in the first quarter, the April SLOOS
found that while losses to CRE debt holders could be
indicated that loan standards across all CRE loan cate-
moderate in aggregate, some banks and the CMBS mar-
gories tightened further in the first quarter. The re-
ket could experience stress should prices of these prop-
ported tightening in standards over the first quarter was
erties decline significantly.
particularly widespread for mid-sized banks. Banks also
reported that they expected to tighten CRE standards The staff assessed that vulnerabilities associated with
further over the remainder of the year, with mid-sized household leverage remained at moderate levels. For
banks very broadly reporting this expectation. Mean- nonfinancial businesses, debt relative to nominal GDP
while, commercial mortgage-backed securities (CMBS) declined some but continued to be near a historically
issuance was very slow in February and March, amid high level. The ability of nonfinancial firms to service
higher spreads and volatility as well as tighter lending their debt kept pace with rising debt loads and interest
standards. rates.
Credit remained broadly available in the residential In terms of financial-sector leverage, going into the pe-
mortgage market for high-credit-score borrowers who riod of recent bank stress, banks of all sizes appeared
met standard conforming loan criteria, but credit avail- strong, with substantial loss-absorbing capacity as
ability for households with lower credit scores remained measured by regulatory capital ratios well above levels
tight. In the April SLOOS, the net percentages of that prevailed before the Great Recession. However,
banks reporting tighter standards for all consumer loan the ratio of tangible common equity to total tangible as-
categories during the first quarter were elevated relative sets at banks—excluding global systemically important
to their historical range, and respondents expected that banks—had fallen sharply in recent quarters, partly be-
standards would continue to tighten over the remainder cause of a substantial drop in the value of securities held
of 2023. Even so, consumer loans grew at a robust pace in their portfolios. The majority of the banking system
in the first quarter, with a continued strong expansion had been able to effectively manage this interest rate
in revolving credit balances. risk exposure. However, the failure of three banks re-
sulting from poor interest rate risk and liquidity risk
Overall, the credit quality of most businesses and
management had put stress on some additional banks.
households remained solid but deteriorated somewhat
For the nonbank sector, leverage at large hedge funds
for businesses with lower credit ratings and for house-
remained somewhat elevated in the third quarter of
holds with lower credit scores. The credit quality of
 Minutes of the Meeting of May 2–3, 2023 Page 7
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2022, and more recent data from the Senior Credit Of- core inflation was forecast to slow through next year
ficer Opinion Survey on Dealer Financing Terms sug- but remain moderately above 2 percent. With expected
gested this fact had not changed. declines in consumer energy prices and a substantial
moderation in food price inflation, total inflation was
With regard to vulnerabilities associated with funding
projected to run below core inflation this year and next.
risks, the staff assessed that although funding strains
In 2025, both total and core PCE price inflation were
had been notable for some banks, such strains remained
expected to be at about 2 percent.
low for the banking system as a whole, especially in light
of official interventions by the Federal Reserve, the The staff continued to judge that uncertainty around
Federal Deposit Insurance Corporation, and the U.S. the baseline projection was considerable and still
Department of Treasury to support bank depositors. viewed risks as being determined importantly by the im-
Outflows of funds from bank deposits in mid-March, plications for macroeconomic conditions of develop-
which were concentrated at a limited number of banks, ments in the banking sector. If banking-sector stress
had slowed. were to abate more quickly or have less of an effect on
macroeconomic conditions than assumed in the base-
Staff Economic Outlook
line, then the risks would be tilted to the upside for eco-
The economic forecast prepared by the staff for the
nomic activity and inflation, a scenario that the staff
May FOMC meeting continued to assume that the ef-
viewed as only a little less likely than the baseline. If
fects of the expected further tightening in bank credit
banking and financial conditions and their effects on
conditions, amid already tight financial conditions,
macroeconomic conditions were to deteriorate more
would lead to a mild recession starting later this year,
than assumed in the baseline, then the risks around the
followed by a moderately paced recovery. Real GDP
baseline would be skewed to the downside for eco-
was projected to decelerate over the next two quarters
nomic activity and inflation. On balance, the staff saw
before declining modestly in both the fourth quarter of
the risks around the baseline inflation forecast as tilted
this year and the first quarter of next year. Real GDP
to the upside, as an upside economic scenario with
growth over 2024 and 2025 was projected to be below
higher inflation appeared more likely than a downside
the staff’s estimate of potential output growth. The un-
scenario with lower inflation, and because inflation
employment rate was forecast to increase this year, to
could continue to be more persistent than expected and
peak next year, and then to start declining gradually in
inflation expectations could become unanchored after
2025. Resource utilization in both product and labor
a long period of elevated inflation.
markets was forecast to loosen, with the level of real
output moving below the staff’s estimate of potential Participants’ Views on Current Conditions and the
output in early 2024 and the unemployment rate rising Economic Outlook
above the staff’s estimate of its natural rate at that time. In their discussion of current economic conditions, par-
ticipants noted that economic activity had expanded at
The staff’s core inflation forecast was revised up a little
a modest pace in the first quarter. Nonetheless, job
relative to the previous projection. Recent data for core
gains had been robust in recent months, and the unem-
PCE goods prices and the ECI measure of wage
ployment rate had remained low. Inflation remained
growth—the latter of which importantly influences the
elevated. Participants agreed that the U.S. banking sys-
staff’s projection of core nonhousing services infla-
tem was sound and resilient. They commented that
tion—came in above expectations, and the staff judged
tighter credit conditions for households and businesses
that supply–demand imbalances in both goods markets
were likely to weigh on economic activity, hiring, and
and labor markets were easing a bit more slowly than
inflation. However, participants agreed that the extent
anticipated. On a four-quarter change basis, total PCE
of these effects remained uncertain. Against this back-
price inflation was projected to be 3.1 percent this year,
ground, participants concurred that they remained
with core inflation at 3.8 percent. Core goods inflation
highly attentive to inflation risks.
was projected to move down further this year and then
remain subdued, housing services inflation was ex- In assessing the economic outlook, participants noted
pected to have about peaked in the first quarter and to that the growth rate of real GDP in the first quarter of
move down over the rest of the year, and core nonhous- this year was modest despite a pickup in consumer
ing services inflation was forecast to slow gradually as spending, as inventory investment—a volatile cate-
nominal wage growth eased further. Reflecting the pro- gory—declined substantially. Participants generally ex-
jected effects of less tightness in resource utilization, pected real GDP to grow at a pace below its longer-run
Page 8 Federal Open Market Committee
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trend rate in 2023, reflecting the effects of restrictive conditions over the past year. Participants remarked
financial conditions. Participants assessed that the cu- that higher interest rates would continue to restrain in-
mulative tightening of monetary policy over the past terest-sensitive expenditures by households, such as
year had contributed significantly to more restrictive fi- those on housing and durable goods. Participants also
nancial conditions. They also judged that banking-sec- noted that the rise in uncertainty associated with recent
tor stress would likely weigh further on economic activ- developments in the banking sector could weigh on
ity, but the extent to which that would be the case re- consumer sentiment and spending. However, several
mained highly uncertain. With inflation well above the participants observed that high-frequency measures of
Committee’s longer-run 2 percent objective, and core consumer sentiment had not yet shown significant
inflation showing only some signs of moderation, par- changes following the banking-sector developments. A
ticipants expected that a period of below-trend growth few participants remarked that there had been some on-
in real GDP and some softening in labor market condi- going reduction in consumers’ discretionary expendi-
tions would be needed to bring aggregate supply and tures in the face of elevated inflation and higher bor-
aggregate demand into better balance and reduce infla- rowing rates, especially among lower- and middle-in-
tionary pressures over time. come households; some of those declines were report-
edly driven by shifts in purchases toward lower-cost op-
Participants generally noted that the actions taken by
tions.
the Federal Reserve and other government agencies in
response to developments in the banking sector had Regarding the business sector, participants observed
been effective in largely reducing stress. They noted that growth in business fixed investment was subdued
that conditions in the banking sector had broadly im- in the first quarter, reflecting relatively high borrowing
proved since early March, with the initial deposit out- costs, weak growth of business-sector output, and busi-
flows experienced by some regional and smaller banks nesses’ increasing concerns about the general economic
moderating substantially over subsequent weeks. Many outlook. Participants expected the tightening of bank
participants commented that the recent developments lending standards to weigh further on firms’ capital ex-
in the banking sector had contributed to some tighten- penditures. Several participants noted that, based on
ing of lending standards beyond that which had oc- reports from their District contacts, concerns related to
curred during previous quarters, especially among small banking-sector stress could add more uncertainty to an
and mid-sized banks. Some participants noted that already soft economic outlook, increasing firms’ cau-
small businesses tend to rely on small and mid-sized tion, especially at smaller and mid-sized firms that rely
banks as primary sources of credit and therefore may heavily on bank credit to finance their operations.
disproportionally bear the effects of tighter lending However, some other participants mentioned that de-
conditions. Some participants mentioned that access to velopments in the banking sector appeared to have had
credit had not yet appeared to have declined signifi- only a modest effect so far on credit availability for
cantly since the recent onset of stress in the banking firms.
sector. Participants judged that stress in the banking
Participants noted that the labor market remained very
sector would, in coming quarters, likely induce banks to
tight, with robust payroll gains in March and an unem-
tighten lending standards by more than they would have
ployment rate near historically low levels. Nevertheless,
in response to higher interest rates alone. However,
they noted some signs that the imbalance of supply and
participants generally noted that it was too early to as-
demand in the labor market was easing, with prime-age
sess with confidence the magnitude and persistence of
labor force participation returning to its pre-pandemic
these effects on economic activity.
level and further reductions in the rates of job openings
In their discussion of the household sector, participants and quits. In addition, some participants noted that
noted that consumer spending showed strength in the their District contacts reported less difficulty in hiring,
first quarter, supported by gains in personal disposable lower turnover rates, and some layoffs. Participants an-
income. They also remarked that the quarterly strength ticipated that employment growth would likely slow
was driven mainly by very strong spending growth in further, reflecting a moderation in aggregate demand
January, while real spending fell modestly over February coming partly from tighter credit conditions. Partici-
and March. Consistent with that slowing, participants pants remarked that although nominal wage growth ap-
anticipated that consumer spending would likely grow peared to be slowing gradually, it was still running at a
at a subdued rate over the remainder of 2023, reflecting pace that, given current estimates of trend productivity
in large part the effects of the tightening in financial growth, was well above what would be consistent over
 Minutes of the Meeting of May 2–3, 2023 Page 9
_____________________________________________________________________________________________

the longer run with the Committee’s 2 percent inflation be raised in a timely manner, threatening significant dis-
objective. Participants generally anticipated that under ruptions to the financial system and tighter financial
appropriate monetary policy, imbalances in the labor conditions that weaken the economy. Regarding risks
market would gradually diminish, easing pressures on to inflation, participants cited the possibility that price
wages and prices. pressures could prove more persistent than anticipated
because of, for example, stronger-than-expected con-
Participants agreed that inflation was unacceptably
sumer spending and a tight labor market, especially if
high. They commented that data through March indi-
the effect of bank stress on economic activity proved
cated that declines in inflation, particularly for measures
modest. However, a few participants cited the possibil-
of core inflation, had been slower than they had ex-
ity that further tightening of credit conditions could
pected. Participants observed that although core goods
slow household spending and reduce business invest-
inflation had moderated since the middle of last year, it
ment and hiring, all of which would support the ongo-
had decelerated less rapidly than expected in recent
ing rebalancing of supply and demand in product and
months, despite reports from several business contacts
labor markets and reduce inflation pressures.
of supply chain constraints continuing to ease. Addi-
tionally, participants emphasized that core nonhousing In their discussion of financial stability, various partici-
services inflation had shown few signs of slowing in the pants commented on recent developments in the bank-
past few months. Some participants remarked that a ing sector. These participants noted that the banking
further easing in labor market conditions would be system was sound and resilient, that actions taken by
needed to help bring down inflation in this component. the Federal Reserve in coordination with other govern-
Regarding housing services inflation, participants ob- ment agencies had served to calm conditions in that sec-
served that soft readings on rents for leases signed by tor, but that stresses remained. A number of partici-
new tenants were starting to feed into measured infla- pants noted that the banking sector was well capitalized
tion. They expected that this process would continue overall, and that the most significant issues in the bank-
and would help lead to a decline in housing services in- ing system appeared to be limited to a small number of
flation over this year. In discussing the likely effects on banks with poor risk-management practices or substan-
inflation of recent banking-sector developments, sev- tial exposure to specific vulnerabilities. These vulnera-
eral participants remarked that tighter credit conditions bilities included significant unrealized losses on assets
may not put much downward pressure on inflation in resulting from rising interest rates, heavy reliance on un-
part because lower credit availability could restrain ag- insured deposits, or strained profitability amid higher
gregate supply as well as aggregate demand. Several funding costs. Some participants additionally noted
participants noted that longer-term measures of infla- that, because of weak fundamentals for CRE such as
tion expectations from surveys of households and busi- high vacancy rates in the office segment, high exposure
nesses remained well anchored. Participants empha- to such assets was a vulnerability for some banks. Par-
sized that with appropriate firming of monetary policy, ticipants also commented on the susceptibility of some
well-anchored longer-term inflation expectations would nonbank financial institutions to runs or instability.
support a return of inflation to the Committee’s 2 per- These included money market funds, which had re-
cent longer-run goal. cently experienced large cash inflows; hedge funds,
which tend to use substantial leverage and may hold
Participants noted that risks associated with the recent
concentrated positions in some assets with low or zero
banking stress had led them to raise their already high
margin; thinly capitalized nonbank mortgage servicers;
assessment of uncertainty around their economic out-
and digital asset entities. Many participants mentioned
looks. Participants judged that risks to the outlook for
that it is essential that the debt limit be raised in a timely
economic activity were weighted to the downside, al-
manner to avoid the risk of severely adverse disloca-
though a few noted the risks were two sided. In dis-
tions in the financial system and the broader economy.
cussing sources of downside risk to economic activity,
A few participants noted the importance of orderly
participants referenced the possibility that the cumula-
functioning of the market for U.S. Treasury securities
tive tightening of monetary policy could affect eco-
or stressed the importance of the appropriate authori-
nomic activity more than expected, and that further
ties continuing to address issues related to the resilience
strains in the banking sector could prove more substan-
of the market. A number of participants emphasized
tial than anticipated. Some participants also noted con-
that the Federal Reserve should maintain readiness to
cerns that the statutory limit on federal debt might not
use its liquidity tools, as well as its microprudential and
Page 10 Federal Open Market Committee
_____________________________________________________________________________________________

macroprudential regulatory and supervisory tools, to Participants also discussed several risk-management
mitigate future financial stability risks. considerations that could bear on future policy deci-
sions. A few assessed that there were upside risks to
In their consideration of appropriate monetary policy
economic growth. However, almost all participants
actions at this meeting, participants concurred that in-
commented that downside risks to growth and upside
flation remained substantially elevated relative to the
risks to unemployment had increased because of the
Committee’s longer-run goal of 2 percent. Economic
possibility that banking-sector developments could lead
activity had expanded at a modest pace in the first quar-
to further tightening of credit conditions and weigh on
ter. The labor market continued to be tight, with robust
economic activity. Almost all participants stated that,
job gains in recent months, and the unemployment rate
with inflation still well above the Committee’s longer-
remained low. Participants also noted that recent de-
run goal and the labor market remaining tight, upside
velopments in the banking sector would likely result in
risks to the inflation outlook remained a key factor
tighter credit conditions for households and businesses,
shaping the policy outlook. A few participants noted
which would weigh on economic activity, hiring, and
that they also saw some downside risks to inflation.
inflation. However, the extent of these effects re-
mained uncertain. Against this backdrop, all partici- Taking into account these various considerations, par-
pants agreed that it was appropriate to raise the target ticipants discussed their views on the extent to which
range for the federal funds rate 25 basis points to 5 per- further policy firming after the current meeting may be
cent to 5¼ percent. All participants agreed that it was appropriate. Participants generally expressed uncer-
also appropriate to continue the process of reducing the tainty about how much more policy tightening may be
Federal Reserve’s securities holdings, as described in its appropriate. Many participants focused on the need to
previously announced Plans for Reducing the Size of retain optionality after this meeting. Some participants
the Federal Reserve’s Balance Sheet. commented that, based on their expectations that pro-
gress in returning inflation to 2 percent could continue
In discussing the policy outlook, participants generally
to be unacceptably slow, additional policy firming
agreed that in light of the lagged effects of cumulative
would likely be warranted at future meetings. Several
tightening in monetary policy and the potential effects
participants noted that if the economy evolved along
on the economy of a further tightening in credit condi-
the lines of their current outlooks, then further policy
tions, the extent to which additional increases in the tar-
firming after this meeting may not be necessary. In
get range may be appropriate after this meeting had be-
light of the prominent risks to the Committee’s objec-
come less certain. Participants agreed that it would be
tives with respect to both maximum employment and
important to closely monitor incoming information and
price stability, participants generally noted the im-
assess the implications for monetary policy. In deter-
portance of closely monitoring incoming information
mining the extent to which additional policy firming
and its implications for the economic outlook.
may be appropriate to return inflation to 2 percent over
time, various participants noted specific factors that Participants discussed the importance and various as-
should bear on future decisions on policy actions. One pects of clearly explaining monetary policy actions and
such factor was the degree and timing with which cu- strategy. All participants reaffirmed their strong com-
mulative policy tightening restrained economic activity mitment to returning inflation to the Committee’s
and reduced inflation, with some participants com- 2 percent objective over time and remained highly at-
menting that they saw evidence that the past years’ tentive to inflation risks. A few participants com-
tightening was beginning to have its intended effect. mented that recent monetary policy actions and com-
Another factor was the degree to which tighter credit munications had helped keep inflation expectations well
conditions for households and businesses resulting anchored, which they saw as important for the attain-
from events in the banking sector would weigh on ac- ment of the Committee’s goals. Participants empha-
tivity and reduce inflation, which participants agreed sized the importance of communicating to the public
was very uncertain. Additional factors included the the data-dependent approach of policymakers, and the
progress toward returning inflation to the Committee’s vast majority of participants commented that the ad-
longer-run goal of 2 percent, and the pace at which la- justed language in the postmeeting statement was help-
bor market conditions softened and economic growth ful in that respect. Some participants stressed that it
slowed. was crucial to communicate that the language in the
postmeeting statement should not be interpreted as sig-
naling either that decreases in the target range are likely
 Minutes of the Meeting of May 2–3, 2023 Page 11
_____________________________________________________________________________________________

this year or that further increases in the target range had System Open Market Account in accordance with the
been ruled out. following domestic policy directive, for release at
2:00 p.m.:
Committee Policy Actions
In their discussion of monetary policy for this meeting, “Effective May 4, 2023, the Federal Open
members agreed that economic activity had expanded Market Committee directs the Desk to:
at a modest pace in the first quarter. They also con-
• Undertake open market operations as nec-
curred that job gains had been robust in recent months,
essary to maintain the federal funds rate in
and the unemployment rate had remained low. Infla-
a target range of 5 to 5¼ percent.
tion had remained elevated.
Members concurred that the U.S. banking system was • Conduct standing overnight repurchase
sound and resilient. They also agreed that tighter credit agreement operations with a minimum bid
conditions for households and businesses were likely to rate of 5.25 percent and with an aggregate
weigh on economic activity, hiring, and inflation, but operation limit of $500 billion.
that the extent of these effects was uncertain. Members • Conduct standing overnight reverse repur-
also concurred that they remained highly attentive to in- chase agreement operations at an offering
flation risks. rate of 5.05 percent and with a per-coun-
Members agreed that the Committee seeks to achieve terparty limit of $160 billion per day.
maximum employment and inflation at the rate of • Roll over at auction the amount of princi-
2 percent over the longer run. In support of these pal payments from the Federal Reserve’s
goals, the members agreed to raise the target range for holdings of Treasury securities maturing in
the federal funds rate to 5 to 5¼ percent. Members each calendar month that exceeds a cap of
agreed to closely monitor incoming information and as- $60 billion per month. Redeem Treasury
sess the implications for monetary policy. In determin- coupon securities up to this monthly cap
ing the extent to which additional policy firming may be and Treasury bills to the extent that cou-
appropriate to return inflation to 2 percent over time, pon principal payments are less than the
members concurred that they will take into account the monthly cap.
cumulative tightening of monetary policy, the lags with
which monetary policy affects economic activity and in- • Reinvest into agency mortgage-backed se-
flation, and economic and financial developments. In curities (MBS) the amount of principal
addition, members agreed that they will continue reduc- payments from the Federal Reserve’s hold-
ing the Federal Reserve’s holdings of Treasury securities ings of agency debt and agency MBS re-
and agency debt and agency mortgage-backed securi- ceived in each calendar month that exceeds
ties, as described in its previously announced plans. All a cap of $35 billion per month.
members affirmed that they are strongly committed to • Allow modest deviations from stated
returning inflation to their 2 percent objective. amounts for reinvestments, if needed for
Members agreed that, in assessing the appropriate operational reasons.
stance of monetary policy, they would continue to mon- • Engage in dollar roll and coupon swap
itor the implications of incoming information for the transactions as necessary to facilitate settle-
economic outlook. They would be prepared to adjust ment of the Federal Reserve’s agency MBS
the stance of monetary policy as appropriate if risks transactions.”
emerge that could impede the attainment of the Com-
mittee’s goals. Members also agreed that their assess- The vote also encompassed approval of the statement
ments will take into account a wide range of infor- below for release at 2:00 p.m.:
mation, including readings on labor market conditions, “Economic activity expanded at a modest pace
inflation pressures and inflation expectations, and fi- in the first quarter. Job gains have been robust
nancial and international developments. in recent months, and the unemployment rate
At the conclusion of the discussion, the Committee has remained low. Inflation remains elevated.
voted to direct the Federal Reserve Bank of New York, The U.S. banking system is sound and resilient.
until instructed otherwise, to execute transactions in the Tighter credit conditions for households and
Page 12 Federal Open Market Committee
_____________________________________________________________________________________________

businesses are likely to weigh on economic ac- information, including readings on labor mar-
tivity, hiring, and inflation. The extent of these ket conditions, inflation pressures and inflation
effects remains uncertain. The Committee re- expectations, and financial and international
mains highly attentive to inflation risks. developments.”
The Committee seeks to achieve maximum Voting for this action: Jerome H. Powell, John C.
employment and inflation at the rate of 2 per- Williams, Michael S. Barr, Michelle W. Bowman, Lisa
cent over the longer run. In support of these D. Cook, Austan D. Goolsbee, Patrick Harker, Philip
goals, the Committee decided to raise the target N. Jefferson, Neel Kashkari, Lorie K. Logan, and
range for the federal funds rate to 5 to 5¼ per- Christopher J. Waller.
cent. The Committee will closely monitor in-
Voting against this action: None.
coming information and assess the implica-
tions for monetary policy. In determining the To support the Committee’s decision to raise the target
extent to which additional policy firming may range for the federal funds rate, the Board of Gover-
be appropriate to return inflation to 2 percent nors of the Federal Reserve System voted unanimously
over time, the Committee will take into ac- to raise the interest rate paid on reserve balances to
count the cumulative tightening of monetary 5.15 percent, effective May 4, 2023. The Board of
policy, the lags with which monetary policy af- Governors of the Federal Reserve System voted unani-
fects economic activity and inflation, and eco- mously to approve a ¼ percentage point increase in the
nomic and financial developments. In addi- primary credit rate to 5.25 percent, effective
tion, the Committee will continue reducing its May 4, 2023. 4
holdings of Treasury securities and agency debt It was agreed that the next meeting of the Committee
and agency mortgage-backed securities, as de-
would be held on Tuesday–Wednesday, June 13–
scribed in its previously announced plans. The
14, 2023. The meeting adjourned at 10:00 a.m. on
Committee is strongly committed to returning
May 3, 2023.
inflation to its 2 percent objective.
Notation Vote
In assessing the appropriate stance of mone-
By notation vote completed on April 11, 2023, the
tary policy, the Committee will continue to
Committee unanimously approved the minutes of the
monitor the implications of incoming infor-
Committee meeting held on March 21–22, 2023.
mation for the economic outlook. The Com-
mittee would be prepared to adjust the stance
of monetary policy as appropriate if risks
emerge that could impede the attainment of the
Committee’s goals. The Committee’s assess- _______________________
ments will take into account a wide range of Joshua Gallin
Secretary

4 In taking this action, the Board approved requests to estab- Reserve Bank, effective on the later of May 4, 2023, or the
lish that rate submitted by the Boards of Directors of the date such Reserve Bank informs the Secretary of the Board
Federal Reserve Banks of Boston, Philadelphia, Cleveland, of such a request. (Secretary’s note: Subsequently, the Fed-
Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas eral Reserve Bank of New York was informed of the Board’s
City, Dallas, and San Francisco. The vote also encompassed approval of their establishment of a primary credit rate of
approval by the Board of Governors of the establishment of 5.25 percent, effective May 4, 2023.)
a 5.25 percent primary credit rate by the remaining Federal