Board of Governors of the Federal Reserve System

Minutes of the Federal Open Market Committee

March 19-20, 2013

In conjunction with the March 19-20, 2013, Federal Open Market Committee (FOMC) meeting, meeting participants--the 7 members of the Board of Governors and the 12 presidents of the Federal Reserve Banks, all of whom participate in the deliberations of the FOMC--submitted their assessments of real output growth, the unemployment rate, inflation, and the target federal funds rate for each year from 2013 through 2015 and over the longer run. Each participant's assessment was based on information available at the time of the meeting plus his or her judgment of appropriate monetary policy and assumptions about the factors likely to affect economic outcomes. The longer-run projections represent each participant's judgment of the value to which each variable would be expected to converge, over time, under appropriate monetary policy and in the absence of further shocks to the economy. "Appropriate monetary policy" is defined as the future path of policy that each participant deems most likely to foster outcomes for economic activity and inflation that best satisfy his or her individual interpretation of the Federal Reserve's objectives of maximum employment and stable prices.

Overall, the assessments submitted in March indicated that FOMC participants projected that, under appropriate monetary policy, the pace of economic recovery would gradually pick up over the 2013-15 period and inflation would remain subdued (table 1 and figure 1). Participants anticipated that the growth rate of real gross domestic product (GDP) would increase somewhat over the forecast period to a pace that generally exceeded their estimates of the longer-run sustainable rate of growth. Participants expected the unemployment rate to decline gradually through 2015. Nearly all participants projected that inflation, as measured by the annual change in the price index for personal consumption expenditures (PCE), would remain somewhat below the longer-run goal in 2013 and then rise toward 2 percent over the forecast period.

Table 1. Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents, March 2013

Percent

As shown in figure 2, most participants judged that highly accommodative monetary policy was likely to be warranted over the next few years to support stable prices and continued progress toward maximum employment. In particular, 14 participants thought that it would be appropriate for the first increase in the target federal funds rate to occur during 2015 or later. Most participants also judged that it would be appropriate to continue purchasing agency mortgage-backed securities (MBS) and longer-term Treasury securities into the second half of 2013.

Figure 1. Central tendencies and ranges of economic projections, 2013-15 and over the longer run*

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Many participants continued to judge the uncertainty associated with the outlook for real activity and the unemployment rate to be unusually high compared with the norm of the past 20 years. In contrast to December, however, more participants viewed the risks to those outlooks as broadly balanced than saw the risks as skewed toward adverse outcomes. A majority of participants indicated that the uncertainty surrounding their projections for PCE inflation was broadly similar to historical norms, and nearly all considered the risks to inflation to be either broadly balanced or weighted to the downside.

Figure 2. Overview of FOMC participants' assessments of appropriate monetary policy*

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The Outlook for Economic Activity
Participants projected that, conditional on their individual assumptions about appropriate monetary policy, the economy would grow at a somewhat faster pace in 2013 than it had in 2012. They also generally judged that growth would strengthen further in 2014 and 2015, in most cases to a rate above what participants saw as the longer-run rate of output growth. Most participants noted that the high degree of monetary policy accommodation assumed in their projections would help promote the economic recovery over the forecast period and expected that continued improvement in the housing sector would add more broadly to private demand; however, they also judged that increased fiscal restraint in the United States would hold back the pace of economic expansion, especially in 2013, and pointed to the situation in Europe as an ongoing downside risk.

The central tendency of participants' projections for the change in real GDP was 2.3 to 2.8 percent for 2013, 2.9 to 3.4 percent for 2014, and 2.9 to 3.7 percent for 2015; these projections were little changed, to slightly below, the ones in December. When participants compared their own March forecast with the one they made in December, many mentioned that stronger-than-anticipated incoming data on private economic activity had nearly offset the effects of greater-than-expected fiscal restraint likely to be put in place this year. The central tendency for the longer-run rate of increase of real GDP was 2.3 to 2.5 percent, unchanged from December.

Participants anticipated a gradual decline in the unemployment rate over the forecast period; even so, they generally thought that the unemployment rate at the end of 2015 would remain well above their individual estimates of its longer-run normal level. The central tendencies of participants' forecasts for the unemployment rate were 7.3 to 7.5 percent at the end of 2013 and 6.7 to 7.0 percent at the end of 2014. These projections are slightly lower than in December, with a few participants attributing their revisions to the more favorable data from the labor market or small changes in their estimated rate of potential output growth. However, the central tendency of the forecasts for the end of 2015, at 6.0 to 6.5 percent, changed little. The central tendency of participants' estimates of the longer-run normal rate of unemployment that would prevail under appropriate monetary policy and in the absence of further shocks to the economy was 5.2 to 6.0 percent, the same as in December. Most participants projected that the unemployment rate would converge to their estimates of its longer-run normal rate in five or six years, while some judged that less time would be needed.

As shown in figures 3.A and 3.B, participants' views regarding the likely outcomes for real GDP growth and the unemployment rate over the next three years and over the longer run remained diverse, reflecting their individual assessments of appropriate monetary policy and its economic effects, the likely rate of improvement in the housing sector and domestic spending more generally, the domestic implications of foreign economic developments, the extent of structural dislocations to the labor market and the economy's productive potential, and a number of other factors. The dispersion of participants' projections of real GDP growth was little changed relative to December, with a small reduction in the upper end of the distribution in all three years of the forecast period and a slight overall downward shift in 2014. The distributions of the unemployment rate projections in each year narrowed a few tenths, reflecting decreases in the high ends of the ranges. The dispersion of estimates for the longer-run rate of output growth stayed fairly narrow, with all but four within the central tendency of 2.3 to 2.5 percent; two participants, however, dropped their estimates to below 2.2 percent. The range of participants' estimates of the longer-run rate of unemployment, at 5.0 to 6.0 percent, was unchanged relative to December.

Figure 3.A. Distribution of participants' projections for the change in real GDP, 2013-15 and over the longer run*

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The Outlook for Inflation
Participants' broad outlook for inflation under appropriate monetary policy suggested that both headline and core inflation would remain subdued over the 2013-15 period, with nearly all participants judging that inflation would be equal to or below the FOMC's longer-run objective of 2 percent in each year. Specifically, the central tendency of participants' projections for overall inflation in 2013, as measured by the growth in the PCE price index, narrowed to 1.3 to 1.7 percent, while the central tendencies for 2014 and 2015 were unchanged at 1.5 to 2.0 percent and 1.7 to 2.0 percent, respectively. The central tendency of the forecasts for core inflation in 2013 also narrowed, to 1.5 to 1.6 percent, but, unlike overall inflation, edged up slightly in 2014 and 2015; nevertheless, the central tendencies remained near or below 2 percent in both years. In discussing factors likely to keep inflation near the Committee's inflation objective of 2 percent, several participants cited the role of stable inflation expectations and existing resource slack that was expected to diminish only gradually.

Figure 3.B. Distribution of participants' projections for the unemployment rate, 2013-15 and over the longer run*

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Figures 3.C and 3.D provide information on the diversity of participants' views about the outlook for inflation. The ranges of participants' projections for overall inflation in 2013 and 2014 were almost unchanged compared with the corresponding distributions for December. The ranges for core inflation were also little changed, but, in 2013, many of the projections shifted toward the lower end of the range. The distributions for core and overall inflation in 2015 remained concentrated near the Committee's longer-run objective, and all participants continued to project that overall inflation would converge to the 2 percent goal over the longer run.

Figure 3.C. Distribution of participants' projections for PCE inflation, 2013-15 and over the longer run*

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Appropriate Monetary Policy
As indicated in figure 2, most participants judged that exceptionally low levels of the federal funds rate would remain appropriate for a couple more years. In particular, 13 participants thought that the first increase in the target federal funds rate would not be warranted until sometime in 2015, and one judged that policy firming would likely not be appropriate until 2016 (upper panel). Five participants judged that an earlier increase in the federal funds rate, in 2013 or 2014, would be most consistent with the Committee's statutory mandate.

All of the participants who judged that raising the federal funds rate target would first be appropriate in 2015 also projected that the unemployment rate would first decline below 6-1/2 percent during that year and that inflation would remain near or below 2 percent. In addition, those participants, as well as the participant who saw liftoff in 2016 as appropriate, also projected that a sizable gap between the unemployment rate and the longer-run normal level of the unemployment rate would persist until 2015 or later. The majority of the five participants who judged that policy firming should begin in 2013 or 2014 indicated that the Committee would need to act relatively soon in order to keep inflation near the FOMC's longer-run objective of 2 percent and to prevent a rise in inflation expectations.

Figure 3.D. Distribution of participants' projections for core PCE inflation, 2013-15*

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Figure 3.E provides the distribution of participants' judgments regarding the appropriate level of the target federal funds rate at the end of each calendar year from 2013 to 2015 and over the longer run. As previously noted, most participants judged that economic conditions would warrant maintaining the current low level of the federal funds rate until 2015. Among the five participants who saw the federal funds rate leaving the effective lower bound earlier, their projections for the federal funds rate at the end of 2014 range from 1/2 to 2-3/4 percent. Views on the appropriate level of the federal funds rate at the end of 2015 varied, with 15 participants seeing the appropriate level of the federal funds rate as 1-1/4 percent or lower and the others seeing the appropriate level as 2 percent or higher. On balance, participants' projections for the appropriate federal funds rate at the end of 2015 shifted down a bit from those in their December forecasts.

Nearly all participants saw the appropriate target for the federal funds rate at the end of 2015 as still well below their assessment of its expected longer-run value. Estimates of the longer-run target federal funds rate ranged from 3-1/4 to 4-1/2 percent, reflecting the Committee's inflation objective of 2 percent and participants' individual judgments about the longer-run level of the real federal funds rate.

Participants also described their views regarding the appropriate path of the Federal Reserve's balance sheet. All but a few participants thought that, given the current economic outlook, it would be appropriate for the Committee to continue purchasing MBS and longer-term Treasury securities at about the current pace at least through midyear. A number of these participants anticipated that the pace would be tapered down around midyear. A few others thought that it would be appropriate for the Committee to purchase securities at the current pace through the third quarter of 2013 before beginning to adjust the pace and a few saw the current rate of purchases continuing at least through the end of 2013, with two participants specifying that some purchases would likely extend into 2014. Several participants emphasized that the asset purchase program was effective in supporting the economic expansion, that the benefits continued to exceed the costs, and that additional purchases would be necessary to achieve a substantial improvement in the outlook for the labor market. In contrast, a couple of participants indicated that the Committee could best foster its dual objectives and limit the potential costs of the program by beginning to taper its purchases before midyear or by ending purchases altogether.

Key factors informing participants' views of the economic outlook and the appropriate setting for monetary policy included their judgments regarding labor market conditions that would be consistent with maximum employment, the extent to which employment currently deviated from maximum employment, the extent to which projected inflation over the medium term deviated from the Committee's longer-term objective of 2 percent, and participants' projections of the likely time horizon necessary to return employment and inflation to mandate-consistent levels. Participants generally discussed their forecasts for the time of the first increase in the federal funds rate in the context of the thresholds adopted by the Committee in December 2012. A couple of participants noted that their assessments of the appropriate path for the federal funds rate took into account the likelihood that the neutral level of the federal funds rate was currently somewhat below its historical norm. It was also noted that, because the appropriate stance of monetary policy is conditional on the path of real activity and inflation over time, assessments of the appropriate future path of the federal funds rate and the balance sheet could change if economic conditions were to evolve in an unexpected manner.

Figure 3.E. Distribution of participants' projections for the target federal funds rate, 2013-15 and over the longer run*

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Uncertainty and Risks
A majority of the participants continued to judge that the levels of uncertainty about their projections for real GDP growth and unemployment remained higher than was the norm during the previous 20 years; however, the number of participants with this view was noticeably smaller than in December (figure 4).¹ The main factor cited as contributing to the elevated uncertainty about economic outcomes was the challenge associated with forecasting the path of the U.S. economic recovery following a financial crisis and recession that differed markedly from recent historical experience. Several participants also noted the difficulties involved in predicting fiscal policy in the United States and the potential for European developments to threaten U.S. financial stability, though a few participants noted a decline in the likely severity of those risks as a reason for changing their assessments of uncertainty from "higher" to "broadly similar" to the norm.

Table 2. Average historical projection error ranges

Percentage points

A majority of participants, somewhat more than in December, reported that they saw the risks to their forecasts of real GDP growth and unemployment as broadly balanced, with the remainder generally indicating that they saw the risks to their forecasts for real GDP growth as weighted to the downside and for unemployment as weighted to the upside. Some participants who changed their assessment to "broadly balanced" indicated that, while U.S. fiscal policy had become more restrictive this year, the future path of that policy had become less uncertain than it was in December.

Participants reported little change in their assessments of the level of uncertainty and the balance of risks around their forecasts for overall PCE inflation and core inflation. Thirteen participants judged the levels of uncertainty associated with their forecasts for those inflation measures to be broadly similar to, or lower than, historical norms; the same number assessed the risks to those projections to be broadly balanced. Several participants highlighted the likely role played by the Committee's adoption of a 2 percent inflation goal or its commitment to maintaining accommodative monetary policy as contributing to the recent stability of longer-term inflation expectations. Four participants saw the risks to their inflation forecast as tilted to the downside, reflecting, for example, risks of disinflation that could arise from adverse shocks to the economy that policy would have limited scope to offset in the current environment. Conversely, a couple of the participants saw the risks to inflation as weighted to the upside in light of the current highly accommodative stance of monetary policy and their concerns about the Committee's ability to shift to a less accommodative policy stance when it becomes appropriate to do so.

Figure 4. Uncertainty and risks in economic projections*

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