Board of Governors of the Federal Reserve System

Minutes of the Federal Open Market Committee

June 17-18, 2014

In conjunction with the June 17-18, 2014, Federal Open Market Committee (FOMC) meeting, meeting participants submitted their assessments of real output growth, the unemployment rate, inflation, and the target federal funds rate for each year from 2014 through 2016 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 expected that, under appropriate monetary policy, economic growth would pick up notably in the second half of 2014 and remain in 2015 and 2016 above their estimates of the longer-run normal rate of economic growth. Consistent with that outlook, the unemployment rate was projected to continue to decline toward its longer-run normal level over the projection period (table 1 and figure 1). The majority of 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, June 2014

Percent

Figure 1. Central tendencies and ranges of economic projections, 2014-16 and over the longer run*

Accessible version of figure 1 | Return to figure 1

The majority of participants expected that highly accommodative monetary policy would remain appropriate over the next few years to foster progress toward the Federal Reserve's longer-run objectives. As shown in figure 2, all but one of the participants anticipated that it would be appropriate to wait at least until 2015 before beginning to increase the federal funds rate, and most projected that it would then be appropriate to raise the target federal funds rate fairly gradually. Given their economic outlooks, most participants judged that it would be appropriate to continue gradually slowing the pace of the Committee's purchases of longer-term securities and complete the asset purchase program later this year.

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

Accessible version of figure 2 | Return to figure 2

Most participants saw the uncertainty associated with their outlooks 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 GDP growth and the unemployment rate to be broadly balanced, and a majority saw the risks to inflation as broadly balanced. However, some saw the risks to their forecasts for economic growth or inflation as tilted to the downside, and a couple saw the risks to their forecasts for inflation as tilted to the upside.

The Outlook for Economic Activity
Participants generally projected that, conditional on their individual assumptions about appropriate monetary policy, real GDP growth would pick up notably in the second half of this year and remain in 2015 and 2016 above their estimates of the longer-run normal rate of output growth. All participants revised down their projections of real GDP growth for the first half of 2014 compared with their projections in March, but most left their forecasts for the remainder of the projection period largely unchanged. Participants generally judged that real GDP growth in the first half of this year was held down by transitory factors depressing output early in the year, and they pointed to a number of factors that they expected would continue to contribute to a pickup in economic growth later this year and next, including rising household net worth, diminished restraint from fiscal policy, improving labor market conditions, and highly accommodative monetary policy. The central tendencies of participants' projections for real GDP growth were 2.1 to 2.3 percent in 2014, 3.0 to 3.2 percent in 2015, and 2.5 to 3.0 percent in 2016. The central tendency for the longer-run normal rate of growth of real GDP was 2.1 to 2.3 percent, only slightly lower than in March.

Participants continued to anticipate 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 6.0 to 6.1 percent in 2014, 5.4 to 5.7 percent in 2015, and 5.1 to 5.5 percent in 2016. Nearly all participants revised down their projected paths for the unemployment rate this year and next relative to their March projections, with the majority pointing to the decline in the unemployment rate in recent months as a reason for the downward revision. 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 also edged down, to 5.2 to 5.5 percent. Most participants projected that the unemployment rate would be close to their individual estimates of its longer-run level at the end of 2016.

Figures 3.A and 3.B show that participants continued to hold a range of views regarding the likely outcomes for real GDP growth and the unemployment rate over the next two years. The diversity of views reflected their individual assessments of the rate at which the headwinds that have been holding back the pace of the economic recovery would abate and of the anticipated path for foreign economic activity, the trajectory for growth in household net worth, and the appropriate path of monetary policy. Relative to March, the dispersion of participants' projections for real GDP growth narrowed a bit in 2014 but was largely unchanged over the next two years, and the dispersion of projections for the unemployment rate over the entire projection period was little changed.

Figure 3.A. Distribution of participants' projections for the change in real GDP, 2014-16 and over the longer run*

Accessible version of figure 3.A | Return to figure 3.A

Figure 3.B. Distribution of participants' projections for the unemployment rate, 2014-16 and over the longer run*

Accessible version of figure 3.B | Return to figure 3.B

The Outlook for Inflation
Compared with March, the central tendencies of participants' projections for inflation were largely unchanged for all years in the projection period, although many participants marked up a bit their projections for inflation in 2014. The vast majority of participants anticipated that, on average, both headline and core inflation would rise gradually over the next few years, and the 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 1.5 to 1.7 percent in 2014, 1.5 to 2.0 percent in 2015, and 1.6 to 2.0 percent in 2016. The central tendencies of the forecasts for core inflation were broadly similar to those for the headline measure. It was noted that some combination of stable inflation expectations and steadily diminishing resource slack was likely to contribute to a gradual rise of inflation back toward the Committee's longer-run objective of 2 percent.

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 were little changed relative to March. The forecasts for PCE inflation in 2016 were at or below the Committee's longer-run objective. Similar to the projections for headline inflation, the projections for core inflation in 2016 were concentrated at or below 2 percent.

Figure 3.C. Distribution of participants' projections for PCE inflation, 2014-16 and over the longer run*

Accessible version of figure 3.C | Return to figure 3.C

Figure 3.D. Distribution of participants' projections for core PCE inflation, 2014-16*

Accessible version of figure 3.D | Return to figure 3.D

Appropriate Monetary Policy
As indicated in figure 2, nearly all participants judged that 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 1 participant thought that an increase in the federal funds rate would be warranted in 2014.

All participants projected that the unemployment rate would be below 6 percent at the end of the year in which they judged the initial increase in the federal funds rate to be warranted, and all but one anticipated that inflation would be at or below the Committee's longer-run objective at that time. Most participants projected that the unemployment rate would remain above their estimates of its longer-run normal level at the end of the year in which they saw the federal funds rate increasing from its 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 2014 to 2016 and over the longer run. As noted earlier, nearly all participants judged that economic conditions would warrant maintaining the current exceptionally low level of the federal funds rate at least until 2015. Relative to their projections in March, the median values of the federal funds rate at the end of 2015 and 2016 increased 13 basis points and 25 basis points to 1.13 percent and 2.50 percent, respectively, while the mean values rose 7 basis points and 11 basis points to 1.18 percent and 2.53 percent, respectively. The dispersion of projections for the value of the federal funds rate was little changed in 2015 but widened slightly in 2016. Most participants expected that the federal funds rate at the end of 2016 would still be significantly below their individual assessments of its longer-run level. For about half of these participants, the low level of the federal funds rate at that time was associated with inflation well below the Committee's 2 percent objective. In contrast, the rest of these participants saw the federal funds rate at the end of 2016 as still significantly low despite their projections that the unemployment rate would be close to or below their individual longer-run projections and inflation would be at or close to 2 percent at that time. These participants cited some combination of a lower equilibrium real interest rate, continuing headwinds from the financial crisis and subsequent recession, and a desire to raise the federal funds rate at a gradual pace after liftoff as explanations for the still-low level of the projected federal funds rate at the end of 2016. A couple of participants also mentioned broader measures of labor market slack that may take longer to return to their normal levels than the unemployment rate. Estimates of the longer-run level of the federal funds rate ranged from 3-1/4 to about 4-1/4 percent, reflecting the Committee's inflation objective of 2 percent and participants' individual judgments regarding the appropriate longer-run level of the real federal funds rate in the absence of further shocks to the economy. Compared with March, some participants revised down their estimates of the longer-run federal funds rate, with a lower assessment of the longer-run level of potential output growth cited as a contributing factor for the majority of those revisions. As a result, the median estimate of the longer-run federal funds rate shifted down to 3.75 percent from 4 percent in March, while its mean value declined 11 basis points to 3.78 percent.

Figure 3.E. Distribution of participants' projections for the target federal funds rate, 2014-16 and over the longer run*

Accessible version of figure 3.E | Return to figure 3.E

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 be appropriate to continue to reduce the pace of the Committee's purchases of longer-term securities in measured steps and to conclude the purchases later this year. A couple of participants judged that a more rapid reduction in the pace of purchases and an earlier end to the asset purchase program would be appropriate.

Participants' views of the appropriate path for monetary policy were informed by their judgments about 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 return to the Committee's longer-term objective of 2 percent, and the balance of risks around the outlook. Many participants also mentioned the prescriptions of various monetary policy rules as factors they considered in judging the appropriate path for the federal funds rate.

Uncertainty and Risks
The vast majority of participants continued to judge the levels of uncertainty about their projections for real GDP growth and the unemployment rate as broadly similar to the norms during the previous 20 years (figure 4).² Most participants continued to judge the risks to real GDP growth and the unemployment rate to be broadly balanced, although a few participants viewed the risks as weighted to the downside, reflecting, for example, their concerns about the limited ability of monetary policy at the zero lower bound to respond to negative shocks to the economy as well as external economic and geopolitical risks. Similar to March, nearly all participants continued to judge the risks to the unemployment rate to be broadly balanced.

Figure 4. Uncertainty and risks in economic projections*

Accessible version of figure 4 | Return to figure 4

Table 2. Average historical projection error ranges

Percentage points

Almost all participants saw the level of uncertainty and the balance of risks around their forecasts for overall PCE inflation and core inflation as little changed from March. Most participants continued to judge the levels of uncertainty associated with their forecasts for the two inflation measures to be broadly similar to historical norms, and a majority continued to see the risks to those projections as broadly balanced. A few participants, however, viewed the risks to their inflation forecasts as tilted to the downside, reflecting, for example, the possibilities that the recent low levels of inflation could prove more persistent than anticipated, and that the upward pull on prices from inflation expectations might be weaker than assumed. Conversely, two participants saw upside risks to inflation, with one citing uncertainty about the timing and efficacy of the Committee's withdrawal of accommodation.