Fed December 2015 Minutes

8/20/2019 Fed December 2015 Minutes

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Minutes of the Federal Open Market Committee December 15 – 16, 2015

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

the Board of Governors of the Federal Reserve Systemin Washington, D.C., on Tuesday, December 15, 2015,at 1:00 p.m. and continued on Wednesday,December 16, 2015, at 9:00 a.m.

PRESENT:

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

Jeffrey M. LackerDennis P. Lockhart Jerome H. PowellDaniel K. Tarullo John C. Williams

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

Patrick Harker and Robert S. Kaplan, Presidents of theFederal Reserve Banks of Philadelphia and Dallas,respectively

James M. Lyon, First Vice President, Federal ReserveBank of Minneapolis

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

David W. Wilcox, Economist

David Altig, Eric M. Engen, Michael P. Leahy, William R. Nelson, and William Wascher, Associate Economists

Simon Potter, Manager, System Open Market Account

Lorie K. Logan, Deputy Manager, System OpenMarket Account

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

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

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

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

Governors

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

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

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

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

Michael G. Palumbo, Senior Associate Director,Division of Research and Statistics, Board ofGovernors; Beth Anne Wilson, Senior AssociateDirector, Division of International Finance, Boardof Governors

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

Research and Statistics, Board of Governors

Joseph W. Gruber, Deputy Associate Director,Division of International Finance, Board ofGovernors

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Francisco Covas, Christopher J. Gust, and Jason Wu, Assistant Directors, Division of Monetary Affairs,Board of Governors; John M. Roberts andSteven A. Sharpe, Assistant Directors, Division ofResearch and Statistics, Board of Governors

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

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

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

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

Valerie Hinojosa, Information Manager, Division ofMonetary Affairs, Board of Governors

Mark L. Mullinix, First Vice President, Federal ReserveBank of Richmond

James J. McAndrews, Executive Vice President, FederalReserve Bank of New York

Troy Davig, Michael Dotsey, Evan F. Koenig, SpencerKrane, Samuel Schulhofer-Wohl, Ellis W. Tallman,Geoffrey Tootell, and Christopher J. Waller, Senior Vice Presidents, Federal Reserve Banks of Kansas

City, Philadelphia, Dallas, Chicago, Minneapolis,Cleveland, Boston, and St. Louis, respectively

Douglas Tillett, Robert G. Valletta, and Alexander L. Wolman, Vice Presidents, Federal Reserve Banksof Chicago, San Francisco, and Richmond,respectively

William E. Riordan,2 Markets Officer, Federal ReserveBank of New York

________________¹ Attended Wednesday session only.

2 Attended through the discussion of financial developmentsand open market operations.

Developments in Financial Markets and OpenMarket Operations The manager of the System Open Market Account(SOMA) reported on developments in domestic and for-eign financial markets, including expectations of market

participants for monetary policy action by the FederalOpen Market Committee (FOMC) at this meeting andin the future. The deputy manager followed with a brief-ing on money market developments and System openmarket operations conducted by the Open Market Deskduring the period since the Committee met on Octo-

ber 27 –28. It was noted that the System’s reverse repur-chase (RRP) agreement operations continued to providea soft floor under short-term interest rates. The deputymanager also discussed plans to publish additional infor-mation on details of the Committee’s current Treasurysecurities reinvestment policy. The manager thenbriefed the Committee on several other matters, includ-ing plans to begin publishing the effective federal fundsrate and a broader overnight bank funding rate based onthe Report of Selected Money Market Rates (FR 2420)in early March 2016; the possibility that the Federal Re-serve, in cooperation with the Office of Financial Re-

search, might publish a reference rate for overnighttransactions collateralized by Treasury securities; and thestaff’s ongoing review of the readiness of various Deskoperations and facilities.

By unanimous vote, the Committee ratified the Desk’sdomestic transactions over the intermeeting period. There were no intervention operations in foreign curren-cies for the System’s account over the intermeeting pe-riod.

Staff Review of the Economic Situation The information reviewed for the December 15 – 16meeting suggested that real gross domestic product

(GDP) was increasing at a moderate pace and that labormarket conditions had improved further. Consumerprice inflation continued to run below the FOMC’slonger-run objective of 2 percent, restrained in part bydeclines in both energy prices and the prices of non-en-ergy imported goods. Some survey-based measures oflonger-run inflation expectations edged down, whilemarket-based measures of inflation compensation werestill low.

Total nonfarm payroll employment expanded at a fastermonthly rate in October and November than in the thirdquarter. The unemployment rate ticked down to5.0 percent in October and remained at that level in No- vember; over the 12 months ending in November, theunemployment rate fell ¾ percentage point. Both thelabor force participation rate and the employment-to-population ratio increased slightly, on net, over Octoberand November. The share of workers employed parttime for economic reasons was flat, on balance, in recentmonths after declining considerably over the previous

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year. The rates of private-sector job openings, hires, andquits were little changed in October from their averagelevels in the third quarter. Recent measures of the gainsin labor compensation were mixed: Over the four quar-ters ending in the third quarter, compensation per hourin the business sector advanced at a strong 3½ percent

rate, while the employment cost index rose at a moremoderate 2 percent pace. Average hourly earnings forall employees increased 2¼ percent over the 12 monthsending in November.

Manufacturing production increased in October,although output in the mining sector continued to de-crease. Automakers’ assembly schedules and broader in-dicators of manufacturing production, such as the read-ings on new orders from national and regional manufac-turing surveys, generally pointed to a slow pace of gainsin factory output in the coming months. Informationon crude oil and natural gas extraction through early De-

cember indicated further declines in mining output.

Real personal consumption expenditures (PCE) ap-peared to be rising at a solid rate in the fourth quarter. The components of the nominal retail sales data used bythe Bureau of Economic Analysis to construct its esti-mate of PCE increased in October and moved up at afaster pace in November, while the rate of sales of lightmotor vehicles remained high. Household spending wassupported by strong growth in real disposable income inSeptember and October, and households’ net worth wasbolstered by recent gains in home values. In addition,consumer sentiment in the University of Michigan Sur-

veys of Consumers improved a little in November andearly December.

Recent information on activity in the housing sector wasmixed. Starts of new single-family homes were somewhat lower in October than in the third quarter, alt-hough building permits moved up. Meanwhile, starts ofmultifamily units declined. Sales of new homes rose inOctober, while existing home sales decreased.

Real private expenditures for business equipment and in-tellectual property products increased at a solid pace inthe third quarter, but business spending growth looked

to be slowing somewhat in the fourth quarter. Nominalshipments of nondefense capital goods excluding air-craft edged down in October, although new orders forthese capital goods continued to move up. Recent read-ings from national and regional surveys of business con-ditions were consistent with more modest increases inbusiness equipment spending than in the third quarter.Firms’ nominal spending for nonresidential structuresexcluding drilling and mining rose in October, although

available indicators of drilling activity, such as the num-ber of oil and gas rigs in operation, continued to fallthrough early December.

Total real government purchases appeared to be aboutflat in the fourth quarter. Federal government spendingfor defense moved roughly sideways, on balance, overrecent months. State and local government payrolls were little changed, on net, in October and November, while the level of nominal construction spending ofthese governments in October was essentially the sameas its average in the third quarter.

The U.S. international trade deficit widened in Octoberafter narrowing in September. Exports declined, on bal-ance, to the lowest level in three years; lower prices forcommodities, along with reduced shipments of capitaland consumer goods, weighed on nominal exports. Im-ports decreased in September and October, partly re-

flecting further declines in the price of imported oil. Theavailable trade data suggested that declines in real net ex-ports would likely continue to be a drag on real GDPgrowth in the fourth quarter.

Total U.S. consumer prices, as measured by the PCEprice index, rose only ¼ percent over the 12 monthsending in October, held down by large declines in con-sumer energy prices. Core PCE inflation, which ex-cludes changes in food and energy prices, was 1¼ per-cent over the same 12-month period, partly restrained bydeclines in the prices of non-energy imported goods.Over the 12 months ending in November, total con-

sumer prices as measured by the consumer price index(CPI) rose ½ percent, while core CPI inflation was 2 per-cent. Survey measures of expected longer-run inflation were relatively stable, although they showed some hintsof having edged slightly lower: In November and earlyDecember, the Michigan survey measure continued torun somewhat below its typical range of the past15 years, though historical patterns suggest that theserelatively low readings may have reflected softness in to-tal inflation and energy prices. The measures from boththe Survey of Professional Forecasters for the fourthquarter and the Survey of Primary Dealers in Decembermoved down slightly.

Foreign real GDP growth improved in the third quarterafter being weak in the first half, and recent indicators were consistent with a further moderate expansion in thefourth quarter. Economic activity in Canada reboundedin the third quarter, boosted by rising exports and asmaller drag from declines in oil-sector investment. The Japanese economy expanded in the third quarter follow-

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ing a small contraction in the previous quarter. In con-trast, growth in the euro-area economy slowed in thethird quarter. Recent indicators for economic activity inChina were relatively favorable, and several other emerg-ing Asian economies strengthened in the third quarter.Mexican economic growth also picked up in the third

quarter, but the Brazilian economy continued to con-tract. Falling energy prices kept headline inflation verylow in many foreign economies.

Staff Review of the Financial SituationFederal Reserve communications and economic data re-leases over the intermeeting period appeared to have ledinvestors to raise the odds they assigned to an increasein the target range for the federal funds rate at the De-cember FOMC meeting. The October FOMC state-ment and the stronger-than-expected October employ-ment report, in particular, boosted expectations ofFOMC action at this meeting. Subsequent data releases

and FOMC communications firmed those views, and inthe weeks before the meeting, market participants cameto attach high odds to the possibility of a December in-crease.

The expected path of the federal funds rate implied bymarket quotes on interest rate derivatives rose moder-ately over the intermeeting period. Nominal yields on2- and 10-year Treasury securities rose about 40 basispoints and 25 basis points, respectively. Measures of in-flation compensation based on Treasury Inflation-Pro-tected Securities remained low.

Over the first few weeks of the intermeeting period, theincrease in the perceived likelihood of an increase in thetarget range for the federal funds rate at the Decembermeeting was not accompanied by a rise in implied or re-alized volatility in domestic equity and fixed-incomemarkets. However, later in the period, concerns amongmarket participants about the implications of fallingcrude oil prices and the credit quality of high-yield bondsevidently increased. In reaction, broad measures of U.S.equity prices declined, with a steep selloff in energy-sec-tor stocks, and the one-month-ahead option-implied volatility on the S&P 500 index, the VIX, climbed. Inaddition, strains in the high-yield bond market increasednotably after a mutual fund that specialized in very low-rated and unrated bonds suspended investor redemp-tions and closed. Over the intermeeting period, high-yield bond spreads widened significantly, on net, partic-ularly for bonds rated triple-C or below, with more pro-nounced increases for firms in the energy sector. In con-trast, spreads on investment-grade corporate bonds werelittle changed on balance.

Nonfinancial businesses continued to tap financial mar-kets at a brisk pace in the intermeeting period. Issuanceof investment-grade corporate bonds and institutionalleveraged loans remained solid, buoyed by demand to fi-nance mergers and acquisitions. Growth of commercialand industrial loans on banks’ books continued to be

strong in October and November, driven mainly by theexpansion of large loans at large banks. However, high-yield bond issuance slowed and refinancing-related lev-eraged loan issuance stayed weak during the intermeet-ing period.

Corporate earnings and credit quality continued to showsome signs of weakening. Available reports and analysts’estimates suggested that aggregate earnings per share inthe third quarter declined slightly compared with year-earlier levels, in line with expectations. Earnings wereparticularly weak in the energy and materials sectors be-cause of declines in prices of crude oil and metals. The

stronger dollar appeared to weigh on earnings growthacross many sectors.

Conditions in the municipal bond market were generallystable. Gross issuance of municipal bonds was solid inrecent months. Yields on municipal bonds declined alittle, leaving their ratios to long-term Treasury yieldssomewhat lower but still near the high end of their his-torical range.

Financing conditions for commercial real estate tight-ened somewhat. Spreads on commercial mortgage-backed securities (CMBS) widened further, suggesting

that investors in CMBS continued to reassess the risksin this sector following several years of robust demandfor these securities. Nonetheless, underwriting stand-ards continued to be relatively loose, and financing con-ditions appeared to remain quite accommodative overall.CMBS issuance stayed strong.

Residential mortgage market conditions were littlechanged, on net, over the intermeeting period. Creditremained tight for borrowers with low credit scores,hard-to-document income, or higher debt-to-income ra-tios. Interest rates on 30-year fixed-rate mortgages in-creased 30 basis points, in line with increases in yields on

mortgage-backed securities and comparable-maturity Treasury securities. Nevertheless, mortgage rates con-tinued to be quite low by historical standards.

Consumer credit markets remained accommodative formost borrowers. Consumer loan balances continued torise at a robust pace through October because of sus-tained expansion in credit card balances and sizable in-creases in auto and student loans; growth of student



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loans continued to slow gradually. Student and autoloans remained broadly available, even to borrowers with subprime credit histories, but the availability ofcredit card loans for subprime borrowers was still tight.

Movements in foreign financial markets over the periodreflected increased expectations that the FOMC wouldbegin raising the target range for the federal funds ratein December, investors’ views about monetary policiesabroad, and substantial declines in commodity prices. The broad nominal index of the dollar rose appreciably.Equity indexes declined in many advanced and emergingmarket economies amid concerns about corporate earn-ings and falling oil and metals prices. Short-term sover-eign yields changed little in the euro area and Japan butrose moderately in the United Kingdom. Longer-termsovereign yields moved higher in Europe along with U.S. Treasury yields.

Staff Economic Outlook In the economic forecast prepared by the staff for theDecember FOMC meeting, real GDP growth in the sec-ond half of this year was little changed, on net, relativeto the projection for the October meeting. The staff’smedium-term projection for real GDP growth was revised up slightly, on balance, from the previous forecast,primarily because the recently passed Bipartisan Budget Act of 2015 was anticipated to lead to somewhat higherfederal government purchases. The staff continued toproject that real GDP would expand at a somewhatfaster pace than potential output in 2016 through 2018,supported primarily by increases in consumer spending.

The unemployment rate was expected to decline gradu-ally and to run somewhat below the staff’s estimate ofits longer-run natural rate over this period.

The staff’s forecast for inflation was revised downslightly in the near term in response to recent data forconsumer prices and the further decline in the price ofcrude oil; over the medium term, the projection was littlerevised. Energy prices and prices of non-energy im-ported goods were expected to begin steadily rising nextyear. The staff projected that inflation would increasegradually over the next several years and reach the Com-mittee’s longer-run objective of 2 percent by the end of2018.

The staff viewed the uncertainty around its Decemberprojections for real GDP growth, the unemploymentrate, and inflation as similar to the average of the past

3 The president of the Federal Reserve Bank of Minneapolis

did not participate in this FOMC meeting, and the incomingpresident is scheduled to assume office on January 1, 2016.

20 years. The risks to the forecast for real GDP wereseen as tilted somewhat to the downside, reflecting thestaff’s assessment that neither monetary nor fiscal policy was currently well positioned to help the economy with-stand substantial adverse shocks. Consistent with thisdownside risk to aggregate demand, the staff viewed the

risks to its outlook for the unemployment rate as skewedsomewhat to the upside. The risks to the projection forinflation were seen as weighted to the downside, reflect-ing the possibility that longer-term inflation expectationsmay have edged down and that the foreign exchange value of the dollar could rise substantially further, which would put downward pressure on inflation.

Participants’ Views on Current Conditions and theEconomic OutlookIn conjunction with this FOMC meeting, members ofthe Board of Governors and Federal Reserve Bank pres-idents submitted their projections of the most likely out-

comes for real GDP growth, the unemployment rate, in-flation, and the federal funds rate for each year from2015 through 2018 and over the longer run.3 Each par-ticipant’s projections were conditioned on his or herjudgment of appropriate monetary policy. The longer-run projections represent each participant’s assessmentof the rate to which each variable would be expected toconverge, over time, under appropriate monetary policyand in the absence of further shocks to the economy. These projections and policy assessments are describedin the Summary of Economic Projections, which is anaddendum to these minutes.

In their discussion of the economic situation and theoutlook, meeting participants viewed the information re-ceived over the intermeeting period as indicating thateconomic activity was expanding moderately and con-firming that underutilization of labor resources had di-minished appreciably since early in the year. Partici-pants’ outlook indicated that, with gradual adjustmentsin the stance of monetary policy, real GDP would con-tinue to increase at a moderate rate over the mediumterm and that labor market indicators would continue tostrengthen. They anticipated that the relative strength indomestic demand would be only partially offset by some

further weakness in net exports. Participants generallysaw the downside risks to U.S. economic activity fromglobal economic and financial developments, althoughstill material, as having diminished since late summer. Inaddition, new and revised information on employment

James M. Lyon, First Vice President of the Federal ReserveBank of Minneapolis, submitted economic projections.



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in recent months had reduced earlier concerns about apossible slowing of progress in the labor market. Ac-cordingly, taking into account domestic and interna-tional developments, most participants judged the risksto the outlook for both economic activity and the labormarket to be balanced.

Incoming data indicated that inflation continued to runbelow the Committee’s 2 percent longer-run objective,partly reflecting declines in energy prices and prices ofnon-energy imports. The price of crude oil fell furtherover the intermeeting period, and many participants low-ered their near-term forecasts for inflation somewhat while leaving their medium-term forecasts little changed.Nearly all continued to anticipate that inflation wouldrise to or very close to 2 percent over the medium termas the transitory effects of declines in energy and importprices dissipated and the labor market strengthened fur-ther. Over the intermeeting period, market-based

measures of inflation compensation stayed low; somesurvey-based measures of longer-term inflation expecta-tions edged down. Although many participants re-mained concerned about downside risks attending theoutlook for inflation, a majority of participants saw therisks to the outlook for inflation as balanced.

Consumer spending continued to rise at a solid rate inrecent months; retail sales picked up over the October – November period, and motor vehicle sales remainedstrong. The available information from District businesscontacts was generally consistent with the recent trendin data on spending, although a couple of reports noted

that households were spending cautiously and that someprice discounting was likely. Over the coming year, par-ticipants expected consumer outlays to be supported im-portantly by ongoing gains in jobs, rising income, andimproved household balance sheets. In addition, severalparticipants pointed out that low energy costs shouldhelp support consumer expenditures.

The housing market was recovering gradually, withsingle-family homebuilding continuing to trend up andmultifamily construction remaining at a high level. Thereports on the pace of construction and real estate activ-ity across Districts varied. Nonetheless, several partici-pants noted factors pointing to continued improvementin the housing sector, including ongoing house price ap-preciation, low levels of home inventories, the substan-tial gap between the rate of household formation and therelatively slow pace of construction, and the possibilitythat homebuyers may be entering the market in anticipa-tion of higher mortgage rates. Outside of the residential

sector, commercial building was highlighted as an areaof relative strength in a few Districts.

As a result of the recently passed Bipartisan Budget Act,federal spending was expected to provide a modestboost to economic activity over the next few years. Con-tacts in one District with a relatively large amount of fed-eral government activity reported that their businesses would also benefit from the reduced uncertainty aboutthe federal fiscal outlook.

Business activity was solid outside of sectors adverselyaffected by low energy prices and weak exports. A num-ber of participants commented on the strength in theservices sector in their Districts, citing, in particular, ac-tivity in high-tech, transportation, leisure and hospitality,and health-related businesses. Some reported that thestronger manufacturing industries in their Districts in-cluded aerospace, power generation equipment, and

medical equipment, and that the domestic auto industry was still a bright spot. However, manufacturing activityoverall continued to be restrained by weakness in indus-tries with significant international exposures, such assteel, agricultural and drilling equipment, and chemicals.In addition, domestic energy producers and their servicesuppliers remained under significant pressure from theexcess supply of crude oil and declining prices. The cut-backs in drilling led to further reductions in capitalspending and to layoffs; credit conditions for some firmscontinued to deteriorate. In the agricultural sector, highlevels of domestic crop production and weak global de-mand had depressed commodity prices, and farm in-

come was expected to decline.

Participants generally agreed that the drag on U.S. eco-nomic activity from the appreciation of the dollar sincethe summer of 2014 and the slowdown in foreign eco-nomic growth, particularly in emerging market econo-mies, was likely to continue to depress U.S. net exportsfor some time. Many expressed the view that the risksto the global economy that emerged late this summerhad receded and anticipated moderate improvement ineconomic growth abroad in the coming year as currencyand commodity markets stabilized. However, partici-pants cited a number of lingering concerns, including thepossibility that further dollar appreciation and persistent weakness in commodity prices could increase the stresson emerging market economies and that China couldfind it difficult to navigate the cyclical and structuralchanges under way in its economy. Several upside risksto the U.S. outlook also were noted, including the possi-bility that declining energy prices could spur consumerspending more than currently anticipated.



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Consumer prices, as measured by the PCE index, werelittle changed, on net, in September and October, helddown importantly by declines in energy prices; core PCEprices posted only small increases. Over the intermeet-ing period, crude oil prices dropped notably, other com-modity prices declined, and the dollar appreciated fur-

ther. The 12-month change in the core PCE price index was 1.3 percent in October and had been running atabout that rate since the beginning of the year, despitethe declines in prices of non-energy imported goodsover the period. Several participants noted that alterna-tive indicators of underlying inflation, such as the coreCPI, the trimmed mean PCE, and the sticky price CPI,showed somewhat higher year-over-year increases, closeto or above 2 percent. Inflation by these measures, how-ever, had typically run higher than PCE price inflation,and a range of views was expressed about their implica-tions for the outlook for PCE inflation.

Almost all participants continued to expect that once en-ergy prices and prices of non-energy commodities stabi-lized, the effects of the declines in those prices on head-line and core PCE inflation would fade. Moreover, withmargins of resource underutilization having already di-minished appreciably and longer-run inflation expecta-tions reasonably stable, most anticipated that tighteningresource utilization over the next year would contributeto higher inflation. Nearly all participants were now rea-sonably confident that inflation would move back to2 percent over the medium term. However, because ofthe recent further decline in crude oil prices, many par-

ticipants judged that falling energy prices would depressheadline inflation somewhat longer than previously an-ticipated. Also, several observed that the additional ap-preciation of the dollar would continue to hold down theprices of imported goods. Although almost all still ex-pected that the downward pressure on inflation from en-ergy and commodity prices would be transitory, many viewed the persistent weakness in those prices as addinguncertainty or posing important downside risks to theinflation outlook.

Participants also discussed readings from various mar-ket- and survey-based measures of longer-run inflation

expectations. Recently, some of the available surveyshad reported softer longer-run inflation expectations, while others suggested still-stable expectations. In addi-tion, the market-based measures of inflation compensa-tion that had declined earlier were still at low levels. Anumber of participants noted, based on historical pat-terns, that some of the survey-based measures could beoverly sensitive to energy price fluctuations rather thanindicating shifts in perceptions of underlying inflation

trends and that the declines in the market-basedmeasures could reflect changes in risk and liquidity pre-miums. Many concluded that longer-run inflation ex-pectations remained reasonably stable. However, someexpressed concerns that inflation expectations may havealready moved lower, or that they might do so if inflation

persisted for much longer at a rate below the Commit-tee’s objective.

Labor market conditions improved further in recentmonths: Monthly gains in nonfarm payroll employmentaveraged more than 200,000 over the period from Sep-tember to November, and the unemployment rate edgedlower. The cumulative reduction in the underutilizationof labor resources since early in the year was appreciable. The unemployment rate, at 5.0 percent in November, was 0.7 percentage point lower than in January and closeto most participants’ estimates of its longer-run normallevel. Broader measures of underemployment that in-

clude marginally attached workers and those employedpart time for economic reasons also fell substantiallysince January. However, the labor force participationrate moved down since January as well, with someFOMC participants attributing part of the decline to de-mographic trends or a structural rise in detachmentamong prime-age men. A number of participants ob-served that wage increases had begun to pick up, or thatthey appeared likely to do so over the coming year. Although many participants judged that the improve-ment in labor market conditions had been substantial,some others indicated that further progress in reducing

labor market slack would be required before conditions would be consistent with the Committee’s objective ofmaximum employment. In particular, some participantsstressed the importance of the pace of economic growthstaying above that of potential output in order to reduceremaining labor underutilization across broader dimen-sions — for example, by lowering the still-elevated num-bers of workers employed part time for economic rea-sons and by encouraging additional workers who arecurrently outside the labor force but want a job toreenter the labor force.

Most participants expected that the unemployment rate

would edge below their estimates of its longer-run levelin the coming year and then stabilize for a time, with thefurther strengthening of the labor market helping moveinflation higher. Because labor compensation was stillincreasing at a subdued rate and inflation remained wellbelow 2 percent, some participants judged that a moder-ate further decline in unemployment would be unlikelyto lead to a buildup of unduly strong inflation pressures.



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A few commented that a sustained period of labor mar-ket activity above levels consistent with maximum em-ployment should speed the rise in inflation to the Com-mittee’s objective.

Financial conditions tightened modestly over the inter-meeting period. Quotes in financial markets and surveyresults suggested that investors were quite confident thatthe Committee would raise the federal funds target range25 basis points at the current meeting. Concerns amonginvestors about the high-yield bond market increasednotably in the days before the meeting after an open-ended mutual fund specializing in junk bonds suspendedredemptions and closed. In their discussion, several par-ticipants commented that markets for leveraged financehad been correcting since midyear — particularly for themost risky assets, including those associated with energyfirms — and noted that the widening of credit spreads incorporate bond markets appeared to be largely due to

the repricing of riskier assets.

During their consideration of economic conditions andmonetary policy, almost all participants agreed that theimprovements that had occurred in the labor market andtheir confidence in a return of inflation to 2 percent overthe medium term now satisfied the Committee’s criteriafor beginning the policy normalization process. Partici-pants also discussed the implications of economic con-ditions going forward for the likely future path of thetarget range for the federal funds rate. Even after theinitial increase in the target range, the stance of policy would remain accommodative. Participants saw several

reasons why a gradual removal of policy accommodation would likely be appropriate. Normalizing policy gradu-ally would keep the stance of monetary policy suffi-ciently accommodative to support further improvementin labor market conditions and to exert upward pressureon inflation. Also, a number of participants pointed outthat because inflation was still running well below theCommittee’s objective and the outlook for inflation wassubject to considerable uncertainty, it would probablytake some time for the data to confirm that inflation wason a trajectory to return to 2 percent over the mediumterm. Gradual adjustments in the federal funds rate

would also allow policymakers to assess how the econ-omy was responding to increases in interest rates. In ad-dition, by several estimates, the neutral short-term realinterest rate was currently close to zero and was expectedto rise only slowly as headwinds restraining the expan-sion receded. Moreover, the ability of monetary policyto offset the economic effects of an unanticipated eco-nomic shock remained asymmetric, and a cautious ap-

proach to normalizing policy could help minimize therisk of having to respond to a negative economic shock while the policy rate remained near its effective lowerbound.

While viewing a gradual approach to policy normaliza-tion as likely to be appropriate given their economic out-look, participants emphasized the need to adjust the pol-icy path as economic conditions evolved and to avoidappearing to commit to any specific pace of adjustments. They stressed the importance of communicating clearlythat the future policy path could become shallower if theeconomic expansion weakened and inflation rose moreslowly than currently anticipated, and that it could be-come steeper if real activity and inflation surprised to theupside. A few participants also indicated that significantrisks to financial stability, should they emerge, could al-ter their view of the appropriate policy path.

Committee Policy Action In their discussion of monetary policy for the periodahead, members judged that information received sincethe FOMC met in October indicated that economic ac-tivity had been expanding at a moderate pace. Althoughnet exports remained soft, consumer and businessspending remained solid, and the housing sector im-proved further. Overall, taking into account domesticand foreign developments, members saw the risks to theoutlook for both economic activity and the labor marketas balanced, and they expected that, with gradual adjust-ments in the stance of monetary policy, economic activ-ity would most likely continue to expand at a moderate

pace.

Members agreed that a range of recent labor market in-dicators, including ongoing job gains and declining un-employment, showed further improvement and con-firmed that underutilization of labor resources had di-minished appreciably since early this year. Members an-ticipated that economic activity was likely to continue toexpand at a pace sufficient to lead to a further increasein the utilization of labor resources, and many membersjudged that additional progress would be required toreach the Committee’s maximum-employment objec-tive.

Inflation continued to run below the Committee’slonger-run objective, held down in part by the effects ofdeclines in energy and non-energy import prices.Market-based measures of inflation compensation re-mained low; some survey-based measures of longer-term inflation expectations had edged down. Membersanticipated that the further decline in crude oil prices



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the federal funds rate in a target range of ¼ to½ percent, including: (1) overnight reverse re-purchase operations (and reverse repurchase op-erations with maturities of more than one day when necessary to accommodate weekend, holi-day, or similar trading conventions) at an offer-

ing rate of 0.25 percent, in amounts limited onlyby the value of Treasury securities held outrightin the System Open Market Account that areavailable for such operations and by a per-coun-terparty limit of $30 billion per day; and (2) termreverse repurchase operations to the extent ap-proved in the resolution on term RRP operationsapproved by the Committee at its March 17 – 18,2015, meeting.

The Committee directs the Desk to continuerolling over maturing Treasury securities at auc-tion and to continue reinvesting principal pay-

ments on all agency debt and agency mortgage-backed securities in agency mortgage-backed se-curities. The Committee also directs the Desk toengage in dollar roll and coupon swap transac-tions as necessary to facilitate settlement of theFederal Reserve’s agency mortgage-backed secu-rities transactions.”

The vote also encompassed approval of the statementbelow to be released at 2:00 p.m.:

“Information received since the Federal OpenMarket Committee met in October suggests that

economic activity has been expanding at a mod-erate pace. Household spending and businessfixed investment have been increasing at solidrates in recent months, and the housing sectorhas improved further; however, net exports havebeen soft. A range of recent labor market indi-cators, including ongoing job gains and decliningunemployment, shows further improvement andconfirms that underutilization of labor resourceshas diminished appreciably since early this year.Inflation has continued to run below the Com-mittee’s 2 percent longer-run objective, partly re-flecting declines in energy prices and in prices ofnon-energy imports. Market-based measures ofinflation compensation remain low; some survey-based measures of longer-term inflation ex-pectations have edged down.

Consistent with its statutory mandate, the Com-mittee seeks to foster maximum employmentand price stability. The Committee currently ex-pects that, with gradual adjustments in the stance

of monetary policy, economic activity will con-tinue to expand at a moderate pace and labormarket indicators will continue to strengthen.Overall, taking into account domestic and inter-national developments, the Committee sees therisks to the outlook for both economic activity

and the labor market as balanced. Inflation is ex-pected to rise to 2 percent over the medium termas the transitory effects of declines in energy andimport prices dissipate and the labor marketstrengthens further. The Committee continuesto monitor inflation developments closely.

The Committee judges that there has been con-siderable improvement in labor market condi-tions this year, and it is reasonably confident thatinflation will rise, over the medium term, to its2 percent objective. Given the economic out-look, and recognizing the time it takes for policy

actions to affect future economic outcomes, theCommittee decided to raise the target range forthe federal funds rate to ¼ to ½ percent. Thestance of monetary policy remains accommoda-tive after this increase, thereby supporting fur-ther improvement in labor market conditionsand a return to 2 percent inflation.

In determining the timing and size of future ad-justments to the target range for the federalfunds rate, the Committee will assess realizedand expected economic conditions relative to itsobjectives of maximum employment and 2 per-

cent inflation. This assessment will take into ac-count a wide range of information, includingmeasures of labor market conditions, indicatorsof inflation pressures and inflation expectations,and readings on financial and international devel-opments. In light of the current shortfall of in-flation from 2 percent, the Committee will care-fully monitor actual and expected progress toward its inflation goal. The Committee expectsthat economic conditions will evolve in a mannerthat will warrant only gradual increases in thefederal funds rate; the federal funds rate is likely

to remain, for some time, below levels that areexpected to prevail in the longer run. However,the actual path of the federal funds rate will de-pend on the economic outlook as informed byincoming data.

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



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securities in agency mortgage-backed securitiesand of rolling over maturing Treasury securitiesat auction, and it anticipates doing so until nor-malization of the level of the federal funds rate is well under way. This policy, by keeping theCommittee’s holdings of longer-term securities

at sizable levels, should help maintain accommo-dative financial conditions.”

Voting for this action: Janet L. Yellen, William C.Dudley, Lael Brainard, Charles L. Evans, StanleyFischer, Jeffrey M. Lacker, Dennis P. Lockhart, JeromeH. Powell, Daniel K. Tarullo, and John C. Williams.

Voting against this action: None.

To support the Committee’s decision to raise the targetrange for the federal funds rate, the Board of Governors voted unanimously to raise the interest rates on requiredand excess reserve balances by ¼ percentage point, to

½ percent, effective December 17, 2015. The Board ofGovernors also voted unanimously to approve a ¼ per-centage point increase in the primary credit rate (dis-count rate) to 1 percent, effective December 17, 2015.4

4 In taking this action, the Board approved requests submittedby the boards of directors of the Federal Reserve Banks ofBoston, Philadelphia, Cleveland, Richmond, Atlanta, Chicago,St. Louis, Kansas City, Dallas, and San Francisco. This votealso encompassed approval by the Board of Governors of theestablishment of a 1 percent primary credit rate by the remain-ing Federal Reserve Banks, effective on the later of Decem-ber 17, 2015, and the date such Reserve Banks informed theSecretary of the Board of such a request. (Secretary’s note:

After these policy decisions, the deputy manager of theSystem Open Market Account briefed the Committeeon plans for term RRPs over year-end.

It was agreed that the next meeting of the Committee would be held on Tuesday – Wednesday, January 26 – 27,2016. The meeting adjourned at 10:30 a.m. on Decem-ber 16, 2015.

Notation Vote

By notation vote completed on November 17, 2015, theCommittee unanimously approved the minutes of theCommittee meeting held on October 27 – 28, 2015.

_____________________________

Brian F. MadiganSecretary

Subsequently, the Federal Reserve Banks of New York andMinneapolis were informed by the Secretary of the Board ofthe Board’s approval of their establishment of a primary creditrate of 1 percent, effective December 17, 2015.) This vote ofthe Board of Governors also encompassed approval of the re-newal by all 12 Federal Reserve Banks of the existing formulasfor calculating the rates applicable to discounts and advancesunder the secondary and seasonal credit programs.



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Summary of Economic Projections

In conjunction with the Federal Open Market Commit-tee (FOMC) meeting held on December 15–16, 2015,meeting participants submitted their projections of the

most likely outcomes for real output growth, the unem-ployment rate, inflation, and the federal funds rate foreach year from 2015 to 2018 and over the longer run.1 Each participant’s projection was based on informationavailable at the time of the meeting, together with his orher assessment of appropriate monetary policy and as-sumptions about the factors likely to affect economicoutcomes. The longer-run projections represent eachparticipant’s assessment of the value to which each var-iable would be expected to converge, over time, underappropriate monetary policy and in the absence of fur-ther shocks to the economy. “Appropriate monetary

policy” is defined as the future path of policy that eachparticipant deems most likely to foster outcomes foreconomic activity and inflation that best satisfy his or herindividual interpretation of the Federal Reserve’s objec-tives of maximum employment and stable prices.

FOMC participants generally expected that, under ap-propriate monetary policy, real gross domestic product(GDP) growth in 2016 and 2017 would be at or somewhat above their individual estimates of the longer-rungrowth rate and would converge toward its longer-runrate in 2018 (table 1 and figure 1). All participants pro-jected that the unemployment rate would decline further

in 2016. Most participants expected that in 2018 the un-employment rate would remain somewhat below theirindividual judgments of its longer-run normal rate. Par-ticipants projected that inflation, as measured by thefour-quarter change in the price index for personal con-sumption expenditures (PCE), would pick up in 2016and 2017 from the very low rate seen in 2015. Almostall participants projected inflation in 2018 to be at or very near the Committee’s 2 percent objective.

As shown in figure 2, all but two participants thoughtthat it would be appropriate to raise the target range forthe federal funds rate before the end of 2015. Most par-

ticipants expected that it would be appropriate to raisethe target range for the federal funds rate gradually overthe projection period as headwinds to economic growthdissipate slowly over time and as inflation rises toward

1 The president of the Federal Reserve Bank of Minneapolis

did not participate in this FOMC meeting, and the incomingpresident is scheduled to assume office on January 1, 2016.

the Committee’s goal of 2 percent. Consistent with thisoutlook, most participants projected that the appropriatelevel of the federal funds rate would be below its longer-

run level through 2018.

Almost all participants viewed the levels of uncertaintyassociated with their outlooks for economic growth andthe unemployment rate as broadly similar to the normsof the previous 20 years. Nearly all also viewed the levelsof uncertainty associated with their inflation forecasts asbroadly similar to historical norms. Most participantssaw the risks to their outlooks for real GDP growth andthe unemployment rate as broadly balanced. A majority viewed the risks attending their projections for bothPCE and core PCE inflation as broadly balanced, butmany saw these risks as weighted to the downside.

Among those who saw the risks to their inflation out-look as tilted to the downside, several highlighted thecontinued strength of the dollar and some recent indica-tions that inflation expectations had declined as contrib-uting to those risks.

The Outlook for Economic ActivityParticipants generally projected that, conditional on theirindividual assumptions about appropriate monetary pol-icy, real GDP would increase in 2016 and 2017 at a pacesomewhat above their estimates of its longer-run rate.Real GDP growth would then slow in 2018 to a rate ator near their individual estimates of the longer-run nor-

mal rate. Participants pointed to a number of factorsthat they expect will contribute to moderate outputgrowth over the next few years, including labor marketconditions that are supportive of economic expansion,household and business balance sheets that had im-proved significantly since the financial crisis, and astance of monetary policy that was expected to remainaccommodative.

Compared with their contributions to the Summary ofEconomic Projections (SEP) in September, participants’projections of real GDP growth from 2016 to 2018 weregenerally little changed. The median value of partici-pants’ projections for real GDP growth in 2016 was revised up slightly to 2.4 percent; some participants citedthe Bipartisan Budget Act of 2015, which was passed in

James M. Lyon, First Vice President of the Federal ReserveBank of Minneapolis, submitted economic projections.

Page 1 _____________________________________________________________________________________________


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

Change in real GDP

Percent

0

1

2

3

4

-

+

2010 2011 2012 2013 2014 2015 2016 2017 2018 Longerrun

Central tendency of projections

Range of projections

Median of projections

Actual

Unemployment rate

Percent

4

5

6

7

8

9

10

2010 2011 2012 2013 2014 2015 2016 2017 2018 Longerrun

PCE inflation

Percent

1

2

3

2010 2011 2012 2013 2014 2015 2016 2017 2018 Longerrun

Core PCE inflation

Percent

1

2

3

2010 2011 2012 2013 2014 2015 2016 2017 2018 Longerrun

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

annual.

Summary of Economic Projections of the Meeting of December 15–16, 2015 Page 3 _____________________________________________________________________________________________


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Figure 2. FOMC participants’ assessments of appropriate monetary policy: Midpoint of target range or target level for

the federal funds rate

Percent

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

2015 2016 2017 2018 Longer run

Note: Each shaded circle indicates the value (rounded to the nearest 1/8 percentage point) of an individual par-ticipant’s judgment of the midpoint of the appropriate target range for the federal funds rate or the appropriate targetlevel for the federal funds rate at the end of the specified calendar year or over the longer run.



16/24

late October, as adding support to economic growth inthe near term. Very few participants changed their fore-casts for real GDP growth in the longer run, resulting inan unchanged median.

All participants projected that the unemployment rate would be at or below their individual judgments of itslonger-run normal level from 2016 through 2018. Com-pared with the September SEP, most participants’ pro-jected paths for the unemployment rate were reviseddown a little over those three years, with the median ofthe projections in the fourth quarter of each year at4.7 percent. Many also revised down slightly their esti-mates of the longer-run normal rate of unemployment,although the median forecast of 4.9 percent was un-changed since September. Participants generally citedstronger-than-expected labor market data in recentmonths as a factor explaining the downward revisions totheir unemployment rate forecasts.

Figures 3.A and 3.B show the distribution of partici-pants’ views regarding the likely outcomes for real GDPgrowth and the unemployment rate through 2018 and inthe longer run. The distributions of the projections forreal GDP growth over the next several years and in thelonger run narrowed some since the September SEP. The diversity of views across participants on the outlookfor GDP growth reflected, in part, differences in theirindividual assessments of the size and persistence of theeffects of lower energy prices and a stronger dollar onreal activity; the time it would take for the headwindsthat have been restraining the pace of the economic ex-

pansion, such as financial and economic conditionsabroad, to dissipate; and the appropriate path of mone-tary policy. With regard to the unemployment rate, thedistributions of projections over the next three yearsshifted modestly to lower values since September.

The Outlook for InflationNearly all participants saw PCE price inflation pickingup in 2016, rising further in 2017, and then reaching arate in 2018 at or very close to the Committee’s 2 percentlonger-run objective. However, relative to the Septem-ber SEP, almost all participants marked down their pro-jections for PCE price inflation in 2016, observing thatrecent declines in energy prices and the continuedstrength in the dollar could exert additional downwardpressure on inflation in the near term. Revisions to par-ticipants’ inflation forecasts in 2017 were more mixed, while the projections for inflation in 2018 were littlechanged. Most participants also marked down their pro-jections for core PCE price inflation in 2016, althoughalmost all still expected core inflation to rise gradually

over the projection period and to be at or very close to2 percent by 2018. Factors cited by participants as con-tributing to their outlook that inflation will rise over themedium term included recent signs of a pickup in wagegrowth, their expectation of tighter resource utilization,their expectation that the effects of recent appreciation

in the dollar and declines in oil prices on inflation willfade, their anticipation that inflation expectations will re-main at levels consistent with the FOMC’s longer-runobjective, and still-accommodative monetary policy.

Figures 3.C and 3.D provide information on the distri-bution of participants’ views about the outlook for infla-tion. The distribution of participants’ projections forPCE price inflation in 2016 and 2017 shifted to the leftcompared with the September SEP, while the distribu-tions of projections for 2018 and in the longer run werelittle changed. The distributions of projections for corePCE price inflation moved lower for 2016 and 2017

compared with September but did not change for 2018.

Appropriate Monetary PolicyFigure 3.E provides the distribution of participants’judgments regarding the appropriate level of the targetfederal funds rate at the end of each calendar year from2015 to 2018 and over the longer run. Relative to Sep-tember, the projections of the appropriate levels of thefederal funds rate over the next three years generallyshifted to lower values. The median projection for nextyear was unchanged, but the medians for 2017 and 2018declined slightly. The median projection now stands at1.4 percent at the end of 2016, 2.4 percent at the end of

2017, and 3.3 percent at the end of 2018. Given theirexpectations that economic headwinds will persist andthat inflation will rise gradually to 2 percent over the nextthree years, most participants judged that it would be ap-propriate for the federal funds rate to remain below itslonger-run normal level from 2016 to 2018. Participantsprojected that a gradual rise in the federal funds rate overthat period would be appropriate as some of those headwinds, such as sluggish foreign economic growth, dimin-ish and the temporary factors holding down inflationdissipate. Some participants noted that a gradual in-crease in the federal funds rate would be consistent with

their expectation that the neutral short-term real interestrate will rise slowly over the next few years.

Both the median and the range of participants’ projec-tions of the federal funds rate in the longer run, at3.5 percent and 3 to 4 percent, respectively, were un-changed since September. However, several participantsrevised their projections for the longer-run federal fundsrate slightly lower. All participants judged that inflation



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

2015

Number of participants

2468

1012141618

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

1.7 1.9 2.1 2.3 2.5 2.7 2.9

Percent range

December projectionsSeptember projections

2016


2468

1012141618

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

1.7 1.9 2.1 2.3 2.5 2.7 2.9

Percent range

2017


2468

1012141618

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

1.7 1.9 2.1 2.3 2.5 2.7 2.9

Percent range

2018


2468

1012141618

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

1.7 1.9 2.1 2.3 2.5 2.7 2.9

Percent range

Longer run


24

68

1012141618

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

1.7 1.9 2.1 2.3 2.5 2.7 2.9

Percent range

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



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Figure 3.B. Distribution of participants’ projections for the unemployment rate, 2015–18 and over the longer run

2015


2468

1012141618

4.2 4.4 4.6 4.8 5.0 5.2 5.4 5.6 5.8- - - - - - - - -

4.3 4.5 4.7 4.9 5.1 5.3 5.5 5.7 5.9

Percent range


2016


2468

1012141618

4.2 4.4 4.6 4.8 5.0 5.2 5.4 5.6 5.8- - - - - - - - -

4.3 4.5 4.7 4.9 5.1 5.3 5.5 5.7 5.9

Percent range

2017


2468

1012141618

4.2 4.4 4.6 4.8 5.0 5.2 5.4 5.6 5.8- - - - - - - - -

4.3 4.5 4.7 4.9 5.1 5.3 5.5 5.7 5.9

Percent range

2018


2468

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4.2 4.4 4.6 4.8 5.0 5.2 5.4 5.6 5.8- - - - - - - - -

4.3 4.5 4.7 4.9 5.1 5.3 5.5 5.7 5.9

Percent range

Longer run


24

68

1012141618

4.2 4.4 4.6 4.8 5.0 5.2 5.4 5.6 5.8- - - - - - - - -

4.3 4.5 4.7 4.9 5.1 5.3 5.5 5.7 5.9

Percent range




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

2015


2

4

68

10

12

14

16

18

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

0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4

Percent range


2016


2

4

6

8

10

12

14

16

18

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

0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4

Percent range

2017


2

4

6

8

10

12

14

16

18

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

0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4

Percent range

2018


2

4

6

8

10

12

14

16

18

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

0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4

Percent range

Longer run


24

6

8

10

12

14

16

18

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

0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4

Percent range




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Figure 3.D. Distribution of participants’ projections for core PCE inflation, 2015–18

2015


2

4

6

8

1012

14

16

18

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

1.2 1.4 1.6 1.8 2.0 2.2 2.4

Percent range


2016


2

4

6

8

10

12

14

16

18

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

1.2 1.4 1.6 1.8 2.0 2.2 2.4

Percent range

2017


2

4

6

8

10

12

14

16

18

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

1.2 1.4 1.6 1.8 2.0 2.2 2.4

Percent range

2018


2

4

6

8

10

12

14

16

18

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

1.2 1.4 1.6 1.8 2.0 2.2 2.4

Percent range




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

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

2015


2

4

6

8

1012

14

16

18

−0.37 −0.12 0.13 0.38 0.63 0.88 1.13 1.38 1.63 1.88 2.13 2.38 2.63 2.88 3.13 3.38 3.63 3.88- - - - - - - - - - - - - - - - - -

−0.13 0.12 0.37 0.62 0.87 1.12 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12

Percent range


2016


2

4

6

8

10

12

14

16

18

−0.37 −0.12 0.13 0.38 0.63 0.88 1.13 1.38 1.63 1.88 2.13 2.38 2.63 2.88 3.13 3.38 3.63 3.88- - - - - - - - - - - - - - - - - -−0.13 0.12 0.37 0.62 0.87 1.12 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12

Percent range

2017


2

4

6

8

10

12

14

16

18

−0.37 −0.12 0.13 0.38 0.63 0.88 1.13 1.38 1.63 1.88 2.13 2.38 2.63 2.88 3.13 3.38 3.63 3.88- - - - - - - - - - - - - - - - - -

−0.13 0.12 0.37 0.62 0.87 1.12 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12

Percent range

2018


2

4

6

8

10

12

14

16

18

−0.37 −0.12 0.13 0.38 0.63 0.88 1.13 1.38 1.63 1.88 2.13 2.38 2.63 2.88 3.13 3.38 3.63 3.88- - - - - - - - - - - - - - - - - -

−0.13 0.12 0.37 0.62 0.87 1.12 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12

Percent range

Longer run


2

4

68

10

12

14

16

18

−0.37 −0.12 0.13 0.38 0.63 0.88 1.13 1.38 1.63 1.88 2.13 2.38 2.63 2.88 3.13 3.38 3.63 3.88- - - - - - - - - - - - - - - - - -

−0.13 0.12 0.37 0.62 0.87 1.12 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12

Percent range

Note: The midpoints of the target ranges for the federal funds rate and the target levels for the federal funds rate

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



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in the longer run would be equal to the Committee’s ob-jective of 2 percent, implying that their individual judg-ments regarding the appropriate longer-run level of thereal federal funds rate, in the absence of further shocksto the economy, ranged from 1 to 2 percent, the same asin September.

Participants’ views of the appropriate path for monetarypolicy were informed by their judgments about the stateof the economy and the outlook for labor markets andinflation. One important consideration for many partic-ipants was their estimate of the extent of slack remainingin the labor market, as informed by the incoming dataon various labor market indicators. Another was pro-spects for inflation to return to the Committee’s objec-tive of 2 percent; in making such assessments, partici-pants considered a range of factors, including measuresof inflation compensation and longer-run inflation ex-pectations as well as the likely persistence and size of the

effects from low energy prices and the strong dollar.Participants also emphasized the potential for interna-tional developments to continue to have important im-plications for domestic economic activity and inflationand thus for appropriate monetary policy. Several par-ticipants discussed potential interactions between policynormalization and risks to financial stability. In addition,given the continued proximity of short-term interestrates to their effective lower bound, asymmetric risksaround the outlook for employment and inflation werenoted as one reason why a gradual approach to raisingthe federal funds rate may be appropriate.

Uncertainty and Risks As in the September SEP, nearly all participants contin-ued to judge the levels of uncertainty around their pro-jections for real GDP growth and the unemploymentrate as broadly similar to the average level of the past20 years (figure 4).2 Most participants saw the risks totheir outlooks for real GDP growth and unemploymentas broadly balanced, as the number of participants who viewed the risks to economic growth as weighted to thedownside and the risks to the unemployment rate as

2 Table 2 provides estimates of the forecast uncertainty for thechange in real GDP, the unemployment rate, and total con-sumer price inflation over the period from 1995 through 2014. At the end of this summary, the box “Forecast Uncertainty”

weighted to the upside fell appreciably since September.Diminished risks to domestic economic activity fromdevelopments abroad and the strength of recent labormarket data were among the reasons noted for the moreupbeat assessment of risks.

As in the September SEP, participants generally agreedthat the levels of uncertainty associated with their infla-tion forecasts were broadly similar to the average level

over the past 20 years. The number of participants who viewed the risks to their inflation forecasts as weightedto the downside declined slightly since September, and amajority now viewed the risks to both PCE and corePCE inflation as broadly balanced. Among those whosaw risks to inflation as tilted to the downside, severalhighlighted the continued strength of the dollar andsome recent indications that inflation expectations haddeclined as contributing to their perception of thoserisks.

discusses the sources and interpretation of uncertainty in theeconomic forecasts and explains the approach used to assessthe uncertainty and risks attending the participants’ projec-tions.

Table 2. Average historical projection error rangesPercentage points

Variable 2015 2016 2017 2018

Change in real GDP1 . . . . . ±0.9 ±1.8 ±2.1 ±2.1

Unemployment rate1 . . . . . ±0.1 ±0.8 ±1.4 ±1.8

Total consumer prices2 . . . . ±0.2 ±1.0 ±1.0 ±1.0

NOTE: Error ranges shown are measured as plus or minus the root meansquared error of projections for 1995 through 2014 that were released in the

winter by various private and government forecasters. As described in thebox “Forecast Uncertainty,” under certain assumptions, there is about a70 percent probability that actual outcomes for real GDP, unemployment,and consumer prices will be in ranges implied by the average size of projec-tion errors made in the past. For more information, see David Reifschneiderand Peter Tulip (2007), “Gauging the Uncertainty of the Economic Outlookfrom Historical Forecasting Errors,” Finance and Economics Discussion Se-ries 2007-60 (Washington: Board of Governors of the Federal Reserve Sys-tem, November), available at www.federalreserve.gov/pubs/feds /2007/200760/200760abs.html; and Board of Governors of the FederalReserve System, Division of Research and Statistics (2014), “Updated His-torical Forecast Errors,” memorandum, April 9, www.federalre-serve.gov/foia/files/20140409-historical-forecast-errors.pdf.

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

2. Measure is the overall consumer price index, the price measure thathas been most widely used in government and private economic forecasts.Projection is percent change, fourth quarter of the previous year to thefourth quarter of the year indicated.


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


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Figure 4. Uncertainty and risks in economic projections

Uncertainty about GDP growth


2468

101214

1618

Lower Broadly Highersimilar

December projections

September projections

Uncertainty about the unemployment rate


2468

1012

141618


Uncertainty about PCE inflation


2468

10

12141618


Uncertainty about core PCE inflation


2468

1012141618


Risks to GDP growth


2468

101214

1618

Weighted to Broadly Weighted todownside balanced upside

December projections

September projections

Risks to the unemployment rate


2468

1012

141618


Risks to PCE inflation


2468

10

12141618


Risks to core PCE inflation


2468

1012141618


Note: For definitions of uncertainty and risks in economic projections, see the box “Forecast Uncertainty.” Defini-

tions of variables are in the general note to table 1.



24/24

Forecast Uncertainty

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

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

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

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

projections are broadly balanced, the numbersreported in table 2 would imply a probability ofabout 70 percent that actual GDP would ex-pand within a range of 2.1 to 3.9 percent in the

current year, 1.2 to 4.8 percent in the secondyear, and 0.9 to 5.1 percent in the third andfourth years. The corresponding 70 percentconfidence intervals for overall inflation wouldbe 1.8 to 2.2 percent in the current year, and1.0 to 3.0 percent in the second, third, and fourthyears.

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

the uncertainty attached to their projections ofeach variable is greater than, smaller than, orbroadly similar to typical levels of forecast un-certainty in the past, as shown in table 2. Partic-ipants also provide judgments as to whether therisks to their projections are weighted to the up-side, are weighted to the downside, or arebroadly balanced. That is, participants judge whether each variable is more likely to be aboveor below their projections of the most likely out-come. These judgments about the uncertaintyand the risks attending each participant’s projec-tions are distinct from the diversity of partici-

pants’ views about the most likely outcomes.Forecast uncertainty is concerned with the risksassociated with a particular projection ratherthan with divergences across a number of differ-ent projections.

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

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


Fed December 2015 Minutes

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