_____________________________________________________________________________________________ Page 1 Minutes of the Federal Open Market Committee April 26–27, 2011A joint meeting of the Federal Open Market Commit- Jennifer J. Johnson, Secretary of the Board, Officetee and the Board of Governors of the Federal Reserve of the Secretary, Board of GovernorsSystem was held in the offices of the Board of Gover-nors in Washington, D.C., on Tuesday, April 26, 2011, Patrick M. Parkinson, Director, Division of Bank-at 10:30 a.m. and continued on Wednesday, April 27, ing Supervision and Regulation, Board of2011, at 8:30 a.m. GovernorsPRESENT: Nellie Liang, Director, Office of Financial Stability Ben Bernanke, Chairman Policy and Research, Board of Governors William C. Dudley, Vice Chairman Elizabeth Duke Robert deV. Frierson, Deputy Secretary, Office of Charles L. Evans the Secretary, Board of Governors Richard W. Fisher Narayana Kocherlakota William Nelson, Deputy Director, Division of Charles I. Plosser Monetary Affairs, Board of Governors Sarah Bloom Raskin Daniel K. Tarullo Linda Robertson, Assistant to the Board, Office of Janet L. Yellen Board Members, Board of Governors Christine Cumming, Jeffrey M. Lacker, Dennis P. Charles S. Struckmeyer, Deputy Staff Director, Of- Lockhart, Sandra Pianalto, and John C. Wil- fice of the Staff Director, Board of Governors liams, Alternate Members of the Federal Open Market Committee Lawrence Slifman and William Wascher, Senior Associate Directors, Division of Research and James Bullard, Thomas M. Hoenig, and Eric Ro- Statistics, Board of Governors sengren, Presidents of the Federal Reserve Banks of St. Louis, Kansas City, and Boston, Andrew T. Levin, Senior Adviser, Office of Board respectively Members, Board of Governors William B. English, Secretary and Economist Joyce K. Zickler, Visiting Senior Adviser, Division Deborah J. Danker, Deputy Secretary of Monetary Affairs, Board of Governors Matthew M. Luecke, Assistant Secretary David W. Skidmore, Assistant Secretary Michael G. Palumbo, Associate Director, Division Michelle A. Smith, Assistant Secretary of Research and Statistics, Board of Gover- Scott G. Alvarez, General Counsel nors; Trevor A. Reeve,¹ Associate Director, Thomas C. Baxter, Deputy General Counsel Division of International Finance, Board of Nathan Sheets, Economist Governors David J. Stockton, Economist Fabio M. Natalucci, Assistant Director, Division of James A. Clouse, Thomas A. Connors, Steven B. Monetary Affairs, Board of Governors Kamin, Loretta J. Mester, David Reifschneider, Harvey Rosenblum, David W. Wilcox, and David H. Small, Project Manager, Division of Kei-Mu Yi, Associate Economists Monetary Affairs, Board of Governors Brian Sack, Manager, System Open Market Ac- _______________________ count ¹ Attended Tuesday’s session only.
_____________________________________________________________________________________________Page 2 Federal Open Market Committee Jeremy B. Rudd, Senior Economist, Division of Agreement of 1994. The arrangement with the Bank of Research and Statistics, Board of Governors Canada is in the amount of $2 billion equivalent, and the arrangement with the Banco de México is in the James M. Lyon, First Vice President, Federal Re- amount of $3 billion equivalent. The vote to renew the serve Bank of Minneapolis System’s participation in these swap arrangements was taken at this meeting because of a provision in the ar- Jamie J. McAndrews and Mark S. Sniderman, Ex- rangements that requires each party to provide six ecutive Vice Presidents, Federal Reserve Banks months’ prior notice of an intention to terminate its of New York and Cleveland, respectively participation. The staff next gave a presentation on strategies for David Altig, Alan D. Barkema, Richard P. Dzina, normalizing the stance and conduct of monetary policy David Marshall, Christopher J. Waller, and over time as the economy strengthens. Normalizing John A. Weinberg, Senior Vice Presidents, the stance of policy would entail the withdrawal of the Federal Reserve Banks of Atlanta, Kansas City, current extraordinary degree of accommodation at the New York, Chicago, St. Louis, and Richmond, appropriate time, while normalizing the conduct of policy respectively would involve draining the large volume of reserve bal- ances in the banking system and shrinking the overall John Fernald and Giovanni Olivei, Vice Presidents, size of the balance sheet, as well as returning the Federal Reserve Banks of San Francisco and SOMA to its historical composition of essentially only Boston, respectively Treasury securities. The presentation noted a few key issues that the Committee would need to address in deciding on its approach to normalization. The firstDevelopments in Financial Markets and the Fed- key issue was the extent to which the Committee woulderal Reserve’s Balance Sheet want to tighten policy, at the appropriate time, by in-The Manager of the System Open Market Account creasing short-term interest rates, by decreasing its(SOMA) reported on developments in domestic and holdings of longer-term securities, or both. Becauseforeign financial markets during the period since the the two policies would restrain economic activity byFederal Open Market Committee (FOMC) met on tightening financial conditions, they could be combinedMarch 15, 2011. He also reported on System open in various ways to achieve similar outcomes. For ex-market operations, including the continuing reinvest- ample, in principle, the Committee could accomplishment into longer-term Treasury securities of principal essentially the same degree of monetary tightening bypayments received on the SOMA’s holdings of agency selling assets sooner and faster but raising the target fordebt and agency-guaranteed mortgage-backed securities the federal funds rate later and more slowly, or by sell-(MBS) as well as the ongoing purchases of additional ing assets later and more slowly but increasing the fed-Treasury securities first authorized in November 2010. eral funds rate target sooner and faster. The SOMASince November, purchases by the Open Market Desk portfolio could be reduced by selling securities outright,of the Federal Reserve Bank of New York had in- by ceasing the reinvestment of principal payments oncreased the SOMA’s holdings by $422 billion. The its securities holdings, or both. A second key issue wasManager reported on the U.S. authorities’ participation the extent to which the Committee might choose toin the coordinated foreign exchange intervention an- vary the pace of any asset sales it undertakes in re-nounced by the Group of Seven (G-7) finance minis- sponse to economic and financial conditions. If itters and central bank governors on March 17, 2011. By chose to make the pace of sales quite responsive tounanimous votes, the Committee ratified the Desk’s conditions, the FOMC would be able to actively usedomestic and foreign exchange market transactions two policy instruments—asset sales and the federalover the intermeeting period. funds rate target—to pursue its economic objectives,By unanimous vote, the Committee agreed to extend which could increase the scope and flexibility for ad-the reciprocal currency (swap) arrangements with the justing financial conditions. In contrast, sales at a paceBank of Canada and the Banco de México for an addi- that varied less with changes in economic and financialtional year beginning in mid-December 2011; these conditions and was preannounced and largely prede-arrangements are associated with the Federal Reserve’s termined would leave the federal funds rate target asparticipation in the North American Framework the Committee’s primary active policy instrument,
_____________________________________________________________________________________________ Minutes of the Meeting of April 26-27, 2011 Page 3which could result in policy that is more straightfor- regarding forward policy guidance would need to ac-ward for the Committee to calibrate and to communi- company the normalization process.cate. Finally, the staff presentation noted that the Participants expressed a range of views on some as-Committee would need to decide if and when to use pects of a normalization strategy. Most participantsthe tools that it has developed to temporarily reduce indicated that once asset sales became appropriate,reserve balances—reverse repurchase agreements and such sales should be put on a largely predeterminedterm deposits—in order to tighten the correspondence and preannounced path; however, many of those par-between any changes in the interest rate the Federal ticipants noted that the pace of sales could nonethelessReserve pays on excess reserves and the changes in the be adjusted in response to material changes in the eco-federal funds rate. nomic outlook. Several other participants preferredMeeting participants agreed on several principles that instead that the pace of sales be a key policy tool andwould guide the Committee’s strategy for normalizing be varied actively in response to changes in the out-monetary policy. First, with regard to the normaliza- look. A majority of participants preferred that sales oftion of the stance of monetary policy, the pace and se- agency securities come after the first increase in thequencing of the policy steps would be driven by the FOMC’s target for short-term interest rates, and manyCommittee’s monetary policy objectives for maximum of those participants also expressed a preference thatemployment and price stability. Participants noted that the sales proceed relatively gradually, returning thethe Committee’s decision to discuss the appropriate SOMA’s composition to all Treasury securities overstrategy for normalizing the stance of policy at the cur- perhaps five years. Participants noted that, for any giv-rent meeting did not mean that the move toward such en degree of policy tightening, more-gradual sales thatnormalization would necessarily begin soon. Second, commenced later in the normalization process wouldto normalize the conduct of monetary policy, it was allow for an earlier increase of the federal funds rateagreed that the size of the SOMA’s securities portfolio target from its effective lower bound than would be thewould be reduced over the intermediate term to a level case if asset sales commenced earlier and at a more rap-consistent with the implementation of monetary policy id pace. As a result, the Committee would later havethrough the management of the federal funds rate ra- the option of easing policy with an interest rate cut ifther than through variation in the size or composition economic conditions then warranted. An earlier in-of the Federal Reserve’s balance sheet. Third, over the crease in the federal funds rate was also mentioned asintermediate term, the exit strategy would involve re- helpful to limit the potential for the very low level ofturning the SOMA to holding essentially only Treasury that rate to encourage financial imbalances. A few par-securities in order to minimize the extent to which the ticipants expressed a preference that sales begin beforeFederal Reserve portfolio might affect the allocation of any increase in the federal funds rate target, and a fewcredit across sectors of the economy. Such a shift was other participants indicated that sales and increases inseen as requiring sales of agency securities at some the federal funds rate target should commence at thepoint. And fourth, asset sales would be implemented same time. The participants who favored earlier saleswithin a framework that had been communicated to the also generally indicated a preference for relatively rapidpublic in advance, and at a pace that potentially could sales, with some suggesting that agency securities in thebe adjusted in response to changes in economic or fi- SOMA be reduced to zero over as little as one or twonancial conditions. years. Such an approach was viewed as allowing for a faster return to a normal policy environment, potential-In addition, nearly all participants indicated that the ly reducing any upside risks to inflation stemming fromfirst step toward normalization should be ceasing to outsized reserve balances, and more quickly eliminatingreinvest payments of principal on agency securities and, any effects of SOMA holdings of agency securities onsimultaneously or soon after, ceasing to reinvest prin- the allocation of credit.cipal payments on Treasury securities. Most partici-pants viewed halting reinvestments as a way to begin to Most participants saw changes in the target for the fed-gradually reduce the size of the balance sheet. It was eral funds rate as the preferred active tool for tighten-noted, however, that ending reinvestments would con- ing monetary policy when appropriate. A number ofstitute a modest step toward policy tightening, implying participants noted that it would be advisable to beginthat that decision should be made in the context of the using the temporary reserves-draining tools in advanceeconomic outlook and the Committee’s policy objec- of an increase in the Committee’s federal funds ratetives. In addition, changes in the statement language target, in part because doing so would put the Federal
_____________________________________________________________________________________________Page 4 Federal Open Market CommitteeReserve in a better position to assess the effectiveness The unemployment rate edged down further toof the draining tools and judge the size of draining op- 8.8 percent in March, while the labor force participa-erations that might be required to support changes in tion rate was unchanged. However, both long-durationthe interest on excess reserves (IOER) rate in imple- unemployment and the share of workers employed partmenting a desired increase in short-term rates. A num- time for economic reasons were still very high.ber of participants also noted that they would be pre- Industrial production in the manufacturing sector ex-pared to sell securities sooner if the temporary reserves- panded at a robust pace in February and March. Thedraining operations and the end of the reinvestment of manufacturing capacity utilization rate moved up fur-principal payments were not sufficient to support a ther, though it continued to be a good bit lower than itsfairly tight link between increases in the IOER rate and longer-run average. Most forward-looking indicatorsincreases in short-term market interest rates. of industrial activity, such as the new orders indexes inIn the discussion of normalization, some participants the national and regional manufacturing surveys, re-also noted their preferences about the longer-run mained at levels consistent with solid gains in produc-framework for monetary policy implementation. Most tion in the near term. However, motor vehicle assem-of these participants indicated that they preferred that blies were expected to step down in the second quartermonetary policy eventually operate through a corridor- from their level in March, reflecting emerging shortagestype system in which the federal funds rate trades in the of specialized components imported from Japan.middle of a range, with the IOER rate as the floor and The rise in consumer spending appeared to havethe discount rate as the ceiling of the range, as opposed slowed to a moderate rate in the first quarter from theto a floor-type system in which a relatively high level of stronger pace posted in the fourth quarter of last year.reserve balances keeps the federal funds rate near the Total real personal consumption expenditures pickedIOER rate. A couple of participants noted that any up in February after being about unchanged in January.normalization strategy would likely involve an elevated Nominal retail sales, excluding purchases at motor ve-balance sheet with the federal funds rate target near the hicles and parts outlets, posted a sizable gain in March,IOER rate—as in floor-type systems—for some time, but sales of new light motor vehicles declined some-and therefore the Committee would accumulate expe- what. Real disposable income edged down in Februaryrience during the process of normalizing policy that following an increase in January that reflected the tem-would allow it to make a more informed choice regard- porary reduction in payroll taxes. In addition, consum-ing the longer-term framework at a later date. er sentiment declined noticeably in March and re-The Committee agreed that more discussion of these mained relatively downbeat in early April.issues was needed, and no decisions regarding the Activity in the housing market remained very weak, asCommittee’s strategy for normalizing policy were made the large overhang of foreclosed and distressed proper-at this meeting. ties continued to restrain new construction. Starts andStaff Review of the Economic Situation permits of new single-family homes inched down, onThe information reviewed at the April 26–27 meeting net, in February and March, and they have been essen-indicated, on balance, that economic activity expanded tially flat since around the middle of last year. Demandat a moderate pace in recent months, and labor market for housing also continued to be depressed. Sales ofconditions continued to improve gradually. Headline new and existing homes moved lower, on net, in Feb-consumer price inflation was boosted by large increases ruary and March, while measures of home prices slidin food and energy prices, but measures of underlying further in February.inflation were still subdued and longer-run inflation Real business investment in equipment and softwareexpectations remained stable. (E&S) appeared to have increased more robustly in thePrivate nonfarm payroll employment increased again in first quarter than in the fourth quarter of last year.March, and the gains in hiring for the first quarter as a Nominal shipments of nondefense capital goods rosewhole were somewhat above the pace seen in the in February and March, and businesses’ purchases offourth quarter. A number of indicators of job open- new vehicles trended higher. New orders of nonde-ings and hiring plans improved in February and March. fense capital goods continued to run ahead of ship-Although initial claims for unemployment insurance ments in February and March, and this expandingwere flat, on net, from early March through the middle backlog of unfilled orders pointed to further increasesof April, they remained lower than earlier in the year. in shipments in subsequent months. In addition, sur-
_____________________________________________________________________________________________ Minutes of the Meeting of April 26-27, 2011 Page 5vey measures of business conditions and sentiment in April—reversing their uptick in March—and stayedrecent months were consistent with continued robust within the range that has prevailed over the past severalgains in E&S spending. In contrast, business outlays years.for nonresidential construction remained extremely Available measures of labor compensation suggestedweak in February, restrained by high vacancy rates, low that wage increases continued to be restrained by theprices for office and commercial properties, and tight presence of a large margin of slack in the labor market.credit conditions for commercial real estate lending. Average hourly earnings for all employees were flat inReal nonfarm inventory investment appeared to have March, and their average rate of increase over the pre-moved up to a moderate pace in the first quarter after ceding 12 months remained low.slowing sharply in the preceding quarter. Motor ve- The pace of recovery abroad appeared to havehicle inventories were drawn down more slowly in the strengthened earlier this year, but the disaster in Japanfirst quarter than in the fourth quarter, while data raised uncertainties about foreign activity in the nearthrough February suggested that the pace of stock- term. In the euro area, production expanded at a solidbuilding outside of motor vehicles had picked up a bit. pace, though indicators of consumer spendingBook-value inventory-to-sales ratios in February were weakened. While measures of economic activity inin line with their pre-recession norms, and survey data Germany posted strong gains, economic conditions inin March provided little evidence that businesses per- Greece and Portugal deteriorated further. The damageceived that their inventories were too high. caused by the earthquake and tsunami in Japan ap-The available data on government spending indicated peared to be sharply curtailing Japanese economic ac-that real federal purchases fell in the first quarter, led by tivity and posed concerns about disruptions to supplya reduction in defense outlays. Real expenditures by chains and production in other economies. Emergingstate and local governments also appeared to have de- market economies (EMEs) continued to expand rapid-clined, as outlays for construction projects decreased ly. Rising prices of oil and other commodities boostedfurther in February to a level well below that in the inflation in foreign economies. However, core inflationfourth quarter, and state and local employment contin- remained subdued in most of the advanced foreignued to contract in March. economies, and inflation in the EMEs seemed to have declined as food price inflation slowed.The U.S. international trade deficit narrowed slightly inFebruary after widening sharply in January. Following Staff Review of the Financial Situationa solid increase in January, exports fell back some in The decisions by the FOMC at its March meeting toFebruary, with declines widespread across categories. continue its asset purchase program and to maintainImports also declined in February after posting large the 0 to ¼ percent target range for the federal fundsgains in January. On average, the trade deficit in Janu- rate were in line with market expectations; nonetheless,ary and February was wider than in the fourth quarter. the accompanying statement prompted a modest rise in nominal yields, as market participants reportedly per-Overall U.S. consumer price inflation moved up further ceived a somewhat more optimistic tone in the Com-in February and March, as increases in the prices of mittee’s economic outlook, as well as heightened con-energy and food commodities continued to be passed cern about inflation risks. Over the intermeeting pe-through to the retail level. More recently, survey data riod, yields on nominal Treasury securities changedthrough the middle of April pointed to additional in- little, on net, amid swings in investors’ assessments ofcreases in retail gasoline prices, while increases in the global risks. Short-term funding rates, including theprices of food commodities appeared to have mod- effective federal funds rate, shifted down several basiserated somewhat. Excluding food and energy, core points in early April following a change in the Federalconsumer price inflation remained relatively subdued. Deposit Insurance Corporation’s deposit insuranceAlthough core consumer price inflation over the first assessment system. On net, the expected path of thethree months of the year stepped up somewhat, the federal funds rate over the next two years was little12-month change in the core consumer price index changed over the intermeeting period.through March was essentially the same as it was a yearearlier. Near-term inflation expectations from the Measures of inflation compensation over the nextThomson Reuters/University of Michigan Surveys of 5 years based on nominal and inflation-protectedConsumers remained elevated in early April. But Treasury securities increased slightly, on net, over thelonger-term inflation expectations moved down in early intermeeting period, partly reflecting the ongoing rise in
_____________________________________________________________________________________________Page 6 Federal Open Market Committeecommodity prices. Staff models suggested that the subprime and prime mortgages were nearly unchangedmodest increase in inflation compensation 5 to 10 years but remained at elevated levels. However, the rate ofahead was mostly attributable to increases in liquidity new delinquencies on prime mortgages declined fur-and inflation-risk premiums rather than higher ex- ther.pected inflation. Conditions in consumer credit markets continued toOver the intermeeting period, yields on corporate improve gradually. Total consumer credit growthbonds were generally little changed, on net, and spreads picked up in February, as a gain in nonrevolving creditof investment- and speculative-grade corporate bonds more than offset a further contraction in revolving cre-relative to comparable-maturity Treasury securities nar- dit. Delinquency and charge-off rates for credit cardrowed slightly. Average secondary-market prices for debt moved down in recent months and approachedsyndicated leveraged loans moved up further. Howev- pre-crisis levels. Issuance of consumer asset-backeder, conditions in the municipal bond market remained securities remained steady in the first quarter of thesomewhat strained. year.Broad U.S. stock price indexes rose, on net, over the Bank credit was about unchanged in March after de-intermeeting period, as initial reports of better-than- clining, on average, in January and February. Coreexpected first-quarter earnings lifted stock prices in late loans—the sum of C&I, real estate, and consumerApril. Option-implied volatility on the S&P 500 index loans—continued to contract, while holdings of securi-was moderately lower, on net, ending the intermeeting ties increased moderately. The Senior Loan Officerperiod at the low end of its recent range. Opinion Survey on Bank Lending Practices conducted in April indicated that, on net, bank lending standardsNet debt financing by nonfinancial corporations re- and terms had eased somewhat further during the firstmained robust in March. Net issuance of investment- quarter of the year and demand for C&I loans, com-and speculative-grade bonds by nonfinancial corpora- mercial mortgages, and auto loans had increased, whiletions continued to be strong, and outstanding amounts demand for residential mortgages continued to decline.of commercial and industrial (C&I) loans and nonfi-nancial commercial paper increased noticeably. Gross M2 expanded at a moderate pace in March. Liquidpublic equity issuance by nonfinancial firms was robust deposits, the largest component of M2, advanced at ain March, and indicators of the credit quality of nonfi- solid pace likely reflecting very low opportunity costsnancial firms improved further. of holding such deposits. Currency advanced signifi- cantly, supported by robust foreign demand for U.S.Commercial mortgage markets showed some signs of bank notes.stabilization. Delinquency rates for commercial realestate loans appeared to have leveled off in recent Foreign sovereign bond yields generally were littlemonths. Issuance of commercial mortgage-backed changed and equity prices rose, on net, over the inter-securities picked up in the first quarter, although com- meeting period, although equity prices in Japan re-mercial real estate loans at banks continued to run off. mained below their pre-earthquake levels despite theIn commercial real estate markets, property sales re- record amounts of liquidity injected by the Bank ofmained tepid, and prices stayed at depressed levels. Japan and the expansion of its asset purchase program. The European Central Bank raised its main policy rateRates on conforming fixed-rate residential mortgages 25 basis points to 1¼ percent during the intermeetingrose modestly during the intermeeting period, and their period, and markets appeared to have priced in addi-spreads relative to 10-year Treasury yields narrowed tional rate increases over the rest of the year. The Bankslightly. Mortgage refinancing activity remained near its of England and the Bank of Canada left their policylowest level in more than two years. The Treasury De- rates unchanged, but quotes from futures markets con-partment’s announcement in late March that it would tinued to suggest that both central banks would raisebegin selling its holdings of agency MBS at a gradual rates later this year. China’s monetary authority furtherpace had little lasting effect on MBS spreads. The Fed- increased banks’ lending rates and deposit rates anderal Reserve began competitive sales of the non-agency continued to tighten reserve requirements; monetaryresidential MBS held by Maiden Lane II LLC; initial policy in a number of other EMEs was also tightenedsales met with strong demand, but market prices of over the intermeeting period.non-agency residential MBS were reportedly littlechanged overall. The rates of serious delinquencies for
_____________________________________________________________________________________________ Minutes of the Meeting of April 26-27, 2011 Page 7The broad nominal index of the U.S. dollar declined Participants’ Views on Current Conditions and themore than 2 percent over the intermeeting period, Economic Outlookthough the dollar appreciated, on net, against the Japa- In conjunction with this FOMC meeting, all meetingnese yen. The yen strengthened to an all-time high participants—the five members of the Board of Gov-against the dollar after the earthquake in Japan, but this ernors and the presidents of the 12 Federal Reservemove was more than reversed when the G-7 countries Banks—provided projections of output growth, theintervened to sell yen. unemployment rate, and inflation for each year from 2011 through 2013 and over the longer run. Longer-In early April, the Portuguese government requested run projections represent each participant’s assessmentfinancial support from the European Union and the of the rate to which each variable would be expected toInternational Monetary Fund, but market participants converge, over time, under appropriate monetary policyreportedly remained concerned about whether the Por- and in the absence of further shocks. Participants’tuguese government would reach agreement on an as- forecasts are described in the Summary of Economicsociated fiscal consolidation plan. Later in the inter- Projections, which is attached as an addendum to thesemeeting period, yields on Greece’s and other peripheral minutes.European countries’ sovereign debt jumped, reflectingheightened market focus on a possible restructuring of In discussing intermeeting developments and their im-Greek sovereign debt. plications for the economic outlook, participants agreed that the information received since their pre-Staff Economic Outlook vious meeting was broadly consistent with continuationWith the recent data on spending somewhat weaker, on of a moderate economic recovery, despite an unex-balance, than the staff had expected at the time of the pected slowing in the pace of economic growth in theMarch FOMC meeting, the staff revised down its pro- first quarter. While construction activity remainedjection for the rate of increase in real gross domestic anemic, measures of consumer spending and businessproduct (GDP) over the first half of 2011. The effects investment continued to expand and labor market con-from the disaster in Japan were also anticipated to tem- ditions continued to improve gradually. Participantsporarily hold down real GDP growth in the near term. viewed the weakness in first-quarter economic growthOver the medium term, the staff’s outlook for the pace as likely to be largely transitory, influenced by unusuallyof economic growth was broadly similar to its previous severe weather, increases in energy and other commod-forecast: As in the March projection, the staff expected ity prices, and lower-than-expected defense spending.real GDP to increase at a moderate rate through 2012, As a result, they saw economic growth picking up laterwith the ongoing recovery in activity receiving contin- this year.ued support from accommodative monetary policy,increasing credit availability, and further improvements Participants’ forecasts for economic growth for 2012in household and business confidence. The average and 2013 were largely unchanged from their Januarypace of GDP growth was expected to be sufficient to projections and continued to indicate expectations thatgradually reduce the unemployment rate over the pro- the recovery will strengthen somewhat over time.jection period, though the jobless rate was anticipated Nonetheless, the pickup in the pace of the economicto remain elevated at the end of 2012. expansion was expected to be limited, reflecting the effects of high energy prices, modest changes in hous-Recent increases in consumer food and energy prices, ing wealth, subdued real income gains, and fiscal con-together with the small uptick in core consumer price traction at the federal, state, and local levels. Partici-inflation, led the staff to raise its near-term projection pants continued to project the unemployment rate tofor consumer price inflation. However, inflation was decline gradually over the forecast period but to remainexpected to recede over the medium term, as food and elevated compared with their assessments of its longer-energy prices were anticipated to decelerate. As in pre- run level. Participants revised up their projections forvious forecasts, the staff expected core consumer price total inflation in 2011, reflecting recent increases ininflation to remain subdued over the projection period, energy and other commodity prices, but they generallyreflecting stable longer-term inflation expectations and anticipated that the recent increase in inflation wouldpersistent slack in labor and product markets. be transitory as commodity prices stabilize and inflation expectations remain anchored. However, they all agreed on the importance of closely monitoring devel- opments regarding inflation and inflation expectations.
_____________________________________________________________________________________________Page 8 Federal Open Market CommitteeParticipants’ judgment that the recovery was continuing hausted potential productivity gains, but others indi-at a moderate pace reflected both the incoming eco- cated that some firms may be putting hiring plans onnomic indicators and information received from busi- hold until they are more certain of the future trend inness contacts. Growth in consumer spending remained materials and other input costs. Signs of rising wagemoderate despite the effects of higher gasoline and pressures were reportedly limited to a few skilled jobfood prices, which appeared to have largely offset the categories for which workers are in short supply, while,increase in disposable income from the payroll tax cut. in general, increases in wages have been subdued. Par-Participants noted that these higher prices had weighed ticipants discussed whether the significant drop in theon consumer sentiment about near-term economic unemployment rate might be overstating the degree ofconditions but that underlying fundamentals for con- improvement in labor markets because many of thetinued moderate growth in spending remained in place. unemployed have dropped out of the labor force orThese underlying factors included continued improve- have accepted jobs that are less desirable than theirment in household balance sheets, easing credit condi- former jobs.tions, and strengthening labor markets. Financial market conditions continued to improve overActivity in the industrial sector also expanded further. the intermeeting period. Equity prices had risen, onIndustrial production posted solid gains, and, while the balance, since the previous meeting, reflecting an im-most recent readings from some of the regional manu- proved outlook for earnings, and were up more sub-facturing surveys showed small declines, in some cases stantially since the start of the year. Bankers again re-these were from near-record highs. Manufacturers re- ported improvements in credit quality, with the volumemained upbeat, although automakers were reporting of nonperforming assets declining at larger banks andsome difficulties in obtaining parts normally produced leveling off at smaller banks. In general, loan demandin Japan, which might weigh on motor vehicle produc- remained weak. However, bank lending to medium-tion in the current quarter. Investment in equipment sized and larger companies increased, and lending toand software was fairly robust. In contrast, the housing small businesses picked up slightly. Banks reported ansector remained distressed, with house prices flat to easing of lending terms on C&I loans, usually prompt-down and a large overhang of vacant properties re- ed by increased competition in the face of still-weakstraining new construction, although reports indicated loan demand. Consumer credit conditions also easedthat sales volumes and traffic were higher in a few somewhat from the tight conditions seen during theareas. Activity in the commercial real estate sector con- recession. However, demand for consumer credit oth-tinued to be weak. er than auto loans reportedly changed little. A few par- ticipants expressed concern that the easing of creditSeveral participants indicated that, in contrast to the conditions was creating incentives for increased lev-somewhat weaker recent economic data, their business erage and risk-taking in some areas, such as leveragedcontacts were more positive about the economy’s syndicated loans and loans to finance land acquisition,prospects, which supported the participants’ view that and that this trend, if it became widespread and exces-the recent weakness was likely to prove temporary. sive, could pose a risk to financial stability.They acknowledged, however, that sentiment canchange quickly; indeed, one participant noted that his Participants discussed the recent rise in inflation, whichcontacts had recently turned more pessimistic, and sev- had been driven largely by significant increases in ener-eral participants indicated that their business contacts gy and, to a somewhat lesser extent, other commodityexpressed concern about the effects of higher com- prices. These commodity price increases, in turn, re-modity prices on their own costs and on the purchasing flected robust global demand and geopolitical devel-power of households. opments that had reduced supply. One participant suggested that excess liquidity might be leading toParticipants judged that overall conditions in labor speculation in commodity markets, possibly puttingmarkets had continued to improve, albeit gradually. upward pressure on prices. Many participants reportedThe unemployment rate had decreased further and pay- that an increasing number of business contacts ex-roll employment had risen again in March. Some par- pressed concerns about rising cost pressures and wereticipants reported that more of their business contacts intending, or already attempting, to pass on at least ahave plans to increase their payrolls later this year. A portion of these higher costs to their customers in or-few participants noted that firms may be poised to ac- der to protect profit margins. This development wascelerate their pace of hiring because they have ex- also reflected in the rising indexes of prices paid and
_____________________________________________________________________________________________ Minutes of the Meeting of April 26-27, 2011 Page 9received in several regional manufacturing surveys. justments at all levels of government in the UnitedSome participants noted that higher commodity prices States, financial disruptions that would be associatedwere negatively affecting both business and consumer with a failure to increase the federal debt limit, and thesentiment. Core inflation and other indicators of un- possibility that the economic weakness in the first quar-derlying inflation over the medium term had increased ter was signaling less underlying momentum going for-modestly in recent months, but their levels remained ward. However, participants also noted that the rapidsubdued. decline in the unemployment rate over the past several months suggested the possibility of stronger-than-Participants generally anticipated that the higher level anticipated economic growth over coming quarters.of overall inflation would be transitory. This outlookwas based partly on a projected leveling-off of com- In their discussion of monetary policy, some partici-modity prices and the belief that longer-run inflation pants expressed the view that in the context of in-expectations would remain stable. Some participants creased inflation risks and roughly balanced risks tonoted that pressures on labor costs continued to be economic growth, the Committee would need to bemuted; if such circumstances continued, a large, persis- prepared to begin taking steps toward less-tent rise in inflation would be unusual. Measures of accommodative policy. A few of these participantsnear-term inflation expectations had risen along with thought that economic conditions might warrant actionthe recent rise in overall inflation. While some indica- to raise the federal funds rate target or to sell assets intors of longer-term expectations had increased, others the SOMA portfolio later this year, but noted that evenwere little changed or down, on net, since March. with such steps, monetary policy would remain ac-Many participants had become more concerned about commodative for some time to come. However, somethe upside risks to the inflation outlook, including the participants indicated that underlying inflation re-possibilities that oil prices might continue to rise, that mained subdued; that longer-term inflation expecta-there might be greater pass-through of higher com- tions were likely to remain anchored, partly becausemodity costs into broader price measures, and that ele- modest changes in labor costs would constrain inflationvated overall inflation caused by higher energy and oth- trends; and that given the downside risks to economicer commodity prices could lead to a rise in longer-term growth, an early exit could unnecessarily damp the on-inflation expectations. Participants agreed that moni- going economic recovery.toring inflation trends and inflation expectations closely Committee Policy Actionwas important in determining whether action would be Committee members agreed that no changes to theneeded to prevent a more lasting pickup in the rate of Committee’s asset purchase program or to its targetgeneral price inflation, which would be costly to re- range for the federal funds rate were warranted at thisverse. Maintaining well-anchored inflation expectations meeting. The information received over the intermeet-would depend on the credibility of the Committee’s ing period indicated that the economic recovery wascommitment to deliver on the price stability part of its proceeding at a moderate pace, albeit somewhat slowermandate. A few participants suggested that clearer than had been anticipated earlier in the year. Overallcommunication about the Committee’s inflation out- conditions in the labor market were gradually improv-look, such as explaining the measures it uses to gauge ing, and the unemployment rate continued to decline,medium-term trends in general price inflation and an- although it remained elevated relative to levels that thenouncing an explicit numerical inflation objective, Committee judged to be consistent, over the longerwould be helpful in this regard. run, with its statutory mandate of maximum employ-While rising energy prices posed an upside risk to the ment and price stability. Significant increases in energyinflation forecast, they also posed a downside risk to and other commodity prices had boosted overall infla-economic growth. Although most participants contin- tion, but members expected this increase to be transito-ued to see the risks to their outlooks for economic ry and to unwind when commodity price increasesgrowth as being broadly balanced, a number now abated. Notwithstanding recent modest increases, indi-judged those risks to be tilted to the downside. These cators of medium-term inflation remained subdued anddownside risks included a larger-than-expected drag on somewhat below the levels seen as consistent with thehousehold and business spending from higher energy dual mandate as indicated by the Committee’s longer-prices, continued fiscal strains in Europe, larger-than- run inflation projections. Near-term inflation expecta-anticipated effects from supply disruptions in the af- tions had increased with energy prices and overall infla-termath of the disaster in Japan, continuing fiscal ad- tion. Recent movements in measures of longer-term
_____________________________________________________________________________________________Page 10 Federal Open Market Committeeinflation expectations were discussed. While some vide additional context for the Committee’s policy de-measures of longer-term inflation expectations had ris- cisions.en, others were little changed or down, on net, since At the conclusion of the discussion, the CommitteeMarch, and members agreed that longer-term inflation voted to authorize and direct the Federal Reserve Bankexpectations had remained stable. Given this economic of New York, until it was instructed otherwise, to ex-outlook, the Committee agreed to continue to expand ecute transactions in the System Account in accordanceits holdings of longer-term Treasury securities as an- with the following domestic policy directive:nounced in November in order to promote a strongerpace of economic recovery and to help ensure that in- “The Federal Open Market Committee seeksflation, over time, is at levels consistent with the Com- monetary and financial conditions that will fos-mittee’s mandate. Specifically, the Committee main- ter price stability and promote sustainabletained its existing policy of reinvesting principal pay- growth in output. To further its long-run ob-ments from its securities holdings and affirmed that it jectives, the Committee seeks conditions in re-will complete purchases of $600 billion of longer-term serve markets consistent with federal fundsTreasury securities by the end of the current quarter. A trading in a range from 0 to ¼ percent. Thefew members remained uncertain about the benefits of Committee directs the Desk to execute pur-the asset purchase program but, with the program near- chases of longer-term Treasury securities inly completed, judged that making changes to the pro- order to increase the total face value of domes-gram at this time was not appropriate. The Committee tic securities held in the System Open Marketcontinued to anticipate that economic conditions, in- Account to approximately $2.6 trillion by thecluding low rates of resource utilization, subdued infla- end of June 2011. The Committee also directstion trends, and stable inflation expectations, were like- the Desk to reinvest principal payments fromly to warrant exceptionally low levels for the federal agency debt and agency mortgage-backed se-funds rate for an extended period. That said, a few curities in longer-term Treasury securities. Themembers viewed the increase in inflation risks as sug- System Open Market Account Manager andgesting that economic conditions might well evolve in a the Secretary will keep the Committee in-way that would warrant the Committee taking steps formed of ongoing developments regardingtoward less-accommodative policy sooner than current- the System’s balance sheet that could affect thely anticipated. attainment over time of the Committee’s ob- jectives of maximum employment and priceMembers agreed that the Committee will regularly re- stability.”view the size and composition of its securities holdingsin light of incoming information and that they are pre- The vote encompassed approval of the statement be-pared to adjust those holdings as needed to best foster low to be released at 12:30 p.m.:maximum employment and price stability. Some “Information received since the Federal Openmembers pointed out that there would need to be a Market Committee met in March indicates thatsignificant change in the economic outlook, or the risks the economic recovery is proceeding at a mod-to that outlook, before another program of asset pur- erate pace and overall conditions in the laborchases would be warranted; in their view, absent such market are improving gradually. Householdchanges, the benefits of additional purchases would be spending and business investment in equip-unlikely to outweigh the costs. ment and software continue to expand. How-In the statement to be released following the meeting, ever, investment in nonresidential structures ismembers decided to indicate that the economic recov- still weak, and the housing sector continues toery was proceeding at a moderate pace and that overall be depressed. Commodity prices have risenconditions in the labor market were gradually improv- significantly since last summer, and concernsing. The Committee also decided to summarize its cur- about global supplies of crude oil have contri-rent thinking about inflation pressures and to empha- buted to a further increase in oil prices sincesize that it will closely monitor the evolution of infla- the Committee met in March. Inflation hastion and inflation expectations. Members anticipated picked up in recent months, but longer-termthat the Chairman, who would deliver his first post- inflation expectations have remained stablemeeting press briefing later that afternoon, would pro- and measures of underlying inflation are still subdued.
_____________________________________________________________________________________________ Minutes of the Meeting of April 26-27, 2011 Page 11 Consistent with its statutory mandate, the tions, including low rates of resource utiliza- Committee seeks to foster maximum employ- tion, subdued inflation trends, and stable infla- ment and price stability. The unemployment tion expectations, are likely to warrant excep- rate remains elevated, and measures of under- tionally low levels for the federal funds rate for lying inflation continue to be somewhat low, an extended period. relative to levels that the Committee judges to The Committee will continue to monitor the be consistent, over the longer run, with its dual economic outlook and financial developments mandate. Increases in the prices of energy and and will employ its policy tools as necessary to other commodities have pushed up inflation in support the economic recovery and to help en- recent months. The Committee expects these sure that inflation, over time, is at levels con- effects to be transitory, but it will pay close at- sistent with its mandate.” tention to the evolution of inflation and infla- tion expectations. The Committee continues Voting for this action: Ben Bernanke, William C. to anticipate a gradual return to higher levels of Dudley, Elizabeth Duke, Charles L. Evans, Richard W. resource utilization in a context of price stabili- Fisher, Narayana Kocherlakota, Charles I. Plosser, ty. Sarah Bloom Raskin, Daniel K. Tarullo, and Janet L. Yellen. To promote a stronger pace of economic re- covery and to help ensure that inflation, over Voting against this action: None. time, is at levels consistent with its mandate, It was agreed that the next meeting of the Committee the Committee decided today to continue ex- would be held on Tuesday–Wednesday, June 21–22, panding its holdings of securities as announced 2011. The meeting adjourned at 10:15 a.m. on April in November. In particular, the Committee is 27, 2011. maintaining its existing policy of reinvesting principal payments from its securities holdings Notation Vote and will complete purchases of $600 billion of By notation vote completed on April 4, 2011, the longer-term Treasury securities by the end of Committee unanimously approved the minutes of the the current quarter. The Committee will regu- FOMC meeting held on March 15, 2011. larly review the size and composition of its se- curities holdings in light of incoming informa- tion and is prepared to adjust those holdings as needed to best foster maximum employment _____________________________ and price stability. William B. English The Committee will maintain the target range Secretary for the federal funds rate at 0 to ¼ percent and continues to anticipate that economic condi
_____________________________________________________________________________________________ Page 1 Summary of Economic ProjectionsIn conjunction with the April 26–27, 2011, Federal in real GDP, the unemployment rate is projected toOpen Market Committee (FOMC) meeting, the mem- gradually trend lower over this projection period.bers of the Board of Governors and the presidents of However, participants anticipated that, at the end ofthe Federal Reserve Banks, all of whom participate in 2013, the unemployment rate would still be well abovethe deliberations of the FOMC, submitted projections their estimates of the longer-run unemployment rate.for growth of real output, the unemployment rate, and Most participants expected that overall inflation wouldinflation for the years 2011 to 2013 and over the longer move up this year, but they projected this increase torun. The projections were based on information avail- be temporary, with overall inflation moving back in lineable through the end of the meeting and on each par- with core inflation in 2012 and 2013 and remaining atticipant’s assumptions about factors likely to affect or below rates they see as consistent, over the longereconomic outcomes, including his or her assessment of run, with the Committee’s dual mandate of maximumappropriate monetary policy. “Appropriate monetary employment and price stability. Participants generallypolicy” is defined as the future path of policy that each saw core inflation gradually edging higher over the nextparticipant deems most likely to foster outcomes for two years from its current relatively low level.economic activity and inflation that best satisfy his or On balance, as indicated in table 1, participants antic-her interpretation of the Federal Reserve’s dual objec- ipated somewhat lower GDP growth and slightly high-tives of maximum employment and stable prices. er inflation over the forecast period than they projectedLonger-run projections represent each participant’s in January. Participants marked down their forecastsassessment of the rate to which each variable would be for real GDP growth this year, revised them down byexpected to converge over time under appropriate less for 2012 and 2013, and did not alter their expecta-monetary policy and in the absence of further shocks. tions for economic growth in the longer run. MostAs depicted in figure 1, FOMC participants expected participants also lowered their forecasts for the averagethe economic recovery to continue at a moderate pace, unemployment rate at the end of this year, but theywith growth of real gross domestic product (GDP) continued to see the unemployment rate moving downpicking up modestly this year (relative to 2010) and slowly in 2012 and 2013 to levels that were littlestrengthening further in 2012 and a bit more in 2013. changed from the previous projections. ParticipantsWith the pace of economic growth exceeding their raised their forecasts for overall inflation this year;estimates of the longer-run sustainable rate of increases however, most expected that the increase would beTable 1. Economic projections of Federal Reserve Governors and Reserve Bank presidents, April 2011Percent Central tendency1 Range2 Variable 2011 2012 2013 Longer run 2011 2012 2013 Longer runChange in real GDP. . . . . . 3.1 to 3.3 3.5 to 4.2 3.5 to 4.3 2.5 to 2.8 2.9 to 3.7 2.9 to 4.4 3.0 to 5.0 2.4 to 3.0 January projection. . . . 3.4 to 3.9 3.5 to 4.4 3.7 to 4.6 2.5 to 2.8 3.2 to 4.2 3.4 to 4.5 3.0 to 5.0 2.4 to 3.0Unemployment rate. . . . . . 8.4 to 8.7 7.6 to 7.9 6.8 to 7.2 5.2 to 5.6 8.1 to 8.9 7.1 to 8.4 6.0 to 8.4 5.0 to 6.0 January projection. . . . 8.8 to 9.0 7.6 to 8.1 6.8 to 7.2 5.0 to 6.0 8.4 to 9.0 7.2 to 8.4 6.0 to 7.9 5.0 to 6.2PCE inflation. . . . . . . . . . . 2.1 to 2.8 1.2 to 2.0 1.4 to 2.0 1.7 to 2.0 2.0 to 3.6 1.0 to 2.8 1.2 to 2.5 1.5 to 2.0 January projection. . . . 1.3 to 1.7 1.0 to 1.9 1.2 to 2.0 1.6 to 2.0 1.0 to 2.0 0.7 to 2.2 0.6 to 2.0 1.5 to 2.0Core PCE inflation3. . . . . . 1.3 to 1.6 1.3 to 1.8 1.4 to 2.0 1.1 to 2.0 1.1 to 2.0 1.2 to 2.0 January projection. . . . 1.0 to 1.3 1.0 to 1.5 1.2 to 2.0 0.7 to 1.8 0.6 to 2.0 0.6 to 2.0 NOTE: Projections of change in real gross domestic product (GDP) and in inflation are from the fourth quarter of the previous year 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 personal consumption expendi- tures (PCE) and the price index for PCE excluding food and energy. Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated. Each participant’s projections are based on his or her assessment of appropriate monetary policy. Longer-run projec- tions represent each participant’s assessment of the rate to which each variable would be expected to converge under appropriate monetary policy and in the absence of further shocks to the economy. The January projections were made in conjunction with the meeting of the Federal Open Market Committee on January 25-26, 2011. 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 consists of 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 2 Federal Open Market Committee Figure 1. Central tendencies and ranges of economic projections, 2011–13 and over the longer run Percent Change in real GDP 5 Central tendency of projections Range of projections 4 3 2 1 + Actual 0 _ 1 2 2006 2007 2008 2009 2010 2011 2012 2013 Longer run Percent Unemployment rate 10 9 8 7 6 5 2006 2007 2008 2009 2010 2011 2012 2013 Longer run Percent PCE inflation 3 2 1 2006 2007 2008 2009 2010 2011 2012 2013 Longer run Percent Core PCE inflation 3 2 1 2006 2007 2008 2009 2010 2011 2012 2013 NOTE: Definitions of variables are in the notes to table 1. The data for the actual values of the variables are annual.
_____________________________________________________________________________________________ Summary of Economic Projections of the Meeting of April 26-27, 2011 Page 3transitory and made only minor changes to their fore- expansion over the next two years. Most participantscasts for the rate of inflation in 2012 and 2013 or for anticipated that the recovery in the housing marketthe longer run. Most participants anticipated that five would remain slow, restrained by the overhang of va-or six years would likely be required for the economy to cant properties and depressed home values; most alsoconverge fully to its longer-run path characterized by expected increasing fiscal drag at the federal, state, andrates of output growth, unemployment, and inflation local levels. In addition, some participants noted theconsistent with their interpretation of the Federal Re- negative impact on household purchasing power of theserve’s dual objectives. elevated levels of energy and food prices. In the ab- sence of further shocks, participants generally expectedA sizable majority of participants continued to judge that, over time, real GDP growth would eventually set-the level of uncertainty associated with their projections tle down at an annual rate of 2.5 to 2.8 percent, a pacefor real economic activity and inflation as unusually that appeared to be sustainable in view of expectedhigh relative to historical norms. About one-half of the long-run trends in labor supply and labor productivity.participants viewed the risks to output growth as ba-lanced, but a number now judged those risks to be Reflecting the decline in the unemployment rate in re-tilted to the downside. Meanwhile, a majority of partic- cent months, participants lowered their forecasts foripants viewed the risks to overall inflation as weighted the average unemployment rate in the fourth quarter ofto the upside. this year, with the central tendency of their projections at 8.4 to 8.7 percent, down from 8.8 to 9.0 percent inThe Outlook January. Participants’ projections for the jobless rate atParticipants marked down their forecasts for real GDP the end of 2012 and 2013 were little changed from theirgrowth in 2011, with the central tendency of their pro- previous forecasts. Consistent with their expectationsjections moving down to 3.1 to 3.3 percent from of a moderate economic recovery, most participants3.4 to 3.9 percent in January. Participants stated that projected that the unemployment rate would bethe change reflected importantly the somewhat slower- 6.8 to 7.2 percent even in late 2013—still well abovethan-expected pace of expansion in the first quarter. the 5.2 to 5.6 percent central tendency of their esti-Participants generally thought that much of the unex- mates of the unemployment rate that would prevailpected weakness in the first quarter would prove tem- over the longer run in the absence of further shocks.porary, but they viewed a number of recent develop- The central tendency for the participants’ projectionsments as potential restraints on the pace of economic of the unemployment rate in the longer run was some-recovery in the near term. Those developments in- what narrower than the 5 to 6 percent interval reportedcluded the effects of the rise in energy prices on real in January.income and consumer sentiment, indications that therecovery in the housing market was further off, and Participants noted that the prices of oil and otherconstraints on state and local government budgets. commodities had risen significantly since the time of their January projections, largely reflecting geopoliticalLooking further ahead, participants’ revisions to their developments and robust global demand. Those in-forecasts for economic growth were modest, and they creases had led to a sharp rise in consumer energy pric-continued to see the economic recovery strengthening es and, to a lesser extent, food prices, which hadover the forecast period, with the central tendency of boosted overall inflation. As a result, participantstheir projections for growth in real GDP stepping up to raised their forecasts for total personal consumption3.5 to 4.2 percent in 2012 and remaining near those expenditures (PCE) inflation in 2011, with the centralrates in 2013. Participants cited the effects of contin- tendency of their estimates significantly higher. Withued monetary policy accommodation, further im- the outlook for oil and other commodity prices uncer-provements in banking and financial market conditions, tain, the dispersion of the projections was noticeablyrising consumer confidence as labor market conditions wider than in January. Most participants expected thatstrengthen gradually, improved household balance overall inflation would run 2.1 to 2.8 percent this year,sheets, stabilizing commodity prices, continued expan- compared with 1.3 to 1.7 percent in their January pro-sion in business investment in equipment and software, jections. However, many participants anticipated thatand gains in U.S. exports as being among the likely the pass-through of higher commodity prices into corecontributors to a sustained pickup in the pace of ex- inflation would be contained by downward pressurespansion. However, participants also saw a number of on inflation from large margins of slack in resourcefactors that would likely continue to hinder the pace of utilization and consequent subdued labor costs. Partic-
_____________________________________________________________________________________________Page 4 Federal Open Market Committeeipants indicated that well-anchored inflation expecta- Table 2. Average historical projection error ranges Percentage pointstions, combined with the appropriate stance of mone- Variable 2011 2012 2013tary policy, should help keep inflation in check. As a Change in real GDP1 . . . . . . ±1.0 ±1.6 ±1.8result, participants anticipated that the increase in totalPCE inflation would be temporary, with the central Unemployment rate1 ....... ±0.5 ±1.2 ±1.8tendency of their estimates moving down to Total consumer prices2 ..... ±0.8 ±1.0 ±1.01.2 to 2.0 percent in 2012 and 1.4 to 2.0 percent in NOTE: Error ranges shown are measured as plus or minus the root2013—at or below the 1.7 to 2.0 percent central ten- mean squared error of projections for 1991 through 2010 that weredency for their estimates of the longer-run, mandate- released in the spring by various private and government forecasters. As described in the box “Forecast Uncertainty,” under certain assumptions,consistent rate of inflation. Nonetheless, the central there is about a 70 percent probability that actual outcomes for realtendencies of participants’ projections for core PCE GDP, unemployment, and consumer prices will be in ranges implied by the average size of projection errors made in the past. Further informa-inflation for this year and next year shifted up a bit to tion is in David Reifschneider and Peter Tulip (2007), “Gauging the1.3 to 1.6 percent in 2011 and 1.3 to 1.8 percent in Uncertainty of the Economic Outlook from Historical Forecasting2012. The central tendency of the core PCE inflation Errors,” Finance and Economics Discussion Series 2007-60 (Washing- ton: Board of Governors of the Federal Reserve System, November).projections in 2013 was 1.4 to 2.0 percent, little 1. For definitions, refer to general note in table 1.changed from the January SEP. 2. Measure is the overall consumer price index, the price measure that has been most widely used in government and private economicUncertainty and Risks forecasts. Projection is percent change, fourth quarter of the previousA sizable majority of participants continued to judge year to the fourth quarter of the year indicated.that the levels of uncertainty associated with their pro- pants’ forecasts of the unemployment rate remainedjections for economic activity and inflation were greater broadly balanced and continued to reflect in large partthan the average levels that had prevailed over the past the risks attending participants’ views of the likely20 years.1 They pointed to a number of factors contri- strength of the expansion in real activity.buting to their assessments of the uncertainty that they Whereas most participants’ assessments of the risksattached to their projections, including structural dislo- associated with their overall inflation projections overcations in the labor market, the outlook for fiscal poli- the period from 2011 to 2013 were broadly balanced incy, the future path of energy and other commodity January, a majority of participants now judged the risksprices, the global economic outlook, and the effects of as weighted to the upside. Although participants gen-unconventional monetary policy. erally indicated that the amount of pass-through ofAbout one-half of the participants continued to view higher oil and other commodity prices into core infla-the risks to their outlooks for economic growth as ba- tion had so far remained limited and that inflation ex-lanced, but a number of participants now judged that pectations continued to be stable, some participantsthose risks had become tilted to the downside. The noted the risk that the extent of pass-through mightmost frequently mentioned downside risks to GDP increase and that the resulting rise in inflation couldgrowth included the possibility of further increases in unmoor longer-term inflation expectations. A few par-energy and other commodity prices, a tighter-than- ticipants noted the possibility that the current highlyanticipated stance of fiscal policy in the United States, accommodative stance of monetary policy could bean even weaker-than-expected housing sector adversely maintained for too long, leading to higher inflation ex-affecting consumer spending and the health of financial pectations and actual inflation.institutions, and possible spillovers from the fiscal Diversity of Viewsstrains in Europe. A few participants saw the risks to Figures 2.A and 2.B provide further details on the di-growth as tilted to the upside; it was noted that the cy- versity of participants’ views regarding the likely out-clical rebound in economic activity might prove strong- comes for real GDP growth and the unemploymenter than anticipated. The risks surrounding partici- rate in 2011, 2012, 2013, and over the longer run. The dispersion in these projections generally continued to1 Table 2 provides estimates of forecast uncertainty for the reflect differences in participants’ assessments of manychange in real GDP, the unemployment rate, and total con- factors, including the likely evolution of conditions insumer price inflation over the period from 1991 to 2010. At credit and financial markets, the current degree of un-the end of this summary, the box “Forecast Uncertainty” derlying momentum in economic activity, the timingdiscusses the sources and interpretation of uncertainty in the and the degree to which the labor market will recovereconomic forecasts and explains the approach used to assessthe uncertainty and risks attending the participants’ projec- from the dislocations associated with the deep reces-tions. sion, the outlook for economic and financial develop-