FOMC Minutes
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Minutes of the Federal Open Market Committee
September 20–21, 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, September 20, 2016,
at 1:00 p.m. and continued on Wednesday, September
21, 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,
Neel Kashkari, and Michael Strine, 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
Michael Held, Deputy General Counsel
Richard M. Ashton, Assistant General Counsel
Steven B. Kamin, Economist
Thomas Laubach, Economist
David W. Wilcox, Economist
Thomas A. Connors, Troy Davig, Michael P. Leahy,
Stephen A. Meyer, Ellis W. Tallman, Geoffrey
Tootell, and William Wascher, Associate
Economists
1 The Federal Open Market Committee is referenced as the
“FOMC” and the “Committee” in these minutes.
2 Attended through the discussion on financial developments
and open market operations.
Simon Potter, Manager, System Open Market Account
Lorie K. Logan, Deputy Manager, System Open
Market Account
Robert deV. Frierson, Secretary of the Board, Office of
the Secretary, Board of Governors
Matthew J. Eichner, 2 Director, Division of Reserve
Bank Operations and Payment Systems, Board of
Governors
James A. Clouse, Deputy Director, Division of
Monetary Affairs, Board of Governors; Maryann F.
Hunter, Deputy Director, Division of Banking
Supervision and Regulation, Board of Governors
David Bowman, Andrew Figura, Joseph W. Gruber,
Ann McKeehan, and David Reifschneider, 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
Eric M. Engen, Joshua Gallin, and Michael G.
Palumbo, Senior Associate Directors, Division of
Research and Statistics, Board of Governors
Michael T. Kiley, Senior Associate Director, Division
of Financial Stability, and Senior Adviser, Division
of Research and Statistics, Board of Governors
Antulio N. Bomfim, Ellen E. Meade, and Joyce K.
Zickler, Senior Advisers, Division of Monetary
Affairs, Board of Governors
David López-Salido, Associate Director, Division of
Monetary Affairs, Board of Governors
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Elizabeth Klee and Jason Wu, Assistant Directors,
Division of Monetary Affairs, Board of Governors;
Shane M. Sherlund, Assistant Director, Division of
Research and Statistics, Board of Governors; Paul
R. Wood, Assistant Director, Division of
International Finance, Board of Governors
Selection of Committee Officer
By unanimous vote, the Committee selected Michael
Held to serve as deputy general counsel, effective
September 20, 2016, until the selection of his successor
at the first regularly scheduled meeting of the Committee
in 2017.
Penelope A. Beattie, 3 Assistant to the Secretary, Office
of the Secretary, Board of Governors
Revisions to Documents Governing Foreign
Currency Operations
The manager of the System Open Market Account
(SOMA) briefed the Committee on a staff proposal to
revise the documents governing the System’s foreign
currency operations, including the Authorization for
Foreign Currency Operations (Foreign Authorization),
the Foreign Currency Directive (Foreign Directive), and
the Procedural Instructions with Respect to Foreign
Currency Operations (Procedural Instructions). The objectives of the proposal were to simplify the organization
of the documents, to better reflect the current operating
environment, and to clarify guidance provided to the
Federal Reserve Bank selected by the Committee to execute open market transactions (Selected Bank). The
staff proposed incorporating the material in the Foreign
Authorization, Foreign Directive, and Procedural Instructions into a new authorization and directive that
would parallel the domestic authorization and directive;
the Procedural Instructions document would no longer
be necessary. The proposed Foreign Authorization was
structured by operation type, including standalone spot
and forward transactions; warehousing of funds for the
Exchange Stabilization Fund; reciprocal currency arrangements, and standing dollar and foreign currency liquidity swaps; and foreign currency holdings. Proposed
substantive changes to procedures and governance included the removal of the Selected Bank’s ability to independently decide, within limits, to enter into
standalone spot and forward transactions, the addition
of a provision for the Foreign Currency Subcommittee
(Subcommittee) to give additional guidance to the Selected Bank regarding management of SOMA foreign
currency holdings, and the incorporation of procedures
that would allow decisions to be made promptly under
circumstances in which the normal procedures would
not be feasible. Additionally, the definition of and provisions governing the Subcommittee were removed
from the Foreign Authorization and incorporated into
the Committee’s Rules of Procedure and Rules of Organization, as appropriate. By unanimous vote, the proposed Foreign Authorization, Foreign Directive, Rules
David H. Small, Project Manager, Division of
Monetary Affairs, Board of Governors
Sophia H. Allison,2 Special Counsel, Legal Division,
Board of Governors
Jonathan E. Goldberg and Francisco Vazquez-Grande,
Senior Economists, Division of Monetary Affairs,
Board of Governors
Paul Dozier,2 Senior Financial Analyst, Division of
International Finance, Board of Governors
Randall A. Williams, Information Manager, Division of
Monetary Affairs, Board of Governors
Mark A. Gould, First Vice President, Federal Reserve
Bank of San Francisco
David Altig, Kartik B. Athreya, and Daniel G. Sullivan,
Executive Vice Presidents, Federal Reserve Banks
of Atlanta, Richmond, and Chicago, respectively
Mary Daly, Evan F. Koenig, Susan McLaughlin,2 and
Paolo A. Pesenti, Senior Vice Presidents, Federal
Reserve Banks of San Francisco, Dallas, New
York, and New York, respectively
David Andolfatto, Vice President, Federal Reserve
Bank of St. Louis
Thomas D. Tallarini, Jr., Assistant Vice President,
Federal Reserve Bank of Minneapolis
Satyajit Chatterjee, Senior Economic Advisor, Federal
Reserve Bank of Philadelphia
Cindy Hull,2 Markets Officer, Federal Reserve Bank of
New York
3
Attended Tuesday session only.
Minutes of the Meeting of September 20–21, 2016
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of Organization, and Rules of Procedure were approved,
and the Procedural Instructions were rescinded. 4
AUTHORIZATION FOR FOREIGN CURRENCY
OPERATIONS
(As amended effective September 20, 2016)
IN GENERAL
1. The Federal Open Market Committee (the “Committee”) authorizes the Federal Reserve Bank selected by
the Committee (the “Selected Bank”) to execute open
market transactions for the System Open Market Account as provided in this Authorization, to the extent
necessary to carry out any foreign currency directive of
the Committee:
A. To purchase and sell foreign currencies (also
known as cable transfers) at home and abroad in the
open market, including with the United States Treasury, with foreign monetary authorities, with the Bank
for International Settlements, and with other entities
in the open market. This authorization to purchase
and sell foreign currencies encompasses purchases and
sales through standalone spot or forward transactions
and through foreign exchange swap transactions. For
purposes of this Authorization, foreign exchange
swap transactions are: swap transactions with the
United States Treasury (also known as warehousing
transactions), swap transactions with other central
banks under reciprocal currency arrangements, swap
transactions with other central banks under standing
dollar liquidity and foreign currency liquidity swap arrangements, and swap transactions with other entities
in the open market.
B. To hold balances of, and to have outstanding forward contracts to receive or to deliver, foreign currencies.
2. All transactions in foreign currencies undertaken
pursuant to paragraph 1 above shall, unless otherwise
authorized by the Committee, be conducted:
A. In a manner consistent with the obligations regarding exchange arrangements under Article IV of
the Articles of Agreement of the International Monetary Fund (IMF).1
B. In close and continuous cooperation and consultation, as appropriate, with the United States Treasury.
C. In consultation, as appropriate, with foreign
monetary authorities, foreign central banks, and international monetary institutions.
The approved Foreign Authorization and Foreign Directive
are included in these minutes. The approved Rules of Organization and Rules of Procedure, as well as other Committee
4
D.
At prevailing market rates.
STANDALONE
TRANSACTIONS
SPOT
AND
FORWARD
3. For any operation that involves standalone spot or
forward transactions in foreign currencies:
A. Approval of such operation is required as follows:
i.
The Committee must direct the Selected Bank
in advance to execute the operation if it would result
in the overall volume of standalone spot and forward transactions in foreign currencies, as defined
in paragraph 3.C of this Authorization, exceeding
$5 billion since the close of the most recent regular
meeting of the Committee. The Foreign Currency
Subcommittee (the “Subcommittee”) must direct
the Selected Bank in advance to execute the operation if the Subcommittee believes that consultation
with the Committee is not feasible in the time available.
ii. The Committee authorizes the Subcommittee
to direct the Selected Bank in advance to execute the
operation if it would result in the overall volume of
standalone spot and forward transactions in foreign
currencies, as defined in paragraph 3.C of this Authorization, totaling $5 billion or less since the close
of the most recent regular meeting of the Committee.
B. Such an operation also shall be:
i.
Generally directed at countering disorderly
market conditions; or
ii. Undertaken to adjust System balances in light
of probable future needs for currencies; or
iii. Conducted for such other purposes as may be
determined by the Committee.
C. For purposes of this Authorization, the overall
volume of standalone spot and forward transactions
in foreign currencies is defined as the sum (disregarding signs) of the dollar values of individual foreign currencies purchased and sold, valued at the time of the
transaction.
WAREHOUSING
4. The Committee authorizes the Selected Bank, with
the prior approval of the Subcommittee and at the request of the United States Treasury, to conduct swap
organizational documents, are available at www.federalreserve.gov/monetarypolicy/rules_authorizations.htm.
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transactions with the United States Exchange Stabilization Fund established by section 10 of the Gold Reserve
Act of 1934 under agreements in which the Selected
Bank purchases foreign currencies from the Exchange
Stabilization Fund and the Exchange Stabilization Fund
repurchases the foreign currencies from the Selected
Bank at a later date (such purchases and sales also known
as warehousing).
RECIPROCAL CURRENCY ARRANGEMENTS,
AND STANDING DOLLAR AND FOREIGN
CURRENCY LIQUIDITY SWAPS
5. The Committee authorizes the Selected Bank to
maintain reciprocal currency arrangements established
under the North American Framework Agreement,
standing dollar liquidity swap arrangements, and standing foreign currency liquidity swap arrangements as provided in this Authorization and to the extent necessary
to carry out any foreign currency directive of the Committee.
A. For reciprocal currency arrangements all drawings must be approved in advance by the Committee
(or by the Subcommittee, if the Subcommittee believes that consultation with the Committee is not feasible in the time available).
B. For standing dollar liquidity swap arrangements
all drawings must be approved in advance by the
Chairman. The Chairman may approve a schedule of
potential drawings, and may delegate to the manager,
System Open Market Account, the authority to approve individual drawings that occur according to the
schedule approved by the Chairman.
C. For standing foreign currency liquidity swap arrangements all drawings must be approved in advance
by the Committee (or by the Subcommittee, if the
Subcommittee believes that consultation with the
Committee is not feasible in the time available).
D. Operations involving standing dollar liquidity
swap arrangements and standing foreign currency liquidity swap arrangements shall generally be directed
at countering strains in financial markets in the United
States or abroad, or reducing the risk that they could
emerge, so as to mitigate their effects on economic
and financial conditions in the United States.
E. For reciprocal currency arrangements, standing
dollar liquidity swap arrangements, and standing foreign currency liquidity swap arrangements:
i.
All arrangements are subject to annual review
and approval by the Committee;
ii. Any new arrangements must be approved by
the Committee; and
iii. Any changes in the terms of existing arrangements must be approved in advance by the Chairman. The Chairman shall keep the Committee informed of any changes in terms, and the terms shall
be consistent with principles discussed with and
guidance provided by the Committee.
OTHER
OPERATIONS
CURRENCIES
IN
FOREIGN
6. Any other operations in foreign currencies for
which governance is not otherwise specified in this Authorization (such as foreign exchange swap transactions
with private-sector counterparties) must be authorized
and directed in advance by the Committee.
FOREIGN CURRENCY HOLDINGS
7. The Committee authorizes the Selected Bank to
hold foreign currencies for the System Open Market Account in accounts maintained at foreign central banks,
the Bank for International Settlements, and such other
foreign institutions as approved by the Board of Governors under Section 214.5 of Regulation N, to the extent
necessary to carry out any foreign currency directive of
the Committee.
A. The Selected Bank shall manage all holdings of
foreign currencies for the System Open Market Account:
i.
Primarily, to ensure sufficient liquidity to enable the Selected Bank to conduct foreign currency
operations as directed by the Committee;
ii. Secondarily, to maintain a high degree of
safety;
iii. Subject to paragraphs 7.A.i and 7.A.ii, to provide the highest rate of return possible in each currency; and
iv. To achieve such other objectives as may be authorized by the Committee.
B. The Selected Bank may manage such foreign currency holdings by:
i.
Purchasing and selling obligations of, or fully
guaranteed as to principal and interest by, a foreign
government or agency thereof (“Permitted Foreign
Securities”) through outright purchases and sales;
ii. Purchasing Permitted Foreign Securities under
agreements for repurchase of such Permitted Foreign Securities and selling such securities under
agreements for the resale of such securities; and
iii. Managing balances in various time and other
deposit accounts at foreign institutions approved by
the Board of Governors under Regulation N.
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C. The Subcommittee, in consultation with the
Committee, may provide additional instructions to the
Selected Bank regarding holdings of foreign currencies.
ADDITIONAL MATTERS
8.
The Committee authorizes the Chairman:
A. With the prior approval of the Committee, to enter into any needed agreement or understanding with
the Secretary of the United States Treasury about the
division of responsibility for foreign currency operations between the System and the United States Treasury;
B. To advise the Secretary of the United States
Treasury concerning System foreign currency operations, and to consult with the Secretary on policy matters relating to foreign currency operations;
C. To designate Federal Reserve System persons authorized to communicate with the United States
Treasury concerning System Open Market Account
foreign currency operations; and
D. From time to time, to transmit appropriate reports and information to the National Advisory Council on International Monetary and Financial Policies.
9. The Committee authorizes the Selected Bank to
undertake transactions of the type described in this Authorization, and foreign exchange and investment
transactions that it may be otherwise authorized to
undertake, from time to time for the purpose of testing
operational readiness. The aggregate amount of such
transactions shall not exceed $2.5 billion per calendar
year. These transactions shall be conducted with prior
notice to the Committee.
10. All Federal Reserve banks shall participate in the
foreign currency operations for System Open Market
Account in accordance with paragraph 3G(1) of the
Board of Governors’ Statement of Procedure with Respect to Foreign Relationships of Federal Reserve Banks
dated January 1, 1944.
11. Any authority of the Subcommittee pursuant to
this Authorization may be exercised by the Chairman if
the Chairman believes that consultation with the Subcommittee is not feasible in the time available. The
Chairman shall promptly report to the Subcommittee
any action approved by the Chairman pursuant to this
paragraph.
12. The Committee authorizes the Chairman, in exceptional circumstances where it would not be feasible to
convene the Committee, to foster the Committee’s objectives by instructing the Selected Bank to engage in
foreign currency operations not otherwise authorized
pursuant to this Authorization. Any such action shall be
made in the context of the Committee’s discussion and
decisions regarding foreign currency operations. The
Chairman, whenever feasible, will consult with the Committee before making any instruction under this paragraph.
________________________
In general, as specified in Article IV, each member of the
IMF undertakes to collaborate with the IMF and other members to assure orderly exchange arrangements and to promote
a stable system of exchange rates. These obligations include
seeking to direct the member’s economic and financial policies
toward the objective of fostering orderly economic growth
with reasonable price stability. These obligations also include
avoiding manipulating exchange rates or the international
monetary system in such a way that would impede effective
balance of payments adjustment or to give an unfair competitive advantage over other members.
1
FOREIGN CURRENCY DIRECTIVE
(As amended effective September 20, 2016)
1. The Committee directs the Federal Reserve Bank
selected by the Committee (the “Selected Bank”) to execute open market transactions, for the System Open
Market Account, in accordance with the provisions of
the Authorization for Foreign Currency Operations (the
“Authorization”) and subject to the limits in this Directive.
2. The Committee directs the Selected Bank to execute warehousing transactions, if so requested by the
United States Treasury and if approved by the Foreign
Currency Subcommittee (the “Subcommittee”), subject
to the limitation that the outstanding balance of United
States dollars provided to the United States Treasury as
a result of these transactions not at any time exceed
$5 billion.
3. The Committee directs the Selected Bank to maintain, for the System Open Market Account:
A. Reciprocal currency arrangements with the following foreign central banks:
Foreign central bank Maximum amount
(millions of dollars
or equivalent)
Bank of Canada
Bank of Mexico
2,000
3,000
B. Standing dollar liquidity swap arrangements with
the following foreign central banks:
Bank of Canada
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Bank of England
Bank of Japan
European Central Bank
Swiss National Bank
C. Standing foreign currency liquidity swap arrangements with the following foreign central banks:
Bank of Canada
Bank of England
Bank of Japan
European Central Bank
Swiss National Bank
4. The Committee directs the Selected Bank to hold
and to invest foreign currencies in the portfolio in accordance with the provisions of paragraph 7 of the Authorization.
5. The Committee directs the Selected Bank to report
to the Committee, at each regular meeting of the Committee, on transactions undertaken pursuant to paragraphs 1 and 6 of the Authorization. The Selected Bank
is also directed to provide quarterly reports to the Committee regarding the management of the foreign currency holdings pursuant to paragraph 7 of the Authorization.
6. The Committee directs the Selected Bank to conduct testing of transactions for the purpose of operational readiness in accordance with the provisions of
paragraph 9 of the Authorization.
Developments in Financial Markets and Open
Market Operations
The manager reported on developments in financial
markets during the period since the Committee met on
July 26–27, 2016. Over much of the period, financial
market volatility was relatively low, but volatility
increased somewhat in the last couple of weeks of the
period amid shifting views among market participants
about potential monetary policy actions by the Federal
Reserve and foreign central banks. The deputy manager
followed with a briefing on open market operations and
developments in money markets, including investment
flows and changes in market interest rates in anticipation
of the upcoming implementation of reforms to the
money market fund (MMF) industry. Usage of the
System’s overnight reverse repurchase agreement facility
increased modestly in the most recent intermeeting
period. Federal funds generally continued to trade close
to the middle of the FOMC’s target range of
¼ to ½ percent.
The Committee was also briefed on planned revisions to
the policies of the Open Market Desk on counterparties
for domestic and foreign open market operations. The
proposal was intended in part to create a single unified
framework for the management of counterparties and to
increase the transparency of the Desk’s counterparty
policies. The Committee indicated its general support
for the proposal. Desk staff anticipated that the
revisions would be published later this year.
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 during the intermeeting period.
Staff Review of the Economic Situation
The information reviewed for the September 20–21
meeting indicated that labor market conditions strengthened in recent months and that real gross domestic
product (GDP) was increasing at a faster pace in the
third quarter than in the first half of the year. 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 nonenergy imports. Survey-based measures of longer-run
inflation expectations were little changed, on balance,
while market-based measures of inflation compensation
remained low.
Total nonfarm payroll employment expanded strongly,
on average, in July and August. The unemployment rate
remained at 4.9 percent in recent months. Both the labor force participation rate and the employment-topopulation ratio had edged up since June. The share of
workers employed part time for economic reasons was
little changed on balance. The rates of private-sector job
openings and of hires increased over June and July, and
the rate of quits was unchanged. The four-week moving
average of initial claims for unemployment insurance
benefits continued to be low. Labor productivity in the
business sector declined slightly over the four quarters
ending in the second quarter of 2016. Measures of labor
compensation continued to rise at a moderate pace.
Compensation per hour in the business sector rose 2
percent over the four quarters ending in the second
quarter, the employment cost index for private workers
increased 2½ percent over the 12 months ending in
June, and average hourly earnings for all employees increased 2½ percent over the 12 months ending in August.
The unemployment rates for African Americans and for
Hispanics remained above the rate for whites, although
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the differentials in jobless rates across these groups were
similar to those before the most recent recession. The
employment-to-population ratio for individuals aged
25 to 64 continued to be higher for whites than for African Americans and for Hispanics.
Total industrial production rose slightly, on net, in July
and August. The output of the mining sector increased
since April after having trended down from late 2014.
Manufacturing production was unchanged, on balance,
since June and had generally been moving sideways since
the end of 2014, as weak export demand and spillovers
from the decline in crude oil and natural gas drilling
weighed on industrial activity. Although automakers’ assembly schedules pointed to some increase in motor vehicle production in the near term, broader indicators of
manufacturing production, such as new orders diffusion
indexes from national and regional manufacturing surveys, suggested that factory output would remain on a
flat trajectory in the coming months.
Real personal consumption expenditures (PCE) appeared to be increasing solidly, on net, in the third quarter. Real PCE rose strongly in July, but the components
of the nominal retail sales data used by the Bureau of
Economic Analysis to construct its estimate of PCE
were flat in August and the pace of light motor vehicle
sales softened. Recent readings on key factors that influence consumer spending were consistent with solid
real PCE growth for the third quarter as a whole, including continued gains in employment, real disposable personal income, and households’ net worth. In addition,
consumer sentiment as measured by the University of
Michigan Surveys of Consumers remained relatively upbeat through early September.
Recent information on housing activity suggested that
real residential investment spending continued to be soft
in the third quarter. Starts for new single-family homes
declined, on net, in July and August, as did starts for multifamily units. Building permit issuance for new singlefamily homes—which tends to be a good indicator of
the underlying trend in construction—was little
changed, on balance, in recent months and was essentially flat since late last year. Sales of new homes increased strongly in July, but sales of existing homes decreased modestly.
Real private expenditures for business equipment and intellectual property appeared to be rising slowly in the
third quarter. Nominal shipments of nondefense capital
goods excluding aircraft declined in July. However, new
orders for these capital goods rose substantially in July
and were notably above the level of shipments, suggesting a pickup in business spending for equipment in the
near term. Firms’ nominal spending for nonresidential
structures excluding drilling and mining increased in
June and July. The number of oil and gas rigs in operation, an indicator of spending for structures in the drilling and mining sector, continued to edge up through
early September. The limited information available suggested that the change in inventory investment would be
positive in the third quarter after subtracting substantially from real GDP growth in the second quarter. Except in the energy sector, inventories generally seemed
well aligned with the pace of sales.
Nominal outlays for defense through August pointed to
flat real federal government purchases in the third quarter. Real state and local government purchases also appeared to be little changed, on net, relative to their level
in the previous quarter. Although payrolls for state and
local governments expanded in July and August, nominal construction spending by these governments declined in July.
The U.S. international trade deficit widened in June before narrowing substantially in July. Exports increased
in both months, with strong growth in July driven by
higher agricultural exports. After rising in June, imports
retraced some of this gain in July, driven by lower imports of consumer goods and capital goods.
Total U.S. consumer prices, as measured by the PCE
price index, increased about ¾ percent over the
12 months ending in July, partly restrained by recent decreases in consumer food prices and 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 those same 12 months, held
down in part by decreases in the prices of non-energy
imports over much of this period and the pass-through
of earlier declines in energy prices into the prices of
other goods and services. Over the 12 months ending
in August, total consumer prices as measured by the consumer price index (CPI) rose about 1 percent, while core
CPI inflation was around 2¼ percent. The Michigan
survey measure of median longer-run inflation expectations edged down in August and was unchanged in early
September. The measure of longer-run inflation expectations for PCE prices from the Survey of Professional
Forecasters was unchanged in the third quarter. Other
measures of longer-run inflation expectations from the
Desk’s Survey of Primary Dealers and Survey of Market
Participants were also unchanged in September.
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Foreign real GDP growth slowed noticeably in the second quarter, primarily owing to contractions in Canada
and Mexico; economic growth in other foreign economies fell only slightly on average. Wildfires disrupted oil
production in Canada, and a second-quarter decline in
U.S. manufacturing production weighed on Mexican exports. Aggregate foreign economic growth appeared to
pick up in the third quarter amid signs of recovery of oil
production in Canada and of improved manufacturing
production in Mexico. However, weaker investment
readings pointed to a slight moderation of economic activity in China in the third quarter. The outcome of the
U.K. referendum on exit from the European Union
(Brexit) apparently exerted less drag on economic activity than previously anticipated by many analysts. Nonetheless, recent data suggested that economic growth in
Europe remained modest. Inflation was generally subdued in recent months in both the advanced foreign
economies (AFEs) and the emerging market economies
(EMEs).
Staff Review of Financial Situation
Domestic financial conditions remained accommodative
since the July FOMC meeting. Asset prices moved
within a fairly narrow range for much of the intermeeting period, although volatility increased somewhat in the
last few days of the period as market participants focused on central bank communications in the United
States and abroad. Market expectations for a policy rate
increase by the end of this year rose a bit since the July
FOMC meeting, reportedly reflecting comments of Federal Reserve officials that were viewed, on balance, as
suggesting that the case for policy firming had strengthened over recent months. Nominal Treasury yields
across the curve edged up. Anticipation of the impending deadline for compliance with MMF reform measures
continued to prompt net outflows from prime MMFs
and put upward pressure on some term money market
rates.
Comments by a number of Federal Reserve officials
over the intermeeting period were interpreted by market
participants as raising the odds on policy firming by the
end of this year. However, domestic economic data releases appeared to be a little softer, on balance, than investors had expected; the August employment report
and manufacturing surveys, in particular, were below expectations. Market-based estimates of the probability of
a rate hike at the September FOMC meeting were volatile but ended the period slightly lower, on balance, at
roughly 15 percent, while the probability of an increase
by the end of the year rose slightly to around 50 percent.
The medium-term federal funds rate path implied by
market quotes edged up on net. Consistent with marketbased estimates, respondents to the Desk’s September
surveys of primary dealers and market participants assigned a probability of about 15 percent to a rate hike at
the September meeting. The median respondent in each
survey continued to expect one policy firming in 2016,
with respondents generally expecting the rate increase to
occur at the December meeting. Based on the median
responses, the most likely path of the target federal
funds rate in 2017 and 2018 was little changed.
Nominal Treasury yields increased moderately, on net,
since the July FOMC meeting, reflecting the slight upward revision in the expected path for the federal funds
rate and a rise in global bond yields that was apparently
spurred by an increased impression among investors that
monetary policy in other advanced economies might be
less accommodative than previously expected. Measures
of forward inflation compensation based on Treasury
Inflation-Protected Securities rose slightly but remained
near the lower end of their historical range.
Broad stock price indexes moved down, on net, since
the July FOMC meeting. Realized and implied volatilities in various asset markets were relatively low during
most of the intermeeting period but increased somewhat
in the last few days before the meeting as market participants reacted to global central bank communications.
Spreads on yields of both investment-grade and highyield nonfinancial corporate bonds over those on comparable-maturity Treasury securities declined somewhat
to levels fairly close to their historical norms.
MMF reform continued to affect several short-term
funding markets in advance of the October 14, 2016,
compliance date. While total assets under the management of MMFs changed little over the intermeeting period, investors continued to shift from prime funds to
government funds. As a result, MMF holdings of commercial paper (CP) and certificates of deposit continued
to decline, and prime institutional funds further reduced
their weighted-average maturities to historically low levels. Reflecting MMFs’ reduced appetite for term lending, spreads of three-month money market rates over
rates on comparable-maturity overnight index swap contracts rose during the intermeeting period. Rates on
short-term municipal securities and net yields on taxexempt MMFs also increased sharply, primarily because
of outflows from these funds.
Financing conditions for nonfinancial firms remained
generally accommodative. While outstanding commercial and industrial loans and CP both declined somewhat
in August, gross issuance of corporate bonds was quite
Minutes of the Meeting of September 20–21, 2016
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large. The overall credit quality of the nonfinancial corporate sector, which had deteriorated a bit over the past
few quarters, showed signs of stabilizing over the intermeeting period. Financing conditions in commercial
real estate (CRE) markets also remained accommodative. Commercial mortgage-backed securities (CMBS)
issuance picked up in August, likely reflecting the narrowing of CMBS spreads—albeit to levels that were still
wider than typical—over the past few months. Growth
in CRE loans at banks continued to be strong.
Gross issuance of municipal bonds in July and August
was strong, credit quality remained stable, and yields on
municipal bonds edged down. Although Puerto Rico
missed a small debt payment due on August 1, prices of
Puerto Rico’s benchmark general obligation bonds were
roughly unchanged over the intermeeting period.
Financing conditions for households generally continued to be accommodative; however, mortgage markets
remained relatively tight for borrowers with low credit
scores. Interest rates on 30-year fixed-rate mortgages
moved higher, in line with comparable-maturity Treasury yields, but remained at a low level. Mortgage refinancing activity in August was the highest in three years,
reflecting lower mortgage rates during June and July.
Consumer loan balances continued to increase, with
credit card balances expanding at a robust pace.
Global risk asset prices broadly increased amid improving sentiment among investors and low volatility. Capital flows to EMEs continued, and sovereign debt
spreads in these economies and corporate bond spreads
in both EMEs and AFEs narrowed further. European
financial markets remained resilient following the Brexit
vote, and European bank equity prices increased on net.
Announcements by foreign central banks garnered investor attention and contributed to somewhat higher asset price volatility later in the period. The European
Central Bank left its policy rates and asset purchase program unchanged at its September meeting. Global yields
moved higher and the euro strengthened following the
meeting, as some market participants had expected an
extension of the program. The Bank of Japan (BOJ) left
its policy rates unchanged at its July meeting and instead
expanded its purchases of exchange-traded stock funds
and introduced additional measures to facilitate dollar
funding. Japanese bond yields increased notably and the
yen appreciated in the aftermath of the announcement.
At its September meeting, the BOJ introduced a new
monetary policy framework, which includes yield curve
control and a commitment to expand the monetary base
until inflation exceeds 2 percent and stays above that target in a stable manner. The introduction of the BOJ’s
new framework elicited little immediate market reaction
outside of Japan. At its early August meeting, the Bank
of England announced a rate cut, a resumption of its asset purchase program, and a new bank funding program.
Longer-term U.K. yields and the pound fell immediately
following the announcement but retraced these declines
following better-than-expected economic data later in
the period. The Bank of England maintained its policy
stance at the September meeting, in line with market expectations.
Staff Economic Outlook
In the U.S. economic projection prepared by the staff
for the September FOMC meeting, the forecast for real
GDP growth in 2016 through 2019 was little changed
from the one presented in July. The pace of real GDP
growth was forecast to be faster over the second half of
this year than in the first half, primarily reflecting a modest increase in the rate of growth of private domestic final purchases and a sizable turnaround in inventory investment. The staff continued to project that real GDP
would expand at a modestly faster pace than potential
output in 2016 through 2019, supported primarily by increases in consumer spending and, to a lesser degree, by
somewhat faster growth in business investment beginning next year. (The staff slightly lowered its assumption
for potential output growth over the medium term and
in the longer run.) The unemployment rate was forecast
to remain flat over the remainder of this year and then
to gradually decline through the end of 2019; over this
period, the unemployment rate was projected to run below the staff’s estimate of its longer-run natural rate.
The forecast for consumer price inflation was essentially
unchanged from the previous projection. The staff continued to project that inflation would increase over the
next several years, as food and energy prices along with
the prices of non-energy imports were expected to begin
steadily rising this year. However, inflation was projected to be marginally below the Committee’s longerrun objective of 2 percent in 2019.
The staff viewed the uncertainty around its 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 both
monetary and fiscal policy appeared to be better positioned to offset large positive shocks than adverse ones.
In addition, the staff continued to see the risks to the
forecast from developments abroad as skewed to the
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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 somewhat to the downside, partly reflecting
the possibility that 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 2019 and over the longer run. 5 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, participants agreed that information received
over the intermeeting period suggested that the labor
market had continued to strengthen and growth of economic activity had picked up from the modest pace seen
in the first half of the year. Although the unemployment
rate was little changed in recent months, job gains had
been solid, on average. Household spending had been
growing strongly but business fixed investment had remained 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 remained low; most survey-based
measures of longer-term inflation expectations were little changed, on balance, in recent months. Volatility in
domestic and global asset markets was relatively low
over most of the intermeeting period, and U.S. financial
conditions were broadly accommodative.
Participants generally expected that, with gradual adjustments in the stance of monetary policy, economic activity would expand at a moderate pace and labor market
5 One participant did not submit longer-run projections for
the change in real GDP, the unemployment rate, or the federal
funds rate.
conditions would strengthen somewhat further. 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. A number
of participants indicated that there had been little change
in their economic outlooks over recent months. A substantial majority now viewed the near-term risks to the
economic outlook as roughly balanced, with several of
them indicating the risks from Brexit had receded. However, a few still judged that overall risks were weighted
to the downside, citing various factors that included the
possibility of weaker-than-expected growth in foreign
economies, continued uncertainty associated with
Brexit, the proximity of policy interest rates to the effective lower bound, or persistent headwinds to economic
growth. Participants agreed that the Committee should
continue to closely monitor inflation indicators and
global economic and financial developments.
Growth in consumer spending appeared to have moderated somewhat in the third quarter from its rapid
second-quarter pace, reflecting a softening in retail sales
since June. District contacts provided mixed reports,
consistent with some easing in growth of sales. Nevertheless, incoming data pointed to still-solid growth in
consumption expenditures overall. Many participants
noted that they expected household spending to be a primary contributor to economic growth going forward.
They saw consumer spending as likely to be supported
by a number of factors, including ongoing job gains, rising household income and wealth, improved household
balance sheets, and buoyant consumer sentiment.
Economic activity in the second half of the year was expected to be buoyed in part by a pickup in business fixed
investment and some rebuilding of inventories. A recent
increase in oil drilling rigs in operation was seen as a positive sign for business investment, although the continued low level of oil prices was still weighing on capital
investment in the energy industry. Contacts in some
Districts suggested that businesses were taking a cautious approach to capital spending even outside of the
energy sector—for instance, preferring to modernize existing manufacturing facilities rather than increase capacity by investing in new facilities—in light of continuing
sluggish global demand, shorter investment time horizons for businesses, and uncertainty about prospects for
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government policy and regulation. Nonresidential construction was reported to be strong in a few Districts.
However, the sluggishness in the housing sector appeared to have continued into the third quarter. A couple of participants pointed to limited availability of lots
and a shortage of skilled labor as restraining residential
construction activity in their Districts; in one District,
constraints on the supply of new homes for sale were
expected to boost spending on home improvements and
offset some of the drag from the slowing in new construction.
Participants’ reports on the manufacturing sector indicated varying conditions across Districts, but, on the
whole, manufacturing activity remained flat. The most
recent survey evidence was downbeat, although smoothing through the past several months provided a more
neutral signal. A couple of participants noted that the
firming in crude oil prices had led to a stabilization in
drilling activity. In the agricultural sector, lower crop
prices continued to weigh on profit margins, farm income was expected to fall, and loan repayment rates had
declined.
Global financial conditions had improved somewhat in
recent months. However, participants noted that economic growth in many foreign economies remained subdued, and inflation rates abroad generally continued to
be quite low. Some participants continued to see important downside risks from abroad.
Participants generally agreed that labor market conditions had improved appreciably over the course of the
year, with monthly payroll gains averaging about
180,000. Reports from several Districts indicated widespread increases in employment over the intermeeting
period. Although job gains had slowed from their pace
in 2015, average monthly increases so far this year had
exceeded most estimates discussed by participants of
monthly payroll increases that could be expected to prevail with economic growth proceeding at its longer-run
trend rate. In addition, several participants cited the rise
in the labor force participation rate since late 2015 or the
increase in the employment-to-population ratio—series
with downward structural trends—as welcome developments. However, it was noted that the unemployment
rate and broader measures of unemployment had
changed little since the beginning of the year. Participants generally expected the unemployment rate to run
somewhat below their estimates of its longer-run normal
rate over the next couple of years, but they offered differing views about the extent of slack that currently remained in the labor market. Some participants pointed
to the slowing in payroll gains and modest pickup in
wages this year and judged that the labor market had little or no remaining slack. Some others noted that stillmuted wage growth, a level of involuntary part-time employment that remained elevated, and recent increases in
labor force participation indicated that slack remained in
resource utilization, or expressed the view that the
longer-run normal rate of unemployment was uncertain
and could be lower than current estimates. Participants
commented on a staff analysis showing differential patterns of unemployment across racial and ethnic groups
that remained after taking education into account; it was
suggested that it might be worthwhile to examine such
issues further.
Recent readings on headline and core PCE price inflation had come in about as expected, and participants
continued to anticipate that headline inflation would rise
over the medium term to the Committee’s 2 percent objective. It was noted, however, that 12-month core PCE
price inflation had been running at a steady rate below
2 percent, and several participants commented on factors that might be expected to restrain increases in inflation. Such factors included the limited evidence of rising
cost or price pressures, the apparent low responsiveness
of inflation to the rate of labor utilization, a possible
downward shift in inflation expectations, and remaining
economic slack. The median expectation for inflation
over the next 5 to 10 years from the Michigan survey
dropped to its historical low of 2.5 percent in August and
held steady in September. However, a couple of participants indicated that the drop in some survey-based
measures of inflation expectations could be explained by
a decline in the number of respondents who had previously expected relatively high inflation outcomes. Overall, survey-based measures of longer-term expectations
were judged to have been reasonably stable in recent
months. Many participants observed that core CPI inflation had been running appreciably above core PCE
inflation; it was noted that different weights on rents and
medical prices as well as different measurement of
health-care inflation in the two indexes largely accounted
for the disparity.
In their discussion of the outlook, participants considered the likelihood of, and the potential benefits and
costs associated with, a more pronounced undershooting of the longer-run normal rate of unemployment than
envisioned in their modal forecasts. A number of participants noted that they expected the unemployment
rate to run somewhat below its longer-run normal rate
and saw a firming of monetary policy over the next few
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years as likely to be appropriate. A few participants referred to historical episodes when the unemployment
rate appeared to have fallen well below its estimated
longer-run normal level. They observed that monetary
tightening in those episodes typically had been followed
by recession and a large increase in the unemployment
rate. Several participants viewed this historical experience as relevant for the Committee’s current decisionmaking and saw it as providing evidence that waiting
too long to resume the process of policy firming could
pose risks to the economic expansion, or noted that a
significant increase in unemployment would have disproportionate effects on low-skilled workers and minority groups. Some others judged this historical experience
to be of limited applicability in the present environment
because the economy was growing only modestly above
trend, inflation was below the Committee’s 2 percent
objective, and inflation expectations were low—circumstances that differed markedly from those earlier episodes. Moreover, the increase in labor force participation over the past year suggested that there could be
greater scope for economic growth without putting undue pressure on labor markets; it was also noted that the
longer-run normal rate of unemployment could be lower
than previously thought, with a similar implication. Participants agreed that it would be useful to continue to
analyze and discuss the dynamics of the adjustment of
the economy and labor markets in circumstances when
unemployment falls well below its estimated longer-run
normal rate.
With regard to recent financial developments, it was
noted that regulatory changes and impending MMF reforms likely had led to an increase in certain short-term
interest rates, but these developments were expected to
have only a small effect on the borrowing costs of nonfinancial corporations and little adverse influence on
overall financial market conditions. A few participants
expressed concern that the protracted period of very low
interest rates might be encouraging excessive borrowing
and increased leverage in the nonfinancial corporate sector. Finally, one participant expressed the view that prolonged periods of low interest rates could encourage
pension funds, endowments, and investors with fixed
future payout obligations to save more, depressing economic growth and adding to downward pressure on the
neutral real interest rate.
Participants discussed reasons for the apparent fall over
recent years in the neutral real rate of interest—or r*—
including lower productivity growth, demographic
shifts, and an excess of saving around the world. Al-
though several participants indicated that there was uncertainty as to how long the low level of r* would persist,
one pointed to a growing consensus that the long period
of slow productivity growth and recent evidence that the
neutral rate had fallen across countries suggested that r*
was likely to remain low for some time. A number of
participants noted that they had revised down their estimates of longer-run r* in their contributions to the Summary of Economic Projections for this meeting. Participants discussed the implications of a fall in longer-run
r* for monetary policy, including the possibility that policy interest rates might be closer to the effective lower
bound more frequently and for a long period, or that
monetary policy was ill equipped to address structural
factors such as the decline in productivity growth. A
couple of participants noted that a lower estimated value
for r* over the near term implied that monetary policy
was providing less accommodation than previously
thought.
Against the backdrop of their economic projections,
participants discussed whether available information
warranted taking another step to reduce policy accommodation at this meeting. Participants generally agreed
that the case for increasing the target range for the federal funds rate had strengthened in recent months.
Many of them, however, expressed the view that recent
evidence suggested that some slack remained in the labor
market. With inflation continuing to run below the
Committee’s 2 percent objective and few signs of increased pressure on wages and prices, most of these participants thought it would be appropriate to await further
evidence of continued progress toward the Committee’s
statutory objectives. In contrast, some other participants believed that the economy was at or near full employment and inflation was moving toward 2 percent.
They maintained that a further delay in raising the target
range would unduly increase the risk of the unemployment rate falling markedly below its longer-run normal
level, necessitating a more rapid removal of monetary
policy accommodation that could shorten the economic
expansion. In addition, several participants expressed
concern that continuing to delay an increase in the target
range implied a further divergence from policy benchmarks based on the Committee’s past behavior or risked
eroding its credibility, especially given that recent economic data had largely corroborated the Committee’s
economic outlook.
Among the participants who supported awaiting further
evidence of continued progress toward the Committee’s
objectives, several stated that the decision at this meeting
was a close call. Some participants believed that it would
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be appropriate to raise the target range for the federal
funds rate relatively soon if the labor market continued
to improve and economic activity strengthened, while
some others preferred to wait for more convincing evidence that inflation was moving toward the Committee’s
2 percent objective. Some participants noted the importance of clearly communicating to the public the conditions that would warrant an increase in the policy rate.
Committee Policy Action
In their discussion of monetary policy for the period
ahead, members judged that the information received
since the Committee met in July indicated that the labor
market had continued to strengthen and growth of economic activity had picked up from the modest pace seen
in the first half of this year. Although the unemployment
rate was little changed in recent months, job gains had
been solid, on average. Household spending had been
growing strongly but business fixed investment had remained 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 remained low; most survey-based
measures of longer-term inflation expectations were little changed, on balance, in recent months. In addition,
financial conditions remained accommodative.
With respect to the economic outlook and its implications for monetary policy, members continued to expect
that, with gradual adjustments in the stance of monetary
policy, economic activity would expand at a moderate
pace and labor market indicators would strengthen
somewhat further. They judged that near-term risks to
the economic outlook now appeared roughly balanced.
Members generally acknowledged that labor market conditions had improved appreciably over the past year, evidenced in particular by the solid pace of monthly payroll
employment gains. Some of them noted that the increase in the labor force participation rate this year suggested more room for labor supply to expand than previously expected, or contended that the slower progress
seen this year in other labor market indicators—such as
the unemployment rate, broader measures of labor utilization, job openings and quits, and wage growth—indicated that slack was being taken up at only a modest
pace. This view suggested that proceeding cautiously
with reducing monetary policy accommodation could
promote further labor market improvement. In contrast, a few other members were concerned that, without
a prompt resumption of gradual increases in the target
range for the federal funds rate, labor market conditions
could tighten well beyond normal levels over the next
few years, potentially necessitating a subsequent sharp
tightening of monetary policy that could shorten the
economic expansion.
Members continued to expect inflation to remain low in
the near term, but most anticipated that, with gradual
adjustments in the stance of monetary policy, it would
rise gradually to the Committee’s 2 percent objective
over the medium term. Many members remarked that
there were few signs of emerging inflationary pressures
or that progress on inflation had been slow. A couple of
other members pointed to recent readings on core CPI
inflation as suggesting that PCE price inflation was close
to meeting the Committee’s 2 percent inflation objective. Nonetheless, in light of the current shortfall of inflation from 2 percent, members agreed that they would
continue to carefully monitor actual and expected progress toward the Committee’s inflation goal.
After assessing the outlook for economic activity, the labor market, and inflation, as well as the risks around that
outlook, the Committee decided to maintain the target
range for the federal funds rate at ¼ to ½ percent at this
meeting. Members generally agreed that the case for an
increase in the policy rate had strengthened. But, with
some slack likely remaining in the labor market and inflation continuing to run below the Committee’s objective, a majority of members judged that the Committee
should, for the time being, await further evidence of progress toward its objectives of maximum employment
and 2 percent inflation before increasing the target range
for the federal funds rate. It was noted that a reasonable
argument could be made either for an increase at this
meeting or for waiting for some additional information
on the labor market and inflation. A couple of members
emphasized that a cautious approach to removing accommodation was warranted given the proximity of policy rates to the effective lower bound, as the Committee
had more scope to increase policy rates, if necessary,
than to reduce them. Three members preferred to raise
the target range for the federal funds rate by 25 basis
points at this meeting. They cautioned that postponing
policy firming for too long could push the unemployment rate markedly below its longer-run normal rate
over the next few years. If so, the Committee might then
need to tighten policy more rapidly, thereby posing risks
to continued economic expansion. A couple of these
members expressed concern about the potential adverse
effects on the credibility of the Committee’s policy communications if the next step in the gradual removal of
accommodation was further postponed.
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The Committee agreed that, in determining the timing
and size of future adjustments to the target range for the
federal funds rate, it 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 that
the federal funds rate was likely to remain, for some
time, below levels that are expected to prevail in the
longer run. However, members emphasized that the actual path of the federal funds rate would depend on the
economic outlook as informed by incoming data. Several members judged that it would be appropriate to increase the target range for the federal funds rate relatively soon if economic developments unfolded about as
the Committee expected; they saw the new sentence in
the third paragraph of the Committee’s statement—a
sentence indicating that the case for an increase in the
federal funds rate had strengthened but that the Committee had decided, for the time being, to wait for further evidence of continued progress toward its objectives—as reflecting this view. A few others, however,
emphasized that decisions regarding near-term adjustments in the stance of monetary policy would appropriately remain data dependent and expressed some concern that the new sentence might be misread as indicating that the passage of time rather than the accumulation
of evidence would be the key factor in the Committee’s
decisions at future meetings.
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 level of the
federal funds rate is well under way. Members noted
that 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 September 22, 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 July indicates that the
labor market has continued to strengthen and
growth of economic activity has picked up from
the modest pace seen in the first half of this
year. Although the unemployment rate is little
changed in recent months, job gains have been
solid, on average. Household spending has
been growing strongly but business fixed investment has remained 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 nonenergy imports. Market-based measures of inflation compensation remain low; most surveybased 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 expects that,
with gradual adjustments in the stance of monetary policy, economic activity will expand at a
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moderate pace and labor market conditions will
strengthen somewhat further. 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. Near-term risks to the economic outlook appear roughly balanced. 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 Committee
judges that the case for an increase in the federal
funds rate has strengthened but decided, for the
time being, to wait for further evidence of continued progress toward its objectives. 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 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,
Jerome H. Powell, and Daniel K. Tarullo.
Voting against this action: Esther L. George,
Loretta J. Mester, and Eric Rosengren.
Mses. George and Mester and Mr. Rosengren dissented
because they preferred to increase the target range for
the federal funds rate by 25 basis points at this meeting.
Ms. George judged that with the unemployment rate and
inflation at or near their longer-run levels, removing
some accommodation was warranted and would be consistent with the prescriptions of several frameworks for
assessing the appropriate stance of monetary policy. She
was concerned that the Committee’s recent policy
choices had incorporated too much discretion, and her
assessment was that by waiting longer to adjust the policy stance and deviating from the appropriate path to
policy normalization, the Committee risked eroding the
credibility of its policy communications.
Ms. Mester noted that the economy had made considerable progress on the Committee’s statutory goals, the
outlook for continued progress had been corroborated
by recent economic developments, and risks around that
outlook had diminished. In these circumstances, she believed it appropriate to gradually increase the target
range for the federal funds rate, consistent with the
Committee’s recent communications. A gradual path
would give the Committee a better chance of recalibrating the policy path over time as it gains more insights
into the underlying structure of the economy. Further
delays in taking the next step on the gradual path might
require the Committee to subsequently steepen the policy path to foster its goals, which would be inconsistent
with the Committee’s recent communications, thereby
posing risks to the Committee’s credibility.
Mr. Rosengren noted that, since the Committee’s most
recent policy action in late 2015, significant progress had
been made toward the Committee’s dual mandate. He
believed that with inflation gradually rising and robust
employment growth moving the economy very close to
full employment, it was appropriate to continue the
gradual normalization of monetary policy at this meeting. He believed that a failure to do so could require the
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Committee to raise policy interest rates faster and more
aggressively later on, which could shorten, rather than
lengthen, the duration of the economic expansion.
Consistent with the Committee’s decision to leave the
target range for the federal funds rate unchanged, the
Board of Governors took no action to change the
interest rates on reserves or discount rates.
It was agreed that the next meeting of the Committee
would be held on Tuesday–Wednesday, November 1–2,
2016.
The meeting adjourned at 10:45 a.m. on
September 21, 2016.
Notation Vote
By notation vote completed on August 16, 2016, the
Committee unanimously approved the minutes of the
Committee meeting held on July 26–27, 2016.
_____________________________
Brian F. Madigan
Secretary
Page 1
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Summary of Economic Projections
In conjunction with the Federal Open Market Committee (FOMC) meeting held on September 20–21, 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 2019 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.
Most FOMC participants expected that, under appropriate monetary policy, growth in real gross domestic product (GDP) would pick up a bit next year and run at or a
little above their individual estimates of its longer-run
rate in 2017 and 2018, and a majority of participants expected real GDP growth to be at its longer-run trend rate
in 2019. A large majority of participants projected that
the unemployment rate will fall to or modestly below
their estimates of its longer-run normal level over the
next two years. Many participants expected the unemployment rate to edge up to or toward their individual
estimates of its longer-run level in 2019. All participants
projected that inflation, as measured by the four-quarter
percentage change in the price index for personal consumption expenditures (PCE), would increase over the
next two years, and all but one expected inflation to be
within 0.1 percentage point of the Committee’s objective
in 2019. Table 1 and figure 1 provide summary statistics
for the projections.
As shown in figure 2, almost all participants expected
that the evolution of the economy would warrant only
gradual increases in the federal funds rate to achieve and
maintain the Committee’s objectives over time. Participants generally judged that the appropriate level of the
federal funds rate in 2019 would still be at or below their
One participant did not submit longer-run projections for
the change in real GDP, the unemployment rate, or the federal
funds rate.
1
estimates of its longer-run rate. However, because the
economic outlook is inherently uncertain, participants’
assessments of appropriate policy are subject to 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 for the unemployment rate as broadly
balanced, while several participants saw the risks to their
GDP growth forecasts as weighted to the downside. In
addition, most participants saw the risks to their forecasts for inflation as broadly balanced, although some
viewed the risks to their inflation forecasts as tilted to
the downside.
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
1.8 percent in 2016, 2 percent in 2017 and 2018, and
1.8 percent in 2019; the median of projections for the
longer-run normal GDP growth rate was 1.8 percent.
Most participants projected that economic growth will
pick up a bit next year and run at or slightly above their
individual estimates of its longer-run rate in 2017 and
2018, and a majority of participants expected real GDP
growth to be at its longer-run trend rate in 2019. Participants pointed to a number of factors that they expected
would contribute to above-trend output growth over the
next few years, including some firming in business investment, diminution of the drag on net exports from a
strong dollar, continued improvements in household
and business balance sheets, and accommodative financial conditions.
The median of participants’ projections for real GDP
growth in 2016 was lower than the median shown in the
June 2016 Summary of Economic Projections (SEP).
Many participants who lowered their projections for
GDP growth this year attributed their revisions to
weaker-than-expected GDP growth in the first half of
the year. The medians of participants’ projections for
real GDP growth in 2017 and 2018 were unchanged
0.6
0.9
1.1
1.6
1.8
1.9
1.9
2.4
2.0
2.0
2.6
n.a.
2.0
n.a.
2.0
n.a.
2.9
3.0
2.0
2.0
2.0
n.a.
2.0
2.0
1.5 – 2.0 1.6 – 2.0 1.8 – 2.0 1.8 – 2.1
1.3 – 2.0 1.6 – 2.0 1.8 – 2.1
n.a.
1.1 – 1.7 1.5 – 2.0 1.8 – 2.0 1.8 – 2.1
1.3 – 2.0 1.6 – 2.0 1.8 – 2.1
n.a.
2.0
2.0
0.6 – 0.9 1.1 – 1.8 1.9 – 2.8 2.4 – 3.0 2.8 – 3.0 0.4 – 1.1 0.6 – 2.1 0.6 – 3.1 0.6 – 3.8 2.5 – 3.8
0.6 – 0.9 1.4 – 1.9 2.1 – 2.9
n.a.
3.0 – 3.3 0.6 – 1.4 0.6 – 2.4 0.6 – 3.4
n.a.
2.8 – 3.8
1.6 – 1.8 1.7 – 1.9 1.9 – 2.0
1.6 – 1.8 1.7 – 2.0 1.9 – 2.0
1.2 – 1.4 1.7 – 1.9 1.8 – 2.0 1.9 – 2.0
1.3 – 1.7 1.7 – 2.0 1.9 – 2.0
n.a.
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 June projections were made in conjunction with the meeting of the Federal Open Market Committee on
June 14–15, 2016. One participant did not submit longer-run projections in conjunction with the June 14–15, 2016, meeting. For the September 20–21, 2016, meeting, one participant
did not submit longer-run projections for the change in real GDP, the unemployment rate, or the federal funds rate.
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
June projection
Memo: Projected
appropriate policy path
1.7
1.7
2.0
2.0
4.7 – 4.9 4.5 – 4.7 4.4 – 4.7 4.4 – 4.8 4.7 – 5.0 4.7 – 4.9 4.4 – 4.8 4.3 – 4.9 4.2 – 5.0 4.5 – 5.0
4.6 – 4.8 4.5 – 4.7 4.4 – 4.8
n.a.
4.7 – 5.0 4.5 – 4.9 4.3 – 4.8 4.3 – 5.0
n.a.
4.6 – 5.0
Core PCE inflation4
June projection
1.9
1.9
4.8
4.8
1.3
1.4
4.6
n.a.
PCE inflation
June projection
4.5
4.6
Unemployment rate
June projection
4.6
4.6
4.8
4.7
Change in real GDP
June projection
Variable
Median1
Central tendency2
Range3
2016 2017 2018 2019 Longer 2016
2017
2018
2019
2016
2017
2018
2019
Longer
Longer
run
run
run
1.8
2.0
2.0
1.8
1.8
1.7 – 1.9 1.9 – 2.2 1.8 – 2.1 1.7 – 2.0 1.7 – 2.0 1.7 – 2.0 1.6 – 2.5 1.5 – 2.3 1.6 – 2.2 1.6 – 2.2
2.0
2.0
2.0 n.a.
2.0
1.9 – 2.0 1.9 – 2.2 1.8 – 2.1
n.a.
1.8 – 2.0 1.8 – 2.2 1.6 – 2.4 1.5 – 2.2
n.a.
1.6 – 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, September 2016
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Federal Open Market Committee
_____________________________________________________________________________________________
Summary of Economic Projections of the Meeting of September 20–21, 2016
Page 3
_____________________________________________________________________________________________
Figure 1. Medians, central tendencies, and ranges of economic projections, 2016–19 and over the longer run
Percent
Change in real GDP
Median of projections
Central tendency of projections
Range of projections
3
2
1
Actual
2011
2012
2013
2014
2015
2016
2017
2018
2019
Longer
run
Percent
Unemployment rate
9
8
7
6
5
4
2011
2012
2013
2014
2015
2016
2017
2018
2019
Longer
run
Percent
PCE inflation
3
2
1
2011
2012
2013
2014
2015
2016
2017
2018
2019
Longer
run
Percent
Core PCE inflation
3
2
1
2011
2012
2013
2014
2015
2016
2017
2018
2019
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.
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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
2019
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 for the federal funds rate.
Summary of Economic Projections of the Meeting of September 20–21, 2016
Page 5
_____________________________________________________________________________________________
from June at 2 percent. This pace was slightly above the
median projection of the longer-run growth rate of
GDP, which was revised down to 1.8 percent.
The median of projections for the unemployment rate at
the end of 2016 was 4.8 percent, slightly higher than in
June. Based on the median projections, the unemployment rate was anticipated to decline to 4.6 percent in
2017 and to 4.5 percent in 2018 before moving up
slightly to 4.6 percent in 2019. The median for 2019 remained below the 4.8 percent median assessment of the
longer-run normal unemployment rate, with a majority
of participants projecting the unemployment rate in
2019 to be 0.2 percentage point or more below their individual estimates of the longer-run normal rate.
Figures 3.A and 3.B show the distributions of participants’ projections for real GDP growth and the unemployment rate from 2016 to 2019 and in the longer run.
The distribution of individual projections of GDP
growth for 2016 shifted lower relative to the distribution
of the June projections, while the distributions for 2017
and 2018 were little changed. The distribution of projections for GDP growth in the longer run shifted down
slightly. The distributions of projections for the unemployment rate were little changed except for a shift upward for 2016.
The Outlook for Inflation
In the September SEP, the median of projections for
headline PCE price inflation in 2016 was 1.3 percent, a
bit lower than in June. The projections for headline PCE
price inflation over the next two years and in the longer
run were little changed since June, with the median inflation projection still rising to 1.9 percent in 2017 and
to the Committee’s objective of 2 percent in 2018, then
remaining there in 2019. All participants but one projected that inflation will be within 0.1 percentage point
of the Committee’s objective in 2019. The median of
individual projections for core PCE price inflation 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 down relative to pro-
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
2
jections for the June meeting, with some participants attributing their forecast revisions to weaker-thanexpected incoming data, while the distribution of projections for core PCE price inflation this year narrowed.
For 2017 and 2018, the distributions of projections for
both total and core PCE price inflation shifted down
slightly.
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
2019 and over the longer run.2 The distributions for
2016 to 2018 shifted down. The median projections of
the federal funds rate continued to show gradual increases, from 0.63 percent at the end of 2016 to 1.13 percent at the end of 2017, 1.88 percent at the end of 2018,
and 2.63 percent at the end of 2019; the median of the
longer-run projections of the federal funds rate was
2.88 percent. Relative to the June projections, the median of the projections for the federal funds rate at the
end of 2016 was 0.25 percentage point lower, and for
2017 and 2018, the median projections were each
0.50 percentage point lower. Compared with the June
SEP, most participants reduced their projection for the
federal funds rate in the longer run; the median moved
down 0.13 percentage point, to 2.88 percent.
In discussing their September 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 and likely to rise only slowly. A number of
participants attributed the low level of the short-term
neutral rate to the persistence of low productivity
growth, continued strength of the dollar, a weak outlook
for economic growth abroad, demand for safe longerterm assets, and other factors, and they anticipated that
the effects of these factors would fade gradually 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. These participants judged that, as a result, the
Committee should take a cautious approach to removing
policy accommodation. Participants cited a number of
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 for variables other than inflation 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, 2016–19 and over the longer run
Number of participants
2016
18
16
14
12
10
8
6
4
2
September projections
June 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
18
16
14
12
10
8
6
4
2
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
18
16
14
12
10
8
6
4
2
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
2019
18
16
14
12
10
8
6
4
2
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
18
16
14
12
10
8
6
4
2
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 September 20–21, 2016
Page 7
_____________________________________________________________________________________________
Figure 3.B. Distribution of participants’ projections for the unemployment rate, 2016–19 and over the longer run
Number of participants
2016
18
16
14
12
10
8
6
4
2
September projections
June projections
4.2 4.3
4.4 4.5
4.6 4.7
4.8 4.9
5.0 5.1
Percent range
Number of participants
2017
18
16
14
12
10
8
6
4
2
4.2 4.3
4.4 4.5
4.6 4.7
4.8 4.9
5.0 5.1
Percent range
Number of participants
2018
18
16
14
12
10
8
6
4
2
4.2 4.3
4.4 4.5
4.6 4.7
4.8 4.9
5.0 5.1
Percent range
Number of participants
2019
18
16
14
12
10
8
6
4
2
4.2 4.3
4.4 4.5
4.6 4.7
4.8 4.9
5.0 5.1
Percent range
Number of participants
Longer run
4.2 4.3
18
16
14
12
10
8
6
4
2
4.4 4.5
4.6 4.7
4.8 4.9
Percent range
Note: Definitions of variables and other explanations are in the notes to table 1.
5.0 5.1
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Federal Open Market Committee
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Figure 3.C. Distribution of participants’ projections for PCE inflation, 2016–19 and over the longer run
Number of participants
2016
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
Percent range
Number of participants
2017
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
Percent range
Number of participants
2018
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
Percent range
Number of participants
2019
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
Percent range
Number of participants
Longer run
1.1 1.2
18
16
14
12
10
8
6
4
2
1.3 1.4
1.5 1.6
1.7 1.8
1.9 2.0
Percent range
Note: Definitions of variables and other explanations are in the notes to table 1.
2.1 2.2
Summary of Economic Projections of the Meeting of September 20–21, 2016
Page 9
_____________________________________________________________________________________________
Figure 3.D. Distribution of participants’ projections for core PCE inflation, 2016–19
Number of participants
2016
18
16
14
12
10
8
6
4
2
September projections
June projections
1.3 1.4
1.5 1.6
1.7 1.8
1.9 2.0
2.1 2.2
Percent range
Number of participants
2017
18
16
14
12
10
8
6
4
2
1.3 1.4
1.5 1.6
1.7 1.8
1.9 2.0
2.1 2.2
Percent range
Number of participants
2018
18
16
14
12
10
8
6
4
2
1.3 1.4
1.5 1.6
1.7 1.8
1.9 2.0
2.1 2.2
Percent range
Number of participants
2019
18
16
14
12
10
8
6
4
2
1.3 1.4
1.5 1.6
1.7 1.8
1.9 2.0
Percent range
Note: Definitions of variables and other explanations are in the notes to table 1.
2.1 2.2
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Federal Open Market Committee
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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, 2016–19 and over the longer run
Number of participants
2016
18
16
14
12
10
8
6
4
2
September projections
June projections
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
Percent range
Number of participants
2017
0.38 0.62
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
Percent range
Number of participants
2018
0.38 0.62
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
Percent range
Number of participants
2019
0.38 0.62
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
Percent range
Number of participants
Longer run
0.38 0.62
0.63 0.87
18
16
14
12
10
8
6
4
2
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
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 for the federal funds rate in conjunction with the June 14–15, 2016, meeting. One participant did not submit
longer-run projections for the federal funds rate in conjunction with the September 20–21, 2016, meeting.
Summary of Economic Projections of the Meeting of September 20–21, 2016
Page 11
_____________________________________________________________________________________________
factors that pushed down their projections of the longerrun federal funds 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, for each
variable, all but a few participants judged the levels of
uncertainty associated with their September projections
for real GDP growth, the unemployment rate, and headline inflation to be broadly similar to the average of the
past 20 years, and all but one participant viewed uncertainty around core inflation to be broadly similar to its
average historical level.3 One participant saw uncertainty
surrounding real GDP growth as higher than average,
down from three participants in June. Participants noted
that continued uncertainty about the rate of productivity
growth and concerns about international developments
were sources of uncertainty attending their forecasts of
real GDP growth. Most participants’ assessments of the
level of uncertainty surrounding their economic projections did not change materially since June.
For each variable, the number of participants viewing
the risks as balanced increased since June, and fewer participants assessed the risks to economic growth as
weighted to the downside or viewed the risks to unemployment as weighted to the upside (figure 4, top two
panels in the right-hand column). Participants who revised their view from an assessment that the risks to
GDP growth were to the downside to a view that the
risks were broadly balanced cited reasons such as an easing of concerns regarding the potential for global economic and financial conditions to deteriorate. Participants who saw the risks to GDP growth as tilted to the
downside attributed this assessment to some signs that
the momentum of growth in domestic demand may be
slowing, businesses’ caution regarding investment and
hiring decisions, the risk of adverse shocks to U.S. economic activity from developments abroad, or potential
limits to the ability of monetary policy to respond to adverse shocks near the effective lower bound on shortterm interest rates. As indicated in the two bottom-right
figures, the number of participants who saw the risks to
their inflation projections as broadly balanced increased;
those who revised their view from an assessment that
the risks to inflation were tilted downward pointed to an
easing of concerns about global financial developments
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”
3
Table 2. Average historical projection error ranges
Percentage points
Variable
Change in real GDP1 . . . . .
Unemployment
rate1
.....
Total consumer
prices2
....
2016
2017
2018
2019
±1.3
±1.9
±2.1
±2.2
±0.3
±1.0
±1.7
±2.0
±0.8
±1.1
±1.1
±1.1
NOTE: Error ranges shown are measured as plus or minus the
root mean squared error of projections for 1995 through 2015 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. 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 200760 (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, www.federal
reserve.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.
or accumulating evidence that inflation expectations
were remaining anchored at policy-consistent levels.
Those who continued to judge that the risks to inflation
were weighted to the downside cited the risks associated
with encountering negative economic shocks when the
policy rate is close to the effective lower bound or with
continued low readings on survey-based measures of inflation expectations and financial-market measures of inflation compensation.
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.
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Federal Open Market Committee
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Figure 4. Uncertainty and risks in economic projections
Number of participants
Uncertainty about GDP growth
Risks to GDP growth
September projections
June projections
Lower
Broadly
similar
Number of participants
18
16
14
12
10
8
6
4
2
Higher
September projections
June projections
Weighted to
downside
Broadly
balanced
Number of participants
Uncertainty about the unemployment rate
18
16
14
12
10
8
6
4
2
Weighted to
upside
Number of participants
Risks to the unemployment rate
18
16
14
12
10
8
6
4
2
Lower
Broadly
similar
Higher
18
16
14
12
10
8
6
4
2
Weighted to
downside
Broadly
balanced
Number of participants
Uncertainty about PCE inflation
Weighted to
upside
Number of participants
Risks to PCE inflation
18
16
14
12
10
8
6
4
2
Lower
Broadly
similar
Higher
18
16
14
12
10
8
6
4
2
Weighted to
downside
Broadly
balanced
Number of participants
Uncertainty about core PCE inflation
Weighted to
upside
Number of participants
Risks to core PCE inflation
18
16
14
12
10
8
6
4
2
Lower
Broadly
similar
Higher
18
16
14
12
10
8
6
4
2
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 September 20–21, 2016
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 1.7 to 4.3 percent in the
current year, 1.1 to 4.9 percent in the second
year, 0.9 to 5.1 percent in the third year, and
0.8 to 5.2 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 and 0.9 to 3.1 percent in the second, 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.
Cite this document
Federal Reserve (2016, September 20). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_20160921
@misc{wtfs_fomc_minutes_20160921,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {2016},
month = {Sep},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_20160921},
note = {Retrieved via When the Fed Speaks corpus}
}