fomc minutes sept 2014

8/11/2019 FOMC Minutes Sept 2014

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Minutes of the Federal Open Market CommitteeSeptember 1617, 2014

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., onTuesday, September 16, 2014, at 11:00 a.m. andcontinued on Wednesday, September 17, 2014, at9:00 a.m.

PRESENT:Janet L. Yellen, ChairWilliam C. Dudley, Vice ChairmanLael BrainardStanley FischerRichard W. FisherNarayana KocherlakotaLoretta J. MesterCharles I. Plosser

Jerome H. PowellDaniel K. Tarullo

Christine Cumming, Charles L. Evans, Jeffrey M.Lacker, Dennis P. Lockhart, and John C. Williams,

Alternate Members of the Federal Open MarketCommittee

James Bullard, Esther L. George, and Eric Rosengren,Presidents of the Federal Reserve Banks of St.Louis, Kansas City, and Boston, respectively

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

James A. Clouse, Evan F. Koenig, Thomas Laubach,Michael P. Leahy, Mark E. Schweitzer, and William

Wascher, Associate Economists

Simon Potter, Manager, System Open Market Account

Lorie K. Logan, Deputy Manager, System Open MarketAccount

Robert deV. Frierson,1Secretary of the Board, Office ofthe Secretary, Board of Governors

Michael S. Gibson,2 Director, Division of BankingSupervision and Regulation, Board of Governors

Matthew J. Eichner,1 Deputy Director, Division ofResearch and Statistics, Board of Governors;Stephen A. Meyer and William R. Nelson, DeputyDirectors, Division of Monetary Affairs, Board ofGovernors; Mark E. Van Der Weide,3 DeputyDirector, Division of Banking Supervision andRegulation, Board of Governors

Andreas Lehnert, Deputy Director, Office ofFinancialStability Policy and Research,Board of Governors

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

Trevor A. Reeve, Special Adviser to the Chair, Office ofBoard 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

Michael T. Kiley4 and Jeremy B. Rudd,4 Senior Advisers,Division of Research and Statistics, Board ofGovernors; Joyce K. Zickler, Senior Adviser,Division of Monetary Affairs, Board of Governors

Eric M. Engen and Michael G. Palumbo, AssociateDirectors, Division of Research and Statistics,Board of Governors; Fabio M. Natalucci, AssociateDirector, Division of Monetary Affairs, Board ofGovernors

________________1 Attended the joint session of the Federal Open MarketCommittee and the Board of Governors.2Attended Wednesdays session only.3Attended Tuesdays session only.4 Attended the portion of the meeting following the jointsession of the Federal Open Market Committee and the Boardof Governors.

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Marnie Gillis DeBoer, Deputy Associate Director,Division of Monetary Affairs, Board of Governors;

Joshua Gallin, Deputy Associate Director, Divisionof Research and Statistics, Board of Governors

Edward Nelson, Assistant Director, Division of Mone-

tary Affairs, Board of Governors

Patrick E. McCabe,1Adviser, Division of Research andStatistics, Board of Governors

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

David H. Small, Project Manager, Division of MonetaryAffairs, Board of Governors

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

Governors

Valerie Hinojosa, Records Project Manager, Division ofMonetary Affairs, Board of Governors

Marie Gooding, First Vice President, Federal ReserveBank of Atlanta

David Altig, Alberto G. Musalem, and Daniel G. Sulli-van, Executive Vice Presidents, Federal ReserveBanks of Atlanta, New York, and Chicago, respec-tively

Troy Davig, Michael Dotsey, Geoffrey Tootell,Christopher J. Waller, and John A. Weinberg, Senior

Vice Presidents, Federal Reserve Banks of KansasCity, Philadelphia, Boston, St. Louis, andRichmond, respectively

Sylvain Leduc, Jonathan P. McCarthy, and DouglasTillett, Vice Presidents, Federal Reserve Banks ofSan Francisco, New York, and Chicago, respectively

Kei-Mu Yi, Special Policy Advisor to the President,Federal Reserve Bank of Minneapolis

______________1 Attended the joint session of the Federal Open MarketCommittee and the Board of Governors.

Developments in Financial Markets and the Fed-eral Reserves Balance SheetIn a joint session of the Federal Open Market Commit-tee (FOMC) and the Board of Governors of the Federal

Reserve System, the manager of the System Open Mar-ket Account (SOMA) reported on developments in do-mestic and foreign financial markets and reviewed theeffects of recent foreign central bank policy actions onyields on the international portion of the SOMA portfo-lio. The deputy manager reported on the System open

market operations conducted during the period since theCommittee met on July 2930, 2014, summarized plansfor additional test operations of the Term Deposit Facil-ity, and described the results from the fixed-rate over-night reverse repurchase agreement (ON RRP) opera-tional exercise.

The deputy manager also outlined a proposal forchanges to the ongoing ON RRP exercise to test possi-ble design features that could allow an ON RRP facilityto serve as an effective supplementary tool during policynormalization while also mitigating the potential for un-intended effects in financial markets. Participants dis-

cussed the proposed changes in the ON RRP exercise,including raising the counterparty-specific limit from$10 billion to $30 billion, limiting the overall size of eachoperation to $300 billion, and introducing an auctionprocess that would be used to determine the interest rateon such operations and allocate take-up if the sum ofbids exceeded the overall limit. Testing these design fea-tures was generally seen as furthering the Committeesunderstanding of how an ON RRP facility might bestructured to best balance its objectives of supportingmonetary control and of limiting the Federal Reservesrole in financial intermediation as well as reducing po-

tential financial stability risks the facility might pose dur-ing periods of stress. Participants also discussed othertests that could be incorporated in the exercise at a laterdate, including a daily time-varying cap along with theoverall limit on the size of ON RRP operations, small

variations in the offered rate on ON RRP operations,and moderate increases and decreases in the overall sizelimit. A number of participants expressed concern thatthese tests could be misunderstood as providing a signalof the Committees intentions regarding the parametersof the ON RRP program that will be implemented whennormalization begins; they wanted to emphasize that thetests are intended to provide additional information toguide the Committees decisions. Participantsagreed toconsider potential additional revisions to the ON RRPexercise at future FOMC meetings. Following the dis-cussion, the Committee unanimously approved the fol-lowing resolution:

The Federal Open Market Committee(FOMC) authorizes the Federal Reserve Bankof New York to conduct a series of overnight

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reverse repurchase operations involving U.S.government securities for the purpose of fur-ther assessing the appropriate structure ofsuch operations in supporting the implemen-tation of monetary policy during normaliza-tion. The reverse repurchase operations au-

thorized by this resolution shall be (i) con-ducted at an offering rate that may vary fromzero to five basis points, (ii) for an overnightterm, or such longer term as is warranted toaccommodate weekend, holiday, and similartrading conventions, (iii) subject to a per-counterparty limit of up to $30 billion per day,(iv) subject to an overall size limit of up to$300 billion per day, (v) awarded to all submit-ters (A) at the specified offering rate if thesum of the bids received is less than or equalto the overall size limit, or (B) at the stopout

rate, determined by evaluating bids in ascend-ing order by submitted rate up to the point atwhich the total quantity of bids equals theoverall size limit, with all bids below this rateawarded in full at the stopout rate and all bidsat the stopout rate awarded on a pro rata basis,if the sum of the counterparty offers receivedis greater than the overall size limit, and (vi)offered beginning with the operation con-ducted on September 22, 2014, with the reso-lution adopted at the January 2829, 2014,FOMC meeting remaining in place until theconclusion of the operation conducted on

September 19, 2014. The Chair must approveany change in the offering rate within therange specified in (i) and any changes to theper-counterparty and overall size limits sub-ject to the limits specified in (iii) and (iv). TheSystem Open Market Account manager willnotify the FOMC in advance about anychanges to the offering rate, per-counterpartylimit, or overall size limit applied to opera-tions. These operations shall be authorizedthrough January 30, 2015.

By unanimous vote, the Committee ratified the OpenMarket Desks domestic transactions over the intermeet-ing period. There were no intervention operations inforeign currencies for the Systems account over the in-termeeting period.

Monetary Policy NormalizationMeeting participants considered publication of a sum-mary statement of their monetary policy normalization

principles and plans based on the discussions at recentCommittee meetings. Participants agreed that it was ap-propriate at this time to provide additional informationregarding their approach to normalization. The pro-posed statement was seen as a concise summary of par-ticipantsviews that would help the public understand

the steps that the Committee plans to take when the timecomes to begin the normalization process and that

would convey the Committees confidence in its plans.However, it was emphasized that the Committee wouldneed to be flexible and pragmatic during normalization,adjusting the details of its approach, if necessary, in lightof changing conditions. Regarding the specific points inthe proposed statement, a couple of participants ex-pressed their preference that the principles make greaterallowance for sales of agency mortgage-backed securities(MBS) over the next few years in order to normalize thesize and composition of the Federal Reserves balance

sheet more quickly and to limit distortions in the alloca-tion of credit that they believed were associated with theFederal Reserves holdings of agency MBS. In addition,a few participants noted that they would have preferredthat the principles point to an earlier end to the reinvest-ment of repayments of principal on securities held in theSOMA portfolio. At the end of the discussion, all butone participant could support the publication of the fol-lowing statement after the meeting:

Policy Normalization Principles and Plans

During its recent meetings, the Federal OpenMarket Committee (FOMC) discussed ways

to normalize the stance of monetary policyand the Federal Reserves securities holdings.

The discussions were part of prudent plan-ning and do not imply that normalization willnecessarily begin soon. The Committee con-tinues to judge that many of the normalizationprinciples that it adopted in June 2011 remainapplicable. However, in light of the changesin the System Open Market Account (SOMA)portfolio since 2011 and enhancements in thetools the Committee will have available to im-plement policy during normalization, the

Committee has concluded that some aspectsof the eventual normalization process willlikely differ from those specified earlier. TheCommittee also has agreed that it is appropri-ate at this time to provide additional infor-mation regarding its normalization plans. AllFOMC participants but one agreed on the fol-lowing key elements of the approach they in-

Minutes of the Meeting of September 1617, 2014 Page 3_____________________________________________________________________________________________


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tend to implement when it becomes appropri-ate to begin normalizing the stance of mone-tary policy:

The Committee will determine the timingand pace of policy normalizationmeaningsteps to raise the federal funds rate andother short-term interest rates to more nor-mal levels and to reduce the Federal Re-serves securities holdingsso as to pro-mote its statutory mandate of maximumemployment and price stability.

oWhen economic conditions and the eco-nomic outlook warrant a less accommo-dative monetary policy, the Committee

will raise its target range for the federalfunds rate.

oDuring normalization, the Federal Re-

serve intends to move the federal fundsrate into the target range set by theFOMC primarily by adjusting the interestrate it pays on excess reserve balances.

oDuring normalization, the Federal Re-serve intends to use an overnight reverserepurchase agreement facility and othersupplementary tools as needed to helpcontrol the federal funds rate. The Com-mittee will use an overnight reverse repur-chase agreement facility only to the extentnecessary and will phase it out when it is

no longer needed to help control the fed-eral funds rate.

The Committee intends to reduce the Fed-eral Reserves securities holdings in a grad-ual and predictable manner primarily byceasing to reinvest repayments of principalon securities held in the SOMA.

oThe Committee expects to cease or com-mence phasing out reinvestments after itbegins increasing the target range for thefederal funds rate; the timing will depend

on how economic and financial condi-tions and the economic outlook evolve.

oThe Committee currently does not antic-ipate selling agency mortgage-backed se-curities as part of the normalization pro-cess, although limited sales might be war-ranted in the longer run to reduce or elim-inate residual holdings. The timing and

pace of any sales would be communicatedto the public in advance.

The Committee intends that the Federal Re-serve will, in the longer run, hold no moresecurities than necessary to implementmonetary policy efficiently and effectively,and that it will hold primarily Treasury se-curities, thereby minimizing the effect ofFederal Reserve holdings on the allocationof credit across sectors of the economy.

The Committee is prepared to adjust the de-tails of its approach to policy normalizationin light of economic and financial develop-ments.

The Board meeting concluded at the end of the discus-sion of policy normalization principles and plans.

Staff Review of the Economic SituationThe information reviewed for the September 1617meeting suggested that economic activity was expandingat a moderate pace in the third quarter. Labor marketconditions improved a little further, although the unem-ployment rate was essentially unchanged over the inter-meeting period. Consumer price inflation was runningbelow the FOMCs longer-run objective of 2 percent,but measures of longer-run inflation expectations re-mained stable.

Total nonfarm payroll employment increased in July andAugust but at a slower pace than in the first half of the

year. The unemployment rate was 6.1 percent in August,the same as in June, and the labor force participation rateand the employment-to-population ratio also were un-changed since that time. Both the share of workers em-ployed part time for economic reasons and the rate oflong-duration unemployment declined a little over thepast two months. Other recent indicators generallypointed to ongoing improvement in labor market condi-tions: Although some measures of household expecta-tions of the labor market situation deteriorated some-

what, the rates of job openings and of gross private-sector hiring moved up, initial claims for unemploymentinsurance were essentially flat at a relatively low level,and some readings on firms hiring plans improved.

On balance, industrial production edged up over Julyand August, and the rate of manufacturing capacity uti-lization was unchanged. Automakers schedules indi-cated that the pace of motor vehicle assemblies woulddecline slightly in the fourth quarter, but broader indica-tors of manufacturing production, such as the readings



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on new orders from the national and regional manufac-turing surveys, were consistent with moderate increasesin factory output in the near term.

Real personal consumption expenditures (PCE) ap-peared to be rising at a moderate pace in the third quar-ter.5 The components of nominal retail sales data usedby the Bureau of Economic Analysis (BEA) to constructits estimates of PCE increased at a solid rate in July and

August, and sales of light motor vehicles surged in Au-gust after edging down in July. Recent information per-taining to key factors that influence consumer spending

were positive: Real disposable incomes continued to in-crease in July, households net worth likely edged up asequity prices and home values rose somewhat further,and consumer sentiment as measured by the ThomsonReuters/University of Michigan Surveys of Consumersimproved in August and early September.

The pace of activity in the housing sector seemed to bepicking up. Starts and permits of both new single-familyhomes and multifamily units were higher in July thantheir average levels in the second quarter. Sales of exist-ing homes increased further in July, although new homesales declined.

Real private expenditures for business equipment and in-tellectual property products appeared to rise further go-ing into the third quarter. Nominal shipments of non-defense capital goods excluding aircraft moved up in

July. Moreover, new orders for these capital goods con-tinued to be above the level of shipments, pointing to

increases in shipments in subsequent months. In addi-tion, other forward-looking indicators, such as surveysof business conditions, were consistent with moderategains in business equipment spending in the near term.Nominal business expenditures for nonresidential con-struction also increased in July. Recent book-value datafor inventories, along with readings on inventories fromnational and regional manufacturing surveys, did notpoint to significant inventory imbalances in most indus-tries; in the energy sector, inventories were drawn downsignificantly early in the year and, despite substantialstockbuilding since then, remained low.

Total real government purchases seemed to be roughlyflat in the third quarter. Federal government purchasesprobably declined a little, as defense spending was lowerin July and August than in the second quarter. State and

5Recently released data for health-services consumption in the

second quarter were notably stronger than the Bureau of Eco-nomic Analysis estimated when constructing its most recentPCE estimates for the second quarter.

local government purchases appeared to be rising slowlyas the payrolls of these governments expanded a bit fur-ther in July and August and their nominal constructionexpenditures increased in July.

The U.S. international trade deficit narrowed in bothJune and July. Exports were little changed in June, butthey expanded robustly in July, with particular strengthin industrial supplies and automotive products. Importsfell in June but then partly recovered in July, driven byswings in imports of oil and automotive products.

Total U.S. consumer price inflation, as measured by thePCE price index, was about 1 percent over the12 months ending in July. Over the 12 months endingin August, the consumer price index (CPI) rose about1 percent. Consumer energy prices declined in both

July and August, while consumer food prices rose. Coreprice inflation (which excludes food and energy prices)

was essentially the same as total inflation for the PCEprice measure and for the CPI over their most recent12-month periods. Near-term inflation expectationsfrom the Michigan survey moved down a bit in Augustand early September, while longer-term inflation expec-tations in the survey were little changed.

Measures of labor compensation increased a little fasterthan consumer prices. Compensation per hour in thebusiness sector rose 2 percent over the year ending inthe second quarter; with modest gains in labor produc-tivity, unit labor costs advanced more slowly than com-pensation per hour. Over the same year-long period, the

employment cost index rose only about 2 percent, andaverage hourly earnings increased at a similar rate overthe 12 months ending in August.

Foreign economies continued to expand in the secondquarter, but with significant differences across countries.Economic growth rebounded strongly from a weakfirst-quarter pace in Canada, China, and Mexico, sup-ported by improvement in exports. In contrast, the Jap-anese economy contracted sharply following the con-sumption tax increase in April, economic activity stag-nated in the euro area, and the Brazilian economy fellinto recession. In the third quarter, household spending

appeared to be normalizing in Japan, and productioncontinued to rise in Mexico. However, indicators ofeconomic activity in the euro area remained weak, andChinese economic data for July and August suggested



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some slowing in the third quarter. With inflation verylow in the euro area, the European Central Bank reducedits policy interest rates at its September 4 meeting andannounced plans to purchase private assets.

Staff Review of the Financial SituationData releases on domestic economic activity were re-portedly interpreted by financial market participants assomewhat better than expected, on balance, notwith-standing the disappointing employment report for Au-gust. Federal Reserve communications, particularly the

July FOMC minutes and the Chairs speech at the Jack-son Hole economic policy symposium, were viewed assignaling slightly less policy accommodation than antici-pated. Reflecting these and other developments, yieldson nominal Treasury securities rose somewhat and eq-uity prices edged up over the intermeeting period. Onnet, the conflicts in the Middle East and Ukraine andother geopolitical tensions had limited effects on domes-

tic financial markets.

The federal funds rate path implied by financial marketquotes was essentially unchanged over the intermeetingperiod. But the results from the Desks September Sur-

vey of Primary Dealers indicated that the distribution ofthe likely date of liftoff across dealers shifted to some-

what earlier dates, and showed the second quarter of2015 as the most likely date for liftoff. However, thedealers expected levels of various employment and in-flation indicators at the time of liftoff did not changematerially from the previous survey.

The yield on 10-year nominal Treasury securities movedup about 15 basis points, on net, since the FOMC metin July, likely boosted in part by Federal Reserve com-munications. Measures of inflation compensation basedon Treasury Inflation-Protected Securities edged down,reportedly reflecting the lower-than-expected CPI datain July and recent declines in oil prices.

Broad measures of domestic equity prices were up mod-estly over the intermeeting period, with some reportssuggesting that investors were interpreting incomingeconomic data as implying that the economic recovery

was strengthening.

Yields on corporate bonds and agency MBS rose aboutin line with those on comparable-maturity Treasury se-curities. High-yield bond mutual funds experiencedsharp outflows early in the intermeeting period, andspreads on such bonds widened noticeably; however,these spreads returned to their initial levels over subse-quent weeks, and high-yield bond funds attracted mod-est inflows. Measures of liquidity in the corporate bond

market remained stable in the face of these substantialflows.

Conditions in short-term dollar funding markets werelittle changed. The Federal Reserve continued its testingof ON RRP operations over the intermeeting period.

Take-up in ON RRP operations increased a little, on av-erage, over the period relative to the previous intermeet-ing period.

Credit conditions for domestic businesses remained fa-vorable. Corporate bond issuance slowed in July andAugust, reflecting a fairly typical summer lull as well asthe elevated volatility in the high-yield bond market earlyin the intermeeting period, but issuance reboundedstrongly in the first week of September. Commercial pa-per outstanding and commercial and industrial loans atbanks expanded briskly. Credit conditions in the com-mercial real estate (CRE) sector continued to ease, and

growth in CRE loans at banks stayed solid. The issuanceof commercial mortgage-backed securities remained ro-bust in July and August.

Issuance of institutional leveraged loans continued apacein July and August, traditionally a slow period in thismarket. The issuance of new money loans, which aretypically earmarked for corporate leveraged-buyouts andmergers and acquisitions, was strong, and the pipeline ofsuch loans was reported to be quite large heading intothe fall. The issuance of collateralized loan obligations

was still a major source of demand for leveraged loans.

Financing conditions for households remained mixed.

Auto loans were widely available; standards and termsfor credit card loans eased somewhat, though they werestill tight; and access to residential mortgages continuedto be limited for all but those with excellent credit histo-ries.

Responding in part to disappointing economic dataabroad, the U.S. dollar appreciated against most curren-cies over the intermeeting period, including large appre-ciations against the euro, the yen, and the pound sterling.Greater monetary accommodation in the euro area andexpectations of a lower policy rate in the near termadded to the downward pressure on the euro while un-certainty about the outcome of the forthcoming referen-dum on Scottish independence weighed on the value ofthe pound. In addition, near-term policy rate expecta-tions moved down in the United Kingdom, reacting toboth the release of the August Inflation Reportand uncer-tainty induced by the referendum. Sovereign yields inthe European economies generally declined, and yield



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spreads of sovereign bonds from the euro-area periph-ery over German bunds narrowed considerably. Mostforeign equity indexes ended the period modestly higher.

Staff Economic OutlookIn the economic forecast prepared by the staff for theSeptember FOMC meeting, the projection for growth inreal gross domestic product (GDP) in the second half ofthis year was revised down slightly from the one pre-pared for the previous meeting, primarily because of asomewhat weaker near-term outlook for consumerspending. The staffs medium-term forecast for realGDP was also revised down a little, reflecting a higherprojected path for the foreign exchange value of the dol-lar along with slightly smaller projected gains for homeprices. The staff still anticipated that the pace of realGDP growth in 2015 and 2016 would exceed the growthrate of potential output, supported by continued in-creases in consumer and business confidence, the fur-

ther easing of the restraint on spending from changes infiscal policy, additional improvements in credit availabil-ity, and a pickup in foreign economic growth. In 2017,real GDP growth was projected to begin slowing to-

ward, but to remain above, the rate of potential outputgrowth. The expansion in economic activity over theprojection period was anticipated to steadily reduce re-source slack, and the unemployment rate was expectedto decline gradually and temporarily move slightly belowthe staffs estimate of its longer-run natural rate towardthe end of the period.

The staffs near-term forecast for inflation was a little

lower than the projection prepared for the previousFOMC meeting, reflecting recent readings on core con-sumer price inflation that were lower than anticipatedand declines in oil prices that were faster than expected,but the forecast for inflation over the medium term waslittle changed. The staff continued to project inflationto be lower in the second half of this year than in thefirst half and to remain below the Committees longer-run objective of 2 percent over the next few years. Withlonger-term inflation expectations assumed to remainstable, resource slack projected to diminish slowly, andchanges in commodity and import prices expected to be

subdued, inflation was projected to rise gradually and toreach the Committees objectivein the longer run.

Overall, the staffs economic projection for the Septem-ber meeting was quite similar to the forecast presentedat the June meeting, when the FOMC last prepared aSummary of Economic Projections (SEP). The staffsSeptember projection showed a slightly higher path forthe unemployment rate, a bit lower real GDP growth,

and essentially no change to inflation compared with itsJune forecast.

The staff continued to view the uncertainty around itsprojections for real GDP growth, the unemploymentrate, and inflation as similar to the average over the past20 years. The risks to the forecast for real GDP growth

were still seen as tilted a little to the downside, as neithermonetary policy nor fiscal policy was viewed as well po-sitioned to help the economy withstand adverse shocks.

At the same time, the staff viewed the risks around itsoutlook for the unemployment rate and for inflation asroughly balanced.

ParticipantsViews on Current Conditions and theEconomic OutlookIn conjunction with this FOMC meeting, members ofthe Board of Governors and the Federal Reserve Bankpresidents submitted their projections of real output

growth, the unemployment rate, inflation, and the fed-eral funds rate for each year from 2014 through 2017and over the longer run, conditional on each partici-pants assessment of appropriate monetary policy. Thelonger-run projections represent each participants as-sessment of the value to which each variable would beexpected to converge, over time, under appropriatemonetary policy and in the absence of further shocks tothe economy. These economic projections and policyassessments are described in the SEP, which is attachedas an addendum to these minutes.

In their discussion of the economic situation and the

outlook, meeting participants viewed the information re-ceived over the intermeeting period as suggesting thateconomic activity was expanding at a moderate rate. Onbalance, labor market conditions improved somewhatfurther; however, the unemployment rate was littlechanged, and most participants judged that there re-mained significant underutilization of labor resources.Participants generally expected that, over the mediumterm, real economic activity would increase at a pace suf-ficient to lead to a further gradual decline in the unem-ployment rate toward levels consistent with the Commit-tees objective of maximum employment. Inflation wasrunning below the Committees longer-run objective,but longer-term inflation expectations were stable. Par-ticipants anticipated that inflation would move towardthe Committees 2 percent goal in coming years, withseveral expressing concern that inflation might persistbelow the Committees objective for quite some time.Most viewed the risks to the outlook for economic ac-tivity and the labor market as broadly balanced. How-ever, a number of participants noted that economicgrowth over the medium term might be slower than they



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expected if foreign economic growth came in weakerthan anticipated, structural productivity continued to in-crease only slowly, or the recovery in residential con-struction continued to lag.

Household spending appeared to be rising moderately,with several participants noting that the recent positivereports on retail sales, motor vehicle purchases, andhealth-care spending had reduced their concern about

weakness in the underlying pace of household spending.Among the favorable factors attending the outlook forconsumer spending, participants cited continued gains inhousehold wealth, improved household balance sheets,low delinquency rates, a high saving rate, or rising confi-dence in employment and income prospects. However,other participants said they heard mixed reports frombusiness contacts regarding consumer spending or wereuncertain about the prospects for stronger gains in realincome necessary to sustain moderate growth in house-

hold spending.

The recovery in housing activity remained slow in all buta few areas of the country despite relatively low mort-gage rates, rising house prices, and improvements inhousehold wealth. Contacts in a couple of Districts re-ported that new construction was being held back byshortages of materials, of lots available for development,and of skilled workers or by the overhang of vacanthomes not on the market. Households with relativelylow credit scores continued to have difficulty obtainingmortgage loans. It was noted that this difficulty couldbe a factor restraining the demand for housing, particu-

larly among younger households who have high levels ofstudent loan debt or weak job prospects. A few partici-pants pointed out the relative strength in construction ofand demand for multifamily units, which possibly wasdue to a shift in demand among younger homebuyersaway from single-family homes.

Information from business contacts in most parts of thecountry indicated improvements in business conditions,rising confidence about the economic outlook, and in-creasing willingness to undertake new investment pro-jects. According to national and regional surveys, man-ufacturing activity was strong, and several participantshad received reports of hiring and increased capitalspending in that sector. Among the other industriescited as relatively strong in recent months were transpor-tation, energy, and services. Several participants notedpositive signs of further increases in investment spend-ing going forward, including elevated levels of new or-ders and shipments of capital goods, strong interest in

the technology sector, and the need to replace aging cap-ital. A couple of participants added that nonresidentialconstruction activity was rising in their Districts.

The improvement in business conditions was reflectedin reports of increased demand for loans at banks in sev-eral Districts. Demand rose for loans to both house-holds and businesses, and a couple of participants indi-cated that borrowers were expanding their use of exist-ing credit lines as well as obtaining new commitments.Bankers in one District stated that, while they had easedthe terms and conditions on loans in response to com-petition from other lenders, they had not taken on riskierloans. Some financial developments that could under-mine financial stability over time were noted, including adeterioration in leveraged lending standards, stretchedstock market valuations, and compressed risk spreads.However, one participant suggested that the leveragedloan market seemed to be moving into better balance,

and that market participants appeared to be taking ap-propriate account of the changes in interest rates thatmight be associated with the eventual normalization ofthe stance of monetary policy. Moreover, a couple ofparticipants, while stressing the importance of remaining

vigilant about potential risks to financial stability, ob-served that conditions in financial markets at present didnot suggest the types of financial stability considerationsthat would impede the achievement of the Committeesmacroeconomic objectives.

Some participants noted that expectations for the pathof the federal funds rate implied by market quotes ap-

peared to remain below most of the projections of thefederal funds rate provided by Committee participantsin the SEP, which represent each individual participantsassessment of the appropriate path for the federal fundsrate consistent with his or her economic outlook. How-ever, it was pointed out that measures of financial mar-ket participants expectations incorporate their judg-ments regarding not only the most likely outcomes, butalso the possible downside tail risks that might be asso-ciated with especially low paths for the federal fundsrate. For example, respondents to the recent Survey ofPrimary Dealers placed considerable odds on the federal

funds rate returning to the zero lower bound during thetwo years following the initial increase in that rate. Theprobability that investors attach to such low interest ratescenarios could pull the expected path of the federalfunds rate computed from market quotes below mostCommittee participants assessments of appropriate pol-icy as reported in the SEP.

The restraint on economic activity from fiscal policy wasseen as diminishing, and a couple of participants pointed



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out that, over the second half of the year, the remainingdrag was likely to be small. Nonetheless, the cutbacks inboth defense and nondefense federal outlays, as well asstate governments budget restraint, continued to weighon jobs and income in some parts of the country. Fiscalpolicy overall was anticipated to be a neutral factor for

economic growth over the next several years.During participants discussion of prospects for eco-nomic activity abroad, they commented on a number ofuncertainties and risks attending the outlook. Over theintermeeting period, the foreign exchange value of thedollar had appreciated, particularly against the euro, theyen, and the pound sterling. Some participants ex-pressed concern that the persistent shortfall of economicgrowth and inflation in the euro area could lead to a fur-ther appreciation of the dollar and have adverse effectson the U.S. external sector. Several participants addedthat slower economic growth in China or Japan or un-

anticipated events in the Middle East or Ukraine mightpose a similar risk. At the same time, a couple of partic-ipants pointed out that the appreciation of the dollarmight also tend to slow the gradual increase in inflationtoward the FOMCs 2percent goal.

Labor market conditions continued to improve over theintermeeting period. Although the unemployment rate

was little changed, participants variously cited positivereadings from other indicators, including a decline inlonger-term unemployment, the low level of new claimsfor unemployment insurance, the rise in job openings,and survey reports of increased hiring plans and job

availability. While the most recent estimate of nonfarmpayroll employment showed a smaller monthly gain thanearlier in the year, it followed six months in which in-creases had averaged more than 200,000. Some partici-pants were reluctant to place much weight on onemonthly report or noted that the first estimate for Au-gust has frequently been revised up in recent years. Par-ticipants generally agreed that the accumulated progressin labor market conditions since the Committees cur-rent asset purchase program began in September 2012had been substantial and expected that progress wouldbe sustained. Nonetheless, they continued to express

differing views on the extent of remaining slack in labormarkets. Most agreed that underutilization of labor re-sources remained significant; these participants noted

variously that the level of nonfarm payroll jobs had onlyrecently returned to its pre-recession level, that the num-ber of individuals working part time for economic rea-sons was still elevated relative to the level of unemploy-ment, and that the labor force participation rate was stillbelow assessments of its structural trend. In this regard,

a couple of participants pointed out that the stability ofthe participation rate, on balance, over the past year sug-gested that some of the cyclical shortfall had diminished.Most agreed that the Committees assessment of labormarket slack should be grounded in its review of a rangeof labor market indicators, although a few saw the gap

between the unemployment rate and their estimate of itslonger-run normal level as a reliable indicator of slack.

Most measures of labor compensation showed nobroad-based increase in wage inflation. However, busi-nesses in several Districts continued to report upwardpressure on wages in specific industries and occupationsassociated with labor shortages or difficult-to-fill jobs,

while a couple of participants noted a more general risein current or planned wage increases in their regions.Several participants commented that the relatively sub-dued rise in nominal labor compensation was still belowlonger-run trend rates of productivity growth and infla-

tion and was a signal of slack remaining in the labor mar-ket. However, a couple of others suggested some cau-tion in reading subdued wage inflation as an indicator oflabor market underutilization. They pointed out that ifnominal wages did not adjust downward when unem-ployment was high, pent-up wage deflation could helpexplain the modest increases in wages so far during therecovery, and wages could rise more rapidly going for-

ward as the unemployment rate continues to decline.

Inflation had been running below the Committeeslonger-run objective, and the readings on consumerprices over the intermeeting period were somewhat

softer than during the preceding four months, in partbecause of declining energy prices. Most participantsanticipated that inflation would move gradually back to-

ward its objective over the medium term. However, par-ticipants differed somewhat in their assessments of howquickly inflation would move up. Some cited the stabil-ity of longer-run inflation expectations at a level con-sistent with the Committees objective as an importantfactor in their forecasts that inflation would reach 2 per-cent in coming years. Participants views on the respon-siveness of inflation to the level and change in resourceutilization varied, with a few seeing labor markets as suf-

ficiently tight that wages and prices would soon begin tomove up noticeably but with some others indicating thatinflation was unlikely to approach 2 percent until the un-employment rate falls below its longer-run normal level.

While most viewed the risk that inflation would run per-sistently below 2 percent as having diminished some-

what since earlier in the year, a couple noted the possi-bility that longer-term inflation expectations might beslightly lower than the Committees 2percent objective



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or that domestic inflation might be held down by persis-tent disinflation among U.S. trading partners and furtherappreciation of the dollar.

In their discussion of the appropriate path for monetarypolicy over the medium term, meeting participantsagreed that the timing of the first increase in the federalfunds rate and the appropriate path of the policy ratethereafter would depend on incoming economic dataand their implications for the outlook. That said, severalparticipants thought that the current forward guidanceregarding the federal funds rate suggested a longer pe-riod before liftoff, and perhaps also a more gradual in-crease in the federal funds rate thereafter, than they be-lieved was likely to be appropriate given economic andfinancial conditions. In addition, the concern was raisedthat the reference to considerable time in the currentforward guidance could be misunderstood as a commit-ment rather than as data dependent. However, it was

noted that the current formulation of the Committeesforward guidance clearly indicated that the Committeespolicy decisions were conditional on its ongoing assess-ment of realized and expected progress toward its objec-tives of maximum employment and 2 percent inflation,and that its assessment reflected its review of a broadarray of economic indicators. It was emphasized that thecurrent forward guidance for the federal funds rate wasdata dependent and did not indicate that the first in-crease in the target range for the federal funds rate wouldoccur mechanically after some fixed calendar intervalfollowing the completion of the current asset purchase

program. If employment and inflation converged morerapidly toward the Committees goalsthan currently ex-pected, the date of liftoff could be earlier, and subse-quent increases in the federal funds rate target morerapid, than participants currently anticipated. Con-

versely, if employment and inflation returned toward theCommittees objectives more slowly than currently an-ticipated, the date of liftoff for the federal funds ratecould be later, and future federal funds rate target in-creases could be more gradual. In addition, some par-ticipants saw the current forward guidance as appropri-ate in light of risk-management considerations, whichsuggested that it would be prudent to err on the side ofpatience while awaiting further evidence of sustainedprogress toward the Committees goals. In their view,the costs of downside shocks to the economy would belarger than those of upside shocks because, in currentcircumstances, it would be less problematic to removeaccommodation quickly, if doing so becomes necessary,than to add accommodation. A number of participantsalso noted that changes to the forward guidance might

be misinterpreted as a signal of a fundamental shift inthe stance of policy that could result in an unintendedtightening of financial conditions.

Participants also discussed how the forward-guidancelanguage might evolve once the Committee decides thatthe current formulation no longer appropriately conveysits intentions about the future stance of policy. Mostparticipants indicated a preference for clarifying the de-pendence of the current forward guidance on economicdata and the Committees assessment of progress towardits objectives of maximum employment and 2 percentinflation. A clarification along these lines was seen aslikely to improve the publicsunderstanding of the Com-mittees reaction function while allowing the Committeeto retain flexibility to respond appropriately to changesin the economic outlook. One participant favored usinga numerical threshold based on the inflation outlook asa form of forward guidance. A few participants, how-

ever, noted the difficulties associated with expressingforward guidance in terms of numerical thresholds forsome set of economic variables. Another participant in-dicated a preference for reducing reliance on explicit for-

ward guidance in the statement and conveying insteadguidance regarding the future stance of monetary policythrough other mechanisms, including the SEP. It wasnoted that providing explicit forward guidance regardingthe future path of the federal funds rate might becomeless important once a highly accommodative stance ofpolicy is no longer appropriate and the process of policynormalization is well under way. It was generally agreed

that when changes to the forward guidance become ap-propriate, they will likely present communication chal-lenges, and that caution will be needed to avoid sendingunintended signals about the Committees policy out-look.

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. Household spendingappeared to be rising moderately, and business fixed in-

vestment was advancing, while the recovery in the hous-

ing sector remained slow. Fiscal policy was restrainingeconomic growth, although the extent of restraint wasdiminishing and would soon be quite small. Inflation

was running below the Committees longer-run objec-tive, but longer-term inflation expectations were stable.

The Committee expected that, with appropriate policyaccommodation, economic activity would expand at a



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moderate pace, with labor market indicators and infla-tion moving toward levels that the Committee judgesconsistent with its dual mandate.

With incoming information continuing to broadly sup-port the Committees expectation of ongoing improve-ment in labor market conditions and inflation movingback toward the Committees 2 percent objective, mem-bers agreed that a further measured reduction in the paceof asset purchases was appropriate at this meeting. Ac-cordingly, the Committee agreed that, beginning in Oc-tober, it would add to its holdings of agency MBS at apace of $5 billion per month rather than $10 billion permonth, and it would add to its holdings of longer-term

Treasury securities at a pace of $10 billion per monthrather than $15 billion per month. The Committeejudged that, if incoming information broadly supportedits expectations that labor market indicator and inflation

would continue to move toward mandate-consistent lev-

els, it would end its current program of asset purchasesat its October meeting.

Members discussed their assessments of progress to-ward the Committees objectives of maximum employ-ment and 2 percent inflation and considered possible en-hancements to the statement that would more clearlycommunicate the Committees view on such progress.Regarding the labor market, many members indicatedthat, although labor market conditions had generallycontinued to improve, there was still significant slack inlabor markets. A few members, however, expressed res-ervations about continuing to characterize the extent of

underutilization of labor resources as significant. In theend, members agreed to indicate that labor market con-ditions had improved somewhat further, but that the un-employment rate was little changed and a range of labormarket indicators continued to suggest that there re-mained significant underutilization of labor resources. It

was noted, however, that the characterization of labormarket underutilization might have to be changed if pro-gress in the labor market continued. Regarding inflation,members agreed that inflation had moved closer to theCommittees 2 percent objective during the first half ofthe year but, more recently, had fallen back somewhat.

As a consequence, they updated the language in thestatement to indicate that inflation had been running be-low the Committees longer-run objective. However,

with stable longer-term inflation expectations, the Com-mittee continued to judge that the likelihood of inflationrunning persistently below 2 percent had diminishedsomewhat since early in the year.

After the discussion, all members but two voted to main-tain the Committees target range for the federal funds

rate and to reiterate its forward guidance about the fed-eral funds rate. The guidance continued to state that theCommittees decisions about how long to maintain thecurrent target range for the federal funds rate would de-pend on its assessment of actual and expected progresstoward its objectives of maximum employment and

2 percent inflation. The Committee again anticipatedthat it likely would be appropriate to maintain the cur-rent target range for the federal funds rate for a consid-erable time after the asset purchase program ends, espe-cially if projected inflation continued to run below theCommittees 2 percent longer-run goal, and providedthat longer-term inflation expectations remained wellanchored. The forward guidance also reiterated theCommittees expectation that, even after employmentand inflation are near mandate-consistent levels, eco-nomic conditions may, for some time, warrant keepingthe target federal funds rate below levels the Committee

views as normal in the longer run. Two members, how-ever, dissented because, in their view, the statement lan-guage did not accurately reflect the progress made todate toward the Committees goals of maximum em-ployment and inflation of 2 percent, and they believedthat ongoing progress will likely warrant an earlier in-crease in the federal funds rate than suggested by theforward guidance in the Committees postmeeting state-ment.

At the conclusion of the discussion, the Committeevoted to authorize and direct the Federal Reserve Bankof New York, until it was instructed otherwise, to

execute 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 to percent. The Committee directs the Deskto undertake open market operations asnecessary to maintain such conditions.

Beginning in October, the Desk is directed topurchase longer-term Treasury securities at apace of about $10 billion per month and topurchase agency mortgage-backed securitiesat a pace of about $5 billion per month. TheCommittee also directs the Desk to engage indollar roll and coupon swap transactions asnecessary to facilitate settlement of theFederal Reserves agency mortgage-backed



12/26

securities transactions. The Committeedirects the Desk to maintain its policy ofrolling over maturing Treasury securities intonew issues and its policy of reinvestingprincipal payments on all agency debt andagency mortgage-backed securities in agency

mortgage-backed securities. The SystemOpen Market Account manager and thesecretary will keep the Committee informedof ongoing developments regarding theSystems balance sheet that could affect theattainment over time of the Committeesobjectives of maximum employment andprice stability.

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

Information received since the Federal Open

Market Committee met in July suggests thateconomic activity is expanding at a moderatepace. On balance, labor market conditionsimproved somewhat further; however, theunemployment rate is little changed and arange of labor market indicators suggests thatthere remains significant underutilization oflabor resources. Household spending appearsto be rising moderately and business fixedinvestment is advancing, while the recovery inthe housing sector remains slow. Fiscal policyis restraining economic growth, although the

extent of restraint is diminishing. Inflationhas been running below the Committeeslonger-run objective. Longer-term inflationexpectations have remained stable.

Consistent with its statutory mandate, theCommittee seeks to foster maximumemployment and price stability. TheCommittee expects that, with appropriatepolicy accommodation, economic activity

will expand at a moderate pace, with labormarket indicators and inflation moving

toward levels the Committee judgesconsistent with its dual mandate. TheCommittee sees the risks to the outlook foreconomic activity and the labor market asnearly balanced and judges that thelikelihood of inflation running persistentlybelow 2 percent has diminished somewhatsince early this year.

The Committee currently judges that there issufficient underlying strength in the broadereconomy to support ongoing improvementin labor market conditions. In light of thecumulative progress toward maximumemployment and the improvement in the

outlook for labor market conditions sincethe inception of the current asset purchaseprogram, the Committee decided to make afurther measured reduction in the pace of itsasset purchases. Beginning in October, theCommittee will add to its holdings of agencymortgage-backed securities at a pace of$5 billion per month rather than $10 billionper month, and will add to its holdings oflonger-term Treasury securities at a pace of$10 billion per month rather than $15 billionper month. The Committee is maintaining

its existing policy of reinvesting principalpayments from its holdings of agency debtand agency mortgage-backed securities inagency mortgage-backed securities and ofrolling over maturing Treasury securities atauction. The Committees sizable and still-increasing holdings of longer-term securitiesshould maintain downward pressure onlonger-term interest rates, support mortgagemarkets, and help to make broader financialconditions more accommodative, which inturn should promote a stronger economicrecovery and help to ensure that inflation,

over time, is at the rate most consistent withthe Committees dual mandate.

The Committee will closely monitor incominginformation on economic and financialdevelopments in coming months and willcontinue its purchases of Treasury and agencymortgage-backed securities, and employ itsother 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 ongoingimprovement in labor market conditions andinflation moving back toward its longer-runobjective, the Committee will end its currentprogram of asset purchases at its nextmeeting. However, asset purchases are not ona preset course, and the Committeesdecisions about their pace will remaincontingent on the Committees outlook for



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the labor market and inflation as well as itsassessment of the likely efficacy and costs ofsuch purchases.

To support continued progress towardmaximum employment and price stability, the

Committee today reaffirmed its view that ahighly accommodative stance of monetarypolicy remains appropriate. In determininghow long to maintain the current 0 to percent target range for the federal fundsrate, the Committee will assess progressboth realized and expectedtoward itsobjectives of maximum employment and2 percent inflation. This assessment will takeinto account a wide range of information,including measures of labor marketconditions, indicators of inflation pressures

and inflation expectations, and readings onfinancial developments. The Committeecontinues to anticipate, based on itsassessment of these factors, that it likely willbe appropriate to maintain the current targetrange for the federal funds rate for aconsiderable time after the asset purchaseprogram ends, especially if projected inflationcontinues to run below the Committees2 percent longer-run goal, and provided thatlonger-term inflation expectations remain wellanchored.

When the Committee decides to begin toremove policy accommodation, it will take abalanced approach consistent with its longer-run goals of maximum employment andinflation of 2 percent. The Committeecurrently anticipates that, even afteremployment and inflation are near mandate-consistent levels, economic conditions may,for some time, warrant keeping the targetfederal funds rate below levels the Committee

views as normal in the longer run.

Voting for this action: Janet L. Yellen, William C.

Dudley, Lael Brainard, Stanley Fischer, NarayanaKocherlakota, Loretta J. Mester, Jerome H. Powell, andDaniel K. Tarullo.

Voting against this action: Richard W. Fisher andCharles I. Plosser.

President Fisher dissented because he believed that thecontinued strengthening of the real economy, theimproved outlook for labor utilization and for generalprice stability, and continued signs of financial marketexcess will likely warrant an earlier reduction inmonetary accommodation than is suggested by theCommittees stated forward guidance.

Mr. Plosser dissented because he objected to thestatements guidance indicating that it likely will beappropriate to maintain the current target range for thefederal funds rate for a considerable time after the assetpurchase program ends. In his view, the reference to

calendar time should be replaced with language thatindicates how monetary policy will respond to incomingdata. Moreover, he judged that the statement did notacknowledge the substantial progress that had beenmade toward the Committees economic goals and thusrisks unnecessary and disruptive volatility in financialmarkets, and perhaps in the economy, if the Committeereduces accommodation sooner or more quickly thanfinancial markets anticipate.

It was agreed that the next meeting of the Committeewould be held on TuesdayWednesday, October 2829,2014. The meeting adjourned at 10:35 a.m. on

September 17, 2014.

Notation Vote

By notation vote completed on August 19, 2014, theCommittee unanimously approved the minutes of theCommittee meeting held on July 2930, 2014.

_____________________________

William B. English

Secretary



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Summary of Economic Projections

In conjunction with the September 1617, 2014, FederalOpen Market Committee (FOMC) meeting, meetingparticipants submitted their projections of real output

growth, the unemployment rate, inflation, and the fed-eral funds rate for each year from 2014 through 2017and in the longer run.1 Each participants projection wasbased on information available at the time of the meet-ing plus his or her assessment of appropriate monetarypolicy and assumptions about the factors likely to affecteconomic outcomes. The longer-run projections repre-sent each participants assessment of the value to whicheach variable would be expected to converge, over time,under appropriate monetary policy and in the absence offurther 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 or her

________________

1As discussed in its Policy Normalization Principles and Plans,released on September 17, 2014, the Committee intends to tar-get a range for the federal funds rate during normalization.Participants were asked to provide, in their contributions tothe Summary of Economic Projections, either the midpoint ofthe target range for the federal funds rate for any period whena range was anticipated or the target level for the federal fundsrate, as appropriate. In the lower panel of figure2, these val-ues have been rounded to the nearest percentage point.

individual interpretation of the Federal Reservesobjectives of maximum employment and stable prices.

Overall, FOMC participants expected that, under appro-priate monetary policy, economic growth would befaster in the second half of 2014 and in 2015 than theirestimates of the U.S. economys longer-run normalgrowth rate. Participants then saw real growth movingback slowly toward its longer-run rate in 2016 and 2017.The unemployment rate was projected to continue todecline gradually over the forecast period, and to be ator below participants individual judgments of its longer-run normal level by the end of 2017 (table 1 andfigure 1). Almost all participants projected that inflation,as measured by the four-quarter change in the price in-dex for personal consumption expenditures (PCE),

would rise gradually over the next few years, reaching alevel at or near the Committees 2 percent objective in2016 or 2017.

Participants judged that it would be appropriate to beginadjusting the current highly accommodative stance ofpolicy over the projection period as labor market indica-tors and inflation move back toward values the Commit-tee judges consistent with the attainment of its mandatedobjectives of maximum employment and stable prices.As shown in figure 2, all but a few participants antici-pated that it would be appropriate to begin raising the

Table 1. Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents, September 2014

Percent

VariableCentral tendency1 Range2

2014 2015 2016 2017 Longer run 2014 2015 2016 2017 Longer run

Change in real GDP . . 2.0 to 2.2 2.6 to 3.0 2.6 to 2.9 2.3 to 2.5 2.0 to 2.3 1.8 to 2.3 2.1 to 3.2 2.1 to 3.0 2.0 to 2.6 1.8 to 2.6June projection . . . . . . 2.1 to 2.3 3.0 to 3.2 2.5 to 3.0 n.a. 2.1 to 2.3 1.9 to 2.4 2.2 to 3.6 2.2 to 3.2 n.a. 1.8 to 2.5

Unemployment rate . . 5.9 to 6.0 5.4 to 5.6 5.1 to 5.4 4.9 to 5.3 5.2 to 5.5 5.7 to 6.1 5.2 to 5.7 4.9 to 5.6 4.7 to 5.8 5.0 to 6.0June projection . . . . . . 6.0 to 6.1 5.4 to 5.7 5.1 to 5.5 n.a. 5.2 to 5.5 5.8 to 6.2 5.2 to 5.9 5.0 to 5.6 n.a. 5.0 to 6.0

PCE inflation . . . . . . . 1.5 to 1.7 1.6 to 1.9 1.7 to 2.0 1.9 to 2.0 2.0 1.5 to 1.8 1.5 to 2.4 1.6 to 2.1 1.7 to 2.2 2.0June projection . . . . . . 1.5 to 1.7 1.5 to 2.0 1.6 to 2.0 n.a. 2.0 1.4 to 2.0 1.4 to 2.4 1.5 to 2.0 n.a. 2.0

Core PCE inflation3 . . 1.5 to 1.6 1.6 to 1.9 1.8 to 2.0 1.9 to 2.0 1.5 to 1.8 1.6 to 2.4 1.7 to 2.2 1.8 to 2.2June projection . . . . . . 1.5 to 1.6 1.6 to 2.0 1.7 to 2.0 n.a. 1.4 to 1.8 1.5 to 2.4 1.6 to 2.0 n.a.

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 personalconsumption expenditures (PCE) and the price index for PCE excluding food and energy. Projections for the unemployment rate are for the average civilianunemployment rate in the fourth quarter of the year indicated. Each participants projections are based on his or her assessment of appropriate monetary policy.Longer-run projections represent each participants assessment of the rate to which each variable would be expected to converge under appropriate monetary policyand in the absence of further shocks to the economy. The June projections were made in conjunction with the meeting of the Federal Open Market Committeeon June 1718, 2014.

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 proj ections, 201417 and over the longer run

Change in real GDP

Percent

0

1

2

3

4

-

+

2009 2010 2011 2012 2013 2014 2015 2016 2017 Longerrun

Central tendency of projections

Range of projections

Actual

Unemployment rate

Percent

5

6

7

8

9

10

2009 2010 2011 2012 2013 2014 2015 2016 2017 Longerrun

PCE inflation

Percent

1

2

3

2009 2010 2011 2012 2013 2014 2015 2016 2017 Longerrun

Core PCE inflation

Percent

1

2

3

2009 2010 2011 2012 2013 2014 2015 2016 2017 Longerrun

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

annual.



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

1

14

2

Appropriate timing of policy firming

Number of participants

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

2014 2015 2016

Percent

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

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

2014 2015 2016 2017 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 2014, the numbers of FOMC participants who judged thatthe first increase in the target federal funds rate would occur in 2014, 2015, and 2016 were, respectively, 1, 12, and 3.In the lower panel, each shaded circle indicates the value (rounded to the nearest 1/8 percentage point) of an individualparticipants 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.

Summary of Economic Projections of the Meeting of September 1617, 2014 Page 3_____________________________________________________________________________________________


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target range for the federal funds rate in 2015, with mostprojecting that it will be appropriate to raise the targetfederal funds rate fairly gradually. Consistent with theimprovement in the outlook for the labor market sincethe Committee began its current asset purchase programin September 2012, as well as participants expectation

of ongoing improvement in labor market conditions andinflation moving back toward their longer-run objective,all participants judged that it would be appropriate tocomplete the asset purchase program in October of thisyear.

Most participants saw the uncertainty associated withtheir outlooks for economic growth, the unemploymentrate, and inflation as similar to that of the past 20 years,although a few judged it as somewhat higher. In addi-tion, most participants considered the risks to the out-look for real gross domestic product (GDP) growth andthe unemployment rate to be broadly balanced, and a

substantial majority saw the risks to inflation as broadlybalanced. However, a few participants, on net, saw therisks to their forecasts for economic growth or inflationas tilted to the downside.

The Outlook for Economic ActivityParticipants generally projected that, conditional on theirindividual assumptions about appropriate monetary pol-icy, economic growth would pick up from its low levelin the first half of the year and run above their estimatesof the longer-run normal rate of economic growth in thesecond half of 2014 and in 2015. Participants pointed toa number of factors that they expected would contribute

to a pickup in economic growth in the second half ofthis year and next year, including rising household networth, diminished restraint from fiscal policy, improvinglabor market conditions, and highly accommodativemonetary policy. In general, participants then saw realgrowth moving gradually back toward, but remaining ator somewhat above, its longer-run rate in 2016 and 2017.

Many participants revised down their projections of realGDP growth somewhat in one or more years and par-ticularly for 2015, compared with their projections inJune. Participants pointed to a couple of factors leadingthem to mark down their projected paths for real GDPgrowth including the incorporation of weaker-than-expected data on consumer spending and perceptions ofslower growth in potential GDP. The central tendenciesof participants projections for real GDP growth in theirmost recent projections were 2.0 to 2.2 percent in 2014,2.6 to 3.0 percent in 2015, 2.6 to 2.9 percent in 2016, and2.3 to 2.5 percent in 2017. The central tendency of the

projections of real GDP growth over the longer run was2.0 to 2.3 percent, essentially the same as in June.

Participants anticipated that the unemployment ratewould continue to decline gradually over the forecast pe-riod and, by the fourth quarter of 2017, would be closeto or below their individual assessments of its longer-runnormal level. The central tendencies of participantsforecasts for the unemployment rate in the fourth quar-ter of each year were 5.9 to 6.0 percent in 2014, 5.4 to5.6 percent in 2015, 5.1 to 5.4 percent in 2016, and4.9 to 5.3 percent in 2017. Participants projected pathsfor the unemployment rate were slightly lower than inJune, with many participants citing lower-than-expectedincoming unemployment data. The central tendency ofparticipants estimates of the longer-run normal rate ofunemployment that would prevail under appropriatemonetary policy and in the absence of further shocks tothe economy was unchanged at 5.2 to 5.5 percent.

Figures 3.A and 3.B show that participants held a rangeof views regarding the likely outcomes for real GDPgrowth and the unemployment rate through 2017. Thediversity of views reflected their individual assessmentsof the rate at which the forces that have been restrainingthe pace of the economic recovery would abate, of theanticipated path for foreign economic activity, of the tra-jectory for growth in consumption as labor market slackdiminishes, and of the appropriate path of monetary pol-icy. Relative to June, the dispersions of participants pro-jections for real GDP growth and for the unemploymentrate over the entire projection period were little changed.

The Outlook for InflationCompared with June, the central tendencies of partici-pants projections for inflation under the assumption ofappropriate policy were largely unchanged for 2014 to2016, and the trends anticipated over that period weregenerally expected to continue in 2017. Almost all par-ticipants projected that PCE inflation would rise gradu-ally over the next few years to a level at or near the Com-mittees 2 percent objective. A few participants expectedPCE inflation to rise somewhat above 2 percent at somepoint during the forecast period, while several others ex-pected inflation to remain below 2 percent even at theend of 2017. The central tendencies for PCE inflationwere 1.5 to 1.7 percent in 2014, 1.6 to 1.9 percent in2015, 1.7 to 2.0 percent in 2016, and 1.9 to 2.0 percentin 2017. The central tendencies of the forecasts for coreinflation were broadly similar to those for the headlinemeasure. It was noted that a combination of factorsincluding stable inflation expectations, steadily diminish-ing resource slack, a pickup in wage growth, a gradual



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Figure 3.A. Distribution of participants projections for the change in real GDP, 201417 and over the longer run

2014


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1012141618

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

September projectionsJune projections

2015


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1012141618

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


2468

1012141618

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

2017


2468

1012141618

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


24

68

1012141618

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, 201417 and over the longer run

2014


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1012141618

4.6 4.8 5.0 5.2 5.4 5.6 5.8 6.0 6.2- - - - - - - - -

4.7 4.9 5.1 5.3 5.5 5.7 5.9 6.1 6.3

Percent range


2015


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4.6 4.8 5.0 5.2 5.4 5.6 5.8 6.0 6.2- - - - - - - - -

4.7 4.9 5.1 5.3 5.5 5.7 5.9 6.1 6.3

Percent range

2016


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1012141618

4.6 4.8 5.0 5.2 5.4 5.6 5.8 6.0 6.2- - - - - - - - -

4.7 4.9 5.1 5.3 5.5 5.7 5.9 6.1 6.3

Percent range

2017


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1012141618

4.6 4.8 5.0 5.2 5.4 5.6 5.8 6.0 6.2- - - - - - - - -

4.7 4.9 5.1 5.3 5.5 5.7 5.9 6.1 6.3

Percent range

Longer run


24

68

1012141618

4.6 4.8 5.0 5.2 5.4 5.6 5.8 6.0 6.2- - - - - - - - -

4.7 4.9 5.1 5.3 5.5 5.7 5.9 6.1 6.3

Percent range




20/26

decline in the foreign exchange value for the dollar, andstill-accommodative monetary policywas likely tocontribute to a gradual rise of inflation back toward theCommittees longer-run objective of 2 percent.

Figures 3.C and 3.D provide information on the diver-sity of participants views about the outlook for inflation.The ranges of participants projections for inflation in2014, 2015, and 2016 were little changed relative to June.The range in 2017 shows a very substantial concentra-tion near the Committees 2 percent longer-run objectiveby that time.

Appropriate Monetary PolicyParticipants judged that it would be appropriate to beginreducing policy accommodation over the projection pe-riod as labor market indicators and inflation move backtoward values the Committee judges consistent with theattainment of its mandated objectives of maximum em-

ployment and price stability. As shown in figure 2, allbut a few participants anticipated that it would be appro-priate to begin raising the target range for the federalfunds rate in 2015, and most projected that the appro-priate level of the federal funds rate would remain belowits longer-run normal level through 2016. Most partici-pants expected the appropriate level of the federal fundsrate would be approaching, or would already havereached, their individual view of its longer-run normallevel by the end of 2017.

All participants projected that the unemployment ratewould be below 5.75 percent at the end of the year in

which they judged the initial increase in the target rangefor the federal funds rate would be warranted, and all butone anticipated that inflation would be at or below theCommittees 2 percent goal at that time. Most partici-pants projected that the unemployment rate would beabove their estimates of its longer-run normal level atthe end of the year in which they saw the target range forthe federal funds rate increasing from its effective lowerbound, although all but one thought that, by the end of2016, the unemployment rate would be at or below theirindividual judgments of its longer-run normal rate.

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 from2014 to 2017 and over the longer run. As noted earlier,nearly all participants judged that economic conditionswould warrant maintaining the current exceptionally lowlevel of the federal funds rate into 2015. Relative to theirprojections in June, the median values of the federalfunds rate at the end of 2015 and 2016 increased 26 basis

points and 38 basis points to 1.38 percent and 2.88 per-cent, respectively, while the mean values rose 10 basispoints and 16 basis points to 1.28 percent and 2.69 per-cent, respectively. The dispersion of projections for theappropriate level of the federal funds rate was littlechanged in 2015 and 2016. Most participants judged

that it would be appropriate to set the federal funds rateat or near its longer-run normal level in 2017, thoughsome projected that the federal funds rate would stillneed to be set appreciably below its longer-run normallevel, and one anticipated that it would be appropriate totarget a level noticeably above its longer-run normallevel. Participants provided a number of reasons whythey thought it would be appropriate for the federalfunds rate to remain below its longer-run normal levelfor some time after inflation and unemployment werenear mandate-consistent levels. These reasons includedan assessment that headwinds holding back the recovery

will continue to exert restraint on economic activity atthat time and that the risks to the economic outlook areasymmetric as a result of the constraints on monetarypolicy caused by the effective lower bound on the federalfunds rate.

As in June, estimates of the longer-run level of the fed-eral funds rate ranged from 3.25 to about 4.25 percent.All participants judged that inflation in the longer runwould be equal to the Committees inflation objective of2 percent, implying that their individual judgments re-garding the appropriate longer-run level of the real fed-eral funds rate in the absence of further shocks to the

economy ranged from 1.25 to about 2.25 percent.Participants also described their views regarding the ap-propriate path of the Federal Reserves balance sheet.Conditional on their respective economic outlooks, allparticipants judged that it likely would be appropriate toconclude asset purchases in October of this year. A fewparticipants thought that it would be appropriate tobegin reducing the size of the balance sheet relativelysoon, with a couple of them judging that the Committeeshould reduce or cease the reinvestment of principalpayments on securities held in the Federal Reservesportfolio.

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, the extent towhich the economy was currently falling short of maxi-mum employment, the prospects for inflation to returnto the Committees longer-term objective of 2 percent,



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Figure 3.C. Distribution of participants projections for PCE inflation, 201417 and over the longer run

2014


2

4

68

10

12

14

16

18

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

1.4 1.6 1.8 2.0 2.2 2.4

Percent range


2015


2

4

6

8

10

12

14

16

18

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

1.4 1.6 1.8 2.0 2.2 2.4

Percent range

2016


2

4

6

8

10

12

14

16

18

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

1.4 1.6 1.8 2.0 2.2 2.4

Percent range

2017


2

4

6

8

10

12

14

16

18

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

1.4 1.6 1.8 2.0 2.2 2.4

Percent range

Longer run


24

6

8

10

12

14

16

18

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

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, 201417

2014


2

4

6

8

1012

14

16

18

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

1.4 1.6 1.8 2.0 2.2 2.4

Percent range


2015


2

4

6

8

10

12

14

16

18

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

1.4 1.6 1.8 2.0 2.2 2.4

Percent range

2016


2

4

6

8

10

12

14

16

18

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

1.4 1.6 1.8 2.0 2.2 2.4

Percent range

2017


2

4

6

8

10

12

14

16

18

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

1.4 1.6 1.8 2.0 2.2 2.4

Percent range




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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, 2014-17 and over the longer run

2014


2

4

6

8

1012

14

16

18

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 4.38- - - - - - - - - - - - - - - - - -

0.37 0.62 0.87 1.12 1.37 1.62

fomc minutes sept 2014

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