fomc minutes · April 24, 2012

FOMC Minutes

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Minutes of the Federal Open Market Committee

April 24–25, 2012

A meeting of the Federal Open Market Committee was

held in the offices of the Board of Governors of the

Federal Reserve System in Washington, D.C., on Tuesday, April 24, 2012, at 1:00 p.m., and continued on

Wednesday, April 25, 2012, at 8:30 a.m.

PRESENT:

Ben Bernanke, Chairman

William C. Dudley, Vice Chairman

Elizabeth Duke

Jeffrey M. Lacker

Dennis P. Lockhart

Sandra Pianalto

Sarah Bloom Raskin

Daniel K. Tarullo

John C. Williams

Janet L. Yellen

James Bullard, Christine Cumming, Charles L. Evans,

Esther L. George, and Eric Rosengren, Alternate

Members of the Federal Open Market Committee

Richard W. Fisher, Narayana Kocherlakota, and

Charles I. Plosser, Presidents of the Federal Reserve Banks of Dallas, Minneapolis, and Philadelphia, respectively

William B. English, Secretary and Economist

Deborah J. Danker, Deputy Secretary

Matthew M. Luecke, Assistant Secretary

David W. Skidmore, Assistant Secretary

Michelle A. Smith, Assistant Secretary

Scott G. Alvarez, General Counsel

Thomas C. Baxter, Deputy General Counsel

Steven B. Kamin, Economist

David W. Wilcox, Economist

David Altig, Thomas A. Connors, Michael P. Leahy,

William Nelson, Simon Potter, David Reifschneider, and William Wascher, Associate Economists

Brian Sack, Manager, System Open Market Account

Jon W. Faust and Andrew T. Levin, Special Advisors to

the Board, Office of Board Members, Board of

Governors

James A. Clouse, Deputy Director, Division of Monetary Affairs, Board of Governors; Matthew J.

Eichner, Deputy Director, Division of Research

and Statistics, Board of Governors

Linda Robertson, Assistant to the Board, Office of

Board Members, Board of Governors

Thomas Laubach, Senior Adviser, Division of Research

and Statistics, Board of Governors; Ellen E.

Meade, Senior Adviser, Division of Monetary Affairs, Board of Governors

Daniel M. Covitz and David E. Lebow, Associate Directors, Division of Research and Statistics, Board

of Governors

David Bowman, Deputy Associate Director, Division

of International Finance, Board of Governors;

Gretchen C. Weinbach, Deputy Associate Director, Division of Monetary Affairs, Board of Governors

Jane E. Ihrig, Assistant Director, Division of Monetary

Affairs, Board of Governors

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

Gregory L. Stefani, First Vice President, Federal Reserve Bank of Cleveland

Jeff Fuhrer, Loretta J. Mester, Harvey Rosenblum, and

Daniel G. Sullivan, Executive Vice Presidents,

Federal Reserve Banks of Boston, Philadelphia,

Dallas, and Chicago, respectively

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

Troy Davig, Ron Feldman, Mark E. Schweitzer, Christopher J. Waller, Senior Vice Presidents, Federal

Reserve Banks of Kansas City, Minneapolis, Cleveland, and St. Louis, respectively

Nellie Liang, Director, Office of Financial Stability Policy and Research, Board of Governors

John Fernald, Group Vice President, Federal Reserve

Bank of San Francisco

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Andreas L. Hornstein and Lorie K. Logan, Vice Presidents, Federal Reserve Banks of Richmond and

New York, respectively

Monetary Policy under Alternative Scenarios

A staff presentation provided an overview of an exercise that explored individual participants’ views on appropriate monetary policy responses under alternative

economic scenarios. Committee participants discussed

the potential value and drawbacks of this type of exercise for both internal deliberations and external communications about monetary policy. Possible benefits

include helping to clarify the factors that individual participants judge most important in forming their views

about the economic outlook and their assessments of

appropriate monetary policy. Two potential limitations

of this approach are that the scenario descriptions must

by necessity be incomplete, and the practical range of

scenarios that can be examined may be insufficient to

be informative, given the degree of uncertainty surrounding possible outcomes. Some participants stated

that exercises using alternative scenarios, with appropriate adjustments, could potentially be helpful for internal deliberations and, thus, should be explored further. However, no decision was made at this meeting

regarding future exercises along these lines.

Developments in Financial Markets and the Federal Reserve’s Balance Sheet

The Manager of the System Open Market Account

(SOMA) reported on developments in domestic and

foreign financial markets during the period since the

Federal Open Market Committee (FOMC) met on

March 13, 2012. He also reported on System open

market operations, including the ongoing reinvestment

into agency-guaranteed mortgage-backed securities

(MBS) of principal payments received on SOMA holdings of agency debt and agency-guaranteed MBS as well

as the operations related to the maturity extension program authorized at the September 20–21, 2011, FOMC

meeting. By unanimous vote, the Committee ratified

the Desk’s domestic transactions over the intermeeting

period. There were no intervention operations in foreign currencies for the System’s account over the intermeeting period.

With Mr. Lacker dissenting, the Committee agreed to

extend the reciprocal currency (swap) arrangements

with the Bank of Canada and the Banco de México for

an additional year beginning in mid-December 2012;

these arrangements are associated with the Federal Reserve’s participation in the North American Framework

Agreement of 1994. The arrangement with the Bank of

Canada allows for cumulative drawings of up to $2 billion equivalent, and the arrangement with the Banco de

México allows for cumulative drawings of up to $3 billion equivalent. The vote to renew the System’s participation in these swap arrangements was taken at this

meeting because a provision in the Framework Agreement requires each party to provide six months’ prior

notice of an intention to terminate its participation.

Mr. Lacker dissented because of his opposition, as indicated at the January meeting, to foreign exchange

market intervention by the Federal Reserve, which such

swap arrangements might facilitate, and because of his

opposition to direct lending to foreign central banks.

Staff Review of the Economic Situation

The information reviewed at the April 24–25 meeting

suggested that economic activity was expanding moderately. Payroll employment continued to move up,

and the unemployment rate, while still elevated, declined a little further. Overall consumer price inflation

increased somewhat, primarily reflecting higher prices

of crude oil and gasoline, but measures of long-run

inflation expectations remained stable.

The unemployment rate declined to 8.2 percent in

March. The share of workers employed part time for

economic reasons also moved down, but the rate of

long-duration unemployment remained elevated. Private nonfarm employment rose at a slower pace in

March than in the preceding three months, while total

government employment was little changed in recent

months after declining last year. Some indicators of

job openings and firms’ hiring plans improved. After

being roughly flat over most of the intermeeting period,

initial claims for unemployment insurance rose moderately toward the end of the period but remained at a

level consistent with further moderate job gains in the

coming months.

Manufacturing production expanded, on net, in February and March, while the rate of manufacturing capacity

utilization was essentially unchanged.

In recent

months, the production of motor vehicles continued to

rise appreciably in response to both higher vehicle sales

and dealers’ additions to relatively low levels of inventories; output gains in other industries also were solid

and widespread. Motor vehicle assemblies were scheduled to step up further in the second quarter, and

broader indicators of manufacturing activity, such as

the diffusion indexes of new orders from the national

and regional manufacturing surveys, were at levels con-

Minutes of the Meeting of April 24–25, 2012

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sistent with moderate increases in factory output in the

second quarter.

Real personal consumption expenditures (PCE) rose

briskly in February, even though households’ real disposable incomes declined. In March, nominal retail

sales excluding purchases of motor vehicles increased

solidly, while motor vehicle sales fell off a little from

their brisk pace in the previous month. Consumer sentiment was little changed, on balance, in March and

early April and remained subdued.

Some measures of home prices rose in January and

February, but activity in the housing market continued

to be held down by the large inventory of foreclosed

and distressed properties and by tight underwriting

standards for mortgage loans. Starts of new singlefamily homes fell back in February and March to a level

more in line with permit issuance; starts were apparently boosted by unseasonably warm weather in December

and January. Moreover, sales of new and existing

homes edged down, on net, in recent months.

Real business expenditures on equipment and software

appeared to rise modestly in the first quarter. Nominal

shipments of nondefense capital goods excluding aircraft increased in February and March after declining in

January; new orders for these capital goods increased,

on balance, in February and March, and they continued

to run above the level of shipments. The buildup of

unfilled orders in recent months, along with improvements in survey measures of capital spending plans and

some other forward-looking indicators, pointed toward

a pickup in the pace of expenditures for business

equipment. In contrast, nominal business spending for

nonresidential construction declined in January and

February. Inventories in most industries looked to be

fairly well aligned with sales in recent months, although

motor vehicle stocks were still relatively lean.

Data for federal government spending in recent

months indicated that real defense expenditures rose

modestly in the first quarter. Real state and local government purchases appeared to be about flat last quarter, as the payrolls of these governments edged up in

the first quarter and their nominal construction spending declined slightly, on net, in January and February.

The U.S. international trade deficit narrowed in February as exports rose and imports fell. The export gains

were concentrated in services. Exports of goods declined largely because of a decrease in exports of automotive products. The drop in imports reflected significant declines in imports of petroleum products, auto-

motive products, capital goods, and consumer goods.

Imports from China were especially weak, which may

in part reflect seasonal adjustment issues related to the

timing of the Chinese New Year.

Overall U.S. consumer prices, as measured by the PCE

price index, rose at a somewhat faster rate in February

than in the preceding six months. In March, prices

measured by the consumer price index increased at that

same faster pace. Consumer energy prices climbed

markedly in February and March, although survey data

indicated that gasoline prices stepped down in the first

half of April. Meanwhile, increases in consumer food

prices were relatively subdued in recent months. Consumer prices excluding food and energy rose moderately in February and March. Near-term inflation expectations from the Thomson Reuters/University of Michigan Surveys of Consumers increased in March but then

fell back in early April, while longer-term inflation expectations in the survey remained stable.

Available measures of labor compensation indicated

that nominal wage gains continued to be muted. Average hourly earnings for all employees rose modestly in

March, and their rate of increase from 12 months earlier remained low.

Recent indicators suggested that foreign economic activity improved on balance in the first quarter, but there

were important differences across economies. In the

euro area, economic indicators pointed to weakening

activity as financial stresses worsened, whereas in the

emerging market economies, recent data were consistent with continued expansion. Readings on foreign

inflation eased, although they were still relatively high

in some Latin American countries.

Staff Review of the Financial Situation

Broad financial market conditions changed little, on

balance, since the March FOMC meeting. However,

asset prices fluctuated substantially over the period,

apparently in response to the evolving views on the

U.S. and global economic outlook and changing expectations regarding the future course of monetary policy.

Yields on nominal Treasury securities moved up early

in the period, reportedly as investors read incoming

information, including the March FOMC statement

and minutes along with the results of the Comprehensive Capital Analysis and Review (CCAR), as suggesting

a somewhat stronger economic outlook than previously

expected. Over subsequent weeks, however, yields

drifted lower in response to disappointing economic

news and increased concerns about the strains in Eu-

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rope. On net, nominal Treasury yields finished the

period slightly lower and measures of the expected path

for the federal funds rate derived from overnight index

swap (OIS) rates moved down.

Conditions in unsecured short-term dollar funding

markets were stable over most of the intermeeting period despite the increase in concerns about Europe in

the latter part of the period. In secured funding markets, the overnight general collateral Treasury repurchase agreement rate declined for a time late in the period, reportedly in response to the seasonal reduction in

Treasury bill issuance in April, but ended the period

roughly unchanged.

Broad U.S. stock price indexes followed the general

pattern observed across asset markets, rising early in

the period on increased investor optimism and then

falling later on, to end the period little changed on net.

Equity prices of financial institutions increased, reportedly as investors interpreted the first-quarter earnings

of several large banking organizations and the results of

the CCAR as better than expected. Yields and spreads

on investment-grade corporate bonds were about unchanged, but yields and spreads on speculative-grade

corporate bonds increased somewhat.

Businesses continued to raise substantial amounts of

funds in credit and capital markets over recent months.

Bond issuance by financial firms picked up further in

March from the strong pace recorded in the previous

two months. Domestic nonfinancial firms’ bond issuance and growth in commercial and industrial (C&I)

loans were robust in the first quarter. Leveraged loan

issuance was brisk over this period as well, reportedly

supported by investor demand for newly issued collateralized loan obligations as well as by interest from

pension funds and other institutional investors. Gross

public equity issuance by nonfinancial firms stayed

strong in March. In contrast, financial conditions in

the commercial real estate (CRE) sector remained

strained amid weak fundamentals and tight underwriting conditions, and issuance of commercial mortgagebacked securities in the first quarter of 2012 was below

that of a year ago.

With respect to credit to households, developments

over the intermeeting period were mixed. Although

mortgage rates remained near their historical lows,

mortgage refinancing activity was subdued, and conditions in residential mortgage markets continued to be

weak. By contrast, consumer credit rose at a solid pace,

on balance, in recent months; nonrevolving credit, particularly student loans, expanded. Issuance of consum-

er asset-backed securities (ABS) edged up in recent

months, supported by auto-loan ABS issuance.

Gross issuance of long-term municipal bonds was subdued in the first quarter. The ratio of general obligation municipal bond yields to yields on comparablematurity Treasury securities was little changed over the

intermeeting period, and the average spreads on credit

default swaps for debt issued by states declined on net.

Bank credit slowed in March but expanded at a solid

pace in the first quarter as a whole. The Senior Loan

Officer Opinion Survey on Bank Lending Practices

conducted in April indicated that, in the aggregate, domestic banks eased slightly their lending standards on

core loans—C&I, real estate, and consumer loans—and

experienced somewhat stronger demand for such loans

in the first quarter of 2012. C&I loans at domestic

banks continued to expand in March, with growth concentrated at large domestic banks. Banks’ holdings of

closed-end residential mortgage loans expanded, while

home equity loans and CRE loans continued to decline.

Consumer loans on banks’ books rose modestly in

March.

M2 expanded at a moderate pace in March, reflecting

growth in liquid deposits and currency that was only

partially offset by declines in small time deposits and in

balances in retail money market funds.

Financial strains within the euro area increased over the

intermeeting period. Spreads of yields on sovereign

Italian and Spanish debt over those on comparablematurity German bonds rose, amid official warnings

that Spain would miss its fiscal target for this year and

would need to make further budget cuts, as well as renewed concerns in the market about the prospects for

Spanish banks. Although the spread of the threemonth euro London interbank offered rate over the

comparable OIS rate narrowed on balance over the

period, euro-area bank equity indexes dropped sharply,

driven by declines in the share prices of Spanish and

Italian banks. Five-year credit default swap premiums

rose for a broad range of euro-area banks, especially

Spanish banks.

Against the background of these increased stresses

within the euro area, foreign equity indexes declined

and corporate credit spreads widened. The staff’s

broad nominal index of the foreign exchange value of

the dollar was about unchanged over the intermeeting

period as the dollar appreciated against most emerging

market currencies but depreciated moderately against

the yen and sterling. Amid some volatility, yields on

Minutes of the Meeting of April 24–25, 2012

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benchmark sovereign bonds for Germany and Japan

ended the period somewhat lower. Monetary policy

abroad remained generally accommodative.

The total outstanding amount on the Federal Reserve’s

dollar liquidity swap lines declined to $32 billion, down

from $65 billion at the time of the March FOMC meeting; demand for dollars fell at the lending operations of

the European Central Bank, the Bank of Japan, and the

Swiss National Bank.

Staff Economic Outlook

In the economic forecast prepared for the April FOMC

meeting, the staff revised up slightly its near-term projection for real gross domestic product (GDP) growth,

reflecting that the unemployment rate was a little lower,

the level of overall payroll employment a bit higher,

and consumer spending noticeably stronger than the

staff had expected at the time of the previous forecast.

However, the staff’s medium-term projection for real

GDP growth in the April forecast was little changed

from the one presented in March. The staff continued

to project that real GDP would accelerate gradually

through 2014, supported by accommodative monetary

policy, further improvements in credit availability, and

rising consumer and business sentiment. Increases in

economic activity were expected to be sufficient to decrease the wide margin of slack in the labor market

slowly over the projection period, but the unemployment rate was anticipated to still be elevated at the end

of 2014.

The staff’s forecast for inflation over the projection

period was just a bit above the forecast prepared for

the March FOMC meeting, reflecting somewhat higher-than-expected data on core consumer prices and a

slightly narrower margin of economic slack than in the

March forecast. However, with the pass-through of the

recent run-up in crude oil prices into consumer energy

prices seen as nearly complete, oil prices expected to

edge lower from current levels, substantial resource

slack persisting over the projection period, and stable

long-run inflation expectations, the staff continued to

forecast that inflation would be subdued through 2014.

Participants’ Views on Current Conditions and the

Economic Outlook

In conjunction with this FOMC meeting, meeting participants—the five members of the Board of Governors and the presidents of the 12 Federal Reserve

Banks, all of whom participate in the deliberations of

the FOMC—submitted their assessments of real output growth, the unemployment rate, inflation, and the

target federal funds rate for each year from 2012

through 2014 and over the longer run, under each participant’s judgment of appropriate monetary policy.

The longer-run projections represent each participant’s

assessment of the rate to which each variable would be

expected to converge, over time, under appropriate

monetary policy and in the absence of further shocks

to the economy. These economic projections and policy assessments are described in more detail in the

Summary of Economic Projections (SEP), which is

attached as an addendum to these minutes.

In their discussion of the economic situation and outlook, meeting participants agreed that the information

received since the Committee’s previous meeting suggested that the economy continued to expand moderately. Labor market conditions improved in recent

months. So far this year, payroll employment had expanded at a faster pace than last year and the unemployment rate had declined further, although it remained elevated. Household spending and business

fixed investment continued to expand. There were

signs of improvement in the housing sector, but from a

very low level of activity. Despite some volatility in

financial markets over the intermeeting period, financial

conditions in U.S. markets continued to improve; bank

credit quality and loan demand both increased. Mainly

reflecting the increase in the prices of crude oil and

gasoline earlier this year, inflation had picked up somewhat. However, longer-term inflation expectations

remained stable.

Participants’ assessments of the economic outlook were

little changed, with the intermeeting information generally seen as suggesting that economic growth would

remain moderate over coming quarters and then pick

up gradually. Reflecting the moderate pace of economic growth, most anticipated a gradual decline in the unemployment rate. The incoming information led some

participants to become more confident about the durability of the recovery. However, others thought it was

premature to infer a stronger underlying trend from the

recent positive indicators, since those readings may

partially reflect the effects of the mild winter weather

or other temporary influences. A number of factors

continued to be seen as likely limiting the economic

expansion to a moderate pace in the near term; these

included slow growth in some foreign economies,

prospective fiscal tightening in the United States, slow

household income growth, and—notwithstanding

some recent signs of improvement—ongoing weakness

in the housing market. Participants continued to expect most of the factors restraining economic expansion to ease over time and so anticipated that the re-

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covery would gradually gain strength. The strains in

global financial markets, though generally less pronounced than last fall, continued to pose a significant

risk to the outlook, and the possibility of a sharp fiscal

tightening in the United States was also considered a

sizable risk. Most participants anticipated that inflation

would fall back from recent elevated levels as the effects of higher energy prices waned, and still expected

that inflation subsequently would run at or below the

2 percent rate that the Committee judges to be most

consistent with its statutory mandate. However, other

participants saw upside risks to the inflation outlook

given the recent pickup in inflation and the highly accommodative stance of monetary policy.

In discussing the household sector, meeting participants generally noted that consumer spending continued to expand moderately, notwithstanding high gasoline prices. The recent strengthening in the pace of

light motor vehicle sales was attributed to both pent-up

demand and the desire for increased fuel efficiency in

the wake of higher gasoline prices. Looking forward,

increases in household wealth from the rise in equity

prices, improving consumer sentiment, and a diminishing drag from household deleveraging were seen as

helping to support continued increases in household

expenditures, notwithstanding sluggish growth in real

disposable income and restrictive fiscal policies.

Recent housing-sector indicators, including sales and

starts, suggested some upward movement, but some

participants saw the improvement as likely related to

unusually warm winter weather in much of the country.

Overall, the level of activity in the sector remained depressed. House prices appeared to be stabilizing but

had not yet begun to rise in most markets. Most participants anticipated that the housing sector was likely to

recover only slowly over time, but a few were more

optimistic about the potential for a more rapid housing

recovery given reports of stronger demand in some

regions and of improved sentiment among builders, as

well as signs that recent changes to the Home Affordable Refinance Program were contributing to the refinancing of performing high loan-to-value mortgages.

Reports from business contacts indicated that activity

in the manufacturing, energy, and agriculture sectors

continued to advance in recent months. Auto production had picked up in light of strengthening demand.

Business contacts suggested that sentiment was improving, but many firms remained somewhat cautious

in their hiring and investment decisions, with most capital investment being undertaken to improve productiv-

ity or gain market share rather than to expand capacity.

Reportedly, this caution reflected in part continued

uncertainty about the strength and durability of the

economic recovery, as well as about government policies.

Participants expected that the government sector

would be a drag on economic growth over coming

quarters. They generally saw the U.S. fiscal situation

also as a risk to the economic outlook; if agreement is

not reached on a plan for the federal budget, a sharp

fiscal tightening could occur at the start of 2013. Several participants indicated that uncertainty about the

trajectory of future fiscal policy could lead businesses

to defer hiring and investment. It was noted that

agreement on a longer-term plan to address the country’s fiscal challenges would help to alleviate uncertainty

and consequent negative effects on consumer and

business sentiment.

Exports have supported U.S. growth so far this year;

however, some participants noted risks to the export

picture from economic weakness in Europe or from a

more significant slowdown in the pace of expansion in

China and emerging Asia.

Labor market conditions continued to improve, although unusually warm weather may have inflated payroll job figures somewhat earlier this year. Contacts in

some parts of the country said that highly qualified

workers were in short supply; overall, however, wage

pressures had been limited so far. The decline in labor

force participation, which has been sharpest for younger workers, has been a factor in the nearly 1 percentage

point decline in the unemployment rate since last August, a drop that was larger than would have been predicted from the historical relationship between real

GDP growth and changes in the unemployment rate.

Assessing the extent to which the changes in labor

force participation reflect cyclical factors that will be

reversed once the recovery picks up, as opposed to

changes in the trend rate of participation, was seen as

important for understanding unemployment dynamics

going forward. One participant cited research suggesting that about half of the decline in labor force participation had reflected cyclical factors, and thus, as participation picks up, unemployment may decline more

slowly in coming quarters compared with the recent

pace. Another posited that the strength in payroll job

growth in recent months may be a one-time reaction to

the sharp layoffs in 2008 and 2009 and that future job

gains may be somewhat weaker unless the pace of economic growth increases. Participants expressed a range

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of views on the extent to which the unemployment rate

was being boosted by structural factors such as mismatches between the skills of unemployed workers and

those being demanded by hiring firms. A few participants acknowledged there could be structural factors at

work, but said that in their view, slack remained high

and weak aggregate demand was the major reason that

unemployment was still elevated. Two noted the possibility that sustained high levels of long-term unemployment could result in higher structural unemployment, an outcome that might be forestalled by increased aggregate demand. A few participants noted

that current measures of labor market slack would be

overstated if structural factors accounted for a large

portion of the current high levels of unemployment.

As a result, such measures might be an unreliable guide

as to how close the economy was to maximum employment. These participants pointed out that, over

time, estimates of the potential level of output have

declined, reducing, as a consequence, estimates of the

level of economic slack. Some participants cited the

recent rise in inflation, abstracting from the direct effect of the rise in energy prices, as supportive of the

view that the level of slack was lower than some believe.

Participants judged that, in general, conditions in domestic credit markets had continued to improve since

the March FOMC meeting. Bank credit quality and

consumer and business loan demand were increasing,

although commercial and residential real estate lending

remained relatively weak. U.S. equity prices had risen

early in the intermeeting period but subsequently declined, ending the period little changed on net; investment-grade corporate bond yields were flat to down

slightly and remained at very low levels. Many U.S.

financial institutions had been taking steps to bolster

their resiliency, including increasing capital levels and

liquidity buffers, and reducing their European exposures. A few participants indicated that they were seeing signs that very low interest rates might be inducing

some investors to take on imprudent risks in the search

for higher nominal returns. In contrast to improved

conditions in domestic credit markets, investors’ concerns about the sovereign debt and banking situation in

the euro area intensified during the intermeeting period. Some participants said they thought the policy

actions taken in Europe would most likely ease stress in

financial markets, but some expressed the view that a

longer-term solution to the banking and fiscal problems

in the euro area would require substantial further adjustment in the banking and public sectors. Partici-

pants expected that global financial markets would remain focused on the evolving situation in Europe.

Readings on consumer price inflation had picked up

somewhat mainly because of increases in oil and gasoline prices earlier in the year. In recent weeks, oil prices

had begun to fall and readings from the oil futures

market suggested this may continue; non-energy commodity prices had remained relatively stable. Several

participants noted that increases in labor costs continued to be subdued. With longer-run inflation expectations well anchored and the unemployment rate elevated, most participants anticipated that after the temporary effect of the rise in oil and gasoline prices had

run its course, inflation would be at or below the 2 percent rate that the Committee judges to be most consistent with its mandate. Overall, most participants

viewed the risks to their inflation outlook as being

roughly balanced. However, some participants saw a

risk that inflation pressures could increase as the expansion continued; they pointed to the fact that inflation was currently above target and were skeptical of

models that rely on economic slack to forecast inflation

partly because of the difficulty in measuring slack, especially in real time. These participants were concerned

that maintaining the current highly accommodative

stance of monetary policy over the medium run could

erode the stability of inflation expectations and risk

higher inflation. In this regard, one participant noted

the potential risks and costs associated with additional

balance sheet actions.

In their discussion of the economic outlook and policy,

some participants noted the potential usefulness of

simple monetary policy rules, of the type the Committee regularly reviews, as guides for monetary policy decisionmaking and for external communications about

policy. These participants suggested that because such

rules give an indication of how policy should systematically respond to changes in economic conditions they

might help clarify the relationship between appropriate

monetary policy and the evolution of the economic

outlook. While acknowledging that there could be differences across participants in the type of rules they

might favor—for example, one participant expressed a

preference for rules based on growth rates rather than

output gaps because of measurement issues—a few

participants indicated that the likely degree of commonality across participants was suggestive that this might

be a promising approach to explore. However, a few

other participants were more skeptical. One thought

that, while prescriptions from rules might provide useful benchmarks, applying the rules mechanically and

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with little thought about the embedded assumptions

would be counterproductive. Another participant

questioned the value of interest rate rules when the

policy rate is constrained by the zero lower bound on

nominal interest rates and unconventional policy options are being used, but others indicated they believed

the rules could be appropriately adjusted to account for

these factors. Interest was expressed in examining the

usefulness of simple policy rules in a more normal environment, as well as in the current environment in

which the policy rate is at the zero lower bound and

large-scale asset purchases and the maturity extension

program have been implemented. Participants planned

to discuss further, at a future meeting, the potential

merits and drawbacks of using simple rules as guides to

monetary policy decisionmaking and for communications.

Committee Policy Action

Members viewed the information on U.S. economic

activity received over the intermeeting period as suggesting that the economy had been expanding moderately and generally agreed that the economic outlook

was broadly similar to that at the time of their March

meeting. Labor market conditions had improved in

recent months, and the unemployment rate had fallen,

but almost all of the members saw the unemployment

rate as still elevated relative to levels that they viewed as

consistent with the Committee’s mandate. Growth was

expected to be moderate over coming quarters and

then to pick up over time. Members expected the unemployment rate to decline gradually. Strains in global

financial markets stemming from the sovereign debt

and banking situation in Europe continued to pose significant downside risks to economic activity both here

and abroad. The possibilities that U.S. fiscal policy

would be more contractionary than anticipated and that

uncertainty about fiscal policy could lead to a deferral

of hiring and investment were other downside risks.

Recent readings indicated that inflation remained above

the Committee’s 2 percent longer-run target, primarily

reflecting the increase in oil and gasoline prices seen

earlier in the year. With longer-term inflation expectations stable, most members anticipated that the increase in inflation would prove temporary and that

subsequently inflation would run at or below the rate

that the Committee judges to be most consistent with

its mandate. However, one member thought that there

were upside risks to inflation, especially if the current

degree of highly accommodative monetary policy were

maintained much beyond this year.

In their discussion of monetary policy for the period

ahead, the Committee members reached the collective

judgment that it would be appropriate to maintain the

existing highly accommodative stance of monetary policy. In particular, the Committee agreed to keep the

target range for the federal funds rate at 0 to ¼ percent,

to continue the program of extending the average maturity of the Federal Reserve’s holdings of securities as

announced last September, and to retain the existing

policies regarding the reinvestment of principal payments from Federal Reserve holdings of securities.

With respect to the statement to be released following

the meeting, members agreed that only relatively small

modifications to the first two paragraphs were needed

to reflect the incoming economic data and the modest

changes to the economic outlook. With the economic

outlook over the medium term not greatly changed,

almost all of the members again agreed to indicate that

the Committee expects to maintain a highly accommodative stance for monetary policy and currently anticipates that economic conditions—including low rates

of resource utilization and a subdued outlook for inflation over the medium run—are likely to warrant exceptionally low levels for the federal funds rate at least

through late 2014. Most members continued to anticipate that the unemployment rate would still be well

above their estimates of its longer-run level, and inflation would be at or below the Committee’s longer-run

objective, in late 2014. Some Committee members

indicated that their policy judgment reflected in part

their perception of downside risks to growth, especially

since the Committee’s ability to respond to weakerthan-expected economic conditions would be somewhat limited by the constraint imposed on monetary

policy when the policy rate is near the zero lower

bound. The need to compensate for a substantial period during which the policy rate was constrained by

the zero bound was also cited by a few members as a

possible reason to maintain a very low level of the federal funds rate for a longer period than would otherwise be the case.

While almost all of the members agreed that the change

in the outlook over the intermeeting period was insufficient to warrant an adjustment to the Committee’s forward guidance, particularly given the uncertainty surrounding economic forecasts, it was noted that the

forward guidance is conditional on economic developments and that the date given in the statement would

be subject to revision should there be a significant

change in the economic outlook. Some members recalled that gains in employment strengthened in early

Minutes of the Meeting of April 24–25, 2012

Page 9

_____________________________________________________________________________________________

2010 and again in early 2011 only to diminish as those

years progressed; moreover, the uncertain effects of the

unusually mild winter weather were cited as making it

harder to discern the underlying trend in the economic

data. They viewed these factors as reinforcing the case

for leaving the forward guidance unchanged at this

meeting and preferred adjusting the forward guidance

only once they were more confident that the mediumterm economic outlook or risks to the outlook had

changed significantly. In contrast, another member

thought that the forward guidance should be more responsive to changes in economic developments; that

member suggested that the Committee would need to

determine the appropriate threshold for altering the

guidance.

The Committee also stated that it will regularly review

the size and composition of its securities holdings and

is prepared to adjust those holdings as appropriate to

promote a stronger economic recovery in a context of

price stability. Several members indicated that additional monetary policy accommodation could be necessary if the economic recovery lost momentum or the

downside risks to the forecast became great enough.

Committee members discussed the desirability of providing more clarity about the economic conditions that

would likely warrant maintaining the current target

range for the federal funds rate and those that would

indicate that a change in monetary policy was appropriate. Doing so might help the public better understand

the conditionality in the Committee’s forward guidance.

The Committee also discussed the relationship between

the Committee’s statement, which expresses the collective view of the Committee, and the policy projections

of individual participants, which are included in the

SEP. The Chairman asked the subcommittee on

communications to consider possible enhancements

and refinements to the SEP that might help better clarify the link between economic developments and the

Committee’s view of the appropriate stance of monetary policy.

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 System Account in accordance

with the following domestic policy directive:

“The Federal Open Market Committee seeks

monetary and financial conditions that will

foster price stability and promote sustainable

growth in output. To further its long-run

objectives, the Committee seeks conditions

in reserve markets consistent with federal

funds trading in a range from 0 to ¼ percent.

The Committee directs the Desk to continue

the maturity extension program it began in

September to purchase, by the end of June

2012, Treasury securities with remaining maturities of approximately 6 years to 30 years

with a total face value of $400 billion, and to

sell Treasury securities with remaining maturities of 3 years or less with a total face value

of $400 billion. The Committee also directs

the Desk to maintain its existing policies of

rolling over maturing Treasury securities into

new issues and of reinvesting principal payments on all agency debt and agency mortgage-backed securities in the System Open

Market Account in agency mortgage-backed

securities in order to maintain the total face

value of domestic securities at approximately

$2.6 trillion. The Committee directs the

Desk to engage in dollar roll transactions as

necessary to facilitate settlement of the Federal Reserve’s agency MBS 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 encompassed approval of the statement below to be released at 12:30 p.m.:

“Information received since the Federal

Open Market Committee met in March suggests that the economy has been expanding

moderately. Labor market conditions have

improved in recent months; the unemployment rate has declined but remains elevated.

Household spending and business fixed investment have continued to advance. Despite some signs of improvement, the housing sector remains depressed. Inflation has

picked up somewhat, mainly reflecting higher

prices of crude oil and gasoline. However,

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 economic growth to remain mod-

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_____________________________________________________________________________________________

erate over coming quarters then to pick up

gradually. Consequently, the Committee anticipates that the unemployment rate will decline gradually toward levels that it judges to

be consistent with its dual mandate. Strains

in global financial markets continue to pose

significant downside risks to the economic

outlook. The increase in oil and gasoline

prices earlier this year is expected to affect

inflation only temporarily, and the Committee anticipates that subsequently inflation will

run at or below the rate that it judges most

consistent with its dual mandate.

To support a stronger economic recovery

and to help ensure that inflation, over time,

is at the rate most consistent with its dual

mandate, the Committee expects to maintain

a highly accommodative stance for monetary

policy. In particular, the Committee decided

today to keep the target range for the federal

funds rate at 0 to ¼ percent and currently

anticipates that economic conditions—

including low rates of resource utilization

and a subdued outlook for inflation over the

medium run—are likely to warrant exceptionally low levels for the federal funds rate

at least through late 2014.

The Committee also decided to continue its

program to extend the average maturity of its

holdings of securities as announced in September. The Committee is maintaining its

existing policies 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. The Committee will regularly review the size and composition of its securi

ties holdings and is prepared to adjust those

holdings as appropriate to promote a stronger economic recovery in a context of price

stability.”

Voting for this action: Ben Bernanke, William C.

Dudley, Elizabeth Duke, Dennis P. Lockhart, Sandra

Pianalto, Sarah Bloom Raskin, Daniel K. Tarullo, John

C. Williams, and Janet L. Yellen.

Voting against this action: Jeffrey M. Lacker.

Mr. Lacker dissented because he did not believe that

economic conditions were likely to warrant exceptionally low levels of the federal funds rate through late

2014. In his view, an increase in the federal funds rate

was likely to be necessary by mid-2013 to prevent the

emergence of inflationary pressures.

It was agreed that the next meeting of the Committee

would be held on Tuesday–Wednesday, June 19–20,

2012. Because some participants had expressed a preference for the two-day format over the one-day format

for FOMC meetings, the Chairman raised the possibility of revising the FOMC meeting schedule to incorporate more two-day meetings to allow additional time for

discussion. The meeting adjourned at 11:10 a.m. on

April 25, 2012.

Notation Vote

By notation vote completed on April 2, 2012, the

Committee unanimously approved the minutes of the

FOMC meeting held on March 13, 2012.

_____________________________

William B. English

Secretary

Page 1

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Summary of Economic Projections

In conjunction with the April 24–25, 2012, Federal

Open Market Committee (FOMC) meeting, meeting

participants—the members of the Board of Governors

and the presidents of the Federal Reserve Banks, all of

whom participate in the deliberations of the FOMC—

submitted their assessments of real output growth, the

unemployment rate, inflation, and the target federal

funds rate for each year from 2012 through 2014 and

over the longer run, under each participant’s judgment

of appropriate monetary policy. These assessments

were based on information available at the time of the

meeting and participants’ individual assumptions about

factors likely to affect economic outcomes. The longer-run projections represent each participant’s assessment of the rate to which each variable would be expected to converge, over time, under appropriate monetary policy and in the absence of further shocks to the

economy. “Appropriate monetary policy” is defined as

the future path of policy that participants deem most

likely to foster outcomes for economic activity and inflation that best satisfy their individual interpretations

of the Federal Reserve’s objectives of maximum employment and stable prices.

gross domestic product (GDP) would rise this year at a

rate that slightly exceeds their estimates of its longerrun sustainable rate of increase, and then accelerate

gradually through 2014. Taking into account the decline in the unemployment rate since the time of the

previous Summary of Economic Projections (SEP) in

January, participants generally anticipated only a small

further reduction in the unemployment rate this year.

They judged that the unemployment rate would then

gradually move lower as economic growth picks up.

Even so, participants generally projected that the unemployment rate at the end of 2014 would still be well

above their estimates of the longer-run rate of unemployment that they currently view as being consistent

with the FOMC’s statutory mandate for promoting

maximum employment and price stability. Most participants judged that inflation, as measured by the annual

change in the price index for personal consumption

expenditures (PCE), would be at or below the FOMC’s

long-run inflation objective of 2 percent under the assumption of appropriate monetary policy. Core inflation was generally projected to run at rates similar to

those of overall inflation.

Overall, the assessments that FOMC participants submitted in April indicated that, with appropriate monetary policy, the pace of economic recovery over the

2012–14 period would likely continue to be moderate.

As depicted in figure 1, participants judged that real

Relative to their previous projections in January, shown

in table 1, participants revised up their projected rate of

increase in real GDP in 2012 while marking down the

pace of real growth over the next two years. With the

unemployment rate having declined in recent months

Table 1. Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents, April 2012

Percent

Variable

Central tendency1

2012

Range2

2013

2014

Longer run

2012

2013

2014

Longer run

Change in real GDP. . . . . . 2.4 to 2.9

January projection. . . . . 2.2 to 2.7

2.7 to 3.1

2.8 to 3.2

3.1 to 3.6

3.3 to 4.0

2.3 to 2.6

2.1 to 3.0

2.4 to 3.8

2.9 to 4.3

2.8 to 4.3

2.2 to 3.0

Unemployment rate. . . . . . 7.8 to 8.0

January projection. . . . . 8.2 to 8.5

7.3 to 7.7

7.4 to 8.1

6.7 to 7.4

6.7 to 7.6

5.2 to 6.0

7.8 to 8.2

7.8 to 8.6

7.0 to 8.1

7.0 to 8.2

6.3 to 7.7

4.9 to 6.0

5.0 to 6.0

PCE inflation. . . . . . . . . . . 1.9 to 2.0

January projection. . . . . 1.4 to 1.8

1.6 to 2.0

1.4 to 2.0

1.7 to 2.0

1.6 to 2.0

2.0

1.8 to 2.3

1.3 to 2.5

1.5 to 2.1

1.4 to 2.3

1.5 to 2.2

1.5 to 2.1

2.0

Core PCE inflation3. . . . . . 1.8 to 2.0

January projection. . . . . 1.5 to 1.8

1.7 to 2.0

1.5 to 2.0

1.8 to 2.0

1.6 to 2.0

1.7 to 2.0

1.3 to 2.0

1.6 to 2.1

1.4 to 2.0

1.7 to 2.2

1.4 to 2.0

NOTE: Projections of change in real gross domestic product (GDP) and projections for both measures of inflation are from the fourth quarter of the previous year to the fourth quarter of the year indicated. PCE inflation and core PCE inflation are the percentage rates of change in, respectively, the price index

for personal consumption expenditures (PCE) and the price index for PCE excluding food and energy. Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated. Each participant’s projections are based on his or her assessment of appropriate

monetary policy. Longer-run projections represent each participant’s assessment of the rate to which each variable would be expected to converge under appropriate monetary policy and in the absence of further shocks to the economy. The January projections were made in conjunction with the meeting of the

Federal Open Market Committee on January 24–25, 2012.

1. The central tendency excludes the three highest and three lowest projections for each variable in each year.

2. The range for a variable in a given year includes all participants’ projections, from lowest to highest, for that variable in that year.

3. Longer-run projections for core PCE inflation are not collected.

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Figure 1. Central tendencies and ranges of economic projections, 2012–14 and over the longer run

Percent

Change in real GDP

Central tendency of projections

Range of projections

Actual

2007

2008

2009

2010

2011

2012

2013

2014

Longer

run

Percent

Unemployment rate

2007

2008

2009

2010

2011

2012

2013

2014

Longer

run

Percent

PCE inflation

2007

2008

2009

2010

2011

2012

2013

2014

Longer

run

Percent

Core PCE inflation

2007

2008

2009

2010

2011

2012

2013

2014

NOTE: Definitions of variables are in the notes to table 1. The data for the actual values of the variables are annual.

Summary of Economic Projections of the Meeting of April 24–25, 2012

Page 3

_____________________________________________________________________________________________

by more than participants had anticipated in the previous SEP, they generally lowered their projections for

the level of the unemployment rate over coming years.

Participants’ expectations for both the longer-run rate

of increase in real GDP and the longer-run unemployment rate were little changed from January. Their projection for the rate of inflation in 2012 moved up since

January, reportedly in light of the recent increases in

the prices of crude oil and gasoline, with much smaller

increases in their projections for 2013 and 2014. The

range and central tendency of the projections of longerrun inflation remained equal to 2 percent.

As shown in figure 2, most participants judged that

highly accommodative monetary policy was likely to be

warranted over coming years to promote a stronger

economic recovery in the context of price stability. In

particular, with inflation generally projected to be subdued over the projection period and the unemployment

rate elevated, 11 participants thought that it would be

appropriate for the first increase in the target federal

funds rate to occur during 2014 or later, the same

number as in the January SEP (upper panel). However,

in contrast to their assessments in January, none of the

participants indicated that 2016 was the appropriate

year to first increase the target federal funds rate. The

remaining 6 participants judged that it would be appropriate to raise the federal funds rate in 2012 or 2013 in

order to avoid a buildup of inflationary pressures or the

creation of imbalances in the financial system. Each

participant’s individual assessment of the appropriate

year-end level of the target federal funds rate over the

projection period was substantially below his or her

projection of the longer-run level of the federal funds

rate (lower panel). In addition, 9 participants placed

the target federal funds rate at 1 percent or lower at the

end of 2014.

All participants indicated that they expected the Federal

Reserve’s balance sheet would be normalized in a manner consistent with the principles that the FOMC

agreed on at its June 2011 meeting, with the date that

participants gave for the onset of the normalization

process dependent on their expected timing of the first

increase in the target federal funds rate. One participant reported that appropriate policy would include

additional balance sheet actions in the near term to

mitigate downside risks to economic growth.

Most participants judged the level of uncertainty associated with their projections for real activity, the unemployment rate, and inflation to be unusually high relative to historical norms, although the number of partic-

ipants doing so declined somewhat since the January

SEP. About half of the participants now see the risks

to real GDP growth as weighted to the downside and

those to the unemployment rate as weighted to the upside, also down somewhat from the previous SEP. As

in January, a majority of participants viewed the risks to

their inflation projections as broadly balanced.

The Outlook for Economic Activity

Under appropriate monetary policy, participants continued to judge that the economy would expand at a

moderate pace over the projection period. The central

tendency of participants’ projections for the change in

real GDP growth in 2012 was 2.4 to 2.9 percent, a bit

higher than in January. Growth at this rate would be a

noticeable pickup from the pace of expansion in 2011

and a little above most participants’ assessments of

trend growth over the longer run. Most participants

characterized the incoming data on consumer spending—especially for motor vehicles—as being at least

somewhat stronger than had been anticipated in January, and several also pointed to some encouraging signs

in recent readings on housing activity. A few participants indicated they had seen some improvements in

household and business confidence. Participants projected that real GDP growth would pick up gradually

over the 2013–14 period. Economic growth would be

supported by monetary policy accommodation as well

as some gradual improvements in credit conditions, the

housing sector, and household balance sheets. The

central tendencies of participants’ projections of real

growth in 2013 and 2014 were 2.7 to 3.1 percent and

3.1 to 3.6 percent, respectively, down somewhat from

the central tendencies of the January projections. The

central tendency of participants’ projections for the

longer-run rate of increase of real GDP was 2.3 to

2.6 percent, unchanged from January.

Participants cited several factors that would likely continue to restrain the pace of economic expansion over

the projection period. In particular, tighter fiscal policy

seemed likely to impart a significant drag on economic

activity for a time. Moreover, uncertainty about the

fiscal environment could hold back both household

spending on durable goods and business capital expenditures. In addition, some participants noted that

the recent stronger data might reflect temporary factors. For example, the pace of consumer spending was

seen as likely to fall back some and be more in line with

that of disposable personal income, and federal outlays

were not expected to continue at their recent pace.

Moreover, a couple of participants also pointed to the

unseasonably warm winter weather as a possible con-

Page 4

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Figure 2. Overview of FOMC participants’ assessments of appropriate monetary policy, April 2012

Appropriate timing of policy firming

Number of participants

2012

2013

2014

2015

Appropriate pace of policy firming

Percent

T arget federal funds rate at year-end

2012

2013

2014

Longer run

NOTE: In the upper panel, the height of each bar denotes the number of FOMC participants who judge that, under appropriate monetary policy,

the first increase in the target federal funds rate from its current range of 0 to ¼ percent will occur in the specified calendar year. In January 2012,

the numbers of FOMC participants who judged that the first increase in the target federal funds rate would occur in 2012, 2013, 2014, 2015, and

2016 were, respectively, 3, 3, 5, 4, and 2. In the lower panel, each shaded circle indicates the value (rounded to the nearest ¼ percent) of an

individual participant’s judgment of the appropriate level of the target federal funds rate at the end of the specified calendar year or over the

longer run.

Summary of Economic Projections of the Meeting of April 24–25, 2012

Page 5

_____________________________________________________________________________________________

tributor to the more favorable tone to the recent incoming data.

Most participants marked down their projections for

the rate of unemployment over the projection period.

The unemployment rate had declined from 8.7 percent,

on average, in the final quarter of last year to 8.2 percent at the end of the first quarter of 2012, more than

most participants anticipated when they prepared their

January projections. With real GDP expected to increase at a moderate pace, the unemployment rate was

projected to decline only a bit further this year, with the

central tendency of participants’ forecasts at 7.8 to

8.0 percent at year-end. Participants projected that in

2013 and 2014, the pickup in the pace of the expansion

would be accompanied by a further gradual improvement in labor market conditions. The central tendency

of participants’ forecasts for the unemployment rate

was 7.3 to 7.7 percent at the end of 2013 and 6.7 to

7.4 percent at the end of 2014. The central tendency of

participants’ estimates of the longer-run normal rate of

unemployment that would prevail in the absence of

further shocks to the economy was 5.2 to 6.0 percent,

unchanged from January. Most participants anticipated

that five or six years would be required to close the gap

between the current unemployment rate and their estimates of the longer-run rate, although a few anticipated

that less time would be needed.

The diversity of participants’ projections for real GDP

growth and the unemployment rate over the next three

years and over the longer run is depicted in figures 3.A

and 3.B. The dispersion in these projections reflects

differences in participants’ assessments of many factors, including appropriate monetary policy and its effects on the economy, the underlying momentum in

economic activity, the likely evolution of credit and

financial market conditions, the prospective path for

U.S. fiscal policy, the effects of the European situation,

and the extent to which current dislocations in the labor market were structural versus cyclical. Given the

decline in the rate of unemployment in the first quarter,

the distribution of participants’ projections of this variable for the fourth quarter of 2012 shifted noticeably

lower, and the range of these projections became considerably narrower, relative to the January assessments.

The distributions of the unemployment rate projections

for 2013 and 2014 exhibited less pronounced shifts

toward lower rates. Participants made only minor adjustments to their projections of the rates of output

growth and unemployment over the longer run, leaving

the dispersions of their projections for both little

changed. As in January, the dispersion of estimates for

the longer-run rate of output growth is fairly narrow,

with only one participant’s estimate outside of a range

of 2.2 to 2.7 percent. By comparison, participants’

views about the level to which the unemployment rate

would converge in the longer run are more diverse,

reflecting, among other things, different views on the

outlook for labor supply and the structure of the labor

market.

The Outlook for Inflation

Participants’ views about the outlook for inflation generally firmed a little since January. In particular, a majority of participants indicated that the incoming readings on inflation, especially for the prices of crude oil

and gasoline, were a little higher than had been anticipated. Nonetheless, assuming no further shocks, most

participants judged that both headline and core inflation would remain subdued over the 2012–14 period,

running at rates at or below the FOMC’s longer-run

objective of 2 percent under the assumption of appropriate monetary policy. Participants pointed to several

factors that would help restrain inflation pressures over

the projection period, including expected declines in

commodity prices, modest increases in business costs,

and the ongoing stability of inflation expectations.

Specifically, the central tendency of participants’ projections for inflation, as measured by the PCE price index,

moved up in 2012 to 1.9 to 2.0 percent, and it edged up

in 2013 and 2014 to 1.6 to 2.0 percent and 1.7 to

2.0 percent, respectively; the central tendencies of the

forecasts for core PCE inflation were very close to

those for the total measure. Participants indicated that

it would take about five or six years, or less, for inflation to converge to its longer-run level.

Information about the diversity of participants’ views

regarding the outlook for inflation is provided in figures 3.C and 3.D. Relative to the assessments that were

compiled in January and reflecting the recent incoming

data, the projections for inflation shifted higher in 2012

and exhibited a noticeably narrower range. The dispersion of inflation projections also narrowed in 2013,

although to a lesser degree, and was little changed in

2014. In general, the dispersion of views on the outlook for inflation over the projection period

represented differences in judgments regarding a range

of issues, including the current degree of slack in resource utilization and the extent to which such slack

influences inflation and inflation expectations. In addition, participants differed in their estimates of how the

stance of monetary policy would influence inflation

expectations.

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Figure 3.A. Distribution of participants’ projections for the change in real GDP, 2012–14 and over the longer run

Number of participants

2012

April projections

January projections

2.02.1

2.22.3

2.42.5

2.62.7

2.82.9

3.03.1

3.23.3

3.43.5

3.63.7

3.83.9

4.04.1

4.24.3

Percent range

Number of participants

2013

2.02.1

2.22.3

2.42.5

2.62.7

2.82.9

3.03.1

3.23.3

3.43.5

3.63.7

3.83.9

4.04.1

4.24.3

Percent range

Number of participants

2014

2.02.1

2.22.3

2.42.5

2.62.7

2.82.9

3.03.1

3.23.3

3.43.5

3.63.7

3.83.9

4.04.1

4.24.3

Percent range

Number of participants

Longer run

2.02.1

2.22.3

2.42.5

2.62.7

2.82.9

3.03.1

Percent range

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

3.23.3

3.43.5

3.63.7

3.83.9

4.04.1

4.24.3

Summary of Economic Projections of the Meeting of April 24–25, 2012

Page 7

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Figure 3.B. Distribution of participants’ projections for the unemployment rate, 2012–14 and over the longer run

Number of participants

2012

April projections

January projections

4.84.9

5.05.1

5.25.3

5.45.5

5.65.7

5.85.9

6.06.1

6.26.3

6.46.5

6.66.7

6.86.9

7.07.1

7.27.3

7.47.5

7.67.7

7.87.9

8.08.1

8.28.3

8.48.5

8.68.7

Percent range

Number of participants

2013

4.84.9

5.05.1

5.25.3

5.45.5

5.65.7

5.85.9

6.06.1

6.26.3

6.46.5

6.66.7

6.86.9

7.07.1

7.27.3

7.47.5

7.67.7

7.87.9

8.08.1

8.28.3

8.48.5

8.68.7

Percent range

Number of participants

2014

4.84.9

5.05.1

5.25.3

5.45.5

5.65.7

5.85.9

6.06.1

6.26.3

6.46.5

6.66.7

6.86.9

7.07.1

7.27.3

7.47.5

7.67.7

7.87.9

8.08.1

8.28.3

8.48.5

8.68.7

Percent range

Number of participants

Longer run

4.84.9

5.05.1

5.25.3

5.45.5

5.65.7

5.85.9

6.06.1

6.26.3

6.46.5

6.66.7

6.86.9

Percent range

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

7.07.1

7.27.3

7.47.5

7.67.7

7.87.9

8.08.1

8.28.3

8.48.5

8.68.7

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Figure 3.C. Distribution of participants’ projections for PCE inflation, 2012–14 and over the longer run

Number of participants

2012

April projections

January projections

1.31.4

1.51.6

1.71.8

1.92.0

2.12.2

2.32.4

2.52.6

Percent range

Number of participants

2013

1.31.4

1.51.6

1.71.8

1.92.0

2.12.2

2.32.4

2.52.6

Percent range

Number of participants

2014

1.31.4

1.51.6

1.71.8

1.92.0

2.12.2

2.32.4

2.52.6

Percent range

Number of participants

Longer run

1.31.4

1.51.6

1.71.8

1.92.0

Percent range

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

2.12.2

2.32.4

2.52.6

Summary of Economic Projections of the Meeting of April 24–25, 2012

Page 9

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Figure 3.D. Distribution of participants’ projections for core PCE inflation, 2012–14

Number of participants

2012

April projections

January projections

1.31.4

1.51.6

1.71.8

1.92.0

2.12.2

Percent range

Number of participants

2013

1.31.4

1.51.6

1.71.8

1.92.0

2.12.2

Percent range

Number of participants

2014

1.31.4

1.51.6

1.71.8

Percent range

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

1.92.0

2.12.2

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Appropriate Monetary Policy

About half of the participants judged that exceptionally

low levels of the federal funds rate would remain appropriate at least until late 2014. In particular, seven

participants viewed appropriate policy firming as commencing during 2014, while four others judged that the

first increase in the target federal funds rate would not

be warranted until 2015. Nine participants anticipated

that the appropriate federal funds rate at the end of

2014 would be 1 percent or lower. Those who saw the

first increase occurring in 2015 anticipated that the federal funds rate would be either 1 percent or 1½ percent

at the end of that year. In contrast, six participants

judged that an increase in the target federal funds rate

would be appropriate in 2012 or 2013, and those participants anticipated that the target rate would need to be

increased to around 2 to 2¾ percent by the end of

2014. All participants reported levels for the appropriate target federal funds rate at the end of 2014 that

were well below their estimates of the level expected to

prevail in the longer run. Participants’ estimates of the

longer-run target federal funds rate ranged from 3½ to

4½ percent, reflecting the Committee’s inflation objective of 2 percent and participants’ individual judgments

about the longer-run equilibrium level of the real federal funds rate.

Several key factors informed participants’ individual

expectations about the appropriate setting for monetary

policy, including their assessments of the maximum

level of employment, the Committee’s longer-run inflation objective, the extent to which current conditions

had deviated from these mandate-consistent levels and

why the deviations had arisen, and their projections of

the likely time periods required to return employment

and inflation to levels they judge to be most consistent

with the Committee’s mandate. Several participants

commented that their assessments took into account

the risks and uncertainties associated with their outlooks for economic activity and inflation, and one

pointed specifically to the potential effects of a protracted period of very low interest rates on financial

stability. Participants also noted that because the appropriate stance of monetary policy depends importantly on the evolution of real activity and inflation

over time, their assessments of the appropriate future

path of the federal funds rate would change if economic conditions were to evolve in an unexpected manner.

Participants also provided qualitative information on

their views regarding the appropriate path of the Federal Reserve’s balance sheet. All participants expect

that the Committee would carry out the normalization

of the balance sheet according to the principles approved at the June 2011 FOMC meeting. That is, prior

to the first increase in the federal funds rate, the Committee would likely cease reinvesting some or all principal payments on securities in the System Open Market Account (SOMA), and it would likely begin sales of

agency securities from the SOMA sometime after the

first rate increase, aiming to eliminate the SOMA’s

holdings of agency securities over a period of three to

five years. In general, the participants linked their preferred start dates for the normalization process to their

views for the appropriate timing for the first increase in

the target federal funds rate. Two participants judged

that once begun, asset sales should proceed relatively

quickly, while one participant’s assessment of appropriate monetary policy incorporated an expansion of the

maturity extension program in the near term. In addition, some participants indicated that they remained

open to considering additional policy-related adjustments to the balance sheet if the economic outlook

deteriorated.

The distribution of participants’ judgments regarding

the appropriate level of the target federal funds rate at

the end of each calendar year from 2012 to 2014 and

over the longer run is presented in figure 3.E. Participants’ views on the appropriate level of the federal

funds rate at the end of 2014 continued to be relatively

widely dispersed, with seven participants seeing the

appropriate level of the federal funds rate at that time

as most likely to be 50 basis points or less and seven

seeing the appropriate rate as 2 percent or higher. Relative to the other participants, the group of participants

who judged that a longer period of exceptionally low

levels of the federal funds rate would be appropriate

tended to include those who anticipated a somewhat

more gradual increase in the pace of the economic expansion and a slower decline in the unemployment rate

over the projection period. Some of these participants

also mentioned their assessment that a longer period of

exceptionally low federal funds rates is appropriate

when the federal funds rate has previously been constrained by its effective lower bound. In contrast, the

six participants who judged that policy firming should

begin in 2012 or 2013 included some who projected a

somewhat faster pickup in economic activity over the

near term. Participants seeing an earlier increase in the

target federal funds rate tended to indicate that the

Committee would need to begin removing policy accommodation relatively soon in order to keep inflation

at mandate-consistent levels and to limit the risk of

undermining the Federal Reserve’s credibility and caus-

Summary of Economic Projections of the Meeting of April 24–25, 2012

Page 11

_____________________________________________________________________________________________

Figure 3.E. Distribution of participants’ projections for the target federal funds rate, 2012–14 and over the longer run

Number of participants

2012

April projections

January projections

0.000.37

0.380.62

0.630.87

0.881.12

1.131.37

1.381.62

1.631.87

1.882.12

2.132.37

2.382.62

2.632.87

2.883.12

3.133.37

3.383.62

3.633.87

3.884.12

4.134.37

4.384.62

Percent range

Number of participants

2013

0.000.37

0.380.62

0.630.87

0.881.12

1.131.37

1.381.62

1.631.87

1.882.12

2.132.37

2.382.62

2.632.87

2.883.12

3.133.37

3.383.62

3.633.87

3.884.12

4.134.37

4.384.62

Percent range

Number of participants

2014

0.000.37

0.380.62

0.630.87

0.881.12

1.131.37

1.381.62

1.631.87

1.882.12

2.132.37

2.382.62

2.632.87

2.883.12

3.133.37

3.383.62

3.633.87

3.884.12

4.134.37

4.384.62

Percent range

Number of participants

Longer run

0.000.37

0.380.62

0.630.87

0.881.12

1.131.37

1.381.62

1.631.87

1.882.12

2.132.37

2.382.62

2.632.87

2.883.12

3.133.37

3.383.62

3.633.87

3.884.12

4.134.37

Percent range

NOTE: The target federal funds rate is measured as the level of the target rate at the end of the calendar year or in the longer run.

4.384.62

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Federal Open Market Committee

_____________________________________________________________________________________________

ing a rise in inflation expectations. One of these participants also stressed the risk of distortions in the financial system from an extended period of exceptionally

low interest rates.

Table 2. Average historical projection error ranges

Variable

2012

2013

2014

Change in real GDP1 . . . . . . . .

±1.1

±1.6

±1.7

Uncertainty and Risks

Most participants judged that their projections for real

GDP growth and the unemployment rate were subject

to a higher level of uncertainty than was the norm during the previous 20 years (figure 4).1 However, the

number reporting elevated uncertainty moved down

somewhat relative to the January SEP. Many participants also judged the levels of uncertainty associated

with their inflation forecasts to be higher than the

longer-run historical norm, but such an assessment

continued to be somewhat less prevalent among participants than was the case for uncertainty about real activity. Several factors were said to be contributing to

the elevated level of uncertainty about the economic

outlook, including ongoing developments regarding the

fiscal and financial situation in Europe. Many participants also cited considerable uncertainty about U.S.

fiscal policy over coming quarters and its potential implications for economic activity. More broadly, participants again noted difficulties in projecting the path of

the economic recovery because deep recessions

brought on by severe financial crises differed importantly from most historical experience. In that regard,

participants continued to be uncertain about the pace at

which credit conditions would improve and about the

prospects for recovery in the housing sector. In addition, participants generally saw the longer-term outlook

for fiscal and regulatory policies as still highly uncertain. Some participants also expressed uncertainty

about the extent to which the labor market was undergoing structural changes. Among the sources of uncertainty about the outlook for inflation were the difficulties in assessing the current and prospective margins of

slack in resource markets and the effect of such slack

on prices. Participants also cited uncertainty about the

future path of global commodity prices, which were

seen as depending on idiosyncratic supply and demand

factors as well as on global growth.

Unemployment rate1 . . . . . . . .

±0.5

±1.2

±1.7

Total consumer prices2 . . . . . .

±0.8

±1.0

Table 2 provides estimates of the forecast uncertainty for

the change in real GDP, the unemployment rate, and total

consumer price inflation over the period from 1992 to 2011.

At the end of this summary, the box “Forecast Uncertainty”

discusses the sources and interpretation of uncertainty in the

economic forecasts and explains the approach used to assess

the uncertainty and risks attending the participants’ projections.

Percentage points

NOTE: Error ranges shown are measured as plus or minus the root

mean squared error of projections for 1992 through 2011 that were

released in the spring by various private and government forecasters. As

described in the box “Forecast Uncertainty,” under certain assumptions,

there is about a 70 percent probability that actual outcomes for real

GDP, unemployment, and consumer prices will be in ranges implied by

the average size of projection errors made in the past. Further information is in David Reifschneider and Peter Tulip (2007), “Gauging the

Uncertainty of the Economic Outlook from Historical Forecasting

Errors,” Finance and Economics Discussion Series 2007-60 (Washington: Board of Governors of the Federal Reserve System, November).

1. For definitions, refer to general note in table 1.

2. Measure is the overall consumer price index, the price measure

that has been most widely used in government and private economic

forecasts. Projection is percent change, fourth quarter of the previous

year to the fourth quarter of the year indicated.

Turning to the balance of risks that participants attached to their economic projections, about half reported that they judged the risks to their forecasts of

both real GDP growth and the unemployment rate as

broadly balanced, a few more than was the case in January. Nearly all of the remaining participants viewed

the risks to real GDP growth as weighted to the downside and the risks to the unemployment rate as skewed

to the upside. Participants identified several downside

risks to the projected pace of economic expansion, including the fiscal and financial strains in the euro area

and the possibility of an abrupt fiscal consolidation in

the United States. In addition, some of the factors that

had restrained the U.S. recovery in recent years could

persist for longer than currently expected and thus

weigh on economic activity to a greater extent going

forward than participants had assumed in their baseline

forecasts. In particular, some participants mentioned

the downside risks to consumer spending in light of

meager gains in disposable personal income and

households’ still-weak balance sheets. Others cited the

possible damping effects of high levels of uncertainty

regarding regulatory policies on businesses’ willingness

to invest and hire. A few participants noted the risk of

another disruption in global oil markets or greater tensions in the Middle East that could not only boost inflation but also reduce real incomes, consumer confidence, and spending. Some of the participants who

judged the risks to be broadly balanced recognized

some of these downside risks to the outlook, but they

saw them as about counterbalanced by the chance that

the recent signs of improvement in labor markets and

Summary of Economic Projections of the Meeting of April 24–25, 2012

Page 13

_____________________________________________________________________________________________

Figure 4. Uncertainty and risks in economic projections

Number of participants

Uncertainty about GDP growth

April projections

January projections

Lower

Broadly

similar

Number of participants

Risks to GDP growth

Weighted to

downside

Broadly

balanced

Number of participants

Lower

Broadly

similar

Number of participants

Risks to the unemployment rate

Broadly

similar

Weighted to

downside

Broadly

balanced

Number of participants

Risks to PCE inflation

Broadly

similar

Higher

Weighted to

downside

Broadly

balanced

Number of participants

Lower

Weighted to

upside

Higher

Uncertainty about core PCE inflation

Number of participants

Lower

Weighted to

upside

Higher

Uncertainty about PCE inflation

Higher

Uncertainty about the unemployment rate

April projections

January projections

Weighted to

upside

Number of participants

Risks to core PCE inflation

Weighted to

downside

Broadly

balanced

Weighted to

upside

NOTE: For definitions of uncertainty and risks in economic projections, see the box “Forecast Uncertainty.” Definitions of variables are in the general

note to table 1.

Page 14

Federal Open Market Committee

_____________________________________________________________________________________________

consumer spending could signal the emergence of a

more vigorous recovery.

Most participants judged the risks to their projections

of inflation as broadly balanced, including a few more

than held that view in January. However, a few saw the

risks as tilted to the upside, pointing to the possibility

of disruptions in global oil and commodity markets or

to effects from the current stance of monetary policy.

Two of these participants indicated that the current

highly accommodative stance of monetary policy and

the substantial liquidity currently in the financial system

risked a pickup in inflation to a level above the Committee’s longer-run objective, or cited the risk that uncertainty about the Committee’s ability to effectively

remove policy accommodation when appropriate could

lead to a rise in inflation expectations.

Summary of Economic Projections of the Meeting of April 24–25, 2012

Page 15

_____________________________________________________________________________________________

Forecast Uncertainty

The economic projections provided by

the members of the Board of Governors and

the presidents of the Federal Reserve Banks

inform discussions of monetary policy among

policymakers and can aid public understanding of the basis for policy actions. Considerable uncertainty attends these projections,

however. The economic and statistical models

and relationships used to help produce economic forecasts are necessarily imperfect descriptions of the real world, and the future

path of the economy can be affected by myriad unforeseen developments and events.

Thus, in setting the stance of monetary policy,

participants consider not only what appears to

be the most likely economic outcome as embodied in their projections, but also the range

of alternative possibilities, the likelihood of

their occurring, and the potential costs to the

economy should they occur.

Table 2 summarizes the average historical

accuracy of a range of forecasts, including

those reported in past Monetary Policy Reports

and those prepared by the Federal Reserve

Board’s staff in advance of meetings of the

Federal Open Market Committee. The projection error ranges shown in the table illustrate the considerable uncertainty associated

with economic forecasts. For example, suppose a participant projects that real gross domestic product (GDP) and total consumer

prices will rise steadily at annual rates of, respectively, 3 percent and 2 percent. If the

uncertainty attending those projections is similar to that experienced in the past and the risks

around the projections are broadly balanced,

the numbers reported in table 2 would imply a

probability of about 70 percent that actual

GDP would expand within a range of 1.9 to

4.1 percent in the current year, 1.4 to 4.6 percent in the second year, and 1.3 to 4.7 percent

in the third year. The corresponding 70 percent

confidence intervals for overall inflation would

be 1.2 to 2.8 percent in the current year and 1.0

to 3.0 percent in the second and third years.

Because current conditions may differ

from those that prevailed, on average, over history, participants provide judgments as to

whether the uncertainty attached to their projections of each variable is greater than, smaller

than, or broadly similar to typical levels of

forecast uncertainty in the past, as shown in

table 2. Participants also provide judgments as

to whether the risks to their projections are

weighted to the upside, are weighted to the

downside, or are broadly balanced. That is,

participants judge whether each variable is

more likely to be above or below their projections of the most likely outcome. These judgments about the uncertainty and the risks attending each participant’s projections are distinct from the diversity of participants’ views

about the most likely outcomes. Forecast uncertainty is concerned with the risks associated

with a particular projection rather than with

divergences across a number of different projections.

As with real activity and inflation, the outlook for the future path of the federal funds

rate is subject to considerable uncertainty. This

uncertainty arises primarily because each participant’s assessment of the appropriate stance of

monetary policy depends importantly on the

evolution of real activity and inflation over

time. If economic conditions evolve in an unexpected manner, then assessments of the appropriate setting of the federal funds rate

would change from that point forward.

Cite this document

APA

Federal Reserve (2012, April 24). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_20120425

BibTeX

@misc{wtfs_fomc_minutes_20120425,
  author = {Federal Reserve},
  title = {FOMC Minutes},
  year = {2012},
  month = {Apr},
  howpublished = {Fomc Minutes, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/fomc_minutes_20120425},
  note = {Retrieved via When the Fed Speaks corpus}
}