Minutes of the Federal Open Market Committee
June 18-19, 2013
In conjunction with the June 18-19, 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 out-put growth, the unemployment rate, inflation, and the target federal funds rate for each year from 2013 through 2015 and over the longer run.1 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, 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 move up from recent very low readings but remain subdued (table 1 and figure 1). Almost all of the participants projected that inflation, as measured by the annual change in the price index for personal consumption expenditures (PCE), would be running at or a little below the Committee's 2 percent objective in 2015.
Table 1. Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents, June 2013
|2013||2014||2015||Longer run||2013||2014||2015||Longer run|
|Change in real GDP||2.3 to 2.6||3.0 to 3.5||2.9 to 3.6||2.3 to 2.5||2.0 to 2.6||2.2 to 3.6||2.3 to 3.8||2.0 to 3.0|
|March projection||2.3 to 2.8||2.9 to 3.4||2.9 to 3.7||2.3 to 2.5||2.0 to 3.0||2.6 to 3.8||2.5 to 3.8||2.2 to 3.0|
|Unemployment rate||7.2 to 7.3||6.5 to 6.8||5.8 to 6.2||5.2 to 6.0||6.9 to 7.5||6.2 to 6.9||5.7 to 6.4||5.0 to 6.0|
|March projection||7.3 to 7.5||6.7 to 7.0||6.0 to 6.5||5.2 to 6.0||6.9 to 7.6||6.1 to 7.1||5.7 to 6.5||5.0 to 6.0|
|PCE inflation||0.8 to 1.2||1.4 to 2.0||1.6 to 2.0||2.0||0.8 to 1.5||1.4 to 2.0||1.6 to 2.3||2.0|
|March projection||1.3 to 1.7||1.5 to 2.0||1.7 to 2.0||2.0||1.3 to 2.0||1.4 to 2.1||1.6 to 2.6||2.0|
|Core PCE inflation3||1.2 to 1.3||1.5 to 1.8||1.7 to 2.0||1.1 to 1.5||1.5 to 2.0||1.7 to 2.3|
|March projection||1.5 to 1.6||1.7 to 2.0||1.8 to 2.1||1.5 to 2.0||1.5 to 2.1||1.7 to 2.6|
Note: Projections of change in real gross domestic product (GDP) and projections for both measures of inflation are from the fourth quarter of the previous year to the fourth quarter of the year indicated. PCE inflation and core PCE inflation are the percentage rates of change in, respectively, the price index for personal consumption expenditures (PCE) and the price index for PCE excluding food and energy. Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated. Each participant's projections are based on his or her assessment of appropriate monetary policy. Longer-run projections represent each participant's assessment of the rate to which each variable would be expected to converge under appropriate monetary policy and in the absence of further shocks to the economy. The March projections were made in conjunction with the meeting of the Federal Open Market Committee on March 19-20, 2013.
1. The central tendency excludes the three highest and three lowest projections for each variable in each year. Return to table
2. The range for a variable in a given year includes all participant' projections, from lowest to highest, for that variable in that year. Return to table
3. Longer-run projections for core PCE inflation are not collected. Return to table
Figure 1. Central tendencies and ranges of economic projections, 2013-15 and over the longer run*
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 continued progress toward maximum employment and a gradual return toward 2 percent inflation. Moreover, all participants but one judged that it would be appropriate to continue purchasing both agency mortgage-backed securities (MBS) and longer-term Treasury securities at least until later this year.
A majority of participants saw the uncertainty associated with their outlook for economic growth and the unemployment rate as similar to that of the past 20 years. An equal number of participants also indicated that the risks to the outlook for real gross domestic product (GDP) growth and the unemployment rate were broadly balanced. Some participants, however, continued to see downside risks to growth and upside risks to unemployment. A majority of participants indicated that the uncertainty surrounding their projections for PCE inflation was 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*
The Outlook for Economic Activity
Participants projected that, conditional on their individual assumptions about appropriate monetary policy, the economy would grow at a 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 their estimates of the longer-run rate of output growth. Most participants noted that the high degree of monetary policy accommodation assumed in their projections, continued improvement in the housing sector and the accompanying rise in household net worth, and the absence of further fiscal tightening should result in a pickup in growth; however, they pointed to the foreign economic outlook as an ongoing downside risk.
The central tendency of participants' projections for real GDP growth was 2.3 to 2.6 percent for 2013, 3.0 to 3.5 percent for 2014, and 2.9 to 3.6 percent for 2015. Most participants noted that their projections were little changed since March, with the downward revisions to growth in 2013 reflecting the somewhat slower-than-anticipated growth in the first half. The central tendency for the longer-run rate of growth of real GDP was 2.3 to 2.5 percent, unchanged from March.
Participants anticipated a gradual decline in the unemployment rate over the forecast period; a large majority projected that the unemployment rate would not reach their estimates of its longer-run level before 2016. The central tendencies of participants' forecasts for the unemployment rate were 7.2 to 7.3 percent at the end of 2013, 6.5 to 6.8 percent at the end of 2014, and 5.8 to 6.2 percent at the end of 2015. These projections were slightly lower than in March, with participants reacting to recent data indicating that the unemployment rate had declined by a little more than they had previously expected. 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 March. 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, the distributions of participants' views regarding the likely outcomes for real GDP growth and the unemployment rate were relatively narrow for 2013. Their projections for economic activity were more diverse for 2014 and 2015, reflecting their individual assessments of appropriate monetary policy and its economic effects, the likely rate of improvement in the housing sector and households' balance sheets, the domestic implications of foreign economic developments, the prospective path for U.S. fiscal policy, the extent of structural dislocations to the labor market, and a number of other factors. The dispersion of participants' projections for 2015 and for the longer run was little changed relative to March; there was some reduction in the upper ends of the distributions in 2013 and 2014 for both real GDP growth and the unemployment rate.
Figure 3.A. Distribution of participants' projections for the change in real GDP, 2013-15 and over the longer run*
The Outlook for Inflation
All participants marked down their projections for both PCE and core PCE inflation in 2013, reflecting the low readings on inflation so far this year. Participants generally judged that the recent slowing in inflation partly reflected transitory factors, and their projections for inflation under appropriate monetary policy over the period 2014-15 were only a little lower than in March. Participants projected that both headline and core inflation would move up but remain subdued, with nearly all projecting that inflation would be equal to, or somewhat below, the FOMC's longer-run objective of 2 percent in each year. Specifically, the central tendency of participants' projections for overall inflation, as measured by the growth in the PCE price index, moved down to 0.8 to 1.2 percent in 2013 and was 1.4 to 2.0 percent in 2014 and 1.6 to 2.0 percent in 2015. The central tendency of the forecasts for core inflation shifted down slightly in 2013 and 2014, to 1.2 to 1.3 percent and 1.5 to 1.8 percent, respectively; the central tendency in 2015 was little changed and broadly similar to that of headline inflation. In discussing factors likely to return inflation to near the Committee's inflation objective of 2 percent, several participants noted that the reversal of transitory factors currently holding down inflation would cause inflation to move up a little in the near term. In addition, many participants viewed the combination of stable inflation expectations and diminishing resource slack as likely to lead to a gradual pickup in inflation toward the Committee's longer-run objective.
Figure 3.B. Distribution of participants' projections for the unemployment rate, 2013-15 and over the longer run*
Figures 3.C and 3.D provide information on the diversity of participants' views about the outlook for inflation. The range of participants' projections for overall and core inflation in 2013 shifted down, while those ranges narrowed in 2014-15. 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 FOMC's 2 percent goal over the longer run.
Figure 3.C. Distribution of participants' projections for PCE inflation, 2013-15 and over the longer run*
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 of years. In particular, 14 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. Four participants judged that an increase in the federal funds rate in 2013 or 2014 would be appropriate.
All of the participants who judged that raising the federal funds rate target would become appropriate in 2015 also projected that the unemployment rate would decline below 6-1/2 percent during that year and that inflation would remain near or below 2 percent. In addition, most of those participants 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. Three of the four participants who judged that policy firming should begin in 2013 or 2014 indicated that, in their judgment, 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 keep longer-run inflation expectations well anchored.
Figure 3.D. Distribution of participants' projections for core PCE inflation, 2013-15*
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 at least until 2015. Among the four 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 ranged from 1 to 1-1/2 percent; however, the median for all participants remained at the effective lower bound. Views on the appropriate level of the federal funds rate at the end of 2015 varied, with the range of participants' projections a bit narrower than in the March Summary of Economic Projections and the median value unchanged at 1 percent.
All participants saw the appropriate target for the federal funds rate at the end of 2015 as still well below their assessments 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 appropriate longer-run level of the real federal funds rate in the absence of further shocks to the economy.
Participants also described their views regarding the appropriate path of the Federal Reserve's balance sheet. Given their respective economic outlooks, all participants but one judged that it would be appropriate to continue purchasing both agency MBS and longer-term Treasury securities. About half of these participants indicated that it likely would be appropriate to end asset purchases late this year. Many other participants anticipated that it likely would be appropriate to continue purchases 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, or that continuing purchases would be necessary to achieve a substantial improvement in the outlook for the labor market. A few participants, however, indicated that the Committee could best foster its dual objectives and limit the potential costs of the program by slowing, or stopping, its purchases at the June meeting.
Key factors informing participants' views of the appropriate path for monetary policy included their judgments regarding the values of the unemployment rate and other labor market indicators that would be consistent with maximum employment; the extent to which the economy fell short of maximum employment and the extent to which inflation was running below the Committee's longer-term objective of 2 percent; and the implications of alternative policy paths for the likely extent of progress, over the medium-term, in returning employment and inflation to mandate-consistent levels. A couple of participants noted that persistent headwinds and somewhat slower productivity growth since the end of the recession made their assessments of the longer-run normal level of the federal funds rate, and thus of the appropriate path for the federal funds rate, lower than would otherwise be the case.
Figure 3.E. Distribution of participants' projections for the target federal funds rate, 2013-15 and over the longer run*
Uncertainty and Risks
A majority of participants reported that they saw the levels of uncertainty about their projections for real GDP growth and unemployment as broadly similar to the norm during the previous 20 years, with the remainder generally indicating that they saw higher uncertainty about these economic outcomes (figure 4).2 In March, a similar number of participants had seen the level of uncertainty about real GDP growth and the unemployment rate as above average. A majority of participants continued to judge that the risks to their forecasts of real GDP growth and unemployment were 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. The main factors cited as contributing to the uncertainty and balance of risks about economic outcomes were the limits on the ability of monetary policy to offset the effects of adverse shocks when short-term interest rates are near their effective lower bound, as well as challenges with forecasting the path of fiscal policy and economic and financial developments abroad.
Table 2. Average historical projection error ranges
|Change in real GDP1||±1.0||±1.6||±1.8|
|Total consumer prices2||±0.8||±1.0||±1.0|
Note: Error ranges shown are measured as plus or minus the root mean squared error of projections for 1993 through 2012 that were released in the spring by various private and government forecasters. As described in the box "Forecast Uncertainty," under certain assumptions, there is about a 70 percent probability that actual outcomes for real GDP, unemployment, and consumer prices will be in ranges implied by the average size of projection errors made in the past. Further information is in David Reifschneider and Peter Tulip (2007), "Gauging the Uncertainty of the Economic Outlook from Historical Forecasting Errors," Finance and Economics Discussion Series 2007-60 (Washington: Board of Governors of the Federal Reserve System, November).
1. Definitions of variables are in the general note to table 1. Return to table
2. Measure is the overall consumer price index, the price measure that has been most widely used in government and private economic forecasts. Projection is percent change, fourth quarter of the previous year to the fourth quarter of the year indicated. Return to table
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. Fourteen 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 saw the risks to those projections as broadly balanced. A few 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 and, hence, the relatively low level of uncertainty. Four participants saw the risks to their inflation forecasts 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, one participant saw the risks to inflation as weighted to the upside, citing the present highly accommodative stance of monetary policy and 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*
The economic projections provided by the members of the Board of Governors and the presidents of the Federal Reserve Banks inform discussions of monetary policy among policymakers and can aid public understanding of the basis for policy actions. Considerable uncertainty attends these projections, however. The economic and statistical models and relationships used to help produce economic forecasts are necessarily imperfect descriptions of the real world, and the future path of the economy can be affected by myriad unforeseen developments and events. Thus, in setting the stance of monetary policy, participants consider not only what appears to be the most likely economic outcome as embodied in their projections, but also the range of alternative possibilities, the likelihood of their occurring, and the potential costs to the economy should they occur.
Table 2 summarizes the average historical accuracy of a range of forecasts, including those reported in past Monetary Policy Reports and those prepared by the Federal Reserve Board's staff in advance of meetings of the Federal Open Market Committee. The projection error ranges shown in the table illustrate the considerable uncertainty associated with economic forecasts. For example, suppose a participant projects that real gross domestic product (GDP) and total consumer prices will rise steadily at annual rates of, respectively, 3 percent and 2 percent. If the uncertainty attending those projections is similar to that experienced in the past and the risks around the projections are broadly balanced, the numbers reported in table 2 would imply a probability of about 70 percent that actual GDP would expand within a range of 1.7 to 4.3 percent in the current year, 1.3 to 4.7 percent in the second year, and 1.2 to 4.8 percent in the third year. The corresponding 70 percent confidence intervals for overall inflation would be 1.1 to 2.9 percent in the current year, 1.0 to 3.0 percent in the second year, and 0.9 to 3.1 percent in the third year.
Because current conditions may differ from those that prevailed, on average, over history, participants provide judgments as to whether the uncertainty attached to their projections of each variable is greater than, smaller than, or broadly similar to typical levels of forecast uncertainty in the past, as shown in table 2. Participants also provide judgments as to whether the risks to their projections are weighted to the upside, are weighted to the downside, or are broadly balanced. That is, participants judge whether each variable is more likely to be above or below their projections of the most likely outcome. These judgments about the uncertainty and the risks attending each participant's projections are distinct from the diversity of participants' views about the most likely outcomes. Forecast uncertainty is concerned with the risks associated with a particular projection rather than with divergences across a number of different projections.
As with real activity and inflation, the outlook for the future path of the federal funds rate is subject to considerable uncertainty. This uncertainty arises primarily because each participant's assessment of the appropriate stance of monetary policy depends importantly on the evolution of real activity and inflation over time. If economic conditions evolve in an unexpected manner, then assessments of the appropriate setting of the federal funds rate would change from that point forward.
2. Table 2 provides estimates of the forecast uncertainty for the change in real GDP, the unemployment rate, and total consumer price inflation over the period from 1993 through 2012. At the end of this summary, the box "Forecast Uncertainty" discusses the sources and interpretation of uncertainty in the economic forecasts and explains the approach used to assess the uncertainty and risks attending the participants' projections. Return to text