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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 15, 2015, pursuant to section 2B of the Federal Reserve Act

The overall condition of the labor market continued to strengthen over the first half of 2015, albeit at a more moderate pace than in 2014. So far this year, payroll employment has increased by about 210,000 on average per month compared with the robust 260,000 average in 2014, and the unemployment rate has declined about 1/4 percentage point to 5.3 percent in June, close to most Federal Open Market Committee (FOMC) participants' estimates of its longer-run normal level. Other measures of labor market activity also point to ongoing improvement in labor market conditions even as they continue to suggest that further improvement is needed to achieve the Committee's maximum employment mandate. In particular, the labor force participation rate has generally been holding steady but nevertheless remains below most assessments of its trend, and the number of people working part time when they would prefer full-time employment has declined further but remains elevated. And, while some measures of labor compensation are starting to rise more rapidly, they nevertheless remain consistent with the view that labor resources likely are still not being fully utilized.

Consumer price inflation remains below the FOMC's longer-run goal of 2 percent. The price index for personal consumption expenditures (PCE) edged up only 1/4 percent over the 12 months ending in May, held down by the pass-through of a sizable decline in crude oil prices over the second half of last year. However, consumer energy prices appear to have stabilized in recent months. Changes in the PCE price index excluding food and energy items, which are often a better indicator of where overall inflation will be in the future, also remained relatively low; this index rose 1-1/4 percent over the 12 months ending in May, partly restrained by declines in the prices of non-energy imported goods. Meanwhile, survey-based measures of longer-run inflation expectations have remained relatively stable; market-based measures of inflation compensation have moved up somewhat from their lows earlier this year but remain below levels that prevailed until last summer.

Real gross domestic product is reported to have been little changed in the first quarter of this year. Some of this weakness likely reflected temporary factors that will reverse over the coming quarters. Indeed, a number of recent spending indicators suggest that economic activity increased at a moderate pace in the second quarter. The economic expansion continues to be supported by rising incomes resulting from ongoing job gains, accommodative monetary policy, and generally favorable financial conditions. Furthermore, the sizable drop in oil prices since last summer has been a substantial benefit to households, although the negative side of that decline has been quite evident in cutbacks in the energy sector of our economy. In addition, the sluggish pace of economic activity abroad, together with the appreciation of the dollar, has weighed on net exports.

The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace and labor market conditions will continue to move toward levels the Committee judges to be consistent with its dual mandate of maximum employment and price stability. In addition, the Committee anticipates that, with stable inflation expectations and strengthening economic activity, inflation will rise gradually over the medium term toward the Committee's 2 percent objective. Those expectations are reflected in the June Summary of Economic Projections (SEP), which provides projections of the individual FOMC participants and is included as Part 3 of this report.

Domestic financial conditions have generally remained supportive of economic growth. After having declined notably in 2014, longer-term interest rates have increased somewhat, on net, over the first half of the year, but they remain at historically low levels. Broad measures of U.S. equity prices have been little changed, on balance, this year after having risen considerably in recent years. Credit flows to large nonfinancial businesses have remained solid, and financing generally appears to have become available to small businesses as well. Credit conditions for households have been mixed: While the availability of mortgage loans continues to expand gradually, mortgages remain relatively difficult to obtain for some individuals, and credit card lending standards and terms are tight for borrowers with below-prime scores. Meanwhile, auto and student loans continued to be widely available, and outstanding balances of such loans have continued to rise significantly.

Financial vulnerabilities in the United States overall have remained moderate since the previous Monetary Policy Report. Capital and liquidity positions at the largest banking firms have remained strong, maturity transformation outside the banking system has continued to trend lower, and debt growth by the household sector has been modest. Valuation pressures in many fixed-income markets, while having eased, have remained notable; prices and valuation measures for commercial real estate have increased further; and borrowing by lower-rated businesses has continued at a rapid rate. Although market participants have expressed concerns about the resilience of liquidity during stress events, a variety of metrics do not suggest a significant deterioration in market liquidity; the Federal Reserve is watching developments closely. Foreign developments, such as the situation in Greece and financial conditions in China, could pose some risks to the United States if they lead to broader strains in those regions.

The FOMC has continued to judge that a high degree of policy accommodation remains appropriate to support continued progress toward maximum employment and price stability. As a result, it has maintained the exceptionally low target range of 0 to 1/4 percent for the federal funds rate and has kept the Federal Reserve's holdings of longer-term securities at their current elevated levels to help maintain accommodative financial conditions. The Committee has reiterated that in deciding how long to maintain the current target range for the federal funds rate, it will consider a broad set of indicators to assess realized and expected progress toward its objectives. Since its April meeting, the Committee has stated it anticipates that raising the target range for the federal funds rate will be appropriate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term. In the June SEP, most policymakers anticipated that these conditions would be met sometime this year. The Committee continues to expect that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.

The Federal Reserve has continued to plan for the eventual normalization of the stance and conduct of monetary policy, including by testing the operational readiness of the policy tools to be used. The FOMC remains confident that it has the tools it needs to raise short-term interest rates when doing so becomes appropriate.

Statement on Longer-Run Goals and Monetary Policy Strategy
Adopted effective January 24, 2012; as amended effective January 27, 2015

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 reaffirms its judgment 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 5.5 percent.

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: August 11, 2015