Federal Open Market Committee - December minutes: Participants' Views on Current Conditions and the Economic Outlook lyrics

Participants' Views on Current Conditions and the Economic Outlook In their discussion of the economic situation and the outlook, most meeting participants viewed the information received over the intermeeting period as suggesting that economic activity continued to expand at a moderate pace. Labor market conditions improved somewhat further, with solid job gains and a lower unemployment rate; on balance, participants judged that the underutilization of labor resources was gradually diminishing. Participants generally expected that, over the medium term, real economic activity would increase at a pace sufficient to lead to a further gradual decline in the unemployment rate toward levels consistent with the Committee's objective of maximum employment. Inflation was continuing to run below the Committee's longer-run objective. Market-based measures of inflation compensation declined somewhat, while survey-based measures of longer-term inflation expectations remained stable. Participants anticipated that inflation would be held down over the near term by the decline in energy prices and other factors, but would move toward the Committee's 2 percent goal in coming years, although a few expressed concern that inflation might persist below the Committee's objective for quite some time. Most viewed the risks to the outlook for economic activity and the labor market as nearly balanced. However, a number of participants noted that economic growth over the medium term might be slower than they currently expected if the foreign economic or financial situation deteriorated significantly. Household spending advanced at a moderate pace over the intermeeting period, and reports from contacts in several parts of the country indicated that recent retail or auto sales had been robust. However, one participant pointed to mixed retail sales reports that likely reflected a continuation of restrained discretionary spending on the part of low- and middle-income households. Many participants judged that the recent significant decline in energy prices would provide a boost to consumer spending over the near term, with several of them noting that the drop in gasoline prices would benefit lower-income households in particular. Among the other favorable factors that were expected to support continued growth in consumer spending, participants cited solid gains in payroll employment, low interest rates, rising consumer confidence, and the decline in levels of household debt relative to income. The recovery in the housing sector remained slow despite low interest rates and some recent improvement in the availability of mortgage credit. Contacts in some parts of the country reported continued weakness in single-family construction, while in other regions activity reportedly was picking up gradually following a sluggish summer. A few participants pointed to continued strong growth in multifamily construction, although the limited pipeline of new projects in one District suggested that activity could slow in 2015. Reports from business contacts in many parts of the country pointed to an improvement in business conditions, with indexes of the manufacturing sector posting broad-based gains in recent months in a number of Districts. A couple of participants reported expectations of a robust holiday sales season based on accumulating inventories of consumer goods or an increase in e-commerce traffic and related transportation activity. Contacts in several regions reported ready availability of credit, strong loan growth, or a steady increase in commercial construction activity. While the fall in energy prices was generally regarded as a positive development for many businesses, it was noted that a sustained drop in prices would have effects on oil drilling and related investment activity. In the agricultural sector, the robust fall harvest had driven down crop prices; food processing and farm equipment businesses were slowing as a result of lower farm income and a drop in exports. In discussing economic developments abroad, participants pointed to a somewhat weaker economic outlook and increased downside risks in Europe, China, and Japan, as well as to the strengthening of the dollar over the period. It was observed that if foreign economic or financial conditions deteriorated further, U.S. economic growth over the medium term might be slower than currently expected. However, many participants saw the effects of recent developments on the domestic economy as likely to be quite limited. These participants suggested variously that the share of external trade in the U.S. economy is relatively small, that the effects of changes in the value of the dollar on net exports are modest, that shifts in the structure of U.S. trade and production over time may have reduced the effects on U.S. trade of developments like those seen of late, or that the slowdown in external demand would likely prove to be less severe than initially feared. Several participants judged that the decline in the prices of energy and other commodities as well as lower long-term interest rates would likely provide an offset to the higher dollar and weaker foreign growth, or that the domestic recovery remained on a firm footing. Indicators of labor market conditions continued to improve over the intermeeting period, with a further reduction in the unemployment rate, declines in longer-duration unemployment, strong growth in payroll employment, and a low level of initial claims for unemployment insurance. Business contacts reported employment gains in several parts of the country, with relatively few pointing to emerging wage pressures, although one participant indicated that larger wage gains had been accruing to some individuals who switched jobs. Labor market conditions indexes constructed from a broad set of indicators suggested that the underutilization of labor had continued to diminish, although a number of participants noted that underutilization of labor market resources remained. A couple of participants judged that the large number of individuals working part time for economic reasons and the continued drift down in the labor force participation rate suggested that the unemployment rate was understating the degree of labor market underutilization. Most participants anticipated that inflation was likely to edge lower in the near term, reflecting the decline in oil and other commodity prices and lower import prices. These participants continued to expect inflation to move back to the Committee's 2 percent target over the medium term as resource slack diminished in an environment of well-anchored inflation expectations, although a few of them thought the return to 2 percent might be quite gradual. Survey-based measures of inflation expectations remained well anchored, but market-based measures of inflation compensation over the next five years as well as over the five-year period beginning five years ahead had declined over the intermeeting period. Various explanations were offered for the decline in the market-based measures, and participants expressed different views about how to interpret these recent movements. The explanations included a decline in inflation risk premiums, possibly reflecting a lower perceived probability of higher inflation outcomes; and special factors, including liquidity risk premiums, that might be influencing the pricing of Treasury Inflation-Protected Securities and inflation derivatives. One participant noted that even if the declines reflected lower inflation risk premiums and not a reduction in expected inflation, policymakers might still want to take them into account because such a change could reflect increased concerns on the part of investors about adverse outcomes in which low inflation was accompanied by weak economic activity. A couple of participants noted that it was likely too early to draw conclusions regarding these developments, especially in light of the recent market volatility. However, many participants observed that the Committee should remain attentive to evidence of a possible downward shift in longer-term inflation expectations; some of them noted that if such an outcome occurred, it would be even more worrisome if growth faltered. In their discussion of financial market developments and financial stability issues, participants judged that the movements in the prices of stocks, bonds, commodities, and the U.S. dollar over the intermeeting period appeared to have been driven primarily by concerns about prospects for foreign economic growth. Many participants commented on the turbulence in financial markets that occurred in mid-October. Some participants pointed out that, despite the market volatility, financial conditions remained highly accommodative and that further pockets of turbulence were likely to arise as the start of policy normalization approached. That said, more work to better understand the recent market dynamics was seen as desirable. In addition, a couple of participants noted the potential usefulness of collecting additional data on wholesale funding markets in order to better understand how changes in interest rates could influence those markets. In their discussion of communications regarding the path of the federal funds rate over the medium term, meeting participants agreed that the timing of the first increase in the federal funds rate and the appropriate path of the policy rate thereafter would depend on incoming economic data and their implications for the outlook. Most participants judged that it would be helpful to include new language in the Committee's forward guidance to clarify how the Committee's decision about when to begin the policy normalization process will depend on incoming information about the economy. Some participants preferred to eliminate language in the statement indicating that the current target range for the federal funds rate would likely be maintained for a "considerable time" after the end of the a**et purchase program. These participants were concerned that such a characterization could be misinterpreted as suggesting that the Committee's decisions would not depend on the incoming data. However, other participants thought that the "considerable time" phrase was useful in communicating the Committee's policy intentions or that additional wording could be used to emphasize the data-dependence of the Committee's decision process. A couple of them noted that the removal of the "considerable time" phrase might be seen as signaling a significant shift in the stance of policy, potentially resulting in an unintended tightening of financial conditions. A couple of others thought that the current forward guidance might be read as suggesting an earlier date of liftoff than was likely to prove appropriate, given the outlook for inflation and the downside risks to the economy a**ociated with the effective lower bound on interest rates. With regard to the pace of interest rate increases after the start of policy normalization, a number of participants thought that it could soon be helpful to clarify the Committee's likely approach. It was noted that communication about post-liftoff policy would pose challenges given the inherent uncertainty of the economic and financial outlook and the Committee's desire to retain flexibility to adjust policy in response to the incoming data. Most participants supported retaining the language in the statement indicating that the Committee anticipates that economic conditions may warrant keeping the target range for the federal funds rate below longer-run normal levels even after employment and inflation are near mandate-consistent levels. However, a couple of participants thought that the language should be amended in light of the prescriptions suggested by many monetary policy rules and the risks a**ociated with keeping interest rates below their longer-run values for an extended period of time. Committee Policy Action In their discussion of monetary policy for the period ahead, members judged that information received since the FOMC met in September indicated that economic activity was expanding at a moderate pace. Labor market conditions had improved somewhat further, with solid job gains and a lower unemployment rate; on balance, a range of indicators suggested that underutilization of labor resources was gradually diminishing. Household spending was rising moderately and business fixed investment was advancing, while the recovery in the housing sector remained slow. Inflation had continued to run below the Committee's longer-run objective. Market-based measures of inflation compensation had declined somewhat, but survey-based measures of longer-term inflation expectations had remained stable. The Committee expected that, with appropriate policy accommodation, economic activity would expand at a moderate pace, with labor market indicators and inflation moving toward levels the Committee judges consistent with its dual mandate. In their discussion of language for the post-meeting statement, a number of members judged that, while some underutilization in the labor market remained, it appeared to be gradually diminishing. In addition, members considered the advantages and disadvantages of adding language to the statement to acknowledge recent developments in financial markets. On the one hand, including a reference would show that the Committee was monitoring financial developments while also providing an opportunity to note that financial conditions remained highly supportive of growth. On the other hand, including a reference risked the possibility of suggesting greater concern on the part of the Committee than was actually the case, perhaps leading to the misimpression that monetary policy was likely to respond to increases in volatility. In the end, the Committee decided not to include such a reference. Finally, a couple of members suggested including language in the statement indicating that recent foreign economic developments had increased uncertainty or had boosted downside risks to the U.S. economic outlook, but participants generally judged that such wording would suggest greater pessimism about the economic outlook than they thought appropriate. In their discussion of the a**et purchase program, members generally agreed that the condition articulated by the Committee when it began the program in September 2012 had been achieved--that is, there had been a substantial improvement in the outlook for the labor market--and that there was sufficient underlying strength in the broader economy to support ongoing progress toward maximum employment in a context of price stability. Accordingly, all members but one supported concluding the Committee's a**et purchase program at the end of October and maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency MBS in agency MBS and of rolling over maturing Treasury securities at auction. By keeping the Committee's holdings of longer-term securities at sizable levels, this policy was expected to help maintain accommodative financial conditions. In addition, the Committee agreed to maintain the target range for the federal funds rate at 0 to 1/4 percent and to reaffirm the indication in the statement that the Committee's decision about how long to maintain the current target range for the federal funds rate would depend on its a**essment of actual and expected progress toward its objectives of maximum employment and 2 percent inflation. All but one member agreed that the Committee should reiterate the expectation that it likely would be appropriate to maintain the current target range for the federal funds rate for a considerable time following the end of the a**et purchase program in October, especially if projected inflation continued to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remained well anchored. The one member thought that the Committee should instead strengthen the forward guidance in order to underscore the Committee's commitment to its 2 percent inflation objective. The Committee agreed to include additional wording in the statement in order to emphasize that the Committee's decision on the timing of the first increase in the federal funds rate would be data dependent. In particular, the statement would say that, if incoming information indicated faster progress toward the Committee's employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate would likely occur sooner than currently anticipated. It would also note that, if progress proves slower than expected, then increases in the target range would likely occur later than currently anticipated. The Committee also agreed to reiterate its expectation that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run. At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the SOMA in accordance with the following domestic policy directive: "Consistent with its statutory mandate, the Federal Open Market Committee seeks monetary and financial conditions that will foster maximum employment and price stability. In particular, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to undertake open market operations as necessary to maintain such conditions. The Desk is directed to conclude the current program of purchases of longer-term Treasury securities and agency mortgage-backed securities by the end of October. The Committee directs the Desk to maintain its policy of rolling over maturing Treasury securities into new issues and its policy of reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency mortgage-backed securities transactions. The System Open Market Account manager and the secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability." The vote encompa**ed approval of the statement below to be released at 2:00 p.m.: "Information received since the Federal Open Market Committee met in September suggests that economic activity is expanding at a moderate pace. Labor market conditions improved somewhat further, with solid job gains and a lower unemployment rate. On balance, a range of labor market indicators suggests that underutilization of labor resources is gradually diminishing. Household spending is rising moderately and business fixed investment is advancing, while the recovery in the housing sector remains slow. Inflation has continued to run below the Committee's longer-run objective. Market-based measures of inflation compensation have declined somewhat; survey-based measures of longer-term inflation expectations have remained stable. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators and inflation moving toward levels the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for economic activity and the labor market as nearly balanced. Although inflation in the near term will likely be held down by lower energy prices and other factors, the Committee judges that the likelihood of inflation running persistently below 2 percent has diminished somewhat since early this year. The Committee judges that there has been a substantial improvement in the outlook for the labor market since the inception of its current a**et purchase program. Moreover, the Committee continues to see sufficient underlying strength in the broader economy to support ongoing progress toward maximum employment in a context of price stability. Accordingly, the Committee decided to conclude its a**et purchase program this month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions. To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will a**ess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This a**essment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee anticipates, based on its current a**essment, that it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time following the end of its a**et purchase program this month, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored. However, if incoming information indicates faster progress toward the Committee's employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated. Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run." Voting for this action: Janet L. Yellen, William C. Dudley, Lael Brainard, Stanley Fischer, Richard W. Fisher, Loretta J. Mester, Charles I. Plosser, Jerome H. Powell, and Daniel K. Tarullo.