fomc minutes 10.8.2015

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Minutes of the Federal Open Market CommitteeSeptember 16–17, 2015

A joint meeting of the Federal Open Market Committeeand the Board of Governors was held in the offices of

the Board of Governors of the Federal Reserve Systemin Washington, D.C., on Wednesday, September 16,2015, at 1:00 p.m. and continued on Thursday,September 17, 2015, at 8:30 a.m.

PRESENT:

Janet L. Yellen, Chair William C. Dudley, Vice ChairmanLael BrainardCharles L. EvansStanley Fischer

Jeffrey M. LackerDennis P. Lockhart

Jerome H. PowellDaniel K. Tarullo

John C. Williams

James Bullard, Esther L. George, Loretta J. Mester,Eric Rosengren, and Michael Strine, AlternateMembers of the Federal Open Market Committee

Patrick Harker, Robert S. Kaplan, and NarayanaKocherlakota, Presidents of the Federal ReserveBanks of Philadelphia, Dallas, and Minneapolis,respectively

Brian F. Madigan, SecretaryMatthew M. Luecke, Deputy SecretaryDavid W. Skidmore, Assistant SecretaryMichelle A. Smith, Assistant SecretaryScott G. Alvarez, General CounselSteven B. Kamin, Economist

Thomas Laubach, EconomistDavid W. Wilcox, Economist

David Altig, Thomas A. Connors, Michael P. Leahy, William R. Nelson, Daniel G. Sullivan, William

Wascher, and John A. Weinberg, AssociateEconomists

Simon Potter, Manager, System Open Market Account

Lorie K. Logan, Deputy Manager, System OpenMarket Account

Robert deV. Frierson, Secretary of the Board, Office ofthe Secretary, Board of Governors

Michael S. Gibson, Director, Division of BankingSupervision and Regulation, Board of Governors

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

James A. Clouse and Stephen A. Meyer, DeputyDirectors, Division of Monetary Affairs, Board ofGovernors

William B. English, Senior Special Adviser to theBoard, Office of Board Members, Board ofGovernors

David Bowman, Andrew Figura, David Reifschneider,and Stacey Tevlin, Special Advisers to the Board,Office of Board Members, Board of Governors

Trevor A. Reeve, Special Adviser to the Chair, Officeof Board Members, Board of Governors

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

Christopher J. Erceg, Senior Associate Director,Division of International Finance, Board ofGovernors; David E. Lebow and Michael G.Palumbo, Senior Associate Directors, Division ofResearch and Statistics, Board of Governors

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

John J. Stevens, Deputy Associate Director, Division ofResearch and Statistics, Board of Governors

Stephanie R. Aaronson, Assistant Director, Division ofResearch and Statistics, Board of Governors;Francisco Covas and Elizabeth Klee, AssistantDirectors, Division of Monetary Affairs, Board ofGovernors

Eric C. Engstrom, Adviser, Division of Research andStatistics, Board of Governors

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Penelope A. Beattie,¹ Assistant to the Secretary, Officeof the Secretary, Board of Governors

Katie Ross,¹ Manager, Office of the Secretary, Board ofGovernors

David H. Small, Project Manager, Division ofMonetary Affairs, Board of Governors

Elmar Mertens, Senior Economist, Division ofMonetary Affairs, Board of Governors

Randall A. Williams, Information Management Analyst,Division of Monetary Affairs, Board of Governors

Gregory L. Stefani, First Vice President, FederalReserve Bank of Cleveland

Alberto G. Musalem, Executive Vice President, FederalReserve Bank of New York

Mary Daly, Troy Davig, Evan F. Koenig, Paolo A. Pe-senti, Samuel Schulhofer-Wohl, Ellis W. Tallman,and Christopher J. Waller, Senior Vice Presidents,Federal Reserve Banks of San Francisco, KansasCity, Dallas, New York, Minneapolis, Cleveland,and St. Louis, respectively

Giovanni Olivei, Keith Sill, and Douglas Tillett, VicePresidents, Federal Reserve Banks of Boston, Phil-adelphia, and Chicago, respectively

________________¹ Attended Wednesday’s session only.

Developments in Financial Markets, Open MarketOperations, and Policy Normalization

The manager of the System Open Market Account(SOMA) reported on developments in domestic and for-eign financial markets. The deputy manager followed

with a briefing on money market developments and Sys-tem open market operations conducted by the Open

Market Desk during the period since the Federal OpenMarket Committee (FOMC) met on July 28–29. Dailytake-up in the Desk’s overnight reverse repurchaseagreement operations declined somewhat, apart frommonth-ends, likely reflecting some increase in moneymarket interest rates. The deputy manager also dis-cussed recent test operations of the Term Deposit Facil-ity and updated the Committee on plans for tests of term

reverse repurchase agreement operations at the end ofthe third quarter.

By unanimous vote, the Committee ratified the Desk’sdomestic transactions over the intermeeting period.

There were no intervention operations in foreign curren-cies for the System’s account over the intermeeting pe-riod.

System Open Market Account Reinvestment Policy A staff briefing provided background on the macroeco-nomic effects of alternative approaches to ceasing rein-

vestments of principal on securities held in the SOMAafter the Committee begins to normalize the stance ofpolicy by increasing the target range for the federal fundsrate. The briefing presented analysis that was based onan assumption that the cessation of reinvestments, onceimplemented, would be permanent. The briefing sug-gested that if economic conditions evolved in line with a

modal outlook, differences in macroeconomic outcomes would be minor across approaches that ceased reinvest-ments soon after initial policy firming or continued rein-

vestments until certain levels of the federal funds rate,such as 1 percent or 2 percent, were reached. As a result,the appropriate path of the federal funds rate would beonly modestly affected. However, if substantial adverseshocks occurred, continuing reinvestment until normal-ization of the level of the federal funds rate was well un-der way could help avoid situations that would warranta larger reduction in the federal funds rate than perhapscould be accomplished given the constraint posed by theeffective lower bound to nominal interest rates.

In the ensuing discussion, participants considered theadvantages and disadvantages of alternative approachesto reinvestment. Participants referred to the Commit-tee’s statement on Policy Normalization Principles andPlans, which indicates that the timing of the cessation orphasing out of reinvestments will depend on how eco-nomic and financial conditions and the economic out-look evolve. Several participants emphasized that con-tinuing reinvestments for some time after the initial pol-icy firming could help manage potential risks, particu-larly by reducing the probability that the federal fundsrate might return to the effective lower bound. Someparticipants expressed a view that, in contrast to the as-sumption in the staff analysis, the Committee couldchoose to resume reinvestments if macroeconomic con-ditions warranted. At the same time, it was also high-lighted that a larger balance sheet could entail costs, andthat the Principles and Plans indicate that, in the longerrun, the SOMA portfolio should be no larger than nec-

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essary to conduct monetary policy efficiently and effec-tively. The Committee made no decisions regarding itsstrategy for ceasing or phasing out reinvestments at thismeeting.

Staff Review of the Economic Situation The information reviewed for the September 16–17meeting suggested that real gross domestic product(GDP) was expanding at a moderate pace in the thirdquarter. Labor market conditions continued to improve,but labor compensation gains were modest. Consumerprice inflation remained below the Committee’s longer-run objective of 2 percent and was restrained by furtherdeclines in energy prices and non-energy import prices.Survey measures of longer-run inflation expectations re-mained stable, while market-based measures of inflationcompensation moved lower.

Total nonfarm payroll employment expanded at a solid

pace in July and August. The unemployment rate stayedat 5.3 percent in July but fell to 5.1 percent in August. With the labor force participation rate unchanged overthis period, the employment-to-population ratio edgedup. The share of workers employed part time for eco-nomic reasons remained elevated. The rate of private-sector job openings increased in July and was at a highlevel, while the rates of hiring and quits were littlechanged.

Industrial production increased, on balance, during Julyand August. Manufacturing production fell in Augustprimarily because of a large drop in the output of motor

vehicles and parts that reversed a substantial portion ofits jump in July. Automakers scheduled further declinesin assemblies over the remainder of the year, andbroader indicators of manufacturing production, includ-ing readings on new orders from national and regionalmanufacturing surveys, generally suggested that factoryoutput would be little changed over that period. Miningoutput moved up, on net, in July and August after a steepdecline in the second quarter.

Real personal consumption expenditures (PCE) ap-peared to be rising at a moderate pace in the third quar-ter. The components of the nominal retail sales data

used by the Bureau of Economic Analysis to constructits estimates of PCE increased at a strong rate in July and

August, and sales of light motor vehicles moved up inboth months. Household spending was supported bymoderate growth in real disposable income in July and a

wealth-to-income ratio that remained high even after re-cent declines in equity values. Consumer sentiment inthe University of Michigan Surveys of Consumers de-creased in early September, reportedly in part because of

the recent decline in stock market prices, but it remainedabove its year-earlier level.

Activity in the housing sector remained on a gradual upward trend. Starts of new single-family homes rose fur-ther early in the third quarter and were slightly above thepace of permit issuance. In the multifamily sector, startsfell back after having been temporarily elevated in June.Sales of new and existing homes both increased in July.

Real private expenditures for business equipment and in-tellectual property products appeared to be rising mod-erately. Nominal shipments of nondefense capital goodsexcluding aircraft increased in July, and orders for non-defense capital goods pointed to modest gains in ship-ments in the coming months, consistent with recentreadings from surveys of business conditions. Realspending for nonresidential structures excluding drillingand mining increased sharply in the second quarter, and

nominal business expenditures for such structures rosefurther in July. In contrast, real business spending fordrilling and mining structures fell steeply in the secondquarter. Available indicators of drilling activity, such ascounts of rigs in operation, suggested spending woulddecline less rapidly in the third quarter.

Total real government purchases appeared to be declin-ing slightly in the third quarter. Federal government pur-chases likely decreased, as defense spending moveddown further through August. State and local govern-ment purchases seemed to be increasing, on balance, asthe payrolls of these governments expanded at a faster

pace in July and August than in the second quarter, whiletheir nominal construction expenditures edged down in

July after a large gain in the second quarter.

The U.S. international trade deficit widened in June be-fore narrowing substantially in July. Exports rose in July,supported by increased shipments of non-aircraft capitalgoods and automobiles, but remained subdued. In con-trast, imports declined in July, reversing a June increase,as imports of consumer goods fell back.

Total U.S. consumer prices, as measured by the PCEprice index, edged up over the 12 months ending in July,restrained importantly by declines in energy prices. CorePCE prices, which exclude food and energy prices, in-creased 1¼ percent over the same period, with the in-crease damped in part by declines in the prices of non-energy imports. Over the 12 months ending in August,total consumer prices as measured by the consumerprice index (CPI) edged up, while the core CPI increased1¾ percent. Measures of expected longer-run inflationfrom a variety of surveys, including the Michigan survey,

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the Survey of Professional Forecasters, and the Desk’sSurvey of Primary Dealers, remained stable. However,market-based measures of inflation compensation fell tonear their historical lows, reportedly in response to therecent appreciation of the dollar, the decline in oil prices,and readings on realized inflation that were slightly be-

low market expectations.

Measures of labor compensation rose faster than con-sumer prices over the past year, but the modest increasesin compensation were similar to those seen in recentyears. Over the four quarters ending in the second quar-ter, the employment cost index increased nearly 2 per-cent and compensation per hour in the nonfarm busi-ness sector rose 2¼ percent. Over the 12 months end-ing in August, average hourly earnings for all employeesincreased 2¼ percent.

Foreign economic growth remained weak in the second

quarter, held back by contractions in real GDP in Can-ada, Japan, Brazil, and Taiwan, even as activity continuedto expand at a moderate pace in the euro area and theUnited Kingdom. Indicators for the third quarterpointed to a slight pickup in the pace of foreign growth,particularly as recent data for Canada suggested thatsome of the first-half weakness there was dissipating.However, recent indicators for some other countries,most notably China, were subdued. Inflation rates con-tinued to be quite low in the advanced foreign econo-mies, and market-based measures of inflation compen-sation had recently moved down in the euro area and

Japan. In contrast, inflation in the emerging market

economies had risen in recent months as a result ofhigher food prices and widespread currency deprecia-tion.

Staff Review of the Financial Situation Although U.S. economic data releases generally metmarket expectations, domestic financial conditions tight-ened modestly as concerns about prospects for globaleconomic growth, centered on China, prompted an in-crease in financial market volatility and a deterioration inrisk sentiment during the intermeeting period. Stockmarket indexes in most advanced and emerging marketeconomies ended the period sharply lower. Tighter fi-nancial market conditions and greater volatility contrib-uted to a reduction of the odds that market participantsappeared to place on the first increase in the federalfunds rate occurring at the September FOMC meetingand to a flatter expected path for the policy rate thereaf-ter. Nevertheless, yields on short- and longer-term nom-inal Treasury securities were modestly higher than whenthe Committee met in July.

Over the intermeeting period, the concerns about globaleconomic growth and turbulence in financial markets ledto greater uncertainty among market participants aboutthe likely timing of the start of the normalization of thestance of U.S. monetary policy. Based on federal fundsfutures, the probability of a first increase in the target

range for the federal funds rate at the September meet-ing fell slightly; the probabilities attached to subsequentmeetings through January 2016 were generally littlechanged and rose for meetings later that year. Similarly,results from the Desk’s September Survey of PrimaryDealers and Survey of Market Participants indicatedthat, on average, respondents pushed out their expectedtiming of the first increase in the target range for the fed-eral funds rate. Regarding the most likely meeting datefor the first rate increase, survey respondents were aboutevenly split between September and December. Data onovernight index swap rates indicated that investors

marked down the expected path of the federal fundsrate, on balance, over the intermeeting period.

Despite the decline in global equity markets and thedownward shift in the expected path of the federal fundsrate, yields on nominal Treasury securities moved upmodestly, with some market participants citing pur-ported sales of Treasury securities by foreign govern-ment authorities to finance foreign exchange market in-tervention as a factor that likely put upward pressure on

Treasury yields. Measures of inflation compensationbased on Treasury Inflation-Protected Securities fell tonear their historical lows.

Broad U.S. equity price indexes were highly correlated with foreign equity indexes over the intermeeting periodand posted net declines. Although concerns aboutglobal economic growth likely contributed to the de-clines in domestic equity prices, investors may also havereassessed valuations and risk in equity markets. Do-mestic equity indexes were quite volatile in late Augustand early September, and one-month-ahead option-implied volatility on the S&P 500 index reached levelslast seen in 2011. Spreads on 10-year triple-B-rated andspeculative-grade corporate bonds over comparable-maturity Treasury securities widened slightly over the in-

termeeting period.

Financing conditions for nonfinancial businesses tight-ened modestly over the summer. Corporate bond andinstitutional leveraged loan issuance remained solidthrough July but moderated in August. The growth ofcommercial and industrial loans on banks’ books slowedin July and August; the deceleration was concentrated in


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banks with greater exposures to oil and gas firms. Fi-nancing for commercial real estate (CRE) remainedbroadly available, with CRE loans on banks’ books ex-panding and issuance of commercial mortgage-backedsecurities (CMBS) staying robust. However, spreads oninvestment-grade CMBS widened noticeably in August,

reportedly a result of heavy issuance as well as the in-creased volatility in broader financial markets.

Conditions in the market for residential mortgages con-tinued to improve slowly, with interest rates on 30-yearfixed-rate mortgages declining slightly. Bank holdings ofclosed-end residential loans increased modestly, and theMortgage Bankers Association’s index of mortgagecredit availability edged up further. However, creditavailability for borrowers with low credit scores, hard-to-document income, or high debt-to-income ratios re-mained tight.

Financing conditions in consumer credit markets re-mained generally accommodative, and the performanceof outstanding consumer loans was largely stable. Creditcard balances expanded amid gradually easing lendingstandards, and student and auto loans continued to bebroadly available, even to borrowers with subprimecredit scores. Delinquency rates on credit card loans andauto loans stayed low through the second quarter, whiledelinquency rates on student loans remained elevated.

The exchange value of the U.S. dollar rose notably overthe period against the currencies of most major U.S.trading partners. While the dollar depreciated against

the euro and the yen, it appreciated against the Canadiandollar. The dollar also strongly appreciated against thecurrencies of most emerging market economies, as most

Asian currencies weakened against the dollar following adepreciation of the Chinese renminbi, and as the curren-cies of commodity exporters fell along with decliningcommodity prices. Sovereign yields in the advanced for-eign economies ended the period roughly unchanged.Changes in peripheral euro-area sovereign yield spreads

were mixed, with Greek sovereign spreads narrowingsignificantly over the period as Greece and the euro areafinalized Greece’s third bailout package. In contrast,falling commodity prices and concerns about the pace ofglobal growth contributed to capital outflows and gen-erally wider spreads on dollar-denominated debt inemerging Asia and Latin America.

Staff Economic Outlook The U.S. economic forecast prepared by the staff for theSeptember FOMC meeting was a little weaker, on bal-ance, than the one prepared for the July FOMC meeting.Recent information on real U.S. economic activity was

generally stronger than expected, but equity prices de-clined, the foreign exchange value of the dollar appreci-ated further, and indicators of foreign economic growth

were generally weak. The staff left its forecast for realGDP growth over the second half of the year littlechanged but lowered its projection for economic growth

over the next several years. The staff also furthertrimmed its assumptions for the rates of increase inproductivity and potential output over the medium term.On net, the level of GDP was anticipated to rise aboveits potential next year, and that gap was projected to

widen gradually over the medium term. The unemploy-ment rate was projected to run a little below the staff’sestimate of its longer-run natural rate over this period.

The staff projected that consumer price inflation wouldmove down over the near term by more than in the pre-

vious projection. Crude oil prices declined further overthe intermeeting period and were expected to result in

lower consumer energy prices, and the effects of recentdollar appreciation and lower commodity prices wereanticipated to push down non-oil import prices. Withenergy prices and non-oil import prices expected tobegin to increase steadily next year, the staff projectedthat inflation would rise gradually over the next severalyears but would still be slightly below the Committee’slonger-run objective of 2 percent at the end of 2018. In-flation was anticipated to move up to 2 percent thereaf-ter, with inflation expectations in the longer run assumedto be consistent with the Committee’s objective andslack in labor and product markets projected to have

waned. The staff viewed the uncertainty around its Septemberprojections for real GDP growth, the unemploymentrate, and inflation as similar to the average of the past20 years. The risks to the forecast for real GDP andinflation were seen as tilted to the downside, reflectingthe staff’s assessment that neither monetary nor fiscalpolicy was well positioned to help the economy with-stand substantial adverse shocks. Consistent with thisdownside risk to aggregate demand and with the furtheradjustments to the staff’s supply-side assumptions, thestaff viewed the risks to its outlook for the unemploy-

ment rate as tilted to the upside.

Participants’ Views on Current Conditions and theEconomic OutlookIn conjunction with this FOMC meeting, members ofthe Board of Governors and Federal Reserve Bank pres-idents submitted their projections of the most likely out-comes for real GDP growth, the unemployment rate, in-flation, and the federal funds rate for each year from


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2015 through 2018 and over the longer run, conditionalon each participant’s judgment of appropriate monetarypolicy. The longer-run projections represent each par-ticipant’s assessment of the rate to which each variable

would be expected to converge, over time, under appro-priate monetary policy and in the absence of further

shocks to the economy. These projections and policyassessments are described in the Summary of EconomicProjections, which is an addendum to these minutes.

In their discussion of the economic situation and theoutlook, meeting participants viewed the information re-ceived over the intermeeting period as indicating thateconomic activity was expanding moderately. Althoughnet exports remained soft, household spending and busi-ness fixed investment were increasing moderately, andthe housing sector recovered further. The labor marketcontinued to improve, with solid job gains and decliningunemployment, and labor market indicators showed that

underutilization of labor resources had diminished sinceearly in the year.

Growth in real GDP over the first half of the year wasstronger than participants expected when they preparedtheir June forecasts, and the unemployment rate de-clined somewhat more than anticipated. Participantsmade only small adjustments to their projections foreconomic activity over the medium term. They contin-ued to anticipate that, with appropriate policy accommo-dation, the pace of expansion of real activity would re-main somewhat above its longer-run rate over the nexttwo years and lead to further improvement in labor mar-

ket conditions. Most continued to see the risks to realactivity and unemployment as nearly balanced, but manyacknowledged that recent global economic and financialdevelopments may have increased the downside risks toeconomic activity somewhat.

Inflation continued to run below the Committee’slonger-run objective, partly reflecting declines in energyprices and in prices of non-energy imports. Market-based measures of inflation compensation moved lower;survey measures of longer-term inflation expectationsremained stable. Participants anticipated that recentglobal developments would likely put further downwardpressure on inflation in the near term; compared withtheir previous forecasts, more now saw the risks to in-flation as tilted to the downside. But participants stillexpected that, as the labor market continued to improveand the transitory effects of declines in energy and non-oil import prices dissipated, inflation would rise gradu-ally toward 2 percent over the medium term.

Consumer spending was rising at a solid rate after amodest increase in the first quarter. Participants notedthat ongoing gains in employment and real income wereproviding support for the rise in spending, and this sup-port was expected to continue going forward. House-hold credit performance was also favorable, with delin-

quency rates on credit cards and auto loans low. Theavailable reports from District contacts in the retail andauto industries confirmed the recent solid gains in con-sumer spending. Contacts were generally optimisticabout the outlook, although retail sales appeared to besoftening in a few areas where economic activity was ad-

versely affected by declines in the energy sector and theincrease in the foreign exchange value of the dollar.

Housing activity was improving, with sales and new con-struction trending higher. Solid gains in employmentand favorable mortgage rates were anticipated to con-tinue to underpin the recovery in housing. Contacts in

a number of Districts were upbeat about prospects forthe sector, citing strengthening sales, rising home prices,an upturn in household formations, and reports thatbuyers had accelerated purchases in anticipation of thepossibility that mortgage rates might move higher in thenear term. Multifamily construction was particularlystrong in a couple of Districts, but in another a shortageof lots was constraining builders’ ability to meet strongdemand for new single-family homes.

The information on business spending from Districtcontacts was mixed. Nonresidential construction wasreported to be expanding in a number of regions. In

manufacturing, the auto industry remained a bright spot,but the appreciation of the dollar was still restrainingproduction of goods for export. Optimism remainedrelatively high according to some District contacts, al-though a few regional activity surveys noted some cau-tion related to uncertainty about recent economic devel-opments abroad. The weakness in commodity pricesand the appreciation of the dollar also continued to

weigh on activity in the energy and agricultural sectors.Moreover, the outlook for the energy sector appeared tobe worsening. The substantial global supply of crude oilseemed likely to maintain downward pressure on energy

prices for some time, leading to a deterioration in creditconditions for some U.S. producers and a further reduc-tion in their capital outlays.

Participants agreed that labor market conditions had im-proved considerably since earlier in the year. Payroll em-ployment had been increasing steadily. Underutilizationof labor resources had diminished along a number of di-mensions: The unemployment rate had fallen to a level


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close to most participants’ estimates of its longer-runnormal rate, and the numbers of discouraged workersand those employed part time for economic reasons hadmoved lower. With the cumulative improvement in la-bor market conditions, most participants thought thatthe underutilization of labor resources had been sub-

stantially reduced, and a few of them expressed the viewthat underutilization had been eliminated. But someothers believed that labor market slack in addition to thatmeasured by the unemployment rate remained and thatfurther progress was possible before labor market con-ditions were fully consistent with the Committee’s ob-jective of maximum employment. They pointed outthat, even recognizing the downward trend in labor forceparticipation, the level of the participation rate, particu-larly for prime-age adults, remained depressed; similarly,the number of workers on part-time schedules for eco-nomic reasons was still elevated. A number of partici-

pants noted that eliminating slack along such broader di-mensions might require a temporary decline in the un-employment rate below its longer-run normal level, andthat this development could speed the return of inflationto 2 percent.

The incoming information on wages and labor compen-sation, including an especially low reading on the em-ployment cost index for the second quarter, showed nobroad-based acceleration. To some, the continued sub-dued trend in wages was evidence of an absence of up-

ward pressure on inflation from current levels of laborutilization. Several others, however, noted that weak

productivity growth and low price inflation might becontributing to modest wage increases. A number ofparticipants reported that some of their business con-tacts were experiencing labor shortages in various occu-pations and geographic areas resulting in upward pres-sure on wages, with a few indicating that the pickup in

wages had become more widespread.

Recent readings on headline consumer price inflation re-flected only small increases in core inflation and renewed

weakness in consumer energy prices. As a result, the12-month changes in both the total and core PCE priceindexes for August were expected to still be well below

the Committee’s 2 percent objective. Participants con-tinued to judge that a significant portion of the shortfall

was the result of the transitory effects of declines inprices of oil and non-energy commodities. A few par-ticipants pointed out that since January when the steepdrop in energy prices ended, core PCE prices had risenat an annual rate of 1.7 percent, closer to the Commit-tee’s objective, despite the continued decline in prices of

non-energy imports. Still, almost all participants antici-pated that inflation would continue to run below 2 per-cent in the near term, particularly in light of the furtherdecline in oil prices and further appreciation of the dollarover the intermeeting period. Participants also discussed

various measures of expectations for inflation over the

longer run. Surveys continued to show stable longer-runinflation expectations, and most participants continuedto anticipate that longer-run inflation expectations

would remain well anchored. A few participants ex-pressed some concern about the decline in market-basedmeasures of inflation compensation. However, it wasnoted that the decline seemed to be related to the furtherdrop in oil prices or may importantly reflect shifts in riskand liquidity premiums, and thus may not signal addi-tional broad and persistent downward price pressures.

Participants discussed the potential implications of re-cent economic and financial developments abroad for

U.S. economic activity and inflation. A material slow-down in economic growth in China and potential ad-

verse spillovers to other economies were likely to de-press U.S. net exports to some extent. In addition, con-cerns associated with developments in China and otheremerging market economies had contributed to a furtherappreciation of the dollar and declines in prices of oiland other commodities, which were likely to hold downU.S. consumer price inflation in the near term. In theUnited States, equity prices fell, on balance, amid signif-icant volatility, and risk spreads for businesses widened.Many participants judged that the effects of these devel-

opments on domestic economic activity were likely to besmall, but they acknowledged the risk that they mightrestrain U.S. economic growth somewhat. In particular,the appreciation of the dollar since mid-2014 was still asubstantial drag on net exports, and the further rise inthe dollar over the intermeeting period could augmentthe restraint on U.S. net exports. Some participantscommented that the recent decline in equity pricesneeded to be viewed in the context of overall valuationlevels, which they saw as relatively high, and a couplenoted that volatility had begun to subside.

During their discussion of economic conditions and

monetary policy, participants indicated that they did notsee the changes in asset prices during the intermeetingperiod as bearing significantly on their policy choice ex-cept insofar as they affected the outlook for achievingthe Committee’s macroeconomic objectives and therisks associated with that outlook. Many of them sawthe likely effects of recent developments on the path ofeconomic activity and inflation as small or transitory.Most participants continued to anticipate that, based on


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their assessment of current economic conditions andtheir outlook for economic activity, the labor market,and inflation, the conditions for policy firming had beenmet or would likely be met by the end of the year. How-ever, some participants judged that the downside risks tothe outlook for economic growth and inflation had in-

creased. In their view, although the time for policy nor-malization might be near, it would be appropriate to waitfor information, including evidence of further improve-ment in the labor market, confirming that the outlookfor economic growth had not deteriorated significantlyand that inflation was still on a path to return to 2 per-cent over the medium term. A few mentioned that apickup in wage increases could bolster their confidencethat resource utilization had tightened sufficiently tohelp move inflation toward the Committee’s objective,but they did not view an acceleration in wages as a nec-essary condition for gaining such confidence.

Participants weighed a number of risks associated withthe timing of policy firming. Some participants wereconcerned that the downside risks to inflation could berealized if the target range for the federal funds rate wasincreased before it was clear that economic growth

would remain at an above-trend pace and downwardpressures on inflation had abated. They also worriedthat such a premature tightening might erode the credi-bility of the Committee’s inflation objective if inflationstayed at a rate below 2 percent for a prolonged period.It was noted that monetary policy was better positionedto respond effectively to unanticipated upside inflation

surprises than to persistent below-objective inflation,particularly when the federal funds rate was still near itseffective lower bound. Such considerations also arguedfor increasing the target range for the federal funds rategradually after policy normalization was under way.Some other participants, however, expressed concernsabout delaying the start of normalizing the target rangefor the federal funds rate much longer. For example, asignificant delay risked an undesired buildup of inflation-ary pressures or economic and financial imbalances that

would be costly to unwind and that eventually couldhave adverse consequences for economic growth. In ad-dition, a prompt decision to firm policy could provide asignal of confidence in the strength of the U.S. economythat might spur rather than restrain economic activity.

These participants preferred to begin policy firmingsoon, with most of them expecting that beginning theprocess before long would allow the target range for thefederal funds rate to be increased gradually.

Committee Policy ActionIn their discussion of monetary policy for the periodahead, members judged that information received sincethe FOMC met in July indicated that economic activity

was expanding at a moderate pace. Although net ex-ports remained soft, economic growth was broadly

based. Members noted that recent global and financialmarket developments might restrain economic activitysomewhat as a result of the higher level of the dollar andpossible effects of slower economic growth in China andin a number of emerging market and commodity-producing economies. Nevertheless, they still viewedthe risks to U.S. economic activity as nearly balanced,and they continued to expect that, with appropriate pol-icy accommodation, economic activity would most likelycontinue to expand at a moderate pace.

Members agreed that labor market conditions had im-proved considerably since earlier in the year, with ongo-

ing solid gains in payroll employment and the unemploy-ment rate falling to a level quite close to their estimatesof its longer-run normal rate. Members anticipated thateconomic activity was likely to continue to expand at apace sufficient to lead to a further reduction in underuti-lization of labor resources. Headline inflation continuedto be held down by the effects of declines in energy andcommodity prices, and the year-over-year increase incore PCE inflation remained below the Committee’s ob-jective. Survey-based measures of longer-term inflationexpectations had remained stable; market-basedmeasures of inflation compensation had moved lower.

Members anticipated that the declines in oil prices andthe appreciation of the dollar over the intermeeting pe-riod were likely to exert some additional downward pres-sure on inflation in the near term. Members expectedinflation to rise gradually toward 2 percent over the me-dium term as the labor market improved further and thetransitory effects of declines in energy and import pricesdissipated, but they agreed to continue to monitor infla-tion developments closely.

In assessing whether economic conditions had im-proved sufficiently to initiate a firming in the stance ofpolicy, many members said that the improvement in la-

bor market conditions met or would soon meet one ofthe Committee’s criteria for beginning policy normaliza-tion. But some indicated that their confidence that in-flation would gradually return to the Committee’s 2 per-cent objective over the medium term had not increased,in large part because recent global economic and finan-cial developments had imparted some restraint to theeconomic outlook and placed further downward pres-sure on inflation in the near term. Most members agreed


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that their confidence that inflation would move to theCommittee’s inflation objective would increase if, as ex-pected, economic activity continued to expand at a mod-erate rate and labor market conditions improved further.Many expected those conditions to be met later this year,although several members were concerned about down-

side risks to the outlook for real activity and inflation.

Other factors important to the Committee’s assessmentof the inflation outlook were the expectation that the in-fluences of lower energy and commodity prices on head-line inflation would abate, as had occurred in previousepisodes, and that inflation expectations would remainstable. With energy and commodity prices expected tostabilize, members’ projections of inflation incorporateda step-up in headline inflation next year. However, sev-eral members saw a risk that the additional downwardpressure on inflation from lower oil prices and a higherforeign exchange value of the dollar could persist and, as

a result, delay or diminish the expected upturn in infla-tion. And, while survey measures of longer-run inflationexpectations remained stable, a couple of members ex-pressed unease with the decline in market-basedmeasures of inflation compensation over the intermeet-ing period.

After assessing the outlook for economic activity, the la-bor market, and inflation and weighing the uncertaintiesassociated with the outlook, all but one member con-cluded that, although the U.S. economy had strength-ened and labor underutilization had diminished, eco-nomic conditions did not warrant an increase in the tar-

get range for the federal funds rate at this meeting. Theyagreed that developments over the intermeeting periodhad not materially altered the Committee’s economicoutlook. Nevertheless, in part because of the risks to theoutlook for economic activity and inflation, the Com-mittee decided that it was prudent to wait for additionalinformation confirming that the economic outlook hadnot deteriorated and bolstering members’ confidencethat inflation would gradually move up toward 2 percentover the medium term. One member, however, pre-ferred to raise the target range for the federal funds rateat this meeting, indicating that the current low level of

real interest rates was not appropriate in the context ofcurrent economic conditions.

The Committee agreed to maintain the target range forthe federal funds rate at 0 to ¼ percent and to reaffirmin its postmeeting statement that the Committee’s deci-sion about how long to maintain the current target rangefor the federal funds rate would depend on its assess-

ment of actual and expected progress toward its objec-tives of maximum employment and 2 percent inflation.Members agreed that the Committee’s evaluation of pro-gress on its objectives would take into account a widerange of information, including measures of labor mar-ket conditions, indicators of inflation pressures and in-

flation expectations, and readings on financial and inter-national developments. They also agreed to indicate thatthe Committee continued to anticipate that it would beappropriate to raise the target range for the federal fundsrate when it sees some further improvement in the labormarket and is reasonably confident that inflation willmove back to its 2 percent objective over the mediumterm. It was noted that the expected path of the federalfunds rate, rather than the exact timing of the initial in-crease, was most important in influencing financial con-ditions and thus the outlook for the economy and infla-tion. The Committee reiterated its expectation that,

even after employment and inflation are near mandate-consistent levels, economic conditions may, for sometime, warrant keeping the target federal funds rate belowlevels the Committee views as normal in the longer run.

The Committee also maintained its policy of reinvestingprincipal payments from its agency debt and agencymortgage-backed securities in agency mortgage-backedsecurities and of rolling over maturing Treasury securi-ties at auction. This policy, by keeping the Committee’sholdings of longer-term securities at sizable levels,should help maintain accommodative financial condi-tions.

At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bankof New York, until it was instructed otherwise, toexecute transactions in the SOMA in accordance withthe following domestic policy directive:

“Consistent with its statutory mandate, theFederal Open Market Committee seeksmonetary and financial conditions that willfoster maximum employment and pricestability. In particular, the Committee seeksconditions in reserve markets consistent withfederal funds trading in a range from 0 to¼ percent. The Committee directs the Desk toundertake open market operations as necessaryto maintain such conditions. The Committeedirects the Desk to maintain its policy of rollingover maturing Treasury securities into newissues and its policy of reinvesting principalpayments on all agency debt and agencymortgage-backed securities in agency mortgage-


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backed securities. The Committee also directsthe Desk to engage in dollar roll and couponswap transactions as necessary to facilitatesettlement of the Federal Reserve’s agencymortgage-backed securities transactions. TheSystem Open Market Account manager and the

secretary will keep the Committee informed ofongoing developments regarding the System’sbalance sheet that could affect the attainmentover time of the Committee’s objectives ofmaximum employment and price stability.”

The vote encompassed approval of the statement belowto be released at 2:00 p.m.:

“Information received since the Federal OpenMarket Committee met in July suggests thateconomic activity is expanding at a moderatepace. Household spending and business fixed

investment have been increasing moderately,and the housing sector has improved further;however, net exports have been soft. The labormarket continued to improve, with solid jobgains and declining unemployment. On bal-ance, labor market indicators show that un-derutilization of labor resources has diminishedsince early this year. Inflation has continued torun below the Committee’s longer-run objec-tive, partly reflecting declines in energy pricesand in prices of non-energy imports. Market-based measures of inflation compensationmoved lower; survey-based measures of longer-

term inflation expectations have remained sta-ble.

Consistent with its statutory mandate, the Com-mittee seeks to foster maximum employmentand price stability. Recent global economic andfinancial developments may restrain economicactivity somewhat and are likely to put furtherdownward pressure on inflation in the nearterm. Nonetheless, the Committee expects that,

with appropriate policy accommodation, eco-nomic activity will expand at a moderate pace,

with labor market indicators continuing tomove toward levels the Committee judges con-sistent with its dual mandate. The Committeecontinues to see the risks to the outlook for eco-nomic activity and the labor market as nearlybalanced but is monitoring developmentsabroad. Inflation is anticipated to remain nearits recent low level in the near term but the

Committee expects inflation to rise gradually toward 2 percent over the medium term as the la-bor market improves further and the transitoryeffects of declines in energy and import pricesdissipate. The Committee continues to monitorinflation developments closely.

To support continued progress toward maxi-mum employment and price stability, the Com-mittee today reaffirmed its view that the current0 to ¼ percent target range for the federal fundsrate remains appropriate. In determining howlong to maintain this target range, the Commit-tee will assess progress—both realized and ex-pected—toward its objectives of maximum em-ployment and 2 percent inflation. This assess-ment will take into account a wide range of in-formation, including measures of labor marketconditions, indicators of inflation pressures and

inflation expectations, and readings on financialand international developments. The Commit-tee anticipates that it will be appropriate to raisethe target range for the federal funds rate whenit has seen some further improvement in the la-bor market and is reasonably confident that in-flation will move back to its 2 percent objectiveover the medium term.

The Committee is maintaining its existing policyof reinvesting principal payments from its hold-ings of agency debt and agency mortgage-backed securities in agency mortgage-backed se-

curities and of rolling over maturing Treasurysecurities at auction. This policy, by keeping theCommittee’s holdings of longer-term securitiesat sizable levels, should help maintain accom-modative financial conditions.

When the Committee decides to begin to re-move policy accommodation, it will take a bal-anced approach consistent with its longer-rungoals of maximum employment and inflation of2 percent. The Committee currently anticipatesthat, even after employment and inflation arenear mandate-consistent levels, economic con-ditions may, for some time, warrant keeping thetarget federal funds rate below levels the Com-mittee views as normal in the longer run.”

Voting for this action: Janet L. Yellen, William C.Dudley, Lael Brainard, Charles L. Evans, Stanley Fischer,Dennis P. Lockhart, Jerome H. Powell, Daniel K. Ta-rullo, and John C. Williams.


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Voting against this action: Jeffrey M. Lacker.

Mr. Lacker dissented because he believed that maintain-ing exceptionally low real interest rates was not appro-priate for an economy with persistently strong consump-tion growth and tightening labor markets. He viewedcurrent disinflationary forces as likely to be transitory,and was reasonably confident that inflation would movetoward 2 percent. In his view, further delay in removingmonetary policy accommodation would represent a riskydeparture from past patterns of FOMC behavior in re-sponse to such economic conditions.

It was agreed that the next meeting of the Committee would be held on Tuesday–Wednesday, October 27–28,

2015. The meeting adjourned at 10:55 a.m. onSeptember 17, 2015.

Notation VoteBy notation vote completed on August 18, 2015, theCommittee unanimously approved the minutes of theCommittee meeting held on July 28–29, 2015.

_____________________________Brian F. Madigan

Secretary


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Summary of Economic Projections

In conjunction with the Federal Open Market Commit-tee (FOMC) meeting held on September 16 – 17, 2015,meeting participants submitted their projections of themost likely outcomes for real output growth, the unem-ployment rate, inflation, and the federal funds rate foreach year from 2015 to 2018 and over the longer run.Each participant’s projection was based on informationavailable at the time of the meeting together with his orher assessment of appropriate monetary policy and as-sumptions about the factors likely to affect economicoutcomes. The longer-run projections represent eachparticipant’s assessment of the value to which each var-iable 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 each

participant deems most likely to foster outcomes foreconomic activity and inflation that best satisfy his or herindividual interpretation of the Federal Reserve’s objec-tives of maximum employment and stable prices.

FOMC participants generally expected that, under ap-propriate monetary policy, economic growth in 2015

would be at or slightly above their individual estimatesof the U.S. economy’s longer-run normal growth rateand would increase somewhat in 2016 before slowing toor toward its longer-run rate in 2017 and 2018 (table 1and figure 1). Most participants projected that the un-employment rate would decline a bit further over the re-

mainder of 2015 and be at or slightly below their individual judgments of its longer-run normal level from2016 through 2018. Participants projected that inflation,as measured by the four-quarter change in the price in-dex for personal consumption expenditures (PCE),

would be very low this year but then would pick up no-tably next year and rise further in 2017; all participantsprojected that inflation would be at or close to the Com-mittee’s 2 percent longer-run objective in 2018.

As shown in figure 2, all but four participants anticipatedthat it would be appropriate to begin raising the targetrange for the federal funds rate in 2015. Most expected

that it would be appropriate to raise the target federalfunds rate fairly gradually over the projection period asheadwinds to economic growth fade, labor market indi-cators reach levels consistent with the Committee’s man-dated objective of maximum employment, and inflationmoves up to 2 percent. Most participants continued toexpect that it would be appropriate for the federal fundsrate still to be appreciably below its longer-run level in

2016 and 2017, reflecting the effects of remaining headwinds along with other factors.

Most participants viewed the levels of uncertainty asso-

ciated with their outlooks for economic growth and theunemployment rate as broadly similar to the averagelevel of the past 20 years. Most also judged the level ofuncertainty about inflation to be broadly similar to theaverage level of the past 20 years, although a few partic-ipants viewed it as higher. In addition, most participantscontinued to see the risks to the outlook for economicgrowth and for the unemployment rate as broadly bal-anced, although some viewed the risks to economicgrowth as weighted to the downside and some saw therisks to unemployment as weighted to the upside. A fewmore participants saw the risks to inflation as weightedto the downside than as balanced, while one judged theserisks to be tilted to the upside.

The Outlook for Economic ActivityParticipants generally projected that, conditional on theirindividual assumptions about appropriate monetary pol-icy, real gross domestic product (GDP) would growfrom 2015 through 2017 at a pace slightly above theirestimates of its longer-run normal rate, and that realGDP growth would then slow in 2018 to a rate at or neartheir individual estimates of the longer-run rate. Partic-ipants pointed to a number of factors that they expected

would contribute to moderate real output growth over

the next few years, including improving labor marketconditions, strengthened household and business bal-ance sheets, the boost to consumer spending from lowenergy prices, diminishing restraint from fiscal policy,and still-accommodative monetary policy.

Compared with their Summary of Economic Projections(SEP) contributions in June, all participants revised uptheir projections of real GDP growth for 2015, reflectingstronger-than-anticipated growth over the first half ofthe year. Most participants revised down their projec-tions of real GDP growth in 2016 and 2017. Severalparticipants cited slower projected productivity growth

as a reason for their downward revisions. The median value of participants’ current projections for real GDPgrowth was 2.1 percent in 2015, 2.3 percent in 2016,2.2 percent in 2017, and 2.0 percent in 2018. Althoughabout half of the participants marked down their projec-tions of real GDP growth in the longer run, the medianremained at 2.0 percent.

Most participants projected that the unemployment rate would decline a bit further over the remainder of 2015

Page 1 _____________________________________________________________________________________________

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Figure 1. Medians, central tendencies, and ranges of economic projections, 2015–18 and over the longer run

Change in real GDP

Percent

0

1

2

3

4

-

+

2010 2011 2012 2013 2014 2015 2016 2017 2018 Longerrun

Central tendency of projections

Range of projections

Median of projections

Actual

Unemployment rate

Percent

5

6

7

8

9

10

2010 2011 2012 2013 2014 2015 2016 2017 2018 Longerrun

PCE inflation

Percent

1

2

3

2010 2011 2012 2013 2014 2015 2016 2017 2018 Longerrun

Core PCE inflation

Percent

1

2

3

2010 2011 2012 2013 2014 2015 2016 2017 2018 Longerrun

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

Summary of Economic Projections of the Meeting of September 16-17, 2015 Page 3 _____________________________________________________________________________________________

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

13

3

1

Appropriate timing of policy firming

Number of participants

1

2

3

4

5

6

7

8

9

10

11

12

13

14

2015 2016 2017

Percent

Appropriate pace of policy firming: Midpoint of target range or target level for the federal funds rate

-

+

0.5

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

2015 2016 2017 2018 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 range for the federal funds rate from its current range of 0 to1/4 percent will occur in the specified calendar year. In June 2015, the numbers of FOMC participants who judged thatthe first increase in the target federal funds rate would occur in 2015, 2016, and 2017 were, respectively, 15, 2, and 0.In the lower panel, each shaded circle indicates the value (rounded to the nearest 1/8 percentage point) of an individualparticipant’s judgment of the midpoint of the appropriate target range for the federal funds rate or the appropriatetarget level for the federal funds rate at the end of the specified calendar year or over the longer run.


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and be at or below their individual judgments of itslonger-run normal level from 2016 through 2018. Themedian of participants’ forecasts for the unemploymentrate in the fourth quarter of each year was 5.0 percent in2015 and 4.8 percent from 2016 through 2018. Com-pared with the June SEP, participants’ projected paths

for the unemployment rate generally shifted down somewhat through 2017. Many participants noted that recentdata pointing to faster-than-expected improvement in la-bor market conditions were an important factor under-lying the downward revisions to their unemploymentrate forecasts. All but a few participants revised downtheir estimates of the longer-run normal rate of unem-ployment; as a result, the median estimate edged downto 4.9 percent. Several participants noted that still-sub-dued wage and price inflation despite the stronger-than-expected momentum in the labor market suggested alower level of the longer-run normal rate of unemploy-

ment than they had thought previously. A few also men-tioned research indicating that demographic groups withlower average unemployment rates have accounted foran increasing fraction of the labor force.

Figures 3.A and 3.B show the distribution of partici-pants’ views regarding the likely outcomes for real GDPgrowth and the unemployment rate through 2018 and inthe longer run. The diversity of views across participantsreflected, in part, their individual assessments of a num-ber of factors, including the effects of lower oil prices onconsumer spending and business investment, the extentto which dollar appreciation and weaker foreign eco-

nomic growth would affect real activity, the rate at whichthe forces that have been restraining the pace of the eco-nomic expansion would continue to abate, the degree to

which ongoing improvements in the labor market wouldsupport stronger consumption growth, and the appro-priate path of monetary policy. Relative to the June SEP,the dispersion of participants’ projections for real GDPgrowth was roughly unchanged through 2016 but wassomewhat wider in 2017 and the longer run. The dis-persion of participants’ projections for the unemploy-ment rate in the longer run also widened somewhat.

The Outlook for InflationCompared with the June SEP, almost all participantsmarked down their projections for PCE inflation thisyear, noting that inflation had been running below theirearlier projections and that further declines in energyprices and import prices were putting additional tempo-rary downward pressure on PCE inflation. Nearly allparticipants saw PCE inflation picking up in 2016 andrising further in 2017, and almost all saw inflation at or

close to the Committee’s 2 percent longer-run objectivein 2018. Some participants also marked down their pro-jections for core PCE inflation from 2015 through 2017,although almost all still expected core inflation to risegradually over the projection period and to reach a levelat or near 2 percent in 2018. The median values of pro-

jections for PCE inflation were 0.4 percent in 2015,1.7 percent in 2016, 1.9 percent in 2017, and 2.0 percentin 2018, and the median values for core PCE inflation

were 1.4 percent in 2015, 1.7 percent in 2016, 1.9 percentin 2017, and 2.0 percent in 2018. Factors cited by par-ticipants as likely to contribute to a rise of inflation to-

ward 2 percent included stable longer-term inflation ex-pectations, tighter resource utilization, a pickup in wagegrowth, the waning effects of declines in energy pricesand appreciation of the dollar, and still-accommodativemonetary policy.

Figures 3.C and 3.D provide information on the distri-

bution of participants’ views about the outlook for infla-tion. The range of participants’ projections for PCE in-flation in 2015 widened slightly compared with June, re-flecting in part differences in participants’ assessmentsof the effects of the declines in energy and import priceson the outlook for inflation. The dispersion for PCEinflation for 2016 and 2017 was about unchanged. Sim-ilarly, the ranges for core PCE inflation widened slightlyin 2015 and were unchanged for 2016 and 2017. Thedistributions for both inflation measures in 2017 and2018 were notably more concentrated near the Commit-tee’s 2 percent longer-run objective than those for 2015

and 2016.

Appropriate Monetary PolicyParticipants judged that it would be appropriate to raisethe target range for the federal funds rate over the pro-jection period as forces that have been restraining theexpansion abate and as labor market indicators and in-flation move toward values the Committee judges con-sistent with the attainment of its mandated objectives ofmaximum employment and price stability. As shown infigure 2, all but four participants anticipated that it wouldbe appropriate to begin raising the target range for the

federal funds rate during 2015. However, most pro-jected that the appropriate level of the federal funds rate would remain noticeably below their individual estimatesof its longer-run normal level through 2017. Most par-ticipants saw the appropriate level of the federal fundsrate as close to its longer-run normal level by 2018.

Most participants projected that the unemployment rate would be at or only slightly above their estimates of itslonger-run normal level at the end of the year in which


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Figure 3.A. Distribution of participants’ projections for the change in real GDP, 2015–18 and over the longer run

2015


2468

1012141618

1.6 1.8 2.0 2.2 2.4 2.6 2.8 3.0- - - - - - - -

1.7 1.9 2.1 2.3 2.5 2.7 2.9 3.1

Percent range

September projectionsJune projections

2016


2468

1012141618

1.6 1.8 2.0 2.2 2.4 2.6 2.8 3.0- - - - - - - -

1.7 1.9 2.1 2.3 2.5 2.7 2.9 3.1

Percent range

2017


2468

1012141618

1.6 1.8 2.0 2.2 2.4 2.6 2.8 3.0- - - - - - - -

1.7 1.9 2.1 2.3 2.5 2.7 2.9 3.1

Percent range

2018


2468

1012141618

1.6 1.8 2.0 2.2 2.4 2.6 2.8 3.0- - - - - - - -

1.7 1.9 2.1 2.3 2.5 2.7 2.9 3.1

Percent range

Longer run


24

68

1012141618

1.6 1.8 2.0 2.2 2.4 2.6 2.8 3.0- - - - - - - -

1.7 1.9 2.1 2.3 2.5 2.7 2.9 3.1

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, 2015–18 and over the longer run

2015


2468

1012141618

4.4 4.6 4.8 5.0 5.2 5.4 5.6 5.8- - - - - - - -

4.5 4.7 4.9 5.1 5.3 5.5 5.7 5.9

Percent range


2016


2468

1012141618

4.4 4.6 4.8 5.0 5.2 5.4 5.6 5.8- - - - - - - -

4.5 4.7 4.9 5.1 5.3 5.5 5.7 5.9

Percent range

2017


2468

1012141618

4.4 4.6 4.8 5.0 5.2 5.4 5.6 5.8- - - - - - - -

4.5 4.7 4.9 5.1 5.3 5.5 5.7 5.9

Percent range

2018


2468

1012141618

4.4 4.6 4.8 5.0 5.2 5.4 5.6 5.8- - - - - - - -

4.5 4.7 4.9 5.1 5.3 5.5 5.7 5.9

Percent range

Longer run


24

68

1012141618

4.4 4.6 4.8 5.0 5.2 5.4 5.6 5.8- - - - - - - -

4.5 4.7 4.9 5.1 5.3 5.5 5.7 5.9

Percent range



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Figure 3.C. Distribution of participants’ projections for PCE inflation, 2015–18 and over the longer run

2015


2

4

68

10

12

14

16

18

0.3 0.5 0.7 0.9 1.1 1.3 1.5 1.7 1.9 2.1 2.3- - - - - - - - - - -

0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4

Percent range


2016


2

4

6

8

10

12

14

16

18

0.3 0.5 0.7 0.9 1.1 1.3 1.5 1.7 1.9 2.1 2.3- - - - - - - - - - -

0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4

Percent range

2017


2

4

6

8

10

12

14

16

18

0.3 0.5 0.7 0.9 1.1 1.3 1.5 1.7 1.9 2.1 2.3- - - - - - - - - - -

0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4

Percent range

2018


2

4

6

8

10

12

14

16

18

0.3 0.5 0.7 0.9 1.1 1.3 1.5 1.7 1.9 2.1 2.3- - - - - - - - - - -

0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4

Percent range

Longer run


24

6

8

10

12

14

16

18

0.3 0.5 0.7 0.9 1.1 1.3 1.5 1.7 1.9 2.1 2.3- - - - - - - - - - -

0.4 0.6 0.8 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, 2015–18

2015


2

4

6

8

1012

14

16

18

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

6

8

10

12

14

16

18

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

2017


2

4

6

8

10

12

14

16

18

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

2018


2

4

6

8

10

12

14

16

18

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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they judged the initial increase in the target range for thefederal funds rate would be warranted. All participantsprojected that inflation would be below the Committee’s2 percent objective in that year, but they also saw infla-tion rising substantially closer to 2 percent in the follow-ing year.

Figure 3.E provides the distribution of participants’judgments regarding the appropriate level of the targetfederal funds rate at the end of each calendar year from2015 to 2018 and over the longer run. Relative to June,the median value of the federal funds rate decreased25 basis points at the end of 2015, 2016, and 2017 to0.38 percent, 1.38 percent, and 2.63 percent, respec-tively, and the dispersion of the projections for the fed-eral funds rate widened from 2015 through 2017.

Almost all participants judged that it would be appropri-ate for the federal funds rate to remain noticeably below

its longer-run normal level over the next two years eventhough the unemployment rate was anticipated to benear its mandate-consistent level and most participantsexpected inflation to be close to 2 percent by 2017. Thereasons cited for only gradually increasing the federalfunds rate included an assessment that the headwindsthat have been holding back the economic expansion

will continue to exert some restraint on economic activ-ity, partly because weak activity abroad and the recentappreciation of the dollar are likely to continue to dampU.S. net exports for some time. As support for a viewthat accommodative monetary policy would remain ap-propriate over the next few years, some participants also

noted their assessment that residual slack in the labormarket will still be evident in measures of labor utiliza-tion other than the unemployment rate, or that the risksto the economic outlook are asymmetric as a result ofthe constraints on monetary policy associated with theeffective lower bound on the federal funds rate. Mostparticipants expected the federal funds rate to be at oronly slightly below its longer-run normal level by 2018.

Relative to the June SEP, more than half of the partici-pants revised down their estimates of the longer-runlevel of the federal funds rate, with a lower assessment

1 Table 2 provides estimates of the forecast uncertainty for thechange in real GDP, the unemployment rate, and total con-sumer price inflation over the period from 1995 through2014. At the end of this summary, the box “Forecast Uncer-tainty” discusses the sources and interpretation of uncertaintyin the economic forecasts and explains the approach used toassess the uncertainty and risks attending the participants’ pro-jections.

of the economy’s longer-run growth potential generallycited as a contributing factor. The median estimate ofthe longer-run normal federal funds rate declined 25 ba-sis points from June, and the range moved down from3.25 to 4.25 percent to 3.0 to 4.0 percent. All partici-pants judged that inflation in the longer run would be

equal to the Committee’s objective of 2 percent, imply-ing that their individual judgments regarding the appro-priate longer-run level of the real federal funds rate inthe absence of further shocks to the economy rangedfrom 1.0 to 2.0 percent.

Participants’ views of the appropriate path for monetarypolicy were informed by their judgments about the stateof the economy, including the values of the unemploy-ment rate and other labor market indicators that wouldbe consistent with maximum employment, their esti-mates of the current extent of slack in the labor market,the prospects for inflation to return to the Committee’s

longer-term objective of 2 percent, the implications ofinternational developments for the domestic economy,the pace at which headwinds that have been restrainingeconomic activity dissipate and underlying momentumin the economy strengthens, the desire to minimize po-tential disruptions in financial markets that could resultfrom a steep increase in the target federal funds rate fol-lowing liftoff, and the risks around the outlook for eco-nomic activity and inflation. Some participants alsomentioned the prescriptions of various monetary policyrules as factors they considered in judging the appropri-ate path for the federal funds rate.

Uncertainty and RisksNearly all participants continued to judge the levels ofuncertainty attending their projections for real GDPgrowth and the unemployment rate as broadly similar tothe norms during the previous 20 years (figure 4).1 Mostparticipants continued to see the risks to their outlooksfor real GDP growth as broadly balanced, although alarger number than in June viewed the risks to real GDPgrowth as weighted to the downside. Those participants

who viewed the risks as weighted to the downside cited,


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Figure 3.E. Distribution of participants’ judgments of the midpoint of the appropriate target range for the federal funds

rate or the appropriate target level for the federal funds rate, 2015–18 and over the longer run

2015


2

4

6

8

1012

14

16

18

−0.37 −0.12 0.13 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- - - - - - - - - - - - - - - - - - -

−0.13 0.12 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


2

4

6

8

10

12

14

16

18

−0.37 −0.12 0.13 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- - - - - - - - - - - - - - - - - - -−0.13 0.12 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

2017


2

4

6

8

10

12

14

16

18

−0.37 −0.12 0.13 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- - - - - - - - - - - - - - - - - - -

−0.13 0.12 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

2018


2

4

6

8

10

12

14

16

18

−0.37 −0.12 0.13 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- - - - - - - - - - - - - - - - - - -

−0.13 0.12 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


2

4

68

10

12

14

16

18

−0.37 −0.12 0.13 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- - - - - - - - - - - - - - - - - - -

−0.13 0.12 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 midpoints of the target ranges for the federal funds rate and the target levels for the federal funds rate

are measured at the end of the specified calendar year or over the longer run.


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Figure 4. Uncertainty and risks in economic projections

Uncertainty about GDP growth


2468

101214

1618

Lower Broadly Highersimilar

September projections

June projections

Uncertainty about the unemployment rate


2468

1012

141618


Uncertainty about PCE inflation


2468

10

12141618


Uncertainty about core PCE inflation


2468

1012141618


Risks to GDP growth


2468

101214

1618

Weighted to Broadly Weighted todownside balanced upside

September projections

June projections

Risks to the unemployment rate


2468

1012

141618


Risks to PCE inflation


2468

10

12141618


Risks to core PCE inflation


2468

1012141618


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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for example, a weaker outlook for economic activityabroad and the recent appreciation of the dollar. Mostparticipants judged the risks to the outlook for the un-employment rate to be broadly balanced, though moreparticipants than in June viewed the risks to the unem-ployment rate as weighted to the upside.

As in the June SEP, participants generally agreed that thelevels of uncertainty associated with their inflation fore-casts were broadly similar to historical norms. Many par-ticipants viewed the risks to their inflation forecast asbalanced. However, the risks were seen as tilted to thedownside by more than half of the participants, an in-crease since the June SEP. These participants cited therecent declines in market-based measures of inflationcompensation and commodity prices and the apprecia-tion of the dollar as factors that could place greaterdownward pressure on prices than anticipated.

Table 2. Average historical projection error rangesPercentage points

Variable 2015 2016 2017 2018

Change in real GDP1 . . . . . ±1.3 ±1.9 ±2.1 ±2.2

Unemployment rate1 . . . . . ±0.3 ±1.0 ±1.7 ±1.9

Total consumer prices2 . . . . ±0.8 ±1.0 ±1.1 ±1.0

NOTE: Error ranges shown are measured as plus or minus theroot mean squared error of projections for 1995 through 2014 that

were released in the fall by various private and government fore-casters. As described in the box “Forecast Uncertainty,” under certainassumptions, there is about a 70 percent probability that actual out-comes for real GDP, unemployment, and consumer prices will be inranges implied by the average size of projection errors made in thepast. For more information, see David Reifschneider and Peter Tulip(2007), “Gauging the Uncertainty of the Economic Outlook from His-torical Forecasting Errors,” Finance and Economics Discussion Series2007-60 (Washington: Board of Governors of the Federal ReserveSystem, November), available at www.federalreserve.gov/pubs/feds/2007/200760/200760abs.html; and Board of Governors of the Fed-eral Reserve System, Division of Research and Statistics (2014), “Up-dated Historical Forecast Errors,” memorandum, April 9, www.federalreserve.gov/foia/files/20140409-historical-forecast-errors.pdf.

1. Definitions of variables are in the general note to table 1.2. Measure is the overall consumer price index, the price measurethat has been most widely used in government and private economicforecasts. Projection is percent change, fourth quarter of the previousyear to the fourth quarter of the year indicated.


http://www.federalreserve.gov/pubs/feds/2007/200760/200760abs.htmlhttp://www.federalreserve.gov/pubs/feds/2007/200760/200760abs.htmlhttp://www.federalreserve.gov/foia/files/20140409-historical-forecast-errors.pdfhttp://www.federalreserve.gov/foia/files/20140409-historical-forecast-errors.pdfhttp://www.federalreserve.gov/foia/files/20140409-historical-forecast-errors.pdfhttp://www.federalreserve.gov/foia/files/20140409-historical-forecast-errors.pdfhttp://www.federalreserve.gov/foia/files/20140409-historical-forecast-errors.pdfhttp://www.federalreserve.gov/pubs/feds/2007/200760/200760abs.htmlhttp://www.federalreserve.gov/pubs/feds/2007/200760/200760abs.html

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Forecast Uncertainty

The economic projections provided by themembers of the Board of Governors and thepresidents of the Federal Reserve Banks informdiscussions of monetary policy among policy-makers and can aid public understanding of thebasis for policy actions. Considerable uncer-tainty attends these projections, however. Theeconomic and statistical models and relation-ships used to help produce economic forecastsare necessarily imperfect descriptions of the

real world, and the future path of the economycan be affected by myriad unforeseen develop-ments and events. Thus, in setting the stanceof monetary policy, participants consider notonly what appears to be the most likely eco-nomic outcome as embodied in their projec-tions, but also the range of alternative possibil-ities, the likelihood of their occurring, and thepotential costs to the economy should they oc-cur.

Table 2 summarizes the average historicalaccuracy of a range of forecasts, includingthose reported in past Monetary Policy Report s

and those prepared by the Federal ReserveBoard’s staff in advance of meetings of theFederal Open Market Committee. The projec-tion error ranges shown in the table illustratethe considerable uncertainty associated witheconomic forecasts. For example, suppose aparticipant projects that real gross domesticproduct (GDP) and total consumer prices willrise steadily at annual rates of, respectively,3 percent and 2 percent. If the uncertainty at-tending those projections is similar to that ex-perienced in the past and the risks around the

projections are broadly balanced, the numbersreported in table 2 would imply a probability ofabout 70 percent that actual GDP would ex-pand within a range of 1.7 to 4.3 percent in thecurrent year, 1.1 to 4.9 percent in the second

year, 0.9 to 5.1 percent in the third year, and0.8 to 5.2 percent in the fourth year. The corre-sponding 70 percent confidence intervals foroverall inflation would be 1.2 to 2.8 percent inthe current year, 1.0 to 3.0 percent in the secondyear, 0.9 to 3.1 percent in the third year, and1.0 to 3.0 percent in the fourth year.

Because current conditions may differ fromthose that prevailed, on average, over history,participants provide judgments as to whether

the uncertainty attached to their projections ofeach variable is greater than, smaller than, orbroadly similar to typical levels of forecast un-certainty in the past, as shown in table 2. Partic-ipants also provide judgments as to whether therisks to their projections are weighted to the up-side, are weighted to the downside, or arebroadly balanced. That is, participants judge

whether each variable is more likely to be aboveor below their projections of the most likely out-come. These judgments about the uncertaintyand the risks attending each participant’s projec-tions are distinct from the diversity of partici-pants’ views about the most likely outcomes.Forecast uncertainty is concerned with the risksassociated with a particular projection ratherthan with divergences across a number of differ-ent projections.

As with real activity and inflation, the out-look for the future path of the federal funds rateis subject to considerable uncertainty. This un-certainty arises primarily because each partici-pant’s assessment of the appropriate stance ofmonetary policy depends importantly on theevolution of real activity and inflation over time.

If economic conditions evolve in an unexpectedmanner, then assessments of the appropriatesetting of the federal funds rate would changefrom that point forward.


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