fomc minutes december

8/13/2019 FOMC Minutes December

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Minutes of the Federal Open Market CommitteeDecember 1718, 2013

A meeting of the Federal Open Market Committee washeld in the offices of the Board of Governors of the

Federal Reserve System in Washington, D.C., on Tues-day, December 17, 2013, at 1:00 p.m. and continued onWednesday, December 18, 2013, at 8:30 a.m.

PRESENT:Ben Bernanke, ChairmanWilliam C. Dudley, Vice ChairmanJames BullardCharles L. EvansEsther L. GeorgeJerome H. PowellEric RosengrenJeremy C. SteinDaniel K. TarulloJanet L. Yellen

Christine Cumming, Richard W. Fisher, NarayanaKocherlakota, Sandra Pianalto, and Charles I.Plosser, Alternate Members of the Federal OpenMarket Committee

Jeffrey M. Lacker, Dennis P. Lockhart, and John C.Williams, Presidents of the Federal Reserve Banksof Richmond, Atlanta, and San Francisco, respec-tively

William B. English, Secretary and EconomistMatthew M. Luecke, Assistant SecretaryDavid W. Skidmore, Assistant SecretaryMichelle A. Smith, Assistant SecretaryScott G. Alvarez, General CounselSteven B. Kamin, EconomistDavid W. Wilcox, Economist

Thomas A. Connors, Troy Davig, Michael P. Leahy,Stephen A. Meyer, and William Wascher, Associ-ate Economists

Simon Potter, Manager, System Open Market Account

Michael S. Gibson, Director, Division of Banking Su-pervision and Regulation, Board of Governors

Nellie Liang, Director, Office of Financial StabilityPolicy and Research, Board of Governors

James A. Clouse and William Nelson, Deputy Direc-tors, Division of Monetary Affairs, Board of Gov-

ernors

Jon W. Faust, Special Adviser to the Board, Office ofBoard Members, Board of Governors

Linda Robertson, Assistant to the Board, Office ofBoard Members, Board of Governors

Trevor A. Reeve, Senior Associate Director, Divisionof International Finance, Board of Governors

Ellen E. Meade and Joyce K. Zickler, Senior Advisers,Division of Monetary Affairs, Board of Gover-nors

Eric M. Engen, Thomas Laubach, David E. Lebow,and Michael G. Palumbo, Associate Directors,Division of Research and Statistics, Board ofGovernors; Gretchen C. Weinbach, Associate Di-rector, Division of Monetary Affairs, Board ofGovernors

Marnie Gillis DeBoer, Deputy Associate Director,Division of Monetary Affairs, Board of Gover-nors; Diana Hancock, Deputy Associate Director,

Division of Research and Statistics, Board ofGovernors

Stacey Tevlin, Assistant Director, Division of Researchand Statistics, Board of Governors

Eric Engstrom, Section Chief, Division of Researchand Statistics, Board of Governors

David H. Small, Project Manager, Division of Mone-tary Affairs, Board of Governors

Peter M. Garavuso, Records Management Analyst,Division of Monetary Affairs, Board of Gover-nors

John F. Moore, First Vice President, Federal ReserveBank of San Francisco

David Altig, Jeff Fuhrer, Loretta J. Mester, andMark S. Sniderman, Executive Vice Presidents,

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Federal Reserve Banks of Atlanta, Boston, Phila-delphia, and Cleveland, respectively

Evan F. Koenig, Lorie K. Logan, and SamuelSchulhofer-Wohl, Senior Vice Presidents, FederalReserve Banks of Dallas, New York, and Minne-

apolis, respectively

David Andolfatto, James P. Bergin, Jonas D. M. Fish-er, Sylvain Leduc, and Paolo A. Pesenti, Vice Pres-idents, Federal Reserve Banks of St. Louis, NewYork, Chicago, San Francisco, and New York, re-spectively

Robert L. Hetzel, Senior Economist, Federal ReserveBank of Richmond

Developments in Financial Markets and the Fed-eral Reserves Balance SheetThe Manager of the System Open Market Accountreported on developments in domestic and foreign fi-nancial markets as well as System open market opera-tions during the period since the Federal Open MarketCommittee (FOMC) met on October 2930, 2013.The staff also presented an update on the ongoing test-ing of overnight reverse repurchase agreement (ONRRP) operations that the Committee approved at itsSeptember meeting and that is scheduled to end onJanuary 29, 2014. All operations to date had proceededsmoothly. Participation in ON RRP operations varied

somewhat from day to day, in part reflecting changes inthe spread between market rates on repurchase agree-ment transactions and the rate offered in the FederalReserves ON RRP operations. The staff reported thatthey saw potential benefits to extending the exerciseand in January would likely recommend a continuationalong with possible adjustments to program parametersthat could provide additional insights into the demandfor a potential facility and its efficacy in putting a flooron money market rates.

Following the Managers report, the Committee con-sidered a proposal to increase the caps on individualallocations in the ON RRP test operations from$1 billion to $3 billion per counterparty. The proposedincrease in caps was intended to test the Desks abilityto manage somewhat larger operational flows and toprovide additional information about the potential use-fulness of ON RRP operations to affect market interestrates when doing so becomes appropriate. Participantsgenerally supported the proposal, with one participantemphasizing the usefulness of extending the end date

of the program beyond the end of January. However,some participants questioned the extent to which theproposed limited increase in the caps would provideadditional insights about the operational aspects of theON RRP program or the potential market effects ofON RRP operations. A few participants suggested that

it would be useful to evaluate the potential role of anON RRP facility in the context of the Committeesplans for monetary policy implementation over themedium and longer term.

Following the discussion, the Committee unanimouslyapproved the following resolution:

The Federal Open Market Committee au-thorizes an increase in the maximum allot-ment cap for the series of fixed-rate, over-night reverse repurchase operations ap-proved on September 17, 2013, to $3 billion

per counterparty per day from its previouslevel of $1 billion per counterparty per day.All other aspects of the resolution remainunchanged.

By unanimous vote, the Committee ratified the Desksdomestic transactions over the intermeeting period.There were no intervention operations in foreign cur-rencies for the Systems account over the intermeetingperiod.

The staff presented a short briefing summarizing a sur-vey that was conducted over the intermeeting periodregarding participants views of the marginal costs and

marginal efficacy of asset purchases. Most participantsjudged the marginal costs of asset purchases as unlikelyto be sufficient, relative to their marginal benefits, tojustify ending the purchases now or relatively soon; afew participants identified some possible costs as beingmore substantial, indicating that the costs could justifyending purchases now or relatively soon even if theCommittees macroeconomic goals for the purchaseprogram had not yet been achieved. Participants weremost concerned about the marginal cost of additionalasset purchases arising from risks to financial stability,pointing out that a highly accommodative stance of

monetary policy could provide an incentive for exces-sive risk-taking in the financial sector. It was notedthat the risks to financial stability could be somewhatlarger in the case of asset purchases than in the case ofinterest rate policy because purchases work in part byaffecting term premiums and policymakers have lessexperience with term premium effects than with moreconventional interest rate policy. Participants also ex-pressed some concern that additional asset purchases

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increase the likelihood that the Federal Reserve mightat some point suffer capital losses. But it was pointedout that the Federal Reserves asset purchases wouldalmost certainly provide significant net income to theTreasury over the life of the program, especially whenthe effects of the program on the broader economy

were taken into account, and that potential reputationalrisks to the Federal Reserve arising from any futurecapital losses could be mitigated by communicating thatpoint to the public. Further, participants noted thatongoing asset purchases could increase the difficulty ofmanaging exit from the current highly accommodativepolicy stance when the time came. Many participants,however, expressed confidence in the tools at the Fed-eral Reserves disposal for managing its balance sheetand for normalizing the stance of policy at the appro-priate time. Regarding the marginal efficacy of the pur-chase program, most participants viewed the program

as continuing to support accommodative financial con-ditions, with a number of them pointing to the im-portance of purchases in serving to enhance the credi-bility of the Committees forward guidance about thetarget federal funds rate. A majority of participantsjudged that the marginal efficacy of purchases was like-ly declining as purchases continue, although some not-ed the difficulty inherent in making such an assessment.A couple of participants thought that the marginal effi-cacy of the program was not declining, as evidenced bythe substantial effects in financial markets in recentmonths of news about the likely path of purchases.

Staff Review of the Economic SituationThe information reviewed for the December 1718meeting indicated that economic activity was expandingat a moderate pace. Total payroll employment in-creased further, and the unemployment rate declinedbut remained elevated. Consumer price inflation con-tinued to run below the Committees objective,although measures of longer-run inflation expectationsremained stable.

Total nonfarm payroll employment rose in Octoberand November at a faster monthly pace than in theprevious two quarters. The unemployment rate de-

clined, on net, from 7.2 percent in September to7.0 percent in November. The labor force participa-tion rate also decreased, on balance, and theemployment-to-population ratio in November was thesame as in September. The share of workers employedpart time for economic reasons declined slightly whilethe rate of long-duration unemployment was littlechanged, but both measures were still high. Other in-dicators were generally consistent with gradually im-

proving conditions in the labor market. The rate of jobopenings edged up in recent months, the share of smallbusinesses reporting that they had hard-to-fill positionsincreased, and the four-week moving average of initialclaims for unemployment insurance trended down, onnet, over the intermeeting period, although the rate of

gross private-sector hiring was still somewhat low.Measures of firms hiring plans remained higher than ayear earlier, and household expectations of the labormarket situation improved in early December.

Manufacturing production accelerated briskly in Octo-ber and November after increasing at a subdued pacein the third quarter, and the gains were broad basedacross industries. Automakers schedules indicated thatthe pace of light motor vehicle assemblies would rise inDecember, and broader indicators of manufacturingproduction, such as the readings on new orders fromthe national and regional manufacturing surveys, were

consistent with a further expansion in factory output inthe coming months.

Real personal consumption expenditures (PCE) in-creased modestly in the third quarter but rose at a fasterpace in September and October. The components ofthe nominal retail sales data used by the Bureau ofEconomic Analysis to construct its estimate of PCEincreased at a strong pace in November, and light mo-tor vehicle sales moved up significantly. Moreover,recent information for key factors that support house-hold spending was consistent with further solid gains inPCE in the coming months. Households net worth

likely expanded as equity values and home prices in-creased further in recent months; real disposable in-come rose, on net, in September and October; andconsumer sentiment in the Thomson Reu-ters/University of Michigan Surveys of Consumersimproved significantly in early December.

The pace of activity in the housing sector appeared tocontinue to slow somewhat, likely reflecting the higherlevel of mortgage rates since the spring. Starts for bothnew single-family homes and multifamily units in-creased, on balance, from August to November, butpermitswhich are typically a better indicator of theunderlying pace of constructionrose more graduallythan starts over the same period. Sales of existinghomes and pending home sales decreased further inOctober, although new home sales rose in Octoberafter falling markedly in the third quarter.

Growth in real private expenditures for businessequipment and intellectual property products was sub-dued in the third quarter. In October, nominal ship-

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ments of nondefense capital goods excluding aircraftedged down. However, nominal new orders for thesecapital goods remained above the level of shipments,pointing to increases in shipments in subsequentmonths, and other forward-looking indicators, such assurveys of business conditions, were generally con-

sistent with moderate gains in business equipmentspending in the near term. Real business spending fornonresidential structures rose substantially in the thirdquarter, but nominal expenditures for new businessbuildings declined slightly in October. Real nonfarminventory investment increased noticeably in the thirdquarter, but recent book-value data forinventory-to-sales ratios, along with readings on inven-tories from national and regional manufacturing sur-veys, did not point to significant inventory imbalancesin most industries.

Real federal government purchases declined somewhat

in the third quarter but appeared likely to decreasemore substantially in the fourth quarter, reflecting theeffect of the temporary partial government shutdownin October and further cuts in defense spending in Oc-tober and November. Real state and local governmentpurchases rose markedly in the third quarter. Moreo-ver, the payrolls of these governments continued toexpand, on net, in October and November, and nomi-nal state and local construction expenditures increasedin October.

The U.S. international trade deficit narrowed in Octo-ber as exports rose more than imports. The gains in

exports were fairly widespread across categories andwere led by sales of consumer goods, industrial sup-plies, and agricultural products. The higher value ofimports reflected increases in services, consumergoods, and petroleum products that more than offsetlower purchases of computers, semiconductors, andautomotive products.

Total U.S. consumer price inflation, as measured by thePCE price index, was less than 1 percent over the12 months ending in October, in part because consum-er energy prices declined over the same 12-month peri-od. In addition, core PCE price inflationwhich ex-cludes consumer energy and food priceswas only alittle above 1 percent, partly reflecting subdued in-creases in medical services prices and recent declines inthe prices of many nonfuel imported goods. In No-vember, the consumer price index (CPI) was flat, andcore CPI prices rose slightly faster than in the preced-ing few months. Both near-term and longer-term infla-tion expectations from the Michigan survey were littlechanged, on net, in November and early December.

Measures of labor compensation indicated that increas-es in nominal wages continued to be modest. Compen-sation per hour in the nonfarm business sector rosemoderately over the year ending in the third quarter,and unit labor costs moved up at a similar pace as gainsin productivity were small. The employment cost index

expanded a little more slowly than the compensationper hour measure over the same yearlong period. Theincrease in nominal average hourly earnings for all em-ployees over the 12 months ending in November wasalso modest.

Foreign economic activity strengthened in the thirdquarter, as the euro area continued to recover from itsrecent recession, economic growth picked up in Chinaafter slowing in the first half of the year, and the Mexi-can economy rebounded from a second-quarter con-traction. Inflation slowed recently in many advancedforeign economies, partly as a result of a deceleration in

prices for energy and other commodities. Monetarypolicy remained very accommodative in most advancedeconomies, but central banks in some emerging marketeconomies recently tightened policy further to containinflation and support the foreign exchange value oftheir currencies.

Staff Review of the Financial SituationFinancial market developments over the intermeetingperiod appeared to be driven largely by incoming dataon employment and economic activity that exceededinvestor expectations as well as by Federal Reservecommunications.

Investors appeared to read the economic data releasesover the intermeeting period as better than had beenexpected and therefore as raising the odds that theFOMC might decide to reduce the pace of asset pur-chases at its December meeting. Survey evidence sug-gested that market participants now saw roughly similarprobabilities of the first reduction in the pace of assetpurchases occurring at the December, January, orMarch meeting. Market expectations regarding thetiming of liftoff of the federal funds rate seemed to belittle changed over the period. In part, a variety ofFederal Reserve communications were seen asstrengthening the Committees forward guidance forthe federal funds rate and contributing to the stabilityof expectations for the near-term path of the federalfunds rate in the face of an improved economic out-look.

On net, judging by financial market quotes on interestrate futures, the expected federal funds rate paththrough the end of 2015 moved only slightly since the



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October FOMC meeting. The expected federal fundsrate path at longer horizons rose somewhat, and theTreasury yield curve steepened, with the 2-year Treas-ury yield about unchanged but the 5- and 10-year yieldshigher by 21 and 34 basis points, respectively. Themeasure of 5-year inflation compensation based on

Treasury inflation-protected securities dipped 5 basispoints, while the 5-year forward measure increased7 basis points. The 30-year current-coupon yield onagency mortgage-backed securities increased a bit morethan the 10-year Treasury yield.

Stock prices were about unchanged, on net, over theintermeeting period, even though some broad equityprice indexes temporarily touched all-time nominalhighs. Corporate risk spreads narrowed somewhat.

Business finance flows were robust over the intermeet-ing period. Gross equity issuance by the nonfinancialcorporate sector in October and November reachedlevels not seen in a decade. Gross bond issuance bynonfinancial corporations picked up again after a diprelated to the fiscal standoff in October. Similarly, in-stitutional issuance of leveraged loans rose in Octoberand November, and collateralized loan obligation issu-ance remained strong.

Financing conditions in commercial real estate (CRE)markets were consistent with increased confidence.Year-to-date issuance of commercial mortgage-backedsecurities (CMBS) remained strong, but far below levelsseen before the financial crisis. Responses to the De-

cember 2013 Senior Credit Officer Opinion Survey onDealer Financing Terms (SCOOS) suggested that de-mand for funding for CMBS picked up since Septem-ber. CRE loans on banks books expanded in Octoberand November at an increasing pace.

Automobile loans continued to expand in October, andavailable data suggested that this trend was sustained inNovember. Automobile asset-backed securities (ABS)issuance accelerated in November, and issuance of pa-per backed by subprime automobile loans stayedstrong. In contrast, credit card balances moved side-ways, and ABS issuance in that sector stayed flat.

In the residential mortgage market, several large lenderswere reported to have eased their underwriting stand-ards slightly, but data suggested that mortgage lendersgenerally continued to be reluctant to lend to borrow-ers with less-than-pristine credit scores. Mortgage ratesrose over the intermeeting period to levels about100 basis points above their early-May lows. On bal-ance, refinancing applications were down substantiallysince May while purchase applications declined much

less. House prices rose significantly in October, butsome indicators suggested that the pace of house pricegains continued to decelerate relative to earlier in theyear.

Responses to the December SCOOS generally showedlittle change in dealer-intermediated financing sinceSeptember. Credit terms for most classes of counter-parties were little changed. One-third of respondentsreported a decline in the use of financial leverage bytrading real estate investment trusts, whereas the use offinancial leverage by other classes of counterparties wasbasically unchanged. In response to special questionsin the survey, dealers indicated that the current use ofrepurchase agreements or other forms of short-termfunding for longer-duration assets was roughly in linewith or somewhat below the levels seen early in 2013.

Bank credit rose slightly in October and November, as

growth in commercial and industrial loans, CRE loans,and consumer loans was partially offset by declines inthe outstanding balances of closed-end residentialmortgages on banks books. Stock prices for large andregional domestic banking firms outperformed thebroad equity market over the intermeeting period amidbetter-than-expected economic data and the settlementof mortgage-related litigation by some large bankingorganizations. Spreads on credit default swaps for thelargest bank holding companies also moved lower, onnet.

M2 contracted in November, likely reflecting in part

portfolio reallocations by investors that had temporarilyplaced funds in bank deposits as a safe haven duringthe recent federal debt limit impasse. Meanwhile, themonetary base continued to expand rapidly, primarilyreflecting the increase in reserve balances resultingfrom the Federal Reserves asset purchases.

The foreign exchange value of the dollar appreciatedfollowing the October FOMC meeting and the Octo-ber employment report and ended the intermeetingperiod higher on balance. A shift in market expecta-tions toward easier monetary policy abroad may havealso boosted the exchange value of the dollar, most

notably against the Japanese yen, and equity prices inJapan rose substantially further during the period. Bycontrast, equity prices declined in many emerging mar-ket economies; in some cases, those declines were largeand accompanied by sizable decreases in currency val-ues and sovereign bond prices. European equity priceswere also lower over the period. Long-term bench-mark sovereign yields in the United Kingdom and Can-ada increased, in line with, but somewhat less than, the



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rise in yields on comparable U.S. Treasury securities.Yields on German sovereign bonds, which reacted to apolicy rate cut by the European Central Bank and therelease of data showing lower-than-expected euro-areainflation, were only slightly higher on net.

The staffs periodic report on potential risks to finan-cial stability concluded that the vulnerability of the fi-nancial system to adverse shocks remained at moderatelevels overall. Relatively strong capital profiles of largedomestic banking firms, low levels and moderategrowth of aggregate credit in the nonfinancial sectors,and some reduction in reliance on short-term wholesalefunding across the financial sector were seen as factorssupporting financial stability in the current environ-ment. Valuations in most asset markets seemed broad-ly in line with historical norms. However, the staff re-port noted that the complexity and interconnectednessof large financial institutions, along with some apparent

increases in investor appetite for higher-yielding assetsand associated pressures on underwriting standardsremained potential sources of risk to the financial sys-tem.

Staff Economic OutlookIn the economic projection prepared by the staff forthe December FOMC meeting, the forecast for growthin real gross domestic product (GDP) in the secondhalf of this year was revised up a little from the oneprepared for the previous meeting, as the recent infor-mation on private domestic final demandparticularlyconsumer spendingwas somewhat better, on balance,

than the staff had anticipated. The staffs medium-term forecast for real GDP growth was also revised upslightly, reflecting a small reduction in fiscal restraintfrom the recent federal budget agreement, which thestaff assumed would be enacted; a lower anticipatedtrajectory for longer-term interest rates; and higherpaths for equity values and home prices. Those fac-tors, in total, more than offset a higher path for theforeign exchange value of the dollar. The staff contin-ued to project that real GDP would expand morequickly over the next few years than it has this year andwould rise significantly faster than the growth rate of

potential output. This acceleration in economic activitywas expected to be supported by an easing in the ef-fects of fiscal policy restraint on economic growth, in-creases in consumer and business sentiment, continuedimprovements in credit availability and financial condi-tions, a further easing of the economic stresses in Eu-rope, and still-accommodative monetary policy. Theexpansion in economic activity was anticipated to slow-ly reduce resource slack over the projection period, and

the unemployment rate was expected to decline gradu-ally to the staffs estimate of its longer-run natural rate.

The staffs forecast for inflation was quite similar to theprojection prepared for the previous FOMC meeting.The near-term forecast for inflation was revised downslightly to reflect some recent softer-than-expected da-ta. The staff continued to forecast that inflation wouldbe modest, on net, through early next year but higherthan its low level in the first half of this year. Thestaffs projection for inflation over the medium termwas essentially unchanged. With longer-run inflationexpectations assumed to remain stable, changes incommodity and import prices expected to be measured,and slack in labor and product markets persisting overmost of the projection period, inflation was projectedto be subdued through 2016.

The staff viewed the uncertainty around the projection

for economic activity as similar to its average over thepast 20 years. Nonetheless, the risks to the forecast forreal GDP growth were viewed as tilted to the down-side, reflecting concerns that the extent of supply-sidedamage to the economy since the recession couldprove greater than assumed; that the tightening inmortgage rates since last spring could exert greater re-straint on the housing recovery than had been project-ed; that economic and financial stresses in emergingmarket economies and the euro area could intensify;and that, with the target federal funds rate already nearits lower bound, the U.S. economy was not well posi-tioned to weather future adverse shocks. However, the

staff viewed the risks around the projection for the un-employment rate as roughly balanced, with the risk of ahigher unemployment rate resulting from adverse de-velopments roughly countered by the possibility thatthe unemployment rate could continue to fall morethan expected, as it had in recent years. The staff didnot see the uncertainty around its outlook for inflationas unusually high, and the risks to that outlook wereviewed as broadly balanced.

Participants Views on Current Conditions and theEconomic OutlookIn conjunction with this FOMC meeting, the meetingparticipants5 members of the Board of Governorsand the presidents of the 12 Federal Reserve Banks, allof whom participated in the deliberationssubmittedtheir assessments of real output growth, the unem-ployment rate, inflation, and the target federal fundsrate for each year from 2013 through 2016 and over thelonger run, under each participants judgment of ap-propriate monetary policy. The longer-run projectionsrepresent each participants assessment of the rate to



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which each variable would be expected to converge,over time, under appropriate monetary policy and inthe absence of further shocks to the economy. Theseeconomic projections and policy assessments are de-scribed in the Summary of Economic Projections(SEP), which is attached as an addendum to these

minutes.In their discussion of the economic situation and theoutlook, meeting participants viewed the informationreceived over the intermeeting period as suggesting thatthe economy was expanding at a moderate pace. Theygenerally indicated that the broad contours of their out-look for real activity, the labor market, and inflationhad not changed materially since their October meet-ing, but most expressed greater confidence in the out-look and saw the risks associated with their forecasts ofreal GDP growth and the unemployment rate as morenearly balanced than earlier in the year. Almost all par-

ticipants continued to project that the rate of growth ofeconomic activity would strengthen in coming years,and all anticipated that the unemployment rate wouldgradually decline toward levels consistent with theircurrent assessments of its longer-run normal value.The projected improvement in economic activity wasexpected to be supported by highly accommodativemonetary policy, diminished fiscal policy restraint, anda pickup in global economic growth, as well as a furthereasing of credit conditions and continued improve-ments in household balance sheets. Inflation remainedbelow the Committees longer-run objective over the

intermeeting period. Nevertheless, participants stillanticipated that with longer-run inflation expectationsstable and economic activity picking up, inflation wouldmove back toward its objective over the medium run.But they noted that inflation persistently below theCommittees objective would pose risks to economicperformance and so saw a need to monitor inflationdevelopments carefully.

Consumer spending appeared to be strengthening, withsolid gains in retail sales in recent months and a re-bound in motor vehicle sales in November. On bal-ance, retail contacts reportedly were fairly optimistic

about holiday sales. Participants cited a number of fac-tors that likely contributed to the recent pickup inspending, including the waning effects of the payrolltax increase that had trimmed disposable income earlierin the year, the drop in energy costs, and the recentimprovement in consumer sentiment. More broadly,spending was being supported by gains in householdwealth associated with rising house prices and equityvalues, the still-low level of interest rates, and the

progress that households have made in reducing debtand strengthening their balance sheets. These favora-ble trends were generally anticipated to continue and tobe accompanied by stronger real disposable income aslabor market conditions improve and inflation remainslow.

Activity in the housing sector slowed in recent months.Some participants noted that the increase in mortgageinterest rates since the spring was having a greater ef-fect on that sector than they had anticipated earlier.Despite the recent softening, participants discussed anumber of factors that should support a continued re-covery in housing going forward. These included ex-pectations that mortgage interest rates would remainrelatively favorable, that rising home values wouldboost household wealth and further reduce the numberof borrowers with underwater mortgages, that consum-er incomes and confidence would continue to rise as

employment expanded, and that a pickup in householdformation would support the demand for housing.

Business investment appeared to be advancing at amoderate rate. A number of the fundamental determi-nants of business investment were positive: Businessbalance sheets remained in good shape, cash flow wasample, and input costs were subdued. Business con-tacts in a number of Districts were reportedly some-what more confident about the outlook than they hadbeen earlier in the fall, but a couple of participants re-ported that their contacts continued to focus on in-vestments intended to reduce costs and were still cau-

tious regarding investment to expand capacity, or thatconcerns about health care costs were holding backhiring. In the manufacturing sector, production ap-peared to be increasing at a solid rate according to bothnational and most of the regional surveys of activity,and the available indexes of future activity continued tosuggest optimism among firms. Renewed export de-mand and a buildup in auto inventories, which may bereversed in 2014, were cited as contributing to the re-cent gains in production. Participants heard positivereports from their contacts in the technology, rail,freight, and airline industries, and activity in the energy

sector remained strong. In agriculture, record yieldswere reported for corn and soybeans, but farm incomewas being reduced by lower crop prices. Measures offarmland values were still rising, but anecdotal reportssuggested softening in some areas.

Fiscal policy continued to restrain economic growth.However, participants generally judged that the extentof the restraint may have begun to diminish as the ef-fects of the payroll tax increases earlier in the year seem



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to have waned, and the drag on real activity from re-strictive fiscal policies was expected to decline furthergoing forward. Moreover, a number of participantsobserved that the prospect that the Congress wouldshortly reach an accord on the budget seemed to bereducing uncertainty and lowering the risks that might

be associated with a disruptive political impasse.Committee participants generally viewed the increasesin nonfarm payroll employment of more than 200,000per month in October and November and the declinein the unemployment rate to 7 percent as encouragingsigns of ongoing improvement in labor market condi-tions. Several cited other indicators of progress in thelabor market, such as the decline in new claims for un-employment insurance, the uptrend in quits, or the risein the number of small businesses reporting job open-ings that were hard to fill. Participants exchangedviews on the extent to which the decrease in labor

force participation over recent years represented cycli-cal weakness in the labor market that was not adequate-ly captured by the unemployment rate. Some partici-pants cited research that found that demographic andother structural factors, particularly rising retirementsby older workers, accounted for much of the recentdecline in participation. However, several others con-tinued to see important elements of cyclical weaknessin the low labor force participation rate and cited otherindicators of considerable slack in the labor market,including the still-high levels of long-duration unem-ployment and of workers employed part time for eco-

nomic reasons and the still-depressed ratio of employ-ment to population for workers ages 25 to 54. In addi-tion, although a couple of participants had heard re-ports of labor shortages, particularly for workers withspecialized skills, most measures of wages had not ac-celerated. A few participants noted the risk that thepersistent weakness in labor force participation and lowrates of productivity growth might indicate lastingstructural economic damage from the financial crisisand ensuing recession.

Inflation continued to run noticeably below the Com-mittees longer-run objective of 2 percent, but partici-

pants anticipated that it would move back toward2 percent over time as the economic recovery strength-ened and longer-run inflation expectations remainedsteady. Several participants suggested that some of thefactors that had held down inflation recently, such asthe slowing in price increases for medical care andbanking services, were likely to prove transitory. Someparticipants suggested that inflation, while low, wasunlikely to slow further, pointing to core, trimmed

mean, or sticky-price inflation measures as indicative offairly steady underlying price trends; most measures ofwage gains were also steady. Nonetheless, many partic-ipants expressed concern about the deceleration inconsumer prices over the past year, and a couple point-ed out that a number of other advanced economies

were also experiencing very low inflation. Among thecosts of very low or declining inflation that were citedwere its effects in raising real interest rates and debtburdens. A few participants raised the possibility thatrecent declines in inflation might suggest that the eco-nomic recovery was not as strong as some thought.

Domestic financial markets were influenced important-ly over the intermeeting period by Federal Reservecommunications and by economic data that were gen-erally better than market participants expected. Thesefactors apparently led market participants to raise theodds they assigned to a reduction in the pace of asset

purchases at the December meeting, and to leaveroughly unchanged their expectations for the timing ofthe first increase in the target federal funds rate. Anumber of participants noted that current market ex-pectations were reasonably well aligned with the Com-mittees recent policy communications.

Participants also reviewed indicators of financial vul-nerabilities that could pose risks to financial stabilityand the broader economy. These indicators generallysuggested that such risks were moderate, in part be-cause of the reduction in leverage and maturity trans-formation that has occurred in the financial sector since

the onset of the financial crisis. In their discussion ofpotential risks, several participants commented on therise in forward price-to-earnings ratios for some small-cap stocks, the increased level of equity repurchases, orthe rise in margin credit. One pointed to the increasein issuance of leveraged loans this year and the appar-ent decline in the average quality of such loans. A cou-ple of participants offered views on the role of financialstability in monetary policy decisionmaking morebroadly. One proposed that the Committee analyzemore explicitly the potential consequences of specificrisks to the financial system for its dual-mandate objec-

tives and take account of the possible effects of mone-tary policy on such risks in its assessment of appropri-ate policy. Another suggested that the importance offinancial stability considerations in the Committeesdeliberations would likely increase over time asprogress is made toward the Committees objectives,and that such considerations should be incorporatedinto forward guidance for the federal funds rate andasset purchases.



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In their discussion of the appropriate path for mone-tary policy, participants considered whether the cumu-lative improvement in labor market conditions sincethe asset purchase program began in September 2012and the associated improvement in the outlook for thelabor market warranted a reduction in the pace of asset

purchases. The most recent data showed that increasesin nonfarm payroll employment had averaged around190,000 per month for the past 15 months, and theunemployment rate had fallen more quickly over thatperiod than most participants had expected. Moreover,participants generally anticipated that the improvementin labor market conditions would continue, and mosthad become more confident in that outlook. Againstthis backdrop, most participants saw a reduction in thepace of purchases as appropriate at this meeting andconsistent with the Committees previous policy com-munications. Many commented that progress to date

had been meaningful, and some expressed the view thatthe criterion of substantial improvement in the outlookfor the labor market was likely to be met in the comingyear if the economy evolved as expected. However,several participants stressed that the unemploymentrate remained elevated, that a range of other indicatorshad shown less progress toward levels consistent with afull recovery in the labor market, and that the projectedpickup in economic growth was not assured. Someparticipants also questioned whether slowing the paceof purchases at a time when inflation was running wellbelow the Committees longer-run objective was ap-propriate. For some, the considerable slack remaining

in the labor market and shortfall of inflation from theCommittees longer-run objective warranted continuingasset purchases at the current pace for a time in orderto wait for additional information confirming sustainedprogress toward the Committees objectives or to pro-mote faster progress toward those objectives. Amongthose inclined to begin to reduce the pace of asset pur-chases at this meeting, many favored a modest initialreduction accompanied by guidance indicating that de-cisions regarding future reductions would depend oneconomic and financial developments as well as theefficacy and costs of purchases. Some other partici-

pants preferred a larger reduction in purchases at thismeeting and future reductions that would bring theprogram to a close relatively quickly. A few proposedthat the Committee lay out, either at this meeting orsubsequently, a more deterministic path for windingdown the program or that it announce a fixed amountof additional purchases and an expected completiondate, thereby reducing uncertainty about the trajectoryof the purchase program.

Participants also considered the potential for clarifyingor strengthening the Committees forward guidance forthe federal funds rate. In general, participants whofavored amending the forward guidance saw a need tomore fully communicate how, if the unemploymentrate threshold was reached first, the Committee would

likely set monetary policy after that threshold wascrossed. A number of participants pointed out that thefederal funds rate paths underlying the economic fore-casts that they prepared for this meeting, as well as ex-pectations for the funds rate path priced into financialmarkets, were consistent with the view that the Com-mittee would not raise the federal funds rate until wellafter the time that the threshold was crossed. A fewparticipants discussed the potential advantages and dis-advantages of using medians of the projections of thefederal funds rate from the SEP as a means of com-municating the likely path of short-term interest rates.

Some worried that, if the Committee began to reduceasset purchases, market expectations might shift, andthey wanted to reinforce the forward guidance to miti-gate the risks of an undesired tightening of financialconditions that could have adverse effects on the econ-omy. In light of their concern that inflation might con-tinue to run well below the Committees longer-runobjective, several participants saw the need to clearlyconvey that inflation remains an important considera-tion in adjusting the target funds rate. Participants de-bated the advantages and disadvantages of lowering theunemployment rate threshold provided in the forwardguidance. In the view of the few participants who ad-

vocated such a change, a lower threshold would be aclear signal of the Committees intentions and was anappropriate adjustment in light of recent labor marketand inflation trends. In contrast, a few others ex-pressed concern that any change in the threshold mightbe confusing and could undermine the credibility of theCommittees forward guidance. Most were inclined toretain the current thresholds for the unemploymentand inflation rates and to instead provide qualitativeguidance regarding the Committees likely behaviorafter a threshold was crossed.

Committee Policy Action

Committee members viewed the information receivedover the intermeeting period as indicating that theeconomy was expanding at a moderate pace. Labormarket conditions had improved in recent months,with monthly gains in payroll employment of morethan 200,000 in October and November. The unem-ployment rate had declined but remained elevated.Household spending and business fixed investmentadvanced, while the recovery in the housing market



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slowed somewhat in recent months. Fiscal policy wasrestraining economic growth, although the extent ofthe restraint may have begun to diminish. The Com-mittee expected that, with appropriate policy accom-modation, economic growth would strengthen and theunemployment rate would gradually decline toward

levels consistent with its dual mandate. Moreover,members judged that the risks to the outlook for theeconomy and the labor market had become more near-ly balanced, reflecting in part an easing of fiscal policyconcerns and an improvement in the prospects forglobal economic growth. Inflation was running belowthe Committees longer-run objective, and this wasseen as posing possible risks to economic performance.Members anticipated that inflation would, over time,return to the Committees 2 percent objective, support-ed by stable inflation expectations and stronger eco-nomic activity. However, in light of their concerns

about the persistence of low inflation, many memberssaw a need for the Committee to monitor inflation de-velopments carefully for evidence that inflation wasmoving back toward its longer-run objective.

In their discussion of monetary policy in the periodahead, most members agreed that the cumulative im-provement in labor market conditions and the likeli-hood that the improvement would be sustained indi-cated that the Committee could appropriately begin toslow the pace of its asset purchases at this meeting.However, members also weighed a number of consid-erations regarding such an action, including their degree

of confidence in prospects for sustained above-potential economic growth, continued improvement inlabor market conditions, and a return of inflation to itsmandate-consistent level over time. Some also ex-pressed concern about the potential for an unintendedtightening of financial conditions if a reduction in thepace of asset purchases was misinterpreted as signalingthat the Committee was likely to withdraw policy ac-commodation more quickly than had been anticipated.As a consequence, many members judged that theCommittee should proceed cautiously in taking its firstaction to reduce the pace of asset purchases and shouldindicate that further reductions would be undertaken inmeasured steps. Members also stressed the need tounderscore that the pace of asset purchases was not ona preset course and would remain contingent on theCommittees outlook for the labor market and inflationas well as its assessment of the efficacy and costs ofpurchases. Consistent with this approach, the Commit-tee agreed that, beginning in January, it would add to itsholdings of agency mortgage-backed securities at a paceof $35 billion per month rather than $40 billion per

month, and add to its holdings of longer-term Treasurysecurities at a pace of $40 billion per month rather than$45 billion per month. While deciding to modestlyreduce its pace of purchases, the Committee empha-sized that its holdings of longer-term securities weresizable and would still be increasing, which would

promote a stronger economic recovery by maintainingdownward pressure on longer-term interest rates, sup-porting mortgage markets, and helping to make broad-er financial conditions more accommodative. TheCommittee also reiterated that it will continue its assetpurchases, and employ its other policy tools as appro-priate, until the outlook for the labor market has im-proved substantially in a context of price stability. Inthe view of one member, a reduction in the pace ofpurchases was premature and, before taking such astep, the Committee should wait for more convincingevidence that economic growth was rising faster than

its potential and that inflation would return to theCommittees 2 percent objective.

In their discussion of forward guidance about the targetfederal funds rate, a few members suggested that lower-ing the unemployment threshold to 6 percent couldeffectively convey the Committees intention to keepthe target federal funds rate low for an extended peri-od. However, most members wanted to make nochange to the threshold and instead preferred to pro-vide qualitative guidance to clarify that a range of labormarket indicators would be used when assessing theappropriate stance of policy once the threshold had

been crossed. A number of members thought that theforward guidance should emphasize the importance ofinflation as a factor in their decisions. Accordingly,almost all members agreed to add language indicatingthe Committees anticipation, based on its current as-sessment of additional measures of labor market condi-tions, indicators of inflation pressures and inflationexpectations, and readings on financial developments,that it would be appropriate to maintain the currenttarget range for the federal funds rate well past the timethat the unemployment rate declines below 6 percent,especially if projected inflation continues to run belowthe Committees longer-run objective. It was notedthat this language might appear calendar-based ratherthan conditional on economic and financial develop-ments, and one member objected to having forwardguidance that might be seen as relatively inflexible inresponse to changes in members views about the ap-propriate path of the target federal funds rate. Howev-er, those concerns generally were seen as outweighedby the benefit of avoiding tying the Committees deci-sion too closely to the unemployment rate alone, while



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still-increasing holdings of longer-term secu-rities should maintain downward pressure onlonger-term interest rates, support mortgagemarkets, and help to make broader financialconditions more accommodative, which inturn should promote a stronger economic

recovery and help to ensure that inflation,over time, is at the rate most consistent withthe Committees dual mandate.

The Committee will closely monitor incom-ing information on economic and financialdevelopments in coming months and willcontinue its purchases of Treasury and agen-cy mortgage-backed securities, and employits other policy tools as appropriate, until theoutlook for the labor market has improvedsubstantially in a context of price stability. Ifincoming information broadly supports the

Committees expectation of ongoing im-provement in labor market conditions andinflation moving back toward its longer-runobjective, the Committee will likely reducethe pace of asset purchases in further meas-ured steps at future meetings. However, as-set purchases are not on a preset course, andthe Committees decisions about their pacewill remain contingent on the Committeesoutlook for the labor market and inflation aswell as its assessment of the likely efficacyand costs of such purchases.

To support continued progress toward max-imum employment and price stability, theCommittee today reaffirmed its view that ahighly accommodative stance of monetarypolicy will remain appropriate for a consider-able time after the asset purchase programends and the economic recovery strengthens.The Committee also reaffirmed its expecta-tion that the current exceptionally low targetrange for the federal funds rate of 0 to percent will be appropriate at least as longas the unemployment rate remains above

6 percent, inflation between one and twoyears ahead is projected to be no more than ahalf percentage point above the Committees2 percent longer-run goal, and longer-terminflation expectations continue to be well an-chored. In determining how long to main-tain a highly accommodative stance of mone-

tary policy, the Committee will also considerother information, including additionalmeasures of labor market conditions, indica-tors of inflation pressures and inflation ex-pectations, and readings on financial devel-opments. The Committee now anticipates,

based on its assessment of these factors, thatit likely will be appropriate to maintain thecurrent target range for the federal funds ratewell past the time that the unemploymentrate declines below 6 percent, especially ifprojected inflation continues to run belowthe Committees 2 percent longer-run goal.When the Committee decides to begin toremove policy accommodation, it will take abalanced approach consistent with its longer-run goals of maximum employment and in-flation of 2 percent.

Voting for this action: Ben Bernanke, William C. Dud-ley, James Bullard, Charles L. Evans, Esther L. George,Jerome H. Powell, Jeremy C. Stein, Daniel K. Tarullo,and Janet L. Yellen.

Voting against this action: Eric Rosengren.

Mr. Rosengren dissented because he viewed the deci-sion to slow the pace of asset purchases at this meetingas premature. In his view, with the unemployment ratestill elevated and the inflation rate well below theCommittees longer-run objective of 2 percent, changesin the asset purchase program should be postponed

until incoming data more clearly indicate that economicgrowth is likely to be sustained above its potential rate.He saw the costs of delaying action at this meeting aslikely to be small relative to the gains from promoting afaster return of both elements of the Committees dualmandate to their longer-run objectives.

It was agreed that the next meeting of the Committeewould be held on TuesdayWednesday, January 2829,2014. The meeting adjourned at 11:00 a.m. on Decem-ber 18, 2013.

Notation VoteBy notation vote completed on November 19, 2013,

the Committee unanimously approved the minutes ofthe FOMC meeting held on October 2930, 2013.

_____________________________

William B. EnglishSecretary



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Summary of Economic Projections

In conjunction with the December 1718, 2013, Feder-al Open Market Committee (FOMC) meeting, meetingparticipants5 members of the Board of Governorsand the 12 presidents of the Federal Reserve Banks, allof whom participated in the deliberationssubmittedtheir assessments of real output growth, the unem-ployment rate, inflation, and the target federal fundsrate for each year from 2013 through 2016 and over thelonger run. Each participants assessment was basedon information available at the time of the meeting plushis or her judgment of appropriate monetary policy andassumptions about the factors likely to affect economicoutcomes. The longer-run projections represent eachparticipants judgment of the value to which each vari-able would be expected to converge, over time, underappropriate monetary policy and in the absence of fur-

ther shocks to the economy. Appropriate monetarypolicy is defined as the future path of policy that eachparticipant deems most likely to foster outcomes foreconomic activity and inflation that best satisfy his orher individual interpretation of the Federal Reservesobjectives of maximum employment and stable prices.

Overall, FOMC participants expected, under appropri-ate monetary policy, that economic growth would pickup, on average, over the next three years, with the un-employment rate declining gradually (table 1 and figure1). Almost all of the participants projected that infla-

tion, as measured by the annual change in the priceindex for personal consumption expenditures (PCE),would rise to a level at or slightly below the Commit-tees 2 percent objective in 2016.

Most participants expected that highly accommodativemonetary policy would remain warranted over the nextfew years to foster progress toward the Federal Re-serves longer-run objectives. As shown in figure 2, alarge majority of participants projected not only that itwould be appropriate to wait until 2015 or later beforebeginning to increase the federal funds rate, but alsothat it would then be appropriate to raise the targetfederal funds rate relatively gradually. Most partici-pants viewed their economic projections as broadlyconsistent with a slowing in the pace of the Commit-tees purchases of longer-term securities in early 2014and the completion of the program in the second halfof the year.

Most participants saw the uncertainty associated withtheir outlook for economic growth, the unemploymentrate, and inflation as similar to that of the past 20 years.In addition, most participants considered the risks tothe outlook for real gross domestic product (GDP), theunemployment rate, and inflation to be broadly bal-anced, although a few saw the risks to their inflationforecasts as tilted to the downside.

Table 1. Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents, December 2013

Percent

VariableCentral tendency1 Range2

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 2.5September 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 6.0September 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 2.0September 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 2.2September 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 previousyear 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 per-sonal consumption expenditures (PCE) and the price index for PCE excluding food and energy. Projections for the unemployment rate are for the average civil-ian unemployment rate in the fourth quarter of the year indicated. Each participants projections are based on his or her assessment of appropriate monetarypolicy. Longer-run projections represent each participants assessment of the rate to which each variable would be expected to converge under appropriate mone-tary policy and in the absence of further shocks to the economy. The September projections were made in conjunction with the meeting of the Federal OpenMarket Committee on September 1718, 2013.

1. The central tendency excludes the three highest and three lowest projections for each variable in each year.2. The range for a variable in a given year includes all participants projections, from lowest to highest, for that variable in that year.3. Longer-run projections for core PCE inflation are not collected.

Page 1_____________________________________________________________________________________________


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Figure 1. Central tendencies and ranges of economic projections, 201316 and over the longer run

Change in real GDP

Percent

3

2

1

0

1

2

3

4

5

-

+

2008 2009 2010 2011 2012 2013 2014 2015 2016 Longerrun

Central tendency of projections

Range of projections

Actual

Unemployment rate

Percent

5

6

7

8

9

10

2008 2009 2010 2011 2012 2013 2014 2015 2016 Longerrun

PCE inflation

Percent

1

2

3

2008 2009 2010 2011 2012 2013 2014 2015 2016 Longerrun

Core PCE inflation

Percent

1

2

3

2008 2009 2010 2011 2012 2013 2014 2015 2016 Longerrun

Note: Definitions of variables are in the general note to table 1. The data for the actual values of the variables areannual.



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

2

12

3

Appropriate timing of policy firming

Number of participants

1

2

3

4

5

6

7

8

9

10

11

12

2014 2015 2016

Appropriate pace of policy firming Percent

Target federal funds rate at year-end

0

1

2

3

4

5

6

2013 2014 2015 2016 Longer run

Note: In the upper panel, the height of each bar denotes the number of FOMC participants who judge that, underappropriate monetary policy, the first increase in the target federal funds rate from its current range of 0 to 1/4 percentwill occur in the specified calendar year. In September 2013, the numbers of FOMC participants who judged that thefirst increase in the target federal funds rate would occur in 2014, 2015, and 2016 were, respectively, 3, 12, and 2. Inthe lower panel, each shaded circle indicates the value (rounded to the nearest 1/4 percentage point) of an individualparticipants judgment of the appropriate level of the target federal funds rate at the end of the specified calendar yearor over the longer run.

Summary of Economic Projections of the Meeting of December 1718, 2013 Page 3_____________________________________________________________________________________________


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The Outlook for Economic ActivityParticipants generally projected that, conditional ontheir individual assumptions about appropriate mone-tary policy, real GDP growth would accelerate in 2014from its rate in 2013 and would pick up further in2015. Subsequently, in 2016, real GDP growth would

begin to converge back to a pace that participants sawas the longer-run rate of output growth. Participantspointed to a number of factors contributing to thepickup in growth in the near term, including diminish-ing restraint from fiscal policy, pent-up demand forconsumer and producer durables, rising household networth, stronger growth abroad, and accommodativemonetary policy. A number of participants noted thatgrowth in residential investment had slowed some re-cently as a result of higher mortgage rates, but they ex-pected growth to strengthen beginning in 2014. Severalparticipants also noted a slowdown in the growth of

business investment but saw growth picking up overthe forecast horizon, reflecting an expected accelerationin sales.

The central tendencies of participants projections forreal 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 tendencyfor the longer-run rate of growth of real GDP was2.2 to 2.4 percent. These projections were littlechanged from September.

Participants anticipated a gradual decline in the unem-ployment rate over the projection period. The central

tendencies of participants forecasts for the unemploy-ment rate in the fourth quarter of each year were 7.0 to7.1 percent in 2013, 6.3 to 6.6 percent in 2014, 5.8 to6.1 percent in 2015, and 5.3 to 5.8 percent in 2016.Nearly all participants made a modest downward revi-sion to their projected path for the unemployment rate,reflecting its recent larger-than-expected decline; how-ever, the central tendency of participants estimates ofthe longer-run normal rate of unemployment thatwould prevail under appropriate monetary policy and inthe absence of further shocks to the economy was un-changed at 5.2 to 5.8 percent. A majority of partici-

pants projected that the unemployment rate would benear or slightly above their individual estimates of itslonger-run level at the end of 2016.

Figures 3.A and 3.B show that participants views re-garding the likely outcomes for real GDP growth andthe unemployment rate remained dispersed. The diver-sity evidently reflected their individual assessments ofthe likely rate at which the restraint from fiscal policy

will diminish and demand for consumer and producerdurables will recover, the anticipated path for foreigneconomic activity, the trajectory for growth in house-hold net worth, and the appropriate path of monetarypolicy. Relative to September, the dispersions of par-ticipants projections for GDP growth in 2014 and be-

yond were about unchanged, while dispersions of theprojections for the unemployment rate narrowed somethrough 2015.

The Outlook for InflationParticipants views on the broad outlook for inflationunder the assumption of appropriate monetary policywere marked down a bit in 2013 and 2014 from thosein their September projections, but the central tenden-cies for 2015 and beyond were similar. All participantsanticipated that, on average, both headline and coreinflation would rise gradually over the next few years,and a large majority of participants expected headline

inflation to be at or slightly below the Committees2 percent objective in 2016. Specifically, the centraltendencies for PCE inflation were 0.9 to 1.0 percent in2013, 1.4 to 1.6 percent in 2014, 1.5 to 2.0 percent in2015, and 1.7 to 2.0 percent in 2016. The centraltendencies of the forecasts for core inflation wereslightly lower over the projection period than in Sep-tember and broadly similar to those for the headlinemeasure. A number of participants viewed the combi-nation of stable inflation expectations and diminishingresource slack as likely to contribute to a gradual rise ofinflation back toward the Committees longer-run ob-

jective.Figures 3.C and 3.D provide information on the diver-sity of participants views about the outlook for infla-tion. Relative to September, the ranges of participantsprojections for overall inflation narrowed some in 2013and 2014 but remained relatively unchanged thereafter.In 2016, the forecasts for PCE inflation were concen-trated near the Committees longer-run objective,though one participant expected inflation to be per-centage point above the Committees objective andanother three expected it to be almost percentagepoint below. Similar to the projections for headline

inflation, the projections for core inflation also wereconcentrated near 2 percent in 2016.

Appropriate Monetary PolicyAs indicated in figure 2, most participants judged thatexceptionally low levels of the federal funds rate wouldremain appropriate for the next few years. In particu-lar, 12 participants thought that the first increase in thetarget federal funds rate would not be warranted until



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Figure 3.A. Distribution of participants projections for the change in real GDP, 201316 and over the longer run

2013


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101214161820

1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6- - - - - - - - - -

1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 3.5 3.7

Percent range

December projections

September projections

2014


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101214161820

1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6- - - - - - - - - -

1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 3.5 3.7

Percent range

2015


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101214161820

1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6- - - - - - - - - -

1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 3.5 3.7

Percent range

2016


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101214161820

1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6- - - - - - - - - -

1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 3.5 3.7

Percent range

Longer run


2468

1012

14161820

1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6- - - - - - - - - -

1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 3.5 3.7

Percent range

Note: Definitions of variables are in the general note to table 1.



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Figure 3.B. Distribution of participants projections for the unemployment rate, 201316 and over the longer run

2013


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101214161820

5.0 5.2 5.4 5.6 5.8 6.0 6.2 6.4 6.6 6.8 7.0 7.2- - - - - - - - - - - -

5.1 5.3 5.5 5.7 5.9 6.1 6.3 6.5 6.7 6.9 7.1 7.3

Percent range



2014


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101214161820

5.0 5.2 5.4 5.6 5.8 6.0 6.2 6.4 6.6 6.8 7.0 7.2- - - - - - - - - - - -

5.1 5.3 5.5 5.7 5.9 6.1 6.3 6.5 6.7 6.9 7.1 7.3

Percent range

2015


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101214161820

5.0 5.2 5.4 5.6 5.8 6.0 6.2 6.4 6.6 6.8 7.0 7.2- - - - - - - - - - - -

5.1 5.3 5.5 5.7 5.9 6.1 6.3 6.5 6.7 6.9 7.1 7.3

Percent range

2016


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5.0 5.2 5.4 5.6 5.8 6.0 6.2 6.4 6.6 6.8 7.0 7.2- - - - - - - - - - - -

5.1 5.3 5.5 5.7 5.9 6.1 6.3 6.5 6.7 6.9 7.1 7.3

Percent range

Longer run


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1012

14161820

5.0 5.2 5.4 5.6 5.8 6.0 6.2 6.4 6.6 6.8 7.0 7.2- - - - - - - - - - - -

5.1 5.3 5.5 5.7 5.9 6.1 6.3 6.5 6.7 6.9 7.1 7.3

Percent range




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Figure 3.C. Distribution of participants projections for PCE inflation, 201316 and over the longer run

2013


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101214161820

0.9 1.1 1.3 1.5 1.7 1.9 2.1 2.3- - - - - - - -

1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4

Percent range



2014


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101214161820

0.9 1.1 1.3 1.5 1.7 1.9 2.1 2.3- - - - - - - -

1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4

Percent range

2015


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101214161820

0.9 1.1 1.3 1.5 1.7 1.9 2.1 2.3- - - - - - - -

1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4

Percent range

2016


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101214161820

0.9 1.1 1.3 1.5 1.7 1.9 2.1 2.3- - - - - - - -

1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4

Percent range

Longer run


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1012

14161820

0.9 1.1 1.3 1.5 1.7 1.9 2.1 2.3- - - - - - - -

1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4

Percent range




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Figure 3.D. Distribution of participants projections for core PCE inflation, 201316

2013


2

4

6

8

1012

14

16

18

20

1.1 1.3 1.5 1.7 1.9 2.1 2.3- - - - - - -

1.2 1.4 1.6 1.8 2.0 2.2 2.4

Percent range

December projectionsSeptember projections

2014


2

4

6

8

10

12

14

16

18

20

1.1 1.3 1.5 1.7 1.9 2.1 2.3- - - - - - -

1.2 1.4 1.6 1.8 2.0 2.2 2.4

Percent range

2015


2

4

6

810

12

14

16

18

20

1.1 1.3 1.5 1.7 1.9 2.1 2.3- - - - - - -

1.2 1.4 1.6 1.8 2.0 2.2 2.4

Percent range

2016


2

4

68

10

12

14

16

18

20

1.1 1.3 1.5 1.7 1.9 2.1 2.3- - - - - - -

1.2 1.4 1.6 1.8 2.0 2.2 2.4

Percent range




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sometime in 2015, and 3 judged that policy firmingwould likely not be appropriate until 2016. Only 2 par-ticipants judged that an increase in the federal fundsrate in 2014 would be appropriate.

All participants projected that the unemployment ratewould be below the Committees 6 percent thresholdat the end of the year in which they viewed the initialincrease in the federal funds rate to be appropriate, andall but one judged that inflation would be at or belowthe Committees longer-run objective. Almost all par-ticipants projected that the unemployment rate wouldremain above their view of its longer-run normal levelat the end of the year in which they saw the federalfunds rate increasing from the effective lower bound.

Figure 3.E provides the distribution of participantsjudgments regarding the appropriate level of the targetfederal 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 conditionswould warrant maintaining the current low level of thefederal funds rate until 2015. The two participants whosaw the federal funds rate leaving the effective lowerbound earlier submitted projections for the federalfunds rate at the end of 2014 of percent and1 percent. These two participants views of the ap-propriate level of the federal funds rate at the end of2015 were 2 percent and 3 percent, while the re-mainder of participants saw the appropriate level of thefunds rate at that time to be 2 percent or lower. Onbalance, while the dispersion of projections for the val-

ue of the federal funds rate in each year changed littlesince September, the median value of the rate at theend of 2015 and 2016 decreased percentage point.

As in September, all of the participants who saw thefirst tightening in either 2015 or 2016 judged that theappropriate level of the federal funds rate at the end of2016 would still be below their individual assessmentsof its expected longer-run value. In contrast, the twoparticipants who saw the first tightening in 2014 be-lieved that the appropriate level of the federal fundsrate at the end of 2016 would be at their assessment ofits longer-run level, which they judged to be either at orjust above 4 percent. Among all participants, estimatesof the longer-run target federal funds rate ranged from3 to about 4 percent, reflecting the Committeesinflation objective of 2 percent and participants indi-vidual judgments about the appropriate longer-run levelof the real federal funds rate in the absence of furthershocks to the economy.

Participants also described their views regarding theappropriate path of the Federal Reserves balance sheet.Conditional on their respective economic outlooks,most participants judged that it would likely be appro-priate to begin to reduce the pace of the Committeespurchases of longer-term securities in the first quarter

of 2014 and to conclude purchases in the second halfof the year. A number of participants thought it wouldbe appropriate to end the asset purchase program earli-er; in contrast, one participant thought a more accom-modative path for asset purchases would be appropri-ate.

Participants views of the appropriate path for mone-tary policy were informed by their judgments on thestate of the economy, including the values of the un-employment rate and other labor market indicators thatwould be consistent with maximum employment, theextent to which the economy was currently falling short

of maximum employment, the prospects for inflationto reach the Committees longer-term objective of2 percent, and the balance of risks around the outlook.A few participants also mentioned using various mone-tary policy rules to guide their thinking on the appro-priate path for the federal funds rate.

Uncertainty and RisksNearly all participants judged that the levels of uncer-tainty about their projections for real GDP growth andunemployment were broadly similar to the norm duringthe previous 20 years, although three participants con-tinued to see them as higher (figure 4).1 More partici-

pants than in September judged the risks to real GDPgrowth and the unemployment rate to be broadly bal-anced. A range of factors was cited as contributing tothis change in view, including an improved outlook forglobal financial and economic conditions, a moderationin geopolitical risks, an upgraded assessment of theprospects for consumption growth, and reduced oddsof a fiscal impasse.

1Table 2 provides estimates of the forecast uncertainty forthe change in real GDP, the unemployment rate, and totalconsumer price inflation over the period from 1993 through2012. At the end of this summary, the box Forecast Uncer-tainty discusses the sources and interpretation of uncertain-ty in the economic forecasts and explains the approach usedto assess the uncertainty and risks attending the participantsprojections.



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Figure 3.E. Distribution of participants projections for the target federal funds rate, 201316 and over the longer run

2013


2468

101214161820

0.00 0.38 0.63 0.88 1.13 1.38 1.63 1.88 2.13 2.38 2.63 2.88 3.13 3.38 3.63 3.88 4.13- - - - - - - - - - - - - - - - -

0.37 0.62 0.87 1.12 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37

Percent range



2014


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101214161820

0.00 0.38 0.63 0.88 1.13 1.38 1.63 1.88 2.13 2.38 2.63 2.88 3.13 3.38 3.63 3.88 4.13- - - - - - - - - - - - - - - - -

0.37 0.62 0.87 1.12 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37

Percent range

2015


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101214161820

0.00 0.38 0.63 0.88 1.13 1.38 1.63 1.88 2.13 2.38 2.63 2.88 3.13 3.38 3.63 3.88 4.13- - - - - - - - - - - - - - - - -

0.37 0.62 0.87 1.12 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37

Percent range

2016


2468

101214161820

0.00 0.38 0.63 0.88 1.13 1.38 1.63 1.88 2.13 2.38 2.63 2.88 3.13 3.38 3.63 3.88 4.13- - - - - - - - - - - - - - - - -

0.37 0.62 0.87 1.12 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37

Percent range

Longer run


2468

1012

14161820

0.00 0.38 0.63 0.88 1.13 1.38 1.63 1.88 2.13 2.38 2.63 2.88 3.13 3.38 3.63 3.88 4.13- - - - - - - - - - - - - - - - -

0.37 0.62 0.87 1.12 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37

Percent range

Note: The target federal funds rate is measured as the level of the target rate at the end of the calendar year orin the longer run.



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Figure 4. Uncertainty and risks in economic projections

Uncertainty about GDP growth


2

4

6

8

10

12

14

16

18

20

Lower Broadly Highersimilar



Uncertainty about the unemployment rate


2

4

6

8

1012

14

16

18

20


Uncertainty about PCE inflation


2

4

6

810

12

14

16

18

20


Uncertainty about core PCE inflation


2

4

68

10

12

14

16

18

20


Risks to GDP growth


2

4

6

8

10

12

14

16

18

20

Weighted to Broadly Weighted todownside balanced upside



Risks to the unemployment rate


2

4

6

8

1012

14

16

18

20


Risks to PCE inflation


2

4

6

810

12

14

16

18

20


Risks to core PCE inflation


2

4

68

10

12

14

16

18

20


Note: For definitions of uncertainty and risks in economic projections, see the box Forecast Uncertainty. Defini-tions of variables are in the general note to table 1.



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Participants reported little change in their assessmentsof the level of uncertainty and the balance of risksaround their forecasts for overall PCE inflation andcore inflation. Most participants judged the levels ofuncertainty associated with their forecasts for the twoinflation measures to be broadly similar to historical

norms and the risks to those projections as broadlybalanced. Four participants saw the risks to their infla-tion forecasts as tilted to the downside, reflecting, forexample, the possibility that the current low levels ofinflation could prove more persistent than anticipated.Conversely, one participant cited upside risks to infla-tion stemming from uncertainty about the timing andefficacy of the Committees withdrawal of accommoda-tion.

Table 2. Average historical projection error rangesPercentage points

Variable 2013 2014 2015 2016

Change in real GDP1. . . . . 0.5 1.4 1.8 1.8

Unemployment rate1. . . . . 0.1 0.7 1.4 1.8

Total consumer prices2. . . . 0.3 0.9 1.0 1.0

NOTE: Error ranges shown are measured as plus or minus theroot mean squared error of projections for 1993 through 2012 that

were released in the winter by various private and government fore-casters. As described in the box Forecast Uncertainty, undercertain assumptions, there is about a 70 percent probability thatactual outcomes for real GDP, unemployment, and consumer prices

will be in ranges implied by the average size of projection errorsmade in the past. Further information may be found in DavidReifschneider and Peter Tulip (2007), Gauging the Uncertainty ofthe Economic Outlook from Historical Forecasting Errors, Financeand Economics Discussion Series 2007-60 (Washington: Board ofGovernors of the Federal Reserve System, November).

1. Definitions of variables are in the general note to table 1.2. Measure is the overall consumer price index, the price meas-

ure that has been most widely used in government and private eco-nomic forecasts. Projection is percent change, fourth quarter of the

previous year to the fourth quarter of the year indicated.



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Forecast Uncertainty

The economic projections provided bythe members of the Board of Governors andthe presidents of the Federal Reserve Banksinform discussions of monetary policy amongpolicymakers and can aid public understand-ing of the basis for policy actions. Consider-able uncertainty attends these projections,however. The economic and statistical modelsand relationships used to help produce eco-nomic forecasts are necessarily imperfect de-scriptions of the real world, and the futurepath of the economy can be affected bymyriad unforeseen developments and events.

Thus, in setting the stance of monetary policy,participants consider not only what appears tobe the most likely economic outcome as em-bodied in their projections, but also the rangeof alternative possibilities, the likelihood oftheir occurring, and the potential costs to theeconomy should they occur.

Table 2 summarizes the average historicalaccuracy of a range of forecasts, includingthose reported in past Monetary Policy Reportsand those prepared by the Federal ReserveBoards staff in advance of meetings of the

Federal Open Market Committee. The pro-jection error ranges shown in the table il-lustrate the considerable uncertainty associat-ed with economic forecasts. For example,suppose a participant projects that real grossdomestic product (GDP) and total consumerprices will rise steadily at annual rates of, re-spectively, 3 percent and 2 percent. If theuncertainty attending those projections is simi-lar to that experienced in the past and the risksaround the projections are broadly balanced,the numbers reported in table 2 would imply a

probability of about 70 percent that actualGDP would expand within a range of 2.5 to3.5 percent in the current year, 1.6 to 4.4 per-

cent in the second year, and 1.2 to 4.8 percentin the third and fourth years. The correspond-ing 70 percent confidence intervals for overallinflation would be 1.7 to 2.3 percent in the cur-rent year, 1.1 to 2.9 percent in the second year,and 1.0 to 3.0 percent in the t

fomc minutes december

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