FOMC Minutes
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Minutes of the Federal Open Market Committee
September 12–13, 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
Wednesday, September 12, 2012, at 10:30 a.m. and
continued on Thursday, September 13, 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
Jerome H. Powell
Sarah Bloom Raskin
Jeremy C. Stein
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, David Reifschneider, Glenn D.
Rudebusch, William Wascher, and John A. Weinberg, Associate Economists
Simon Potter, Manager, System Open Market Account
Nellie Liang, Director, Office of Financial Stability Policy and Research, Board of Governors
Jon W. Faust, Special Adviser to the Board, Office of
Board Members, Board of Governors
James A. Clouse, Deputy Director, Division of Monetary Affairs, Board of Governors; Maryann F.
Hunter, Deputy Director, Division of Banking Supervision and Regulation, Board of Governors
Andreas Lehnert,¹ Deputy Director, Office of Financial
Stability Policy and Research, Board of Governors
Linda Robertson, Assistant to the Board, Office of
Board Members, Board of Governors
Seth B. Carpenter, Senior Associate Director, Division
of Monetary Affairs, Board of Governors
Thomas Laubach, Senior Adviser, Division of Research
and Statistics, Board of Governors; Ellen E. Meade
and Joyce K. Zickler, Senior Advisers, Division of
Monetary Affairs, Board of Governors
Brian J. Gross,² Special Assistant to the Board, Office
of Board Members, Board of Governors
Eric M. Engen, Michael G. Palumbo, and Wayne
Passmore, Associate Directors, Division of Research and Statistics, Board of Governors
Fabio M. Natalucci, Deputy Associate Director, Division of Monetary Affairs, Board of Governors
Edward Nelson, Section Chief, Division of Monetary
Affairs, Board of Governors
Jeremy B. Rudd, Senior Economist, Division of Research and Statistics, Board of Governors
Kelly J. Dubbert, First Vice President, Federal Reserve
Bank of Kansas City
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¹ Attended Wednesday’s session only.
² Attended Thursday’s session only.
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Loretta J. Mester, Harvey Rosenblum, and Daniel G.
Sullivan, Executive Vice Presidents, Federal Reserve Banks of Philadelphia, Dallas, and Chicago,
respectively
Cletus C. Coughlin, Troy Davig, Mark E. Schweitzer,
and Kei-Mu Yi, Senior Vice Presidents, Federal
Reserve Banks of St. Louis, Kansas City, Cleveland, and Minneapolis, respectively
Lorie K. Logan, Jonathan P. McCarthy, Giovanni Olivei, and Nathaniel Wuerffel,³ Vice Presidents, Federal Reserve Banks of New York, New York, Boston, and New York, respectively
Michelle Ezer,4 Markets Officer, Federal Reserve Bank
of New York
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³ Attended after the discussion on potential effects of a largescale asset purchase program.
4 Attended the discussion on potential effects of a large-scale
asset purchase program.
Potential Effects of a Large-Scale Asset Purchase
Program
The staff presented an analysis of various aspects of
possible large-scale asset purchase programs, including
a comparison of flow-based purchase programs to programs of fixed size. The presentation reviewed the
modeling approach used by the staff in estimating the
financial and macroeconomic effects of such purchases.
While significant uncertainty surrounds such estimates,
the presentation indicated that asset purchases could be
effective in fostering more rapid progress toward the
Committee’s objectives. The staff noted that, for a
flow-based program, the public’s understanding of the
conditions under which the Committee would end purchases would shape expectations of the magnitude of
the Federal Reserve’s holdings of longer-term securities, and thus also influence the financial and economic
effects of such a program. The staff also discussed the
potential implications of additional asset purchases for
the evolution of the Federal Reserve’s balance sheet
and income. The presentation noted that significant
additional asset purchases should not adversely affect
the ability of the Committee to tighten the stance of
policy when doing so becomes appropriate. In their
discussion of the staff presentation, a few participants
noted the uncertainty surrounding estimates of the effects of large-scale asset purchases or the need for addi-
tional work regarding the implications of such purchases for the normalization of policy.
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
July 31–August 1, 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 June 19–20, 2012,
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.
Staff Review of the Economic Situation
The information reviewed at the September 12–13
meeting suggested that economic activity continued to
increase at a moderate pace in recent months. Employment rose slowly, and the unemployment rate was
still high. Consumer price inflation stayed subdued,
while measures of long-run inflation expectations remained stable.
Private nonfarm employment increased in July and August at only a slightly faster pace than in the second
quarter, and the rate of decline in government employment eased somewhat. The unemployment rate
was 8.1 percent in August, just a bit lower than its average during the first half of the year, and the labor force
participation rate edged down further. The share of
workers employed part time for economic reasons remained large, and the rate of long-duration unemployment continued to be high. Indicators of job openings
and firms’ hiring plans were little changed, on balance,
and initial claims for unemployment insurance were
essentially flat over the intermeeting period.
Manufacturing production increased at a faster pace in
July than in the second quarter, and the rate of manufacturing capacity utilization rose slightly. However,
automakers’ schedules indicated that the pace of motor
vehicle assemblies would be somewhat lower in the
coming months than it was in July, and broader indicators of manufacturing activity, such as the diffusion
indexes of new orders from the national and regional
manufacturing surveys, generally remained quite muted
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in recent months at levels consistent with only meager
gains in factory output in the near term.
Following a couple of months when real personal consumption expenditures (PCE) were roughly flat, spending increased in July, and the gains were fairly widespread across categories of consumer goods and services. Incoming data on factors that tend to support
household spending were somewhat mixed. Real disposable incomes increased solidly in July, boosted in
part by lower energy prices. The continued rise in
house values through July, and the increase in equity
prices during the intermeeting period, suggested that
households’ net worth may have improved a little in
recent months. However, consumer sentiment remained more downbeat in August than earlier in the
year.
Housing market conditions continued to improve, but
construction activity was still at a low level, reflecting
the restraint imposed by the substantial inventory of
foreclosed and distressed properties and by tight credit
standards for mortgage loans. Starts of new singlefamily homes declined in July, but permits increased,
which pointed to further gains in single-family construction in the coming months. Both starts and permits for new multifamily units rose in July. Home
prices increased for the sixth consecutive month in
July, and sales of both new and existing homes also
rose.
Real business expenditures on equipment and software
appeared to be decelerating. Both nominal shipments
and new orders for nondefense capital goods excluding
aircraft declined in July, and the backlog of unfilled
orders decreased. Other forward-looking indicators,
such as downbeat readings from surveys of business
conditions and capital spending plans, also pointed toward only muted increases in real expenditures for
business equipment in the near term. Nominal business spending for new nonresidential construction declined in July after only edging up in the second quarter. Inventories in most industries looked to be roughly aligned with sales in recent months.
Real federal government purchases appeared to decrease further, as data for nominal federal spending in
July pointed to continued declines in real defense expenditures. Real state and local government purchases
also appeared to still be trending down. State and local
government payrolls contracted in July and August,
although at a somewhat slower rate than in the second
quarter, and nominal construction spending by these
governments decreased slightly in July.
The U.S. international trade deficit was about unchanged in July after narrowing significantly in June.
Exports declined in July, as decreases in the exports of
industrial supplies, automotive products, and consumer
goods were only partially offset by greater exports of
agricultural products. Imports also declined in July,
reflecting lower imports of capital goods and petroleum
products and somewhat higher imports of automotive
products. The trade data for July pointed toward real
net exports having a roughly neutral effect on the
growth of U.S. real gross domestic product (GDP) in
the third quarter after they made a positive contribution to the increase in real GDP in the second quarter.
Overall U.S. consumer prices, as measured by the PCE
price index, were flat in July. Consumer food prices
were essentially unchanged, but the substantial increases in spot and futures prices of farm commodities in
recent months, reflecting the effects of the drought in
the Midwest, pointed toward some temporary upward
pressures on retail food prices later this year. Consumer energy prices declined slightly in July, but survey data
indicated that retail gasoline prices rose in August.
Consumer prices excluding food and energy also were
flat in July. Near-term inflation expectations from the
Thomson Reuters/University of Michigan Surveys of
Consumers increased somewhat in August, while longer-term inflation expectations in the survey edged up
but remained within the narrow range that they have
occupied for many years. Long-run inflation expectations from the Federal Reserve Bank of Philadelphia
Survey of Professional Forecasters continued to be
stable in the third quarter.
Measures of labor compensation indicated that increases in nominal wages remained modest. The rise in
compensation per hour in the nonfarm business sector
was muted over the year ending in the second quarter,
and with small gains in productivity, unit labor costs
rose only slightly. The employment cost index increased a little more slowly than the measure of compensation per hour over the same period. More recently, the gains in average hourly earnings for all employees in July and August were small.
Overall foreign economic growth appeared to be subdued in the third quarter after slowing in the second
quarter. In the euro area, policy developments contributed to an improvement in financial conditions; recent
indicators pointed to further decreases in production,
however, and both business and consumer confidence
continued to decline. Indicators of activity in the
emerging market economies generally weakened. In
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China, export growth slowed, while retail sales and investment spending changed little. The rate of economic growth rose in Brazil but was still sluggish, and increases in economic activity in Mexico were below the
faster pace seen earlier in the year. Consistent with the
slowing in foreign economic growth, readings on foreign inflation continued to moderate.
Staff Review of the Financial Situation
Sentiment in financial markets improved somewhat
since the time of the August FOMC meeting. Investors’ concerns about the situation in Europe seemed to
ease somewhat, and market participants also appeared
to have increased their expectations of additional monetary policy accommodation.
On balance, the nominal Treasury yield curve steepened over the intermeeting period, with yields on longer-dated Treasury securities rising notably. Following
the August FOMC statement, Treasury yields moved
up, reportedly in part because investors had factored in
some probability that the anticipated liftoff date for the
federal funds rate in the forward-guidance language
would be moved back at that meeting. Treasury yields
subsequently rose further as concerns about the situation in the euro area moderated. Later in the period,
Treasury yields retraced some of their earlier gains as
market participants’ expectations of additional policy
action increased following the release of the minutes of
the August FOMC meeting, the Chairman’s speech at
the economic symposium in Jackson Hole, and the
weaker-than-expected August employment report. On
net, the expected path of the federal funds rate derived
from overnight index swap rates was little changed.
Indicators of inflation expectations derived from nominal and inflation-protected Treasury securities edged
up over the period but stayed in the ranges observed
over recent quarters.
Conditions in unsecured short-term dollar funding
markets remained stable over the intermeeting period.
In secured funding markets, conditions were also little
changed.
In the September Senior Credit Officer Opinion Survey
on Dealer Financing Terms, respondents reported no
significant changes in credit terms for important classes
of counterparties over the past three months, although
a few noted a slight easing in terms for some clients.
The use of leverage by hedge funds was reported to
have remained basically unchanged. However, respondents noted greater demand for funding of agency and
non-agency residential MBS.
Broad price indexes for U.S. equities rose moderately,
on net, over the intermeeting period, prompted by generally better-than-expected readings on economic activity released early in the period, somewhat reduced concerns about the situation in Europe, and some additional anticipation of monetary policy easing later in the
period. Option-implied volatility on the S&P 500 index
fell in early August to levels not seen since the middle
of 2007; it subsequently partially retraced. Equity prices for large domestic banks rose about in line with the
broad equity price indexes, and credit default swap
(CDS) spreads for the largest bank holding companies
continued to move down.
Yields on investment-grade corporate bonds were little
changed at near-record low levels over the intermeeting
period, while yields on speculative-grade corporate
bonds edged down. The spread of yields on corporate
bonds over those on comparable-maturity Treasury
securities narrowed. Net debt issuance by nonfinancial
firms continued to be strong over the period. Investment- and speculative-grade bond issuance increased in
August from an already robust pace in preceding
months, and commercial and industrial (C&I) loans
rose further. In the syndicated leveraged loan market,
gross issuance of institutional loans continued to be
solid in July and August. Issuance of collateralized loan
obligations remained on pace to post its strongest year
since 2007. The rate of gross public equity issuance by
nonfinancial firms increased slightly in August but was
still at a subdued level.
Financial conditions in the commercial real estate
(CRE) market were still somewhat strained against a
backdrop of weak fundamentals and tight underwriting
standards. Nevertheless, issuance of commercial mortgage-backed securities continued at a solid pace over
the intermeeting period.
Mortgage rates remained at very low levels over the
intermeeting period. Refinancing activity increased but
was still restrained by tight underwriting conditions,
capacity constraints at mortgage originators, and low
levels of home equity. Nonrevolving consumer credit
continued to expand briskly in June, largely due to robust growth in student loans originated by the federal
government, while revolving credit remained subdued.
Delinquency rates for consumer credit were still low,
mostly reflecting a shift in lending toward highercredit-quality borrowers.
Gross issuance of long-term municipal bonds picked
up in August from the subdued pace in July, but net
issuance continued to decline. CDS spreads for debt
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issued by state governments moved lower over the intermeeting period, and the ratio of yields on long-term
general obligation municipal bonds to yields on comparable-maturity Treasury securities decreased, on balance.
asset classes did not appear stretched, or supported by
excessive leverage. The staff also did not find evidence
that excessive risk-taking was widespread, although
such behavior had appeared in a few smaller and less
liquid markets.
Bank credit continued to expand at a moderate pace
over the intermeeting period, as growth in C&I loans
remained brisk while CRE and home equity loans both
trended down further. The August Survey of Terms of
Business Lending indicated that overall interest-rate
spreads on C&I loans were little changed; spreads on
loans drawn on recently established commitments narrowed materially, although they remained wide.
Staff Economic Outlook
In the economic projection prepared by the staff for
the September FOMC meeting, the forecast for real
GDP growth in the near term was broadly similar, on
balance, to the previous projection. The near-term
forecast incorporated a larger negative effect of the
drought on farm output in the second half of this year
than the staff previously anticipated, but this effect was
mostly offset by the staff’s expectation of a smaller
drag from net exports. The staff’s medium-term projection for real GDP growth, which was conditioned
on the assumption of no changes in monetary policy,
was revised up a little, mostly reflecting a slight improvement in the outlook for the European situation
and a somewhat higher projected path for equity prices.
Nevertheless, with fiscal policy assumed to be tighter
next year than this year, the staff expected that increases in real GDP would not materially exceed the growth
of potential output in 2013. In 2014, economic activity
was projected to accelerate gradually, supported by an
easing in fiscal policy restraint, increases in consumer
and business confidence, further improvements in financial conditions and credit availability, and accommodative monetary policy. The expansion in economic
activity was expected to narrow the significant margin
of slack in labor and product markets only slowly over
the projection period, and the unemployment rate was
anticipated to still be elevated at the end of 2014.
M2 growth was rapid in July, likely reflecting investors’
heightened demand for safe and liquid assets amid concerns about the situation in Europe, but it slowed to a
moderate pace in August as those concerns eased
somewhat. The monetary base rose in July and August
as reserve balances and currency expanded.
Sentiment improved in foreign financial markets as the
European Central Bank (ECB) outlined a plan to make
additional sovereign bond purchases in conjunction
with the European Financial Stability Facility and the
European Stability Mechanism. Spreads of shorterterm yields on peripheral euro-area sovereign bonds
over those on comparable-maturity German bunds
declined substantially over the period. The staff’s
broad nominal index of the foreign exchange value of
the dollar declined and benchmark sovereign yields in
the major advanced foreign economies increased as
safe-haven demands eased with the lessening of concerns about the European situation. Most global
benchmark indexes for equity prices moved up, and the
equity prices of European banks rose sharply. Funding
conditions for euro-area banks improved, although
these conditions remained fragile, and draws on the
Federal Reserve’s liquidity swap facility with the ECB
fell.
The staff also reported on potential risks to financial
stability, including those owing to the developments in
Europe and to the current environment of low interest
rates. Although the support for economic activity provided by low interest rates enhances financial stability,
low interest rates also could eventually contribute to
excessive borrowing or risk-taking and possibly leave
some aspects of the financial system vulnerable to a
future rise in interest rates. The staff surveyed a wide
range of asset markets and financial institutions for
signs of excessive valuations, leverage, or risk-taking
that could pose systemic risks. Valuations for broad
The staff’s near-term forecast for inflation was revised
up from the projection prepared for the August FOMC
meeting, reflecting increases in consumer energy prices
that were greater than anticipated. However, the staff’s
projection for inflation over the medium term was little
changed. With crude oil prices expected to gradually
decline from their current levels, the boost to retail
food prices from the drought anticipated to be only
temporary and comparatively small, long-run inflation
expectations assumed to remain stable, and substantial
resource slack persisting over the projection period, the
staff continued to forecast that inflation would be subdued through 2014.
The staff viewed the uncertainty around the forecast
for economic activity as elevated and the risks skewed
to the downside, largely reflecting concerns about the
situation in Europe and the possibility of a more severe
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tightening in U.S. fiscal policy than anticipated. Although the staff saw the outlook for inflation as uncertain, the risks were viewed as balanced and not unusually high.
Participants’ Views on Current Conditions and the
Economic Outlook
In conjunction with this FOMC meeting, meeting participants—the 7 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
2015 and over the longer run, under each participants’
judgment of appropriate monetary policy. The longerrun 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 the Summary of Economic Projections,
which is attached as an addendum to these minutes.
In their discussion of the economic situation and outlook, meeting participants regarded the information
received during the intermeeting period as indicating
that economic activity had continued to expand at a
moderate pace in recent months. However, recent
gains in employment were small and the unemployment rate remained high. Although consumer spending had continued to advance, growth in business fixed
investment appeared to have slowed. The housing sector showed some further signs of improvement, albeit
from a depressed level. Consumer price inflation had
been subdued despite recent increases in the prices of
some key commodities, and longer-term inflation expectations had remained stable.
Regarding the economic outlook, participants generally
agreed that the pace of the economic recovery would
likely remain moderate over coming quarters but would
pick up over the 2013–15 period. In the near term, the
drought in the Midwest was expected to weigh on economic growth. Moreover, participants observed that
the pace of economic recovery would likely continue to
be held down for some time by persistent headwinds,
including continued weakness in the housing market,
ongoing household sector deleveraging, still-tight credit
conditions for some households and businesses, and
fiscal consolidation at all levels of government. Many
participants also noted that a high level of uncertainty
regarding the European fiscal and banking crisis and
the outlook for U.S. fiscal and regulatory policies was
weighing on confidence, thereby restraining household
and business spending. However, others questioned
the role of uncertainty about policy as a factor constraining aggregate demand. In addition, participants
still saw significant downside risks to the outlook for
economic growth. Prominent among these risks were a
possible intensification of strains in the euro zone, with
potential spillovers to U.S. financial markets and institutions and thus to the broader U.S. economy; a largerthan-expected U.S. fiscal tightening; and the possibility
of a further slowdown in global economic growth. A
few participants, however, mentioned the possibility
that economic growth could be more rapid than currently anticipated, particularly if major sources of uncertainty were resolved favorably or if faster-thanexpected advances in the housing sector led to improvements in household balance sheets, increased
confidence, and easier credit conditions. Participants’
forecasts for economic activity, which in most cases
were conditioned on an assumption of additional, nearterm monetary policy accommodation, were also associated with an outlook for the unemployment rate to
remain close to recent levels through 2012 and then to
decline gradually toward levels judged to be consistent
with the Committee’s mandate.
In the household sector, incoming data on retail sales
were somewhat stronger than expected. Participants
noted, however, that households were still in the
process of deleveraging, confidence was low, and consumers appeared to remain particularly pessimistic
about the prospects for the future, raising doubts that
the somewhat stronger pace of spending would persist.
Although the level of activity in the housing sector remained low, the somewhat faster pace of home sales
and construction provided some encouraging signs of
improvement. A number of participants also observed
that house prices were rising. It was noted that such
increases, coupled with historically low mortgage rates,
could lead to a stronger upturn in housing activity, although constraints on the capacity for loan origination
and still-tight credit terms for some borrowers continued to weigh on mortgage lending.
Business contacts in many parts of the country were
reported to be highly uncertain about the outlook for
the economy and for fiscal and regulatory policies.
Although firms’ balance sheets were generally strong,
these uncertainties had led them to be particularly cautious and to remain reluctant to hire or expand capacity. Reports on manufacturing activity were mixed, with
production related to autos and housing the most not-
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able areas of relative strength. In one District, business
surveys pointed to further growth; however, readings
on forward-looking indicators of orders around the
country were less positive. In addition, business contacts noted that export demand was showing signs of
weakness as a result of the slowdown in economic activity in Europe. The energy sector continued to expand. In the agricultural sector, high grain prices and
crop insurance payments were supporting farm incomes, helping offset declines in production and reduced profits on livestock. The drought was expected
to reduce farm inventories and have a transitory impact
on broader measures of economic growth.
Participants generally expected that fiscal policy would
continue to be a drag on economic activity over coming quarters. In addition to ongoing weakness in
spending at the federal, state, and local government
levels, uncertainties about tax and spending policies
reportedly were restraining business decisionmaking.
Participants also noted that if an agreement was not
reached to tackle the expiring tax cuts and scheduled
spending reductions, a sharp consolidation of fiscal
policy would take place at the beginning of 2013.
The available indicators pointed to continued weakness
in overall labor market conditions. Growth in employment had been disappointing, with the average
monthly increases in payrolls so far this year below last
year’s pace and below the pace that would be required
to make significant progress in reducing the unemployment rate. The unemployment rate declined
around the turn of the year but had not fallen significantly since then. In addition, the labor force participation rate and employment-to-population ratios were at
or near post-recession lows.
Meeting participants again discussed the extent of slack
in labor markets. A few participants reiterated their
view that the persistently high level of unemployment
reflected the effect of structural factors, including mismatches across and within sectors between the skills of
the unemployed and those demanded in sectors in
which jobs were currently available. It was also suggested that there was an ongoing process of polarization in the labor market, with the share of job opportunities in middle-skill occupations continuing to decline while the shares of low and high skill occupations
increased. Both of these views would suggest a lower
level of potential output and thus reduced scope for
combating unemployment with additional monetary
policy stimulus. Several participants, while acknowledging some evidence of structural changes in the labor
market, stated again that weak aggregate demand was
the principal reason for the high unemployment rate.
They saw slack in resource utilization as remaining
wide, indicating an important role for additional policy
accommodation. Several participants noted the risk
that continued high levels of unemployment, even if
initially cyclical, might ultimately induce adverse structural changes. In particular, they expressed concerns
about the risk that the exceptionally high level of longterm unemployment and the depressed level of labor
participation could ultimately lead to permanent negative effects on the skills and prospects of those without
jobs, thereby reducing the longer-run normal level of
employment and potential output.
Sentiment in financial markets improved notably during
the intermeeting period. Participants indicated that
recent decisions by the ECB helped ease investors’ anxiety about the near-term prospects for the euro.
However, participants also observed that significant
risks related to the euro-area banking and fiscal crisis
remained, and that a number of important issues would
have to be resolved in order to achieve further progress
toward a comprehensive solution to the crisis. Participants noted that indicators of financial stress in the
United States were not especially high and overall conditions in U.S. financial markets remained favorable.
Longer-term interest rates were low and supportive of
economic growth, while equity prices had risen. One
participant noted that, while there were few current
signs of excessive risk-taking, low interest rates could
ultimately lead to financial imbalances that would be
challenging to detect before they became serious problems.
The incoming information on inflation over the intermeeting period was largely in line with participants’
expectations. Despite recent increases in the prices of
some key commodities, consumer price inflation remained subdued. With longer-term inflation expectations stable and the unemployment rate elevated, participants generally anticipated that inflation over the
medium run would likely run at or below the 2 percent
rate that the Committee judges to be most consistent
with its mandate. Most participants saw the risks to the
outlook for inflation as roughly balanced. A few participants felt that maintaining a highly accommodative
stance of monetary policy over an extended period
could unmoor longer-term inflation expectations and,
against a backdrop of higher energy and commodity
prices, posed upside risks to inflation. Other participants, by contrast, saw inflation risks as tilted to the
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downside, given their expectations for sizable and persistent resource slack.
sponse to economic developments or to changes in its
assessment of their efficacy and costs.
Participants again exchanged views on the likely benefits and costs of a new large-scale asset purchase program. Many participants anticipated that such a program would provide support to the economic recovery
by putting downward pressure on longer-term interest
rates and promoting more accommodative financial
conditions. A number of participants also indicated
that it could lift consumer and business confidence by
emphasizing the Committee’s commitment to continued progress toward its dual mandate. In addition, it
was noted that additional purchases could reinforce the
Committee’s forward guidance regarding the federal
funds rate. Participants discussed the effectiveness of
purchases of Treasury securities relative to purchases of
agency MBS in easing financial conditions. Some participants suggested that, all else being equal, MBS purchases could be preferable because they would more
directly support the housing sector, which remains
weak but has shown some signs of improvement of
late. One participant, however, objected that purchases
of MBS, when compared to purchases of longer-term
Treasury securities, would likely result in higher interest
rates for many borrowers in other sectors. A number
of participants highlighted the uncertainty about the
overall effects of additional purchases on financial
markets and the real economy. Some participants
thought past purchases were useful because they were
conducted during periods of market stress or heightened deflation risk and were less confident of the efficacy of additional purchases under present circumstances. A few expressed skepticism that additional
policy accommodation could help spur an economy
that they saw as held back by uncertainties and a range
of structural issues. In discussing the costs and risks
that such a program might entail, several participants
reiterated their concern that additional purchases might
complicate the Committee’s efforts to withdraw monetary policy accommodation when it eventually became
appropriate to do so, raising the risk of undesirably
high inflation in the future and potentially unmooring
inflation expectations. One participant noted that an
extended period of accommodation resulting from additional asset purchases could lead to excessive risktaking on the part of some investors and so undermine
financial stability over time. The possible adverse effects of large purchases on market functioning were
also noted. However, most participants thought these
risks could be managed since the Committee could
make adjustments to its purchases, as needed, in re-
Participants also discussed issues related to the provision of forward guidance regarding the future path of
the federal funds rate. It was noted that clear communication and credibility allow the central bank to help
shape the public’s expectations about policy, which is
crucial to managing monetary policy when the federal
funds rate is at its effective lower bound. A number of
participants questioned the effectiveness of continuing
to use a calendar date to provide forward guidance,
noting that a change in the calendar date might be interpreted pessimistically as a downgrade of the Committee’s economic outlook rather than as conveying the
Committee’s determination to support the economic
recovery. If the public interpreted the statement pessimistically, consumer and business confidence could
fall rather than rise. Many participants indicated a preference for replacing the calendar date with language
describing the economic factors that the Committee
would consider in deciding to raise its target for the
federal funds rate. Participants discussed the benefits
of such an approach, including the potential for enhanced effectiveness of policy through greater clarity
regarding the Committee’s future behavior. That approach could also bolster the stimulus provided by the
System’s holdings of longer-term securities. It was
noted that forward guidance along these lines would
allow market expectations regarding the federal funds
rate to adjust automatically in response to incoming
data on the economy. Many participants thought that
more-effective forward guidance could be provided by
specifying numerical thresholds for labor market and
inflation indicators that would be consistent with maintaining the federal funds rate at exceptionally low levels.
However, reaching agreement on specific thresholds
could be challenging given the diversity of participants’
views, and some were reluctant to specify explicit numerical thresholds out of concern that such thresholds
would necessarily be too simple to fully capture the
complexities of the economy and the policy process or
could be incorrectly interpreted as triggers prompting
an automatic policy response. In addition, numerical
thresholds could be confused with the Committee’s
longer-term objectives, and so undermine the Committee’s credibility. At the conclusion of the discussion,
most participants agreed that the use of numerical
thresholds could be useful to provide more clarity
about the conditionality of the forward guidance but
thought that further work would be needed to address
the related communications challenges.
Minutes of the Meeting of September 12–13, 2012
Page 9
_____________________________________________________________________________________________
Committee Policy Action
Committee members saw the information received
over the intermeeting period as suggesting that economic activity had continued to expand at a moderate
pace in recent months. However, growth in employment had been slow, and almost all members saw the
unemployment rate as still elevated relative to levels
that they viewed as consistent with the Committee’s
mandate. Members generally judged that without additional policy accommodation, economic growth might
not be strong enough to generate sustained improvement in labor market conditions. Moreover, while the
sovereign and banking crisis in Europe had eased some
recently, members still saw strains in global financial
conditions as posing significant downside risks to the
economic outlook. The possibility of a larger-thanexpected fiscal tightening in the United States and
slower global growth were also seen as downside risks.
Inflation had been subdued, even though the prices of
some key commodities had increased recently. Members generally continued to anticipate that, with longerterm inflation expectations stable and given the existing
slack in resource utilization, inflation over the medium
term would run at or below the Committee’s longerrun objective of 2 percent.
In their discussion of monetary policy for the period
ahead, members generally expressed concerns about
the slow pace of improvement in labor market conditions and all members but one agreed that the outlook
for economic activity and inflation called for additional
monetary accommodation. Members agreed that such
accommodation should be provided through both a
strengthening of the forward guidance regarding the
federal funds rate and purchases of additional agency
MBS at a pace of $40 billion per month. Along with
the ongoing purchases of $45 billion per month of
longer-term Treasury securities under the maturity extension program announced in June, these purchases
will increase the Committee’s holdings of longer-term
securities by about $85 billion each month through the
end of the year, and should put downward pressure on
longer-term interest rates, support mortgage markets,
and help make broader financial conditions more accommodative. Members also agreed to maintain the
Committee’s existing policy of reinvesting principal
payments from its holdings of agency debt and agency
MBS into agency MBS. The Committee agreed that it
would closely monitor incoming information on economic and financial developments in coming months,
and that if the outlook for the labor market did not
improve substantially, it would continue its purchases
of agency MBS, undertake additional asset purchases,
and employ its other policy tools as appropriate until
such improvement is achieved in a context of price
stability. This flexible approach was seen as allowing
the Committee to tailor its policy response over time to
incoming information while incorporating conditional
features that clarified the Committee’s intention to improve labor market conditions, thereby enhancing the
effectiveness of the action by helping to bolster business and consumer confidence. While members generally viewed the potential risks associated with these
purchases as manageable, the Committee agreed that in
determining the size, pace, and composition of its asset
purchases, it would, as always, take appropriate account
of the likely efficacy and costs of such purchases. With
regard to the forward guidance, the Committee agreed
on an extension through mid-2015, in conjunction with
language in the statement indicating that it expects that
a highly accommodative stance of policy will remain
appropriate for a considerable time after the economic
recovery strengthens. That new language was meant to
clarify that the maintenance of a very low federal funds
rate over that period did not reflect an expectation that
the economy would remain weak, but rather reflected
the Committee’s intention to support a stronger economic recovery. One member dissented from the policy decision, on the grounds that he opposed additional
asset purchases and preferred to omit the calendar date
from the forward guidance; in his view, it would be
better to use qualitative language to describe the factors
that would influence the Committee’s decision to increase the target federal funds rate.
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 announced
in June to purchase Treasury securities with
remaining maturities of 6 years to 30 years
with a total face value of about $267 billion
by the end of December 2012, and to sell or
redeem Treasury securities with remaining
Page 10
Federal Open Market Committee
_____________________________________________________________________________________________
maturities of approximately 3 years or less
with a total face value of about $267 billion.
For the duration of this program, the Committee directs the Desk to suspend its policy
of rolling over maturing Treasury securities
into new issues. The Committee directs the
Desk to maintain its existing policy of reinvesting principal payments on all agency debt
and agency mortgage-backed securities in the
System Open Market Account in agency
mortgage-backed securities. The Desk is also directed to begin purchasing agency mortgage-backed securities at a pace of about
$40 billion per month. The Committee directs the Desk to engage in dollar roll and
coupon swap 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 August suggests that economic activity has continued to
expand at a moderate pace in recent months.
Growth in employment has been slow, and
the unemployment rate remains elevated.
Household spending has continued to advance, but growth in business fixed investment appears to have slowed. The housing
sector has shown some further signs of improvement, albeit from a depressed level.
Inflation has been subdued, although the
prices of some key commodities have increased recently. Longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the
Committee seeks to foster maximum employment and price stability. The Committee
is concerned that, without further policy accommodation, economic growth might not
be strong enough to generate sustained improvement in labor market conditions. Furthermore, strains in global financial markets
continue to pose significant downside risks
to the economic outlook. The Committee
also anticipates that inflation over the medium term likely would run at or below its
2 percent objective.
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 agreed today to increase policy accommodation by purchasing
additional agency mortgage-backed securities
at a pace of $40 billion per month. The
Committee also will continue through the
end of the year its program to extend the average maturity of its holdings of securities as
announced in June, and it is maintaining its
existing policy of reinvesting principal payments from its holdings of agency debt and
agency mortgage-backed securities in agency
mortgage-backed securities. These actions,
which together will increase the Committee’s
holdings of longer-term securities by about
$85 billion each month through the end of
the year, should put downward pressure on
longer-term interest rates, support mortgage
markets, and help to make broader financial
conditions more accommodative.
The Committee will closely monitor incoming information on economic and financial
developments in coming months. If the outlook for the labor market does not improve
substantially, the Committee will continue its
purchases of agency mortgage-backed securities, undertake additional asset purchases,
and employ its other policy tools as appropriate until such improvement is achieved in
a context of price stability. In determining
the size, pace, and composition of its asset
purchases, the Committee will, as always,
take appropriate account of the likely efficacy
and costs of such purchases.
To support continued progress toward maximum employment and price stability, the
Committee expects that a highly accommodative stance of monetary policy will remain
appropriate for a considerable time after the
economic recovery strengthens. In particular, the Committee also decided today to
keep the target range for the federal funds
rate at 0 to ¼ percent and currently anticipates that exceptionally low levels for the
Minutes of the Meeting of September 12–13, 2012
Page 11
_____________________________________________________________________________________________
federal funds rate are likely to be warranted
at least through mid-2015.”
Voting for this action: Ben Bernanke, William C.
Dudley, Elizabeth Duke, Dennis P. Lockhart, Sandra
Pianalto, Jerome H. Powell, Sarah Bloom Raskin, Jeremy C. Stein, Daniel K. Tarullo, John C. Williams, and
Janet L. Yellen.
Voting against this action: Jeffrey M. Lacker.
Mr. Lacker dissented because he believed that additional monetary stimulus at this time was unlikely to result
in a discernible improvement in economic growth
without also causing an unwanted increase in inflation.
Moreover, he expressed his opposition to the purchase
of more MBS, because he viewed it as inappropriate for
the Committee to choose a particular sector of the
economy to support; purchases of Treasury securities
instead would have avoided this effect. Finally, he preferred to omit the description of the time period over
which exceptionally low levels for the federal funds rate
were likely to be warranted.
Consensus Forecast Experiment
In light of the discussion at the previous FOMC meeting, the subcommittee on communications developed a
second experimental exercise intended to shed light on
the feasibility and desirability of constructing an FOMC
consensus forecast. At this meeting, participants discussed possible formulations of the monetary policy
assumptions on which to condition an FOMC consensus forecast and alternative approaches for participants
to express their endorsement of the consensus forecast.
In conclusion, participants agreed to have a broad discussion of the experiences gathered from the two experimental exercises in conjunction with the October
FOMC meeting.
It was agreed that the next meeting of the Committee
would be held on Tuesday–Wednesday, October 23–
24, 2012. The meeting adjourned at 12:10 p.m. on September 13, 2012.
Notation Vote
By notation vote completed on August 21, 2012, the
Committee unanimously approved the minutes of the
FOMC meeting held on July 31–August 1, 2012.
_____________________________
William B. English
Secretary
Page 1
_____________________________________________________________________________________________
Summary of Economic Projections
In conjunction with the September 12−13, 2012, Federal Open Market Committee (FOMC) meeting, meeting participants—the 7 members of the Board of Governors and the 12 presidents of the Federal Reserve
Banks, all of whom participate in the deliberations of
the FOMC—submitted their assessments, under each
participant’s judgment of appropriate monetary policy,
of real output growth, the unemployment rate, inflation, and the target federal funds rate for each year
from 2012 through 2015 and over the longer run.
These assessments were based on information available
at the time of the meeting and participants’ individual
assumptions about the factors likely to affect economic
outcomes. The longer-run projections represent each
participant’s judgment 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.
ticipants judged that the growth rate of real gross domestic product (GDP) would increase somewhat in
2013 and that economic growth in 2014 and 2015
would modestly exceed participants’ estimates of the
longer-run sustainable rate of growth, while the unemployment rate would decline gradually through 2015.
Participants projected that inflation, as measured by the
annual change in the price index for personal consumption expenditures (PCE), would run close to or below
the FOMC’s longer-run inflation objective of 2 percent.
As shown in figure 2, most participants judged that
highly accommodative monetary policy was likely to be
warranted over the next few years. In particular,
13 participants thought that it would be appropriate for
the first increase in the target federal funds rate to occur during 2015 or later. The majority of participants
judged that appropriate monetary policy would involve
a decision by the Committee, at the September meeting
or before long, to undertake significant additional asset
purchases.
As in June, participants in September judged the uncertainty associated with the outlook for real activity and
the unemployment rate to be unusually high compared
with historical norms, with the risks weighted mainly
toward slower economic growth and a higher unemployment rate. While a number of participants viewed
the uncertainty surrounding their projections for inflation to be unusually high in comparison with historical
Overall, the assessments that FOMC participants submitted in September indicated that, under appropriate
monetary policy, the pace of economic recovery over
the 2012−15 period would gradually pick up and inflation would remain subdued (table 1 and figure 1). Par-
Table 1. Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents, September 2012
Percent
Variable
Range2
Central tendency1
2014
2015
Longer run
Change in real GDP . . 1.7 to 2.0 2.5 to 3.0 3.0 to 3.8 3.0 to 3.8
June projection. . . 1.9 to 2.4 2.2 to 2.8 3.0 to 3.5
n.a.
2012
2013
2014
2015
2.3 to 2.5
2.3 to 2.5
1.6 to 2.0 2.3 to 3.5
1.6 to 2.5 2.2 to 3.5
2.7 to 4.1
2.8 to 4.0
2.5 to 4.2
n.a.
2.2 to 3.0
2.2 to 3.0
Unemployment rate. . . 8.0 to 8.2 7.6 to 7.9 6.7 to 7.3 6.0 to 6.8
June projection. . . 8.0 to 8.2 7.5 to 8.0 7.0 to 7.7
n.a.
5.2 to 6.0
5.2 to 6.0
8.0 to 8.3 7.0 to 8.0
7.8 to 8.4 7.0 to 8.1
6.3 to 7.5
6.3 to 7.7
5.7 to 6.9
n.a.
5.0 to 6.3
4.9 to 6.3
PCE inflation. . . . . . . . 1.7 to 1.8 1.6 to 2.0 1.6 to 2.0 1.8 to 2.0
June projection. . . 1.2 to 1.7 1.5 to 2.0 1.5 to 2.0
n.a.
2.0
2.0
1.5 to 1.9 1.5 to 2.1
1.2 to 2.0 1.5 to 2.1
1.6 to 2.2
1.5 to 2.2
1.8 to 2.3
n.a.
2.0
2.0
1.6 to 2.0 1.6 to 2.0
1.7 to 2.0 1.4 to 2.1
1.6 to 2.2
1.5 to 2.2
1.8 to 2.3
n.a.
Core PCE inflation3. . 1.7 to 1.9 1.7 to 2.0 1.8 to 2.0 1.9 to 2.0
June projection. . . . 1.7 to 2.0 1.6 to 2.0 1.6 to 2.0
n.a.
Longer run
2012
2013
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 June projections were made in conjunction with the meeting of the Federal Open
Market Committee on June 19–20, 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.
Page 2
Federal Open Market Committee
_____________________________________________________________________________________________
Figure 1. Central tendencies and ranges of economic projections, 2012–15 and over the longer run
Percent
Change in real GDP
5
Central tendency of projections
Range of projections
4
3
2
1
+
0
1
Actual
2
3
2007
2008
2009
2010
2011
2012
2013
2014
2015
Longer
run
Percent
Unemployment rate
10
9
8
7
6
5
2007
2008
2009
2010
2011
2012
2013
2014
2015
Longer
run
Percent
PCE inflation
3
2
1
2007
2008
2009
2010
2011
2012
2013
2014
2015
Longer
run
Percent
Core PCE inflation
3
2
1
2007
2008
2009
2010
2011
2012
2013
2014
2015
Longer
run
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 September 12–13, 2012
Page 3
_____________________________________________________________________________________________
Figure 2. Overview of FOMC participants’ assessments of appropriate monetary policy, September 2012
Number of participants
Appropriate timing of policy firming
13
12
12
11
10
9
8
7
6
5
4
3
3
2
2
1
2012
1
2013
2014
2015
1
2016
Appropriate pace of policy firming
Percent
Target federal funds rate at year-end
6
5
4
3
2
1
0
2012
2013
2014
2015
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 1/4 percent
will occur in the specified calendar year. In June 2012, the numbers of FOMC participants who judged that the first
increase in the target federal funds rate would occur in 2012, 2013, 2014, and 2015 were, respectively, 3, 3, 7, and 6. In
the lower panel, each shaded circle indicates the value (rounded to the nearest 1/4 percentage point) 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.
Page 4
Federal Open Market Committee
_____________________________________________________________________________________________
norms, many judged it to be broadly similar to historical norms, and most considered the risks to inflation to
be roughly balanced.
The Outlook for Economic Activity
Conditional on their individual assumptions about appropriate monetary policy, participants judged that the
economy would grow at a moderate pace over coming
quarters and then pick up somewhat in 2013 before
expanding in 2014 and 2015 at a rate modestly above
what participants saw as the longer-run rate of output
growth. The central tendency of their projections for
the change in real GDP in 2012 was 1.7 to 2.0 percent,
somewhat lower than in June. Many participants characterized the incoming data as having been to the
weak side of their expectations at the time of the June
meeting; several participants also cited the severe
drought as a factor causing them to mark down their
projections for economic growth in 2012. However,
participants’ projections for 2013 and 2014 were generally slightly higher than in June; this reflected, in part, a
greater assumed amount of monetary policy accommodation than in their June submissions as well as some
improvement since then in the outlook for economic
activity in Europe. The central tendency of participants’ projections for real GDP growth in 2013 was 2.5
to 3.0 percent, followed by central tendencies for both
2014 and 2015 of 3.0 to 3.8 percent. The central tendency for the longer-run rate of increase of real GDP
remained at 2.3 to 2.5 percent, unchanged from June.
While most participants noted that the increased degree
of monetary policy accommodation assumed in their
projections would help promote a faster recovery, participants cited several headwinds that would be likely to
hold back the pace of economic expansion over the
forecast period, including slower growth abroad, a stillweak housing market, the difficult fiscal and financial
situation in Europe, and fiscal restraint in the United
States.
Participants projected the unemployment rate at the
end of 2012 to remain close to recent levels, with a central tendency of 8.0 to 8.2 percent, the same as in their
June submissions. Participants anticipated gradual improvement from 2013 through 2015; even so, they generally thought that the unemployment rate at the end of
2015 would still lie well above their individual estimates
of its longer-run normal level. The central tendencies
of participants’ forecasts for the unemployment rate
were 7.6 to 7.9 percent at the end of 2013, 6.7 to
7.3 percent at the end of 2014, and 6.0 to 6.8 percent at
the end of 2015. The central tendency of participants’
estimates of the longer-run normal rate of unemploy-
ment that would prevail under the assumption of appropriate monetary policy and in the absence of further
shocks to the economy was 5.2 to 6.0 percent, unchanged from June. Most participants projected that
the gap between the current unemployment rate and
their estimates of its longer-run normal rate would be
closed in five or six years, while a few judged that less
time would be needed.
Figures 3.A and 3.B provide details on the diversity of
participants’ views regarding the likely outcomes for
real GDP growth and the unemployment rate over the
next three years and over the longer run. The dispersion in these projections reflects differences in participants’ assessments of many factors, including appropriate monetary policy and its effects on the economy, the
rate of improvement in the housing sector, the spillover
effects of the fiscal and financial situation in Europe,
the prospective path for U.S. fiscal policy, the extent of
structural dislocations in the labor market, the likely
evolution of credit and financial market conditions, and
longer-term trends in productivity and the labor force.
With much of the data for the first eight months of
2012 now in hand, the dispersion of participants’ projections of real GDP growth and the unemployment
rate this year narrowed in September compared with
June. The range of participants’ forecasts for the
change in real GDP in 2013 and 2014, however, was
little changed from June, on balance. The distribution
of projections for the unemployment rate was not
much altered for 2013, while for 2014 it narrowed a bit
and shifted down slightly. The range for the unemployment rate for 2015 was 5.7 to 6.9 percent. As in
June, the dispersion of estimates for the longer-run rate
of output growth was fairly narrow, with the values
being mostly from 2.2 to 2.7 percent. The range of
participants’ estimates of the longer-run rate of unemployment was 5.0 to 6.3 percent, a similar range to that
in June; this range reflected different judgments among
participants about several factors, including the outlook
for labor force participation and the structure of the
labor market.
The Outlook for Inflation
Participants’ views on the broad outlook for inflation
under the assumption of appropriate monetary policy
were little changed from June. For 2012 as a whole,
most anticipated that overall inflation would be only
slightly above its average annual rate of 1.6 percent
over the first half of the year; a number of participants
pointed to higher food prices in response to the
drought, along with recent increases in oil prices, as
temporary sources of upward pressure on the headline
Summary of Economic Projections of the Meeting of September 12–13, 2012
Page 5
_____________________________________________________________________________________________
Figure 3.A. Distribution of participants’ projections for the change in real GDP, 2012–15 and over the longer run
Number of participants
20
18
16
14
12
10
8
6
4
2
2012
September projections
June projections
1.6 1.7
1.8 1.9
2.0 2.1
2.2 2.3
2.4 2.5
2.6 2.7
2.8 2.9
3.0 3.1
3.2 3.3
3.4 3.5
3.6 3.7
3.8 3.9
4.0 4.1
4.2 4.3
Percent range
Number of participants
20
18
16
14
12
10
8
6
4
2
2013
1.6 1.7
1.8 1.9
2.0 2.1
2.2 2.3
2.4 2.5
2.6 2.7
2.8 2.9
3.0 3.1
3.2 3.3
3.4 3.5
3.6 3.7
3.8 3.9
4.0 4.1
4.2 4.3
Percent range
Number of participants
20
18
16
14
12
10
8
6
4
2
2014
1.6 1.7
1.8 1.9
2.0 2.1
2.2 2.3
2.4 2.5
2.6 2.7
2.8 2.9
3.0 3.1
3.2 3.3
3.4 3.5
3.6 3.7
3.8 3.9
4.0 4.1
4.2 4.3
Percent range
Number of participants
20
18
16
14
12
10
8
6
4
2
2015
1.6 1.7
1.8 1.9
2.0 2.1
2.2 2.3
2.4 2.5
2.6 2.7
2.8 2.9
3.0 3.1
3.2 3.3
3.4 3.5
3.6 3.7
3.8 3.9
4.0 4.1
4.2 4.3
Percent range
Number of participants
20
18
16
14
12
10
8
6
4
2
Longer run
1.6 1.7
1.8 1.9
2.0 2.1
2.2 2.3
2.4 2.5
2.6 2.7
2.8 2.9
3.0 3.1
3.2 3.3
Percent range
Note: Definitions of variables are in the general note to table 1.
3.4 3.5
3.6 3.7
3.8 3.9
4.0 4.1
4.2 4.3
Page 6
Federal Open Market Committee
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Figure 3.B. Distribution of participants’ projections for the unemployment rate, 2012–15 and over the longer run
Number of participants
20
18
16
14
12
10
8
6
4
2
2012
September projections
June projections
4.8 4.9
5.0 5.1
5.2 5.3
5.4 5.5
5.6 5.7
5.8 5.9
6.0 6.1
6.2 6.3
6.4 6.5
6.6 6.7
6.8 6.9
7.0 7.1
7.2 7.3
7.4 7.5
7.6 7.7
7.8 7.9
8.0 8.1
8.2 8.3
8.4 8.5
Percent range
Number of participants
20
18
16
14
12
10
8
6
4
2
2013
4.8 4.9
5.0 5.1
5.2 5.3
5.4 5.5
5.6 5.7
5.8 5.9
6.0 6.1
6.2 6.3
6.4 6.5
6.6 6.7
6.8 6.9
7.0 7.1
7.2 7.3
7.4 7.5
7.6 7.7
7.8 7.9
8.0 8.1
8.2 8.3
8.4 8.5
Percent range
Number of participants
20
18
16
14
12
10
8
6
4
2
2014
4.8 4.9
5.0 5.1
5.2 5.3
5.4 5.5
5.6 5.7
5.8 5.9
6.0 6.1
6.2 6.3
6.4 6.5
6.6 6.7
6.8 6.9
7.0 7.1
7.2 7.3
7.4 7.5
7.6 7.7
7.8 7.9
8.0 8.1
8.2 8.3
8.4 8.5
Percent range
Number of participants
20
18
16
14
12
10
8
6
4
2
2015
4.8 4.9
5.0 5.1
5.2 5.3
5.4 5.5
5.6 5.7
5.8 5.9
6.0 6.1
6.2 6.3
6.4 6.5
6.6 6.7
6.8 6.9
7.0 7.1
7.2 7.3
7.4 7.5
7.6 7.7
7.8 7.9
8.0 8.1
8.2 8.3
8.4 8.5
Percent range
Number of participants
20
18
16
14
12
10
8
6
4
2
Longer run
4.8 4.9
5.0 5.1
5.2 5.3
5.4 5.5
5.6 5.7
5.8 5.9
6.0 6.1
6.2 6.3
6.4 6.5
6.6 6.7
6.8 6.9
7.0 7.1
Percent range
Note: Definitions of variables are in the general note to table 1.
7.2 7.3
7.4 7.5
7.6 7.7
7.8 7.9
8.0 8.1
8.2 8.3
8.4 8.5
Summary of Economic Projections of the Meeting of September 12–13, 2012
Page 7
_____________________________________________________________________________________________
rate. Almost all participants judged that both headline
and core inflation would remain subdued over the
2013–15 period, running at rates at or below the
FOMC’s longer-run objective of 2 percent. In pointing
to factors likely to restrain price pressures, several participants cited sizable resource slack and stable inflation
expectations, while a few noted the subdued behavior
of labor compensation. Specifically, the central tendency of participants’ projections for inflation, as
measured by the PCE price index, moved up and tightened to 1.7 to 1.8 percent for 2012 and was little
changed for 2013 and 2014 at 1.6 to 2.0 percent. For
2015, the central tendency was 1.8 to 2.0 percent. The
central tendencies of the forecasts for core inflation
were broadly similar to those for the headline measure
for 2013 through 2015.
Figures 3.C and 3.D provide information about the
diversity of participants’ views about the outlook for
inflation. Participants’ projections for headline inflation for 2012, which in June had ranged from 1.2 to
2 percent, narrowed in September to the range of 1.5 to
1.9 percent; about three-fourths of participants’ projections took values of 1.7 to 1.8 percent, broadly in line
with recent inflation readings. The distributions of
participants’ projections for headline inflation in 2013
and 2014 were very similar to those for June, while the
range of projections for core inflation narrowed slightly
for both years. The distributions for core and overall
inflation in 2015 were concentrated near the Committee’s longer-run inflation objective of 2 percent.
Appropriate Monetary Policy
As indicated in figure 2, most participants judged that
exceptionally low levels of the federal funds rate would
remain appropriate for several more years. In particular, 12 participants thought that the first increase in the
target federal funds rate would not be warranted until
2015, and 1 viewed a start to firming in 2016 as appropriate (upper panel). The 12 participants who expected
that the target federal funds rate would not move
above its effective lower bound until 2015 thought the
federal funds rate would be 1.6 percent or lower at the
end of that year, while the one participant who expected that policy firming would commence in 2016
saw the funds rate target at 75 basis points at the end of
that year. Six participants judged that policy firming in
2012, 2013, or 2014 would be consistent with the
Committee’s statutory mandate. Those participants
judged that the appropriate value for the federal funds
rate would range from 1½ to 3 percent at the end of
2014 and from 2½ to 4½ percent at the end of 2015.
In total, 14 participants judged that appropriate mone-
tary policy called for a more-accommodative path for
the federal funds rate than in their June submissions,
involving either a lower target for the federal funds rate
at the end of the initial year of policy firming, or a shift
out in the first year of firming.
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, and most saw the appropriate target
federal funds rate as still well below its longer-run value
at the end of 2015. Estimates of the longer-run target
federal funds rate ranged from 3 to 4½ percent, reflecting the Committee’s inflation objective of 2 percent
and participants’ judgments about the longer-run equilibrium level of the real federal funds rate.
Participants also provided qualitative information on
their views regarding the appropriate path of the Federal Reserve’s balance sheet. Eleven participants indicated that appropriate policy would involve a decision
by the Committee, at the September meeting or soon
thereafter, to undertake significant additional asset purchases. Several participants envisioned this program as
entailing purchases of agency mortgage-backed securities. Almost all participants assumed that, at the appropriate time, the Committee would carry out the
normalization of the balance sheet according to the
principles approved at the June 2011 FOMC meeting.
In general, participants linked their preferred start dates
for the normalization process to their views for the
appropriate timing of the first increase in the target
federal funds rate.
The key factors informing participants’ individual assessments of the appropriate setting for monetary policy included their judgments regarding labor market
conditions that would be consistent with the maximum
level of employment, the extent to which employment
currently deviated from the maximum level of employment, the extent to which inflation deviated from
the Committee’s longer-term objective of 2 percent,
and participants’ projections of the likely time horizon
necessary to return employment and inflation to
mandate-consistent levels. Several participants noted
that their assessments of appropriate monetary policy
reflected the subpar pace of labor market improvement
and the persistent shortfall of output from potential
since the 2007–09 recession. A few participants noted
that their settings of appropriate federal funds rate policy took into account unusual factors prevailing in recent years, such as the likelihood that the neutral level
of the federal funds rate was somewhat below its his-
Page 8
Federal Open Market Committee
_____________________________________________________________________________________________
Figure 3.C. Distribution of participants’ projections for PCE inflation, 2012–15 and over the longer run
Number of participants
20
18
16
14
12
10
8
6
4
2
2012
September projections
June projections
1.1 1.2
1.3 1.4
1.5 1.6
1.7 1.8
1.9 2.0
2.1 2.2
2.3 2.4
Percent range
Number of participants
20
18
16
14
12
10
8
6
4
2
2013
1.1 1.2
1.3 1.4
1.5 1.6
1.7 1.8
1.9 2.0
2.1 2.2
2.3 2.4
Percent range
Number of participants
20
18
16
14
12
10
8
6
4
2
2014
1.1 1.2
1.3 1.4
1.5 1.6
1.7 1.8
1.9 2.0
2.1 2.2
2.3 2.4
Percent range
Number of participants
20
18
16
14
12
10
8
6
4
2
2015
1.1 1.2
1.3 1.4
1.5 1.6
1.7 1.8
1.9 2.0
2.1 2.2
2.3 2.4
Percent range
Number of participants
20
18
16
14
12
10
8
6
4
2
Longer run
1.1 1.2
1.3 1.4
1.5 1.6
1.7 1.8
Percent range
Note: Definitions of variables are in the general note to table 1.
1.9 2.0
2.1 2.2
2.3 2.4
Summary of Economic Projections of the Meeting of September 12–13, 2012
Page 9
_____________________________________________________________________________________________
Figure 3.D. Distribution of participants’ projections for core PCE inflation, 2012–15
Number of participants
2012
20
18
16
14
12
10
8
6
4
2
September projections
June projections
1.3 1.4
1.5 1.6
1.7 1.8
1.9 2.0
2.1 2.2
2.3 2.4
Percent range
Number of participants
2013
20
18
16
14
12
10
8
6
4
2
1.3 1.4
1.5 1.6
1.7 1.8
1.9 2.0
2.1 2.2
2.3 2.4
Percent range
Number of participants
2014
20
18
16
14
12
10
8
6
4
2
1.3 1.4
1.5 1.6
1.7 1.8
1.9 2.0
2.1 2.2
2.3 2.4
Percent range
Number of participants
2015
20
18
16
14
12
10
8
6
4
2
1.3 1.4
1.5 1.6
1.7 1.8
1.9 2.0
Percent range
Note: Definitions of variables are in the general note to table 1.
2.1 2.2
2.3 2.4
Page 10
Federal Open Market Committee
_____________________________________________________________________________________________
torical norm and the fact that policy rate setting had
been constrained by the effective lower bound on nominal interest rates. Two participants expressed concern
that a protracted period of very accommodative monetary policy could lead to imbalances in the financial
system. Participants also noted that because the appropriate stance of monetary policy is conditional on
the evolution of real activity and inflation over time,
their assessments of the appropriate future path of the
federal funds rate and the balance sheet could change if
economic conditions were to evolve in an unexpected
manner.
Figure 3.E details 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 2015 and over the longer run. As previously
noted, most participants judged that economic conditions would warrant maintaining the current low level
of the federal funds rate through the end of 2014.
Views on the appropriate level of the federal funds rate
at the end of 2015 were more widely dispersed, with
10 participants seeing the appropriate level of the federal funds rate as 1 percent or lower and 6 of them seeing the appropriate rate as 2½ percent or higher.
Those who judged that a longer period of very accommodative monetary policy would be appropriate generally were participants who projected a sizable gap between the unemployment rate and the longer-run normal level of the unemployment rate until 2015 or later.
In contrast, the 6 participants who judged that policy
firming should begin in 2012, 2013, or 2014 indicated
that the Committee would need to act relatively soon in
order to keep inflation near the FOMC’s longer-run
objective of 2 percent and to prevent a rise in inflation
expectations.
Uncertainty and Risks
Nearly all participants judged that their current level of
uncertainty about real GDP growth and unemployment
was higher than was the norm during the previous
20 years (figure 4).1 Eight participants judged the level
of uncertainty associated with their forecasts of total
PCE inflation to be higher as well, while another
10 participants viewed uncertainty about inflation as
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 1991 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.
1
Table 2. Average historical projection error ranges
Percentage points
Variable
Change in real GDP1 . . . . .
Unemployment
rate1
.....
Total consumer
prices2
....
2012
2013
2014
2015
±0.6
±1.4
±1.7
±1.7
±0.2
±0.9
±1.5
±1.9
±0.5
±0.9
±1.1
±1.0
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 fall 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 may be found 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. Definitions of variables are in the general note to 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.
broadly similar to historical norms. The main factors
cited as contributing to the elevated uncertainty about
economic outcomes were the ongoing fiscal and financial situation in Europe, the outlook for fiscal policy in
the United States, and a general slowdown in global
economic growth, including the possibility of a significant slowdown in China. As in June, participants noted
the difficulties associated with forecasting the path of
the U.S. economic recovery following a financial crisis
and recession that differed markedly from recent historical experience. A number of participants commented that in the aftermath of the financial crisis, they
were more uncertain about the level of potential output
and its rate of growth. A couple of participants noted
that some of the uncertainty about potential output
arose from the risk that continuation of long-term unemployment might impair the skill level of the labor
force or cause some workers to retire earlier than
would otherwise have been the case, thereby reducing
potential output in the medium term.
A majority of participants reported that they saw the
risks to their forecasts of real GDP growth as weighted
toward the downside and, accordingly, the risks to their
projections of the unemployment rate as tilted to the
upside. The most frequently identified sources of risk
were the situation in Europe, which many participants
thought had the potential to slow global economic activity further, particularly over the near term, and issues
associated with fiscal policy in the United States.
Most participants continued to judge the risks to their
projections for inflation as broadly balanced, with several highlighting the recent stability of inflation expecta-
Summary of Economic Projections of the Meeting of September 12–13, 2012
Page 11
_____________________________________________________________________________________________
Figure 3.E. Distribution of participants’ projections for the target federal funds rate, 2012–15 and over the longer run
Number of participants
2012
September projections
June projections
0.00 0.37
0.38 0.62
0.63 0.87
0.88 1.12
1.13 1.37
1.38 1.62
1.63 1.87
1.88 2.12
2.13 2.37
2.38 2.62
2.63 2.87
2.88 3.12
3.13 3.37
3.38 3.62
3.63 3.87
3.88 4.12
4.13 4.37
20
18
16
14
12
10
8
6
4
2
4.38 4.62
Percent range
Number of participants
2013
20
18
16
14
12
10
8
6
4
2
0.00 0.37
0.38 0.62
0.63 0.87
0.88 1.12
1.13 1.37
1.38 1.62
1.63 1.87
1.88 2.12
2.13 2.37
2.38 2.62
2.63 2.87
2.88 3.12
3.13 3.37
3.38 3.62
3.63 3.87
3.88 4.12
4.13 4.37
4.38 4.62
Percent range
Number of participants
2014
20
18
16
14
12
10
8
6
4
2
0.00 0.37
0.38 0.62
0.63 0.87
0.88 1.12
1.13 1.37
1.38 1.62
1.63 1.87
1.88 2.12
2.13 2.37
2.38 2.62
2.63 2.87
2.88 3.12
3.13 3.37
3.38 3.62
3.63 3.87
3.88 4.12
4.13 4.37
4.38 4.62
Percent range
Number of participants
2015
20
18
16
14
12
10
8
6
4
2
0.00 0.37
0.38 0.62
0.63 0.87
0.88 1.12
1.13 1.37
1.38 1.62
1.63 1.87
1.88 2.12
2.13 2.37
2.38 2.62
2.63 2.87
2.88 3.12
3.13 3.37
3.38 3.62
3.63 3.87
3.88 4.12
4.13 4.37
4.38 4.62
Percent range
Number of participants
Longer run
20
18
16
14
12
10
8
6
4
2
0.00 0.37
0.38 0.62
0.63 0.87
0.88 1.12
1.13 1.37
1.38 1.62
1.63 1.87
1.88 2.12
2.13 2.37
2.38 2.62
2.63 2.87
2.88 3.12
3.13 3.37
3.38 3.62
3.63 3.87
3.88 4.12
4.13 4.37
4.38 4.62
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.
Page 12
Federal Open Market Committee
_____________________________________________________________________________________________
Figure 4. Uncertainty and risks in economic projections
Number of participants
Uncertainty about GDP growth
20
18
16
14
12
10
8
6
4
2
September projections
June projections
Lower
Broadly
similar
Higher
Number of participants
Risks to GDP growth
Weighted to
downside
Broadly
balanced
Number of participants
Uncertainty about the unemployment rate
Lower
Broadly
similar
20
18
16
14
12
10
8
6
4
2
Higher
Risks to the unemployment rate
Weighted to
downside
Lower
Broadly
similar
20
18
16
14
12
10
8
6
4
2
Higher
Broadly
balanced
Lower
Broadly
similar
Higher
Weighted to
upside
Risks to PCE inflation
Weighted to
downside
20
18
16
14
12
10
8
6
4
2
20
18
16
14
12
10
8
6
4
2
Number of participants
Broadly
balanced
Number of participants
Uncertainty about core PCE inflation
Weighted to
upside
Number of participants
Number of participants
Uncertainty about PCE inflation
20
18
16
14
12
10
8
6
4
2
September projections
June projections
20
18
16
14
12
10
8
6
4
2
Weighted to
upside
Number of participants
Risks to core PCE inflation
Weighted to
downside
Broadly
balanced
20
18
16
14
12
10
8
6
4
2
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.
Summary of Economic Projections of the Meeting of September 12–13, 2012
Page 13
_____________________________________________________________________________________________
tions. However, four participants saw the risks to inflation as tilted to the downside, with a couple of them
noting that slack in resource markets could turn out to
be greater than they were anticipating. Three participants saw the risks to inflation as weighted to the up
side in light of concerns about U.S. fiscal imbalances,
the current highly accommodative stance of monetary
policy, and uncertainty about the Committee’s ability to
shift to a less accommodative policy stance when it
becomes appropriate to do so.
Page 14
Federal Open Market Committee
_____________________________________________________________________________________________
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 2.4 to
3.6 percent in the current year, 1.6 to 4.4 per-
cent in the second year, and 1.3 to 4.7 percent
in the third and fourth years. The corresponding 70 percent confidence intervals for overall
inflation would be 1.5 to 2.5 percent in the current year, 1.1 to 2.9 percent in the second year,
0.9 to 3.1 percent in the third year, and 1.0 to
3.0 percent in the fourth year.
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
Federal Reserve (2012, September 12). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_20120913
@misc{wtfs_fomc_minutes_20120913,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {2012},
month = {Sep},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_20120913},
note = {Retrieved via When the Fed Speaks corpus}
}