FOMC Minutes

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Minutes of the Federal Open Market Committee

September 17–18, 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, September 17, 2013, at 1:00 p.m. and continued on

Wednesday, September 18, 2013, at 8:30 a.m.

PRESENT:

Ben Bernanke, Chairman

William C. Dudley, Vice Chairman

James Bullard

Charles L. Evans

Esther L. George

Jerome H. Powell

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

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

Steven B. Kamin, Economist

David W. Wilcox, Economist

Thomas A. Connors, Troy Davig, Michael P. Leahy,

Stephen A. Meyer, Geoffrey Tootell, 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

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

Ellen E. Meade and Joyce K. Zickler, Senior Advisers,

Division of Monetary Affairs, Board of Governors

Eric M. Engen, Michael T. Kiley, Thomas Laubach,

David E. Lebow, and Michael G. Palumbo, Associate Directors, Division of Research and Statistics,

Board of Governors; Fabio M. Natalucci, Associate

Director, Division of Monetary Affairs, Board of

Governors

Joshua Gallin, Deputy Associate Director, Division of

Research and Statistics, Board of Governors

Jeremy B. Rudd, Adviser, Division of Research and

Statistics, Board of Governors

Christopher J. Gust and Elizabeth Klee, Section Chiefs,

Division of Monetary Affairs, Board of Governors

Gordon Werkema, First Vice President, Federal Reserve Bank of Chicago

David Altig, Loretta J. Mester, and Harvey Rosenblum,1 Executive Vice Presidents, Federal Reserve

Banks of Atlanta, Philadelphia, and Dallas, respectively

Joyce Hansen, Evan F. Koenig, Spencer Krane, Lorie

K. Logan, Mark E. Schweitzer, John A. Weinberg,

and Kei-Mu Yi, Senior Vice Presidents, Federal

Reserve Banks of New York, Dallas, Chicago, New

York, Cleveland, Richmond, and Minneapolis, respectively

_______________________

1

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

Attended introductory remarks at Tuesday’s session only.

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Chris Burke and Jonathan P. McCarthy, Vice Presidents, Federal Reserve Bank of New York

Eric T. Swanson, Senior Research Advisor, Federal

Reserve Bank of San Francisco

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 July 30–31, 2013. The

review included a report that the System’s purchases of

longer-term assets did not appear to have had an adverse effect on the functioning of the markets for

Treasury securities or agency mortgage-backed securities (MBS), and that the Open Market Desk’s operations in both sectors had proceeded smoothly. By

unanimous vote, the Committee ratified the Desk’s

domestic transactions over the intermeeting period.

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

period.

In support of the Committee’s longer-run planning for

improvements in the implementation of monetary policy, the staff presented an update on the potential for

establishing a fixed-rate, full-allotment overnight reverse repurchase agreement (RRP) facility. The presentation summarized initial discussions with financial

market firms about how such a facility might affect

money market interest rates and intermediation flows,

what the relationship might be between the facility rate

and other money market rates, and how the different

types of firms might view the facility. Overall, the inquiries suggested that the facility could be an effective

additional tool for managing money market interest

rates and helping to support a floor on those rates.

Meeting participants discussed the potential role for an

overnight RRP facility, the possible effects on the functioning of the federal funds market or the structure of

money markets, and the usefulness of expanding the

Desk’s test operations in RRPs. Meeting participants

generally supported a proposal to authorize the Desk to

conduct a limited exercise in order to provide some

insight into the potential usage of an overnight RRP

facility as well as additional experience with operational

aspects of such a facility. One participant, however,

preferred that further analysis be undertaken before

proceeding with the exercise. A number of meeting

participants emphasized that their interest in these op-

erations reflected an ongoing effort to improve the

technical execution of policy and did not signal any

change in the Committee’s views about policy going

forward. Following the discussion, the Committee

unanimously approved the following resolution:

“The Federal Open Market Committee

(FOMC) authorizes the Federal Reserve

Bank of New York to conduct a series of

fixed-rate, overnight reverse repurchase operations involving U.S. Government securities, and securities that are direct obligations

of, or fully guaranteed as to principal and interest by, any agency of the United States, for

the purpose of assessing operational readiness. The reverse repurchase operations authorized by this resolution shall be (i) offered

at a fixed rate that may vary from zero to five

basis points, (ii) offered at up to a capped allotment per counterparty of $1 billion per

day and (iii) for an overnight term, or such

longer term as is warranted to accommodate

weekend, holiday, and similar trading conventions. The System Open Market Account

Manager will inform the FOMC in advance

of the terms of the planned operations.

These operations may be announced when

authorized by the Chairman, may begin when

authorized by the Chairman on or after September 23, 2013, and shall be authorized

through the FOMC meeting that ends on

January 29, 2014.”

Staff Review of the Economic Situation

The information reviewed for the September 17–18

meeting suggested that economic activity continued to

increase at a moderate rate. Private-sector employment

rose further in July and August, but the unemployment

rate was still elevated. Total consumer price inflation

picked up in recent months but continued to be modest, and measures of longer-run inflation expectations

remained stable.

Private nonfarm employment continued to expand in

July and August, but at a somewhat slower pace than in

the first half of the year, while total government employment edged down on balance. The unemployment

rate declined further to 7.3 percent in August. The

labor force participation rate also decreased, leaving the

employment-to-population ratio essentially unchanged

in recent months. Other indicators of labor market

activity also were mixed. Measures of firms’ hiring

plans moved up, initial claims for unemployment insur-

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ance declined, and the share of workers employed part

time for economic reasons decreased a little. However,

household expectations of the labor market situation

deteriorated somewhat, rates of job openings and gross

private-sector hiring were little changed, on net, and the

rate of long-duration unemployment rose slightly.

Manufacturing production increased in August after a

decline in July, and the rate of manufacturing capacity

utilization was unchanged, on balance, over those two

months. Automakers’ schedules indicated that the pace

of motor vehicle assemblies would remain roughly flat

in the coming months, but broader indicators of manufacturing production, such as the readings on new orders from the national and regional manufacturing surveys, pointed to moderate increases in factory output in

the near term.

Real personal consumption expenditures (PCE) were

flat in July. In August, nominal retail sales, excluding

those at motor vehicle and parts outlets, edged up,

while sales of light motor vehicles rose notably. Recent

information on key factors that influence consumer

spending were mixed: Households’ net worth likely

expanded further as home prices posted additional

gains through July, but real disposable incomes increased only a little in July and consumer sentiment in

the Thomson Reuters/University of Michigan Surveys

of Consumers moved lower in August and early September.

Improvements in housing-sector activity appeared to

slow, possibly reflecting the rise in mortgage rates since

the spring. Starts and permits of new single-family

homes moved down in July, but the level of permit

issuance was still somewhat above that for starts and

pointed to moderate increases in construction in subsequent months. In the multifamily sector, both starts

and permits rose in July but construction remained

around the same level as early in the year. Sales of existing homes increased, but new home sales declined.

Growth in real private expenditures for business

equipment and intellectual property products appeared

to be subdued going into the third quarter. Nominal

shipments of nondefense capital goods excluding aircraft declined again in July. However, nominal new

orders for these capital goods continued to be above

the level of shipments, pointing to increases in shipments in subsequent months, and other forwardlooking indicators, such as surveys of business conditions, were consistent with moderate gains in spending

for business equipment in the near term. Nominal

business expenditures for nonresidential construction

increased in July but were still at a low level. Recent

book-value data for inventory-sales ratios, along with

readings on inventories from national and regional

manufacturing surveys, did not point to significant inventory imbalances.

Reductions in real federal government purchases appeared to persist: Defense spending continued to decrease in July and August, while federal employment

edged down further. Real state and local government

purchases looked to be about flat—the payrolls of

these governments expanded slightly, on balance, in

July and August, and state and local construction expenditures seemed to be leveling off.

The U.S. international trade deficit narrowed substantially in June before widening in July to a level near its

second-quarter average. Exports expanded in June,

with particular strength in industrial supplies and capital goods, before stepping down somewhat in July.

Imports fell in June but then largely recovered in July,

driven by swings in imports of oil and consumer goods.

Total U.S. inflation, as measured by the PCE price index through July and by the consumer price index

through August, was about 1½ percent over the preceding 12-month period for each series. Consumer

food prices only edged up in July and August, while

energy prices were little changed, on net, over those

two months, and retail gasoline prices moved down in

the first half of September. Core consumer price inflation, which excludes food and energy, was modest in

July and August. Both near-term and longer-term inflation expectations from the Michigan survey were little

changed in August and early September.

Measures of labor compensation indicated that increases in nominal wages were still subdued. Both compensation per hour and unit labor costs in the nonfarm

business sector rose modestly over the year ending in

the second quarter, as there were only slight gains in

productivity. In July and August, increases in average

hourly earnings for all employees were fairly slow on

balance.

Average foreign economic growth remained muted in

the first half of the year, although there were some notable divergences across countries. Growth in real

gross domestic product (GDP) picked up in the second

quarter in the United Kingdom and remained strong in

Japan, recent data suggested that the euro-area economy was coming out of recession, and economic indicators were positive for China and several other emerging

market economies (EMEs) in Asia. However, real

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GDP fell in the second quarter in Mexico and decelerated notably in India. Foreign inflation was generally

subdued. Monetary policy remained highly accommodative in the advanced economies, but some EME central banks moved toward tighter monetary policy in the

face of capital outflows and depreciation pressures. An

exception was the Bank of Mexico, which cut its policy

rate in response to economic weakness.

Staff Review of the Financial Situation

Longer-term interest rates rose over the intermeeting

period, while equity prices were fairly volatile but ended

the period modestly higher. The move in interest rates

appeared to be importantly influenced by shifting expectations about monetary policy.

The path of the federal funds rate implied by financial

market quotes steepened notably during the period, in

part reflecting some increase in uncertainty about the

outlook for monetary policy as indicated by optionimplied measures of uncertainty about the future path

of the policy rate. In contrast to market-based quotes,

the results from the Desk’s September survey of primary dealers showed little change in the projected path

of the policy rate relative to that in the July survey.

However, the survey also suggested that primary dealers marked up somewhat the odds that the FOMC

would begin to cut the pace of asset purchases at its

September meeting, a result generally in line with other

surveys of market participants.

Five- and 10-year Treasury yields increased about

25 basis points over the intermeeting period. Yields on

corporate bonds, agency MBS, and Treasury inflationprotected securities rose about in line with those on

nominal Treasury securities.

Conditions in short-term dollar funding markets were

generally stable during the period since the July FOMC

meeting. Responses to the September Senior Credit

Officer Opinion Survey on Dealer Financing Terms

suggested little change over the preceding three months

in the credit terms applicable to most classes of counterparties covered by the survey. A moderate net fraction of respondents reported a decline in the use of

financial leverage by hedge funds, and a more substantial net fraction reported a decrease in financial leverage

used by real estate investment trusts. In response to

special questions in the survey, dealers indicated that,

during the period of heightened volatility beginning in

May and extending into early July, liquidity and functioning had deteriorated in a number of fixed-income

markets.

Stock prices for financial-sector firms underperformed

the broad equity market somewhat over the intermeeting period. However, spreads on credit default swaps

(CDS) for the largest bank holding companies remained stable at levels near the bottom of their range

over the past few years.

Credit flows to nonfinancial businesses remained solid

in the face of higher longer-term interest rates. Relative

to the typical summer lull, gross issuance of corporate

bonds and leveraged loans was robust in August; commercial and industrial (C&I) loans on banks’ books

continued to expand moderately, on average, in July

and August. Commercial real estate (CRE) loans at

banks accelerated over the summer, and issuance of

commercial mortgage-backed securities remained

strong despite slightly wider spreads on those securities.

Recent information about household credit was mixed.

Mortgage rates increased further over the intermeeting

period, and credit standards for mortgage loans remained tight. Nonetheless, applications for new mortgages declined only modestly, apparently supported by

improvements in labor market conditions and some

pent-up demand. Higher mortgage rates weighed more

heavily on applications to refinance existing mortgages,

which decreased significantly. The pace of home price

appreciation moderated a bit in July, although it was

still strong. In nonmortgage credit, automobile loans

and student loans both continued to expand rapidly,

while balances on revolving consumer credit stayed

about flat. Issuance of consumer asset-backed securities remained robust in July and August.

In the municipal bond market, despite the ongoing

bankruptcy proceedings for Detroit and greater scrutiny of Puerto Rico’s fiscal problems, broader market

sentiment was reportedly supported by the lessening in

budget pressures for many other state and local governments. Gross issuance of long-term municipal

bonds was solid in August, and yield ratios on generalobligation municipal bonds over comparable Treasury

securities were about unchanged, on balance, over the

intermeeting period.

Bank credit declined in July and August amid the general rise in longer-term interest rates. While banks’

holdings of assets with longer duration, such as residential mortgages, decreased, growth in C&I, CRE, and

automobile loans—which are more likely to have floating interest rates or relatively short maturities, and

therefore less duration risk—tended to hold up in recent months.

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M2 increased significantly in July and August, as the

selloff in fixed-income markets that began in May,

along with the associated outflows from bond funds,

likely continued to support reallocations into liquid M2

assets. The monetary base continued to expand rapidly, primarily reflecting the rise in reserve balances resulting from the Federal Reserve’s asset purchases.

Against a backdrop of higher interest rates in the advanced economies and slowing economic growth in the

EMEs, several EME currencies came under downward

pressure in August; yields and CDS premiums on EME

sovereign debt increased, particularly for those economies experiencing sharp currency depreciations; and

investors continued to decrease their holdings in EME

mutual funds. In response, some EME authorities

took actions to support their currencies, including

tightening monetary policy, modifying capital controls,

and purchasing their currencies in foreign exchange

markets. On net over the period, the dollar ended little

changed on a trade-weighted basis against a broad set

of currencies, but it appreciated notably against the

currencies of India, Indonesia, and Turkey. Equity

prices in Germany increased substantially and sovereign

yields in the United Kingdom and Germany continued

to rise as data on economic activity in Europe generally

improved over the period, while yield spreads of Spanish and Italian sovereign securities relative to German

government debt declined a bit further.

The staff reported on potential risks to financial stability, including those highlighted by the rise in yields and

volatility on longer-term fixed-income securities since

the spring. The increase in yields appeared to reduce

investors’ appetite for taking duration risk, but if a significant volume of bond investors moved to sell at a

future time, issues surrounding dealer capacity and willingness to make markets in volatile conditions could

again amplify price movements. On balance, the vulnerability of the financial system appeared moderate, as

loss-absorbing capital had increased and the reliance on

short-term funding and the exposure of financial institutions to nonfinancial credit risk had decreased.

Nonetheless, a number of potential shocks could prove

challenging to markets and institutions, including a failure to raise the U.S. federal debt limit, financial instability in EMEs, and geopolitical events in the Middle East.

Staff Economic Outlook

In the economic forecast prepared by the staff for the

September FOMC meeting, the projection for real

GDP growth in the second half of this year was revised

down a little from the one prepared for the previous

meeting. The staff’s forecast for real GDP over the

medium term also was revised down somewhat, reflecting higher projected paths for both longer-term interest

rates and the foreign exchange value of the dollar,

along with slightly lower projected paths for equity and

home prices. The staff still anticipated that the pace of

expansion in real GDP this year would only moderately

exceed the growth rate of potential output but continued to forecast that real GDP would accelerate in 2014

and 2015, supported by an eventual easing in the effects of fiscal policy restraint on economic growth, increases in consumer and business sentiment, further

improvements in credit availability and financial conditions, and accommodative monetary policy. In 2016,

real GDP growth was projected to begin to edge down

toward the growth rate of potential output. Over the

projection period, the expansion in economic activity

was anticipated to slowly reduce the slack in labor and

product markets, and the unemployment rate was expected to decline gradually.

The staff’s forecast for inflation was little changed from

the projection prepared for the previous FOMC meeting. In the near term, the staff continued to project

that inflation would be modest in the second half of

this year but higher than the readings posted in the first

half. Over the medium term, with longer-run inflation

expectations assumed to remain stable, changes in

commodity and import prices expected to be modest,

and resource slack persisting over most of the projection period, inflation was forecast to be subdued

through 2016.

The staff viewed the uncertainty around the forecast

for economic activity as similar to its normal level over

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

skewed to the downside, reflecting concerns about the

economic effects of the recent tightening in U.S. financial market conditions, the resolution of federal fiscal

policy issues in the coming months, the economic and

financial stresses in the EMEs, and the ability of the

U.S. economy to weather potential future adverse

shocks. The staff did not see the uncertainty around its

outlook for inflation as unusually high, and the risks

were viewed as balanced.

Participants’ Views on Current Conditions and the

Economic Outlook

In conjunction with this FOMC meeting, meeting participants—5 members of the Board of Governors and

the presidents of the 12 Federal Reserve Banks, all of

whom participated in the deliberations—submitted

their assessments of real output growth, the unem-

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ployment rate, inflation, and the target federal funds

rate for each year from 2013 through 2016 and over the

longer run, under each participant’s judgment of appropriate monetary policy. The longer-run projections

represent each participant’s assessment of the rate to

which each variable would be expected to converge,

over time, under appropriate monetary policy and in

the absence of further shocks to the economy. These

economic projections and policy assessments are described in the Summary of Economic Projections

(SEP), which is attached as an addendum to these

minutes.

confidence, concerns about job security and availability,

and the lingering effects of this year’s payroll tax increase.

While the housing sector continued to

strengthen, supported by improving fundamentals and

gains in house prices, the increases in mortgage rates

since the spring were seen as a potential risk. The extent to which the higher mortgage rates had materially

affected that sector remained unclear, with the exception of the sharp decline in refinancing activity. But it

was noted that recent softness in housing starts and

home sales might well reflect some restraint from those

higher rates.

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

received during the intermeeting period as indicating

that economic activity had continued to expand at a

moderate pace, albeit somewhat more slowly than earlier anticipated, and they generally indicated that the

broad contours of the outlook further out had not

changed materially since their July meeting. Participants continued to project the rate of growth of economic activity to strengthen over coming years, supported by highly accommodative monetary policy and

the gradual abatement of the headwinds that have been

slowing the pace of economic recovery, such as

household-sector deleveraging, tight credit conditions

for some households and businesses, and fiscal restraint. Accordingly, the unemployment rate was projected to continue to decline over time toward levels

judged to be consistent with the Committee’s dual

mandate. While downside risks to the outlook for the

economy and the labor market were generally viewed as

having diminished, on balance, since last fall, a number

of significant risks remained, including those related to

the potential economic effects of the sizable increases

in interest rates since the spring, ongoing fiscal drag,

and the possible fallout from near-term fiscal debates.

Inflation continued to run below the Committee’s

longer-run objective, apart from fluctuations that largely reflected changes in energy prices, and participants

generally saw it as moving back gradually to 2 percent

in the medium term.

Business contacts in selected parts of the country were

reported to be cautiously optimistic, consistent with

encouraging responses to a number of business surveys. Nonetheless, uncertainties regarding the outlook

for the economy and fiscal and regulatory policies were

reportedly continuing to weigh on business decisionmaking, with firms focused on improving their

balance sheets and enhancing productivity and still

quite cautious about expanding their workforces. Reports on manufacturing activity pointed to some rebound, with production related to autos the most notable area of strength, and activity in the energy sector

continued to expand at a steady pace. In the agricultural sector, farmland values increased further, even

though farm income was reported to be declining.

Some business contacts indicated that wage and price

pressures were subdued; however, in one District, contacts pointed to rising wage pressures and labor shortages.

In the household sector, consumer spending continued

to advance, but incoming data on retail sales were

somewhat weaker than expected. Auto sales, however,

remained strong, supported in part by steady interest

rates on auto loans, which, unlike mortgage rates, did

not rise substantially in recent months. Despite the

continued improvement in household balance sheets, a

number of factors were mentioned as possible restraints on spending, including declines in consumer

Participants discussed the extent to which the ongoing

tightening in fiscal policy was likely to further restrain

economic activity in the second half of this year, with

one participant noting that the effects of the federal

sequestration appeared to be less pronounced than

previously anticipated. However, a number of others

pointed to heightened uncertainty about the course of

federal fiscal policy over coming months, including the

potential for a government shutdown or strains related

to the debt ceiling debate, which posed downside risks

to the economic outlook.

In discussing labor market developments, a number of

participants indicated that gains in payrolls in the July

and August employment reports were disappointing,

but one participant also noted that seasonal adjustment

tended to be challenging during the summer months.

Taking a range of data into account, participants generally agreed that labor market conditions had improved

meaningfully since the start of the asset purchase pro-

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gram in September 2012. Participants discussed how

to reconcile the notable decline in the unemployment

rate over the past year with the only moderate pace of

expansion in real GDP. One possible explanation was

that, to the extent the decline in the unemployment rate

was primarily driven by a fall in the labor force participation rate and low productivity growth, such a decline

might overstate the degree of improvement in broader

labor market conditions. Indeed, the continued low

readings on the employment-to-population ratio were

supportive of this explanation, suggesting that overall

labor market conditions had not improved as much as

the unemployment rate would indicate. An alternative

explanation for the significant improvement in the labor market performance despite the moderate growth

in real GDP over the past year was that growth had

been understated somewhat; notably, some research

suggested that real gross domestic income, which expanded at a somewhat faster pace than real GDP, may

provide better information about overall economic activity. Despite recent declines in the unemployment

rate, one participant noted the risk that the longer the

duration of elevated unemployment, the more likely it

was that the labor market and economy would experience some lasting structural damage. While judging the

extent of structural damage continued to be quite difficult, one piece of evidence consistent with this view

was the apparent decline in the job-finding rate of the

long-term unemployed.

few others observed that the increase in longer-term

yields in recent months had not seemed to leave a

meaningful imprint on other asset prices, suggesting

that the effects on the economy were likely to be relatively muted. While recognizing the potentially significant impact of higher mortgage rates on the housing

market, these same participants pointed to higher equity prices, the further gradual loosening of terms in bank

lending, and the continued availability of credit at inexpensive terms in corporate debt markets as signs that

financial conditions more generally had not tightened

materially. In any case, however, the assessment of the

adverse effects of the increase in longer-term rates on

financial conditions and ultimately on economic activity

would depend importantly upon the extent to which

rates stabilized at current levels or instead continued to

rise.

Despite the reversal of some transitory factors that had

contributed to the earlier softness in inflation, recent

readings continued to be below the Committee’s

longer-run objective of 2 percent. However, participants generally expected inflation to pick up over the

coming year as the pace of economic growth accelerated and slack in resource utilization diminished further,

although to a rate still below the Committee’s longerrun objective.

Participants also touched on the implications for financial stability resulting from the increase in interest rates,

focusing on the effects on securities held by banking

and other nonbank institutions, the unwinding of leveraged trades, and the liquidity and functioning of a

number of fixed-income markets. One participant noted that, notwithstanding the recent rise in interest rates,

net interest margins remained under pressure at community and regional banks, and as a result many of

these banks continued to add to risk exposures. Another participant raised the possibility that financial

stability risks might arise from recent adverse developments in municipal bond markets. It was also noted

that financial conditions in a number of EMEs had

tightened as a result of some depreciation of their currencies, an increase in yields and borrowing costs, and

some capital outflows as measured by withdrawals

from bond funds. More broadly, a couple of participants noted the complexities related to the interaction

between the stance of monetary policy and the vulnerabilities in the financial system.

Participants discussed financial market developments,

including their views on the extent to which the rise in

longer-term interest rates since May reflected growing

confidence about the economic outlook or a perception by financial markets that monetary policy would be

less accommodative going forward than had been previously anticipated. Several participants judged that

overall financial conditions had tightened notably over

the past few months, as seen most importantly in the

rise in mortgage rates. While acknowledging that it was

too early to assess the effects of such an increase, they

expressed concerns that tighter financial conditions

might weigh on the recovery in the housing sector. A

In their discussion of the path for monetary policy,

participants debated the advantages and disadvantages

of reducing the pace of the Committee’s asset purchases at this meeting, focusing importantly on whether the

conditions presented to the public in June for reducing

the pace of asset purchases had yet been met. In general, those who preferred to maintain for now the pace

of purchases viewed incoming data as having been on

the disappointing side and, despite clear improvements

in labor market conditions since the purchase program’s inception in September 2012, were not yet adequately confident of continued progress. Many of

these participants had revised down their forecasts for

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economic activity or pointed to near-term risks and

uncertainties. For example, questions were raised

about the effects on the housing sector and on the

broader economy of the tightening in financial conditions in recent months, as well as about the considerable risks surrounding fiscal policy. Moreover, the announcement of a reduction in asset purchases at this

meeting might trigger an additional, unwarranted tightening of financial conditions, perhaps because markets

would read such an announcement as signaling the

Committee’s willingness, notwithstanding mixed recent

data, to take an initial step toward exit from its highly

accommodative policy. As a result of such concerns, a

number of participants thought that risk-management

considerations called for a cautious approach and that,

in light of the ambiguous cast of recent readings on the

economy, it would be prudent to await further evidence

of progress before reducing the pace of asset purchases. Consistent with the framework discussed by the

Chairman during the June press conference, asset purchases were contingent on the Committee’s ongoing

assessment of the economic outlook and were not on a

preset course; this approach implied a need to adapt

and to adjust asset purchases in response to changes in

economic conditions in order to preserve the Committee’s credibility. With many outside observers expecting a decision to reduce purchases at this meeting,

some participants emphasized a need to clearly communicate the rationale behind any decision not to do

so, in order to avoid conveying a message of pessimism

regarding the economic outlook or to reinforce the

distinction between decisions concerning the pace of

purchases and those concerning the federal funds rate.

One participant suggested that postponing the reduction in the pace of asset purchases would also allow

time for the Committee to further discuss and to implement a clarification or strengthening of its forward

guidance for the federal funds rate, which could temper

the risk that a future downward adjustment in asset

purchases would cause an undesirable tightening of

financial conditions.

The participants who spoke in favor of moderating the

pace of securities purchases at this meeting also cited

the incoming data, but viewed those data as broadly

consistent with the Committee’s outlook for the labor

market at the time of the June FOMC meeting when

the contingent expectation that the pace of asset purchases would be reduced later in the year was first presented to the public. Moreover, they highlighted what

they saw as meaningful cumulative progress in labor

market conditions since the purchase program began.

Those participants generally were satisfied that investors had come to understand the data-dependent nature

of the Committee’s thinking about asset purchases,

and, because they judged that the conditions laid out in

June had been met, they believed that the credibility of

the Committee would best be served by announcing a

downward adjustment in asset purchases at this meeting. With the markets apparently viewing a cut in purchases as the most likely outcome, it was noted that the

postponement of such an announcement to later in the

year or beyond could have significant implications for

the effectiveness of Committee communications. In

particular, concerns were expressed that a delay could

potentially undermine the credibility or predictability of

monetary policy by, for example, increasing uncertainty

about the Committee’s reaction function and about its

commitment to the forward guidance for the federal

funds rate, with the result of an increase in volatility in

financial markets. Moreover, maintaining the pace of

purchases could be perceived as a sign that the FOMC

had turned more pessimistic about the economic outlook. Finally, it was noted that if the Committee did

not pare back its purchases in these circumstances, it

might be difficult to explain a cut in coming months,

absent clearly stronger data on the economy and a swift

resolution of federal fiscal uncertainties. Most of the

participants leaning toward a downward adjustment in

the pace of asset purchases also indicated that they favored a relatively small reduction to signal the Committee’s intention to proceed cautiously.

With regard to adjustments in the pace of asset purchases, whether at this or a future meeting, a few participants expressed a preference for not cutting MBS

purchases but reducing purchases only of Treasury securities initially, with the intent of continuing to support the recovery in the housing sector. However, the

appeal of including both types of securities in any reduction was also mentioned. In addition, in an effort

to reduce uncertainty about how the Committee might

adjust its purchases in response to economic developments and to alleviate some of the related communications issues, one participant suggested an approach that

would mechanically link the reduction in asset purchases to numerical values for the unemployment rate, with

the goal of ending the program when the unemployment rate reached a stated level.

Participants also discussed the potential for clarifying

or strengthening the Committee’s forward guidance for

the federal funds rate. To the extent that financial

markets have at times interpreted the Committee’s

communications regarding the asset purchase program

Minutes of the Meeting of September 17–18, 2013

Page 9

_____________________________________________________________________________________________

as also signaling information about the federal funds

rate target, participants thought it might be important

to reiterate the distinction between the two, and a clarification or strengthening of the forward guidance might

help to reinforce this message. In part toward this end,

participants mentioned several possible steps that

might be considered, including stating that the Committee would not raise its target for the federal funds

rate if the inflation rate was expected to run below a

given level or providing additional information on the

Committee’s intentions regarding the federal funds rate

after the 6½ percent unemployment threshold was

reached. One participant stressed that the Committee

could use the full range of its tools, including forward

guidance, to further improve the alignment of the

medium-term outlook for employment and inflation

with its longer-term goals. In light of the importance

of credibility for the effectiveness of the forward guidance for the federal funds rate, participants noted the

possible implications of uncertainties related to the

Federal Reserve leadership transition in considering the

appropriate timing of any enhancements to the guidance.

In discussing the projections for the target federal

funds rate at the end of 2016 as reported in the SEP,

some participants highlighted the importance of communicating to the public the reasons why the policy

rates that were projected by most, but not all, participants appeared to remain at low levels even as the unemployment rate and inflation by then were expected

to be close to their longer-run values. In particular, if

economic headwinds died away only slowly, as a number of participants expected, the achievement of the

Committee’s employment and price stability objectives

would likely require keeping the federal funds rate below its longer-run equilibrium value for some time even

as economic conditions improved. In light of the potential difficulties in succinctly conveying this information in the Committee’s policy statement, the

Chairman’s postmeeting press conference and the

minutes were mentioned as more appropriate vehicles

for providing this information. A couple of participants also remarked that they viewed their projections

of a low federal funds rate in 2016 as reflecting a commitment to support the economy by maintaining a

more accommodative policy for longer.

Committee Policy Action

Committee members saw the information received

over the intermeeting period as suggesting that economic activity was expanding at a moderate pace.

Some indicators of labor market conditions showed

further improvement in recent months, but the unemployment rate remained elevated. Household spending

and business fixed investment advanced, and the housing sector was strengthening, but mortgage rates had

risen further and fiscal policy was restraining growth.

The Committee expected that, with appropriate policy

accommodation, economic growth would pick up from

its recent pace, resulting in a gradual decline in the unemployment rate toward levels consistent with the

Committee’s dual mandate. Members generally continued to see the downside risks to the outlook for the

economy and the labor market as having diminished,

on net, since last fall, but indicated that the tightening

of financial conditions observed in recent months, if

sustained, could slow the pace of improvement in the

economy and labor market. Apart from fluctuations

due to changes in energy prices, inflation was running

below the Committee’s longer-run objective, but

longer-term inflation expectations were stable, and the

Committee anticipated that inflation would move back

toward its objective over the medium term. Members

recognized, however, that inflation persistently below

the Committee’s 2 percent objective could pose risks to

economic performance.

In their discussion of monetary policy for the period

ahead, members reviewed the degree of improvement

in economic activity and labor market conditions since

the asset purchase program began a year ago and

judged that, taking into account the extent of federal

fiscal retrenchment, the improvement was consistent

with growing underlying strength in the broader economy. However, all members but one judged that it

would be appropriate for the Committee to await more

evidence that progress would be sustained before adjusting the pace of asset purchases. In the view of one

member, the progress to date in labor markets and in

broader economic conditions amply supported a reduction in purchases. During the exchange of views on

whether to trim the flow of asset purchases at this

meeting, a number of members emphasized the contingent and data-dependent nature of the Committee’s

purchase program. In light of the mixed data recently,

including inflation readings that remained below the

Committee’s longer-run objective, and the concerns

over near-term fiscal uncertainties, some members indicated that they preferred to await more evidence that

their expectation of continuing improvement would be

realized. But with financial markets appearing to expect a reduction in purchases at this meeting, concerns

were raised about the effectiveness of FOMC communications if the Committee did not take that step. For

Page 10

Federal Open Market Committee

_____________________________________________________________________________________________

several members, the various considerations made the

decision to maintain an unchanged pace of asset purchases at this meeting a relatively close call. At the

conclusion of the discussion, the Committee decided to

continue adding policy accommodation by purchasing

additional MBS at a pace of $40 billion per month and

longer-term Treasury securities at a pace of $45 billion

per month and to maintain its existing reinvestment

policies. In addition, the Committee reaffirmed its intention to keep the target federal funds rate at 0 to

¼ percent and retained its forward guidance that it 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 longerterm inflation expectations continue to be well anchored.

Members also discussed the wording of the policy

statement to be issued following the meeting. In addition to updating its description of the state of the

economy, the Committee decided to underline its concern about the tightening of financial conditions observed in recent months. It also acknowledged the improvement in economic activity and labor market conditions since its asset purchase program began, while

emphasizing that it was prepared to be patient and

await more evidence that progress would be sustained

before adjusting downward the pace of purchases. The

Committee also adopted language to the effect that, in

judging when to moderate the pace of asset purchases

at its coming meetings, it would assess whether incoming information continued to support its expectation of

ongoing improvement in labor market conditions and

of inflation moving back toward its longer-run objective. Finally, the Committee reiterated the contingent

nature of the outlook for asset purchases, indicating

that asset purchases were not on a preset course and

that the Committee’s decisions about their pace would

continue to depend on its economic outlook as well as

its assessment of the likely efficacy and costs of such

purchases.

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 mortgagebacked 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 July suggests that economic activity has been expanding at a moderate pace. Some indicators

of labor market conditions have shown further improvement in recent months, but the

unemployment rate remains elevated.

Household spending and business fixed investment advanced, and the housing sector

has been strengthening, but mortgage rates

have risen further and fiscal policy is restraining economic growth. Apart from fluctuations due to changes in energy prices, inflation has been running below the Committee’s longer-run objective, but longer-term

inflation expectations have remained stable.

Minutes of the Meeting of September 17–18, 2013

Page 11

_____________________________________________________________________________________________

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 pick up

from its recent pace and the unemployment

rate will gradually decline toward levels the

Committee judges consistent with its dual

mandate. The Committee sees the downside

risks to the outlook for the economy and the

labor market as having diminished, on net,

since last fall, but the tightening of financial

conditions observed in recent months, if sustained, could slow the pace of improvement

in the economy and labor market. The

Committee recognizes that inflation persistently below its 2 percent objective could

pose risks to economic performance, but it

anticipates that inflation will move back toward its objective over the medium term.

developments in coming months and 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

judging when to moderate the pace of asset

purchases, the Committee will, at its coming

meetings, assess whether incoming information continues to support the Committee’s expectation of ongoing improvement in

labor market conditions and inflation moving

back toward its longer-run objective. Asset

purchases are not on a preset course, and the

Committee’s decisions about their pace will

remain contingent on the Committee’s economic outlook as well as its assessment of

the likely efficacy and costs of such purchases.

Taking into account the extent of federal fiscal retrenchment, the Committee sees the

improvement in economic activity and labor

market conditions since it began its asset

purchase program a year ago as consistent

with growing underlying strength in the

broader economy. However, the Committee

decided to await more evidence that progress

will be sustained before adjusting the pace of

its purchases. Accordingly, the Committee

decided to continue purchasing additional

agency mortgage-backed 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, which in

turn should promote a stronger economic

recovery and help to ensure that inflation,

over time, is at the rate most consistent with

the Committee’s dual mandate.

To support continued progress toward maximum employment and price stability, the

Committee today reaffirmed its view 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.”

The Committee will closely monitor incoming information on economic and financial

Voting for this action: Ben Bernanke, William C.

Dudley, James Bullard, Charles L. Evans, Jerome H.

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Powell, Eric Rosengren, Jeremy C. Stein, Daniel K.

Tarullo, and Janet L. Yellen.

Voting against this action: Esther L. George.

Ms. George dissented because she saw recent information on the economy as sufficiently positive to warrant a reduction in the pace of the Committee’s asset

purchases at this meeting. In her view, waiting for

more evidence of progress discounted the cumulative

improvement in the economy as well as the potential

costs of ongoing purchases. Accordingly, not only

would a reduction be appropriate in light of the ongoing improvement in labor market conditions, but it also

would support the credibility and predictability of

monetary policy because it would be seen as following

through on the Committee’s earlier communications

about the outlook for the asset purchase program.

It was agreed that the next meeting of the Committee

would be held on Tuesday–Wednesday, October 29–

30, 2013. The meeting adjourned at 11:15 a.m. on September 18, 2013.

Notation Vote

By notation vote completed on August 20, 2013, the

Committee unanimously approved the minutes of the

FOMC meeting held on July 30–31, 2013.

_____________________________

William B. English

Secretary

Page 1

_____________________________________________________________________________________________

Summary of Economic Projections

In conjunction with the September 17–18, 2013, Federal Open Market Committee (FOMC) meeting, meeting participants—5 members of the Board of Governors and the 12 presidents of the Federal Reserve

Banks, all of whom participated in the deliberations—

submitted their assessments of real output growth, the

unemployment rate, inflation, and the target federal

funds rate for each year from 2013 through 2016 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.

index for personal consumption expenditures (PCE),

would rise to a level at or somewhat below the Committee’s 2 percent objective in 2016.

Most participants judged that highly accommodative

monetary policy was likely to remain warranted over

the next few years to support continued progress toward maximum employment and a return to 2 percent

inflation. As shown in figure 2, a large majority of participants judged not only that it would be appropriate

to wait until 2015 or later before beginning to increase

the federal funds rate, but also that it would then be

appropriate to raise the federal funds rate target relatively gradually. Most participants viewed their economic projections as broadly consistent with a slowing

in the pace of the Committee’s purchases of longerterm securities this year and the completion of the program in mid-2014.

Most participants saw the uncertainty associated with

their outlook for economic growth, the unemployment

rate, and inflation as similar to that of the past 20 years.

In addition, most participants considered the risks to

the outlook for the unemployment rate and inflation as

broadly balanced. A slim majority of the participants

also judged that the risks to the outlook for real gross

domestic product (GDP) growth were broadly balanced, while nearly as many indicated that the risks

were weighted to the downside.

Overall, FOMC participants expected, under appropriate monetary policy, a pickup in economic growth, with

the unemployment rate declining gradually (table 1 and

figure 1). Almost all of the participants projected that

inflation, as measured by the annual change in the price

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

Percent

Variable

Central tendency1

2013

2014

2015

2016

Range2

2015

2016

Longer run

Change in real GDP . . 2.0 to 2.3 2.9 to 3.1 3.0 to 3.5 2.5 to 3.3

June projection . . . . . . 2.3 to 2.6 3.0 to 3.5 2.9 to 3.6

n.a.

2.2 to 2.5

2.3 to 2.5

1.8 to 2.4 2.2 to 3.3

2.0 to 2.6 2.2 to 3.6

2.2 to 3.7

2.3 to 3.8

2.2 to 3.5

n.a.

2.1 to 2.5

2.0 to 3.0

Unemployment rate . . 7.1 to 7.3 6.4 to 6.8 5.9 to 6.2 5.4 to 5.9

June projection . . . . . . 7.2 to 7.3 6.5 to 6.8 5.8 to 6.2

n.a.

5.2 to 5.8

5.2 to 6.0

6.9 to 7.3 6.2 to 6.9

6.9 to 7.5 6.2 to 6.9

5.3 to 6.3

5.7 to 6.4

5.2 to 6.0

n.a.

5.2 to 6.0

5.0 to 6.0

PCE inflation . . . . . . . 1.1 to 1.2 1.3 to 1.8 1.6 to 2.0 1.7 to 2.0

June projection . . . . . . 0.8 to 1.2 1.4 to 2.0 1.6 to 2.0

n.a.

2.0

2.0

1.0 to 1.3 1.2 to 2.0

0.8 to 1.5 1.4 to 2.0

1.4 to 2.3

1.6 to 2.3

1.5 to 2.3

n.a.

2.0

2.0

1.2 to 1.4 1.4 to 2.0

1.1 to 1.5 1.5 to 2.0

1.6 to 2.3

1.7 to 2.3

1.7 to 2.3

n.a.

Core PCE inflation3 . . 1.2 to 1.3 1.5 to 1.7 1.7 to 2.0 1.9 to 2.0

June projection . . . . . . 1.2 to 1.3 1.5 to 1.8 1.7 to 2.0

n.a.

Longer run

2013

2014

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

personal consumption expenditures (PCE) and the price index for PCE excluding food and energy. Projections for the unemployment rate are for the average

civilian unemployment rate in the fourth quarter of the year indicated. Each participant’s projections are based on his or her assessment of appropriate monetary

policy. Longer-run projections represent each participant’s assessment of the rate to which each variable would be expected to converge under appropriate

monetary policy and in the absence of further shocks to the economy. The June projections were made in conjunction with the meeting of the Federal Open

Market Committee on June 18–19, 2013.

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, 2013–16 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

2016

Longer

run

Percent

Unemployment rate

10

9

8

7

6

5

2008

2009

2010

2011

2012

2013

2014

2015

2016

Longer

run

Percent

PCE inflation

3

2

1

2008

2009

2010

2011

2012

2013

2014

2015

2016

Longer

run

Percent

Core PCE inflation

3

2

1

2008

2009

2010

2011

2012

2013

2014

2015

2016

Longer

run

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

annual.

Summary of Economic Projections of the Meeting of September 17–18, 2013

Page 3

_____________________________________________________________________________________________

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

Number of participants

Appropriate timing of policy firming

12

12

11

10

9

8

7

6

5

4

3

3

2

2

1

2014

2015

2016

Appropriate pace of policy firming

Percent

Target federal funds rate at year-end

6

5

4

3

2

1

0

2013

2014

2015

2016

Longer run

Note: In the upper panel, the height of each bar denotes the number of FOMC participants who judge that, under

appropriate monetary policy, the first increase in the target federal funds rate from its current range of 0 to 1/4 percent

will occur in the specified calendar year. In June 2013, 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, 1, 3, 14, 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.

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Federal Open Market Committee

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The Outlook for Economic Activity

Participants generally projected that, conditional on

their individual assumptions about appropriate monetary policy, real GDP growth would be similar in 2013

to its rate in 2012 and would increase in the 2014–16

period to a pace above what participants saw as the

longer-run rate of output growth. Many participants

pointed to diminishing restraint from fiscal policy,

pent-up demand for consumer and producer durables,

or rising household net worth as contributing to the

pickup in growth. In addition, a number of participants noted continued improvement in the housing

sector, supported by rising employment and income

and by improved credit availability.

The central tendencies of participants’ projections for

real GDP growth were 2.0 to 2.3 percent in 2013,

2.9 to 3.1 percent in 2014, 3.0 to 3.5 percent in 2015,

and 2.5 to 3.3 percent in 2016. In general, participants’

projections for growth in 2013, 2014, and, to a lesser

extent, 2015 were below those collected in June. Most

participants attributed the downward revisions to their

projections in 2013 and 2014 in part to weaker-thanexpected incoming data, while some participants pointed to tighter financial conditions. The central tendency

for the longer-run rate of growth of real GDP was

2.2 to 2.5 percent, little changed from June.

Participants anticipated a gradual decline in the unemployment rate over the projection period. The central

tendencies of participants’ forecasts for the unemployment rate in the fourth quarter of each year were 7.1 to

7.3 percent in 2013, 6.4 to 6.8 percent in 2014, 5.9 to

6.2 percent in 2015, and 5.4 to 5.9 percent in 2016.

These projections were little changed from June. 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

5.8 percent. A majority of participants projected that

the unemployment rate would be near or slightly above

their individual estimates of its longer-run level at the

end of 2016.

Figures 3.A and 3.B show that participants’ views regarding the likely outcomes for real GDP growth and

the unemployment rate in 2014 and 2015 remained

dispersed. This diversity reflected their individual assessments of the likely rate of improvement in the

housing sector and in household balance sheets, the

domestic implications of foreign economic developments, the prospective path for U.S. fiscal policy, the

likely evolution of financial conditions, and a number

of other factors. Relative to June, the dispersions of

participants’ projections for GDP growth in 2014 and

2015 narrowed to some extent, while the dispersions of

projections for the unemployment rate in those years

generally widened a bit.

The Outlook for Inflation

Participants’ views on the broad outlook for inflation

under the assumption of appropriate monetary policy

were little changed from June. Although most participants revised up slightly their projection for PCE inflation in 2013, a number of participants revised down a

bit their forecasts for 2014. All participants anticipated

that both headline and core inflation would rise gradually over the next few years, and almost all participants

expected inflation to be at or somewhat below the

Committee’s 2 percent objective in 2016. Specifically,

the central tendencies for PCE inflation were 1.1 to

1.2 percent in 2013, 1.3 to 1.8 percent in 2014, 1.6 to

2.0 percent in 2015, and 1.7 to 2.0 percent in 2016.

The central tendencies of the forecasts for core inflation were little changed from June and broadly similar

to those for the headline measure over the projection

period. A number of participants viewed the combination of stable inflation expectations and diminishing

resource slack as important factors leading to a gradual

pickup in inflation toward the Committee’s longer-run

objective.

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 2014 and 2015 widened slightly from June

and were 1.2 to 2.0 percent in 2014 and 1.4 to 2.3 percent in 2015. In 2016, the forecasts for PCE inflation

were concentrated near the Committee’s longer-run

objective, though one participant expected inflation to

be noticeably above the Committee’s objective and

another expected it to be ½ percentage point below.

Similar to the projections for headline inflation, the

projections for core inflation became more concentrated near the 2 percent objective in 2016 than in earlier

years; however, the dispersion of the projections for

core inflation in each year was lower than for headline

inflation.

Appropriate Monetary Policy

As indicated in figure 2, most participants judged that

exceptionally low levels of the federal funds rate would

remain appropriate for the next few years. In particular, 12 participants thought that the first increase in the

target federal funds rate would not be warranted until

sometime in 2015, and two judged that policy firming

Summary of Economic Projections of the Meeting of September 17–18, 2013

Page 5

_____________________________________________________________________________________________

Figure 3.A. Distribution of participants’ projections for the change in real GDP, 2013–16 and over the longer run

Number of participants

2013

September projections

June projections

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

20

18

16

14

12

10

8

6

4

2

3.8 3.9

Percent range

Number of participants

20

18

16

14

12

10

8

6

4

2

2014

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

Percent range

Number of participants

20

18

16

14

12

10

8

6

4

2

2015

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

Percent range

Number of participants

20

18

16

14

12

10

8

6

4

2

2016

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

Percent range

Number of participants

20

18

16

14

12

10

8

6

4

2

Longer run

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

Percent range

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

3.2 3.3

3.4 3.5

3.6 3.7

3.8 3.9

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Figure 3.B. Distribution of participants’ projections for the unemployment rate, 2013–16 and over the longer run

Number of participants

20

18

16

14

12

10

8

6

4

2

2013

September projections

June 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

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

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

Percent range

Number of participants

20

18

16

14

12

10

8

6

4

2

2016

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

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

Percent range

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

6.6 6.7

6.8 6.9

7.0 7.1

7.2 7.3

7.4 7.5

Summary of Economic Projections of the Meeting of September 17–18, 2013

Page 7

_____________________________________________________________________________________________

Figure 3.C. Distribution of participants’ projections for PCE inflation, 2013–16 and over the longer run

Number of participants

20

18

16

14

12

10

8

6

4

2

2013

September projections

June projections

0.7 0.8

0.9 1.0

1.1 1.2

1.3 1.4

1.5 1.6

1.7 1.8

1.9 2.0

2.1 2.2

2.3 2.4

Percent range

Number of participants

20

18

16

14

12

10

8

6

4

2

2014

0.7 0.8

0.9 1.0

1.1 1.2

1.3 1.4

1.5 1.6

1.7 1.8

1.9 2.0

2.1 2.2

2.3 2.4

Percent range

Number of participants

20

18

16

14

12

10

8

6

4

2

2015

0.7 0.8

0.9 1.0

1.1 1.2

1.3 1.4

1.5 1.6

1.7 1.8

1.9 2.0

2.1 2.2

2.3 2.4

Percent range

Number of participants

20

18

16

14

12

10

8

6

4

2

2016

0.7 0.8

0.9 1.0

1.1 1.2

1.3 1.4

1.5 1.6

1.7 1.8

1.9 2.0

2.1 2.2

2.3 2.4

Percent range

Number of participants

20

18

16

14

12

10

8

6

4

2

Longer run

0.7 0.8

0.9 1.0

1.1 1.2

1.3 1.4

1.5 1.6

1.7 1.8

Percent range

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

1.9 2.0

2.1 2.2

2.3 2.4

Page 8

Federal Open Market Committee

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Figure 3.D. Distribution of participants’ projections for core PCE inflation, 2013–16

Number of participants

2013

20

18

16

14

12

10

8

6

4

2

September projections

June projections

1.1 1.2

1.3 1.4

1.5 1.6

1.7 1.8

1.9 2.0

2.1 2.2

2.3 2.4

Percent range

Number of participants

2014

20

18

16

14

12

10

8

6

4

2

1.1 1.2

1.3 1.4

1.5 1.6

1.7 1.8

1.9 2.0

2.1 2.2

2.3 2.4

Percent range

Number of participants

2015

20

18

16

14

12

10

8

6

4

2

1.1 1.2

1.3 1.4

1.5 1.6

1.7 1.8

1.9 2.0

2.1 2.2

2.3 2.4

Percent range

Number of participants

2016

20

18

16

14

12

10

8

6

4

2

1.1 1.2

1.3 1.4

1.5 1.6

1.7 1.8

Percent range

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

1.9 2.0

2.1 2.2

2.3 2.4

Summary of Economic Projections of the Meeting of September 17–18, 2013

Page 9

_____________________________________________________________________________________________

would likely not be appropriate until 2016. Three participants judged that an increase in the federal funds

rate in 2014 would be appropriate.

All participants projected that the unemployment rate

would be below the Committee’s 6½ percent threshold

at the end of the year in which they viewed the initial

increase in the federal funds rate to be appropriate, and

all but one judged that inflation would be at or below

the Committee’s longer-run objective. Almost all participants projected that the unemployment rate would

still be above their view of its longer-run level at the

end of the year in which they saw the federal funds rate

increasing from the effective lower bound.

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 2016 and over the longer run. As noted above,

most participants judged that economic conditions

would warrant maintaining the current low level of the

federal funds rate until 2015. Among the three participants who saw the federal funds rate leaving the effective lower bound earlier, projections for the federal

funds rate at the end of 2014 ranged from 1 to 1¼ percent. These three participants viewed the appropriate

level of the federal funds rate as 3 percent or higher at

the end of 2015, while the remainder of participants

saw the appropriate level of the funds rate as 1½ percent or lower. On balance, the dispersion of participants’ projections for the appropriate federal funds rate

at the end of 2015 widened a bit from June, while the

median value of the rate was unchanged.

All of the participants who saw the first tightening in

either 2015 or 2016 judged that the appropriate level of

the federal funds rate at the end of 2016 would still be

below their individual assessment of its expected

longer-run value. In contrast, the three participants

who saw the first tightening in 2014 believed that the

appropriate level of the federal funds rate at the end of

2016 would be at their assessment of its longer-run

level, which they viewed as either at or just above

4 percent. Among all participants, estimates of the

longer-run target federal funds rate ranged from 3¼ to

about 4¼ percent, reflecting the Committee’s inflation

objective of 2 percent and participants’ individual

judgments about the appropriate longer-run level of the

real federal funds rate in the absence of further shocks

to the economy.

Participants also described their views regarding the

appropriate path of the Federal Reserve’s balance sheet.

Conditional on their respective economic outlooks,

most participants judged that it would likely be appropriate to begin to reduce the pace of the Committee’s

purchases of longer-term securities this year and to

conclude purchases in the middle of 2014. A couple of

participants thought it appropriate for the first reduction in the pace of asset purchases to occur later, and

another specified that purchases likely would continue

past midyear 2014; in contrast, a couple of participants

thought that the program should be ended considerably

sooner than the middle of next year.

Participants’ views of the appropriate path for monetary policy were informed by their judgments on the

state of the economy, including the values of the unemployment rate and other labor market indicators that

would be consistent with maximum employment, the

extent to which the economy was currently falling short

of maximum employment, the prospects for inflation

to reach the Committee’s longer-term objective of

2 percent, and the balance of risks around the outlook.

Some participants also mentioned the usefulness of

examining the implications of alternative policy strategies for returning employment and inflation to

mandate-consistent levels over the medium term.

Uncertainty and Risks

Most participants judged that the levels of uncertainty

about their projections for real GDP growth and unemployment were broadly similar to the norm during

the previous 20 years, although four participants continued to see them as higher (figure 4).1 The number

of participants who viewed the risks around their GDP

projections as weighted to the downside was nearly

equal to the number who viewed them as broadly balanced. Most participants saw the risks around their

unemployment projections as broadly balanced. The

main factors cited as contributing to the uncertainty

and balance of risks around economic outcomes were

the limits on the ability of monetary policy at the zero

lower bound to respond to adverse shocks, as well as

challenges associated with forecasting the path of fiscal

policy and developments abroad. In addition, some

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 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

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Federal Open Market Committee

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Figure 3.E. Distribution of participants’ projections for the target federal funds rate, 2013–16 and over the longer run

Number of participants

2013

20

18

16

14

12

10

8

6

4

2

September projections

June projections

0.00 0.37

0.38 0.62

0.63 0.87

0.88 1.12

1.13 1.37

1.38 1.62

1.63 1.87

1.88 2.12

2.13 2.37

2.38 2.62

2.63 2.87

2.88 3.12

3.13 3.37

3.38 3.62

3.63 3.87

3.88 4.12

4.13 4.37

4.38 4.62

Percent range

Number of participants

2014

0.00 0.37

20

18

16

14

12

10

8

6

4

2

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

0.00 0.37

20

18

16

14

12

10

8

6

4

2

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

2016

0.00 0.37

20

18

16

14

12

10

8

6

4

2

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

0.00 0.37

0.38 0.62

20

18

16

14

12

10

8

6

4

2

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 September 17–18, 2013

Page 11

_____________________________________________________________________________________________

Figure 4. Uncertainty and risks in economic projections

Number of participants

Uncertainty about GDP growth

20

18

16

14

12

10

8

6

4

2

September projections

June projections

Lower

Broadly

similar

Higher

Number of participants

Risks to GDP growth

Weighted to

downside

Broadly

balanced

Number of participants

Uncertainty about the unemployment rate

Lower

Broadly

similar

20

18

16

14

12

10

8

6

4

2

Higher

Risks to the unemployment rate

Weighted to

downside

Lower

Broadly

similar

20

18

16

14

12

10

8

6

4

2

Higher

Broadly

balanced

Lower

Broadly

similar

Higher

Weighted to

upside

Risks to PCE inflation

Weighted to

downside

20

18

16

14

12

10

8

6

4

2

20

18

16

14

12

10

8

6

4

2

Number of participants

Broadly

balanced

Number of participants

Uncertainty about core PCE inflation

Weighted to

upside

Number of participants

Number of participants

Uncertainty about PCE inflation

20

18

16

14

12

10

8

6

4

2

September projections

June projections

20

18

16

14

12

10

8

6

4

2

Weighted to

upside

Number of participants

Risks to core PCE inflation

Weighted to

downside

Broadly

balanced

20

18

16

14

12

10

8

6

4

2

Weighted to

upside

Note: For definitions of uncertainty and risks in economic projections, see the box “Forecast Uncertainty.” Definitions of variables are in the general note to table 1.

Page 12

Federal Open Market Committee

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Table 2. Average historical projection error ranges

Percentage points

Variable

Change in real

GDP1

rate1

Unemployment

2013

2014

2015

2016

.....

±0.9

±1.5

±1.8

±1.9

.....

±0.3

±1.0

±1.6

±1.9

±0.8

±1.0

±1.1

±1.1

Total consumer prices2 . . . .

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 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.

participants pointed to the tightening in financial conditions in recent months and the possibility of heightened

volatility in financial markets, while others pointed to

risks associated with structural changes affecting

productivity growth and labor markets.

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. Eleven participants judged the levels of

uncertainty associated with their forecasts for those

inflation measures to be broadly similar to historical

norms; the same number saw the risks to those projections as broadly balanced. Five participants saw the

risks to their inflation forecasts as tilted to the downside, reflecting, for example, the possibility that the

current low levels of inflation could persist and become

embedded in inflation expectations. Conversely, a

couple of participants cited upside risks to inflation

stemming from the current highly accommodative

stance of monetary policy or concerns about the

Committee’s ability to shift to a less accommodative

policy stance when it becomes appropriate to do so.

Summary of Economic Projections of the Meeting of September 17–18, 2013

Page 13

_____________________________________________________________________________________________

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 2.1 to

3.9 percent in the current year, 1.5 to 4.5 per-

cent in the second year, 1.2 to 4.8 percent in the

third year, and 1.1 to 4.9 percent in the fourth

year. The corresponding 70 percent confidence

intervals for overall inflation would be 1.2 to

2.8 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 and fourth years.

Because current conditions may differ

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

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

than, or broadly similar to typical levels of

forecast uncertainty in the past, as shown in

table 2. Participants also provide judgments as

to whether the risks to their projections are

weighted to the upside, are weighted to the

downside, or are broadly balanced. That is,

participants judge whether each variable is

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

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

with a particular projection rather than with

divergences across a number of different projections.

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

rate is subject to considerable uncertainty. This

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

monetary policy depends importantly on the

evolution of real activity and inflation over

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

would change from that point forward.