FOMC Minutes
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Minutes of the Federal Open Market Committee
December 11–12, 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, December 11, 2012, at 11:00 a.m. and continued
on Wednesday, December 12, 2012, at 8:30 a.m.
James A. Clouse and Stephen A. Meyer, Deputy Directors, Division of Monetary Affairs, Board of Governors; Maryann F. Hunter, Deputy Director, Division of Banking Supervision and Regulation, Board
of Governors
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
Linda Robertson, Assistant to the Board, Office of
Board Members, Board of Governors
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
Michelle A. Smith, Assistant Secretary
Scott G. Alvarez, General Counsel
Steven B. Kamin, Economist
David W. Wilcox, Economist
David Altig, Thomas A. Connors, Michael P. Leahy,
William Nelson, David Reifschneider, and William
Wascher, 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 Advisor to the Board, Office of
Board Members, Board of Governors
Ellen E. Meade and Joyce K. Zickler, Senior Advisers,
Division of Monetary Affairs, Board of Governors
Eric M. Engen, Thomas Laubach, and David E. Lebow, Associate Directors, Division of Research
and Statistics, Board of Governors; Michael T. Kiley,¹ Associate Director, Office of Financial Stability Policy and Research, Board of Governors
Joshua Gallin, Deputy Associate Director, Division of
Research and Statistics, Board of Governors; Jane
E. Ihrig, Deputy Associate Director, Division of
Monetary Affairs, Board of Governors; Beth Anne
Wilson, Deputy Associate Director, Division of International Finance, Board of Governors
David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors
Jennifer E. Roush, Senior Economist, Division of
Monetary Affairs, Board of Governors
Marie Gooding, First Vice President, Federal Reserve
Bank of Atlanta
Loretta J. Mester and Daniel G. Sullivan, Executive
Vice Presidents, Federal Reserve Banks of Philadelphia and Chicago, respectively
Troy Davig, Mark E. Schweitzer, Geoffrey Tootell,
Christopher J. Waller, and Kei-Mu Yi, Senior Vice
Presidents, Federal Reserve Banks of Kansas City,
Cleveland, Boston, St. Louis, and Minneapolis, respectively
Mary Daly, Group Vice President, Federal Reserve
Bank of San Francisco
_______________________
¹ Attended Tuesday’s session only.
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Evan F. Koenig, Lorie K. Logan, Julie Ann Remache,
Alexander L. Wolman, and Nathaniel Wuerffel,
Vice Presidents, Federal Reserve Banks of Dallas,
New York, New York, Richmond, and New York,
respectively
Argia M. Sbordone, Assistant Vice President, Federal
Reserve Bank of New York
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 October 23–24, 2012. He also reported on System open
market operations over the intermeeting period, 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; the operations related to the
maturity extension program authorized at the June 19–
20, 2012, FOMC meeting; and the purchases of MBS
authorized at the September 12–13, 2012, FOMC
meeting. By unanimous vote, the Committee ratified
the Open Market 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.
The Committee considered a proposal to extend its
liquidity swap arrangements with foreign central banks
past February 1, 2013. All but one member approved
the following resolution:
“The Federal Open Market Committee directs the Federal Reserve Bank of New York
to extend the existing temporary dollar liquidity swap arrangements with the Bank of
Canada, the Bank of England, the Bank of
Japan, the European Central Bank, and the
Swiss National Bank through February 1,
2014. In addition, the Federal Open Market
Committee directs the Federal Reserve Bank
of New York to extend the existing temporary foreign currency liquidity swap arrangements with the Bank of Canada, the Bank of
England, the Bank of Japan, the European
Central Bank, and the Swiss National Bank
through February 1, 2014.”
Mr. Lacker dissented because of his opposition to arrangements that support Federal Reserve lending in
foreign currencies, which he viewed as amounting to
fiscal policy.
Options for the Continuation of Asset Purchases
The staff reviewed several options for purchasing longer-term securities after the planned completion at the
end of the month of the maturity extension program.
The presentation focused on the potential effects for
the U.S. economy, based in part on simulations of a
staff macroeconomic model, and for the Federal Reserve’s balance sheet and income of continuing to buy
MBS and longer-term Treasury securities over various
time frames. In their discussion of the staff presentation, some participants asked about the possible consequences of the alternative purchase programs for the
expected path of Federal Reserve remittances to the
Treasury Department, and a few indicated the need for
additional consideration of the implications of such
purchases for the eventual normalization of the stance
of monetary policy and the size and composition of the
Federal Reserve’s balance sheet.
Staff Review of the Economic Situation
The information reviewed at the December 11–12
meeting indicated that economic activity continued to
increase at a moderate pace in recent months. Employment expanded further, and the unemployment
rate declined slightly, on balance, from September to
November but was still elevated. Consumer price inflation slowed as consumer energy costs fell, while
measures of longer-run inflation expectations remained
stable.
Private nonfarm employment increased at a slightly
faster rate in October and November than in the third
quarter, but government employment decreased somewhat. The unemployment rate declined to 7.7 percent
in November, and the labor force participation rate in
that month was at the same level as in the third quarter.
The relatively large share of workers employed part
time for economic reasons trended up a bit, on net,
while the share of long-duration unemployment in total
unemployment was essentially flat and remained elevated. Indicators of firms’ job openings and hiring plans
were little changed on balance. Initial claims for unemployment insurance were boosted in early November by the effects of Hurricane Sandy but returned
within weeks to a level that was about the same as before the hurricane.
Manufacturing production declined in October, as output was held down at the end of the month by the dis-
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ruptions and damage caused by Hurricane Sandy; the
rate of manufacturing capacity utilization also declined.
Automakers’ schedules indicated that the pace of motor vehicle assemblies would rise somewhat in the coming months. Broader indicators of factory output, such
as the diffusion indexes of new orders from the national and regional manufacturing surveys, continued to be
subdued at levels consistent with only small gains in
production in the near term.
Real personal consumption expenditures rose at a
modest pace in the third quarter, but spending declined
in October, likely in response in part to some disruptions caused by the hurricane. Probably reflecting
those disruptions, sales of light motor vehicles fell in
October but then increased notably in November.
Some factors that tend to influence household spending became less supportive: Real disposable personal
income moved up only slightly in the third quarter and
declined in October. Moreover, consumer sentiment
fell back in early December to about its level during the
summer. In contrast, household net worth increased in
the third quarter, partially a result of higher equity and
home values.
Conditions in the housing market continued to improve gradually, but construction activity was still at a
low level, restrained by the considerable inventory of
foreclosed and distressed homes and the tight credit
standards for mortgages. Starts and permits of new
single-family homes were essentially flat in October
after rising significantly in the preceding month. Starts
of new multifamily units rose in October, although
permits declined somewhat following their brisk increase in the previous month. Meanwhile, home prices
advanced further and sales of existing homes continued
to expand, but new home sales were little changed.
Real business expenditures on equipment and software
decreased in the third quarter. In October, nominal
new orders for nondefense capital goods excluding
aircraft moved up a little, but shipments of these capital
goods edged down and the level of orders remained
below that of shipments. In addition, other forwardlooking indicators of equipment investment by firms,
such as surveys of business conditions and capital
spending plans, were still subdued. Real business expenditures for nonresidential structures also decreased
in the third quarter, although nominal construction
spending by firms increased in October. Inventories in
most industries appeared to be roughly aligned with
sales in recent months.
Real federal government purchases increased markedly
in the third quarter, led by a sharp rise in defense
spending. However, data for nominal federal spending
in October pointed toward a decline in real defense
expenditures in the fourth quarter. Real state and local
government purchases were little changed in the third
quarter. State and local government payrolls decreased
on net over October and November, and nominal construction spending by these governments edged lower
in October.
The U.S. international trade deficit widened in October,
and both exports and imports fell sharply from the
previous month. The decrease in exports was widespread across categories, while the reduction in imports
importantly reflected lower purchases of consumer
goods and non-oil industrial supplies, although petroleum imports increased.
Consumer prices moved up more slowly in October
than in the preceding few months, primarily because of
a small decline in energy prices after several months of
large gains. Moreover, survey data indicated that retail
gasoline prices decreased further in November. Consumer food prices rose a little faster in October, as the
effects of last summer’s drought started to show
through at the retail level. Increases in consumer prices
excluding food and energy remained subdued. Nearterm inflation expectations from the Thomson Reuters/University of Michigan Surveys of Consumers
edged up, on balance, in November and early December, while longer-term inflation expectations in the survey were little changed and continued to run within the
relatively narrow range that has prevailed for some
time.
Measures of labor compensation indicated that gains in
nominal wages remained slow. Compensation per hour
in the nonfarm business sector increased slightly over
the year ending in the third quarter, and with a moderate rise in productivity, unit labor costs were essentially
unchanged. The employment cost index rose only a bit
faster than the measure of compensation per hour over
the same period. In October and November, increases
in average hourly earnings for all employees were small.
Economic activity abroad remained subdued, especially
in the advanced foreign economies. The euro-area
economy contracted further in the third quarter, and
consumer and business confidence remained low.
Economic activity in Japan also declined in the third
quarter, and a sharp drop in exports restrained economic growth in Canada. In emerging market economies, by contrast, recent data on exports and manufac-
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turing improved somewhat. In most countries, inflation was still well contained, and monetary policy
abroad generally remained accommodative.
Staff Review of the Financial Situation
U.S. financial conditions were little changed, on balance, over the intermeeting period. In early November,
market concerns about the fiscal outlook and ongoing
federal budget negotiations seemed to intensify,
prompting a notable reduction in equity prices and
yields on Treasury securities. But these concerns reportedly eased somewhat over subsequent weeks, and
the initial move in equity prices was reversed. In contrast, yields on intermediate- and long-term nominal
Treasury securities declined, on net, perhaps reflecting
some increase in safe-haven demand associated with
concerns about the potential economic effects of a substantial tightening in fiscal policy. Indicators of inflation compensation derived from nominal and inflationprotected Treasury securities showed mixed changes
and remained within the ranges observed over recent
years.
The expected path of the federal funds rate derived
from overnight index swap rates flattened somewhat,
on balance, over the intermeeting period, as longerdated rates declined. Market-based measures of uncertainty about the path of the federal funds rate beyond
the near term also declined. The survey of primary
dealers conducted prior to the December meeting
showed that they expected the FOMC to maintain purchases of longer-term securities after year-end at about
the current pace of $85 billion per month.
Conditions in unsecured and secured short-term dollar
funding markets remained stable, on net, over the intermeeting period, with reports of only limited disruptions to trading or operations following Hurricane
Sandy. Yields on Treasury bills maturing beyond the
year-end were noticeably lower than those on shorterterm bills; market participants pointed to the anticipated ending of the Federal Reserve’s maturity extension
program and the expiration of the Federal Deposit Insurance Corporation’s unlimited insurance of noninterest-bearing transaction deposits at the end of the year
as factors contributing to this pattern of yields.
In the December Senior Credit Officer Opinion Survey
on Dealer Financing Terms, respondents reported little
change in credit terms over the past three months for
important classes of dealer counterparties. While respondents reported that the use of leverage by counterparties had remained basically unchanged, they noted
greater demand for funding of various types of securitization products.
Broad U.S. equity price indexes edged up, on net, over
the intermeeting period, while equity prices of large
domestic banks decreased a little. Nevertheless, the
credit default swap spreads of most large domestic
bank holding companies continued to move lower.
Option-implied volatility for the S&P 500 index over
the next month declined moderately, on balance, while
measures of equity market volatility for longer maturities remained above their historical averages, excluding
the financial crisis period.
Yields on investment-grade corporate bonds were little
changed over the intermeeting period, and their spreads
over yields on comparable-maturity Treasury securities
widened modestly. Yields on speculative-grade corporate bonds fell to historical lows, and their spreads decreased slightly.
The pace of bond issuance by nonfinancial firms increased further in October and November after rising
robustly in the third quarter, as some firms reportedly
sought to issue new debt before the end of the year.
Commercial and industrial (C&I) loans outstanding
also expanded notably in October and November.
Nonfinancial commercial paper outstanding increased
somewhat in November following a small decline in
October. In the syndicated leveraged loan market, institutional issuance surged in October before subsiding
somewhat in November, although it remained at a stillrobust level.
Financial conditions in the commercial real estate
(CRE) sector were still generally strained amid elevated
vacancy and delinquency rates. However, prices for
CRE properties continued to increase in the third quarter, and issuance of commercial mortgage-backed securities remained at a solid pace in the current quarter.
Residential mortgage rates declined modestly over the
intermeeting period, largely in line with the decline in
MBS yields. Refinancing expanded a bit further in October and November. House prices continued to increase despite a rise in the proportion of properties
sold through foreclosures or short sales. The share of
existing mortgages that were seriously delinquent fell in
the third quarter but remained elevated.
Consumer credit continued to expand briskly in September, led by sizable increases in auto and student
loans. Revolving credit decreased in September but
was little changed, on net, over the previous few
months. Issuance of consumer asset-backed securities
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continued to rise at a strong pace. Delinquency rates
on consumer credit generally remained low, with the
notable exception of student loans.
Bank credit was about flat, on balance, over October
and November. Growth in C&I loans and consumer
loans was offset by a decline in banks’ residential real
estate loans. The November Survey of Terms of Business Lending indicated some easing in loan pricing and
terms.
M2 growth was rapid in October but slowed in November. Liquid deposits continued to grow at a strong
pace, as yields available on alternative money market
instruments remained low. Reserves increased over the
intermeeting period, in part because of the settlement
of the ongoing MBS purchases announced at the September FOMC meeting.
In many foreign financial markets, asset prices fluctuated as sentiment regarding negotiations over both the
U.S. fiscal situation and official support for vulnerable
euro-area countries shifted during the period. Spreads
on Greek sovereign bonds over comparable German
bunds fell, on balance, reflecting in part the agreement
by European officials and the International Monetary
Fund to grant further aid to Greece. However, spreads
on Italian and Spanish bonds were little changed on
balance over the period. On net, foreign equity prices
rose slightly. The foreign exchange value of the dollar
edged lower on balance. However, the dollar appreciated against the Brazilian real and the Japanese yen,
which were held down by weak economic data and, in
the case of the yen, by market reaction to statements
suggesting that the country’s likely next government
would urge the Bank of Japan to seek a higher rate of
inflation. Yields on foreign benchmark sovereign
bonds declined, as central banks maintained or extended monetary accommodation. The Bank of Japan expanded its asset purchase program and announced a
new lending scheme. The Bank of England announced
that it would transfer cash holdings from its asset purchase fund to the U.K. Treasury, a measure that may
exert some further downward pressure on gilt yields to
the extent that gilt issuance by the government is reduced. The Reserve Bank of Australia and several
emerging market central banks also eased monetary
policy.
The staff also reported on potential risks to financial
stability, including those associated with a disorderly
resolution of the so-called fiscal cliff, a delayed increase
in the federal debt ceiling, or a future deterioration of
financial conditions in Europe. In addition, in moni-
toring for possible adverse effects of the current environment of low 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
asset classes did not appear stretched, or supported by
excessive leverage. Indicators of risk-taking and leverage had moderately increased, on balance, over the past
couple of years but remained notably below their levels
before the financial crisis.
Staff Economic Outlook
In the economic projection prepared by the staff for
the December FOMC meeting, real gross domestic
product (GDP) growth in the near term was revised
down slightly relative to the previous forecast. This
downward revision primarily reflected weaker-thanexpected data for consumer spending and household
income that more than offset the somewhat betterthan-anticipated news regarding employment and business equipment investment. The staff’s medium-term
forecast for real GDP growth also was revised down a
little, as some of the recent weakness in household
spending and income was carried forward in the projection. In addition, financial conditions were anticipated
to be a little less supportive than expected in the staff’s
previous forecast. With federal fiscal policy assumed to
be tighter next year than this year, the staff expected
that the increase in real GDP would not materially exceed the growth rate of potential output in 2013. In
2014 and 2015, economic activity was projected to accelerate slowly, supported by a lessening in fiscal policy
restraint, gains in consumer and business confidence,
further improvements in financial conditions and credit
availability, and accommodative monetary policy. The
expansion in economic activity was anticipated to result
in only a gradual decline in slack in labor and product
markets over the forecast period, and progress in reducing unemployment was expected to be relatively
slow.
The staff’s projection for inflation in both the near
term and the medium term was essentially unchanged
from the forecast prepared for the previous FOMC
meeting. With crude oil prices expected to continue to
decrease slowly, the boost to retail food prices from
last summer’s drought anticipated to be only temporary
and fairly small, long-run inflation expectations assumed to remain stable, and considerable resource
slack persisting over the forecast period, the staff projected that inflation would be subdued through 2015.
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The staff viewed the uncertainty around the projection
for economic activity as somewhat elevated and the
risks as skewed to the downside, largely reflecting the
possibility of a more severe tightening in U.S. fiscal
policy than expected, along with continued concerns
about the economic and financial situation in Europe.
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 participant’s
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, participants regarded the information received during the intermeeting period as indicating that economic activity
and employment continued to expand at a moderate
pace, apart from weather-related disruptions. The unemployment rate had declined somewhat since the
summer but remained elevated. Although household
spending had continued to advance, growth in business
fixed investment had slowed. The housing sector had
shown further signs of improvement. Consumer price
inflation had been running somewhat below the Committee’s longer-run objective of 2 percent, apart from
temporary variations that largely reflected fluctuations
in energy prices, and longer-term inflation expectations
had remained stable.
In their assessments of the economic outlook, many
participants thought that the pace of economic expansion would remain moderate in 2013 before picking up
gradually in 2014 and 2015. This outlook was little
changed from their projections at recent meetings.
Hurricane Sandy was expected to weigh on economic
growth in the current quarter, but rebuilding could
provide some temporary impetus early in 2013. Partic-
ipants’ forecasts, which generally were conditioned on
the view that it would be appropriate to maintain a
highly accommodative monetary policy for a considerable time, included an outlook for a continued gradual
decline in the unemployment rate toward levels judged
to be consistent with the Committee’s mandate over
the longer run, with inflation running near the Committee’s 2 percent longer-run goal.
Participants observed that growth in economic activity
continued to be restrained by several persistent headwinds, including ongoing deleveraging on the part of
households and still-tight credit conditions for some
borrowers, and that a major headwind facing the economy at present appeared to be uncertainty about U.S.
fiscal policy and the outcome of the ongoing negotiations on federal spending and taxes. While participants
generally saw it as likely that the Congress and the Administration would avert the full force of the tax increases and spending cuts scheduled to occur in 2013,
almost all indicated that heightened uncertainty about
fiscal policy probably was affecting economic activity
adversely. For example, it likely had reduced household and business confidence and led firms to defer
hiring and investment spending. Some participants
noted that an early and constructive resolution to fiscal
policy negotiations had the potential to release pent-up
demand and therefore be followed by a boost to spending, investment, and employment; however, a few
pointed out that an extended breakdown of negotiations could have significant adverse effects on economic growth. Other factors weighing on the economic
outlook included the slowdown in global economic
growth and continued uncertainty regarding the European fiscal and banking situation.
In their discussion of the household sector, many participants noted a recent drop in consumer sentiment
and a softening in consumer spending. Some participants thought this reflected uncertainty about fiscal
policy, including the prospect of higher taxes, and several noted that growth of households’ real disposable
income remained weak despite recent gains in employment. While indicators of spending were mixed, purchases of autos and other durables remained relatively
strong. A couple of participants observed that businesses in a few areas had reported strong holidayrelated activity. Many pointed out that reductions in
households’ debt, together with rising home prices, had
led to an improvement in household balance sheets; it
was noted that household net worth was approaching
levels seen before the financial crisis.
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Business contacts in many parts of the country were
also said to be highly uncertain about the outlook for
U.S. fiscal policy, and participants noted that this uncertainty appeared to have weighed on investment and
hiring decisions. Although firms’ balance sheets were
generally strong and liquidity was ample, some business
contacts reported that they had shifted toward a higher
proportion of part-time employees and postponed
plans to expand capacity. A number of participants
suggested that the business sector was well positioned
to expand spending and hiring quickly upon a positive
resolution of the fiscal cliff negotiations. In a few regions, contacts reported concerns about the expense
associated with new regulations, including those related
to health care, and in some cases indicated a shift to the
hiring of part-time workers in order to avoid these
costs. There were reports of weaker manufacturing,
particularly in the Northeast in the aftermath of Hurricane Sandy, and a slackening in economic activity in the
Southwest related in part to cutbacks in defense spending. Export orders had softened, reflecting the slowdown in global growth. The energy sector continued to
expand. In the agricultural sector, farm incomes were
high, notwithstanding the drought, although elevated
grain prices were cutting into profits on livestock.
Meeting participants generally agreed that the recovery
in the housing sector had continued. Many commented that the headwinds facing the housing market appeared to have dissipated somewhat. The capacity constraints on the processing of new home-mortgage applications appeared to be easing, and gradually rising
home prices had reduced the proportion of households
with underwater mortgages. It was noted that the mix
of new home sales seemed to have shifted from homes
already completed to homes not yet built.
In discussing labor market developments, participants
generally viewed the recent data as having been somewhat better than expected, with moderate gains in payroll employment and a decline in the unemployment
rate. However, the unemployment rate remained elevated, and part of the decline in unemployment in November was attributable to a drop in labor force participation. A few participants noted that some exits from
the labor force may have been related to the loss or
prospective loss of eligibility for emergency unemployment insurance benefits. Several pointed to indicators suggesting that rates of hiring remained depressed
relative to those observed before the financial crisis. A
couple of participants noted that vacancies remained at
a high level in terms of their historical relationship to
the rate of unemployment, suggesting that at least some
firms were having a hard time finding suitable workers;
indeed, business contacts in a couple of regions had
reported difficulty in locating and retaining workers
with requisite skills. However, one participant suggested that employer−worker mismatch likely reflected
longer-term problems and had probably not worsened
materially as a result of the recent deep recession and
slow recovery.
Incoming information pointed to stable, low inflation
that was running a little below the Committee’s longerrun goal of 2 percent. Crude oil prices had moved
down since the October meeting amid accumulating
inventories and market concerns about a weaker global
outlook. Despite some reports of labor shortages in
certain industries, compensation pressures had remained subdued, and unit labor costs were little
changed over the previous four quarters. Most participants saw the risks to the inflation outlook as broadly
balanced, and many noted that longer-term inflation
expectations were well anchored. One participant,
however, expressed concern that considerable uncertainty surrounded the relationship between unemployment and inflation, raising questions about the extent
to which resource slack would keep inflation restrained
over the medium term.
In their discussion of financial developments, a few
participants commented that recent steps taken by European authorities had reduced volatility in sovereign
debt markets over the intermeeting period; however,
concerns remained about the fiscal and economic outlook in Europe. Many noted the ongoing deleveraging
in the private nonfinancial sector of the U.S. economy
and indicated that it was difficult to judge when that
process would be complete. A few participants, observing that low interest rates had increased the demand for riskier financial products, pointed to the possibility that holding interest rates low for a prolonged
period could lead to financial imbalances and imprudent risk-taking. One participant suggested that there
were several historical episodes in the United States and
other countries that might be used to build a better
understanding of the financial strains that could develop from a long period of very low long-term interest
rates. Pointing to a recent decision of the Financial
Stability Oversight Council, one participant commented
that further money market mutual fund reform would
help reduce risk in the financial system.
Participants exchanged views on the likely benefits and
costs of additional asset purchases in the context of an
assessment of the ongoing purchases of MBS and pos-
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sible additional purchases of longer-term Treasury securities to follow the conclusion of the maturity extension program. Regarding the benefits, it was noted that
asset purchases provide support to the economic recovery by putting downward pressure on longer-term
interest rates and promoting more-accommodative financial conditions. Participants discussed the effectiveness of purchasing different types of assets and the
potential for the effects on yields from purchases in the
market for one class of securities to spill over to other
markets. If these spillovers are significant, then purchases of longer-term Treasury securities might be preferred, in light of the depth and liquidity of that market.
However, if markets are more segmented, purchases of
MBS might be preferred because they would provide
more support to real activity through the housing sector. One participant commented that the best approach would be to continue purchases in both the
Treasury and MBS markets, given the uncertainty about
the precise channels through which asset purchases
operated. Others emphasized the advantages of MBS
purchases, including by noting the apparent effectiveness of recent MBS purchases on the housing market,
while another participant objected and thought that
Federal Reserve purchases should not direct credit to a
specific sector. With regard to the possible costs and
risks of purchases, a number of participants expressed
the concern that additional purchases could complicate
the Committee’s efforts to eventually withdraw monetary policy accommodation, for example, by potentially
causing inflation expectations to rise or by impairing
the future implementation of monetary policy. Participants also discussed the implications of continued asset
purchases for the size of the Federal Reserve’s balance
sheet. Depending on the path for the balance sheet
and interest rates, the Federal Reserve’s net income and
its remittances to the Treasury could be significantly
affected during the period of policy normalization.
Participants noted that the Committee would need to
continue to assess whether large purchases were having
adverse effects on market functioning and financial
stability. They expressed a range of views on the appropriate pace of purchases, both now and as the outlook evolved. It was agreed that both the efficacy and
the costs would need to be carefully monitored and
taken into account in determining the size, pace, and
composition of asset purchases.
Meeting participants discussed the possibility of replacing the calendar date in the forward guidance for the
federal funds rate with specific quantitative thresholds
of 6½ percent for the unemployment rate and 2½ per-
cent for projected inflation between one and two years
ahead. Most participants favored replacing the calendar-date forward guidance with economic thresholds,
and several noted that the consistency between the
“mid-2015” reference in the Committee’s October
statement and the specific quantitative thresholds being
considered at the current meeting provided an opportunity for a smooth transition. However, possible advantages of waiting a while to introduce the change to
the Committee’s forward guidance were also mentioned, including that a delay might simplify communications by keeping the introduction of thresholds separate from the announcement of additional asset purchases. Among the benefits of quantitative thresholds
that were cited was that they could help the public
more readily understand how the likely timing of an
eventual increase in the federal funds rate would shift
in response to unanticipated changes in economic conditions and the outlook. Accordingly, thresholds could
increase the probability that market reactions to economic developments would move longer-term interest
rates in a manner consistent with the Committee’s view
regarding the likely future path of short-term interest
rates. A few participants expressed a preference for
using a qualitative description of the economic indicators influencing the Committee’s thinking about current and future monetary policy rather than quantitative
guidance because they felt that qualitative guidance
would be at least as effective as numerical thresholds
while avoiding some potential disadvantages, including
the possibility that the numerical thresholds would be
mistakenly interpreted as the Committee’s longer-run
objectives. A few participants commented that the
quantitative thresholds might be interpreted as triggers
that, when reached, would prompt an immediate increase in short-term rates. However, a number of participants indicated that the Chairman’s press conference and other avenues of communication could be
used to emphasize, for example, the distinction between thresholds and the longer-run objectives as well
as between thresholds and triggers. Participants also
discussed the importance of clarifying that the thresholds would not be followed mechanically and that a
variety of indicators of labor market conditions and
inflation pressures, as well as financial developments,
would be taken into account in setting policy.
Committee Policy Action
Committee members viewed the information received
over the intermeeting period as suggesting that economic activity and employment continued to expand at
a moderate pace in recent months, abstracting from
Minutes of the Meeting of December 11–12, 2012
Page 9
_____________________________________________________________________________________________
weather-related disruptions. Household spending had
continued to advance and the housing sector had
shown further signs of improvement, but growth in the
business sector had slowed. Anecdotal evidence indicated that uncertainty about U.S. fiscal policy weighed
heavily on sentiment in the household and business
sectors. Although the unemployment rate had declined
somewhat since the summer, it was still elevated relative to levels that members viewed as normal in the
longer run. Members generally agreed that the economic outlook was little changed since the previous
meeting and judged that, without sufficient policy accommodation, economic growth might not be strong
enough to generate sustained improvement in labor
market conditions. Furthermore, strains in global financial markets continued to pose significant downside
risks to the economic outlook. Inflation had been subdued, apart from some temporary variations that largely
reflected fluctuations in energy prices. With longerterm inflation expectations stable, inflation over the
medium term was anticipated to run at or below the
Committee’s longer-run objective of 2 percent.
In their discussion of monetary policy for the period
ahead, all members but one judged that continued provision of monetary accommodation was warranted in
order to support further progress toward the Committee’s goals of maximum employment and price stability.
The Committee judged that such accommodation
should be provided in part by continuing to purchase
MBS at a pace of $40 billion per month and by purchasing longer-term Treasury securities, initially at a
pace of $45 billion per month, following the completion of the maturity extension program at the end of
the year. The Committee also maintained its existing
policy of reinvesting principal payments from its holdings of agency debt and agency MBS into agency MBS
and decided that, starting in January, it will resume rolling over maturing Treasury securities at auction. While
almost all members thought that the asset purchase
program begun in September had been effective and
supportive of growth, they also generally saw that the
benefits of ongoing purchases were uncertain and that
the potential costs could rise as the size of the balance
sheet increased. Various members stressed the importance of a continuing assessment of labor market
developments and reviews of the program’s efficacy
and costs at upcoming FOMC meetings. In considering the outlook for the labor market and the broader
economy, a few members expressed the view that ongoing asset purchases would likely be warranted until
about the end of 2013, while a few others emphasized
the need for considerable policy accommodation but
did not state a specific time frame or total for purchases. Several others thought that it would probably be
appropriate to slow or to stop purchases well before
the end of 2013, citing concerns about financial stability or the size of the balance sheet. One member
viewed any additional purchases as unwarranted.
With regard to its forward guidance about the federal
funds rate, the Committee decided to indicate in the
statement language that it expects the highly accommodative stance of monetary policy to remain appropriate for a considerable time after the asset purchase
program ends and the economic recovery strengthens.
In addition, all but one member agreed to replace the
date-based guidance with economic thresholds indicating that the exceptionally low range for the federal
funds rate would remain appropriate at least as long as
the unemployment rate remains above 6½ percent,
inflation between one and two years ahead is projected
to be no more than a half percentage point above the
Committee’s longer-run goal, and longer-term inflation
expectations continue to be well anchored. The Committee thought it would be helpful to indicate in the
statement that it viewed the economic thresholds as
consistent with its earlier, date-based guidance. The
new language noted that the Committee would also
consider other information when determining how
long to maintain the highly accommodative stance of
monetary policy, including additional measures of labor
market conditions, indicators of inflation pressures and
inflation expectations, and readings on financial developments. One member dissented from the policy decision, opposing the new economic threshold language in
the forward guidance, as well as the additional asset
purchases and continued intervention in the MBS market.
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 complete
the maturity extension program it announced
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Federal Open Market Committee
_____________________________________________________________________________________________
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
maturities of approximately 3 years or less
with a total face value of about $267 billion.
Following the completion of this program,
the Committee directs the Desk to resume its
policy of rolling over maturing Treasury securities into new issues. From the beginning
of January, the Desk is directed to purchase
longer-term Treasury securities at a pace of
about $45 billion per month. 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 continue 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 October
suggests that economic activity and employment have continued to expand at a moderate pace in recent months, apart from weather-related disruptions. Although the unemployment rate has declined somewhat since
the summer, it remains elevated. Household
spending has continued to advance, and the
housing sector has shown further signs of
improvement, but growth in business fixed
investment has slowed. Inflation has been
running somewhat below the Committee’s
longer-run objective, apart from temporary
variations that largely reflect fluctuations in
energy prices. Longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the
Committee seeks to foster maximum employment and price stability. The Committee
remains concerned that, without sufficient
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 will 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 will continue purchasing additional agency mortgage-backed
securities at a pace of $40 billion per month.
The Committee also will purchase longerterm Treasury securities after its program to
extend the average maturity of its holdings of
Treasury securities is completed at the end of
the year, initially at a pace of $45 billion per
month. The Committee is maintaining its
existing policy of reinvesting principal payments from its holdings of agency debt and
agency mortgage-backed securities in agency
mortgage-backed securities and, in January,
will resume rolling over maturing Treasury
securities at auction. Taken together, these
actions should maintain 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 Treasury and agency mortgagebacked securities, 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.
Minutes of the Meeting of December 11–12, 2012
Page 11
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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
asset purchase program ends and the economic recovery strengthens. In particular,
the Committee decided to keep the target
range for the federal funds rate at 0 to
¼ percent and currently anticipates that this
exceptionally low range for the federal funds
rate will be appropriate at least as long as the
unemployment rate remains above 6½ percent, inflation between one and two years
ahead is projected to be no more than a half
percentage point above the Committee’s
2 percent longer-run goal, and longer-term
inflation expectations continue to be well anchored. The Committee views these thresholds as consistent with its earlier date-based
guidance. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider
other information, including additional
measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to
begin to remove policy accommodation, it
will take a balanced approach consistent with
its longer-run goals of maximum employment and inflation of 2 percent.”
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 objected to the asset
purchases and to the characterization of the conditions
under which an exceptionally low range for the federal
funds rate would remain appropriate. He continued to
view asset purchases as unlikely to add to economic
growth without unacceptably increasing the risk of future inflation, and to see purchases of MBS as inappropriate credit allocation. With regard to the funds rate,
Mr. Lacker was concerned that linking the forward
guidance to a specific numerical level of the unemployment rate would inhibit the effectiveness of the
Committee’s communications and increase the potential for inflationary policy errors; he preferred qualitative guidance instead.
It was agreed that the next meeting of the Committee
would be held on Tuesday–Wednesday, January 29–30,
2013. The meeting adjourned at 11:25 a.m. on December 12, 2012.
Notation Vote
By notation vote completed on November 9, 2012, the
Committee unanimously approved the minutes of the
FOMC meeting held on October 23–24, 2012.
_____________________________
William B. English
Secretary
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Summary of Economic Projections
In conjunction with the December 11–12, 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 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. Each participant’s assessment was based on information available
at the time of the meeting plus his or her judgment of
appropriate monetary policy and assumptions about the
factors likely to affect economic outcomes. The longer-run projections represent each participant’s judgment of the value 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 each participant deems
most likely to foster outcomes for economic activity
and inflation that best satisfy his or her individual interpretation of the Federal Reserve’s objectives of maximum employment and stable prices.
period and inflation would remain subdued (table 1 and
figure 1). Participants anticipated that the growth rate
of real gross domestic product (GDP) would increase
somewhat in 2013 and again in 2014, and that economic growth in 2014 and 2015 would exceed their estimates of the longer-run sustainable rate of growth,
while the unemployment rate would decline gradually
through 2015. Participants projected that each year’s
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,
14 participants thought that it would be appropriate for
the first increase in the target federal funds rate to occur during 2015 or later. Most participants judged that
appropriate monetary policy would include purchasing
agency mortgage-backed securities (MBS) and longerterm Treasury securities after the completion of the
maturity extension program at the end of 2012.
As in September, participants 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
Overall, the assessments submitted in December indicated that FOMC participants projected that, under
appropriate monetary policy, the pace of economic
recovery would gradually pick up over the 2012–15
Table 1. Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents, December 2012
Percent
Variable
Central tendency1
2012
2013
2014
2015
Range2
Longer run
2012
2013
2014
2015
Longer run
Change in real GDP . . 1.7 to 1.8 2.3 to 3.0 3.0 to 3.5 3.0 to 3.7
September projection . 1.7 to 2.0 2.5 to 3.0 3.0 to 3.8 3.0 to 3.8
2.3 to 2.5
2.3 to 2.5
1.6 to 2.0 2.0 to 3.2
1.6 to 2.0 2.3 to 3.5
2.8 to 4.0
2.7 to 4.1
2.5 to 4.2
2.5 to 4.2
2.2 to 3.0
2.2 to 3.0
Unemployment rate. . . 7.8 to 7.9 7.4 to 7.7 6.8 to 7.3 6.0 to 6.6
September projection . 8.0 to 8.2 7.6 to 7.9 6.7 to 7.3 6.0 to 6.8
5.2 to 6.0
5.2 to 6.0
7.7 to 8.0 6.9 to 7.8
8.0 to 8.3 7.0 to 8.0
6.1 to 7.4
6.3 to 7.5
5.7 to 6.8
5.7 to 6.9
5.0 to 6.0
5.0 to 6.3
PCE inflation. . . . . . . . 1.6 to 1.7 1.3 to 2.0 1.5 to 2.0 1.7 to 2.0
September projection . 1.7 to 1.8 1.6 to 2.0 1.6 to 2.0 1.8 to 2.0
2.0
2.0
1.6 to 1.8 1.3 to 2.0
1.5 to 1.9 1.5 to 2.1
1.4 to 2.2
1.6 to 2.2
1.5 to 2.2
1.8 to 2.3
2.0
2.0
1.6 to 1.8 1.5 to 2.0
1.6 to 2.0 1.6 to 2.0
1.5 to 2.0
1.6 to 2.2
1.7 to 2.2
1.8 to 2.3
Core PCE inflation3. . 1.6 to 1.7 1.6 to 1.9 1.6 to 2.0 1.8 to 2.0
September projection . 1.7 to 1.9 1.7 to 2.0 1.8 to 2.0 1.9 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 September projections were made in conjunction with the meeting of the Federal
Open Market Committee on September 12–13, 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 December 11–12, 2012
Page 3
_____________________________________________________________________________________________
Figure 2. Overview of FOMC participants’ assessments of appropriate monetary policy, December 2012
Number of participants
Appropriate timing of policy firming
13
13
12
11
10
9
8
7
6
5
4
3
3
2
2
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 September 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, 1, 3,
2, 12, and 1. 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
_____________________________________________________________________________________________
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, more saw the level of uncertainty to be broadly similar to historical norms; most
considered the risks to inflation to be roughly balanced.
The Outlook for Economic Activity
Participants judged that the economy grew at a moderate pace over the second half of 2012 and projected
that, conditional on their individual assumptions about
appropriate monetary policy, the economy would grow
at a somewhat faster pace in 2013 before expanding in
2014 and 2015 at a rate 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 1.8 percent, slightly lower than in
September. A number of participants mentioned that
last summer’s drought and the effects of Hurricane
Sandy likely had held down economic activity in the
second half of this year. Many participants also noted
that, while conditions in the housing and labor markets
appeared to have improved recently, uncertainty about
fiscal policy appeared to be holding back business and
household spending. Participants’ projections for 2013
through 2015 were generally little changed relative to
their September projections. The central tendency of
participants’ projections for real GDP growth in 2013
was 2.3 to 3.0 percent, followed by a central tendency
of 3.0 to 3.5 percent for 2014 and one of 3.0 to
3.7 percent for 2015. The central tendency for the
longer-run rate of increase of real GDP remained 2.3 to
2.5 percent, unchanged from September. Most participants noted that the high degree of monetary policy
accommodation assumed in their projections would
help promote the economic recovery over the forecast
period; however, they also judged that several factors
would likely hold back the pace of economic expansion, including slower growth abroad, a still-weak housing market, the difficult fiscal and financial situation in
Europe, and fiscal restraint in the United States.
Participants projected the unemployment rate for the
final quarter of 2012 to be close to its average level in
October and November, implying a rate somewhat
below that projected in September. Participants anticipated a gradual decline in the unemployment rate over
the forecast period; even so, they generally thought that
the unemployment rate at the end of 2015 would still
be well above their individual estimates of its longerrun normal level. The central tendencies of participants’ forecasts for the unemployment rate were 7.4 to
7.7 percent at the end of 2013, 6.8 to 7.3 percent at the
end of 2014, and 6.0 to 6.6 percent at the end of 2015.
The central tendency of participants’ estimates of the
longer-run normal rate of unemployment that would
prevail under appropriate monetary policy and in the
absence of further shocks to the economy was 5.2 to
6.0 percent, unchanged from September. Most participants projected that the unemployment rate would
converge to their estimates of its longer-run normal
rate 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 the data for much of 2012 now in hand, the dispersion of participants’ projections of real GDP growth
and the unemployment rate this year narrowed compared with their September submissions. Meanwhile,
the distribution of participants’ forecasts for the change
in real GDP in 2013 shifted down a bit, and that for
2014 narrowed slightly. However, the range of projections for real GDP growth in 2015 was little changed
from September. The distributions of the unemployment rate projections at the end of 2012, 2013, and
2014 all shifted lower, while the range of projections
for the unemployment rate for 2015, at 5.7 to 6.8 percent, remained close to its September level. The dispersion of estimates for the longer-run rate of output
growth stayed fairly narrow, with all but one between
2.2 and 2.5 percent. The range of participants’ estimates of the longer-run rate of unemployment, at
5.0 to 6.0 percent, narrowed relative to September.
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 appropriate monetary policy were little changed
from September. Most anticipated that inflation for
2012 as a whole would be close to 1.6 percent, somewhat lower than projected in September. A number of
Summary of Economic Projections of the Meeting of December 11–12, 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
2012
December projections
September 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
20
18
16
14
12
10
8
6
4
2
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
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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
December projections
September projections
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
Percent range
Number of participants
20
18
16
14
12
10
8
6
4
2
2013
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
Percent range
Number of participants
20
18
16
14
12
10
8
6
4
2
2014
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
Percent range
Number of participants
20
18
16
14
12
10
8
6
4
2
2015
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
Percent range
Number of participants
20
18
16
14
12
10
8
6
4
2
Longer run
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
Percent range
Note: Definitions of variables are in the general note to table 1.
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
Summary of Economic Projections of the Meeting of December 11–12, 2012
Page 7
_____________________________________________________________________________________________
participants remarked that recent inflation readings had
come in below their expectations. Almost all of the
participants judged that both headline and core inflation would remain subdued over the 2013–15 period,
running at rates equal to or below the FOMC’s longerrun objective of 2 percent. Specifically, the central tendency of participants’ projections for inflation, as
measured by the PCE price index, moved down to
1.3 to 2.0 percent for 2013 and was little changed for
2014 and 2015 at 1.5 to 2.0 percent and 1.7 to 2.0 percent, respectively. The central tendencies of the forecasts for core inflation were broadly similar to those for
the headline measure for 2013 through 2015. In discussing factors likely to sustain low inflation, several
participants cited stable inflation expectations and expectations for continued sizable resource slack.
Figures 3.C and 3.D provide information about the
diversity of participants’ views about the outlook for
inflation. The range of participants’ projections for
headline inflation for 2012 narrowed from 1.5 to
1.9 percent in September to 1.6 to 1.8 percent in December; nearly all participants’ projections in December
were at 1.6 percent or 1.7 percent, broadly in line with
recent inflation readings. The distributions of participants’ projections for headline inflation in 2013 and
2014 shifted lower compared with the corresponding
distributions for September, 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, although somewhat less
so than in September.
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, 13 participants thought that the first increase in the
target federal funds rate would not be warranted until
2015, and 1 judged that policy firming would likely not
be appropriate until 2016 (upper panel). The 13 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 1¼ percent or lower at the end of that year, while the 1 participant who expected that policy firming would commence in 2016 saw the federal funds rate target at
50 basis points at the end of that year. Five participants judged that an earlier increase in the federal funds
rate, in 2013 or 2014, would be most consistent with
the Committee’s statutory mandate. Those participants
judged that the appropriate value for the federal funds
rate would range from ½ to 2¾ percent at the end of
2014 and from 2 to 4½ percent at the end of 2015.
Among the participants who saw a later tightening of
policy, a majority indicated that they believed it was
appropriate to maintain the current level of the federal
funds rate until the unemployment rate is less than or
equal to 6½ percent. In contrast, a majority of those
who favored an earlier tightening of policy pointed to
concerns about inflation as a primary reason for expecting that it would be appropriate to tighten policy
sooner. Participants were about evenly split between
those who judged the appropriate path for the federal
funds rate to be unchanged relative to September and
those who saw the appropriate path as lower.
Nearly all participants saw the appropriate target for
the federal funds rate at the end of 2015 as still well
below its expected longer-run value. 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 information on their views
regarding the appropriate path of the Federal Reserve’s
balance sheet. Most participants thought it was appropriate for the Committee to continue purchasing MBS
and longer-term Treasury securities after completing
the maturity extension program at the end of this year.
In their projections, taking into account the likely benefits and costs of purchases as well as the expected evolution of the outlook, these participants were approximately evenly divided between those who judged that it
would likely be appropriate for the Committee to complete its asset purchases sometime around the middle
of 2013 and those who judged that it would likely be
appropriate for the asset purchases to continue beyond
that date. In contrast, several participants believed the
Committee would best foster its dual objectives by ending its purchases of Treasury securities or all of its asset
purchases at the end of this year when the maturity
extension program was completed.
Key factors informing participants’ views of the economic outlook and the appropriate setting for monetary policy include their judgments regarding labor
market conditions that would be consistent with maximum employment, the extent to which employment
currently deviated from maximum employment, the
extent to which projected inflation over the medium
term deviated from the Committee’s longer-term objective of 2 percent, and participants’ projections of the
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
December projections
September 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
20
18
16
14
12
10
8
6
4
2
2013
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
1.3 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
1.3 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
1.3 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
Summary of Economic Projections of the Meeting of December 11–12, 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
December projections
September projections
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
1.5 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
1.5 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
1.5 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
_____________________________________________________________________________________________
likely time horizon necessary to return employment and
inflation to mandate-consistent levels. Many participants mentioned economic thresholds based on the
unemployment rate and the inflation outlook that were
consistent with their judgments of when it would be
appropriate to consider beginning to raise the federal
funds rate. A couple of participants noted that their
assessments of the appropriate path for the federal
funds rate took into account the likelihood that the
neutral level of the federal funds rate was somewhat
below its historical norm. There was some concern
expressed that a protracted period of very accommodative monetary policy could lead to imbalances in the
financial system. It was also noted that because the
appropriate stance of monetary policy is conditional on
the evolution of real activity and inflation over time,
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 until 2015. Views on the appropriate level of the federal funds rate by the end of
2015 varied, with 12 participants seeing the appropriate
level of the federal funds rate as 1 percent or lower and
4 of them seeing the appropriate level as 2½ percent or
higher. Generally, the participants who judged that a
longer period of very accommodative monetary policy
would be appropriate were those who projected that a
sizable gap between the unemployment rate and the
longer-run normal level of the unemployment rate
would persist until 2015 or later. In contrast, the majority of the 5 participants who judged that policy firming should begin in 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 of the participants judged their current levels
of uncertainty about real GDP growth and unemployment to be higher than was the norm during the previ-
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.
ous 20 years (figure 4).1 Seven participants judged that
the levels of uncertainty associated with their forecasts
of total PCE inflation were higher as well, while another 10 participants viewed uncertainty about inflation as
broadly similar to historical norms. The main factors
cited as contributing to the elevated uncertainty about
economic outcomes were the difficulties involved in
predicting fiscal policy in the United States, the continuing potential for European developments to threaten
financial stability, and the possibility of a general slowdown in global economic growth. As in September,
participants noted the challenges 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 also commented that in the aftermath of the
financial crisis, they were more uncertain about the level of potential output and its rate of growth. It was
noted that some of the uncertainty about potential output arose from the risk that a continuation of elevated
levels of long-term unemployment might impair the
skills of the affected individuals or cause some of them
to drop out of the labor force, thereby reducing potential output in the medium term.
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 through
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
Summary of Economic Projections of the Meeting of December 11–12, 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
December projections
September 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
December projections
September 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
December projections
September 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 December 11–12, 2012
Page 13
_____________________________________________________________________________________________
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 U.S. fiscal policy, which many participants
thought had the potential to slow economic activity
significantly over the near term, and the situation in
Europe.
Most participants continued to judge the risks to their
projections for inflation as broadly balanced, with several highlighting the recent stability of longer-term in
flation expectations. However, three participants saw
the risks to inflation as tilted to the downside, reflecting, for example, risks of disinflation that could arise
from adverse shocks to the economy that policy would
have limited scope to offset. A couple of participants
saw the risks to inflation as weighted to the upside 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, December 11). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_20121212
@misc{wtfs_fomc_minutes_20121212,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {2012},
month = {Dec},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_20121212},
note = {Retrieved via When the Fed Speaks corpus}
}