fomc minutes · June 14, 2016

FOMC Minutes

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Minutes of the Federal Open Market Committee

June 14–15, 2016

A joint meeting of the Federal Open Market Committee

and the Board of Governors was held in the offices of

the Board of Governors of the Federal Reserve System

in Washington, D.C., on Tuesday, June 14, 2016, at

1:00 p.m. and continued on Wednesday, June 15, 2016,

at 9:00 a.m. 1

PRESENT:

Janet L. Yellen, Chair

William C. Dudley, Vice Chairman

Lael Brainard

James Bullard

Stanley Fischer

Esther L. George

Loretta J. Mester

Jerome H. Powell

Eric Rosengren

Daniel K. Tarullo

Charles L. Evans, Patrick Harker, Robert S. Kaplan,

and Neel Kashkari, 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

Brian F. Madigan, Secretary

Matthew M. Luecke, Deputy Secretary

David W. Skidmore, Assistant Secretary

Michelle A. Smith, Assistant Secretary

Scott G. Alvarez, General Counsel

Steven B. Kamin, Economist

Thomas Laubach, Economist

David W. Wilcox, Economist

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

Lebow, Jonathan P. McCarthy, Stephen A. Meyer,

Ellis W. Tallman, Christopher J. Waller, and

William Wascher, Associate Economists

Simon Potter, Manager, System Open Market Account

The Federal Open Market Committee is referenced as the

“FOMC” and the “Committee” in these minutes.

Lorie K. Logan, Deputy Manager, System Open

Market Account

Robert deV. Frierson, Secretary of the Board, Office of

the Secretary, Board of Governors

Michael S. Gibson, Director, Division of Banking

Supervision and Regulation, Board of Governors

James A. Clouse, Deputy Director, Division of

Monetary Affairs, Board of Governors; Andreas

Lehnert, Deputy Director, Division of Financial

Stability, Board of Governors

David Bowman, Andrew Figura, Ann McKeehan,

David Reifschneider, and Stacey Tevlin, Special

Advisers to the Board, Office of Board Members,

Board of Governors

Trevor A. Reeve, Special Adviser to the Chair, Office

of Board Members, Board of Governors

Linda Robertson, Assistant to the Board, Office of

Board Members, Board of Governors

Fabio M. Natalucci, Senior Associate Director,

Division of Monetary Affairs, Board of Governors;

Beth Anne Wilson, Senior Associate Director,

Division of International Finance, Board of

Governors

Michael T. Kiley, Senior Adviser, Division of Research

and Statistics, and Senior Associate Director,

Division of Financial Stability, Board of Governors

Antulio N. Bomfim, Ellen E. Meade, and Joyce K.

Zickler, Senior Advisers, Division of Monetary

Affairs, Board of Governors; Jeremy B. Rudd,

Senior Adviser, Division of Research and Statistics,

Board of Governors

Shaghil Ahmed, Deputy Associate Director, Division

of International Finance, Board of Governors

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Christopher J. Gust 2 and Jason Wu, Assistant

Directors, Division of Monetary Affairs, Board of

Governors; Paul A. Smith, Assistant Director,

Division of Research and Statistics, Board of

Governors

Eric C. Engstrom and Patrick E. McCabe, Advisers,

Division of Research and Statistics, Board of

Governors

Penelope A. Beattie,3 Assistant to the Secretary, Office

of the Secretary, Board of Governors

Brett Berger, Senior Economic Project Manager,

Division of International Finance, Board of

Governors

David H. Small, Project Manager, Division of

Monetary Affairs, Board of Governors

Wendy E. Dunn, Principal Economist, Division of

Research and Statistics, Board of Governors;

Marcelo Rezende, Principal Economist, Division

of Monetary Affairs, Board of Governors

Edward Herbst and Hiroatsu Tanaka, Senior

Economists, Division of Monetary Affairs, Board

of Governors

Randall A. Williams, Information Manager, Division of

Monetary Affairs, Board of Governors

David Sapenaro, First Vice President, Federal Reserve

Bank of St. Louis

David Altig, Kartik B. Athreya, and Jeff Fuhrer,

Executive Vice Presidents, Federal Reserve Banks

of Atlanta, Richmond, and Boston, respectively

Stephanie Heller, Evan F. Koenig, and Spencer Krane,

Senior Vice Presidents, Federal Reserve Banks of

New York, Dallas, and Chicago, respectively

Roc Armenter, Sarah K. Bell, Òscar Jordà, and

George A. Kahn, Vice Presidents, Federal Reserve

Banks of Philadelphia, New York, San Francisco,

and Kansas City, respectively

Attended Wednesday session only.

Attended Tuesday session only.

Cristina Arellano, Senior Research Economist, Federal

Reserve Bank of Minneapolis

Developments in Financial Markets and Open

Market Operations

The manager of the System Open Market Account

(SOMA) reported on developments in domestic and foreign financial markets during the period since the Committee met on April 26–27, 2016. Market participants’

expectations for a firming of monetary policy at the June

FOMC meeting rose considerably in the middle of the

period, largely in response to monetary policy communications, but those expectations subsequently fell

sharply following the release of labor market data for

May. Nominal yields on Treasury securities declined

over the period. Forward measures of inflation compensation derived from yields on nominal and inflationindexed Treasury securities fell despite an appreciable increase in crude oil prices, a development that contrasted

with the positive correlation between these variables that

had been evident for some time. The manager also

noted that bond yields globally had declined to very low

levels and discussed some of the possible reasons for the

drop. Actions by investors to shift their portfolios away

from very low-yielding foreign sovereign debt were cited

as adding to the downward pressure on U.S. yields. The

manager also reviewed the apparent effects on financial

markets of changes in the perceived odds that the United

Kingdom would vote in a referendum on June 23 to

leave the European Union.

In domestic money markets, the effective federal funds

rate once again stayed close to the middle of the

FOMC’s ¼ to ½ percent target range over the intermeeting period except on month-ends. Usage of the

System’s overnight reverse repurchase agreement facility

remained low. Market participants anticipated that

changes to the regulation of money market mutual funds

that will take effect later in the year could lead to some

increase in usage of the facility. Finally, the manager

briefed the Committee on various efforts, including

small-value tests of System facilities, to enhance operational readiness.

By unanimous vote, the Committee ratified the Desk’s

domestic transactions over the intermeeting period.

Minutes of the Meeting of June 14–15, 2016

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

Staff Review of the Economic Situation

The information reviewed for the June 14–15 meeting

indicated that the pace of improvement in labor market

conditions slowed in April and May but that real gross

domestic product (GDP) appeared to be rising faster

than in the first quarter. Consumer price inflation continued to run below the Committee’s longer-run objective of 2 percent, restrained in part by earlier decreases

in energy prices and in prices of non-energy imports.

Survey-based measures of longer-run inflation expectations were mixed in recent months, while market-based

measures of inflation compensation declined from levels

that were already low.

Total nonfarm payroll employment gains slowed in April

and May, even after adjusting for the effects of a strike

at a large telecommunications company. The unemployment rate dropped to 4.7 percent in May, partly reflecting an unusually large number of unemployed persons

exiting the labor force. Over the first two months of the

second quarter, both the labor force participation rate

and the employment-to-population ratio moved down

on net. The share of workers employed part time for

economic reasons rose noticeably in May. Although the

rate of private-sector job openings remained elevated,

the rate of hires declined in both March and April and

the rate of quits was unchanged. The four-week moving

average of initial claims for unemployment insurance

benefits moved up a little, on net, from late April to early

June but was still at a low level. Labor productivity

growth remained slow over the four quarters ending in

the first quarter of 2016. Measures of labor compensation continued to rise at a moderate pace on balance:

Compensation per hour in the nonfarm business sector

increased 3¾ percent over the four quarters ending in

the first quarter, the employment cost index for private

workers rose 1¾ percent over the 12 months ending in

March, and average hourly earnings for all employees increased 2½ percent over the 12 months ending in May.

The unemployment rates for African Americans and for

Hispanics stayed above the rate for whites, although the

differentials in jobless rates across the different groups

were similar to those before the most recent recession.

The share of African American and Hispanic workers

employed part time for economic reasons remained

higher than for whites, and the gap in these rates was

wider than in the years just before the most recent recession.

Total industrial production (IP) rose in April, principally

reflecting a rebound in the output of utilities following a

couple of unseasonably warm winter months as well as

a moderate increase in manufacturing production.

Meanwhile, mining output continued to contract as a result of further declines in drilling activity, a slower pace

of crude oil extraction, and a continued pullback in coal

production. A variety of indicators—including manufacturing production worker hours, motor vehicle assemblies, and oil and gas extraction and drilling activity—suggested that IP likely declined in May. Automakers’ assembly schedules and mixed readings on other indicators of manufacturing production, such as new orders from national and regional manufacturing surveys,

pointed to only subdued gains in factory output over the

next few months.

Growth in real personal consumption expenditures

(PCE) appeared to be picking up in the second quarter.

The components of the nominal retail sales data used by

the Bureau of Economic Analysis to construct its estimate of PCE rose at a solid pace in April and May, and

sales of light motor vehicles rebounded after dipping in

March. The apparent pickup in real PCE growth was

consistent with recent readings on key factors that influence consumer spending. Gains in real disposable personal income continued to be solid in March and April,

and households’ net worth was boosted by further

strong increases in home values through April. Also,

consumer sentiment as measured by the University of

Michigan Surveys of Consumers remained upbeat in

early June.

Recent information on housing activity was broadly consistent with a continued gradual recovery in this sector.

Starts for new single-family homes increased in April but

were below the average pace in the first quarter, and

building permit issuance remained essentially flat at the

level that prevailed since late last year. The pace of starts

for multifamily units moved up in April and was faster

than in the first quarter. Sales of both new and existing

homes rose in April.

Real private expenditures for business equipment and intellectual property appeared to be relatively flat early in

the second quarter after declining sharply in the previous

quarter. Nominal shipments of nondefense capital

goods excluding aircraft edged up in April, and forwardlooking indicators, such as new orders for these capital

goods and recent readings from national and regional

surveys of business conditions, suggested little change in

business equipment spending in the near term. Firms’

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nominal spending for nonresidential structures excluding drilling and mining was little changed, on net, in

March and April. The number of oil and gas rigs in operation, an indicator of spending for structures in the

drilling and mining sector, fell through late May but

edged up in early June.

Total real government purchases rose modestly in the

first quarter and appeared to be increasing at about the

same pace in the second quarter. Nominal outlays for

defense in April and May pointed to an increase in real

federal purchases in the second quarter, after such purchases had declined in the first quarter. In contrast, real

state and local government purchases seemed to be edging down in the second quarter; the payrolls of these

governments were little changed, on net, in April and

May, and their nominal spending for construction declined in April.

The U.S. international trade deficit narrowed substantially in March, with a sharp decline in imports more than

offsetting a fall in exports. The March data, together

with revised estimates for earlier months, suggested that

real exports were about flat in the first quarter while imports fell slightly. In April, the deficit widened as imports recovered somewhat, but it remained narrower

than its first-quarter average.

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

price index, increased about 1 percent over the

12 months ending in April, partly restrained by earlier

declines in consumer energy prices. Core PCE price inflation, which excludes changes in food and energy

prices, was a little above 1½ percent over the same

12-month period, held down in part by decreases in the

prices of non-energy imports over much of this period

and the pass-through of the declines in energy prices to

prices of other goods and services. Over the 12 months

ending in April, total consumer prices as measured by

the consumer price index (CPI) also rose about 1 percent, while core CPI inflation was a little above 2 percent. The Michigan survey measure of longer-run inflation expectations fell to its lowest level on record in early

June, but other measures of such expectations—including those from the Survey of Professional Forecasters

and from the Desk’s Survey of Primary Dealers and Survey of Market Participants—were generally little

changed, on balance, in recent months.

Foreign real GDP growth picked up in the first quarter,

supported by relatively robust increases in Canada, the

euro area, Japan, and Mexico. However, the pace of

growth appeared to slow in many foreign economies in

the second quarter, although in some cases as a result of

what were likely to be temporary disruptions, including

wildfires in Canada and an earthquake in Japan. In the

United Kingdom, uncertainty about the outcome of the

referendum on exit from the European Union seemed

to be holding down investment. In contrast, indicators

for emerging Asia, including China, suggested that economic growth picked up in the second quarter. Inflation

remained low in the advanced foreign economies

(AFEs), in part reflecting previous declines in energy

prices. Inflation also continued to be subdued in most

emerging market economies (EMEs).

Staff Review of the Financial Situation

Domestic financial market conditions remained accommodative over the intermeeting period. Equity price indexes and corporate bond spreads were little changed,

on net, and, in aggregate, corporations continued to tap

credit markets at a solid pace. Credit also remained

broadly available to households, except for higher-risk

borrowers in some markets. The expected near-term

path of the federal funds rate implied by market quotes

varied notably over the intermeeting period. On balance, it flattened, largely in response to the disappointing

May employment report and growing concerns among

investors about the British referendum on membership

in the European Union. The flatter expected path of the

federal funds rate, along with an apparent decline in

global risk sentiment early in the period, contributed to

an appreciable reduction in longer-term Treasury yields.

Market-based estimates of the probability of a hike in the

federal funds rate at the June FOMC meeting were variable during the intermeeting period. The probability of

an increase in June fell to near zero in early May in response to incoming economic data, jumped to about

30 percent after the release of the April FOMC minutes

and other Federal Reserve communications, and

dropped again to near zero after the May employment

report. The expected path of the federal funds rate for

the medium term implied by market quotes declined

somewhat on net. The average probability assigned by

respondents to the Desk’s June Survey of Primary Dealers and Survey of Market Participants was near zero for

a rate hike in June and around 20 percent for a rate increase in July. The median respondent in each survey

indicated that the most likely outcome was only one hike

in 2016, down from two in the April surveys.

The nominal Treasury yield curve flattened, on net, over

the intermeeting period, mainly reflecting declines in

longer-term rates; the flattening left the spread between

yields on 2- and 10-year Treasury securities near its lowest level since 2007. Although a significant portion of

Minutes of the Meeting of June 14–15, 2016

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the declines in yields occurred following the release of

the May employment report, yields at longer maturities

had begun drifting down earlier in the period, consistent

with an apparent deterioration in global risk sentiment.

Yields moved lower late in the period amid growing concerns about the upcoming British referendum. Some

market participants attributed the decline in Treasury

yields in part to heavy demand from foreign investors

faced with extraordinarily low yields on foreign sovereign securities. Inflation compensation based on Treasury Inflation-Protected Securities (TIPS) decreased, particularly at longer tenors. Measures of inflation compensation based on inflation swaps also declined, but less

than TIPS-based measures, consistent with anecdotal reports suggesting that a portion of the declines in TIPSbased measures might have been driven by elevated demand for longer-term nominal Treasury securities.

Broad stock price indexes moved within narrow ranges

but were modestly lower, on net, over the intermeeting

period. However, one-month-ahead option-implied

volatility on the S&P 500 index—the VIX—rose notably

from fairly low levels and ended the period close to its

historical median level. Spreads of 10-year triple-B-rated

corporate bond yields over those on comparable-maturity Treasury securities were little changed on balance.

High-yield spreads widened, mainly for firms outside of

the energy sector; spreads on bonds for firms in the energy sector narrowed, likely in response to rising oil

prices.

Overall financing conditions for nonfinancial firms improved a bit over the intermeeting period, remaining accommodative. Amid still-low yields, bond issuance by

investment-grade corporations rose to a robust pace in

May, and speculative-grade issuance also picked up.

Growth of commercial and industrial (C&I) loans on

banks’ books remained strong in April and May, particularly at large banks. Following significant declines in

the first quarter of 2016, gross issuance of leveraged

loans increased slightly in April and May, as refinancing

was reportedly boosted by lower loan spreads. Equity

issuance by nonfinancial firms through initial public offerings remained subdued over the intermeeting period.

Meanwhile, nonfinancial firms continued to repurchase

their shares at a brisk pace in the first quarter, and dividends stayed near record levels.

Recent developments pointed to some decline in the

credit quality of nonfinancial firms. The percentage of

C&I loans entering delinquency or being charged off increased further in the first quarter, the default rate of

corporate bonds moved up in April, and downgrades of

nonfinancial bonds significantly outpaced upgrades in

May. Expected year-ahead default rates for nonfinancial

firms remained moderately elevated relative to previous

expansions, while those for oil companies continued to

be high.

Financing conditions for commercial real estate remained fairly accommodative. All major categories of

commercial real estate loans on banks’ books increased

briskly during April and May. However, spreads on

commercial mortgage-backed securities (CMBS) stayed

elevated, continuing to depress CMBS issuance.

On balance, credit conditions in municipal bond markets

continued to be stable. Yield spreads on general obligation municipal bonds were little changed, and gross issuance remained solid. The default by Puerto Rico’s Government Development Bank on debt payments due in

early May was widely expected and elicited limited reaction in broader municipal bond markets.

Conditions in consumer credit markets were little

changed and generally remained accommodative. Consumer loan balances continued to increase at a robust

pace in recent months, with year-over-year growth in

credit card balances outstanding continuing to trend upward. Credit in mortgage markets stayed tight for borrowers with low credit scores, hard-to-document income, or high debt-to-income ratios. Interest rates on

30-year fixed-rate mortgages declined and continued to

be low by historical standards.

Over the intermeeting period, developments in global financial markets were driven in large part by shifting

views on the expected path of U.S. monetary policy and

by fluctuating expectations about the outcome of the

U.K. vote on membership in the European Union. The

exchange value of the U.S. dollar rose in the middle of

the intermeeting period along with expectations for less

accommodative Federal Reserve monetary policy. However, the dollar partially retraced these increases following the much weaker-than-expected U.S. employment

report for May, finishing the period a bit stronger against

the currencies of the AFEs and about 3 percent higher

against EME currencies. In contrast to its changes

against most currencies, the dollar depreciated against

the Japanese yen, in large part because of the unexpected

decision by the Bank of Japan not to ease policy further

at its April meeting. AFE sovereign yields declined, with

U.K. yields in particular being weighed down following

polls showing an increase in support for the “leave” vote

in the upcoming referendum. Decreases in equity indexes in the AFEs, particularly in Europe, also report-

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edly reflected concerns about the possibility of a successful “leave” vote. Most EME equity markets also edged

lower.

Staff Economic Outlook

In the U.S. economic forecast prepared by the staff for

the June FOMC meeting, real GDP growth was estimated to have been faster in the first quarter than in the

April forecast, and the incoming information was consistent with a moderate pickup in GDP growth in the

second quarter. Real GDP was projected to rise a little

slower in the second half of this year than in the previous

forecast and to increase at about the same pace thereafter; the small boosts to real GDP growth implied by a

lower assumed path for interest rates and by a slightly

stronger trajectory for home values were essentially offset by restraint from higher projected paths for the foreign exchange value of the dollar and for oil prices. The

staff continued to forecast that real GDP would expand

at a modestly faster pace than potential output in 2016

through 2018, supported primarily by increases in consumer spending. The unemployment rate was expected

to remain relatively flat over the second half of the year

and then to gradually decline further; over this period,

the unemployment rate was projected to run somewhat

below the staff’s estimate of its longer-run natural rate.

The staff’s forecast for inflation was little changed from

the previous projection. The staff continued to project

that inflation would increase over the next several years,

as energy prices and the prices of non-energy imports

were expected to begin steadily rising this year. However, inflation was still projected to be slightly below the

Committee’s longer-run objective of 2 percent in 2018.

The staff viewed the uncertainty around its April projections for real GDP growth, the unemployment rate, and

inflation as similar to the average of the past 20 years.

The risks to the forecast for real GDP were seen as tilted

to the downside, reflecting the staff’s assessment that

neither monetary nor fiscal policy was well positioned to

help the economy withstand substantial adverse shocks.

In addition, the staff continued to see the risks to the

forecast from developments abroad as skewed to the

downside. Consistent with the downside risks to aggregate demand, the staff viewed the risks to its outlook for

the unemployment rate as tilted to the upside. The risks

to the projection for inflation were still judged as

weighted to the downside, reflecting the possibility that

One participant did not submit longer-run projections in

conjunction with the June 2016 FOMC meeting.

longer-term inflation expectations may have edged

down.

Participants’ Views on Current Conditions and the

Economic Outlook

In conjunction with this FOMC meeting, members of

the Board of Governors and Federal Reserve Bank presidents submitted their projections of the most likely outcomes for real GDP growth, the unemployment rate, inflation, and the federal funds rate for each year from

2016 through 2018 and over the longer run. 4 Each participant’s projections were conditioned on his or her

judgment of appropriate monetary policy. The longerrun projections represented 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 projections and policy assessments are

described in the Summary of Economic Projections,

which is an addendum to these minutes.

In their discussion of the economic situation and the

outlook, meeting participants agreed that information

received over the intermeeting period indicated that the

pace of improvement in the labor market had slowed

while growth in economic activity appeared to have

picked up. Although the unemployment rate had declined, job gains had diminished. Growth in household

spending had strengthened. Since the beginning of the

year, the housing sector had continued to improve and

the drag from net exports appeared to have lessened, but

business fixed investment had been soft. Inflation had

continued to run below the Committee’s 2 percent

longer-run objective, partly reflecting earlier declines in

energy prices and in prices of non-energy imports. Market-based measures of inflation compensation declined;

most survey-based measures of longer-term inflation expectations were little changed, on balance, in recent

months.

Participants generally expected that, with gradual adjustments in the stance of monetary policy, economic activity would expand at a moderate pace and labor market

indicators would strengthen. Inflation was expected to

remain low in the near term, in part because of earlier

declines in energy prices, but to rise to 2 percent over

the medium term as the transitory effects of past declines in energy and import prices dissipated and the labor market strengthened further. Participants generally

agreed that the Committee should continue to closely

Minutes of the Meeting of June 14–15, 2016

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monitor inflation indicators and global economic and financial developments.

Growth of consumer spending appeared to have picked

up from its slow pace in the first quarter. Retail sales

posted strong gains in April and May, and sales of light

motor vehicles moved back up. At the time of the April

meeting, most participants had anticipated a rebound in

consumer spending in light of the still-solid fundamental

determinants of household spending. Some participants

indicated that consumption was likely to continue being

supported by these factors, which included ongoing

gains in income, robust household balance sheets, and

the positive assessment of current economic conditions

that was evident in recent surveys of consumers. However, a few participants expressed caution about the outlook for consumer expenditures, noting that slower increases in employment and higher energy prices could

restrain spending.

The housing sector continued to improve since the beginning of the year. Reports from a number of participants indicated that single-family construction was

strengthening and house prices were rising in most parts

of their Districts. However, some areas that were affected by the slowdown in the energy sector experienced

house price declines or increases in mortgage delinquency rates.

Participants summarized survey readings and anecdotal

reports on business conditions in their Districts. Those

indicators were mixed regarding the pace of economic

activity within the manufacturing sector. Some of the

weakness in manufacturing activity was linked to the effects of earlier declines in oil prices on firms in the energy sector and to previous increases in the exchange

value of the dollar, which had adversely affected exporters. But manufacturing activity was judged to have stabilized in a couple of Districts, and contacts there were

optimistic about further improvement in the months

ahead. It was noted that the recent increase in crude oil

prices had improved the outlook for the energy sector.

However, a couple of participants observed that financial strains caused by previous declines in energy prices

had continued for firms or financial institutions in their

Districts, and such difficulties were seen as likely to persist absent further increases in energy prices. Regarding

the service sector, a few participants commented that activity and hiring continued to expand in their Districts.

The near-term outlook for farm income remained weak

despite recent increases in the futures prices of some agricultural commodities.

Available indicators suggested that the softness in business fixed investment since late last year persisted early

in the second quarter. While weakness in the drilling and

mining sector was attributable to the earlier declines in

oil prices, participants identified a variety of potential

causes of the broader weakness in investment spending,

including a slowdown in corporate profits, concern

about prospects for economic growth, heightened uncertainty regarding the future course of domestic regulatory and fiscal policies, and a persistent reluctance on the

part of firms to undertake new projects in the wake of

the financial crisis. Some participants mentioned that

the sluggishness in business investment could portend a

broader economic slowdown. A couple of participants

also noted that elevated inventory levels could be a drag

on economic growth in the near term. However, participants also cited factors that could lead to a pickup in

business spending, including the recent turnaround in

energy prices and the greater optimism on the part of

firms indicated by surveys of businesses and anecdotal

reports in some Districts.

The employment report for May showed considerably

weaker growth in payrolls than had been expected, and

gains in previous months were revised down. Although

the unemployment rate fell in May, a drop in labor force

participation accounted for the decline. Participants discussed a range of interpretations of these data. Many

participants observed that, because of transitory factors,

such as statistical noise and the effects of a strike in the

telecommunications industry, the reported rate of payroll job growth likely understated its underlying pace;

however, many participants thought that the underlying

pace had slowed some from that of previous months.

Some noted that other indicators did not corroborate a

material weakening of labor market conditions. These

indicators included a number of regional surveys of labor market conditions, relatively low levels of initial

claims for unemployment insurance, surveys of business

hiring plans, and positive views of labor market conditions in recent consumer surveys. In addition, a few participants commented that the movements in labor force

participation in recent months were, on balance, consistent with its secular downtrend. In contrast, some

noted that the lower rate of payroll gains could instead

be indicative of a broader slowdown in growth of economic activity that was also evidenced by other downbeat labor market indicators, such as a decline in the diffusion indexes of industry payrolls, an increase in the

number of workers reporting that they were working

part time for economic reasons, or the recent sharp drop

in labor force participation. Finally, a few participants

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suggested that the weak employment growth may instead reflect supply constraints associated with a general

tightening of labor market conditions. These participants saw the rising trend in wages, business reports of

reduced worker availability, and high rate of job openings as supporting this interpretation. Others thought it

unlikely that such constraints would have become evident so abruptly.

Almost all participants judged that the surprisingly weak

May employment report increased their uncertainty

about the outlook for the labor market. Even so, many

remarked that they were reluctant to change their outlook materially based on one economic data release. Participants generally expected to see a resumption of

monthly gains in payroll employment that would be sufficient to promote continued strengthening of the labor

market. However, some noted that with labor market

conditions at or near those consistent with maximum

employment, it would be reasonable to anticipate that

gains in payroll employment would soon moderate from

the pace seen over the past few years.

Inflation continued to run below the Committee’s 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Core PCE price inflation registered an increase of

1.6 percent for the 12 months ending in April, while recent readings on retail energy prices moved up notably.

Most participants expected to see continued progress toward the Committee’s 2 percent inflation objective.

They viewed the firming in some measures of core inflation, the evidence that wage growth was picking up, the

ongoing tightening of resource utilization, the recent

firming in oil prices, and the stabilization of the foreign

exchange value of the dollar this year as factors likely to

boost inflation over time. However, other participants

were less confident that inflation would return to its target level over the medium term. They thought that progress could be very slow, particularly in light of the likelihood that tighter resource utilization may impart only

modest upward pressure on prices. They also saw important downside risks, including persistent disinflationary pressures from very low inflation and weak economic growth abroad as well as the softening in some

survey-based measures of longer-term inflation expectations and market-based measures of inflation compensation.

Global financial conditions had improved since earlier in

the year, and recent data on net exports suggested that

the drag on domestic economic activity from the exter-

nal sector had abated somewhat. Still, participants generally agreed that global economic and financial developments should continue to be monitored closely.

Some participants indicated that prospects for economic

activity in many foreign economies appeared to be subdued, that global inflation and interest rates remained

very low by historical standards, and that recurring bouts

of global financial market instability remained a risk.

Most participants noted that the upcoming British referendum on membership in the European Union could

generate financial market turbulence that could adversely affect domestic economic performance. Some

also noted that continued uncertainty regarding the outlook for China’s foreign exchange policy and the relatively high levels of debt in China and some other EMEs

represented appreciable risks to global financial stability

and economic performance.

In light of participants’ updates to their economic projections, they discussed their current assessments of the

appropriate trajectory of monetary policy over the medium term. Most still expected that the appropriate target range for the federal funds rate associated with their

projections of further progress toward the Committee’s

statutory objectives would rise gradually in coming years.

However, some noted that their forecasts were now consistent with a shallower path than they had expected at

the time of the March meeting. Many participants commented that the level of the federal funds rate consistent

with maintaining trend economic growth—the so-called

neutral rate—appeared to be lower currently or was

likely to be lower in the longer run than they had estimated earlier. While recognizing that the longer-run

neutral rate was highly uncertain, many judged that it

would likely remain low relative to historical standards,

held down by factors such as slow productivity growth

and demographic trends. Several noted that in the prevailing circumstances of considerable uncertainty about

the neutral federal funds rate, the Committee could better gauge the effects of increases in the federal funds rate

on the economy if it proceeded gradually in adjusting

policy.

Participants weighed a number of considerations in assessing the conditions under which it would be appropriate to increase the target range for the federal funds

rate. Most participants indicated that they made only

small changes to their forecasts for achieving and maintaining the Committee’s objectives of maximum employment and 2 percent inflation over the medium term.

Several noted that the fundamentals underlying their

forecasts remained solid, with several mentioning, in

particular, that financial conditions were accommodative

Minutes of the Meeting of June 14–15, 2016

Page 9

_____________________________________________________________________________________________

and household balance sheets had improved. In evaluating recent economic information, participants generally agreed that it was advisable to avoid overreacting to

one or two labor market reports; however, the implications of the recent data on labor market conditions for

the economic outlook were uncertain. Most judged that

they would need to accumulate additional information

on the labor market, production, and spending to help

clarify how the economy was evolving in order to evaluate whether the stance of monetary policy should be adjusted. In addition, participants generally thought that it

would be prudent to wait for the outcome of the upcoming referendum in the United Kingdom on membership

in the European Union in order to assess the consequences of the vote for global financial market conditions and the U.S. economic outlook.

Most participants judged that, in the absence of significant economic or financial shocks, raising the target

range for the federal funds rate would be appropriate if

incoming information confirmed that economic growth

had picked up, that job gains were continuing at a pace

sufficient to sustain progress toward the Committee’s

maximum-employment objective, and that inflation was

likely to rise to 2 percent over the medium term. Some

participants viewed a broad range of labor market indicators as well as the recent firming in wages as consistent

with a high level of labor utilization. They also pointed

out that core inflation had begun to move up and that

the transitory factors that had been holding down headline inflation were receding. Several of these participants

expressed concern that a delay in resuming further gradual increases in the federal funds rate would increase the

risks to financial stability or would raise the potential for

overshooting the Committee’s objectives; such an overshooting might require a rapid removal of policy accommodation at some point in the future, which could entail

significant risks for U.S. financial markets and the economy.

However, some other participants were uncertain

whether economic conditions would soon warrant an increase in the target range for the federal funds rate. Several of them noted downside risks to the outlook for

growth in economic activity and for further improvement in labor market conditions, including the possibility that the sharp slowdown in employment gains and

the continued weakness in business fixed investment signaled a downshift in economic growth, as well as the potential for global economic or financial shocks. Moreover, several of them worried about the declines in

measures of inflation compensation and in some surveybased measures of inflation expectations and suggested

that monetary policy may need to remain accommodative for some time in order to move inflation closer to

2 percent on a sustained basis. A few pointed out that

with inflation likely to remain low for some time and to

rise only gradually, maintaining an accommodative

stance of policy could extend the strengthening of the

labor market. In addition, several participants observed

that because short-term interest rates were still near zero,

monetary policy could, if necessary, respond more effectively to surprisingly strong inflationary pressures in the

future than to a weakening in the labor market and falling inflation.

A number of participants emphasized that the Committee’s approach to policy-setting was necessarily data dependent given the uncertainties associated with mediumterm forecasts of economic activity and, accordingly,

with the appropriate policy path over the medium term.

It was noted that their expectations for the federal funds

rate did not represent a preset plan and could change as

incoming information influenced their views of the economic outlook and the risks associated with it. Several

participants expressed concern that the Committee’s

communications had not been fully effective in informing the public how incoming information affected the

Committee’s view of the economic outlook, its degree

of confidence in the outlook, or the implications for the

trajectory of monetary policy.

Committee Policy Action

In their consideration of monetary policy for the period

ahead, members judged that the information received

since the Committee met in April indicated that the pace

of improvement in labor market conditions had slowed

in recent months while growth in economic activity appeared to have picked up from the low rates recorded in

the fourth quarter of 2015 and the first quarter of 2016.

Although the unemployment rate had declined over the

intermeeting period, job gains had diminished. After

only a modest increase early in the year, growth in household spending had strengthened in recent months. Since

the beginning of the year, the housing sector had continued to improve and the drag from net exports had lessened, but business fixed investment had been soft. Inflation continued to run below the Committee’s 2 percent objective, partly reflecting declines in energy prices

and in prices of non-energy imports. Market-based

measures of inflation compensation declined over the

intermeeting period; most survey-based measures of inflation expectations were little changed.

With respect to the economic outlook and its implications for monetary policy, members continued to expect

Page 10

Federal Open Market Committee

_____________________________________________________________________________________________

that, with gradual adjustments in the stance of monetary

policy, economic activity would expand at a moderate

pace and labor market indicators would strengthen.

Most members made only small changes to their forecasts for economic activity and the labor market. Most

judged it appropriate to avoid overweighting one or two

labor market reports in their consideration of the economic outlook, but they indicated that the recent slowing in payroll employment gains had increased their uncertainty about the likely pace of improvements in the

labor market going forward. Many noted that the slowdown could be a temporary aberration and that other labor market indicators—such as new claims for unemployment insurance, the rate of job openings, and readings on consumers’ perceptions of the labor market—

remained positive. Some of them judged that labor market conditions were now at or close to the Committee’s

objectives and pointed out that some moderation in employment gains was to be expected when such conditions were near those consistent with maximum employment. However, other members observed that the recent soft readings on payroll jobs as well as the decline

in the labor force participation rate and the absence of

further reductions in the number of individuals who

were working part time for economic reasons in recent

months suggested a possible downshift in the pace of

improvement in the labor market.

An additional factor in the Committee’s policy deliberations was the upcoming U.K. referendum on membership in the European Union. Members noted the considerable uncertainty about the outcome of the vote and

its potential economic and financial market consequences. They indicated that they would closely monitor

developments associated with the referendum as well as

other global economic and financial developments that

could affect the U.S. outlook.

Members expected inflation to remain low in the near

term, in part because of earlier declines in energy prices,

but most anticipated that inflation would rise to 2 percent over the medium term as the transitory effects of

past declines in energy and import prices dissipated and

the labor market strengthened further. Although headline inflation continued to run below the Committee’s

objective, some members observed that core inflation

had risen, and one member noted that the annual rate of

increase in core PCE inflation in the first quarter had

exceeded 2 percent. However, several others continued

to see downside risks to inflation, citing the decline in

inflation expectations and the risk of adverse shocks to

U.S. economic activity from developments abroad. In

light of the current shortfall of inflation from 2 percent,

the Committee agreed to continue carefully monitoring

actual and expected progress toward its inflation goal.

After assessing the outlook for economic activity, the labor market, and inflation, and after weighing the uncertainties associated with the outlook, members agreed to

leave the target range for the federal funds rate unchanged at ¼ to ½ percent at this meeting. Members

generally agreed that, before assessing whether another

step in removing monetary accommodation was warranted, it was prudent to wait for additional data regarding labor market conditions as well as information that

would allow them to assess the consequences of the

U.K. vote for global financial conditions and the U.S.

economic outlook. They judged that their decisions

about the appropriate level of the federal funds rate in

coming months would depend importantly on whether

incoming information corroborated the Committee’s expectations for economic activity, the labor market, and

inflation. Some of them emphasized that, with labor

market conditions and inflation at or close to the Committee’s objectives, taking another step in removing

monetary accommodation should not be delayed too

long. However, a couple of members underscored that

they would need to accumulate sufficient evidence to increase their confidence that economic growth was

strong enough to withstand a possible downward shock

to demand and that inflation was moving closer to 2 percent on a sustained basis.

Members reiterated that, in determining the timing and

size of future adjustments to the target range for the federal funds rate, the Committee would assess realized and

expected economic conditions relative to its objectives

of maximum employment and 2 percent inflation. This

assessment would take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international

developments. The Committee expected that economic

conditions would evolve in a manner that would warrant

only gradual increases in the federal funds rate, and the

federal funds rate was likely to remain, for some time,

below levels that were expected to prevail in the longer

run. Members emphasized that the actual path of the

federal funds rate would depend on the economic outlook as informed by incoming data. In that regard, they

judged it appropriate to continue to leave their policy

options open and maintain the flexibility to adjust the

stance of policy based on how incoming information affected the Committee’s assessment of the outlook for

economic activity, the labor market, and inflation as well

as the risks to the outlook.

Minutes of the Meeting of June 14–15, 2016

Page 11

_____________________________________________________________________________________________

The Committee also decided to maintain 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, and it anticipated doing so until normalization of the federal funds

rate is well under way. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

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 SOMA in accordance with the

following domestic policy directive, to be released at

2:00 p.m.:

“Effective June 16, 2016, the Federal Open

Market Committee directs the Desk to

undertake open market operations as necessary

to maintain the federal funds rate in a target

range of ¼ to ½ percent, including overnight

reverse repurchase operations (and reverse

repurchase operations with maturities of more

than one day when necessary to accommodate

weekend, holiday, or similar trading

conventions) at an offering rate of 0.25 percent,

in amounts limited only by the value of Treasury

securities held outright in the System Open

Market Account that are available for such

operations and by a per-counterparty limit of

$30 billion per day.

The Committee directs the Desk to continue

rolling over maturing Treasury securities at auction and to continue reinvesting principal payments on all agency debt and agency mortgagebacked securities in agency mortgage-backed securities. 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 vote also encompassed approval of the statement

below to be released at 2:00 p.m.:

“Information received since the Federal Open

Market Committee met in April indicates that

the pace of improvement in the labor market

has slowed while growth in economic activity

appears to have picked up. Although the

unemployment rate has declined, job gains have

diminished. Growth in household spending has

strengthened. Since the beginning of the year,

the housing sector has continued to improve

and the drag from net exports appears to have

lessened, but business fixed investment has

been soft. Inflation has continued to run below

the Committee’s 2 percent longer-run objective,

partly reflecting earlier declines in energy prices

and in prices of non-energy imports. Marketbased measures of inflation compensation

declined; most survey-based measures of

longer-term inflation expectations are little

changed, on balance, in recent months.

Consistent with its statutory mandate, the

Committee seeks to foster maximum

employment and price stability.

The

Committee currently expects that, with gradual

adjustments in the stance of monetary policy,

economic activity will expand at a moderate

pace and labor market indicators will

strengthen. Inflation is expected to remain low

in the near term, in part because of earlier

declines in energy prices, but to rise to 2 percent

over the medium term as the transitory effects

of past declines in energy and import prices

dissipate and the labor market strengthens

further. The Committee continues to closely

monitor inflation indicators and global

economic and financial developments.

Against this backdrop, the Committee decided

to maintain the target range for the federal

funds rate at ¼ to ½ percent. The stance of

monetary policy remains accommodative,

thereby supporting further improvement in

labor market conditions and a return to

2 percent inflation.

In determining the timing and size of future

adjustments to the target range for the federal

funds rate, the Committee will assess realized

and expected economic conditions relative to its

objectives of maximum employment and

2 percent inflation. This assessment will take

into account a wide range of information,

including measures of labor market conditions,

indicators of inflation pressures and inflation

expectations, and readings on financial and

international developments. In light of the

current shortfall of inflation from 2 percent, the

Committee will carefully monitor actual and

expected progress toward its inflation goal. The

Page 12

Federal Open Market Committee

_____________________________________________________________________________________________

Committee expects that economic conditions

will evolve in a manner that will warrant only

gradual increases in the federal funds rate; the

federal funds rate is likely to remain, for some

time, below levels that are expected to prevail in

the longer run. However, the actual path of the

federal funds rate will depend on the economic

outlook as informed by incoming data.

The Committee is maintaining its existing policy

of reinvesting principal payments from its holdings of agency debt and agency mortgagebacked securities in agency mortgage-backed securities and of rolling over maturing Treasury

securities at auction, and it anticipates doing so

until normalization of the level of the federal

funds rate is well under way. This policy, by

keeping the Committee’s holdings of longerterm securities at sizable levels, should help

maintain accommodative financial conditions.”

Voting for this action: Janet L. Yellen, William C.

Dudley, Lael Brainard, James Bullard, Stanley Fischer,

Esther L. George, Loretta J. Mester, Jerome H. Powell,

Eric Rosengren, and Daniel K. Tarullo.

Voting against this action: None.

It was agreed that the next meeting of the Committee

would be held on Tuesday–Wednesday, July 26–27,

2016. The meeting adjourned at 10:30 a.m. on June 15,

2016.

Notation Vote

By notation vote completed on May 17, 2016, the

Committee unanimously approved the minutes of the

Committee meeting held on April 26–27, 2016.

_____________________________

Brian F. Madigan

Secretary

Page 1

_____________________________________________________________________________________________

Summary of Economic Projections

In conjunction with the Federal Open Market Committee (FOMC) meeting held on June 14–15, 2016, meeting

participants submitted their projections of the most

likely outcomes for real output growth, the unemployment rate, inflation, and the federal funds rate for each

year from 2016 to 2018 and over the longer run. 1 Each

participant’s projection was based on information available at the time of the meeting, together with his or her

assessment of appropriate monetary policy and assumptions about the factors likely to affect economic outcomes. The longer-run projections represent each participant’s assessment 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.

FOMC participants generally expected that, under appropriate monetary policy, growth in real gross domestic

product (GDP) this year, next year, and in 2018 would

be at or quite close to their individual estimates of GDP

growth over the longer run. All but a few participants

projected that the unemployment rate at the end of this

year will be at or below its longer-run normal rate and

expected it to edge lower next year. For 2018, nearly all

participants expected the unemployment rate to be at or

a bit below its longer-run level. Almost all participants

projected that inflation, as measured by the four-quarter

percentage change in the price index for personal consumption expenditures (PCE), would increase this year

and over the next two years, and most expected inflation

to have converged to the Committee’s objective of

2 percent by 2018. Table 1 and figure 1 provide summary statistics for the projections.

As shown in figure 2, almost all participants expected

that it would be appropriate for the target range for the

federal funds rate to rise gradually as the economy steadily progresses toward the Committee’s longer-run goals

of maximum employment and 2 percent inflation. Indeed, participants generally judged that the federal funds

rate in 2018 would still be below their estimates of its

One participant did not submit longer-run projections in

conjunction with the June 2016 FOMC meeting.

longer-run rate. However, because the economic outlook is inherently uncertain, participants’ assessments of

appropriate policy were also uncertain and likely would

change in response to revisions to their economic outlooks and associated risks.

Participants generally viewed the level of uncertainty associated with their individual forecasts for economic

growth, unemployment, and inflation as broadly similar

to the norms of the previous 20 years. Most participants

also judged the risks around their projections for economic activity and inflation as broadly balanced, although many participants saw the risks to their GDP

growth and inflation forecasts as weighted to the downside. In addition, some participants viewed the risks to

their forecasts of the unemployment rate as tilted to the

upside.

The Outlook for Economic Activity

The median of participants’ projections for the growth

rate of real GDP, conditional on their individual assumptions about appropriate monetary policy, was

2 percent for each year from 2016 through 2018, the

same as the median of their projections of the longerrun GDP growth rate. However, a majority of participants expected that real GDP growth would pick up a

bit in 2017 from this year’s pace, and most expected it to

remain at or above their estimates of its longer-run pace

in 2018. Participants pointed to a number of factors that

they expected would contribute to moderate output

growth over the next few years, including a diminution

of the drag on net exports from a strong dollar, the continued improvements in household and business balance

sheets, accommodative financial conditions, and somewhat more supportive fiscal policy.

Participants’ median projections for real GDP growth in

2016 and 2017 were slightly lower than the medians

shown in the March 2016 Summary of Economic Projections (SEP). Participants who lowered their projections for near-term GDP growth generally attributed

their revisions to weaker-than-expected growth in the

first quarter and soft readings on economic activity in

recent months, particularly those on business spending.

Although several participants also reduced their forecasts for real GDP growth in 2018 and in the longer run,

0.9

1.6

1.9

1.8

2.4

3.0

2.0

3.0

3.3

2.0

1.3 – 2.0 1.6 – 2.0 1.8 – 2.1

1.4 – 2.1 1.6 – 2.0 1.8 – 2.0

1.3 – 2.0 1.6 – 2.0 1.8 – 2.1

1.0 – 1.6 1.6 – 2.0 1.8 – 2.0

2.0

0.6 – 0.9 1.4 – 1.9 2.1 – 2.9 3.0 – 3.3 0.6 – 1.4 0.6 – 2.4 0.6 – 3.4 2.8 – 3.8

0.9 – 1.4 1.6 – 2.4 2.5 – 3.3 3.0 – 3.5 0.6 – 1.4 1.6 – 2.8 2.1 – 3.9 3.0 – 4.0

1.6 – 1.8 1.7 – 2.0 1.9 – 2.0

1.4 – 1.7 1.7 – 2.0 1.9 – 2.0

1.3 – 1.7 1.7 – 2.0 1.9 – 2.0

1.0 – 1.6 1.7 – 2.0 1.9 – 2.0

Note: Projections of change in real gross domestic product (GDP) and projections for both measures of inﬂation are percent changes 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 projections for the

federal funds rate are the value of the midpoint of the projected appropriate target range for the federal funds rate or the projected appropriate target

level for the federal funds rate at the end of the speciﬁed calendar year or over the longer run. The March projections were made in conjunction with

the meeting of the Federal Open Market Committee on March 15–16, 2016. One participant did not submit longer-run projections in conjunction with

the June 14–15, 2016 meeting.

1. For each period, the median is the middle projection when the projections are arranged from lowest to highest. When the number of projections

is even, the median is the average of the two middle projections.

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

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

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

Federal funds rate

March projection

Memo: Projected

appropriate policy path

1.7

1.6

Core PCE inﬂation4

March projection

1.9

4.6 – 4.8 4.5 – 4.7 4.4 – 4.8 4.7 – 5.0 4.5 – 4.9 4.3 – 4.8 4.3 – 5.0 4.6 – 5.0

4.6 – 4.8 4.5 – 4.7 4.5 – 5.0 4.7 – 5.0 4.5 – 4.9 4.3 – 4.9 4.3 – 5.0 4.7 – 5.8

1.4

1.2

4.8

PCE inﬂation

March projection

4.6

4.5

Unemployment rate

March projection

4.6

4.7

Change in real GDP

March projection

Variable

Median1

Central tendency2

Range3

2016 2017 2018 Longer 2016

2017

2018

2016

2017

2018

Longer

run

2.0

1.9 – 2.0 1.9 – 2.2 1.8 – 2.1 1.8 – 2.0 1.8 – 2.2 1.6 – 2.4 1.5 – 2.2 1.6 – 2.4

2.2

2.1

2.0

2.1 – 2.3 2.0 – 2.3 1.8 – 2.1 1.8 – 2.1 1.9 – 2.5 1.7 – 2.3 1.8 – 2.3 1.8 – 2.4

Percent

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

under their individual assessments of projected appropriate monetary policy, June 2016

Page 2

Federal Open Market Committee

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Summary of Economic Projections of the Meeting of June 14–15, 2016

Page 3

_____________________________________________________________________________________________

Figure 1. Medians, central tendencies, and ranges of economic projections, 2016–18 and over the longer run

Percent

Change in real GDP

Median of projections

Central tendency of projections

Range of projections

Actual

2011

2012

2013

2014

2015

2016

2017

2018

Longer

run

Percent

Unemployment rate

2011

2012

2013

2014

2015

2016

2017

2018

Longer

run

Percent

PCE inflation

2011

2012

2013

2014

2015

2016

2017

2018

Longer

run

Percent

Core PCE inflation

2011

2012

2013

2014

2015

2016

2017

2018

Longer

run

Note: Deﬁnitions of variables and other explanations are in the notes to table 1. The data for the actual values of

the variables are annual.

Page 4

Federal Open Market Committee

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Figure 2. FOMC participants’ assessments of appropriate monetary policy: Midpoint of target range or target level for

the federal funds rate

Percent

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

2016

2017

2018

Longer run

Note: Each shaded circle indicates the value (rounded to the nearest 1/8 percentage point) of an individual participant’s judgment of the midpoint of the appropriate target range for the federal funds rate or the appropriate target

level for the federal funds rate at the end of the speciﬁed calendar year or over the longer run. One participant did not

submit longer-run projections.

Summary of Economic Projections of the Meeting of June 14–15, 2016

Page 5

_____________________________________________________________________________________________

those downward revisions did not alter the median forecasts.

The median of projections for the unemployment rate

edged down from 4.7 percent at the end of 2016 to

4.6 percent in 2017 and remained at that level in 2018,

modestly below the median assessment of the longerrun normal unemployment rate of 4.8 percent. The medians and ranges of the unemployment rate projections

for 2016 to 2018 were nearly unchanged from March.

Figures 3.A and 3.B show the distributions of participants’ projections for real GDP growth and the unemployment rate from 2016 through 2018 and in the longer

run. The distribution of individual projections of GDP

growth for 2016 shifted lower relative to the distribution

of the March projections. The distributions of projections for GDP growth over the next two years and in the

longer run also shifted down. For this year and next, the

distributions of projections for the unemployment rate

were little changed, while the distribution for 2018 became less dispersed.

The Outlook for Inflation

In the June SEP, the median of projections for headline

PCE price inflation in 2016 was 1.4 percent, a bit higher

than in March. Many participants pointed to strongerthan-expected readings on inflation early this year, as

well as to the recent stabilization of oil prices, as factors

contributing to the upward revision to their inflation

projections. The projections for headline PCE price inflation over the next two years and in the longer run were

little changed since March, with the median inflation

projection still rising to 1.9 percent in 2017 and to the

Committee’s objective of 2 percent in 2018. Almost all

participants projected that inflation will be within

0.1 percentage point of the Committee’s objective by

2018. The median of individual projections for core

PCE price inflation also increases gradually over the next

two years.

Figures 3.C and 3.D provide information on the distribution of participants’ views about the outlook for inflation. The distribution of projections for headline PCE

price inflation for this year shifted up relative to projections for the March meeting. The distribution of projections for core PCE price inflation this year also moved

2 One

participant’s projections for the federal funds rate, GDP

growth, the unemployment rate, and inflation were informed

by the view that there are multiple possible medium-term regimes for the U.S. economy, that these regimes are persistent,

and that the economy shifts between regimes in a way that

to the right on balance. For 2017 and 2018, the distributions of projections for both total and core PCE price

inflation were nearly unchanged.

Appropriate Monetary Policy

Figure 3.E provides the distribution of participants’

judgments regarding the appropriate level of the target

federal funds rate at the end of each year from 2016 to

2018 and over the longer run. 2 The distributions for

2016 to 2018 and for the longer run shifted to the left.

The median projection for the federal funds rate rises

gradually from 0.88 percent at the end of 2016 to

1.63 percent at the end of 2017 and 2.38 percent at the

end of 2018; the median for the longer-run projections

of the federal funds rate is 3 percent. Although the median federal funds rate at the end of 2016 was unchanged

from the March projection, a majority of participants revised down their projections for that year, most by

0.25 percentage point. For 2017 and 2018, the median

projections were 0.25 percentage point and 0.62 percentage point lower, respectively, than in March.

Compared with the March SEP, the median of participants’ projections for the federal funds rate in the longer

run moved down 0.25 percentage point. This change

reflected downward revisions by about half of the participants.

Participants’ projections for the path of the federal funds

rate represented their individual assessments of appropriate monetary policy consistent with their projections

of economic growth, employment, inflation, and other

factors. In discussing their June forecasts, many participants expressed a view that increases in the federal funds

rate over the next several years would need to be gradual

in light of a short-term neutral interest rate that was currently low—a phenomenon that several participants attributed to the persistence of factors that restrained

spending over recent years—and that was likely to rise

only slowly as the effects of those factors faded over

time. Some participants noted the proximity of shortterm nominal interest rates to the effective lower bound

as limiting the Committee’s ability to increase monetary

accommodation to counter adverse shocks to the economy should they occur. They judged that, as a result, the

Committee should take a cautious approach to monetary

cannot be forecast. Under this view, the economy currently is

in a regime characterized by expansion of economic activity

with low productivity growth and a low short-term real interest rate, but longer-term outcomes cannot be usefully projected.

Page 6

Federal Open Market Committee

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Figure 3.A. Distribution of participants’ projections for the change in real GDP, 2016–18 and over the longer run

Number of participants

2016

June projections

March projections

1.4 1.5

1.6 1.7

1.8 1.9

2.0 2.1

2.2 2.3

2.4 2.5

Percent range

Number of participants

2017

1.4 1.5

1.6 1.7

1.8 1.9

2.0 2.1

2.2 2.3

2.4 2.5

Percent range

Number of participants

2018

1.4 1.5

1.6 1.7

1.8 1.9

2.0 2.1

2.2 2.3

2.4 2.5

Percent range

Number of participants

Longer run

1.4 1.5

1.6 1.7

1.8 1.9

2.0 2.1

2.2 2.3

Percent range

Note: Deﬁnitions of variables and other explanations are in the notes to table 1.

2.4 2.5

Summary of Economic Projections of the Meeting of June 14–15, 2016

Page 7

_____________________________________________________________________________________________

Figure 3.B. Distribution of participants’ projections for the unemployment rate, 2016–18 and over the longer run

Number of participants

2016

June projections

March projections

4.2 4.3

4.4 4.5

4.6 4.7

4.8 4.9

5.0 5.1

5.2 5.3

5.4 5.5

5.6 5.7

5.8 5.9

Percent range

Number of participants

2017

4.2 4.3

4.4 4.5

4.6 4.7

4.8 4.9

5.0 5.1

5.2 5.3

5.4 5.5

5.6 5.7

5.8 5.9

Percent range

Number of participants

2018

4.2 4.3

4.4 4.5

4.6 4.7

4.8 4.9

5.0 5.1

5.2 5.3

5.4 5.5

5.6 5.7

5.8 5.9

Percent range

Number of participants

Longer run

4.2 4.3

4.4 4.5

4.6 4.7

4.8 4.9

5.0 5.1

5.2 5.3

5.4 5.5

Percent range

Note: Deﬁnitions of variables and other explanations are in the notes to table 1.

5.6 5.7

5.8 5.9

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Figure 3.C. Distribution of participants’ projections for PCE inﬂation, 2016–18 and over the longer run

Number of participants

2016

June projections

March projections

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

Percent range

Number of participants

2017

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

Percent range

Number of participants

2018

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

Percent range

Number of participants

Longer run

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 and other explanations are in the notes to table 1.

1.9 2.0

2.1 2.2

Summary of Economic Projections of the Meeting of June 14–15, 2016

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Figure 3.D. Distribution of participants’ projections for core PCE inﬂation, 2016–18

Number of participants

2016

June projections

March projections

1.3 1.4

1.5 1.6

1.7 1.8

1.9 2.0

2.1 2.2

Percent range

Number of participants

2017

1.3 1.4

1.5 1.6

1.7 1.8

1.9 2.0

2.1 2.2

Percent range

Number of participants

2018

1.3 1.4

1.5 1.6

1.7 1.8

1.9 2.0

Percent range

Note: Deﬁnitions of variables and other explanations are in the notes to table 1.

2.1 2.2

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Figure 3.E. Distribution of participants’ judgments of the midpoint of the appropriate target range for the federal funds

rate or the appropriate target level for the federal funds rate, 2016–18 and over the longer run

Number of participants

2016

June projections

March projections

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

Percent range

Number of participants

2017

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

Percent range

Number of participants

2018

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

Percent range

Number of participants

Longer run

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

Percent range

Note: The midpoints of the target ranges for the federal funds rate and the target levels for the federal funds rate

are measured at the end of the speciﬁed calendar year or over the longer run. One participant did not submit longer-run

projections.

Summary of Economic Projections of the Meeting of June 14–15, 2016

Page 11

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policy normalization. Participants cited a number of factors that pushed down their projections of the longerrun rate, including domestic and global demographic

trends and weak productivity growth, which together

imply a slower pace of trend output growth.

Uncertainty and Risks

The left-hand column of figure 4 shows that all but a few

participants judged the levels of uncertainty around their

June projections for real GDP growth, the unemployment rate, and headline and core PCE price inflation to

be broadly similar to the average levels of the past

20 years. 3 A few participants saw the uncertainty about

GDP growth as higher than its historical average, up

from only one in March. These participants cited the

surprisingly weak productivity growth of recent years or

the continuing fragile nature of the global economic environment as supporting such a view. Most participants’

assessments of the level of uncertainty surrounding their

economic projections did not change materially from

March.

As in March, most participants judged the risks to their

projections of GDP growth and the unemployment rate

to be broadly balanced, although many still assessed the

risks to GDP growth as weighted to the downside and

some saw the risks to the unemployment rate as tilted to

the upside (top two panels in the right-hand column of

figure 4). Participants who saw the risks to growth as

tilted to the downside attributed this assessment to the

weaker-than-expected May employment report; recent

softness in business fixed investment; concerns about

the global economic environment, including possible

economic and financial consequences of the upcoming

British referendum on European Union membership; or

the proximity of short-term nominal interest rates to the

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 1996 through 2015.

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

Table 2. Average historical projection error ranges

Percentage points

2016

2017

2018

Change in real GDP1 . . . . . .

Variable

±1.4

±2.0

±2.2

Unemployment rate1 . . . . . .

±0.4

±1.2

±1.8

Total consumer prices2 . . . .

±0.8

±1.0

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

squared error of projections for 1996 through 2015 that were released in the

summer 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. For more information, see 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), available at www.federalreserve.gov/pubs/feds/

2007/200760/200760abs.html; and Board of Governors of the Federal Reserve System, Division of Research and Statistics (2014), “Updated Historical Forecast Errors,” memorandum, April 9, http://www.federalreserve.gov/foia/files/20140409-historical-forecast-errors.pdf.

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.

effective lower bound. A majority of participants judged

the risks to their inflation projections to be broadly balanced. However, many viewed the risks to inflation as

skewed to the downside, although fewer than in March.

A couple of participants pointed to the firming of some

measures of inflation in recent months as contributing

to the change in their risk assessment. Among those

who continued to judge that the risks to inflation were

weighted to the downside, almost all cited recent declines in measures of inflation compensation and some

survey-based measures of longer-run inflation expectations as reasons for that assessment.

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.

Page 12

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Figure 4. Uncertainty and risks in economic projections

Number of participants

Uncertainty about GDP growth

Risks to GDP growth

June projections

March projections

Lower

Broadly

similar

Number of participants

Higher

June projections

March projections

Weighted to

downside

Broadly

balanced

Number of participants

Uncertainty about the unemployment rate

Weighted to

upside

Number of participants

Risks to the unemployment rate

Lower

Broadly

similar

Higher

Weighted to

downside

Broadly

balanced

Number of participants

Uncertainty about PCE inflation

Weighted to

upside

Number of participants

Risks to PCE inflation

Lower

Broadly

similar

Higher

Weighted to

downside

Broadly

balanced

Number of participants

Uncertainty about core PCE inflation

Weighted to

upside

Number of participants

Risks to core PCE inflation

Lower

Broadly

similar

Higher

Weighted to

downside

Broadly

balanced

Weighted to

upside

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

Summary of Economic Projections of the Meeting of June 14–15, 2016

Page 13

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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

1.6 to 4.4 percent in the current year, 1.0 to

5.0 percent in the second year, and 0.8 to 5.2 percent in the third year. The corresponding 70 percent confidence intervals for overall inflation would

be 1.2 to 2.8 percent in the current year and 1.0 to

3.0 percent in the second and third years.

Because current conditions may differ from

those that prevailed, on average, over history, participants provide judgments as to whether the uncertainty attached to their projections of each variable is greater than, smaller than, or broadly similar

to typical levels of forecast uncertainty in the past,

as shown in table 2. Participants also provide judgments as to whether the risks to their projections

are weighted to the upside, are weighted to the

downside, or are broadly balanced. That is, participants judge whether each variable is more likely to

be above or below their projections of the most

likely outcome. These judgments about the uncertainty and the risks attending each participant’s

projections are distinct from the diversity of participants’ views about the most likely outcomes.

Forecast uncertainty is concerned with the risks associated with a particular projection rather than

with divergences across a number of different projections.

As with real activity and inflation, the outlook

for the future path of the federal funds rate is subject to considerable uncertainty. This uncertainty

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

depends importantly on the evolution of real activity and inflation over time. If economic conditions

evolve in an unexpected manner, then assessments

of the appropriate setting of the federal funds rate

would change from that point forward.

Cite this document

APA

Federal Reserve (2016, June 14). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_20160615

BibTeX

@misc{wtfs_fomc_minutes_20160615,
  author = {Federal Reserve},
  title = {FOMC Minutes},
  year = {2016},
  month = {Jun},
  howpublished = {Fomc Minutes, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/fomc_minutes_20160615},
  note = {Retrieved via When the Fed Speaks corpus}
}