Minutes of the Federal Open Market Committee
December 17-18, 2013
In conjunction with the December 17-18, 2013, Federal Open Market Committee (FOMC) meeting, meeting participants--5 members of the Board of Governors and the 12 presidents of the Federal Reserve Banks, all of whom participated in the deliberations--submitted their assessments of real output growth, the unemployment rate, inflation, and the target federal funds rate for each year from 2013 through 2016 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, FOMC participants expected, under appropriate monetary policy, that economic growth would pick up, on average, over the next three years, with the unemployment rate declining gradually (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 rise to a level at or slightly below the Committee's 2 percent objective in 2016.
Table 1. Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents, December 2013
|2013||2014||2015||2016||Longer run||2013||2014||2015||2016||Longer run|
|Change in real GDP||2.2 to 2.3||2.8 to 3.2||3.0 to 3.4||2.5 to 3.2||2.2 to 2.4||2.2 to 2.4||2.2 to 3.3||2.2 to 3.6||2.1 to 3.5||1.8 to 2.5|
|September projection||2.0 to 2.3||2.9 to 3.1||3.0 to 3.5||2.5 to 3.3||2.2 to 2.5||1.8 to 2.4||2.2 to 3.3||2.2 to 3.7||2.2 to 3.5||2.1 to 2.5|
|Unemployment rate||7.0 to 7.1||6.3 to 6.6||5.8 to 6.1||5.3 to 5.8||5.2 to 5.8||7.0 to 7.1||6.2 to 6.7||5.5 to 6.2||5.0 to 6.0||5.2 to 6.0|
|September projection||7.1 to 7.3||6.4 to 6.8||5.9 to 6.2||5.4 to 5.9||5.2 to 5.8||6.9 to 7.3||6.2 to 6.9||5.3 to 6.3||5.2 to 6.0||5.2 to 6.0|
|PCE inflation||0.9 to 1.0||1.4 to 1.6||1.5 to 2.0||1.7 to 2.0||2.0||0.9 to 1.2||1.3 to 1.8||1.4 to 2.3||1.6 to 2.2||2.0|
|September projection||1.1 to 1.2||1.3 to 1.8||1.6 to 2.0||1.7 to 2.0||2.0||1.0 to 1.3||1.2 to 2.0||1.4 to 2.3||1.5 to 2.3||2.0|
|Core PCE inflation3||1.1 to 1.2||1.4 to 1.6||1.6 to 2.0||1.8 to 2.0||1.1 to 1.2||1.3 to 1.8||1.5 to 2.3||1.6 to 2.2|
|September projection||1.2 to 1.3||1.5 to 1.7||1.7 to 2.0||1.9 to 2.0||1.2 to 1.4||1.4 to 2.0||1.6 to 2.3||1.7 to 2.3|
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 September projections were made in conjunction with the meeting of the Federal Open Market Committee on September 17-18, 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 participants' 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, 2013-16 and over the longer run*
Most participants expected that highly accommodative monetary policy would remain warranted over the next few years to foster progress toward the Federal Reserve's longer-run objectives. As shown in figure 2, a large majority of participants projected not only that it would be appropriate to wait until 2015 or later before beginning to increase the federal funds rate, but also that it would then be appropriate to raise the target federal funds rate relatively gradually. Most participants viewed their economic projections as broadly consistent with a slowing in the pace of the Committee's purchases of longer-term securities in early 2014 and the completion of the program in the second half of the year.
Figure 2. Overview of FOMC participants' assessments of appropriate monetary policy*
Most participants saw the uncertainty associated with their outlook for economic growth, the unemployment rate, and inflation as similar to that of the past 20 years. In addition, most participants considered the risks to the outlook for real gross domestic product (GDP), the unemployment rate, and inflation to be broadly balanced, although a few saw the risks to their inflation forecasts as tilted to the downside.
The Outlook for Economic Activity
Participants generally projected that, conditional on their individual assumptions about appropriate monetary policy, real GDP growth would accelerate in 2014 from its rate in 2013 and would pick up further in 2015. Subsequently, in 2016, real GDP growth would begin to converge back to a pace that participants saw as the longer-run rate of output growth. Participants pointed to a number of factors contributing to the pickup in growth in the near term, including diminishing restraint from fiscal policy, pent-up demand for consumer and producer durables, rising household net worth, stronger growth abroad, and accommodative monetary policy. A number of participants noted that growth in residential investment had slowed some recently as a result of higher mortgage rates, but they expected growth to strengthen beginning in 2014. Several participants also noted a slowdown in the growth of business investment but saw growth picking up over the forecast horizon, reflecting an expected acceleration in sales.
The central tendencies of participants' projections for real GDP growth were 2.2 to 2.3 percent in 2013, 2.8 to 3.2 percent in 2014, 3.0 to 3.4 percent in 2015, and 2.5 to 3.2 percent in 2016. The central tendency for the longer-run rate of growth of real GDP was 2.2 to 2.4 percent. These projections were little changed from September.
Participants anticipated a gradual decline in the unemployment rate over the projection period. The central tendencies of participants' forecasts for the unemployment rate in the fourth quarter of each year were 7.0 to 7.1 percent in 2013, 6.3 to 6.6 percent in 2014, 5.8 to 6.1 percent in 2015, and 5.3 to 5.8 percent in 2016. Nearly all participants made a modest downward revision to their projected path for the unemployment rate, reflecting its recent larger-than-expected decline; however, 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 unchanged at 5.2 to 5.8 percent. A majority of participants projected that the unemployment rate would be near or slightly above their individual estimates of its longer-run level at the end of 2016.
Figures 3.A and 3.B show that participants' views regarding the likely outcomes for real GDP growth and the unemployment rate remained dispersed. The diversity evidently reflected their individual assessments of the likely rate at which the restraint from fiscal policy will diminish and demand for consumer and producer durables will recover, the anticipated path for foreign economic activity, the trajectory for growth in household net worth, and the appropriate path of monetary policy. Relative to September, the dispersions of participants' projections for GDP growth in 2014 and beyond were about unchanged, while dispersions of the projections for the unemployment rate narrowed some through 2015.
Figure 3.A. Distribution of participants' projections for the change in real GDP, 2013-16 and over the longer run*
Figure 3.B. Distribution of participants' projections for the unemployment rate, 2013-16 and over the longer run*
The Outlook for Inflation
Participants' views on the broad outlook for inflation under the assumption of appropriate monetary policy were marked down a bit in 2013 and 2014 from those in their September projections, but the central tendencies for 2015 and beyond were similar. All participants anticipated that, on average, both headline and core inflation would rise gradually over the next few years, and a large majority of participants expected headline inflation to be at or slightly below the Committee's 2 percent objective in 2016. Specifically, the central tendencies for PCE inflation were 0.9 to 1.0 percent in 2013, 1.4 to 1.6 percent in 2014, 1.5 to 2.0 percent in 2015, and 1.7 to 2.0 percent in 2016. The central tendencies of the forecasts for core inflation were slightly lower over the projection period than in September and broadly similar to those for the headline measure. A number of participants viewed the combination of stable inflation expectations and diminishing resource slack as likely to contribute to a gradual rise of inflation back toward the Committee's longer-run objective.
Figures 3.C and 3.D provide information on the diversity of participants' views about the outlook for inflation. Relative to September, the ranges of participants' projections for overall inflation narrowed some in 2013 and 2014 but remained relatively unchanged thereafter. In 2016, the forecasts for PCE inflation were concentrated near the Committee's longer-run objective, though one participant expected inflation to be 1/4 percentage point above the Committee's objective and another three expected it to be almost 1/2 percentage point below. Similar to the projections for headline inflation, the projections for core inflation also were concentrated near 2 percent in 2016.
Figure 3.C. Distribution of participants' projections for PCE inflation, 2013-16 and over the longer run*
Figure 3.D. Distribution of participants' projections for core PCE inflation, 2013-16*
Appropriate Monetary Policy
As indicated in figure 2, most participants judged that exceptionally low levels of the federal funds rate would remain appropriate for the next few years. In particular, 12 participants thought that the first increase in the target federal funds rate would not be warranted until sometime in 2015, and 3 judged that policy firming would likely not be appropriate until 2016. Only 2 participants judged that an increase in the federal funds rate in 2014 would be appropriate.
All participants projected that the unemployment rate would be below the Committee's 6-1/2 percent threshold at the end of the year in which they viewed the initial increase in the federal funds rate to be appropriate, and all but one judged that inflation would be at or below the Committee's longer-run objective. Almost all participants projected that the unemployment rate would remain above their view of its longer-run normal level at the end of the year in which they saw the federal funds rate increasing from the effective lower bound.
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 2016 and over the longer run. As noted above, most participants judged that economic conditions would warrant maintaining the current low level of the federal funds rate until 2015. The two participants who saw the federal funds rate leaving the effective lower bound earlier submitted projections for the federal funds rate at the end of 2014 of 3/4 percent and 1-1/4 percent. These two participants' views of the appropriate level of the federal funds rate at the end of 2015 were 2-3/4 percent and 3-1/4 percent, while the remainder of participants saw the appropriate level of the funds rate at that time to be 2 percent or lower. On balance, while the dispersion of projections for the value of the federal funds rate in each year changed little since September, the median value of the rate at the end of 2015 and 2016 decreased 1/4 percentage point.
Figure 3.E. Distribution of participants' projections for the target federal funds rate, 2013-16 and over the longer run*
As in September, all of the participants who saw the first tightening in either 2015 or 2016 judged that the appropriate level of the federal funds rate at the end of 2016 would still be below their individual assessments of its expected longer-run value. In contrast, the two participants who saw the first tightening in 2014 believed that the appropriate level of the federal funds rate at the end of 2016 would be at their assessment of its longer-run level, which they judged to be either at or just above 4 percent. Among all participants, estimates of the longer-run target federal funds rate ranged from 3-1/2 to about 4-1/4 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. Conditional on their respective economic outlooks, most participants judged that it would likely be appropriate to begin to reduce the pace of the Committee's purchases of longer-term securities in the first quarter of 2014 and to conclude purchases in the second half of the year. A number of participants thought it would be appropriate to end the asset purchase program earlier; in contrast, one participant thought a more accommodative path for asset purchases would be appropriate.
Participants' views of the appropriate path for monetary policy were informed by their judgments on the state of the economy, including the values of the unemployment rate and other labor market indicators that would be consistent with maximum employment, the extent to which the economy was currently falling short of maximum employment, the prospects for inflation to reach the Committee's longer-term objective of 2 percent, and the balance of risks around the outlook. A few participants also mentioned using various monetary policy rules to guide their thinking on the appropriate path for the federal funds rate.
Uncertainty and Risks
Nearly all participants judged that the levels of uncertainty about their projections for real GDP growth and unemployment were broadly similar to the norm during the previous 20 years, although three participants continued to see them as higher (figure 4).1 More participants than in September judged the risks to real GDP growth and the unemployment rate to be broadly balanced. A range of factors was cited as contributing to this change in view, including an improved outlook for global financial and economic conditions, a moderation in geopolitical risks, an upgraded assessment of the prospects for consumption growth, and reduced odds of a fiscal impasse.
Table 2. Average historical projection error ranges
|Change in real GDP1||±0.5||±1.4||±1.8||±1.8|
|Total consumer prices2||±0.3||±0.9||±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 winter 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 may be found 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. Most participants judged the levels of uncertainty associated with their forecasts for the two inflation measures to be broadly similar to historical norms and the risks to those projections as broadly balanced. Four participants saw the risks to their inflation forecasts as tilted to the downside, reflecting, for example, the possibility that the current low levels of inflation could prove more persistent than anticipated. Conversely, one participant cited upside risks to inflation stemming from uncertainty about the timing and efficacy of the Committee's withdrawal of accommodation.
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 2.5 to 3.5 percent in the current year, 1.6 to 4.4 percent in the second year, and 1.2 to 4.8 percent in the third and fourth years. The corresponding 70 percent confidence intervals for overall inflation would be 1.7 to 2.3 percent in the current year, 1.1 to 2.9 percent in the second year, and 1.0 to 3.0 percent in the third and fourth years.
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.
1. 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