2 SUMMARY remained widely available, though credit The FOMC expects that, with further gradual was still difficult to access in credit card and djustments in the stance of monetary policy, mortgage markets for borrowers with low economic activity will expand at a moderate credit scores or harder-to-document incomes pace and labor market conditions will remain Longer-term nominal Treasury yields and strong. Inflation on a 12-month basis is mortgage rates have moved up on net. The expected to move up this year and to stabilize dollar depreciated, on average, against the around the Committee's 2 percent objective currencies of our trading partners. In foreign over the next few years. The federal funds financial markets, equity prices generally rate is likely to remain, for some time, below increased in the second half of 2017. and most levels that are expected to prevail in the longer of those indexes remain higher, on net, despite run. Consistent with this outlook. in the most recent declines. Most longer-term yields rose recent Summary of Economic Projections noticeably. (SEP), which was compiled at the time of the December FOMC meeting, the median of Financial stability. vulnerabilities in the U.S participants' assessments for the appropriate financial system are judged to be moderate on level of the federal funds rate through the end balance Valuation pressures continue to be of 2019 remains below the median projection elevated across a range of asset classes eve for its longer-run level. (The December SEP is after taking into account the current level presented in Part 3 of this report. However of Treasury yields and the expectation that as the Committee has continued to emphasize the reduction in corporate tax rates should the actual path of the federal funds rate will generate an increase in after-tax earnings depend on the economic outlook as informed Leverage in the nonfinancial business sector by incoming data. In particular, with inflation has remained high, and net issuance of risky having persistently run below the 2 perce debt has climbed in recent months. In contrast longer-run objective, the Committee will leverage in the household sector has remained carefully monitor actual and expected inflation at a relatively low level, and household debt developments relative to its symmetric in recent years has expanded only about in infation goal. line with nominal income. moreover US banks are well capitalized and have significant Balance sheet policy. In the second half of liquidity buffers 2017. the Committee initiated the balance sheet normalization program that is described Monetary Policy the addendum to the policy Principles and Plans the Committee issued in Interest rate policy. The FOMC continued June.Specifically, since October, the Federal to gradually increase the target range for the Reserve has been gradually reducing its federal funds rate. After having raised it twice holdings of Treasury and agency securities the first half of 2017. the Committee raised by decreasing the reinvestment of principal he target range for the federal funds rate payments it receives from these securities. again in December, bringing it to the current range of 1 /4 to 1/ percent. The decision elan TOpICS to increase the target range for the federal funds rate reflected the solid performance of How tight is the labor market Although he economy. Even with this rate increase, there is no way to know with precision, the the stance of monetary policy remains accommodative, thereby supporting strong 1. The June addendum is available on the boards labor market conditions and a sustained return websiteathttps://www.federalreservegov/monetarypolicy/ to 2 percent inflation fles/FOMC_ Policy Normalization. 20170613. pdf.2 Summary remained widely available, though credit was still difficult to access in credit card and mortgage markets for borrowers with low credit scores or harder-to-document incomes. Longer-term nominal Treasury yields and mortgage rates have moved up on net. The dollar depreciated, on average, against the currencies of our trading partners. In foreign financial markets, equity prices generally increased in the second half of 2017, and most of those indexes remain higher, on net, despite recent declines. Most longer-term yields rose noticeably. Financial stability. Vulnerabilities in the U.S. financial system are judged to be moderate on balance. Valuation pressures continue to be elevated across a range of asset classes even after taking into account the current level of Treasury yields and the expectation that the reduction in corporate tax rates should generate an increase in after-tax earnings. Leverage in the nonfinancial business sector has remained high, and net issuance of risky debt has climbed in recent months. In contrast, leverage in the household sector has remained at a relatively low level, and household debt in recent years has expanded only about in line with nominal income. Moreover, U.S. banks are well capitalized and have significant liquidity buffers. Monetary Policy Interest rate policy. The FOMC continued to gradually increase the target range for the federal funds rate. After having raised it twice in the first half of 2017, the Committee raised the target range for the federal funds rate again in December, bringing it to the current range of 1¼ to 1½ percent. The decision to increase the target range for the federal funds rate reflected the solid performance of the economy. Even with this rate increase, the stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation. The FOMC expects that, with further gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will remain strong. Inflation on a 12-month basis is expected to move up this year and to stabilize around the Committee’s 2 percent objective over the next few years. The federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. Consistent with this outlook, in the most recent Summary of Economic Projections (SEP), which was compiled at the time of the December FOMC meeting, the median of participants’ assessments for the appropriate level of the federal funds rate through the end of 2019 remains below the median projection for its longer-run level. (The December SEP is presented in Part 3 of this report.) However, as the Committee has continued to emphasize, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data. In particular, with inflation having persistently run below the 2 percent longer-run objective, the Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. Balance sheet policy. In the second half of 2017, the Committee initiated the balance sheet normalization program that is described in the Addendum to the Policy Normalization Principles and Plans the Committee issued in June.1 Specifically, since October, the Federal Reserve has been gradually reducing its holdings of Treasury and agency securities by decreasing the reinvestment of principal payments it receives from these securities. Special Topics How tight is the labor market? Although there is no way to know with precision, the 1. The June addendum is available on the Board’s website at https://www.federalreserve.gov/monetarypolicy/ files/FOMC_PolicyNormalization.20170613.pdf