FOMC Minutes
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Minutes of the Federal Open Market Committee
December 18–19, 2018
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, December 18, 2018,
at 1:00 p.m. and continued on Wednesday, December 19, 2018, at 9:00 a.m. 1
PRESENT:
Jerome H. Powell, Chairman
John C. Williams, Vice Chairman
Thomas I. Barkin
Raphael W. Bostic
Michelle W. Bowman
Lael Brainard
Richard H. Clarida
Mary C. Daly
Loretta J. Mester
Randal K. Quarles
James Bullard, Charles L. Evans, Esther L. George,
Eric Rosengren, and Michael Strine, Alternate
Members of the Federal Open Market Committee
Patrick Harker, Robert S. Kaplan, and Neel Kashkari,
Presidents of the Federal Reserve Banks of
Philadelphia, Dallas, and Minneapolis, respectively
James A. Clouse, Secretary
Matthew M. Luecke, Deputy Secretary
David W. Skidmore, Assistant Secretary
Michelle A. Smith, Assistant Secretary
Mark E. Van Der Weide, General Counsel
Michael Held, Deputy General Counsel
Steven B. Kamin, Economist
Thomas Laubach, Economist
David W. Wilcox, Economist
David Altig, Kartik B. Athreya, Thomas A. Connors,
David E. Lebow, Trevor A. Reeve, William
Wascher, and Beth Anne Wilson, Associate
Economists
Simon Potter, Manager, System Open Market Account
1 The Federal Open Market Committee is referenced as the
“FOMC” and the “Committee” in these minutes.
2 Attended through the discussion of developments in financial markets and open market operations.
Lorie K. Logan, Deputy Manager, System Open
Market Account
Ann E. Misback, Secretary, Office of the Secretary,
Board of Governors
Matthew J. Eichner, 2 Director, Division of Reserve
Bank Operations and Payment Systems, Board of
Governors; Michael S. Gibson, Director, Division
of Supervision and Regulation, Board of
Governors; Andreas Lehnert, Director, Division of
Financial Stability, Board of Governors
Daniel M. Covitz, Deputy Director, Division of
Research and Statistics, Board of Governors;
Rochelle M. Edge, Deputy Director, Division of
Monetary Affairs, Board of Governors; Michael T.
Kiley, Deputy Director, Division of Financial
Stability, Board of Governors
Jon Faust, Senior Special Adviser to the Chairman,
Office of Board Members, Board of Governors
Antulio N. Bomfim, Special Adviser to the Chairman,
Office of Board Members, Board of Governors
Brian M. Doyle, Joseph W. Gruber, Ellen E. Meade,
and John M. Roberts, Special Advisers to the
Board, Office of Board Members, Board of
Governors
Linda Robertson, Assistant to the Board, Office of
Board Members, Board of Governors
Shaghil Ahmed and Christopher J. Erceg, Senior
Associate Directors, Division of International
Finance, Board of Governors; Eric M. Engen,
Senior Associate Director, Division of Research
and Statistics, Board of Governors; Gretchen C.
Weinbach,3 Senior Associate Director, Division of
Monetary Affairs, Board of Governors
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Edward Nelson, Senior Adviser, Division of Monetary
Affairs, Board of Governors
Marnie Gillis DeBoer, 3 David López-Salido, and Min
Wei, Associate Directors, Division of Monetary
Affairs, Board of Governors; John J. Stevens,
Associate Director, Division of Research and
Statistics, Board of Governors
Steven A. Sharpe, Deputy Associate Director, Division
of Research and Statistics, Board of Governors;
Jeffrey D. Walker,2 Deputy Associate Director,
Division of Reserve Bank Operations and Payment
Systems, Board of Governors
Andrew Figura and John Sabelhaus, Assistant
Directors, Division of Research and Statistics,
Board of Governors; Christopher J. Gust, 4 Laura
Lipscomb,3 and Zeynep Senyuz,3 Assistant
Directors, Division of Monetary Affairs, Board of
Governors
Don Kim, Adviser, Division of Monetary Affairs,
Board of Governors
Penelope A. Beattie, 5 Assistant to the Secretary, Office
of the Secretary, Board of Governors
Michele Cavallo,5 Section Chief, Division of Monetary
Affairs, Board of Governors
Mark A. Carlson,2 Senior Economic Project Manager,
Division of Monetary Affairs, Board of Governors
David H. Small, Project Manager, Division of
Monetary Affairs, Board of Governors
Andrea Ajello and Alyssa G. Anderson,3 Principal
Economists, Division of Monetary Affairs, Board
of Governors
Arsenios Skaperdas,3 Economist, Division of Monetary
Affairs, Board of Governors
Donielle A. Winford, Information Management
Analyst, Division of Monetary Affairs, Board of
Governors
3 Attended through the discussion of the long-run monetary
policy implementation frameworks.
Michael Dotsey, Sylvain Leduc, Daniel G. Sullivan,
Geoffrey Tootell, and Christopher J. Waller,
Executive Vice Presidents, Federal Reserve Banks
of Philadelphia, San Francisco, Chicago, Boston,
and St. Louis, respectively
Todd E. Clark, Evan F. Koenig, Antoine Martin, and
Julie Ann Remache,3 Senior Vice Presidents,
Federal Reserve Banks of Cleveland, Dallas, New
York, and New York, respectively
Roc Armenter,3 Kathryn B. Chen,3 Jonathan L. Willis,
and Patricia Zobel,3 Vice Presidents, Federal
Reserve Banks of Philadelphia, New York, Kansas
City, and New York, respectively
Gara Afonso3 and William E. Riordan,3 Assistant Vice
Presidents, Federal Reserve Bank of New York.
Suraj Prasanna3 and Lisa Stowe,3 Markets Officers,
Federal Reserve Bank of New York.
Samuel Schulhofer-Wohl,2 Senior Economist and
Research Advisor, Federal Reserve Bank of
Chicago
Fabrizio Perri, Monetary Advisor, Federal Reserve
Bank of Minneapolis
Long-Run Monetary Policy Implementation
Frameworks
Committee participants resumed their discussion from
the November 2018 FOMC meeting of potential longrun frameworks for monetary policy implementation.
At the December meeting, the staff provided a set of
briefings that considered various issues related to the
transition to a long-run operating regime with lower levels of excess reserves than at present and to a long-run
composition of the balance sheet.
The staff noted that during the transition to a long-run
operating regime with excess reserves below current levels, the effective federal funds rate (EFFR) could begin
to rise a little above the interest on excess reserves
(IOER) rate as reserves in the banking system declined
gradually to a level that the Committee judges to be most
appropriate for efficient and effective implementation of
policy. This upward movement in the federal funds rate
Attended the discussion of financial developments and open
market operations through the close of the meeting.
5 Attended Tuesday session only.
4
Minutes of the Meeting of December 18–19, 2018
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could be gradual. However, the staff noted that the federal funds rate and other money market rates could possibly become somewhat volatile at times as banks and
financial markets adjusted to lower levels of reserve balances. Were upward pressures on the federal funds rate
to emerge, it could be challenging to distinguish between
pressures that were transitory and likely to abate as financial institutions adjust and those that were more persistent and associated with aggregate reserve scarcity.
The staff reported on the monitoring of conditions in
money markets as well as various survey and market outreach activities that could assist in detecting reserve scarcity. The staff reviewed a number of steps that the Federal Reserve could take to ensure effective monetary policy implementation were upward pressures on the federal funds rate and other money market rates to emerge.
These steps included lowering the IOER rate further
within the target range, using the discount window to
support the efficient distribution of reserves, and slowing or smoothing the pace of reserve decline through
open market operations or through slowing portfolio redemptions. The staff also discussed new ceiling tools
that could help keep the EFFR within the Committee’s
target range, including options that would add new
counterparties for the Open Market Desk’s operations.
The staff also provided a review of the liabilities on the
Federal Reserve’s balance sheet; the review described the
factors that influence the size of reserve and nonreserve
liabilities and discussed the increase in the size of these
liabilities since the financial crisis. Additionally, the staff
outlined various issues related to the long-run composition of the System Open Market Account (SOMA) portfolio, including the maturity composition of the portfolio’s Treasury securities and the management of residual
holdings of agency mortgage-backed securities (MBS)
after the Committee has normalized the size of the balance sheet.
In discussing the transition to a long-run operating regime, participants commented on the advantages and
disadvantages of allowing reserves to decline to a level
that could put noticeable upward pressure on the federal
funds rate, at least for a time. Reducing reserves close
to the lowest level that still corresponded to the flat portion of the reserve demand curve would be one approach consistent with the Committee’s previously
stated intention, in the Policy Normalization Principles
and Plans that it issued in 2014, to “hold no more securities than necessary to implement monetary policy efficiently and effectively.” However, reducing reserves to
a point very close to the level at which the reserve de-
mand curve begins to slope upward could lead to a significant increase in the volatility in short-term interest
rates and require frequent sizable open market operations or new ceiling facilities to maintain effective interest rate control. These considerations suggested that it
might be appropriate to instead provide a buffer of reserves sufficient to ensure that the Federal Reserve operates consistently on the flat portion of the reserve demand curve so as to promote the efficient and effective
implementation of monetary policy.
Participants discussed options for maintaining control of
interest rates should upward pressures on money market
rates emerge during the transition to a regime with lower
excess reserves. Several participants commented on options that rely on existing or currently used tools, such
as further technical adjustments to the IOER rate to
keep the federal funds rate within the target range or using the discount window, although such options were
recognized to have limitations in some situations. Some
participants commented on the possibility of slowing the
pace of the decline in reserves in approaching the longerrun level of reserves. Standard temporary open market
operations could be used for this purpose. In addition,
participants discussed options such as ending portfolio
redemptions with a relatively high level of reserves still
in the system and then either maintaining that level of
reserves or allowing growth in nonreserve liabilities to
very gradually reduce reserves further. These approaches could allow markets and banks more time to
adjust to lower reserve levels while maintaining effective
control of interest rates. Several participants, however,
expressed concern that a slowing of redemptions could
be misinterpreted as a signal about the stance of monetary policy. Some participants expressed an interest in
learning more about possible options for new ceiling
tools to provide firmer control of the policy rate.
Participants commented on the role that the Federal Reserve’s nonreserve liabilities have played in the expansion of the Federal Reserve’s balance sheet since the financial crisis. Many participants noted that the magnitudes of these nonreserve liabilities—most significantly
currency but also liabilities to the Treasury through the
Treasury General Account and liabilities to foreign official institutions through their accounts at the Federal Reserve—are not closely related to Federal Reserve monetary policy decisions. They also remarked that the size
of the Federal Reserve’s balance sheet was expected to
increase over time as the growth of these liabilities
roughly tracks the growth of nominal gross domestic
product (GDP). Additionally, participants cited the social benefits provided by these liabilities to the economy.
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Participants considered it important to present information on the Federal Reserve’s balance sheet to the
public in ways that communicated these facts. In discussing the long-run level of reserve liabilities, participants noted that it might be useful to explore ways to
encourage banks to reduce their demand for reserves
and to provide information to banks and the public
about the likely long-run level of reserves.
Participants commented on a number of issues related
to the long-run composition of the SOMA portfolio.
With regard to the portfolio of Treasury securities, participants discussed the advantages of different portfolio
maturity compositions. Several participants noted that a
portfolio of holdings weighted toward shorter maturities
would provide greater flexibility to lengthen maturity if
warranted by an economic downturn, while a couple of
others noted that a portfolio with maturities that
matched the outstanding Treasury market would have a
more neutral effect on the market. With regard to the
MBS portfolio, participants noted that the passive runoff of MBS holdings through principal paydowns would
continue for many years after the size of the balance
sheet had been normalized. Several participants commented on the possibility of reducing agency MBS holdings somewhat more quickly than the passive approach
by implementing a program of very gradual MBS sales
sometime after the size of the balance sheet had been
normalized.
Participants expected to continue their discussion of
long-run implementation frameworks and related issues
at upcoming meetings. They reiterated the importance
of communicating clearly on the rationale for any decision made on the implementation framework.
Developments in Financial Markets and Open Market Operations
The SOMA manager reviewed developments in financial
markets over the intermeeting period. Asset prices were
volatile in recent weeks, reportedly reflecting a pullback
from risk-taking by investors. In part, the deterioration
in risk sentiment appeared to stem importantly from uncertainty about the state of trade negotiations between
China and the United States. In addition, investors
pointed to concerns about the global growth outlook,
the unsettled state of Brexit negotiations, and uncertainties about the political situation in Europe.
Against this backdrop, U.S. stock prices were down
nearly 8 percent on the period. Risk spreads on corporate bonds widened appreciably, with market participants reportedly focusing on the potential implications
of downside risks to the U.S. economic outlook for the
financial condition of companies, particularly for companies at the lower end of the investment-grade spectrum. Treasury yields declined significantly, especially at
longer maturities, contributing to some flattening of the
Treasury yield curve. Based on readings from Treasury
Inflation-Protected Securities (TIPS), the decline in
nominal Treasury yields was associated with a notable
drop in inflation compensation. A sizable decline in oil
prices was cited as an important factor contributing to
the drop in measures of inflation compensation.
The deterioration in market sentiment was accompanied
by a significant downward revision in the expected path
of the federal funds rate based on federal funds futures
quotes. In addition, futures-based measures of policy
expectations moved lower in response to speeches by
Federal Reserve officials. The revision in the expected
policy path was less noticeable in the Desk’s surveybased measures of the expected path of the federal funds
rate. Desk surveys indicated that respondents placed
high odds on a further quarter-point firming in the
stance of monetary policy at the December meeting, but
lower than the near certainty of a rate increase reported
just before previous policy firmings in 2018; survey responses anticipated that the median projected path of
the federal funds rate in the Summary of Economic Projections (SEP) would show only two additional quarterpoint policy firmings next year—down from the three
policy firmings in the median path in the September SEP
results.
The deputy manager followed with a discussion of
money market developments and open market operations. After a fast narrowing of the spread between the
IOER rate and the EFFR before the November meeting, the EFFR had remained stable at, or just 1 basis
point below the level of the IOER rate since then. Some
upward pressures on overnight rates were evident in the
repurchase agreement (repo) market, apparently from
higher issuance of Treasury bills and an associated expansion of primary dealer inventories over the intermeeting period. Banks expanded their lending in repo
markets in light of higher repo rates relative to the IOER
rate; the willingness of banks to lend in repo markets
suggested that the reserve supply was still ample. The
deputy manager noted the results of the recent Desk surveys of primary dealers and market participants indicating an increase in the median respondent’s estimate of
the long-run level of reserve balances to a level closer to
that implied by banks’ responses in the Senior Financial
Officer Survey conducted in advance of the November
FOMC meeting. The deputy manager also reported on
paydowns on the SOMA securities holdings. Under the
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baseline outlook, prepayments of principal on agency
MBS would remain below the $20 billion redemption
cap for the foreseeable future. However, if longer-term
interest rates moved substantively lower than assumed
in the baseline, some modest reinvestments in MBS
could occur for a few months next year concurrent with
the pickup in seasonal turnover.
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 December 18–19
meeting indicated that labor market conditions continued to strengthen in recent months and that real GDP
growth was strong. Consumer price inflation, as measured by the 12-month percentage change in the price index for personal consumption expenditures (PCE), was
2 percent in October. Survey-based measures of longerrun inflation expectations were little changed on balance.
Total nonfarm payroll employment expanded further in
November, and job gains were strong, on average, over
recent months. The national unemployment rate remained at a very low level of 3.7 percent, and both the
labor force participation rate and the employment-topopulation ratio also stayed flat in November. The unemployment rates for African Americans, Asians, and
Hispanics in November were below their levels at the
end of the previous economic expansion. The share of
workers employed part time for economic reasons was
still close to the lows reached in late 2007. The rates of
private-sector job openings and quits were both still at
high levels in October; initial claims for unemployment
insurance benefits in early December were still close to
historically low levels. Total labor compensation per
hour in the nonfarm business sector—a volatile measure
even on a four-quarter change basis—increased 2.2 percent over the four quarters ending in the third quarter.
Average hourly earnings for all employees rose 3.1 percent over the 12 months ending in November.
Industrial production expanded, on net, over October
and November. Output increased in the mining and utilities sectors, while manufacturing production edged
down on balance. Automakers’ assembly schedules suggested that production of light motor vehicles would rise
in December, and new orders indexes from national and
regional manufacturing surveys pointed to moderate
gains in total factory output in the coming months.
Household spending continued to increase at a strong
pace in recent months. Real PCE growth was brisk in
October, and the components of the nominal retail sales
used by the Bureau of Economic Analysis to construct
its estimate of PCE rose considerably in November.
The pace of light motor vehicle sales edged down in November but stayed near its recent elevated level. Key
factors that influence consumer spending—including
ongoing gains in real disposable personal income and the
effects of earlier increases in equity prices and home values on households’ net worth—continued to be supportive of solid real PCE growth in the near term. Consumer sentiment, as measured by the University of
Michigan Surveys of Consumers, remained relatively upbeat through early December.
Real residential investment appeared to be declining further in the fourth quarter, likely reflecting in part the effects of the rise in mortgage interest rates over the past
year on the affordability of housing. Starts of new single-family homes decreased in October and November,
although starts of multifamily units rose sharply in November. Building permit issuance for new single-family
homes, which tends to be a good indicator of the underlying trend in construction of such homes, moved down
modestly over recent months. Sales of new homes declined markedly in October, although existing home
sales increased modestly.
Growth in real private expenditures for business equipment and intellectual property looked to be picking up
solidly in the fourth quarter after moderating in the previous quarter. Nominal shipments of nondefense capital
goods excluding aircraft moved up in October.
Forward-looking indicators of business equipment
spending—such as a rising backlog of unfilled orders for
nondefense capital goods excluding aircraft and upbeat
readings on business sentiment—pointed to further
spending gains in the near term. Nominal business expenditures for nonresidential structures outside of the
drilling and mining sector declined modestly in October,
while the number of crude oil and natural gas rigs in operation—an indicator of business spending for structures in the drilling and mining sector—held about
steady in November through early December.
Total real government purchases appeared to be rising
moderately in the fourth quarter. Nominal defense
spending in October and November pointed to solid
growth in real federal purchases. Real purchases by state
and local governments looked to be only edging up, as
nominal construction spending by these governments
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rose solidly in October but their payrolls declined a little
in October and November.
The nominal U.S. international trade deficit widened
slightly in October. Exports declined a little, with decreases in exports of agricultural products and capital
goods, although exports of industrial supplies increased.
Imports rose a bit, with increases in imports of consumer goods and automotive products, but imports of
capital goods declined sharply from September’s elevated level. Available trade data suggested that the contribution of the change in net exports to the rate of real
GDP growth in the fourth quarter would be much less
negative than the drag of nearly 2 percentage points in
the third quarter.
Total U.S. consumer prices, as measured by the PCE
price index, increased 2 percent over the 12 months ending in October. Core PCE price inflation, which excludes changes in consumer food and energy prices, was
1.8 percent over that same period. The consumer price
index (CPI) rose 2.2 percent over the 12 months ending
in November, and core CPI inflation was also 2.2 percent. Recent readings on survey-based measures of
longer-run inflation expectations—including those from
the Michigan survey, the Survey of Professional Forecasters, and the Desk’s Survey of Primary Dealers and
Survey of Market Participants—were little changed on
balance.
Foreign economic growth continued at a moderate pace
in the third quarter, as a pickup in emerging market
economies (EMEs) roughly offset slowing growth in advanced foreign economies (AFEs). Among EMEs,
growth in Mexico and Brazil bounced back from transitory second-quarter weakness, more than offsetting a
slowdown in China and India. The softness in AFE
growth partly reflected temporary factors, including disruptions from natural disasters in Japan and the adoption of new car emissions testing in Germany. Indicators for economic activity in the fourth quarter were
consistent with continued moderate foreign economic
growth. Foreign inflation fell in recent months, largely
reflecting a significant drag from lower oil prices. Underlying inflation pressures, especially in some AFEs, remained muted.
Staff Review of the Financial Situation
Investors’ perceptions of downside risks to the domestic
and global outlook appeared to increase over the intermeeting period, reportedly driven in part by signs of
slowing in foreign economies and growing concerns
over escalating trade frictions. Both nominal U.S. Treasury yields and U.S. equity prices declined notably over
the period. Financing conditions for businesses and
households tightened a bit but generally remained supportive of economic growth.
Remarks by Federal Reserve officials over the intermeeting period were interpreted by market participants as signaling a shift in the stance of policy toward a more gradual path of federal funds rate increases. The marketimplied path for the federal funds rate for 2019 and 2020
shifted down markedly, while the market-implied probability for a rate hike at the December FOMC meeting
declined slightly though remained high.
Nominal Treasury yields fell considerably over the period, with the declines most pronounced in longer-dated
maturities and contributing to a flattening of the yield
curve. The spread between 10- and 2-year nominal
Treasury yields narrowed to near the 20th percentile of
its distribution since 1971. Investor perceptions of increased downside risks to the outlooks for domestic and
foreign economic growth, including growing concerns
over trade frictions between the United States and
China, reportedly weighed on yields. Measures of inflation compensation derived from TIPS also decreased
notably over the period along with the declines in oil
prices.
Concerns over escalating trade tensions, global growth
prospects, and the sustainability of corporate earnings
growth were among the factors that appeared to contribute to a significant drop in U.S. equity prices. The declines were largest in the technology and retail sectors.
One-month option-implied volatility on the S&P 500 index—the VIX—increased over the period and corporate credit spreads widened, consistent with the selloff in
equities.
Over the intermeeting period, foreign financial markets
were affected by perceived increases in downside risks
to the global growth outlook and ongoing uncertainty
about trade relations between the United States and
China. Investors also focused on the state of negotiations over Brexit and the Italian government budget deficit. Equity markets in AFEs posted notable declines,
and Europe-dedicated bond and equity funds reported
strong outflows. Equity declines in EMEs were more
modest, and emerging market funds received modest inflows on net.
AFE sovereign yields declined significantly, reflecting
decreases in U.S. bond yields and weaker-than-expected
euro-area and U.K. economic data. Measures of inflation compensation generally fell, partly reflecting sharp
decreases in oil prices. Spreads of Italian sovereign
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yields over German counterparts narrowed amid progress on budget negotiations between the Italian government and the European Commission. The U.S. dollar
appreciated modestly; although declines in U.S. yields
weighed on the dollar, deteriorating global risk sentiment provided support. Ongoing uncertainty about the
passage of a Brexit withdrawal agreement put downward
pressure on the exchange value of the British pound.
Short-term funding markets functioned smoothly over
the intermeeting period. Elevated levels of Treasury bills
outstanding have continued to put upward pressure on
money market rates. The EFFR held steady at or very
close to the level of the IOER rate, while take-up in the
overnight reverse repo facility remained near historically
low levels. In offshore funding markets, the one-month
foreign exchange swap basis for most major currencies
increased, consistent with typical year-end pressures.
Financing conditions for nonfinancial firms remained
accommodative, on net, though funding conditions for
capital markets tightened somewhat as spreads on nonfinancial corporate bonds widened to near the middle of
their historical distribution. Gross issuance of corporate
bonds also moderated in November, driven by a significant step-down in speculative-grade bond issuance,
while institutional leveraged loan issuance also slowed in
November. Small business credit market conditions
were little changed, and credit conditions in municipal
bond markets stayed accommodative on net.
Private-sector analysts revised down their projections
for year-ahead corporate earnings a bit. In many cases,
nonfinancial firms’ earnings reports suggested that tariffs were a salient concern in the changed outlook for
corporate earnings. The pace of gross equity issuance
through both seasoned and initial offerings moderated,
consistent with the weakness and volatility in the stock
market.
In the commercial real estate (CRE) sector, financing
conditions remained accommodative. Commercial
mortgage-backed securities (CMBS) spreads widened
slightly over the intermeeting period but remained near
post-crisis lows. Issuance of non-agency CMBS was stable while CRE loan growth remained strong at banks.
Financing conditions in the residential mortgage market
also remained accommodative for most borrowers, but
the demand for mortgage credit softened. Purchase
mortgage origination activity declined modestly, while
refinance activity remained muted.
Financing conditions in consumer credit markets also remained accommodative. Broad consumer credit grew at
a solid pace through September, though October and
November saw credit card growth at banks edge a bit
lower on average. Conditions in the consumer assetbacked securities market remained stable over the intermeeting period with slightly higher spreads and robust
issuance.
Staff Economic Outlook
With some stronger-than-expected incoming data on
economic activity and the recent tightening in financial
conditions, particularly the decline in equity prices, the
U.S. economic forecast prepared by the staff for the December FOMC meeting was little revised on balance.
The staff continued to expect that real GDP growth
would be strong in the fourth quarter of 2018, although
somewhat slower than the rapid pace of growth in the
previous two quarters. Over the 2018–20 period, real
GDP was forecast to rise at a rate above the staff’s estimate of potential output growth and then slow to a pace
below it in 2021. The unemployment rate was projected
to decline further below the staff’s estimate of its longerrun natural rate but to bottom out by 2020 and begin to
edge up in 2021. With labor market conditions already
tight, the staff continued to assume that projected employment gains would manifest in smaller-than-usual
downward pressure on the unemployment rate and in
larger-than-usual upward pressure on the labor force
participation rate.
The staff expected both total and core PCE price inflation to be just a touch below 2 percent in 2018, with total
inflation revised down a bit because of recent declines in
consumer energy prices. Core PCE price inflation was
forecast to move up to 2 percent in 2019 and remain at
that level through the medium term; total inflation was
forecast to be a little below core inflation in 2019, reflecting projected declines in energy prices, and then to
run at the same level as core inflation over the following
two years. The staff’s medium-term projections for both
total and core PCE price inflation were little revised on
net.
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
staff also saw the risks to the forecasts for real GDP
growth and the unemployment rate as balanced. On the
upside, household spending and business investment
could expand faster than the staff projected, supported
in part by the tax cuts enacted last year. On the downside, trade policies and foreign economic developments
could move in directions that have significant negative
effects on U.S. economic growth. Risks to the inflation
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projection also were seen as balanced. The upside risk
that inflation could increase more than expected in an
economy that was projected to move further above its
potential was counterbalanced by the downside risk that
longer-term inflation expectations may be lower than
was assumed in the staff forecast.
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,
and inflation for each year from 2018 through 2021 and
over the longer run, based on their individual assessments of the appropriate path for the federal funds rate.
The longer-run 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 SEP, which is an addendum to these minutes.
In their discussion of the economic situation and the
outlook, meeting participants agreed that information
received since the FOMC met in November indicated
that the labor market had continued to strengthen and
that economic activity had been rising at a strong rate.
Job gains had been strong, on average, in recent months,
and the unemployment rate had remained low. Household spending had continued to grow strongly, while
growth of business fixed investment had moderated
from its rapid pace earlier in the year. On a 12-month
basis, both overall inflation and inflation for items other
than food and energy remained near 2 percent. Indicators of longer-term inflation expectations were little
changed on balance.
In assessing the economic outlook, participants noted
the contrast between the strength of incoming data on
economic activity and the concerns about downside
risks evident in financial markets and in reports from
business contacts. Recent readings on household and
business spending, inflation, and labor market conditions were largely in line with participants’ expectations
and indicated continued strength of the economy. By
contrast, financial markets were volatile and conditions
had tightened over the intermeeting period, with sizable
declines in equity prices and notably wider corporate
credit spreads coinciding with a continued flattening of
the Treasury yield curve; in part, these changes in financial conditions appeared to reflect greater concerns
about the global economic outlook. Participants also reported hearing more frequent concerns about the global
economic outlook from business contacts.
After taking into account incoming economic data, information from business contacts, and the tightening of
financial conditions, participants generally revised down
their individual assessments of the appropriate path for
monetary policy and indicated either no material change
or only a modest downward revision in their assessment
of the economic outlook. Economic growth was expected to remain above trend in 2019 and then slow to
a pace closer to trend over the medium term. Participants who downgraded their assessment of the economic outlook pointed to a variety of factors underlying
their assessment, including recent financial market developments, some softening in the foreign economic
growth outlook, or a more pessimistic outlook for
housing-sector activity.
In their discussion of the household sector, participants
generally characterized real PCE growth as remaining
strong. Participants pointed to a number of factors that
were supporting consumer spending, including further
gains in wages and household income reflecting a strong
labor market, expansionary federal tax policies, stillupbeat readings on consumer sentiment, recent declines
in oil prices, and household balance sheets that generally
remained healthy despite tighter financial conditions.
Although household spending overall was seen as
strong, several participants noted continued weakness in
residential investment. This weakness was attributed to
a variety of factors, including increased mortgage rates
and rising home prices. Reports from District contacts
in the auto sector were mixed.
Several participants noted that business fixed investment
remained solid despite a slowdown in the third quarter,
as more recent data pointed to a rebound in investment
spending. Business contacts in several Districts reported
robust activity through the end of 2018 and planned to
follow through or expand on their current capital expenditure projects. However, contacts in a number of
Districts appeared less upbeat than at the time of the
November meeting, as concerns about a variety of factors—including trade policy, waning fiscal stimulus,
slowing global economic growth, or financial market
volatility—were reportedly beginning to weigh on business sentiment. A couple of participants commented
that the recent decline in oil prices could be a sign of a
weakening in global demand that could weigh on capital
spending by oil production companies and affect companies providing services to the oil industry. However,
Minutes of the Meeting of December 18–19, 2018
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_____________________________________________________________________________________________
a couple of participants noted that the recent oil price
decline could also be associated with increasing oil supply rather than softening global demand.
Contacts in the agricultural sector reported that conditions remained depressed, in part because of the effects
of trade policy actions on exports and farm incomes, uncertainty about future trade agreements, and continued
low commodity prices. Banks continued to report a
gradual increase in agricultural loan delinquencies in recent months. Nonetheless, participants cited a few recent favorable developments, including new trade mitigation payments as well as legislative action to maintain
crop insurance that was seen as reducing uncertainty.
Participants agreed that labor market conditions had remained strong. Payrolls continued to grow at an abovetrend rate in November, and measures of labor market
tightness such as rates of job openings and quits continued to be elevated. The unemployment rate remained at
a historically low level in November, and the labor force
participation rate stayed steady, which represented an
improvement relative to its gradual downward-sloping
underlying trend. Several participants observed that labor force participation had been improving for lowskilled workers and for prime-age workers. A couple of
participants saw scope for further improvements in the
labor force participation rate relative to its historical
downward trend, while a couple of others judged that
there was little scope for significant further improvements.
Contacts in many Districts continued to report tight labor markets with difficulties finding qualified workers.
In some cases, firms were responding to these difficulties by using various types of nonwage incentives to attract and retain workers, while in other cases, firms were
responding by raising wages. Many participants observed that, at the national level, most measures of nominal wage growth had risen and were currently at levels
that were broadly in line with trends in productivity
growth and inflation.
Participants observed that both overall and core PCE
price inflation remained near 2 percent on a 12-month
basis, but that core inflation had edged lower in recent
months. A few participants noted that the recent declines in energy prices would likely only temporarily
weigh on headline inflation. Several participants remarked that longer-term TIPS-based inflation compensation had declined notably since November, concurrent
with both falling oil prices and a deterioration in investor
risk sentiment. A few participants pointed to the decline
in longer-term inflation compensation as an indication
that longer-run inflation expectations may have edged
lower, while several others cited survey-based measures
as suggesting that longer-run expectations likely remained anchored. Participants generally continued to
view recent price developments as consistent with their
expectation that inflation would remain near the Committee’s symmetric 2 percent objective on a sustained
basis. Although a few participants pointed to anecdotal
and survey evidence indicating rising input costs and
pass-through of these higher costs to consumer prices,
reports from business contacts and surveys in some
other Districts suggested some moderation in inflationary pressure.
In their discussion of financial developments, participants agreed that financial markets had been volatile and
financial conditions had tightened over the intermeeting
period, as equity prices declined, corporate credit
spreads widened, and the Treasury yield curve continued
to flatten. Some participants commented that these developments may reflect an increased focus among market participants on tail risks such as a sharp escalation of
trade tensions or could be a signal of a significant slowdown in the pace of economic growth in the future. A
couple of participants noted that the tightening in financial conditions so far did not appear to be restraining real
activity, although a more persistent tightening would undoubtedly weigh on business and household spending.
Participants agreed to continue to monitor financial
market developments and assess the implications of
these developments for the economic outlook.
Participants commented on a number of risks associated
with their outlook for economic activity, the labor market, and inflation over the medium term. Various factors
that could pose downside risks for domestic economic
growth and inflation were mentioned, including the possibilities of a sharper-than-expected slowdown in global
economic growth, a more rapid waning of fiscal stimulus, an escalation in trade tensions, a further tightening
of financial conditions, or greater-than-anticipated negative effects from the monetary policy tightening to date.
A few participants expressed concern that longer-run inflation expectations would remain low, particularly if
economic growth slowed more than expected. With regard to upside risks, participants noted that the effects
of fiscal stimulus could turn out to be greater than expected and the uncertainties surrounding trade tensions
or the global growth outlook could be resolved favorably, leading to stronger-than-expected economic outcomes, while a couple of participants suggested that
tightening resource utilization in conjunction with an increase in the ability of firms to pass through increases in
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Federal Open Market Committee
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input costs to consumer prices could generate undesirable upward pressure on inflation. A couple of participants pointed to risks to financial stability stemming
from high levels of corporate borrowing, especially by
riskier firms, and elevated CRE prices. In general, participants agreed that risks to the outlook appeared
roughly balanced, although some noted that downside
risks may have increased of late.
In their consideration of monetary policy at this meeting,
participants generally judged that the economy was
evolving about as anticipated, with real economic activity rising at a strong rate, labor market conditions continuing to strengthen, and inflation near the Committee’s
objective. Based on their current assessments, most participants expressed the view that it would be appropriate
for the Committee to raise the target range for the federal funds rate 25 basis points at this meeting. A few
participants, however, favored no change in the target
range at this meeting, judging that the absence of signs
of upward inflation pressure afforded the Committee
some latitude to wait and see how the data would develop amid the recent rise in financial market volatility
and increased uncertainty about the global economic
growth outlook.
With regard to the outlook for monetary policy beyond
this meeting, participants generally judged that some further gradual increases in the target range for the federal
funds rate would most likely be consistent with a sustained economic expansion, strong labor market conditions, and inflation near 2 percent over the medium
term. With an increase in the target range at this meeting, the federal funds rate would be at or close to the
lower end of the range of estimates of the longer-run
neutral interest rate, and participants expressed that recent developments, including the volatility in financial
markets and the increased concerns about global growth,
made the appropriate extent and timing of future policy
firming less clear than earlier. Against this backdrop,
many participants expressed the view that, especially in
an environment of muted inflation pressures, the Committee could afford to be patient about further policy
firming. A number of participants noted that, before
making further changes to the stance of policy, it was
important for the Committee to assess factors such as
how the risks that had become more pronounced in recent months might unfold and to what extent they would
affect economic activity, and the effects of past actions
to remove policy accommodation, which were likely still
working their way through the economy.
Participants emphasized that the Committee’s approach
to setting the stance of policy should be importantly
guided by the implications of incoming data for the economic outlook. They noted that their expectations for
the path of the federal funds rate were based on their
current assessment of the economic outlook. Monetary
policy was not on a preset course; neither the pace nor
the ultimate endpoint of future rate increases was
known. If incoming information prompted meaningful
reassessments of the economic outlook and attendant
risks, either to the upside or the downside, their policy
outlook would change. Various factors, such as the recent tightening in financial conditions and risks to the
global outlook, on the one hand, and further indicators
of tightness in labor markets and possible risks to financial stability from a prolonged period of tight resource
utilization, on the other hand, were noted in this context.
Participants discussed ideas for effectively communicating to the public the Committee’s data-dependent approach, including options for transitioning away from
forward guidance language in future postmeeting statements. Several participants expressed the view that it
might be appropriate over upcoming meetings to remove forward guidance entirely and replace it with language emphasizing the data-dependent nature of policy
decisions.
Participants supported a plan to implement another
technical adjustment to the IOER rate that would place
it 10 basis points below the top of the target range for
the federal funds rate. This adjustment would foster
trading in the federal funds market at rates well within
the FOMC’s target range.
Committee Policy Action
In their discussion of monetary policy for the period
ahead, members judged that information received since
the Committee met in November indicated that the labor market had continued to strengthen and that economic activity had been rising at a strong rate. Job gains
had been strong, on average, in recent months, and the
unemployment rate had remained low. Household
spending had continued to grow strongly, while growth
of business fixed investment had moderated from its
rapid pace earlier in the year. On a 12-month basis, both
overall inflation and inflation for items other than food
and energy remained near 2 percent. Indicators of
longer-term inflation expectations were little changed,
on balance.
Members generally judged that the economy had been
evolving about as they had anticipated at the previous
meeting. Though financial conditions had tightened and
Minutes of the Meeting of December 18–19, 2018
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global growth had moderated, members generally anticipated that growth would remain above trend and the
labor market would remain strong. Members judged
that some further gradual increases in the target range
for the federal funds rate would be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term.
After assessing current conditions and the outlook for
economic activity, the labor market, and inflation, members decided to raise the target range for the federal
funds rate to 2¼ to 2½ percent. Members agreed that
the timing and size of future adjustments to the target
range for the federal funds rate would depend on their
assessment of realized and expected economic conditions relative to the Committee’s maximum employment
and symmetric 2 percent inflation objectives. They reiterated that 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. More generally, members
noted that decisions regarding near-term adjustments of
the stance of monetary policy would appropriately remain dependent on the evolution of the outlook as informed by incoming data.
With regard to the postmeeting statement, members
agreed to modify the phrase “the Committee expects
that further gradual increases” to read “the Committee
judges that some further gradual increases.” The use of
the word “judges” in the revised phrase was intended to
better convey the data-dependency of the Committee’s
decisions regarding the future stance of policy; the reference to “some” further gradual increases was viewed
as helping indicate that, based on current information,
the Committee judged that a relatively limited amount of
additional tightening likely would be appropriate. While
members judged that the risks to the economic outlook
were roughly balanced, they decided that recent developments warranted emphasizing that the Committee
would “continue to monitor global economic and financial developments and assess their implications for the
economic outlook.”
At the conclusion of the discussion, the Committee
voted to authorize and direct the Federal Reserve Bank
of New York, until 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 December 20, 2018, 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 2¼ to 2½ 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 2.25 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 at auction the amount of principal
payments from the Federal Reserve’s holdings
of Treasury securities maturing during each calendar month that exceeds $30 billion, and to
continue reinvesting in agency mortgagebacked securities the amount of principal payments from the Federal Reserve’s holdings of
agency debt and agency mortgage-backed securities received during each calendar month that
exceeds $20 billion. Small deviations from
these amounts for operational reasons are acceptable.
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 November indicates
that the labor market has continued to
strengthen and that economic activity has been
rising at a strong rate. Job gains have been
strong, on average, in recent months, and the
unemployment rate has remained low. Household spending has continued to grow strongly,
while growth of business fixed investment has
moderated from its rapid pace earlier in the year.
On a 12-month basis, both overall inflation and
inflation for items other than food and energy
remain near 2 percent. Indicators of longerterm inflation expectations are little changed, on
balance.
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Federal Open Market Committee
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Consistent with its statutory mandate, the Committee seeks to foster maximum employment
and price stability. The Committee judges that
some further gradual increases in the target
range for the federal funds rate will be consistent with sustained expansion of economic
activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term. The
Committee judges that risks to the economic
outlook are roughly balanced, but will continue
to monitor global economic and financial developments and assess their implications for the
economic outlook.
In view of realized and expected labor market
conditions and inflation, the Committee decided to raise the target range for the federal
funds rate to 2¼ to 2½ percent.
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
maximum employment objective and its symmetric 2 percent inflation objective. 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 taking this action, the Board approved requests to establish that rate submitted by the boards of directors of the Federal Reserve Banks of Boston, Cleveland, Richmond, Atlanta,
Chicago, and San Francisco. This vote also encompassed approval by the Board of Governors of the establishment of a
3.00 percent primary credit rate by the remaining Federal Reserve Banks, effective on the later of December 20, 2018, and
the date such Reserve Banks informed the Secretary of the
Board of such a request. (Secretary’s note: Subsequently, the
6
Voting for this action: Jerome H. Powell, John C.
Williams, Thomas I. Barkin, Raphael W. Bostic, Michelle
W. Bowman, Lael Brainard, Richard H. Clarida, Mary C.
Daly, Loretta J. Mester, and Randal K. Quarles.
Voting against this action: None.
To support the Committee’s decision to raise the target
range for the federal funds rate, the Board of Governors
voted unanimously to raise the interest rates on required
and excess reserve balances to 2.40 percent, effective
December 20, 2018. The Board of Governors also
voted unanimously to approve a ¼ percentage point increase in the primary credit rate (discount rate) to
3.00 percent, effective December 20, 2018. 6
It was agreed that the next meeting of the Committee
would be held on Tuesday–Wednesday, January 29–30,
2019. The meeting adjourned at 10:50 a.m. on December 19, 2018.
Notation Vote
By notation vote completed on November 28, 2018, the
Committee unanimously approved the minutes of the
Committee meeting held on November 7–8, 2018.
_______________________
James A. Clouse
Secretary
Federal Reserve Banks of New York, Philadelphia, St. Louis,
Minneapolis, Kansas City, and Dallas were informed by the
Secretary of the Board’s approval of their establishment of a
primary credit rate of 3.00 percent, effective December 20,
2018.) The second vote of the Board also encompassed approval of the establishment of the interest rates for secondary
and seasonal credit under the existing formulas for computing
such rates.
Page 1
_____________________________________________________________________________________________
Summary of Economic Projections
In conjunction with the Federal Open Market Committee (FOMC) meeting held on December 18–19, 2018,
meeting participants submitted their projections of the
most likely outcomes for real gross domestic product
(GDP) growth, the unemployment rate, and inflation for
each year from 2018 to 2021 and over the longer run. 1
Each participant’s projections were based on information available at the time of the meeting, together with
his or her assessment of appropriate monetary policy—
including a path for the federal funds rate and its longerrun value—and assumptions about other 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. 2 “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
statutory mandate to promote maximum employment
and price stability.
All participants who submitted longer-run projections
expected that, under appropriate monetary policy,
growth in real GDP in 2019 would run somewhat above
their individual estimate of its longer-run rate. Most participants continued to expect real GDP growth to slow
throughout the projection horizon, with a majority of
participants projecting growth in 2021 to be a little below their estimate of its longer-run rate. Almost all participants who submitted longer-run projections continued to expect that the unemployment rate would run below their estimate of its longer-run level through 2021.
Most participants projected that inflation, as measured
by the four-quarter percentage change in the price index
for personal consumption expenditures (PCE), would
increase slightly over the next two years, and nearly all
participants expected that it would be at or slightly above
the Committee’s 2 percent objective in 2020 and 2021.
Compared with the Summary of Economic Projections
(SEP) from September, many participants marked down
slightly their projections for real GDP growth and inflation in 2019. Table 1 and figure 1 provide summary statistics for the projections.
Five members of the Board of Governors, one more than in
September 2018, were in office at the time of the December
2018 meeting and submitted economic projections.
1
As shown in figure 2, participants generally continued to
expect that the evolution of the economy, relative to
their objectives of maximum employment and 2 percent
inflation, would likely warrant some further gradual increases in the federal funds rate. Compared with the
September submissions, the median projections for the
federal funds rate for the end of 2019 through 2021 and
over the longer run were a little lower. Most participants
expected that the federal funds rate at the end of 2020
and 2021 would be modestly higher than their estimate
of its level over the longer run; however, many marked
down the extent to which it would exceed their estimate
of the longer-run level relative to their September projections.
On balance, participants continued to view the uncertainty around their projections as broadly similar to the
average of the past 20 years. While most participants
viewed the risks to the outlook as balanced, a couple
more participants than in September saw risks to real
GDP growth as weighted to the downside, and one less
participant viewed the risks to inflation as weighted to
the upside.
The Outlook for Economic Activity
The median of participants’ projections for the growth
rate of real GDP for 2019, conditional on their individual assessment of appropriate monetary policy, was
2.3 percent, slower than the 3.0 percent pace expected
for 2018. Most participants continued to expect GDP
growth to slow throughout the projection horizon, with
the median projection at 2.0 percent in 2020 and at
1.8 percent in 2021, a touch lower than the median estimate of its longer-run rate of 1.9 percent. Relative to the
September SEP, the medians of the projections for real
GDP growth for 2018 and 2019 were slightly lower,
while the median for the longer-run rate of growth was
a bit higher. Several participants mentioned tighter financial conditions or a softer global economic outlook
as factors behind the downward revisions to their nearterm growth estimates.
The median of projections for the unemployment rate in
the fourth quarter of 2019 was 3.5 percent, unchanged
from the September SEP and almost 1 percentage point
below the median assessment of its longer-run normal
level. With participants generally continuing to expect
2 One participant did not submit longer-run projections for
real GDP growth, the unemployment rate, or the federal funds
rate.
1.9
2.0
Core PCE inflation4
September projection
2.9
3.1
2.0
2.1
1.9
2.0
3.5
3.5
3.1
3.4
2.0
2.1
2.1
2.1
3.6
3.5
3.1
3.4
2.0
2.1
2.1
2.1
3.8
3.7
2.8
3.0
2.0
2.0
4.4
4.5
1.8 – 1.9 1.9 – 2.2 2.0 – 2.2 2.0 – 2.3
1.9 – 2.0 2.0 – 2.3 2.0 – 2.2 2.0 – 2.3
1.8 – 1.9 1.8 – 2.2 2.0 – 2.2 2.0 – 2.3
1.9 – 2.2 2.0 – 2.3 2.0 – 2.2 2.0 – 2.3
2.0
2.0
2.4
2.6 – 3.1 2.9 – 3.4 2.6 – 3.1 2.5 – 3.0 2.1 – 2.4 2.4 – 3.1 2.4 – 3.6 2.4 – 3.6 2.5 – 3.5
2.1 – 2.4 2.9 – 3.4 3.1 – 3.6 2.9 – 3.6 2.8 – 3.0 2.1 – 2.4 2.1 – 3.6 2.1 – 3.9 2.1 – 4.1 2.5 – 3.5
1.8 – 1.9 2.0 – 2.1 2.0 – 2.1 2.0 – 2.1
1.9 – 2.0 2.0 – 2.1 2.1 – 2.2 2.0 – 2.2
2.0
2.0
3.5 – 3.7 3.5 – 3.8 3.6 – 3.9 4.2 – 4.5
3.7
3.4 – 4.0 3.4 – 4.3 3.4 – 4.2 4.0 – 4.6
3.4 – 3.6 3.4 – 3.8 3.5 – 4.0 4.3 – 4.6 3.7 – 3.8 3.4 – 3.8 3.3 – 4.0 3.4 – 4.2 4.0 – 4.6
1.8 – 1.9 1.8 – 2.1 2.0 – 2.1 2.0 – 2.1
2.0 – 2.1 2.0 – 2.1 2.1 – 2.2 2.0 – 2.2
3.7
3.7
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 September projections were made in conjunction with the meeting of the Federal Open Market Committee
on September 25–26, 2018. One participant did not submit longer-run projections for the change in real GDP, the unemployment rate, or the federal funds rate in conjunction with
the September 25–26, 2018, meeting, and one participant did not submit such projections in conjunction with the December 18–19, 2018, meeting.
1. For each period, the median is the middle projection when the projections are arranged from lowest to highest. When the number of projections is even, the median is the
average of the two middle projections.
2. The central tendency excludes the three highest and three lowest projections for each variable in each year.
3. The range for a variable in a given year includes all participants’ projections, from lowest to highest, for that variable in that year.
4. Longer-run projections for core PCE inflation are not collected.
Federal funds rate
September projection
2.4
2.4
1.9
2.1
PCE inflation
September projection
Memo: Projected
appropriate policy path
3.7
3.7
Unemployment rate
September projection
Median1
Central tendency2
Range3
Variable
2018 2019 2020 2021 Longer
2018
2019
2020
2021
2018
2019
2020
2021
Longer
Longer
run
run
run
Change in real GDP
3.0
2.3
2.0
1.8
1.9
3.0 – 3.1 2.3 – 2.5 1.8 – 2.0 1.5 – 2.0 1.8 – 2.0 3.0 – 3.1 2.0 – 2.7 1.5 – 2.2 1.4 – 2.1 1.7 – 2.2
September projection 3.1
2.5
2.0
1.8
1.8
3.0 – 3.2 2.4 – 2.7 1.8 – 2.1 1.6 – 2.0 1.8 – 2.0 2.9 – 3.2 2.1 – 2.8 1.7 – 2.4 1.5 – 2.1 1.7 – 2.1
Percent
Table 1. Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents,
under their individual assessments of projected appropriate monetary policy, December 2018
Page 2
Federal Open Market Committee
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Summary of Economic Projections of the Meeting of December 18–19, 2018
Page 3
_____________________________________________________________________________________________
Figure 1. Medians, central tendencies, and ranges of economic projections, 2018–21 and over the longer run
Percent
Change in real GDP
Median of projections
Central tendency of projections
Range of projections
3
Actual
2
1
2013
2014
2015
2016
2017
2018
2019
2020
2021
Longer
run
Percent
Unemployment rate
7
6
5
4
3
2013
2014
2015
2016
2017
2018
2019
2020
2021
Longer
run
Percent
PCE inflation
3
2
1
2013
2014
2015
2016
2017
2018
2019
2020
2021
Longer
run
Percent
Core PCE inflation
3
2
1
2013
2014
2015
2016
2017
2018
2019
2020
2021
Longer
run
Note: Definitions of variables and other explanations are in the notes to table 1. The data for the actual values of
the variables are annual.
Page 4
Federal Open Market Committee
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Figure 2. FOMC participants’ assessments of appropriate monetary policy: Midpoint of target range or target level for
the federal funds rate
Percent
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
2018
2019
2020
2021
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 December 18–19, 2018
Page 5
_____________________________________________________________________________________________
the unemployment rate to bottom out in 2019 or 2020,
the median projections for 2020 and 2021 edged back up
to 3.6 percent and 3.8 percent, respectively. Nevertheless, most participants continued to project that the unemployment rate in 2021 would still be well below their
estimates of its longer-run level. The median estimate of
the longer-run normal rate of unemployment was
slightly lower than in September.
Figures 3.A and 3.B show the distributions of participants’ projections for real GDP growth and the unemployment rate from 2018 to 2021 and in the longer run.
The distributions of individual projections for real GDP
growth for 2019 and 2020 shifted down relative to those
in the September SEP, while the distributions for 2021
and for the longer-run rate of GDP growth were little
changed. The distribution of individual projections for
the unemployment rate in 2019 was a touch more dispersed relative to the distribution of the September projections; the distribution moved slightly higher for 2020,
while the distribution for the longer-run normal rate
shifted toward the lower end of its range.
The Outlook for Inflation
The median of projections for total PCE price inflation
was 1.9 percent in 2019, a bit lower than in the September SEP, while the medians for 2020 and 2021 were
2.1 percent, the same as in the previous projections. The
medians of projections for core PCE price inflation over
the 2019–21 period were 2.0 percent, a touch lower than
in September. Some participants pointed to softer incoming data or recent declines in oil prices as reasons
for shaving their projections for inflation.
Figures 3.C and 3.D provide information on the distributions of participants’ views about the outlook for inflation. On the whole, the distributions of projections
for total PCE price inflation and core PCE price inflation beyond this year either shifted slightly to the left or
were unchanged relative to the September SEP. Most
participants revised down slightly their projections of total PCE price inflation for 2019. All participants expected that total PCE price inflation would be in a range
from 2.0 to 2.3 percent in 2020 and 2021. Most participants projected that core PCE inflation would run at
2.0 to 2.1 percent throughout the projection horizon.
Appropriate Monetary Policy
Figure 3.E shows distributions of participants’ judgments regarding the appropriate target—or midpoint of
the target range—for the federal funds rate at the end of
each year from 2018 to 2021 and over the longer run.
The distributions for 2019 through 2021 were less dis-
persed and shifted slightly toward lower values. Compared with the projections prepared for the September
SEP, the median federal funds rate was 25 basis points
lower over the 2019–21 period. For the end of 2019, the
median of federal funds rate projections was 2.88 percent, consistent with two 25 basis point rate increases
over the course of 2019. Thereafter, the medians of the
projections were 3.13 percent at the end of 2020 and
2021. Most participants expected that the federal funds
rate at the end of 2020 and 2021 would be modestly
higher than their estimate of its level over the longer run;
however, many marked down the extent to which it
would exceed their estimate of the longer-run level relative to their September projections. The median of the
longer-run projections of the federal funds rate was
2.75 percent, 25 basis points lower than in September.
In discussing their projections, many participants continued to express the view that any further increases in
the federal funds rate over the next few years would
likely be gradual. That anticipated pace reflected a few
factors, such as a short-term neutral real interest rate that
is currently low and an inflation rate that has been rising
only gradually to the Committee’s 2 percent objective.
Some participants cited a weaker near-term trajectory for
economic growth or a muted response of inflation to
tight labor market conditions as factors contributing to
the downward revisions in their assessments of the appropriate path for the policy rate.
Uncertainty and Risks
In assessing the appropriate path of the federal funds
rate, FOMC participants take account of the range of
possible economic outcomes, the likelihood of those
outcomes, and the potential benefits and costs should
they occur. As a reference, table 2 provides measures of
forecast uncertainty—based on the forecast errors of
various private and government forecasts over the past
20 years—for real GDP growth, the unemployment
rate, and total PCE price inflation. Those measures are
represented graphically in the “fan charts” shown in the
top panels of figures 4.A, 4.B, and 4.C. The fan charts
display the median SEP projections for the three variables surrounded by symmetric confidence intervals derived from the forecast errors reported in table 2. If the
degree of uncertainty attending these projections is similar to the typical magnitude of past forecast errors and
the risks around the projections are broadly balanced,
then future outcomes of these variables would have
about a 70 percent probability of being within these confidence intervals. For all three variables, this measure of
Page 6
Federal Open Market Committee
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Figure 3.A. Distribution of participants’ projections for the change in real GDP, 2018–21 and over the longer run
Number of participants
2018
18
16
14
12
10
8
6
4
2
December projections
September projections
1.2 1.3
1.4 1.5
1.6 1.7
1.8 1.9
2.0 2.1
2.2 2.3
2.4 2.5
2.6 2.7
2.8 2.9
3.0 3.1
3.2 3.3
Percent range
Number of participants
2019
1.2 1.3
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
2.6 2.7
2.8 2.9
3.0 3.1
3.2 3.3
Percent range
Number of participants
2020
1.2 1.3
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
2.6 2.7
2.8 2.9
3.0 3.1
3.2 3.3
Percent range
Number of participants
2021
1.2 1.3
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
2.6 2.7
2.8 2.9
3.0 3.1
3.2 3.3
Percent range
Number of participants
Longer run
1.2 1.3
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
2.6 2.7
Percent range
Note: Definitions of variables and other explanations are in the notes to table 1.
2.8 2.9
3.0 3.1
3.2 3.3
Summary of Economic Projections of the Meeting of December 18–19, 2018
Page 7
_____________________________________________________________________________________________
Figure 3.B. Distribution of participants’ projections for the unemployment rate, 2018–21 and over the longer run
Number of participants
2018
18
16
14
12
10
8
6
4
2
December projections
September projections
3.0 3.1
3.2 3.3
3.4 3.5
3.6 3.7
3.8 3.9
4.0 4.1
4.2 4.3
4.4 4.5
4.6 4.7
4.8 4.9
5.0 5.1
Percent range
Number of participants
2019
3.0 3.1
18
16
14
12
10
8
6
4
2
3.2 3.3
3.4 3.5
3.6 3.7
3.8 3.9
4.0 4.1
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
2020
3.0 3.1
18
16
14
12
10
8
6
4
2
3.2 3.3
3.4 3.5
3.6 3.7
3.8 3.9
4.0 4.1
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
2021
3.0 3.1
18
16
14
12
10
8
6
4
2
3.2 3.3
3.4 3.5
3.6 3.7
3.8 3.9
4.0 4.1
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
3.0 3.1
18
16
14
12
10
8
6
4
2
3.2 3.3
3.4 3.5
3.6 3.7
3.8 3.9
4.0 4.1
4.2 4.3
4.4 4.5
Percent range
Note: Definitions of variables and other explanations are in the notes to table 1.
4.6 4.7
4.8 4.9
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, 2018–21 and over the longer run
Number of participants
2018
18
16
14
12
10
8
6
4
2
December projections
September projections
1.7 1.8
1.9 2.0
2.1 2.2
2.3 2.4
Percent range
Number of participants
2019
18
16
14
12
10
8
6
4
2
1.7 1.8
1.9 2.0
2.1 2.2
2.3 2.4
Percent range
Number of participants
2020
18
16
14
12
10
8
6
4
2
1.7 1.8
1.9 2.0
2.1 2.2
2.3 2.4
Percent range
Number of participants
2021
18
16
14
12
10
8
6
4
2
1.7 1.8
1.9 2.0
2.1 2.2
2.3 2.4
Percent range
Number of participants
Longer run
18
16
14
12
10
8
6
4
2
1.7 1.8
1.9 2.0
2.1 2.2
Percent range
Note: Definitions of variables and other explanations are in the notes to table 1.
2.3 2.4
Summary of Economic Projections of the Meeting of December 18–19, 2018
Page 9
_____________________________________________________________________________________________
Figure 3.D. Distribution of participants’ projections for core PCE inflation, 2018–21
Number of participants
2018
18
16
14
12
10
8
6
4
2
December projections
September projections
1.7 1.8
1.9 2.0
2.1 2.2
2.3 2.4
Percent range
Number of participants
2019
18
16
14
12
10
8
6
4
2
1.7 1.8
1.9 2.0
2.1 2.2
2.3 2.4
Percent range
Number of participants
2020
18
16
14
12
10
8
6
4
2
1.7 1.8
1.9 2.0
2.1 2.2
2.3 2.4
Percent range
Number of participants
2021
18
16
14
12
10
8
6
4
2
1.7 1.8
1.9 2.0
2.1 2.2
Percent range
Note: Definitions of variables and other explanations are in the notes to table 1.
2.3 2.4
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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, 2018–21 and over the longer run
Number of participants
2018
18
16
14
12
10
8
6
4
2
December projections
September projections
1.88 2.12
2.13 2.37
2.38 2.62
2.63 2.87
2.88 3.12
3.13 3.37
3.38 3.62
3.63 3.87
3.88 4.12
4.13 4.37
4.38 4.62
4.63 4.87
4.88 5.12
Percent range
Number of participants
2019
1.88 2.12
18
16
14
12
10
8
6
4
2
2.13 2.37
2.38 2.62
2.63 2.87
2.88 3.12
3.13 3.37
3.38 3.62
3.63 3.87
3.88 4.12
4.13 4.37
4.38 4.62
4.63 4.87
4.88 5.12
Percent range
Number of participants
2020
1.88 2.12
18
16
14
12
10
8
6
4
2
2.13 2.37
2.38 2.62
2.63 2.87
2.88 3.12
3.13 3.37
3.38 3.62
3.63 3.87
3.88 4.12
4.13 4.37
4.38 4.62
4.63 4.87
4.88 5.12
Percent range
Number of participants
2021
1.88 2.12
18
16
14
12
10
8
6
4
2
2.13 2.37
2.38 2.62
2.63 2.87
2.88 3.12
3.13 3.37
3.38 3.62
3.63 3.87
3.88 4.12
4.13 4.37
4.38 4.62
4.63 4.87
4.88 5.12
Percent range
Number of participants
Longer run
1.88 2.12
18
16
14
12
10
8
6
4
2
2.13 2.37
2.38 2.62
2.63 2.87
2.88 3.12
3.13 3.37
3.38 3.62
3.63 3.87
3.88 4.12
4.13 4.37
Percent range
Note: Definitions of variables and other explanations are in the notes to table 1.
4.38 4.62
4.63 4.87
4.88 5.12
Summary of Economic Projections of the Meeting of December 18–19, 2018
Page 11
_____________________________________________________________________________________________
Table 2. Average historical projection error ranges
Percentage points
2018
2019
2020
2021
Change in real GDP1 . . . . . . ±0.8
Variable
±1.6
±2.1
±2.1
Unemployment
rate1
±0.1
±0.8
±1.5
±1.9
Total consumer
prices2
±0.2
±1.0
±1.0
±1.0
. . . ±0.1
±1.4
±2.0
±2.4
Short-term interest
......
....
rates3
NOTE: Error ranges shown are measured as plus or minus the
root mean squared error of projections for 1998 through 2017 that
were released in the winter 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, consumer prices, and the federal
funds rate 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 (2017), “Gauging the Uncertainty of the Economic
Outlook Using Historical Forecasting Errors: The Federal Reserve’s
Approach,” Finance and Economics Discussion Series 2017-020
(Washington: Board of Governors of the Federal Reserve System,
February), https://dx.doi.org/10.17016/FEDS.2017.020.
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. Projections are percent changes on a fourth quarter to
fourth quarter basis.
3. For Federal Reserve staff forecasts, measure is the federal funds
rate. For other forecasts, measure is the rate on 3-month Treasury
bills. Projection errors are calculated using average levels, in percent,
in the fourth quarter.
uncertainty is substantial and generally increases as the
forecast horizon lengthens.
Participants’ assessments of the level of uncertainty surrounding their individual economic projections are
shown in the bottom-left panels of figures 4.A, 4.B, and
4.C. Participants generally continued to view the degree
of uncertainty attached to their economic projections for
real GDP growth and inflation as broadly similar to the
average of the past 20 years. 3 A couple more participants than in September viewed the uncertainty around
the unemployment rate as higher than average.
Because the fan charts are constructed to be symmetric
around the median projections, they do not reflect any
asymmetries in the balance of risks that participants may
see in their economic projections. Participants’ assessments of the balance of risks to their economic projections are shown in the bottom-right panels of figures 4.A, 4.B, and 4.C. Most participants generally
judged the risks to the outlook for real GDP growth, the
unemployment rate, headline inflation, and core inflation as broadly balanced—in other words, as broadly
At the end of this summary, the box “Forecast Uncertainty”
discusses the sources and interpretation of uncertainty surrounding the economic forecasts and explains the approach
3
consistent with a symmetric fan chart. Two more participants than in September saw the risks to real GDP
growth as weighted to the downside, and one less judged
the risks as weighted to the upside. The balance of risks
to the projection for the unemployment rate was unchanged, with three participants judging the risks to the
unemployment rate as weighted to the downside and
two participants viewing the risks as weighted to the upside. In addition, the balance of risks to the inflation
projections shifted down slightly relative to September,
as one less participant judged the risks to both total and
core inflation as weighted to the upside and one more
participant viewed the risks as weighted to the downside.
In discussing the uncertainty and risks surrounding their
economic projections, participants mentioned trade tensions as well as financial and foreign economic developments as sources of uncertainty or downside risk to the
growth outlook. For the inflation outlook, the effects of
trade restrictions were cited as upside risks and lower energy prices and the stronger dollar as downside risks.
Those who commented on U.S. fiscal policy viewed it as
an additional source of uncertainty and noted that it
might present two-sided risks to the outlook, as its effects could be waning faster than expected or turn out
to be more stimulative than anticipated.
Participants’ assessments of the appropriate future path
of the federal funds rate were also subject to considerable uncertainty. Because the Committee adjusts the federal funds rate in response to actual and prospective developments over time in real GDP growth, the unemployment rate, and inflation, uncertainty surrounding the
projected path for the federal funds rate importantly reflects the uncertainties about the paths for those key economic variables along with other factors. Figure 5 provides a graphical representation of this uncertainty, plotting the median SEP projection for the federal funds rate
surrounded by confidence intervals derived from the results presented in table 2. As with the macroeconomic
variables, the forecast uncertainty surrounding the appropriate path of the federal funds rate is substantial and
increases for longer horizons.
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.A. Uncertainty and risks in projections of GDP growth
Median projection and confidence interval based on historical forecast errors
Percent
Change in real GDP
Median of projections
70% confidence interval
4
3
2
Actual
1
0
2013
2014
2015
2016
2017
2018
2019
2020
2021
FOMC participants’ assessments of uncertainty and risks around their economic projections
Number of participants
Uncertainty about GDP growth
Risks to GDP growth
December projections
September projections
Lower
Broadly
similar
Number of participants
18
16
14
12
10
8
6
4
2
Higher
December projections
September projections
Weighted to
downside
Broadly
balanced
18
16
14
12
10
8
6
4
2
Weighted to
upside
Note: The blue and red lines in the top panel show actual values and median projected values, respectively, of the
percent change in real gross domestic product (GDP) from the fourth quarter of the previous year to the fourth quarter
of the year indicated. The confidence interval around the median projected values is assumed to be symmetric and is
based on root mean squared errors of various private and government forecasts made over the previous 20 years; more
information about these data is available in table 2. Because current conditions may differ from those that prevailed,
on average, over the previous 20 years, the width and shape of the confidence interval estimated on the basis of the
historical forecast errors may not reflect FOMC participants’ current assessments of the uncertainty and risks around
their projections; these current assessments are summarized in the lower panels. Generally speaking, participants who
judge the uncertainty about their projections as “broadly similar” to the average levels of the past 20 years would view
the width of the confidence interval shown in the historical fan chart as largely consistent with their assessments of
the uncertainty about their projections. Likewise, participants who judge the risks to their projections as “broadly
balanced” would view the confidence interval around their projections as approximately symmetric. For definitions of
uncertainty and risks in economic projections, see the box “Forecast Uncertainty.”
Summary of Economic Projections of the Meeting of December 18–19, 2018
Page 13
_____________________________________________________________________________________________
Figure 4.B. Uncertainty and risks in projections of the unemployment rate
Median projection and confidence interval based on historical forecast errors
Percent
Unemployment rate
10
Median of projections
70% confidence interval
9
8
7
6
Actual
5
4
3
2
1
2013
2014
2015
2016
2017
2018
2019
2020
2021
FOMC participants’ assessments of uncertainty and risks around their economic projections
Number of participants
Uncertainty about the unemployment rate
December projections
September projections
Lower
Broadly
similar
Risks to the unemployment rate
18
16
14
12
10
8
6
4
2
Higher
Number of participants
December projections
September projections
Weighted to
downside
Broadly
balanced
18
16
14
12
10
8
6
4
2
Weighted to
upside
Note: The blue and red lines in the top panel show actual values and median projected values, respectively, of
the average civilian unemployment rate in the fourth quarter of the year indicated. The confidence interval around
the median projected values is assumed to be symmetric and is based on root mean squared errors of various private
and government forecasts made over the previous 20 years; more information about these data is available in table 2.
Because current conditions may differ from those that prevailed, on average, over the previous 20 years, the width
and shape of the confidence interval estimated on the basis of the historical forecast errors may not reflect FOMC
participants’ current assessments of the uncertainty and risks around their projections; these current assessments are
summarized in the lower panels. Generally speaking, participants who judge the uncertainty about their projections as
“broadly similar” to the average levels of the past 20 years would view the width of the confidence interval shown in the
historical fan chart as largely consistent with their assessments of the uncertainty about their projections. Likewise,
participants who judge the risks to their projections as “broadly balanced” would view the confidence interval around
their projections as approximately symmetric. For definitions of uncertainty and risks in economic projections, see the
box “Forecast Uncertainty.”
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Federal Open Market Committee
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Figure 4.C. Uncertainty and risks in projections of PCE inflation
Median projection and confidence interval based on historical forecast errors
Percent
PCE inflation
Median of projections
70% confidence interval
3
2
1
Actual
0
2013
2014
2015
2016
2017
2018
2019
2020
2021
FOMC participants’ assessments of uncertainty and risks around their economic projections
Number of participants
Uncertainty about PCE inflation
Risks to PCE inflation
December projections
September projections
Lower
Broadly
similar
Number of participants
18
16
14
12
10
8
6
4
2
Higher
December projections
September projections
Weighted to
downside
Broadly
balanced
Number of participants
Uncertainty about core PCE inflation
Broadly
similar
Weighted to
upside
Number of participants
Risks to core PCE inflation
December projections
September projections
Lower
18
16
14
12
10
8
6
4
2
18
16
14
12
10
8
6
4
2
Higher
December projections
September projections
Weighted to
downside
Broadly
balanced
18
16
14
12
10
8
6
4
2
Weighted to
upside
Note: The blue and red lines in the top panel show actual values and median projected values, respectively, of the
percent change in the price index for personal consumption expenditures (PCE) from the fourth quarter of the previous
year to the fourth quarter of the year indicated. The confidence interval around the median projected values is assumed
to be symmetric and is based on root mean squared errors of various private and government forecasts made over the
previous 20 years; more information about these data is available in table 2. Because current conditions may differ from
those that prevailed, on average, over the previous 20 years, the width and shape of the confidence interval estimated
on the basis of the historical forecast errors may not reflect FOMC participants’ current assessments of the uncertainty
and risks around their projections; these current assessments are summarized in the lower panels. Generally speaking,
participants who judge the uncertainty about their projections as “broadly similar” to the average levels of the past
20 years would view the width of the confidence interval shown in the historical fan chart as largely consistent with their
assessments of the uncertainty about their projections. Likewise, participants who judge the risks to their projections
as “broadly balanced” would view the confidence interval around their projections as approximately symmetric. For
definitions of uncertainty and risks in economic projections, see the box “Forecast Uncertainty.”
Summary of Economic Projections of the Meeting of December 18–19, 2018
Page 15
_____________________________________________________________________________________________
Figure 5. Uncertainty in projections of the federal funds rate
Median projection and confidence interval based on historical forecast errors
Percent
Federal funds rate
Midpoint of target range
Median of projections
70% confidence interval*
6
5
4
3
2
1
Actual
0
2013
2014
2015
2016
2017
2018
2019
2020
2021
Note: The blue and red lines are based on actual values and median projected values, respectively, of the Committee’s target for the federal funds rate at the end of the year indicated. The actual values are the midpoint of the
target range; the median projected values are based on either the midpoint of the target range or the target level.
The confidence interval around the median projected values is based on root mean squared errors of various private
and government forecasts made over the previous 20 years. The confidence interval is not strictly consistent with the
projections for the federal funds rate, primarily because these projections are not forecasts of the likeliest outcomes for
the federal funds rate, but rather projections of participants’ individual assessments of appropriate monetary policy.
Still, historical forecast errors provide a broad sense of the uncertainty around the future path of the federal funds rate
generated by the uncertainty about the macroeconomic variables as well as additional adjustments to monetary policy
that may be appropriate to offset the effects of shocks to the economy.
The confidence interval is assumed to be symmetric except when it is truncated at zero—the bottom of the lowest
target range for the federal funds rate that has been adopted in the past by the Committee. This truncation would
not be intended to indicate the likelihood of the use of negative interest rates to provide additional monetary policy
accommodation if doing so was judged appropriate. In such situations, the Committee could also employ other tools,
including forward guidance and large-scale asset purchases, to provide additional accommodation. Because current
conditions may differ from those that prevailed, on average, over the previous 20 years, the width and shape of the
confidence interval estimated on the basis of the historical forecast errors may not reflect FOMC participants’ current
assessments of the uncertainty and risks around their projections.
* The confidence interval is derived from forecasts of the average level of short-term interest rates in the fourth
quarter of the year indicated; more information about these data is available in table 2. The shaded area encompasses
less than a 70 percent confidence interval if the confidence interval has been truncated at zero.
Page 16
Federal Open Market Committee
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Forecast Uncertainty
The economic projections provided by the members of
the Board of Governors and the presidents of the Federal
Reserve Banks inform discussions of monetary policy among
policymakers and can aid public understanding of the basis
for policy actions. Considerable uncertainty attends these
projections, however. The economic and statistical models
and relationships used to help produce economic forecasts
are necessarily imperfect descriptions of the real world, and
the future path of the economy can be affected by myriad
unforeseen developments and events. Thus, in setting the
stance of monetary policy, participants consider not only
what appears to be the most likely economic outcome as embodied in their projections, but also the range of alternative
possibilities, the likelihood of their occurring, and the potential costs to the economy should they occur.
Table 2 summarizes the average historical accuracy of a
range of forecasts, including those reported in past Monetary
Policy Reports and those prepared by the Federal Reserve
Board’s staff in advance of meetings of the Federal Open
Market Committee (FOMC). The projection error ranges
shown in the table illustrate the considerable uncertainty associated with economic forecasts. For example, suppose a
participant projects that real gross domestic product (GDP)
and total consumer prices will rise steadily at annual rates of,
respectively, 3 percent and 2 percent. If the uncertainty attending those projections is similar to that experienced in the
past and the risks around the projections are broadly balanced, the numbers reported in table 2 would imply a probability of about 70 percent that actual GDP would expand
within a range of 2.2 to 3.8 percent in the current year, 1.4 to
4.6 percent in the second year, and 0.9 to 5.1 percent in the
third and fourth years. The corresponding 70 percent confidence intervals for overall inflation would be 1.8 to 2.2 percent in the current year and 1.0 to 3.0 percent in the second,
third, and fourth years. Figures 4.A through 4.C illustrate
these confidence bounds in “fan charts” that are symmetric
and centered on the medians of FOMC participants’ projections for GDP growth, the unemployment rate, and inflation. However, in some instances, the risks around the projections may not be symmetric. In particular, the unemployment rate cannot be negative; furthermore, the risks around
a particular projection might be tilted to either the upside or
the downside, in which case the corresponding fan chart
would be asymmetrically positioned around the median projection.
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 economic variable is greater than, smaller
than, or broadly similar to typical levels of forecast uncertainty seen in the past 20 years, as presented in table 2 and
reflected in the widths of the confidence intervals shown in
the top panels of figures 4.A through 4.C. Participants’ current assessments of the uncertainty surrounding their projec-
tions are summarized in the bottom-left panels of those figures. 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,
while the symmetric historical fan charts shown in the top
panels of figures 4.A through 4.C imply that the risks to participants’ projections are balanced, participants may judge that
there is a greater risk that a given variable will be above rather
than below their projections. These judgments are summarized in the lower-right panels of figures 4.A through 4.C.
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. The final line in table 2 shows the error ranges
for forecasts of short-term interest rates. They suggest that
the historical confidence intervals associated with projections
of the federal funds rate are quite wide. It should be noted,
however, that these confidence intervals are not strictly consistent with the projections for the federal funds rate, as these
projections are not forecasts of the most likely quarterly outcomes but rather are projections of participants’ individual assessments of appropriate monetary policy and are on an endof-year basis. However, the forecast errors should provide a
sense of the uncertainty around the future path of the federal
funds rate generated by the uncertainty about the macroeconomic variables as well as additional adjustments to monetary
policy that would be appropriate to offset the effects of
shocks to the economy.
If at some point in the future the confidence interval
around the federal funds rate were to extend below zero, it
would be truncated at zero for purposes of the fan chart
shown in figure 5; zero is the bottom of the lowest target
range for the federal funds rate that has been adopted by the
Committee in the past. This approach to the construction of
the federal funds rate fan chart would be merely a convention;
it would not have any implications for possible future policy
decisions regarding the use of negative interest rates to provide additional monetary policy accommodation if doing so
were appropriate. In such situations, the Committee could
also employ other tools, including forward guidance and asset
purchases, to provide additional accommodation.
While figures 4.A through 4.C provide information on
the uncertainty around the economic projections, figure 1
provides information on the range of views across FOMC
participants. A comparison of figure 1 with figures 4.A
through 4.C shows that the dispersion of the projections
across participants is much smaller than the average forecast
errors over the past 20 years.
Cite this document
Federal Reserve (2018, December 18). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_20181219
@misc{wtfs_fomc_minutes_20181219,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {2018},
month = {Dec},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_20181219},
note = {Retrieved via When the Fed Speaks corpus}
}