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Board of Governors of the Federal Reserve System
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Board of Governors of the Federal Reserve System


Monetary Policy Report submitted to the Congress on July 17, 2013, pursuant to section 2B of the Federal Reserve Act

Thus far this year, labor market conditions have improved further, while consumer price inflation has run below the Federal Open Market Committee's (FOMC) longer-run objective of 2 percent. Gains in payroll employment since the start of the year have averaged about 200,000 jobs per month, and various measures of underutilization in labor markets have continued to trend down. Even so, the unemployment rate, at 7-1/2 percent in June, was still well above levels prevailing prior to the recent recession and well above the levels that FOMC participants think can be sustained in the longer term consistent with price stability.

Consumer price inflation has slowed this year. Over the first five months of the year, the price index for personal consumption expenditures increased at an annual rate of only 1/2 percent, while the index excluding food and energy prices rose at a rate of 1 percent, both down from increases of about 1-1/2 percent over 2012. This slowing appears to owe partly to transitory factors. Survey measures of longer-term inflation expectations have remained in the narrow ranges seen over the past several years, while market-based measures have declined so far this year, reversing their rise over the second half of 2012.

Meanwhile, real gross domestic product (GDP) continued to increase at a moderate pace in the first quarter of this year. Available indicators suggest that the growth of real GDP proceeded at a somewhat slower pace in the second quarter. Although federal fiscal policy is imposing a substantial drag on growth this year and export demand is still damped by subdued growth in foreign economies, some of the other headwinds that have weighed on the economic recovery have begun to dissipate. Against this backdrop, a sustained housing market recovery now appears to be under way, and consumption growth is estimated to have held up reasonably well despite the increase in taxes earlier this year.

Credit conditions generally have eased further, though they remain relatively tight for households with lower credit scores--and especially for such households seeking mortgage loans. However, beginning in May, longer-term interest rates rose significantly and asset price volatility increased as investors responded to somewhat better-than-expected economic data as well as Federal Reserve communications about monetary policy. Despite their recent moves, interest rates have generally remained low by historical standards, importantly due to the Federal Reserve's highly accommodative monetary policy stance.

With unemployment still well above normal levels and inflation quite low, and with the economic recovery anticipated to pick up only gradually, the FOMC has continued its highly accommodative monetary policy this year in order to support progress toward maximum employment and price stability.

The FOMC kept its target range for the federal funds rate at 0 to 1/4 percent and anticipated that this exceptionally low range would be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. The Committee also stated that when it decides to begin to remove policy accommodation, it would take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.

The FOMC also has continued its asset purchase program, purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee has reiterated that the purchase program will continue until the outlook for the labor market has improved substantially in a context of price stability. In addition, the FOMC has indicated that the size, pace, and composition of purchases will be adjusted in light of the Committee's assessment of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives. The Committee has noted that it is prepared to increase or reduce the pace of purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes.

At the June FOMC meeting, Committee participants generally thought it would be helpful to provide greater clarity about the Committee's approach to decisions about its asset purchase program and thereby reduce investors' uncertainty about how the Committee might react to future economic developments. In choosing to provide this clarification, the Committee made no changes to its approach to monetary policy. Against this backdrop, Chairman Bernanke, at his postmeeting press conference, described a possible path for asset purchases that the Committee would anticipate implementing if economic conditions evolved in a manner broadly consistent with the outcomes the Committee saw as most likely. The Chairman noted that such economic outcomes involved continued gains in labor markets, supported by moderate growth that picks up over the next several quarters, and inflation moving back toward its 2 percent objective over time. If the economy were to evolve broadly in line with the Committee's expectations, the FOMC would moderate the pace of purchases later this year and continue to reduce the pace of purchases in measured steps until purchases ended around the middle of next year, at which time the unemployment rate would likely be in the vicinity of 7 percent, with solid economic growth supporting further job gains and inflation moving back toward the FOMC's 2 percent target. In emphasizing that the Committee's policy was in no way predetermined, the Chairman noted that the pace of asset purchases could increase or decrease depending on the evolution of the outlook and its implications for further progress in the labor market. The Chairman also drew a strong distinction between the asset purchase program and the forward guidance regarding the target for the federal funds rate, noting that the Committee anticipates that there will be a considerable period between the end of asset purchases and the time when it becomes appropriate to increase the target for the federal funds rate.

In conjunction with the most recent FOMC meeting in June, Committee participants submitted individual economic projections under each participant's judgment of appropriate monetary policy. According to the Summary of Economic Projections (SEP), Committee participants saw the downside risks to the outlook for the economy and the labor market as having diminished since the fall. (The June SEP is included as Part 3 of this report.) Committee participants also projected that, with appropriate monetary policy accommodation, economic growth would pick up, the unemployment rate would gradually decline, and inflation would move up over the medium term from recent very low readings and subsequently move back toward the FOMC's 2 percent longer-run objective. Committee participants saw increases in the target for the federal funds rate as being quite far in the future, with most expecting the first increase to occur in 2015 or 2016.

Statement on Longer-Run Goals and Monetary Policy Strategy

As amended effective on January 29, 2013

The Federal Open Market Committee (FOMC) is firmly committed to fulfilling its statutory mandate from the Congress of promoting maximum employment, stable prices, and moderate long-term interest rates. The Committee seeks to explain its monetary policy decisions to the public as clearly as possible. Such clarity facilitates well-informed decisionmaking by households and businesses, reduces economic and financial uncertainty, increases the effectiveness of monetary policy, and enhances transparency and accountability, which are essential in a democratic society.

Inflation, employment, and long-term interest rates fluctuate over time in response to economic and financial disturbances. Moreover, monetary policy actions tend to influence economic activity and prices with a lag. Therefore, the Committee's policy decisions reflect its longer-run goals, its medium-term outlook, and its assessments of the balance of risks, including risks to the financial system that could impede the attainment of the Committee's goals.

The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee has the ability to specify a longer-run goal for inflation. The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate. Communicating this inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability and moderate long-term interest rates and enhancing the Committee's ability to promote maximum employment in the face of significant economic disturbances.

The maximum level of employment is largely determined by nonmonetary factors that affect the structure and dynamics of the labor market. These factors may change over time and may not be directly measurable. Consequently, it would not be appropriate to specify a fixed goal for employment; rather, the Committee's policy decisions must be informed by assessments of the maximum level of employment, recognizing that such assessments are necessarily uncertain and subject to revision. The Committee considers a wide range of indicators in making these assessments. Information about Committee participants' estimates of the longer-run normal rates of output growth and unemployment is published four times per year in the FOMC's Summary of Economic Projections. For example, in the most recent projections, FOMC participants' estimates of the longer-run normal rate of unemployment had a central tendency of 5.2 percent to 6.0 percent, unchanged from one year ago but substantially higher than the corresponding interval several years earlier.

In setting monetary policy, the Committee seeks to mitigate deviations of inflation from its longer-run goal and deviations of employment from the Committee's assessments of its maximum level. These objectives are generally complementary. However, under circumstances in which the Committee judges that the objectives are not complementary, it follows a balanced approach in promoting them, taking into account the magnitude of the deviations and the potentially different time horizons over which employment and inflation are projected to return to levels judged consistent with its mandate.

The Committee intends to reaffirm these principles and to make adjustments as appropriate at its annual organizational meeting each January.

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Last update: July 17, 2013