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Minutes of the Federal Open Market CommitteeSeptember 1718, 2013

A meeting of the Federal Open Market Committee washeld in the offices of the Board of Governors of the

Federal Reserve System in Washington, D.C., on Tues-day, September 17, 2013, at 1:00 p.m. and continued onWednesday, September 18, 2013, at 8:30 a.m.

PRESENT:Ben Bernanke, ChairmanWilliam C. Dudley, Vice ChairmanJames BullardCharles L. EvansEsther L. GeorgeJerome H. PowellEric RosengrenJeremy C. Stein

Daniel K. TarulloJanet L. Yellen

Christine Cumming, Richard W. Fisher, NarayanaKocherlakota, Sandra Pianalto, and Charles I.Plosser, Alternate Members of the Federal OpenMarket Committee

Jeffrey M. Lacker, Dennis P. Lockhart, and John C.Williams, Presidents of the Federal Reserve Banksof Richmond, Atlanta, and San Francisco, respec-tively

Deborah J. Danker, Deputy SecretaryMatthew M. Luecke, Assistant SecretaryDavid W. Skidmore, Assistant SecretaryMichelle A. Smith, Assistant SecretaryScott G. Alvarez, General CounselSteven B. Kamin, EconomistDavid W. Wilcox, Economist

Thomas A. Connors, Troy Davig, Michael P. Leahy,Stephen A. Meyer, Geoffrey Tootell, Christopher J.Waller, and William Wascher, Associate Econo-

mists

Simon Potter, Manager, System Open Market Account

Michael S. Gibson, Director, Division of Banking Su-pervision and Regulation, Board of Governors

Nellie Liang, Director, Office of Financial Stability Pol-icy and Research, Board of Governors

James A. Clouse and William Nelson, Deputy Direc-tors, Division of Monetary Affairs, Board of Gov-

ernors

Jon W. Faust, Special Adviser to the Board, Office ofBoard Members, Board of Governors

Linda Robertson, Assistant to the Board, Office ofBoard Members, Board of Governors

Ellen E. Meade and Joyce K. Zickler, Senior Advisers,Division of Monetary Affairs, Board of Governors

Eric M. Engen, Michael T. Kiley, Thomas Laubach,David E. Lebow, and Michael G. Palumbo, Asso-

ciate Directors, Division of Research and Statistics,Board of Governors; Fabio M. Natalucci, AssociateDirector, Division of Monetary Affairs, Board ofGovernors

Joshua Gallin, Deputy Associate Director, Division ofResearch and Statistics, Board of Governors

Jeremy B. Rudd, Adviser, Division of Research andStatistics, Board of Governors

Christopher J. Gust and Elizabeth Klee, Section Chiefs,

Division of Monetary Affairs, Board of Governors

Gordon Werkema, First Vice President, Federal Re-serve Bank of Chicago

David Altig, Loretta J. Mester, and Harvey Rosen-blum,1 Executive Vice Presidents, Federal ReserveBanks of Atlanta, Philadelphia, and Dallas, respec-tively

Joyce Hansen, Evan F. Koenig, Spencer Krane, LorieK. Logan, Mark E. Schweitzer, John A. Weinberg,

and Kei-Mu Yi, Senior Vice Presidents, FederalReserve Banks of New York, Dallas, Chicago, NewYork, Cleveland, Richmond, and Minneapolis, re-spectively

_______________________1 Attended introductory remarks at Tuesdays session only.

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Chris Burke and Jonathan P. McCarthy, Vice Presi-dents, Federal Reserve Bank of New York

Eric T. Swanson, Senior Research Advisor, FederalReserve Bank of San Francisco

Developments in Financial Markets and the Fed-eral Reserves Balance SheetThe Manager of the System Open Market Accountreported on developments in domestic and foreign fi-nancial markets as well as the System open market op-erations during the period since the Federal Open Mar-ket Committee (FOMC) met on July 3031, 2013. Thereview included a report that the Systems purchases oflonger-term assets did not appear to have had an ad-verse effect on the functioning of the markets forTreasury securities or agency mortgage-backed securi-ties (MBS), and that the Open Market Desks opera-

tions in both sectors had proceeded smoothly. Byunanimous vote, the Committee ratified the Desksdomestic transactions over the intermeeting period.There were no intervention operations in foreign cur-rencies for the Systems account over the intermeetingperiod.

In support of the Committees longer-run planning forimprovements in the implementation of monetary poli-cy, the staff presented an update on the potential forestablishing a fixed-rate, full-allotment overnight re-verse repurchase agreement (RRP) facility. The presen-tation summarized initial discussions with financial

market firms about how such a facility might affectmoney market interest rates and intermediation flows,what the relationship might be between the facility rateand other money market rates, and how the differenttypes of firms might view the facility. Overall, the in-quiries suggested that the facility could be an effectiveadditional tool for managing money market interestrates and helping to support a floor on those rates.Meeting participants discussed the potential role for anovernight RRP facility, the possible effects on the func-tioning of the federal funds market or the structure ofmoney markets, and the usefulness of expanding theDesks test operations in RRPs. Meeting participantsgenerally supported a proposal to authorize the Desk toconduct a limited exercise in order to provide someinsight into the potential usage of an overnight RRPfacility as well as additional experience with operationalaspects of such a facility. One participant, however,preferred that further analysis be undertaken beforeproceeding with the exercise. A number of meetingparticipants emphasized that their interest in these op-

erations reflected an ongoing effort to improve thetechnical execution of policy and did not signal anychange in the Committees views about policy goingforward. Following the discussion, the Committeeunanimously approved the following resolution:

The Federal Open Market Committee(FOMC) authorizes the Federal ReserveBank of New York to conduct a series offixed-rate, overnight reverse repurchase op-erations involving U.S. Government securi-ties, and securities that are direct obligationsof, or fully guaranteed as to principal and in-terest by, any agency of the United States, forthe purpose of assessing operational readi-ness. The reverse repurchase operations au-thorized by this resolution shall be (i) offeredat a fixed rate that may vary from zero to fivebasis points, (ii) offered at up to a capped al-

lotment per counterparty of $1 billion perday and (iii) for an overnight term, or suchlonger term as is warranted to accommodateweekend, holiday, and similar trading con-ventions. The System Open Market AccountManager will inform the FOMC in advanceof the terms of the planned operations.These operations may be announced whenauthorized by the Chairman, may begin whenauthorized by the Chairman on or after Sep-tember 23, 2013, and shall be authorizedthrough the FOMC meeting that ends on

January 29, 2014.Staff Review of the Economic SituationThe information reviewed for the September 1718meeting suggested that economic activity continued toincrease at a moderate rate. Private-sector employmentrose further in July and August, but the unemploymentrate was still elevated. Total consumer price inflationpicked up in recent months but continued to be mod-est, and measures of longer-run inflation expectationsremained stable.

Private nonfarm employment continued to expand inJuly and August, but at a somewhat slower pace than inthe first half of the year, while total government em-ployment edged down on balance. The unemploymentrate declined further to 7.3 percent in August. Thelabor force participation rate also decreased, leaving theemployment-to-population ratio essentially unchangedin recent months. Other indicators of labor marketactivity also were mixed. Measures of firms hiringplans moved up, initial claims for unemployment insur-

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ance declined, and the share of workers employed parttime for economic reasons decreased a little. However,household expectations of the labor market situationdeteriorated somewhat, rates of job openings and grossprivate-sector hiring were little changed, on net, and therate of long-duration unemployment rose slightly.

Manufacturing production increased in August after adecline in July, and the rate of manufacturing capacityutilization was unchanged, on balance, over those twomonths. Automakers schedules indicated that the paceof motor vehicle assemblies would remain roughly flatin the coming months, but broader indicators of manu-facturing production, such as the readings on new or-ders from the national and regional manufacturing sur-veys, pointed to moderate increases in factory output inthe near term.

Real personal consumption expenditures (PCE) were

flat in July. In August, nominal retail sales, excludingthose at motor vehicle and parts outlets, edged up,while sales of light motor vehicles rose notably. Recentinformation on key factors that influence consumerspending were mixed: Households net worth likelyexpanded further as home prices posted additionalgains through July, but real disposable incomes in-creased only a little in July and consumer sentiment inthe Thomson Reuters/University of Michigan Surveysof Consumers moved lower in August and early Sep-tember.

Improvements in housing-sector activity appeared to

slow, possibly reflecting the rise in mortgage rates sincethe spring. Starts and permits of new single-familyhomes moved down in July, but the level of permitissuance was still somewhat above that for starts andpointed to moderate increases in construction in sub-sequent months. In the multifamily sector, both startsand permits rose in July but construction remainedaround the same level as early in the year. Sales of ex-isting homes increased, but new home sales declined.

Growth in real private expenditures for businessequipment and intellectual property products appearedto be subdued going into the third quarter. Nominal

shipments of nondefense capital goods excluding air-craft declined again in July. However, nominal neworders for these capital goods continued to be abovethe level of shipments, pointing to increases in ship-ments in subsequent months, and other forward-looking indicators, such as surveys of business condi-tions, were consistent with moderate gains in spendingfor business equipment in the near term. Nominalbusiness expenditures for nonresidential construction

increased in July but were still at a low level. Recentbook-value data for inventory-sales ratios, along withreadings on inventories from national and regionalmanufacturing surveys, did not point to significant in-ventory imbalances.

Reductions in real federal government purchases ap-peared to persist: Defense spending continued to de-crease in July and August, while federal employmentedged down further. Real state and local governmentpurchases looked to be about flatthe payrolls ofthese governments expanded slightly, on balance, inJuly and August, and state and local construction ex-penditures seemed to be leveling off.

The U.S. international trade deficit narrowed substan-tially in June before widening in July to a level near itssecond-quarter average. Exports expanded in June,with particular strength in industrial supplies and capi-

tal goods, before stepping down somewhat in July.Imports fell in June but then largely recovered in July,driven by swings in imports of oil and consumer goods.

Total U.S. inflation, as measured by the PCE price in-dex through July and by the consumer price indexthrough August, was about 1 percent over the pre-ceding 12-month period for each series. Consumerfood prices only edged up in July and August, whileenergy prices were little changed, on net, over thosetwo months, and retail gasoline prices moved down inthe first half of September. Core consumer price infla-tion, which excludes food and energy, was modest in

July and August. Both near-term and longer-term infla-tion expectations from the Michigan survey were littlechanged in August and early September.

Measures of labor compensation indicated that increas-es in nominal wages were still subdued. Both compen-sation per hour and unit labor costs in the nonfarmbusiness sector rose modestly over the year ending inthe second quarter, as there were only slight gains inproductivity. In July and August, increases in averagehourly earnings for all employees were fairly slow onbalance.

Average foreign economic growth remained muted inthe first half of the year, although there were some no-table divergences across countries. Growth in realgross domestic product (GDP) picked up in the secondquarter in the United Kingdom and remained strong inJapan, recent data suggested that the euro-area econo-my was coming out of recession, and economic indica-tors were positive for China and several other emergingmarket economies (EMEs) in Asia. However, real

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GDP fell in the second quarter in Mexico and deceler-ated notably in India. Foreign inflation was generallysubdued. Monetary policy remained highly accommo-dative in the advanced economies, but some EME cen-tral banks moved toward tighter monetary policy in theface of capital outflows and depreciation pressures. An

exception was the Bank of Mexico, which cut its policyrate in response to economic weakness.

Staff Review of the Financial SituationLonger-term interest rates rose over the intermeetingperiod, while equity prices were fairly volatile but endedthe period modestly higher. The move in interest ratesappeared to be importantly influenced by shifting ex-pectations about monetary policy.

The path of the federal funds rate implied by financialmarket quotes steepened notably during the period, inpart reflecting some increase in uncertainty about the

outlook for monetary policy as indicated by option-implied measures of uncertainty about the future pathof the policy rate. In contrast to market-based quotes,the results from the Desks September survey of pri-mary dealers showed little change in the projected pathof the policy rate relative to that in the July survey.However, the survey also suggested that primary deal-ers marked up somewhat the odds that the FOMCwould begin to cut the pace of asset purchases at itsSeptember meeting, a result generally in line with othersurveys of market participants.

Five- and 10-year Treasury yields increased about

25 basis points over the intermeeting period. Yields oncorporate bonds, agency MBS, and Treasury inflation-protected securities rose about in line with those onnominal Treasury securities.

Conditions in short-term dollar funding markets weregenerally stable during the period since the July FOMCmeeting. Responses to the September Senior CreditOfficer Opinion Survey on Dealer Financing Termssuggested little change over the preceding three monthsin the credit terms applicable to most classes of coun-terparties covered by the survey. A moderate net frac-tion of respondents reported a decline in the use of

financial leverage by hedge funds, and a more substan-tial net fraction reported a decrease in financial leverageused by real estate investment trusts. In response tospecial questions in the survey, dealers indicated that,during the period of heightened volatility beginning inMay and extending into early July, liquidity and func-tioning had deteriorated in a number of fixed-incomemarkets.

Stock prices for financial-sector firms underperformedthe broad equity market somewhat over the intermeet-ing period. However, spreads on credit default swaps(CDS) for the largest bank holding companies re-mained stable at levels near the bottom of their rangeover the past few years.

Credit flows to nonfinancial businesses remained solidin the face of higher longer-term interest rates. Relativeto the typical summer lull, gross issuance of corporatebonds and leveraged loans was robust in August; com-mercial and industrial (C&I) loans on banks bookscontinued to expand moderately, on average, in Julyand August. Commercial real estate (CRE) loans atbanks accelerated over the summer, and issuance ofcommercial mortgage-backed securities remainedstrong despite slightly wider spreads on those securities.

Recent information about household credit was mixed.

Mortgage rates increased further over the intermeetingperiod, and credit standards for mortgage loans re-mained tight. Nonetheless, applications for new mort-gages declined only modestly, apparently supported byimprovements in labor market conditions and somepent-up demand. Higher mortgage rates weighed moreheavily on applications to refinance existing mortgages,which decreased significantly. The pace of home priceappreciation moderated a bit in July, although it wasstill strong. In nonmortgage credit, automobile loansand student loans both continued to expand rapidly,while balances on revolving consumer credit stayedabout flat. Issuance of consumer asset-backed securi-

ties remained robust in July and August.

In the municipal bond market, despite the ongoingbankruptcy proceedings for Detroit and greater scruti-ny of Puerto Ricos fiscal problems, broader marketsentiment was reportedly supported by the lessening inbudget pressures for many other state and local gov-ernments. Gross issuance of long-term municipalbonds was solid in August, and yield ratios on general-obligation municipal bonds over comparable Treasurysecurities were about unchanged, on balance, over theintermeeting period.

Bank credit declined in July and August amid the gen-eral rise in longer-term interest rates. While banksholdings of assets with longer duration, such as resi-dential mortgages, decreased, growth in C&I, CRE, andautomobile loanswhich are more likely to have float-ing interest rates or relatively short maturities, andtherefore less duration risktended to hold up in re-cent months.



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M2 increased significantly in July and August, as theselloff in fixed-income markets that began in May,along with the associated outflows from bond funds,likely continued to support reallocations into liquid M2assets. The monetary base continued to expand rapid-ly, primarily reflecting the rise in reserve balances re-

sulting from the Federal Reserves asset purchases.

Against a backdrop of higher interest rates in the ad-vanced economies and slowing economic growth in theEMEs, several EME currencies came under downwardpressure in August; yields and CDS premiums on EMEsovereign debt increased, particularly for those econo-mies experiencing sharp currency depreciations; andinvestors continued to decrease their holdings in EMEmutual funds. In response, some EME authoritiestook actions to support their currencies, includingtightening monetary policy, modifying capital controls,and purchasing their currencies in foreign exchange

markets. On net over the period, the dollar ended littlechanged on a trade-weighted basis against a broad setof currencies, but it appreciated notably against thecurrencies of India, Indonesia, and Turkey. Equityprices in Germany increased substantially and sovereignyields in the United Kingdom and Germany continuedto rise as data on economic activity in Europe generallyimproved over the period, while yield spreads of Span-ish and Italian sovereign securities relative to Germangovernment debt declined a bit further.

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

volatility on longer-term fixed-income securities sincethe spring. The increase in yields appeared to reduceinvestors appetite for taking duration risk, but if a sig-nificant volume of bond investors moved to sell at afuture time, issues surrounding dealer capacity and will-ingness to make markets in volatile conditions couldagain amplify price movements. On balance, the vul-nerability of the financial system appeared moderate, asloss-absorbing capital had increased and the reliance onshort-term funding and the exposure of financial insti-tutions to nonfinancial credit risk had decreased.Nonetheless, a number of potential shocks could prove

challenging to markets and institutions, including a fail-ure to raise the U.S. federal debt limit, financial instabil-ity in EMEs, and geopolitical events in the Middle East.

Staff Economic OutlookIn the economic forecast prepared by the staff for theSeptember FOMC meeting, the projection for realGDP growth in the second half of this year was reviseddown a little from the one prepared for the previous

meeting. The staffs forecast for real GDP over themedium term also was revised down somewhat, reflect-ing higher projected paths for both longer-term interestrates and the foreign exchange value of the dollar,along with slightly lower projected paths for equity andhome prices. The staff still anticipated that the pace of

expansion in real GDP this year would only moderatelyexceed the growth rate of potential output but contin-ued to forecast that real GDP would accelerate in 2014and 2015, supported by an eventual easing in the ef-fects of fiscal policy restraint on economic growth, in-creases in consumer and business sentiment, furtherimprovements in credit availability and financial condi-tions, and accommodative monetary policy. In 2016,real GDP growth was projected to begin to edge downtoward the growth rate of potential output. Over theprojection period, the expansion in economic activitywas anticipated to slowly reduce the slack in labor and

product markets, and the unemployment rate was ex-pected to decline gradually.

The staffs forecast for inflation was little changed fromthe projection prepared for the previous FOMC meet-ing. In the near term, the staff continued to projectthat inflation would be modest in the second half ofthis year but higher than the readings posted in the firsthalf. Over the medium term, with longer-run inflationexpectations assumed to remain stable, changes incommodity and import prices expected to be modest,and resource slack persisting over most of the projec-tion period, inflation was forecast to be subdued

through 2016.The staff viewed the uncertainty around the forecastfor economic activity as similar to its normal level overthe past 20 years. However, the risks were viewed asskewed to the downside, reflecting concerns about theeconomic effects of the recent tightening in U.S. finan-cial market conditions, the resolution of federal fiscalpolicy issues in the coming months, the economic andfinancial stresses in the EMEs, and the ability of theU.S. economy to weather potential future adverseshocks. The staff did not see the uncertainty around itsoutlook for inflation as unusually high, and the risks

were viewed as balanced.Participants Views on Current Conditions and theEconomic OutlookIn conjunction with this FOMC meeting, meeting par-ticipants5 members of the Board of Governors andthe presidents of the 12 Federal Reserve Banks, all ofwhom participated in the deliberationssubmittedtheir assessments of real output growth, the unem-



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ployment rate, inflation, and the target federal fundsrate for each year from 2013 through 2016 and over thelonger run, under each participants judgment of ap-propriate monetary policy. The longer-run projectionsrepresent each participants assessment of the rate towhich each variable would be expected to converge,

over time, under appropriate monetary policy and inthe absence of further shocks to the economy. Theseeconomic projections and policy assessments are de-scribed in the Summary of Economic Projections(SEP), which is attached as an addendum to theseminutes.

In their discussion of the economic situation and out-look, meeting participants regarded the informationreceived during the intermeeting period as indicatingthat economic activity had continued to expand at amoderate pace, albeit somewhat more slowly than earli-er anticipated, and they generally indicated that the

broad contours of the outlook further out had notchanged materially since their July meeting. Partici-pants continued to project the rate of growth of eco-nomic activity to strengthen over coming years, sup-ported by highly accommodative monetary policy andthe gradual abatement of the headwinds that have beenslowing the pace of economic recovery, such ashousehold-sector deleveraging, tight credit conditionsfor some households and businesses, and fiscal re-straint. Accordingly, the unemployment rate was pro-jected to continue to decline over time toward levelsjudged to be consistent with the Committees dual

mandate. While downside risks to the outlook for theeconomy and the labor market were generally viewed ashaving diminished, on balance, since last fall, a numberof significant risks remained, including those related tothe potential economic effects of the sizable increasesin interest rates since the spring, ongoing fiscal drag,and the possible fallout from near-term fiscal debates.Inflation continued to run below the Committeeslonger-run objective, apart from fluctuations that large-ly reflected changes in energy prices, and participantsgenerally saw it as moving back gradually to 2 percentin the medium term.

In the household sector, consumer spending continuedto advance, but incoming data on retail sales weresomewhat weaker than expected. Auto sales, however,remained strong, supported in part by steady interestrates on auto loans, which, unlike mortgage rates, didnot rise substantially in recent months. Despite thecontinued improvement in household balance sheets, anumber of factors were mentioned as possible re-straints on spending, including declines in consumer

confidence, concerns about job security and availability,and the lingering effects of this years payroll tax in-crease. While the housing sector continued tostrengthen, supported by improving fundamentals andgains in house prices, the increases in mortgage ratessince the spring were seen as a potential risk. The ex-

tent to which the higher mortgage rates had materiallyaffected that sector remained unclear, with the excep-tion of the sharp decline in refinancing activity. But itwas noted that recent softness in housing starts andhome sales might well reflect some restraint from thosehigher rates.

Business contacts in selected parts of the country werereported to be cautiously optimistic, consistent withencouraging responses to a number of business sur-veys. Nonetheless, uncertainties regarding the outlookfor the economy and fiscal and regulatory policies werereportedly continuing to weigh on business deci-

sionmaking, with firms focused on improving theirbalance sheets and enhancing productivity and stillquite cautious about expanding their workforces. Re-ports on manufacturing activity pointed to some re-bound, with production related to autos the most nota-ble area of strength, and activity in the energy sectorcontinued to expand at a steady pace. In the agricul-tural sector, farmland values increased further, eventhough farm income was reported to be declining.Some business contacts indicated that wage and pricepressures were subdued; however, in one District, con-tacts pointed to rising wage pressures and labor short-

ages.Participants discussed the extent to which the ongoingtightening in fiscal policy was likely to further restraineconomic activity in the second half of this year, withone participant noting that the effects of the federalsequestration appeared to be less pronounced thanpreviously anticipated. However, a number of otherspointed to heightened uncertainty about the course offederal fiscal policy over coming months, including thepotential for a government shutdown or strains relatedto the debt ceiling debate, which posed downside risksto the economic outlook.

In discussing labor market developments, a number ofparticipants indicated that gains in payrolls in the Julyand August employment reports were disappointing,but one participant also noted that seasonal adjustmenttended to be challenging during the summer months.Taking a range of data into account, participants gener-ally agreed that labor market conditions had improvedmeaningfully since the start of the asset purchase pro-



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gram in September 2012. Participants discussed howto reconcile the notable decline in the unemploymentrate over the past year with the only moderate pace ofexpansion in real GDP. One possible explanation wasthat, to the extent the decline in the unemployment ratewas primarily driven by a fall in the labor force partici-

pation rate and low productivity growth, such a declinemight overstate the degree of improvement in broaderlabor market conditions. Indeed, the continued lowreadings on the employment-to-population ratio weresupportive of this explanation, suggesting that overalllabor market conditions had not improved as much asthe unemployment rate would indicate. An alternativeexplanation for the significant improvement in the la-bor market performance despite the moderate growthin real GDP over the past year was that growth hadbeen understated somewhat; notably, some researchsuggested that real gross domestic income, which ex-

panded at a somewhat faster pace than real GDP, mayprovide better information about overall economic ac-tivity. Despite recent declines in the unemploymentrate, one participant noted the risk that the longer theduration of elevated unemployment, the more likely itwas that the labor market and economy would experi-ence some lasting structural damage. While judging theextent of structural damage continued to be quite diffi-cult, one piece of evidence consistent with this viewwas the apparent decline in the job-finding rate of thelong-term unemployed.

Despite the reversal of some transitory factors that had

contributed to the earlier softness in inflation, recentreadings continued to be below the Committeeslonger-run objective of 2 percent. However, partici-pants generally expected inflation to pick up over thecoming year as the pace of economic growth accelerat-ed and slack in resource utilization diminished further,although to a rate still below the Committees longer-run objective.

Participants discussed financial market developments,including their views on the extent to which the rise inlonger-term interest rates since May reflected growingconfidence about the economic outlook or a percep-

tion by financial markets that monetary policy would beless accommodative going forward than had been pre-viously anticipated. Several participants judged thatoverall financial conditions had tightened notably overthe past few months, as seen most importantly in therise in mortgage rates. While acknowledging that it wastoo early to assess the effects of such an increase, theyexpressed concerns that tighter financial conditionsmight weigh on the recovery in the housing sector. A

few others observed that the increase in longer-termyields in recent months had not seemed to leave ameaningful imprint on other asset prices, suggestingthat the effects on the economy were likely to be rela-tively muted. While recognizing the potentially signifi-cant impact of higher mortgage rates on the housing

market, these same participants pointed to higher equi-ty prices, the further gradual loosening of terms in banklending, and the continued availability of credit at inex-pensive terms in corporate debt markets as signs thatfinancial conditions more generally had not tightenedmaterially. In any case, however, the assessment of theadverse effects of the increase in longer-term rates onfinancial conditions and ultimately on economic activitywould depend importantly upon the extent to whichrates stabilized at current levels or instead continued torise.

Participants also touched on the implications for finan-

cial stability resulting from the increase in interest rates,focusing on the effects on securities held by bankingand other nonbank institutions, the unwinding of lever-aged trades, and the liquidity and functioning of anumber of fixed-income markets. One participant not-ed that, notwithstanding the recent rise in interest rates,net interest margins remained under pressure at com-munity and regional banks, and as a result many ofthese banks continued to add to risk exposures. An-other participant raised the possibility that financialstability risks might arise from recent adverse develop-ments in municipal bond markets. It was also noted

that financial conditions in a number of EMEs hadtightened as a result of some depreciation of their cur-rencies, an increase in yields and borrowing costs, andsome capital outflows as measured by withdrawalsfrom bond funds. More broadly, a couple of partici-pants noted the complexities related to the interactionbetween the stance of monetary policy and the vulner-abilities in the financial system.

In their discussion of the path for monetary policy,participants debated the advantages and disadvantagesof reducing the pace of the Committees asset purchas-es at this meeting, focusing importantly on whether the

conditions presented to the public in June for reducingthe pace of asset purchases had yet been met. In gen-eral, those who preferred to maintain for now the paceof purchases viewed incoming data as having been onthe disappointing side and, despite clear improvementsin labor market conditions since the purchase pro-grams inception in September 2012, were not yet ade-quately confident of continued progress. Many ofthese participants had revised down their forecasts for



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economic activity or pointed to near-term risks anduncertainties. For example, questions were raisedabout the effects on the housing sector and on thebroader economy of the tightening in financial condi-tions in recent months, as well as about the considera-ble risks surrounding fiscal policy. Moreover, the an-

nouncement of a reduction in asset purchases at thismeeting might trigger an additional, unwarranted tight-ening of financial conditions, perhaps because marketswould read such an announcement as signaling theCommittees willingness, notwithstanding mixed recentdata, to take an initial step toward exit from its highlyaccommodative policy. As a result of such concerns, anumber of participants thought that risk-managementconsiderations called for a cautious approach and that,in light of the ambiguous cast of recent readings on theeconomy, it would be prudent to await further evidenceof progress before reducing the pace of asset purchas-

es. Consistent with the framework discussed by theChairman during the June press conference, asset pur-chases were contingent on the Committees ongoingassessment of the economic outlook and were not on apreset course; this approach implied a need to adaptand to adjust asset purchases in response to changes ineconomic conditions in order to preserve the Commit-tees credibility. With many outside observers expect-ing a decision to reduce purchases at this meeting,some participants emphasized a need to clearly com-municate the rationale behind any decision not to doso, in order to avoid conveying a message of pessimismregarding the economic outlook or to reinforce the

distinction between decisions concerning the pace ofpurchases and those concerning the federal funds rate.One participant suggested that postponing the reduc-tion in the pace of asset purchases would also allowtime for the Committee to further discuss and to im-plement a clarification or strengthening of its forwardguidance for the federal funds rate, which could temperthe risk that a future downward adjustment in assetpurchases would cause an undesirable tightening offinancial conditions.

The participants who spoke in favor of moderating thepace of securities purchases at this meeting also citedthe incoming data, but viewed those data as broadlyconsistent with the Committees outlook for the labormarket at the time of the June FOMC meeting whenthe contingent expectation that the pace of asset pur-chases would be reduced later in the year was first pre-sented to the public. Moreover, they highlighted whatthey saw as meaningful cumulative progress in labormarket conditions since the purchase program began.

Those participants generally were satisfied that inves-tors had come to understand the data-dependent natureof the Committees thinking about asset purchases,and, because they judged that the conditions laid out inJune had been met, they believed that the credibility ofthe Committee would best be served by announcing a

downward adjustment in asset purchases at this meet-ing. With the markets apparently viewing a cut in pur-chases as the most likely outcome, it was noted that thepostponement of such an announcement to later in theyear or beyond could have significant implications forthe effectiveness of Committee communications. Inparticular, concerns were expressed that a delay couldpotentially undermine the credibility or predictability ofmonetary policy by, for example, increasing uncertaintyabout the Committees reaction function and about itscommitment to the forward guidance for the federalfunds rate, with the result of an increase in volatility in

financial markets. Moreover, maintaining the pace ofpurchases could be perceived as a sign that the FOMChad turned more pessimistic about the economic out-look. Finally, it was noted that if the Committee didnot pare back its purchases in these circumstances, itmight be difficult to explain a cut in coming months,absent clearly stronger data on the economy and a swiftresolution of federal fiscal uncertainties. Most of theparticipants leaning toward a downward adjustment inthe pace of asset purchases also indicated that they fa-vored a relatively small reduction to signal the Commit-tees intention to proceed cautiously.

With regard to adjustments in the pace of asset pur-chases, whether at this or a future meeting, a few par-ticipants expressed a preference for not cutting MBSpurchases but reducing purchases only of Treasury se-curities initially, with the intent of continuing to sup-port the recovery in the housing sector. However, theappeal of including both types of securities in any re-duction was also mentioned. In addition, in an effortto reduce uncertainty about how the Committee mightadjust its purchases in response to economic develop-ments and to alleviate some of the related communica-tions issues, one participant suggested an approach thatwould mechanically link the reduction in asset purchas-es to numerical values for the unemployment rate, withthe goal of ending the program when the unemploy-ment rate reached a stated level.

Participants also discussed the potential for clarifyingor strengthening the Committees forward guidance forthe federal funds rate. To the extent that financialmarkets have at times interpreted the Committeescommunications regarding the asset purchase program



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as also signaling information about the federal fundsrate target, participants thought it might be importantto reiterate the distinction between the two, and a clari-fication or strengthening of the forward guidance mighthelp to reinforce this message. In part toward this end,participants mentioned several possible steps that

might be considered, including stating that the Com-mittee would not raise its target for the federal fundsrate if the inflation rate was expected to run below agiven level or providing additional information on theCommittees intentions regarding the federal funds rateafter the 6 percent unemployment threshold wasreached. One participant stressed that the Committeecould use the full range of its tools, including forwardguidance, to further improve the alignment of themedium-term outlook for employment and inflationwith its longer-term goals. In light of the importanceof credibility for the effectiveness of the forward guid-

ance for the federal funds rate, participants noted thepossible implications of uncertainties related to theFederal Reserve leadership transition in considering theappropriate timing of any enhancements to the guid-ance.

In discussing the projections for the target federalfunds rate at the end of 2016 as reported in the SEP,some participants highlighted the importance of com-municating to the public the reasons why the policyrates that were projected by most, but not all, partici-pants appeared to remain at low levels even as the un-employment rate and inflation by then were expected

to be close to their longer-run values. In particular, ifeconomic headwinds died away only slowly, as a num-ber of participants expected, the achievement of theCommittees employment and price stability objectiveswould likely require keeping the federal funds rate be-low its longer-run equilibrium value for some time evenas economic conditions improved. In light of the po-tential difficulties in succinctly conveying this infor-mation in the Committees policy statement, theChairmans postmeeting press conference and theminutes were mentioned as more appropriate vehiclesfor providing this information. A couple of partici-pants also remarked that they viewed their projectionsof a low federal funds rate in 2016 as reflecting a com-mitment to support the economy by maintaining amore accommodative policy for longer.

Committee Policy ActionCommittee members saw the information receivedover the intermeeting period as suggesting that eco-nomic activity was expanding at a moderate pace.Some indicators of labor market conditions showed

further improvement in recent months, but the unem-ployment rate remained elevated. Household spendingand business fixed investment advanced, and the hous-ing sector was strengthening, but mortgage rates hadrisen further and fiscal policy was restraining growth.The Committee expected that, with appropriate policy

accommodation, economic growth would pick up fromits recent pace, resulting in a gradual decline in the un-employment rate toward levels consistent with theCommittees dual mandate. Members generally contin-ued to see the downside risks to the outlook for theeconomy and the labor market as having diminished,on net, since last fall, but indicated that the tighteningof financial conditions observed in recent months, ifsustained, could slow the pace of improvement in theeconomy and labor market. Apart from fluctuationsdue to changes in energy prices, inflation was runningbelow the Committees longer-run objective, but

longer-term inflation expectations were stable, and theCommittee anticipated that inflation would move backtoward its objective over the medium term. Membersrecognized, however, that inflation persistently belowthe Committees 2 percent objective could pose risks toeconomic performance.

In their discussion of monetary policy for the periodahead, members reviewed the degree of improvementin economic activity and labor market conditions sincethe asset purchase program began a year ago andjudged that, taking into account the extent of federalfiscal retrenchment, the improvement was consistent

with growing underlying strength in the broader econ-omy. However, all members but one judged that itwould be appropriate for the Committee to await moreevidence that progress would be sustained before ad-justing the pace of asset purchases. In the view of onemember, the progress to date in labor markets and inbroader economic conditions amply supported a reduc-tion in purchases. During the exchange of views onwhether to trim the flow of asset purchases at thismeeting, a number of members emphasized the contin-gent and data-dependent nature of the Committeespurchase program. In light of the mixed data recently,including inflation readings that remained below theCommittees longer-run objective, and the concernsover near-term fiscal uncertainties, some members in-dicated that they preferred to await more evidence thattheir expectation of continuing improvement would berealized. But with financial markets appearing to ex-pect a reduction in purchases at this meeting, concernswere raised about the effectiveness of FOMC commu-nications if the Committee did not take that step. For



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several members, the various considerations made thedecision to maintain an unchanged pace of asset pur-chases at this meeting a relatively close call. At theconclusion of the discussion, the Committee decided tocontinue adding policy accommodation by purchasingadditional MBS at a pace of $40 billion per month and

longer-term Treasury securities at a pace of $45 billionper month and to maintain its existing reinvestmentpolicies. In addition, the Committee reaffirmed its in-tention to keep the target federal funds rate at 0 to percent and retained its forward guidance that it an-ticipates that this exceptionally low range for the feder-al funds rate will be appropriate at least as long as theunemployment rate remains above 6 percent, infla-tion between one and two years ahead is projected tobe no more than a half percentage point above theCommittees 2 percent longer-run goal, and longer-term inflation expectations continue to be well an-

chored.Members also discussed the wording of the policystatement to be issued following the meeting. In addi-tion to updating its description of the state of theeconomy, the Committee decided to underline its con-cern about the tightening of financial conditions ob-served in recent months. It also acknowledged the im-provement in economic activity and labor market con-ditions since its asset purchase program began, whileemphasizing that it was prepared to be patient andawait more evidence that progress would be sustainedbefore adjusting downward the pace of purchases. The

Committee also adopted language to the effect that, injudging when to moderate the pace of asset purchasesat its coming meetings, it would assess whether incom-ing information continued to support its expectation ofongoing improvement in labor market conditions andof inflation moving back toward its longer-run objec-tive. Finally, the Committee reiterated the contingentnature of the outlook for asset purchases, indicatingthat asset purchases were not on a preset course andthat the Committees decisions about their pace wouldcontinue to depend on its economic outlook as well asits assessment of the likely efficacy and costs of suchpurchases.

At the conclusion of the discussion, the Committeevoted to authorize and direct the Federal Reserve Bankof New York, until it was instructed otherwise, to exe-cute transactions in the System Account in accordancewith the following domestic policy directive:

Consistent with its statutory mandate, theFederal Open Market Committee seeks

monetary and financial conditions that willfoster maximum employment and price sta-bility. In particular, the Committee seeksconditions in reserve markets consistent withfederal funds trading in a range from 0 to percent. The Committee directs the Desk

to undertake open market operations as nec-essary to maintain such conditions. TheDesk is directed to continue purchasinglonger-term Treasury securities at a pace ofabout $45 billion per month and to continuepurchasing agency mortgage-backed securi-ties at a pace of about $40 billion per month.The Committee also directs the Desk to en-gage in dollar roll and coupon swap transac-tions as necessary to facilitate settlement ofthe Federal Reserves agency mortgage-backed securities transactions. The Commit-

tee directs the Desk to maintain its policy ofrolling over maturing Treasury securities intonew issues and its policy of reinvestingprincipal payments on all agency debt andagency mortgage-backed securities in agencymortgage-backed securities. The SystemOpen Market Account Manager and the Sec-retary will keep the Committee informed ofongoing developments regarding the Sys-tems balance sheet that could affect the at-tainment over time of the Committees ob-jectives of maximum employment and pricestability.

The vote encompassed approval of the statement be-low to be released at 2:00 p.m.:

Information received since the FederalOpen Market Committee met in July sug-gests that economic activity has been ex-panding at a moderate pace. Some indicatorsof labor market conditions have shown fur-ther improvement in recent months, but theunemployment rate remains elevated.Household spending and business fixed in-vestment advanced, and the housing sector

has been strengthening, but mortgage rateshave risen further and fiscal policy is re-straining economic growth. Apart from fluc-tuations due to changes in energy prices, in-flation has been running below the Commit-tees longer-run objective, but longer-terminflation expectations have remained stable.



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Consistent with its statutory mandate, theCommittee seeks to foster maximum em-ployment and price stability. The Committeeexpects that, with appropriate policy ac-commodation, economic growth will pick upfrom its recent pace and the unemployment

rate will gradually decline toward levels theCommittee judges consistent with its dualmandate. The Committee sees the downsiderisks to the outlook for the economy and thelabor market as having diminished, on net,since last fall, but the tightening of financialconditions observed in recent months, if sus-tained, could slow the pace of improvementin the economy and labor market. TheCommittee recognizes that inflation persis-tently below its 2 percent objective couldpose risks to economic performance, but it

anticipates that inflation will move back to-ward its objective over the medium term.

Taking into account the extent of federal fis-cal retrenchment, the Committee sees theimprovement in economic activity and labormarket conditions since it began its assetpurchase program a year ago as consistentwith growing underlying strength in thebroader economy. However, the Committeedecided to await more evidence that progresswill be sustained before adjusting the pace ofits purchases. Accordingly, the Committee

decided to continue purchasing additionalagency mortgage-backed securities at a paceof $40 billion per month and longer-termTreasury securities at a pace of $45 billionper month. The Committee is maintainingits existing policy of reinvesting principalpayments from its holdings of agency debtand agency mortgage-backed securities inagency mortgage-backed securities and ofrolling over maturing Treasury securities atauction. Taken together, these actionsshould maintain downward pressure onlonger-term interest rates, support mortgagemarkets, and help to make broader financialconditions more accommodative, which inturn should promote a stronger economicrecovery and help to ensure that inflation,over time, is at the rate most consistent withthe Committees dual mandate.

The Committee will closely monitor incom-ing information on economic and financial

developments in coming months and willcontinue its purchases of Treasury and agen-cy mortgage-backed securities, and employits other policy tools as appropriate, until theoutlook for the labor market has improvedsubstantially in a context of price stability. In

judging when to moderate the pace of assetpurchases, the Committee will, at its comingmeetings, assess whether incoming infor-mation continues to support the Commit-tees expectation of ongoing improvement inlabor market conditions and inflation movingback toward its longer-run objective. Assetpurchases are not on a preset course, and theCommittees decisions about their pace willremain contingent on the Committees eco-nomic outlook as well as its assessment ofthe likely efficacy and costs of such purchas-

es.To support continued progress toward max-imum employment and price stability, theCommittee today reaffirmed its view that ahighly accommodative stance of monetarypolicy will remain appropriate for a consider-able time after the asset purchase programends and the economic recovery strengthens.In particular, the Committee decided to keepthe target range for the federal funds rate at0 to percent and currently anticipates thatthis exceptionally low range for the federal

funds rate will be appropriate at least as longas the unemployment rate remains above6 percent, inflation between one and twoyears ahead is projected to be no more than ahalf percentage point above the Committees2 percent longer-run goal, and longer-terminflation expectations continue to be well an-chored. In determining how long to main-tain a highly accommodative stance of mone-tary policy, the Committee will also considerother information, including additionalmeasures of labor market conditions, indica-tors of inflation pressures and inflation ex-pectations, and readings on financial devel-opments. When the Committee decides tobegin to remove policy accommodation, itwill take a balanced approach consistent withits longer-run goals of maximum employ-ment and inflation of 2 percent.

Voting for this action: Ben Bernanke, William C.Dudley, James Bullard, Charles L. Evans, Jerome H.



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Powell, Eric Rosengren, Jeremy C. Stein, Daniel K.Tarullo, and Janet L. Yellen.

Voting against this action: Esther L. George.

Ms. George dissented because she saw recent infor-mation on the economy as sufficiently positive to war-

rant a reduction in the pace of the Committees assetpurchases at this meeting. In her view, waiting formore evidence of progress discounted the cumulativeimprovement in the economy as well as the potentialcosts of ongoing purchases. Accordingly, not onlywould a reduction be appropriate in light of the ongo-ing improvement in labor market conditions, but it alsowould support the credibility and predictability ofmonetary policy because it would be seen as followingthrough on the Committees earlier communicationsabout the outlook for the asset purchase program.

It was agreed that the next meeting of the Committeewould be held on TuesdayWednesday, October 2930, 2013. The meeting adjourned at 11:15 a.m. on Sep-tember 18, 2013.

Notation Vote

By notation vote completed on August 20, 2013, theCommittee unanimously approved the minutes of theFOMC meeting held on July 3031, 2013.

_____________________________William B. English

Secretary



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Summary of Economic Projections

In conjunction with the September 1718, 2013, Fed-eral Open Market Committee (FOMC) meeting, meet-ing participants5 members of the Board of Gover-nors and the 12 presidents of the Federal Reserve

Banks, all of whom participated in the deliberationssubmitted their assessments of real output growth, theunemployment rate, inflation, and the target federalfunds rate for each year from 2013 through 2016 andover the longer run. Each participants assessment wasbased on information available at the time of the meet-ing plus his or her judgment of appropriate monetarypolicy and assumptions about the factors likely to affecteconomic outcomes. The longer-run projections rep-resent each participants judgment of the value towhich each variable would be expected to converge,over time, under appropriate monetary policy and in

the absence of further shocks to the economy. Ap-propriate monetary policy is defined as the future pathof policy that each participant deems most likely tofoster outcomes for economic activity and inflationthat best satisfy his or her individual interpretation ofthe Federal Reserves objectives of maximum employ-ment and stable prices.

Overall, FOMC participants expected, under appropri-ate monetary policy, a pickup in economic growth, withthe unemployment rate declining gradually (table 1 andfigure 1). Almost all of the participants projected thatinflation, as measured by the annual change in the price

index for personal consumption expenditures (PCE),would rise to a level at or somewhat below the Com-mittees 2 percent objective in 2016.

Most participants judged that highly accommodativemonetary policy was likely to remain warranted overthe next few years to support continued progress to-ward maximum employment and a return to 2 percentinflation. As shown in figure 2, a large majority of par-ticipants judged not only that it would be appropriateto wait until 2015 or later before beginning to increasethe federal funds rate, but also that it would then beappropriate to raise the federal funds rate target rela-tively gradually. Most participants viewed their eco-nomic projections as broadly consistent with a slowingin the pace of the Committees purchases of longer-term securities this year and the completion of the pro-gram in mid-2014.

Most participants saw the uncertainty associated withtheir outlook for economic growth, the unemploymentrate, and inflation as similar to that of the past 20 years.In addition, most participants considered the risks tothe outlook for the unemployment rate and inflation asbroadly balanced. A slim majority of the participantsalso judged that the risks to the outlook for real grossdomestic product (GDP) growth were broadly bal-anced, while nearly as many indicated that the riskswere weighted to the downside.

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

Percent

VariableCentral tendency1 Range2

2013 2014 2015 2016 Longer run 2013 2014 2015 2016 Longer run

Change in real GDP . . 2.0 to 2.3 2.9 to 3.1 3.0 to 3.5 2.5 to 3.3 2.2 to 2.5 1.8 to 2.4 2.2 to 3.3 2.2 to 3.7 2.2 to 3.5 2.1 to 2.5June projection . . . . . . 2.3 to 2.6 3.0 to 3.5 2.9 to 3.6 n.a. 2.3 to 2.5 2.0 to 2.6 2.2 to 3.6 2.3 to 3.8 n.a. 2.0 to 3.0

Unemployment rate . . 7.1 to 7.3 6.4 to 6.8 5.9 to 6.2 5.4 to 5.9 5.2 to 5.8 6.9 to 7.3 6.2 to 6.9 5.3 to 6.3 5.2 to 6.0 5.2 to 6.0June projection . . . . . . 7.2 to 7.3 6.5 to 6.8 5.8 to 6.2 n.a. 5.2 to 6.0 6.9 to 7.5 6.2 to 6.9 5.7 to 6.4 n.a. 5.0 to 6.0

PCE inflation . . . . . . . 1.1 to 1.2 1.3 to 1.8 1.6 to 2.0 1.7 to 2.0 2.0 1.0 to 1.3 1.2 to 2.0 1.4 to 2.3 1.5 to 2.3 2.0June projection . . . . . . 0.8 to 1.2 1.4 to 2.0 1.6 to 2.0 n.a. 2.0 0.8 to 1.5 1.4 to 2.0 1.6 to 2.3 n.a. 2.0

Core PCE inflation3 . . 1.2 to 1.3 1.5 to 1.7 1.7 to 2.0 1.9 to 2.0 1.2 to 1.4 1.4 to 2.0 1.6 to 2.3 1.7 to 2.3

June projection . . . . . . 1.2 to 1.3 1.5 to 1.8 1.7 to 2.0 n.a. 1.1 to 1.5 1.5 to 2.0 1.7 to 2.3 n.a.

NOTE: Projections of change in real gross domestic product (GDP) and projections for both measures of inflation are from the fourth quarter of the pre-vious 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 forpersonal consumption expenditures (PCE) and the price index for PCE excluding food and energy. Projections for the unemployment rate are for the averagecivilian unemployment rate in the fourth quarter of the year indicated. Each participants projections are based on his or her assessment of appropriate monetarypolicy. Longer-run projections represent each participants assessment of the rate to which each variable would be expected to converge under appropriatemonetary policy and in the absence of further shocks to the economy. The June projections were made in conjunction with the meeting of the Federal OpenMarket Committee on June 1819, 2013.

1. The central tendency excludes the three highest and three lowest projections for each variable in each year.2. The range for a variable in a given year includes all participants projections, from lowest to highest, for that variable in that year.3. Longer-run projections for core PCE inflation are not collected.

Page 1_____________________________________________________________________________________________


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Figure 1. Central tendencies and ranges of economic projections, 201316 and over the longer run

Change in real GDP

Percent

3

2

1

0

1

2

3

4

5

-

+

2008 2009 2010 2011 2012 2013 2014 2015 2016 Longerrun

Central tendency of projections

Range of projections

Actual

Unemployment rate

Percent

5

6

7

8

9

10

2008 2009 2010 2011 2012 2013 2014 2015 2016 Longerrun

PCE inflation

Percent

1

2

3

2008 2009 2010 2011 2012 2013 2014 2015 2016 Longerrun

Core PCE inflation

Percent

1

2

3

2008 2009 2010 2011 2012 2013 2014 2015 2016 Longerrun

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



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

3

12

2

Appropriate timing of policy firming

Number of participants

1

2

3

4

5

6

7

8

9

10

11

12

2014 2015 2016

Appropriate pace of policy firming Percent

Target federal funds rate at year-end

0

1

2

3

4

5

6

2013 2014 2015 2016 Longer run

Note: In the upper panel, the height of each bar denotes the number of FOMC participants who judge that, underappropriate monetary policy, the first increase in the target federal funds rate from its current range of 0 to 1/4 percentwill occur in the specified calendar year. In June 2013, the numbers of FOMC participants who judged that the firstincrease in the target federal funds rate would occur in 2013, 2014, 2015, and 2016 were, respectively, 1, 3, 14, and 1.In the lower panel, each shaded circle indicates the value (rounded to the nearest 1/4 percentage point) of an individualparticipants judgment of the appropriate level of the target federal funds rate at the end of the specified calendar yearor over the longer run.

Summary of Economic Projections of the Meeting of September 1718, 2013 Page 3_____________________________________________________________________________________________


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The Outlook for Economic ActivityParticipants generally projected that, conditional ontheir individual assumptions about appropriate mone-tary policy, real GDP growth would be similar in 2013to its rate in 2012 and would increase in the 201416period to a pace above what participants saw as the

longer-run rate of output growth. Many participantspointed to diminishing restraint from fiscal policy,pent-up demand for consumer and producer durables,or rising household net worth as contributing to thepickup in growth. In addition, a number of partici-pants noted continued improvement in the housingsector, supported by rising employment and incomeand by improved credit availability.

The central tendencies of participants projections forreal GDP growth were 2.0 to 2.3 percent in 2013,2.9 to 3.1 percent in 2014, 3.0 to 3.5 percent in 2015,and 2.5 to 3.3 percent in 2016. In general, participants

projections for growth in 2013, 2014, and, to a lesserextent, 2015 were below those collected in June. Mostparticipants attributed the downward revisions to theirprojections in 2013 and 2014 in part to weaker-than-expected incoming data, while some participants point-ed to tighter financial conditions. The central tendencyfor the longer-run rate of growth of real GDP was2.2 to 2.5 percent, little changed from June.

Participants anticipated a gradual decline in the unem-ployment rate over the projection period. The centraltendencies of participants forecasts for the unemploy-ment rate in the fourth quarter of each year were 7.1 to

7.3 percent in 2013, 6.4 to 6.8 percent in 2014, 5.9 to6.2 percent in 2015, and 5.4 to 5.9 percent in 2016.These projections were little changed from June. Thecentral tendency of participants estimates of thelonger-run normal rate of unemployment that wouldprevail under appropriate monetary policy and in theabsence of further shocks to the economy was 5.2 to5.8 percent. A majority of participants projected thatthe unemployment rate would be near or slightly abovetheir individual estimates of its longer-run level at theend of 2016.

Figures 3.A and 3.B show that participants views re-garding the likely outcomes for real GDP growth andthe unemployment rate in 2014 and 2015 remaineddispersed. This diversity reflected their individual as-sessments of the likely rate of improvement in thehousing sector and in household balance sheets, thedomestic implications of foreign economic develop-ments, the prospective path for U.S. fiscal policy, thelikely evolution of financial conditions, and a number

of other factors. Relative to June, the dispersions ofparticipants projections for GDP growth in 2014 and2015 narrowed to some extent, while the dispersions ofprojections for the unemployment rate in those yearsgenerally widened a bit.

The Outlook for InflationParticipants views on the broad outlook for inflationunder the assumption of appropriate monetary policywere little changed from June. Although most partici-pants revised up slightly their projection for PCE infla-tion in 2013, a number of participants revised down abit their forecasts for 2014. All participants anticipatedthat both headline and core inflation would rise gradu-ally over the next few years, and almost all participantsexpected inflation to be at or somewhat below theCommittees 2 percent objective in 2016. Specifically,the central tendencies for PCE inflation were 1.1 to1.2 percent in 2013, 1.3 to 1.8 percent in 2014, 1.6 to

2.0 percent in 2015, and 1.7 to 2.0 percent in 2016.The central tendencies of the forecasts for core infla-tion were little changed from June and broadly similarto those for the headline measure over the projectionperiod. A number of participants viewed the combina-tion of stable inflation expectations and diminishingresource slack as important factors leading to a gradualpickup in inflation toward the Committees longer-runobjective.

Figures 3.C and 3.D provide information on the diver-sity of participants views about the outlook for infla-tion. The ranges of participants projections for overall

inflation in 2014 and 2015 widened slightly from Juneand were 1.2 to 2.0 percent in 2014 and 1.4 to 2.3 per-cent in 2015. In 2016, the forecasts for PCE inflationwere concentrated near the Committees longer-runobjective, though one participant expected inflation tobe noticeably above the Committees objective andanother expected it to be percentage point below.Similar to the projections for headline inflation, theprojections for core inflation became more concentrat-ed near the 2 percent objective in 2016 than in earlieryears; however, the dispersion of the projections forcore inflation in each year was lower than for headline

inflation.

Appropriate Monetary PolicyAs indicated in figure 2, most participants judged thatexceptionally low levels of the federal funds rate wouldremain appropriate for the next few years. In particu-lar, 12 participants thought that the first increase in thetarget federal funds rate would not be warranted untilsometime in 2015, and two judged that policy firming



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Figure 3.A. Distribution of participants projections for the change in real GDP, 201316 and over the longer run

2013


2468

101214161820

1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6 3.8- - - - - - - - - - -

1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 3.5 3.7 3.9

Percent range

September projections

June projections

2014


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101214161820

1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6 3.8- - - - - - - - - - -

1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 3.5 3.7 3.9

Percent range

2015


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101214161820

1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6 3.8- - - - - - - - - - -

1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 3.5 3.7 3.9

Percent range

2016


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101214161820

1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6 3.8- - - - - - - - - - -

1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 3.5 3.7 3.9

Percent range

Longer run


2468

1012

14161820

1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6 3.8- - - - - - - - - - -

1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 3.5 3.7 3.9

Percent range

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



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Figure 3.B. Distribution of participants projections for the unemployment rate, 201316 and over the longer run

2013


2468

101214161820

5.0 5.2 5.4 5.6 5.8 6.0 6.2 6.4 6.6 6.8 7.0 7.2 7.4- - - - - - - - - - - - -

5.1 5.3 5.5 5.7 5.9 6.1 6.3 6.5 6.7 6.9 7.1 7.3 7.5

Percent range


June projections

2014


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101214161820

5.0 5.2 5.4 5.6 5.8 6.0 6.2 6.4 6.6 6.8 7.0 7.2 7.4- - - - - - - - - - - - -

5.1 5.3 5.5 5.7 5.9 6.1 6.3 6.5 6.7 6.9 7.1 7.3 7.5

Percent range

2015


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101214161820

5.0 5.2 5.4 5.6 5.8 6.0 6.2 6.4 6.6 6.8 7.0 7.2 7.4- - - - - - - - - - - - -

5.1 5.3 5.5 5.7 5.9 6.1 6.3 6.5 6.7 6.9 7.1 7.3 7.5

Percent range

2016


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101214161820

5.0 5.2 5.4 5.6 5.8 6.0 6.2 6.4 6.6 6.8 7.0 7.2 7.4- - - - - - - - - - - - -

5.1 5.3 5.5 5.7 5.9 6.1 6.3 6.5 6.7 6.9 7.1 7.3 7.5

Percent range

Longer run


2468

1012

14161820

5.0 5.2 5.4 5.6 5.8 6.0 6.2 6.4 6.6 6.8 7.0 7.2 7.4- - - - - - - - - - - - -

5.1 5.3 5.5 5.7 5.9 6.1 6.3 6.5 6.7 6.9 7.1 7.3 7.5

Percent range




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Figure 3.C. Distribution of participants projections for PCE inflation, 201316 and over the longer run

2013


2468

101214161820

0.7 0.9 1.1 1.3 1.5 1.7 1.9 2.1 2.3- - - - - - - - -

0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4

Percent range


June projections

2014


2468

101214161820

0.7 0.9 1.1 1.3 1.5 1.7 1.9 2.1 2.3- - - - - - - - -

0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4

Percent range

2015


2468

101214161820

0.7 0.9 1.1 1.3 1.5 1.7 1.9 2.1 2.3- - - - - - - - -

0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4

Percent range

2016


2468

101214161820

0.7 0.9 1.1 1.3 1.5 1.7 1.9 2.1 2.3- - - - - - - - -

0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4

Percent range

Longer run


2468

1012

14161820

0.7 0.9 1.1 1.3 1.5 1.7 1.9 2.1 2.3- - - - - - - - -

0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4

Percent range




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Figure 3.D. Distribution of participants projections for core PCE inflation, 201316

2013


2

4

6

8

1012

14

16

18

20

1.1 1.3 1.5 1.7 1.9 2.1 2.3- - - - - - -

1.2 1.4 1.6 1.8 2.0 2.2 2.4

Percent range

September projectionsJune projections

2014


2

4

6

8

10

12

14

16

18

20

1.1 1.3 1.5 1.7 1.9 2.1 2.3- - - - - - -

1.2 1.4 1.6 1.8 2.0 2.2 2.4

Percent range

2015


2

4

6

810

12

14

16

18

20

1.1 1.3 1.5 1.7 1.9 2.1 2.3- - - - - - -

1.2 1.4 1.6 1.8 2.0 2.2 2.4

Percent range

2016


2

4

68

10

12

14

16

18

20

1.1 1.3 1.5 1.7 1.9 2.1 2.3- - - - - - -

1.2 1.4 1.6 1.8 2.0 2.2 2.4

Percent range




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would likely not be appropriate until 2016. Three par-ticipants judged that an increase in the federal fundsrate in 2014 would be appropriate.

All participants projected that the unemployment ratewould be below the Committees 6 percent thresholdat the end of the year in which they viewed the initialincrease in the federal funds rate to be appropriate, andall but one judged that inflation would be at or belowthe Committees longer-run objective. Almost all par-ticipants projected that the unemployment rate wouldstill be above their view of its longer-run level at theend of the year in which they saw the federal funds rateincreasing from the effective lower bound.

Figure 3.E provides the distribution of participantsjudgments regarding the appropriate level of the targetfederal funds rate at the end of each calendar year from2013 to 2016 and over the longer run. As noted above,

most participants judged that economic conditionswould warrant maintaining the current low level of thefederal funds rate until 2015. Among the three partici-pants who saw the federal funds rate leaving the effec-tive lower bound earlier, projections for the federalfunds rate at the end of 2014 ranged from 1 to 1 per-cent. These three participants viewed the appropriatelevel of the federal funds rate as 3 percent or higher atthe end of 2015, while the remainder of participantssaw the appropriate level of the funds rate as 1 per-cent or lower. On balance, the dispersion of partici-pants projections for the appropriate federal funds rateat the end of 2015 widened a bit from June, while the

median value of the rate was unchanged.

All of the participants who saw the first tightening ineither 2015 or 2016 judged that the appropriate level ofthe federal funds rate at the end of 2016 would still bebelow their individual assessment of its expectedlonger-run value. In contrast, the three participantswho saw the first tightening in 2014 believed that theappropriate level of the federal funds rate at the end of2016 would be at their assessment of its longer-runlevel, which they viewed as either at or just above4 percent. Among all participants, estimates of thelonger-run target federal funds rate ranged from 3 toabout 4 percent, reflecting the Committees inflationobjective of 2 percent and participants individualjudgments about the appropriate longer-run level of thereal federal funds rate in the absence of further shocksto the economy.

Participants also described their views regarding theappropriate path of the Federal Reserves balance sheet.Conditional on their respective economic outlooks,

most participants judged that it would likely be appro-priate to begin to reduce the pace of the Committeespurchases of longer-term securities this year and toconclude purchases in the middle of 2014. A couple ofparticipants thought it appropriate for the first reduc-tion in the pace of asset purchases to occur later, and

another specified that purchases likely would continuepast midyear 2014; in contrast, a couple of participantsthought that the program should be ended considerablysooner than the middle of next year.

Participants views of the appropriate path for mone-tary policy were informed by their judgments on thestate of the economy, including the values of the un-employment rate and other labor market indicators thatwould be consistent with maximum employment, theextent to which the economy was currently falling shortof maximum employment, the prospects for inflationto reach the Committees longer-term objective of

2 percent, and the balance of risks around the outlook.Some participants also mentioned the usefulness ofexamining the implications of alternative policy strate-gies for returning employment and inflation tomandate-consistent levels over the medium term.

Uncertainty and RisksMost participants judged that the levels of uncertaintyabout their projections for real GDP growth and un-employment were broadly similar to the norm duringthe previous 20 years, although four participants con-tinued to see them as higher (figure 4).1 The numberof participants who viewed the risks around their GDP

projections as weighted to the downside was nearlyequal to the number who viewed them as broadly bal-anced. Most participants saw the risks around theirunemployment projections as broadly balanced. Themain factors cited as contributing to the uncertaintyand balance of risks around economic outcomes werethe limits on the ability of monetary policy at the zerolower bound to respond to adverse shocks, as well aschallenges associated with forecasting the path of fiscalpolicy and developments abroad. In addition, some

1 Table 2 provides estimates of the forecast uncertainty forthe change in real GDP, the unemployment rate, and totalconsumer price inflation over the period from 1993 through2012. At the end of this summary, the box Forecast Uncer-tainty discusses the sources and interpretation of uncertain-ty in the economic forecasts and explains the approach usedto assess the uncertainty and risks attending the participantsprojections.



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Figure 3.E. Distribution of participants projections for the target federal funds rate, 201316 and over the longer run

2013


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101214161820

0.00 0.38 0.63 0.88 1.13 1.38 1.63 1.88 2.13 2.38 2.63 2.88 3.13 3.38 3.63 3.88 4.13 4.38- - - - - - - - - - - - - - - - - -

0.37 0.62 0.87 1.12 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37 4.62

Percent range


June projections

2014


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101214161820

0.00 0.38 0.63 0.88 1.13 1.38 1.63 1.88 2.13 2.38 2.63 2.88 3.13 3.38 3.63 3.88 4.13 4.38- - - - - - - - - - - - - - - - - -

0.37 0.62 0.87 1.12 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37 4.62

Percent range

2015


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101214161820

0.00 0.38 0.63 0.88 1.13 1.38 1.63 1.88 2.13 2.38 2.63 2.88 3.13 3.38 3.63 3.88 4.13 4.38- - - - - - - - - - - - - - - - - -

0.37 0.62 0.87 1.12 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37 4.62

Percent range

2016


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101214161820

0.00 0.38 0.63 0.88 1.13 1.38 1.63 1.88 2.13 2.38 2.63 2.88 3.13 3.38 3.63 3.88 4.13 4.38- - - - - - - - - - - - - - - - - -

0.37 0.62 0.87 1.12 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37 4.62

Percent range

Longer run


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1012

14161820

0.00 0.38 0.63 0.88 1.13 1.38 1.63 1.88 2.13 2.38 2.63 2.88 3.13 3.38 3.63 3.88 4.13 4.38- - - - - - - - - - - - - - - - - -

0.37 0.62 0.87 1.12 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37 4.62

Percent range

Note: The target federal funds rate is measured as the level of the target rate at the end of the calendar year orin the longer run.



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Figure 4. Uncertainty and risks in economic projections

Uncertainty about GDP growth


2

4

6

8

10

12

14

16

18

20

Lower Broadly Highersimilar


June projections

Uncertainty about the unemployment rate


2

4

6

8

1012

14

16

18

20


Uncertainty about PCE inflation


2

4

6

810

12

14

16

18

20


Uncertainty about core PCE inflation


2

4

68

10

12

14

16

18

20


Risks to GDP growth


2

4

6

8

10

12

14

16

18

20

Weighted to Broadly Weighted todownside balanced upside


June projections

Risks to the unemployment rate


2

4

6

8

1012

14

16

18

20


Risks to PCE inflation


2

4

6

810

12

14

16

18

20


Risks to core PCE inflation


2

4

68

10

12

14

16

18

20


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



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participants pointed to the tightening in financial condi-tions in recent months and the possibility of heightened

volatility in financial markets, while others pointed torisks associated with structural changes affectingproductivity growth and labor markets.

Participants reported little change in their assessmentsof the level of uncertainty and the balance of risksaround their forecasts for overall PCE inflation andcore inflation. Eleven participants judged the levels ofuncertainty associated with their forecasts for thoseinflation measures to be broadly similar to historicalnorms; the same number saw the risks to those projec-tions as broadly balanced. Five participants saw therisks to their inflation forecasts as tilted to the down-side, reflecting, for example, the possibility that thecurrent low levels of inflation could persist and becomeembedded in inflation expectations. Conversely, acouple of participants cited upside risks to inflationstemming from the current highly accommodativestance of monetary policy or concerns about the

Committees ability to shift to a less accommodativepolicy stance when it becomes appropriate to do so.

Table 2. Average historical projection error rangesPercentage points

Variable 2013 2014 2015 2016

Change in real GDP1 . . . . . 0.9 1.5 1.8 1.9

Unemployment rate1 . . . . . 0.3 1.0 1.6 1.9

Total consumer prices2

. . . . 0.8 1.0 1.1 1.1NOTE: Error ranges shown are measured as plus or minus the

root mean squared error of projections for 1993 through 2012 thatwere released in the fall by various private and government forecast-ers. As described in the box Forecast Uncertainty, under certainassumptions, there is about a 70 percent probability that actual out-comes for real GDP, unemployment, and consumer prices will be inranges implied by the average size of projection errors made in thepast. Further information may be found in David Reifschneider andPeter Tulip (2007), Gauging the Uncertainty of the Economic Out-look from Historical Forecasting Errors, Finance and EconomicsDiscussion Series 2007-60 (Washington: Board of Governors of theFederal Reserve System, November).

1. Definitions of variables are in the general note to table 1.2. Measure is the overall consumer price index, the price meas-

ure that has been most widely used in government and private eco-nomic forecasts. Projection is percent change, fourth quarter of the

previous year to the fourth quarter of the year indicated.



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Forecast Uncertainty

The economic projections provided bythe members of the Board of Governors andthe presidents of the Federal Reserve Banksinform discussions of monetary policy amongpolicymakers and can aid public understand-ing of the basis for policy actions. Consider-able uncertainty attends these projections,however. The economic and statistical modelsand relationships used to help produce eco-nomic forecasts are necessarily imperfect de-

scriptions of the real world, and the futurepath of the economy can be affected by myr-iad unforeseen developments and events.Thus, in setting the stance of monetary policy,participants consider not only what appears tobe the most likely economic outcome as em-bodied in their projections, but also the rangeof alternative possibilities, the likelihood oftheir occurring, and the potential costs to theeconomy should they occur.

Table 2 summari

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