FOMC Minutes

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Minutes of the Federal Open Market Committee

March 19–20, 2013

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, March 19, 2013, at 10:00 a.m., and continued on

Wednesday, March 20, 2013, at 9:00 a.m.

PRESENT:

Ben Bernanke, Chairman

William C. Dudley, Vice Chairman

James Bullard

Elizabeth Duke

Charles L. Evans

Esther L. George

Jerome H. Powell

Sarah Bloom Raskin

Eric Rosengren

Jeremy C. Stein

Daniel K. Tarullo

Janet L. Yellen

Christine Cumming, Richard W. Fisher, Narayana

Kocherlakota, Sandra Pianalto, and Charles I.

Plosser, Alternate Members of the Federal

Open Market Committee

Jeffrey M. Lacker, Dennis P. Lockhart, and John C.

Williams, Presidents of the Federal Reserve

Banks of Richmond, Atlanta, and San Francisco, 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

Thomas A. Connors, Troy Davig, Michael P.

Leahy, Stephen A. Meyer, David Reifschneider, Christopher J. Waller, and William

Wascher, Associate Economists

Simon Potter, Manager, System Open Market Account

Michael S. Gibson, Director, Division of Banking

Supervision and Regulation, Board of Governors

Nellie Liang, Director, Office of Financial Stability

Policy and Research, Board of Governors

James A. Clouse and William Nelson, Deputy Directors, Division of Monetary Affairs, Board of

Governors

Jon W. Faust, Special Adviser to the Board, Office

of Board Members, 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

Ellen M. Meade, Senior Adviser, Division of Monetary Affairs, Board of Governors

Eric M. Engen, Thomas Laubach, David E. Lebow, and Michael G. Palumbo, Associate Directors, Division of Research and Statistics,

Board of Governors

William F. Bassett, Deputy Associate Director, Division of Monetary Affairs, Board of Governors

Stacey Tevlin, Assistant Director, Division of Research and Statistics, Board of Governors; Min

Wei, Assistant Director, Division of Monetary

Affairs, Board of Governors

Jeremy B. Rudd, Adviser, Division of Research and

Statistics, Board of Governors

David H. Small, Project Manager, Division of

Monetary Affairs, Board of Governors

Gregory L. Stefani, First Vice President, Federal

Reserve Bank of Cleveland

David Altig, Loretta J. Mester, Glenn D. Rudebusch, and Mark S. Sniderman, Executive Vice

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Presidents, Federal Reserve Banks of Atlanta,

Philadelphia, San Francisco, and Cleveland, respectively

Spencer Krane, Lorie K. Logan, Kevin Stiroh, and

Kei-Mu Yi, Senior Vice Presidents, Federal Reserve Banks of Chicago, New York, New

York, and Minneapolis, respectively

Evan F. Koenig, Jonathan P. McCarthy, Giovanni

Olivei, and Julie Ann Remache,¹ Vice Presidents, Federal Reserve Banks of Dallas, New

York, Boston, and New York, respectively

Robert L. Hetzel, Senior Economist, Federal Reserve Bank of Richmond

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¹ Attended Tuesday’s session only.

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

The Manager of the System Open Market Account

reported on developments in domestic and foreign financial markets as well as the System open market operations during the period since the Federal Open Market Committee (FOMC) met on January 29–30, 2013.

The Manager also reported on developments in foreign

money markets and implications for the assets that the

Federal Reserve holds in its foreign currency portfolio.

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.

Staff Review of the Economic Situation

The information reviewed at the March 19–20 meeting

suggested that economic activity was expanding at a

moderate rate in the first quarter of this year after the

slowdown late last year. Private-sector employment

increased at a fairly solid pace, on balance, and the unemployment rate, though still elevated, was slightly

lower in February than in the fourth quarter of last

year. Consumer price inflation, excluding some temporary fluctuations in energy prices, was subdued, while

measures of longer-run inflation expectations remained

stable.

Private nonfarm employment increased at a modest

rate in January but expanded more briskly in February,

while government employment continued to decrease.

The unemployment rate was 7.7 percent in February,

slightly less than its fourth-quarter average; the labor

force participation rate was also a bit below its fourthquarter average. The rate of long-duration unemployment and the share of workers employed part time for

economic reasons were little changed, on net, and both

measures remained high. Initial claims for unemployment insurance trended down somewhat over the intermeeting period. The rate of private-sector hiring,

along with indicators of job openings and firms’ hiring

plans, were generally subdued and were consistent with

continued moderate increases in employment in the

coming months.

Manufacturing production increased strongly in February after declining in January, and the rate of manufacturing capacity utilization in February was a little higher

than in the fourth quarter. The production of motor

vehicles and parts rose considerably in February, and

there were also widespread increases in factory output

in other sectors. Automakers’ schedules, however, indicated that the pace of motor vehicle assemblies in the

coming months would be a bit below that in February.

Broader indicators of manufacturing production, such

as the diffusion indexes of new orders from the national and regional manufacturing surveys, were at levels

that pointed to moderate increases in factory production in the near term.

Real personal consumption expenditures rose modestly

in January. In February, nominal retail sales, excluding

those at motor vehicle and parts outlets, increased at a

strong rate, while light motor vehicle sales edged up.

Some key factors that tend to influence household

spending were mixed: Households’ real disposable

incomes declined in January, reflecting in part the increases in both payroll and income taxes that went into

effect at the beginning of the year and the previous

pulling forward of taxable income from 2013 into 2012;

in contrast, household net worth likely rose in recent

months as a result of higher equity values and home

prices. Consumer sentiment in the Thomson Reuters/University of Michigan Surveys of Consumers

rose somewhat in February, but it declined in early

March and remained relatively downbeat.

Conditions in the housing sector improved further, but

construction activity was still at a relatively low level

and continued to be restrained by tight credit standards

for mortgages. Both starts and permits of new singlefamily homes increased, on net, over January and February. Starts of multifamily units declined, on balance,

but permits rose, consistent with additional gains in

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construction in coming months. Sales of both new and

existing homes advanced in January, and home prices

increased further.

Real business expenditures on equipment and software

appeared to slow somewhat early this year after rising

at a brisk rate in the fourth quarter. Nominal shipments for nondefense capital goods excluding aircraft

decreased in January, but nominal orders increased to a

level above that of shipments, pointing to higher shipments in the near term. Other forward-looking indicators, such as surveys of business conditions and capital

spending plans, also suggested that outlays for business

equipment would rise in the coming months. Nominal

business spending for nonresidential construction declined in January. Business inventories in most industries appeared to be generally aligned with sales in recent months.

Real federal government purchases appeared to decrease further in January and February, as defense

spending continued to contract on balance. Real state

and local government purchases looked to have declined as nonfederal government payrolls decreased in

January and February and nominal construction expenditures fell in January.

The U.S. international trade deficit narrowed in December but widened in January. Imports rose in January, largely reflecting a rebound in the value of oil imports, and exports decreased, driven by a decline in the

value of exports of petroleum products. Exports of

capital goods increased; the other major categories of

exports remained about unchanged.

Indexes of overall U.S. consumer prices were little

changed in January but the consumer price index

moved up briskly in February, largely reflecting a sharp

rise in gasoline prices. Consumer food prices were flat

in January and only edged up in February. Consumer

prices excluding food and energy increased moderately

in January and February. Near-term inflation expectations from the Michigan survey were unchanged in

February and early March; longer-term inflation expectations in the survey were also little changed and remained within the narrow range that they have occupied for some time.

Measures of labor compensation indicated that gains in

nominal wages remained relatively slow, only slightly

above the rate of price inflation. Compensation per

hour in the nonfarm business sector rose modestly

over 2012, and, with small increases in productivity,

unit labor costs also advanced only modestly. Gains in

the employment cost index were even slower than for

the measure of compensation per hour last year. In

January and February, increases in average hourly earnings for all employees continued to be subdued.

Economic growth weakened in a number of the advanced foreign economies in the fourth quarter of

2012. In the euro area, real gross domestic product

(GDP) contracted for a fifth consecutive quarter. Recent data for European economies, including retail

sales and purchasing managers indexes, suggest that the

rate of economic contraction may have diminished

since the beginning of the year. In emerging market

economies (EMEs), an increase in exports contributed

to a pickup in the pace of economic growth in the

fourth quarter, including for China. More-recent indicators suggest that economic activity in China has

slowed some. Inflation remained generally contained in

both advanced foreign economies and EMEs.

Staff Review of the Financial Situation

Generally favorable U.S. economic data releases, along

with communications from Federal Reserve policymakers regarding the outlook for the economy and monetary policy, appeared to contribute to improved sentiment in domestic financial markets over the intermeeting period despite some renewed concerns about economic and financial conditions in Europe.

The expected path for the federal funds rate implied by

market quotes moved down over the intermeeting period, likely reflecting policymakers’ communications

that reinforced market expectations of continued monetary policy accommodation. Results from the Desk’s

survey of primary dealers conducted prior to the March

meeting showed that dealers continued to view the

third quarter of 2015 as the most likely time of the first

increase in the target federal funds rate. In addition,

the median dealer continued to see the first quarter of

2014 as the most probable time for the Federal Reserve’s asset purchases to end, and most dealers anticipated that the pace of purchases would be adjusted

down before ending.

Yields on nominal Treasury securities were modestly

lower, on net, over the intermeeting period. In late

February, these yields declined notably following the

inconclusive election outcomes in Italy but mostly retraced this decline as economic data releases in subsequent weeks exceeded expectations. Measures of inflation compensation derived from nominal and inflationprotected Treasury securities edged down over the period.

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Conditions in domestic and offshore dollar funding

markets were generally little changed, on balance, during the intermeeting period. The outstanding amount

of unsecured commercial paper (CP) issued by financial

institutions with European parents increased slightly on

net, and CP issued by institutions with U.S. parents

remained stable.

In the March Senior Credit Officer Opinion Survey on

Dealer Financing Terms, respondents reported that

leveraged investors seemed to have become somewhat

more willing to take positions in risky assets since December.

Market reaction to the results of the Dodd–-Frank Act

annual stress tests and of the Comprehensive Capital

Analysis and Review was limited. Overall, a broad index of U.S. bank equity prices rose, on net, over the

intermeeting period, and credit default swap spreads

for most large domestic banks edged down on balance.

Broad equity price indexes increased over the intermeeting period, bolstered by favorable incoming economic data. Option-implied volatility for the S&P 500

index over the near term rose slightly but remained

low, at levels last seen in early 2007. Fourth-quarter

earnings per share for S&P 500 firms were estimated to

have increased modestly from the previous quarter.

Yields on investment- and speculative-grade corporate

bonds rose a bit over the intermeeting period, leaving

risk spreads a little wider. Corporate bond issuance by

nonfinancial firms remained fairly robust in February;

commercial and industrial (C&I) loans and nonfinancial

CP also continued to expand. After picking up in January, gross public issuance of equity by nonfinancial

firms remained strong in February, and issuance of collateralized loan obligations reached a post-financialcrisis high.

Conditions in the commercial real estate (CRE) sector

improved somewhat. Commercial mortgage debt increased in the fourth quarter after having decreased in

each quarter since the beginning of 2009, and commercial mortgage-backed security (CMBS) issuance continued to be robust over the intermeeting period. Nonetheless, delinquency rates on loans underlying existing

CMBS remained near historically high levels in February, and CRE prices flattened out in the fourth quarter

after several quarters of increases.

Both conforming home mortgage rates and yields on

agency mortgage-backed securities (MBS) rose, on net,

during the intermeeting period, and the spread between

the primary mortgage rate and MBS yields narrowed a

bit. Despite the increase in mortgage rates since the

start of the year, mortgage refinancing originations declined only slightly.

Consumer credit sustained its moderate expansion in

December and January. Nonrevolving credit continued

to increase at a solid pace because of growth in student

and auto loans, while revolving credit was roughly flat.

Issuance of consumer asset-backed securities remained

strong.

Driven largely by continued growth in C&I loans, total

bank credit expanded in January and February at

roughly its fourth-quarter pace. The February Survey

of Terms of Business Lending indicated some easing in

loan pricing.

The level of M2 was about unchanged, on net, over

January and February. In contrast, the monetary base

expanded briskly from January through mid-March,

driven mainly by the increase in reserve balances resulting from the Federal Reserve’s purchases of Treasury

securities and agency MBS.

Financial market concerns regarding the euro area rose

over the intermeeting period amid weaker-thanexpected economic data releases and political uncertainties generated by the inconclusive election results in

Italy. Adding to the concerns was the proposal in Cyprus to tax insured, along with uninsured, deposits as

part of the country’s effort to secure an aid package

from the euro area and the International Monetary

Fund. Ten-year sovereign yields in most peripheral

euro-area countries rose relative to German bond

yields, with spreads for Italian sovereign debt increasing

noticeably; euro-area banking-sector share prices fell

sharply. With economic data for the euro area, the

United Kingdom, and Canada coming in weaker than

anticipated, yields on bunds, gilts, and long-term Canadian government securities fell. In addition, marketbased measures of expected overnight interest rates

also declined in those countries, and the dollar appreciated against the euro, sterling, and the Canadian dollar.

Expectations intensified that the Bank of Japan would

pursue aggressive monetary easing after the new governor of the Bank of Japan was installed; over the intermeeting period, the yen depreciated further, 10-year

Japanese government bond yields declined to near record lows, and the Nikkei stock price index rose substantially. Movements in the currencies of EMEs

against the dollar were generally small. Although inflows into emerging market mutual funds continued,

they slowed notably in recent weeks, and EME equity

indexes were, on average, slightly lower. Some EME

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central banks cut interest rates, citing concerns about

economic growth.

The staff also reported on potential risks to financial

stability, including those associated with the current

low interest rate environment. Some observers have

suggested that a lengthy period of low long-term rates

could encourage excessive risk-taking that could have

adverse consequences for financial stability at some

point in the future. The staff surveyed a wide range of

asset markets and financial institutions for signs of excess valuations, leverage, or risk-taking that could pose

systemic risks. Low interest rates likely have supported

gains in asset prices and encouraged the flow of credit

to households and businesses, but these changes to

date do not appear to have been accompanied by significant financial imbalances. However, trends in a few

specific markets bore watching, and the staff will continue to monitor for signs of developments that could

pose risks to financial stability.

Staff Economic Outlook

In the economic forecast prepared by the staff for the

March FOMC meeting, real GDP growth was revised

down somewhat in the near term, largely reflecting the

federal spending sequestration that went into effect on

March 1 and the resulting drag from reduced government purchases. The staff’s medium-term forecast for

real GDP growth was little changed, on balance, as the

effects of somewhat more fiscal policy restraint and a

higher assumed path for the foreign exchange value of

the dollar were essentially offset by a brighter outlook

for domestic energy production and a higher projection

for household wealth, which reflected upward revisions

to the projected paths for both equity prices and home

prices. On balance, with fiscal policy expected to be

tighter in 2013 than in 2012, the staff expected that

increases in real GDP this year would only modestly

exceed the growth rate of potential output. Fiscal policy restraint on economic growth was assumed to ease

over time, and real GDP was projected to accelerate

gradually in 2014 and 2015, supported by increases in

consumer and business sentiment, further improvements in credit availability and financial conditions, and

accommodative monetary policy. The expansion in

economic activity was anticipated to slowly reduce the

slack in labor and product markets over the projection

period, and progress in reducing the unemployment

rate was expected to be gradual.

The staff’s forecast for inflation was little changed from

the projection prepared for the January FOMC meeting. With crude oil prices anticipated to trend down

slowly from their current levels, long-run inflation expectations assumed to remain stable, and significant

resource slack persisting over the forecast period, the

staff continued to project that inflation would be subdued through 2015.

The staff viewed the uncertainty around its forecast for

economic activity as similar to the average level over

the past 20 years. However, the risks were viewed as

skewed to the downside, reflecting in part the concerns

about the situation in Europe and the possibility of a

more severe tightening in U.S. fiscal policy than currently anticipated. The staff saw the uncertainty around

its projection for inflation as about average, and it

viewed the risks to the inflation outlook as roughly balanced.

Participants’ Views on Current Conditions and

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 2013 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.

Meeting participants generally indicated that they

viewed the economic data received during the intermeeting period as somewhat more positive than had

been expected, but that fiscal policy appeared to have

become more restrictive, leaving the outlook for the

economy little changed on balance since the January

meeting. Participants judged that the economy had

returned to moderate growth following a pause late last

year, and a few noted that the downside risks may have

diminished. Conditions in labor markets had shown

signs of improvement, although the unemployment

rate remained elevated. Spending by households and

businesses was continuing to expand, perhaps reflecting some increased optimism. Participants noted that

the housing market, in particular, had firmed somewhat

further. Accommodative monetary policy was likely

providing important support to these developments.

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In contrast, participants thought that fiscal policy was

exerting significant near-term restraint on the economy.

Participants generally anticipated that growth would

proceed at a moderate pace and that the unemployment

rate would decline gradually toward levels consistent

with the Committee’s mandate. Inflation had been

running below the Committee’s 2 percent objective for

some time, and nearly all of the participants anticipated

that it would run at or below 2 percent over the medium term.

In their discussion of the household sector, most participants noted that the data on spending were somewhat encouraging, particularly with regard to spending

on automobiles, other consumer durables, and housing.

Several participants stated that the moderate acceleration in spending might in part reflect pent-up demand

following years of deleveraging and was importantly

supported by the stance of monetary policy, which has

reduced the cost of financing purchases and improved

credit availability to some degree. A couple of participants noted that the increase in the payroll tax appeared to have not yet had a material effect on household spending; however, another suggested that the

payroll tax increase, along with higher gasoline prices,

may be one reason why spending by lower-income

households appeared to be depressed, as those changes

disproportionately cut into the disposable income of

those households. A couple of other participants

thought that overall consumer spending was likely still

held back, at least in part, by ongoing concerns about

future income and employment prospects. Both fiscal

restraint and the high level of student debt were mentioned as risks to aggregate household spending over

the forecast period.

Participants generally saw conditions in the housing

market as having improved further over the intermeeting period. Rising house prices were strengthening

household balance sheets by raising wealth and by increasing the ability of some homeowners to refinance

their mortgages at lower rates. Such a dynamic was

seen as potentially leading to a virtuous cycle that could

help support household spending and financial market

conditions over time. Reports from homebuilders in

many parts of the country were encouraging. One participant pointed to ongoing changes in a range of factors—including demographics, credit conditions, business models, and consumer preferences—that were

likely shifting both supply and demand in the housing

sector and concluded that the outlook for the sector

was quite uncertain and potentially subject to rapid

changes.

Many participants reported that their business contacts

were seeing some further improvement in the economic outlook. Firms reported increased planning for capital expenditures, supported by low interest rates and

substantial cash holdings. Investment spending on

productivity-enhancing technology was strong, as was

pipeline construction in the energy sector. A few participants indicated that their contacts saw the level of

uncertainty about the economic outlook as having declined recently, a development that could lead to increased investment expenditures.

Most participants remarked on the federal spending

sequester and its potential effects on the economy; they

judged that recent tax and spending changes were already restraining aggregate demand or would do so

over the course of the year. A couple of participants,

however, suggested that they had cut their estimates of

the effect of recent federal austerity measures or had

never considered the effects to be substantial.

Recent readings on private employment and the unemployment rate indicated some improvement in labor

market conditions. Nonetheless, participants generally

saw the unemployment rate as still elevated and were

not yet confident that the recent progress toward the

Committee’s employment objective would be sustained. The need to use a range of indicators to gauge

labor market conditions was noted. One participant

highlighted that hiring rates and quit rates remained

somewhat low. Another participant discussed evidence

that the labor market may have become less dynamic

over time, with the result that recent payroll gains

might be more meaningful than would first appear.

Inference about the labor force participation rate was

complicated by its long-run downward trend. One participant cited research indicating that long-term unemployment, which is currently especially high, could lead

to persistently lower income and wealth for those affected, even after they found jobs. More broadly, firms

reportedly remained cautious about hiring, which some

participants attributed in part to restrictive fiscal policy

combined with growing regulatory burden. This caution appeared to have resulted in jobs remaining vacant

for substantially longer than would normally be the

case, given the unemployment rate.

Recent price developments were consistent with subdued inflation pressures and inflation remaining at or

below the Committee’s 2 percent objective over the

medium run. Participants saw little near-term inflationary pressure, with a few noting that the appreciation of

the dollar was holding down import costs or that the

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recent increases in gasoline prices did not appear to

have passed through more broadly to prices of other

goods. Pointing to inflation that had been running below their objective for some time, some participants

saw downside risks to inflation, especially if economic

activity did not pick up as projected. But a few participants noted that the risk remained that inflationary

pressures could rise as the expansion continued, especially if monetary policy remained highly accommodative for too long.

Participants discussed their assessments of risks to financial stability, particularly in light of the Committee’s

highly accommodative stance of monetary policy.

Many participants noted that in the current low-interest

rate environment, investors in some financial markets

were taking on additional risk—either credit risk or

interest rate risk—in an effort to boost returns. As a

result, vigilance on the part of policymakers and regulators was warranted, especially in light of episodic

strains in European markets. A couple of participants

noted that U.S. banks had expanded their capital positions and were generally in sound financial condition.

Meeting participants generally agreed that there was an

ongoing need to evaluate the possible interactions between monetary policy decisions and financial stability,

with some noting that adverse shocks to financial stability can affect progress toward the Committee’s dual

mandate.

Review of Efficacy and Costs of Asset Purchases

The staff provided presentations covering the efficacy

of the Federal Reserve’s asset purchases, the effects of

the purchases on security market functioning, the ways

in which asset purchases might amplify or reduce risks

to financial stability, and the fiscal implications of purchases. In their discussion of this topic, meeting participants generally judged the macroeconomic benefits of

the current purchase program to outweigh the likely

costs and risks, but they agreed that an ongoing assessment of the benefits and costs was necessary.

Pointing to academic and Federal Reserve staff research, most participants saw asset purchases as having

a meaningful effect in easing financial conditions and

so supporting economic growth. Some expressed the

view that these effects had likely been stronger during

the Federal Reserve’s initial large-scale asset purchases

because that program also helped support market functioning during the financial crisis. Other participants,

however, saw little evidence that the efficacy of asset

purchases had declined over time, and a couple of these

suggested that the effectiveness of purchases might

even have increased more recently, as the easing of

credit constraints allowed more borrowers to take advantage of lower interest rates. One participant emphasized the role of recent asset purchases in keeping

inflation from declining further below the Committee’s

longer-run goal. A few participants felt that MBS purchases provided more support to the economy than

purchases of longer-term Treasury securities because

they stimulated the housing sector directly; however, a

few preferred to focus any purchases in the Treasury

market to avoid allocating credit to a specific sector of

the economy. It was noted that, in addition to the

standard channels through which monetary policy affects the economy, asset purchases could help signal

the Committee’s commitment to accommodative monetary policy, thereby making the forward guidance

about the federal funds rate more effective. However,

a few participants were not convinced of the benefits

of asset purchases, stating that the effects on financial

markets appeared to be short lived or that they saw

little evidence of a significant macroeconomic effect.

One participant suggested that the signaling effect of

asset purchases may have been reduced by the adoption

of threshold-based forward guidance. In general, reflecting the limited experience with large-scale asset

purchases, participants recognized that estimates of the

economic effects were necessarily imprecise and covered a wide range.

Participants generally agreed that asset purchases also

have potential costs and risks. In particular, participants pointed to possible risks to the stability of the

financial system, the functioning of particular financial

markets, the smooth withdrawal of monetary accommodation when it eventually becomes appropriate, and

the Federal Reserve’s net income. Their views on the

practical importance of these risks varied, as did their

prescriptions for mitigating them. Asset purchases

were seen by some as having a potential to contribute

to imbalances in financial markets and asset prices,

which could undermine financial stability over time.

Moreover, to the extent that asset purchases push

down longer-term interest rates, they potentially expose

financial markets to a rapid rise in those rates in the

future, which could impose significant losses on some

investors and intermediaries. Several participants suggested that enhanced supervision could serve to limit,

at least to some extent, the increased risk-taking associated with a lengthy period of low long-term interest

rates, and that effective policy communication or balance sheet management by the Committee could reduce the probability of excessively rapid increases in

longer-term rates. It was also noted that the accom-

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modative stance of policy could be supporting financial

stability by returning the economy to a stable footing

sooner than would otherwise be the case and perhaps

by allowing borrowers to secure longer-term financing

and thereby reduce funding risks; by contrast, curtailing

asset purchases could slow the recovery and so extend

the period of very low interest rates. Nevertheless, a

number of participants remained concerned about the

potential for financial stability risks to build. One consequence of asset purchases has been the increase in

the Federal Reserve’s net income and its remittances to

the Treasury, but those values were projected to decline, perhaps even to zero for a time, as the Committee eventually withdraws policy accommodation. Some

participants were concerned that a substantial decline in

remittances might lead to an adverse public reaction or

potentially undermine Federal Reserve credibility or

effectiveness. The possibility of such outcomes was

seen as necessitating clear communications about the

outlook for Federal Reserve net income. Several participants stated that such risks should not inhibit the

Committee from pursuing its mandated objectives for

inflation and employment. In any case, it was indicated

that the fiscal benefits of a stronger economy would be

much greater than any short-term fluctuations in remittances, and moreover, a couple of participants noted

that cumulative remittances to the Treasury would likely be higher than would have been the case without any

asset purchases. Some participants also were concerned that additional asset purchases could complicate

the eventual firming of policy—for example, by impairing the Committee’s control over the federal funds rate.

A few participants raised the possibility of an undesirable rise in inflation. However, others expressed confidence in the Committee’s exit tools and its resolve to

keep inflation near its longer-run goal. Another exitrelated concern was a possible adverse effect on market

functioning from MBS sales during the normalization

of the Federal Reserve’s balance sheet. Although the

Committee’s asset purchases have had little apparent

effect on securities market functioning to date, some

participants felt that future asset sales could prove

more challenging. In this regard, several participants

noted that a decision by the Committee to hold its

MBS to maturity instead of selling them would essentially eliminate this risk. A decision not to sell MBS, or

to sell MBS only very slowly, would also mitigate some

of the financial stability risks that could be associated

with such sales as well as damp the decline in remittances to the Treasury at that time. Such a decision was

also seen by some as a potential source of additional

near-term policy accommodation. Overall, most meet-

ing participants thought the risks and costs of additional asset purchases remained manageable, but also that

continued close attention to these issues was warranted.

A few participants noted that curtailing the purchase

program was the most direct way to mitigate the costs

and risks.

In light of their discussion of the benefits and costs of

asset purchases, participants discussed their views on

the appropriate course for the current asset purchase

program. A few participants noted that they already

viewed the costs as likely outweighing the benefits and

so would like to bring the program to a close relatively

soon. A few others saw the risks as increasing fairly

quickly with the size of the Federal Reserve’s balance

sheet and judged that the pace of purchases would likely need to be reduced before long. Many participants,

including some of those who were focused on the increasing risks, expressed the view that continued solid

improvement in the outlook for the labor market could

prompt the Committee to slow the pace of purchases

beginning at some point over the next several meetings,

while a few participants suggested that economic conditions would likely justify continuing the program at

its current pace at least until late in the year. A range of

views was expressed regarding the economic and labor

market conditions that would call for an adjustment in

the pace of purchases. Many participants emphasized

that any decision to reduce the pace of purchases

should reflect both an improvement in their overall

outlook for labor market conditions, as implied by a

wide range of available indicators, and their confidence

in the sustainability of that improvement. A couple of

these participants noted that if progress toward the

Committee’s economic goals were not maintained, the

pace of purchases might appropriately be increased. A

number of participants suggested that the Committee

could change the mix of its policy tools if necessary to

increase or maintain overall accommodation, including

potentially adjusting its forward guidance or its balance

sheet policies.

Committee Policy Action

Committee members saw the information received

over the intermeeting period as suggesting that moderate economic growth had resumed following a pause

late last year. Labor market conditions had shown

signs of improvement, but the unemployment rate remained elevated. Household spending and business

fixed investment had advanced, and the housing sector

had strengthened further, but fiscal policy had become

somewhat more restrictive. The Committee expected

that, with appropriate monetary policy accommodation,

Minutes of the Meeting of March 19–20, 2013

Page 9

_____________________________________________________________________________________________

economic growth would proceed at a moderate pace

and result in a gradual decline in the unemployment

rate toward levels that the Committee judges consistent

with its dual mandate. Members generally continued to

anticipate that, with longer-term inflation expectations

stable and slack in resource utilization remaining, inflation over the medium term would likely run at or below

the Committee’s 2 percent objective.

In their discussion of monetary policy for the period

ahead, members saw the economic outlook as little

changed since the previous meeting, and, consequently,

all but one member judged that a highly accommodative stance of monetary policy was warranted in order

to foster a stronger economic recovery in a context of

price stability. The Committee agreed that it would be

appropriate to continue purchases of MBS at a pace of

$40 billion per month and purchases of longer-term

Treasury securities at a pace of $45 billion per month,

as well as to maintain the Committee’s reinvestment

policies. The Committee also retained its forward

guidance about the federal funds rate, including the

thresholds on the unemployment and inflation rates.

One member dissented from the Committee’s policy

decision, expressing concern that the continued high

level of monetary accommodation increased the risks

of future economic and financial imbalances and, over

time, could cause an increase in inflation expectations.

Members stressed that any changes to the purchase

program should be conditional on continuing assessments both of labor market and inflation developments

and of the efficacy and costs of asset purchases. In

light of the current review of benefits and costs, one

member judged that the pace of purchases should ideally be slowed immediately. A few members felt that

the risks and costs of purchases, along with the improved outlook since last fall, would likely make a reduction in the pace of purchases appropriate around

midyear, with purchases ending later this year. Several

others thought that if the outlook for labor market

conditions improved as anticipated, it would probably

be appropriate to slow purchases later in the year and

to stop them by year-end. Two members indicated that

purchases might well continue at the current pace at

least through the end of the year. It was also noted

that were the outlook to deteriorate, the pace of purchases could be increased. In light of this discussion,

the Committee included language in the statement to

be released following the meeting in part to make explicit that the size, pace, and composition of its asset

purchases were conditional not only on the likely efficacy and costs of those purchases, but also on the ex-

tent of progress toward the Committee’s economic

objectives.

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:

“Consistent with its statutory mandate, the

Federal Open Market Committee seeks

monetary and financial conditions that will

foster maximum employment and price stability. In particular, the Committee seeks

conditions in reserve markets consistent

with federal funds trading in a range from

0 to ¼ percent. The Committee directs the

Desk to undertake open market operations

as necessary to maintain such conditions.

The Desk is directed to continue purchasing

longer-term Treasury securities at a pace of

about $45 billion per month and to continue purchasing agency mortgage-backed securities at a pace of about $40 billion per

month. The Committee also directs the

Desk to engage in dollar roll and coupon

swap transactions as necessary to facilitate

settlement of the Federal Reserve’s agency

mortgage-backed securities transactions.

The Committee directs the Desk to maintain its policy of rolling over maturing

Treasury securities into new issues and its

policy of reinvesting principal payments on

all agency debt and agency mortgage-backed

securities in agency mortgage-backed securities. The 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 2:00 p.m.:

“Information received since the Federal

Open Market Committee met in January

suggests a return to moderate economic

growth following a pause late last year. Labor market conditions have shown signs of

improvement in recent months but the unemployment rate remains elevated. Household spending and business fixed invest-

Page 10

Federal Open Market Committee

_____________________________________________________________________________________________

ment advanced, and the housing sector has

strengthened further, but fiscal policy has

become somewhat more restrictive. Inflation has been running somewhat below the

Committee’s longer-run objective, apart

from temporary variations that largely reflect fluctuations in energy prices. Longerterm inflation expectations have remained

stable.

Consistent with its statutory mandate, the

Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline toward

levels the Committee judges consistent with

its dual mandate. The Committee continues

to see 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 decided to continue purchasing additional agency mortgagebacked securities at a pace of $40 billion per

month and longer-term Treasury securities

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 of 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. The

Committee will continue its purchases of

Treasury and agency mortgage-backed securities, and employ its other policy tools as

appropriate, until the outlook for the labor

market has improved substantially in a context of price stability. In determining the

size, pace, and composition of its asset purchases, the Committee will continue to take

appropriate account of the likely efficacy

and costs of such purchases as well as the

extent of progress toward its economic objectives.

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. 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, James Bullard, Elizabeth Duke, Charles L. Evans, Jerome H. Powell, Sarah Bloom Raskin, Eric

Rosengren, Jeremy C. Stein, Daniel K. Tarullo, and

Janet L. Yellen.

Voting against this action: Esther L. George.

Ms. George dissented because she continued to view

monetary policy as too accommodative and therefore

as posing risks to the achievement of the Committee’s

economic objectives in the long run. In particular, the

current stance of policy could lead to financial imbalances, a mispricing of risk, and, over time, higher longterm inflation expectations. In her view, the Commit-

Minutes of the Meeting of March 19–20, 2013

Page 11

_____________________________________________________________________________________________

tee’s asset purchases were providing relatively small

benefits, and, given the risks that they posed as well as

the improvement in the outlook for the labor market,

she thought they should be wound down.

It was agreed that the next meeting of the Committee

would be held on Tuesday–Wednesday, April 30–May

1, 2013. The meeting adjourned at 11:30 a.m. on

March 20, 2013.

Notation Vote

By notation vote completed on February 19, 2013, the

Committee unanimously approved the minutes of the

FOMC meeting held on January 29–30, 2013.

_____________________________

William B. English

Secretary

Page 1

Summary of Economic Projections

In conjunction with the March 19–20, 2013, 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 2013

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.

Overall, the assessments submitted in March indicated

that FOMC participants projected that, under appropriate monetary policy, the pace of economic recovery

would gradually pick up over the 2013–15 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 over the forecast period to a pace that generally

exceeded their estimates of the longer-run sustainable

rate of growth. Participants expected the unemployment rate to decline gradually through 2015. Nearly all

participants projected that inflation, as measured by the

annual change in the price index for personal consumption expenditures (PCE), would remain somewhat below the longer-run goal in 2013 and then rise toward

2 percent over the forecast period.

As shown in figure 2, most participants judged that

highly accommodative monetary policy was likely to be

warranted over the next few years to support stable

prices and continued progress toward maximum employment. 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 also judged that it would be appropriate to

continue purchasing agency mortgage-backed securities

(MBS) and longer-term Treasury securities into the second half of 2013.

Many participants continued to judge the uncertainty

associated with the outlook for real activity and the

unemployment rate to be unusually high compared

with the norm of the past 20 years. In contrast to December, however, more participants viewed the risks to

those outlooks as broadly balanced than saw the risks

Table 1. Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents, March 2013

Percent

Variable

Range2

Central tendency1

2013

2014

2015

Longer run

2013

2014

2015

Longer run

Change in real GDP . . . . . 2.3 to 2.8

December projection . . 2.3 to 3.0

2.9 to 3.4

3.0 to 3.5

2.9 to 3.7

3.0 to 3.7

2.3 to 2.5

2.3 to 2.5

2.0 to 3.0

2.0 to 3.2

2.6 to 3.8

2.8 to 4.0

2.5 to 3.8

2.5 to 4.2

2.0 to 3.0

2.2 to 3.0

Unemployment rate . . . . . 7.3 to 7.5

December projection . . 7.4 to 7.7

6.7 to 7.0

6.8 to 7.3

6.0 to 6.5

6.0 to 6.6

5.2 to 6.0

5.2 to 6.0

6.9 to 7.6

6.9 to 7.8

6.1 to 7.1

6.1 to 7.4

5.7 to 6.5

5.7 to 6.8

5.0 to 6.0

5.0 to 6.0

PCE inflation . . . . . . . . . . . 1.3 to 1.7

December projection . . 1.3 to 2.0

1.5 to 2.0

1.5 to 2.0

1.7 to 2.0

1.7 to 2.0

2.0

2.0

1.3 to 2.0

1.3 to 2.0

1.4 to 2.1

1.4 to 2.2

1.6 to 2.6

1.5 to 2.2

2.0

2.0

Core PCE inflation3 . . . . . 1.5 to 1.6

December projection . . 1.6 to 1.9

1.7 to 2.0

1.6 to 2.0

1.8 to 2.1

1.8 to 2.0

1.5 to 2.0

1.5 to 2.0

1.5 to 2.1

1.5 to 2.0

1.7 to 2.6

1.7 to 2.2

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 December projections were made in conjunction with the meeting of the

Federal Open Market Committee on December 11–12, 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, 2013–15 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

2008

2009

2010

2011

2012

2013

2014

2015

Longer

run

Percent

Unemployment rate

10

9

8

7

6

5

2008

2009

2010

2011

2012

2013

2014

2015

Longer

run

Percent

PCE inflation

3

2

1

2008

2009

2010

2011

2012

2013

2014

2015

Longer

run

Percent

Core PCE inflation

3

2

1

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 March 19–20, 2013

Page 3

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

Number of participants

Appropriate timing of policy firming

13

13

12

11

10

9

8

7

6

5

4

4

3

2

1

2013

1

2014

2015

1

2016

Appropriate pace of policy firming

Percent

Target federal funds rate at year-end

6

5

4

3

2

1

0

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 December 2012, the numbers of FOMC participants who judged that the

first increase in the target federal funds rate would occur in 2013, 2014, 2015, and 2016 were, respectively, 2, 3, 13,

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

as skewed toward adverse outcomes. A majority of

participants indicated that the uncertainty surrounding

their projections for PCE inflation was broadly similar

to historical norms, and nearly all considered the risks

to inflation to be either broadly balanced or weighted

to the downside.

The Outlook for Economic Activity

Participants projected that, conditional on their individual assumptions about appropriate monetary policy,

the economy would grow at a somewhat faster pace in

2013 than it had in 2012. They also generally judged

that growth would strengthen further in 2014 and 2015,

in most cases to a rate above what participants saw as

the longer-run rate of output growth. 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 and expected that continued improvement in

the housing sector would add more broadly to private

demand; however, they also judged that increased fiscal

restraint in the United States would hold back the pace

of economic expansion, especially in 2013, and pointed

to the situation in Europe as an ongoing downside risk.

The central tendency of participants’ projections for

the change in real GDP was 2.3 to 2.8 percent for

2013, 2.9 to 3.4 percent for 2014, and 2.9 to 3.7 percent

for 2015; these projections were little changed, to

slightly below, the ones in December. When participants compared their own March forecast with the one

they made in December, many mentioned that

stronger-than-anticipated incoming data on private

economic activity had nearly offset the effects of

greater-than-expected fiscal restraint likely to be put in

place this year. The central tendency for the longer-run

rate of increase of real GDP was 2.3 to 2.5 percent,

unchanged from December.

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 remain well above their individual

estimates of its longer-run normal level. The central

tendencies of participants’ forecasts for the unemployment rate were 7.3 to 7.5 percent at the end of 2013

and 6.7 to 7.0 percent at the end of 2014. These projections are slightly lower than in December, with a few

participants attributing their revisions to the more favorable data from the labor market or small changes in

their estimated rate of potential output growth. However, the central tendency of the forecasts for the end

of 2015, at 6.0 to 6.5 percent, changed little. The cen-

_

tral tendency of participants’ estimates of the longerrun 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, the same as in December. Most participants projected that the unemployment rate would converge to

their estimates of its longer-run normal rate in five or

six years, while some judged that less time would be

needed.

As shown in figures 3.A and 3.B, participants’ views

regarding the likely outcomes for real GDP growth and

the unemployment rate over the next three years and

over the longer run remained diverse, reflecting their

individual assessments of appropriate monetary policy

and its economic effects, the likely rate of improvement

in the housing sector and domestic spending more generally, the domestic implications of foreign economic

developments, the extent of structural dislocations to

the labor market and the economy’s productive potential, and a number of other factors. The dispersion of

participants’ projections of real GDP growth was little

changed relative to December, with a small reduction

in the upper end of the distribution in all three years of

the forecast period and a slight overall downward shift

in 2014. The distributions of the unemployment rate

projections in each year narrowed a few tenths, reflecting decreases in the high ends of the ranges. The dispersion of estimates for the longer-run rate of output

growth stayed fairly narrow, with all but four within the

central tendency of 2.3 to 2.5 percent; two participants,

however, dropped their estimates to below 2.2 percent.

The range of participants’ estimates of the longer-run

rate of unemployment, at 5.0 to 6.0 percent, was unchanged relative to December.

The Outlook for Inflation

Participants’ broad outlook for inflation under appropriate monetary policy suggested that both headline and

core inflation would remain subdued over the 2013–15

period, with nearly all participants judging that inflation

would be equal to or below the FOMC’s longer-run

objective of 2 percent in each year. Specifically, the

central tendency of participants’ projections for overall

inflation in 2013, as measured by the growth in the

PCE price index, narrowed to 1.3 to 1.7 percent, while

the central tendencies for 2014 and 2015 were unchanged at 1.5 to 2.0 percent and 1.7 to 2.0 percent,

respectively. The central tendency of the forecasts for

core inflation in 2013 also narrowed, to 1.5 to 1.6 percent, but, unlike overall inflation, edged up slightly in

2014 and 2015; nevertheless, the central tendencies

remained near or below 2 percent in both years. In

Summary of Economic Projections of the Meeting of March 19–20, 2013

Page 5

Figure 3.A. Distribution of participants’ projections for the change in real GDP, 2013–15 and over the longer run

Number of participants

2013

March projections

December projections

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

2014

2.0 2.1

20

18

16

14

12

10

8

6

4

2

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

2015

2.0 2.1

20

18

16

14

12

10

8

6

4

2

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

Longer run

2.0 2.1

20

18

16

14

12

10

8

6

4

2

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

_

Figure 3.B. Distribution of participants’ projections for the unemployment rate, 2013–15 and over the longer run

Number of participants

2013

20

18

16

14

12

10

8

6

4

2

March projections

December 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

Percent range

Number of participants

2014

5.0 5.1

20

18

16

14

12

10

8

6

4

2

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

Percent range

Number of participants

2015

5.0 5.1

20

18

16

14

12

10

8

6

4

2

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

Percent range

Number of participants

Longer run

5.0 5.1

5.2 5.3

20

18

16

14

12

10

8

6

4

2

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

Percent range

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

6.8 6.9

7.0 7.1

7.2 7.3

7.4 7.5

7.6 7.7

7.8 7.9

Summary of Economic Projections of the Meeting of March 19–20, 2013

discussing factors likely to keep inflation near the

Committee’s inflation objective of 2 percent, several

participants cited the role of stable inflation expectations and existing resource slack that was expected to

diminish only gradually.

Figures 3.C and 3.D provide information on the diversity of participants’ views about the outlook for inflation. The ranges of participants’ projections for overall

inflation in 2013 and 2014 were almost unchanged

compared with the corresponding distributions for December. The ranges for core inflation were also little

changed, but, in 2013, many of the projections shifted

toward the lower end of the range. The distributions

for core and overall inflation in 2015 remained concentrated near the Committee’s longer-run objective, and

all participants continued to project that overall inflation would converge to the 2 percent goal over the

longer run.

Appropriate Monetary Policy

As indicated in figure 2, most participants judged that

exceptionally low levels of the federal funds rate would

remain appropriate for a couple more years. In particular, 13 participants thought that the first increase in the

target federal funds rate would not be warranted until

sometime in 2015, and one judged that policy firming

would likely not be appropriate until 2016 (upper panel). 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.

All of the participants who judged that raising the federal funds rate target would first be appropriate in 2015

also projected that the unemployment rate would first

decline below 6½ percent during that year and that

inflation would remain near or below 2 percent. In

addition, those participants, as well as the participant

who saw liftoff in 2016 as appropriate, also 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. The majority of the

five 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.

Figure 3.E provides the distribution of participants’

judgments regarding the appropriate level of the target

federal funds rate at the end of each calendar year from

2013 to 2015 and over the longer run. As previously

noted, most participants judged that economic conditions would warrant maintaining the current low level

Page 7

of the federal funds rate until 2015. Among the five

participants who saw the federal funds rate leaving the

effective lower bound earlier, their projections for the

federal funds rate at the end of 2014 range from ½ to

2¾ percent. Views on the appropriate level of the federal funds rate at the end of 2015 varied, with 15 participants seeing the appropriate level of the federal funds

rate as 1¼ percent or lower and the others seeing the

appropriate level as 2 percent or higher. On balance,

participants’ projections for the appropriate federal

funds rate at the end of 2015 shifted down a bit from

those in their December forecasts.

Nearly all participants saw the appropriate target for

the federal funds rate at the end of 2015 as still well

below their assessment of its expected longer-run value. Estimates of the longer-run target federal funds

rate ranged from 3¼ to 4½ percent, reflecting the

Committee’s inflation objective of 2 percent and participants’ individual judgments about the longer-run level

of the real federal funds rate.

Participants also described their views regarding the

appropriate path of the Federal Reserve’s balance sheet.

All but a few participants thought that, given the current economic outlook, it would be appropriate for the

Committee to continue purchasing MBS and longerterm Treasury securities at about the current pace at

least through midyear. A number of these participants

anticipated that the pace would be tapered down

around midyear. A few others thought that it would be

appropriate for the Committee to purchase securities at

the current pace through the third quarter of 2013 before beginning to adjust the pace and a few saw the

current rate of purchases continuing at least through

the end of 2013, with two participants specifying that

some purchases would likely extend into 2014. Several

participants emphasized that the asset purchase program was effective in supporting the economic expansion, that the benefits continued to exceed the costs,

and that additional purchases would be necessary to

achieve a substantial improvement in the outlook for

the labor market. In contrast, a couple of participants

indicated that the Committee could best foster its dual

objectives and limit the potential costs of the program

by beginning to taper its purchases before midyear or

by ending purchases altogether.

Key factors informing participants’ views of the economic outlook and the appropriate setting for monetary policy included their judgments regarding labor

market conditions that would be consistent with maximum employment, the extent to which employment

Page 8

Federal Open Market Committee

_

Figure 3.C. Distribution of participants’ projections for PCE inflation, 2013–15 and over the longer run

Number of participants

2013

20

18

16

14

12

10

8

6

4

2

March projections

December 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

2.5 2.6

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

2.5 2.6

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

2.1 2.2

2.3 2.4

2.5 2.6

Percent range

Number of participants

Longer run

1.3 1.4

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

2.5 2.6

Summary of Economic Projections of the Meeting of March 19–20, 2013

Page 9

Figure 3.D. Distribution of participants’ projections for core PCE inflation, 2013–15

Number of participants

2013

20

March projections

December projections

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

2.5 2.6

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

2.5 2.6

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

2.1 2.2

Percent range

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

2.3 2.4

2.5 2.6

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Federal Open Market Committee

_

Figure 3.E. Distribution of participants’ projections for the target federal funds rate, 2013–15 and over the longer run

Number of participants

2013

March projections

December projections

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.

Summary of Economic Projections of the Meeting of March 19–20, 2013

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

likely time horizon necessary to return employment and

inflation to mandate-consistent levels. Participants

generally discussed their forecasts for the time of the

first increase in the federal funds rate in the context of

the thresholds adopted by the Committee in December

2012. 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 currently somewhat below

its historical norm. It was also noted that, because the

appropriate stance of monetary policy is conditional on

the path 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.

Uncertainty and Risks

A majority of the participants continued to judge that

the levels of uncertainty about their projections for real

GDP growth and unemployment remained higher than

was the norm during the previous 20 years; however,

the number of participants with this view was noticeably smaller than in December (figure 4).1 The main

factor cited as contributing to the elevated uncertainty

about economic outcomes was the challenge associated

with forecasting the path of the U.S. economic recovery following a financial crisis and recession that differed markedly from recent historical experience. Several participants also noted the difficulties involved in

predicting fiscal policy in the United States and the potential for European developments to threaten U.S.

financial stability, though a few participants noted a

decline in the likely severity of those risks as a reason

for changing their assessments of uncertainty from

“higher” to “broadly similar” to the norm.

A majority of participants, somewhat more than in December, reported that they saw the risks to their forecasts of real GDP growth and unemployment as broadTable 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 1993 through

2012. 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

Page 11

Table 2. Average historical projection error ranges

Percentage points

Variable

Change in real

2013

2014

2015

±1.3

±1.7

±1.8

GDP1

........

rate1

.........

±0.6

±1.2

±1.7

Total consumer prices2 . . . . . . .

±0.9

±1.0

±1.1

Unemployment

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

mean squared error of projections for 1993 through 2012 that were

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

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

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

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

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

Uncertainty of the Economic Outlook from Historical Forecasting

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

1. 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.

ly balanced, with the remainder generally indicating that

they saw the risks to their forecasts for real GDP

growth as weighted to the downside and for unemployment as weighted to the upside. Some participants

who changed their assessment to “broadly balanced”

indicated that, while U.S. fiscal policy had become

more restrictive this year, the future path of that policy

had become less uncertain than it was in December.

Participants reported little change in their assessments

of the level of uncertainty and the balance of risks

around their forecasts for overall PCE inflation and

core inflation. Thirteen participants judged the levels

of uncertainty associated with their forecasts for those

inflation measures to be broadly similar to, or lower

than, historical norms; the same number assessed the

risks to those projections to be broadly balanced. Several participants highlighted the likely role played by the

Committee’s adoption of a 2 percent inflation goal or

its commitment to maintaining accommodative monetary policy as contributing to the recent stability of

longer-term inflation expectations. Four participants

saw the risks to their inflation forecast 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 in the

current environment. Conversely, a couple of the participants saw the risks to inflation as weighted to the

upside in light of the current highly accommodative

stance of monetary policy and their concerns about the

Committee’s ability to shift to a less accommodative

policy stance when it becomes appropriate to do so.

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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

March projections

December 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

March projections

December 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 March 19–20, 2013

Forecast Uncertainty

The economic projections provided by

the members of the Board of Governors and

the presidents of the Federal Reserve Banks

inform discussions of monetary policy among

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

however. The economic and statistical models

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

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

Thus, in setting the stance of monetary policy,

participants consider not only what appears to

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

of alternative possibilities, the likelihood of

their occurring, and the potential costs to the

economy should they occur.

Table 2 summarizes the average historical

accuracy of a range of forecasts, including

those reported in past Monetary Policy Reports

and those prepared by the Federal Reserve

Board’s staff in advance of meetings of the

Federal Open Market Committee. The projection error ranges shown in the table illustrate the considerable uncertainty associated with economic forecasts. For example,

suppose a participant projects that real gross

domestic product (GDP) and total consumer

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

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

around the projections are broadly balanced,

the numbers reported in table 2 would imply a

probability of about 70 percent that actual

GDP would expand within a range of 1.7 to

4.3 percent in the current year, 1.3 to 4.7 per-

cent in the second year, and 1.2 to 4.8 percent

in the third year. The corresponding 70 percent

confidence intervals for overall inflation would

be 1.1 to 2.9 percent in the current year, 1.0 to

3.0 percent in the second year, and 0.9 to

3.1 percent in the third 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.

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